Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 1 of 22 Kandinsky, Fragment 2 for Composition VII (1913)

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 2 of 25 Corporate practice Law profession Citizen of world Bar exam Bar exam Why BusOrgs?

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 3 of 25 1.Fundamentals –Introduction to firm –Corporate basics 2.Corporations and policy –Corporate federalism –Corporate social responsibility –Corporate political action 3.Corporate form –Organizational choices –Incorporation –Locating corporate authority 4.Corporate finance –Numeracy for corporate lawyers –Capital structure 5.Corporate externalities –Piercing corporate veil –Corporate environmental liability –Corporate criminal liability 6.Corporate governance –Shareholder voting –Shareholder information rights –Public shareholder activism 7.Fiduciary duties –Shareholder litigation –Board decision making –Board oversight –Director conflicts –Executive compensation –Corporate groups 8.Stock trading –Securities markets –Securities fraud class actions –Insider trading 9.Corporate deals –Sale of control –Antitakeover devices –Deal protection 10.Close corporations –Planning –Oppression 1.Fundamentals –Introduction to firm –Corporate basics 2.Corporations and policy –Corporate federalism –Corporate social responsibility –Corporate political action 3.Corporate form –Organizational choices –Incorporation –Locating corporate authority 4.Corporate finance –Numeracy for corporate lawyers –Capital structure 5.Corporate externalities –Piercing corporate veil –Corporate environmental liability –Corporate criminal liability 6.Corporate governance –Shareholder voting –Shareholder information rights –Public shareholder activism 7.Fiduciary duties –Shareholder litigation –Board decision making –Board oversight –Director conflicts –Executive compensation –Corporate groups 10.Close corporations –Planning –Oppression

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 4 of 25 Schedule Fall 2014 Workshops: Sep 11 / Sep 25 / Oct 9 / Nov 13 No classes: Oct / Nov 3-6 Exam period: Dec 8-19

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 5 of 25 Grading (see Syllabus) Three components: 1.Shareholder proposal memo – due Nov 21 (20%) 2.Multiple-choice exam – during exam period (30%) 3.Final essay exam – during exam period (50%)

Your input … Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm 1. College / major / post-college experience 2. Business background: 1-zero to 5-lots (describe) 3. Reason taking course: bar, practice, lawyer, worldly 4. In my free time … (how you de-stress) Name / Year Slide 6 of 25

What you will learn … 1.Basic vocabulary / essential concepts 2.Business understanding 3.Corporation in law / society 4.Policy – learn to learn Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 7 of 25 Frank Partnoy

Class “panels” … Mon:Abaldukarim  Darr Tue:Dickens  Kennedy Wed:Kipinen  Price Thu:Rivers  Zimlich Class groups … Five (5) classmates seated nearby Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 8 of 25 Michael Klotz (3L) [Teaching Assistant]

Laptops … Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 9 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 10 of 25 Chapter 1 Introduction to the Firm Module I – Fundamentals Risks and risk allocation –Controllable/noncontrollable risks –Risk control devices: diversification, insurance, incentives –Allocation devices: owner/agent Fiduciary duties –Source: judge-made law –Party expectations vs. legal norms –Understanding of human motivations Role of law –Mandatory vs. default rules –Types of defaults: majoritarian, tailored, penalty –Nature of US corporate law Citizen of world Law profession Corporate practice Bar exam Bar exam

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 11 of 25 The “business firm” Meinhard v. Salmon –Allocating risks –Fiduciary duties Business firm –Essential questions –This course Role of law –Mandatory vs. default rules –US corporate law

Meinhard v. Salmon (NY 1928) (1) The business story (2) The parties’ motivations? (3) Which business organization? (4)Nature and extent of fiduciary duties? Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 12 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 13 of 25 Hotel Bristol Salmon Tower

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 14 of 25 Meinhard (capitalist) Salmon ( manager) Risks –uncontrollable –controllable Expected returns –weighted average –risk tolerance Manage risk –insurance –diversification –internal allocation –externalization Firm organization –Risk to principal –Risk to agent –Shared risk

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 15 of 25 Expected returns (what are returns worth) Scenarios Return (M’s share) Probability Expected (weighted) Upturn (best-case) $15,00030%$4,500 Middling (likely-case) $10,00050%$5,000 Downturn (worst-case) ($6,000)20%($1,200) TOTAL $8,300

Business organization choices in Meinhard v. Salmon … Who bears risk? What agency costs arise? How is risk-taking compensated? Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 16 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 17 of 25 Employer- employee Meinhard Lender- borrower Joint ownership Salmon Meinhard (owner) ---- Salmon (owner) Salmon (owner) Meinhard (owner) Business organization choices…

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 18 of 22

Fiduciary duties in Meinhard v. Salmon … What did plaintiff argue? What did court hold? What was remedy? Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 19 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 20 of 25 “Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty.” “A trustee is held to something stricter than the morals of the market place.” “Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” “Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty …” Bejamin Cardozo ( )

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 21 of 25 “There was no general partnership, merely a joint venture for a limited object, to end at a fixed time.” “The new lease, covering additional property, containing many new and unusual terms and conditions, with a possible duration of 80 years, was more nearly the purchase of the reversion than the ordinary renewal with which the authorities are concerned.” William Andrews ( )

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 22 of 25 Essential elements of “business firm” Basic structure –Terms of relationship –Who is “owner” / “manager”? Financing –Sharing of profits/losses –Insiders’ liability to outsiders Governance –Powers of “manager” –Oversight by “owner” –Information rights of “owner” Fiduciary duties –Discretion/duties of “manager” –Method of enforcement Liquidity rights –Terminate relationship –What if no “owner” market? Change relationship Capitalist (owner) Manager (manager)

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 23 of 25 1.Fundamentals –Introduction to firm –Corporate basics 2.Corporations and policy –Corporate federalism –Corporate social responsibility –Corporate political action 3.Corporate form –Organizational choices –Incorporation –Locating corporate authority 4.Corporate finance –Numeracy for corporate lawyers –Capital structure 5.Corporate externalities –Piercing corporate veil –Corporate environmental liability –Corporate criminal liability 6.Corporate governance –Shareholder voting –Shareholder information rights –Public shareholder activism 7.Fiduciary duties –Shareholder litigation –Board decision making –Board oversight –Director conflicts –Executive compensation –Corporate groups 8.Stock trading –Securities markets –Securities fraud class actions –Insider trading 9.Corporate deals –Sale of control –Antitakeover devices –Deal protection 10.Close corporations –Planning –Oppression

Group Hypo Your BusOrg professor is co-author of a Corporations casebook published by West. As part of his deal with West, he receives complimentary “author” copies. A bookseller has come by the professor’s office and offers to buy copies for $30. Should he sell? The professor’s contract with West does not address the resale of complimentary author copies. The professor and his co-author (who share royalties equally) have no agreement about whether they can sell their complimentary copies. Please advise your professor. Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 24 of 25

Group Answers Consider co-author Duty to co-author – don’t sell (13) As co-venturer, fiduciary duty to co-author Conflict of interest: sales reduce royalties to co-author Must inform co-author; need consent of co-author No duty to co-author – free to sell (3) No conflict of interest identified; co-author can sell his copies No duties beyond writing/publishing agreement Consider West Duty to West – don’t sell (7) Fiduciary duty to West; can’t compete, undercut profits Gave right to distribute to West; author must be loyal Protect your reputation; publishers may shun you No duty to West – free to sell (7) No fiduciary relationship; no limits in contract “Complimentary” copies means belong to author; no E(V) Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 25 of 25

Model Answer Dear Professor, You asked for my advice on whether you can sell your complimentary “author” copies of your book to a bookseller. My advice is that you not sell your “author” copies, until you consult with your co- author. Given your relationship, you have a duty not to benefit yourself at his expense – such as by selling your “author” copies so as to reduce his royalties. Nonetheless, you and your co-author could agree on how to handle this. Your contract with West, on the other hand, does not prevent you from selling your “author” copies. They’re yours! Assuming that you have not misrepresented anything to West and that such sales by authors are not uncommon, you have no duty to West. Although your limited sales of “author” copies may reduce sales for the publisher, that’s your prerogative. I could cite law, but that would make this a legal memo. You asked for my advice. Sincerely, Your trusted adviser Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 26 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 27 of 25 Identify type of rule … Rule 1 - Every employer shall pay to each of his employees wages at not less than $7.25 an hour. Rule 2 - An employment, having no specified term, may be terminated at the will of either party on notice to the other. Rule 3 - An agent, as fiduciary, must use reasonable efforts to give his principal information relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have. Rule 4 - An employee cannot compete with his employer during the term of employment. After employment terminates, a non-compete covenant will not be implied. Mandatory rule - cannot agree otherwise Default rule - can agree otherwise 1.Majoritarian (most parties would choose) 2.Tailored (fits parties’ expectations) 3.Penalty (forces parties to negotiate)

Chapter 1 Introduction to the Firm Corporations: A Contemporary Approach Slide 28 of 25 Role of law (in business firms)

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 29 of 25 Company law rules (131 E.U. directives) US v. Europe (who is more mandatory?)

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 30 of 25 Mandatory company law rules (67 E.U. directives) US v. Europe (who is more mandatory?)

Group Hypo Your BusOrg professor is co-author of a Corporations casebook published by West. As part of his deal with West, he receives complimentary “author” copies. A bookseller has come by the professor’s office and offers to buy copies for $30. Should he sell? The professor’s contract with West does not address the resale of complimentary author copies. The professor and his co-author (who share royalties equally) have no agreement about whether they can sell their complimentary copies. Please advise your professor. Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 31 of 25

Group Answers Consider co-author Duty to co-author – don’t sell (13) As co-venturer, fiduciary duty to co-author Conflict of interest: sales reduce royalties to co-author Must inform co-author; need consent of co-author No duty to co-author – free to sell (3) No conflict of interest identified; co-author can sell his copies No duties beyond writing/publishing agreement Consider West Duty to West – don’t sell (7) Fiduciary duty to West; can’t compete, undercut profits Gave right to distribute to West; author must be loyal Protect your reputation; publishers may shun you No duty to West – free to sell (7) No fiduciary relationship; no limits in contract “Complimentary” copies means belong to author; no E(V) Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 32 of 25

Model Answer Dear Professor, You asked for my advice on whether you can sell your complimentary “author” copies of your book to a bookseller. My advice is that you not sell your “author” copies, until you consult with your co- author. Given your relationship, you have a duty not to benefit yourself at his expense – such as by selling your “author” copies so as to reduce his royalties. Nonetheless, you and your co-author could agree on how to handle this. Your contract with West, on the other hand, does not prevent you from selling your “author” copies. They’re yours! Assuming that you have not misrepresented anything to West and that such sales by authors are not uncommon, you have no duty to West. Although your limited sales of “author” copies may reduce sales for the publisher, that’s your prerogative. I could cite law, but that would make this a legal memo. You asked for my advice. Sincerely, Your trusted adviser Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 33 of 25

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 34 of 25 The end

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 35 of 25 Corporate practice Law profession Citizen of world Bar exam Bar exam Why BusOrgs?

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 36 of 25 Being physically active How de-stress? Being social / kind Being social / kind Being creative Watching TV Watching TV Enjoying solitude