Forms of Business Organization Essay

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court, it will be a state court. Each state has different laws with respect to how they treat LLCs in such situations. Without knowing the state, it is impossible to know which statute a state might apply. There can be significant differences between state law on this matter (Garon, 2008).

In most states, it will be difficult to adjudicate such disputes, insomuch as there is likely to be limited precedence (Garon, 2008). If the court uses the Uniform Limited Liability Company Act, it would turn to the language in Section 112, particularly subsection D. The relevant text is as follows: "Absent any contrary provision in the operating agreement, language in an LLC's certificate of organization might be evidence of the members' agreement and might thereby constitute or at least imply a term of the operating agreement." If there is nothing written down at all, the court is likely to find that the profits should be split by share of ownership, under the logic that ownership share implies profit sharing in the same manner, which it does unless otherwise stated, as this is the law of fiduciary duty.

This dispute could have been avoided in the first place in two ways. First, if the principles acted like grown-ups. Going to court with something like this probably costs the parties more money that this company makes in profits. Plus, there are many other dispute resolution mechanisms available to these people, such that it would be unusual for something like this to end up in litigation. The second way is that all LLCs should have a corporate operating agreement. This document is agreed to and signed by the owning when the LLC is formed. It specifically covers critical issues such as how the profit will be split among them. Even a standard COA will contain all of the elements describing the contributions that each owner commits to making, and what their compensation/profit-sharing will be in exchange for those contributions.

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A standard COA would have avoided this issue -- they may still have disagreed about changing the split at some point in the future, but the current dispute would have been avoided by addressing this issue in a legal document at the time that the LLC was formed.

Unit 9 Discussion

The theory under which Darla might be liable is the breach of trust theory. She traded on the basis of material non-public information, which would in theory cause her to breach trust to the potential purchasers of FCPA, Cardware. The breach of trust is owed under statute not only directly, but indirectly and derivatively.

The defences against this charge could include Darla having a prior plan -- that she can prove -- to buy this stock. That was not the case. That said, the SEC would have to prove that she actually had material information. Darla's trades can be used against her, but this is dissimilar to the Falbo case -- Falbo's wife was an assistant to a Grand Met executive. While Darla knows who the players are in this case, there is no direct tie between an insider and her trades. Unless the SEC can prove that she received that information, they have hearsay and circumstantial evidence (such as evidence that she was in the building). But unless an insider testifies that they Darla something, Darla can defend this because the one thing lacking is actual evidence that she possessed insider knowledge.

SEC Rule 10b-5 is fairly clear that duty of trust can be indirect or derivative. That means that….....

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