Module 2 Legal Reasoning Exercises
1. Peter and Linda have started a business on a handshake deal with very vague terms about
ownership. The business is beginning to earn revenues and the general expectation is that
the company will be very profitable in a short amount of time. Peter is hesitant to
incorporate and structure the ownership of the company’s equity. Linda, however, thinks
it is the best course of action. Adopt Linda’s position to try to convince Peter why it is
important to structure the company’s ownership at this early stage in time.
-When making a handshake deal, the relationship is discussed and there is an oral agreement to
divide the profits fairly. The problem is the fairness is in the eye of the beholder. When
incorporating you clarify who owns what percentage, who will be in positions of control,
monetary contributions, and any other ground rules that will keep the business running smoothly.
With a handshake deal nothing is legally set in stone. Having a structure is more beneficial
versus guessing who or what is best for the business. This will avoid any confusion in the future,
and the earlier the business components are established, the better it will be for everyone
involved.
2. The Board of NewCo. wants to allow and encourage NewCo’s CEO to manage the
operational day-to-day matters related to the enterprise, yet they also want to make sure
the CEO is accountable for issues related to performance. Discuss how the board can
accomplish these two goals.
– The duty of loyalty deals with the decision-making process that involves the day-to-day
operations of the company. To gratify their duty of loyalty, directors must adapt their financial
and professional interests to that of the corporation. In exchange for their time and effort, they
are to receive a monetary compensation. Smaller firms who may not have the financial stability
that bigger firms do, compensate directors through offering equity in the company such as stocks
or stock grants.