Transactional View | Holger Spamann | September 19, 2015

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Transactional View

We just looked at Louis and Kathy’s pizza shop from a litigator’s perspective. Most of the work of corporate lawyers, however, is to avoid disputes arising in the first place, in particular to design procedures that will resolve conflicts without litigation. So let’s travel back in time six years.

Kathy and Louis ask you to set up the legal side of a pizza shop they envision. (Question: can you ethically represent both of them in this matter?)

Louis has been working as a baker in a local bakery for many years. He will give up his job to become the pizza shop’s general manager and, for the time being, only full-time employee. Kathy runs a marketing agency that does lots of business with mostly upscale restaurants. She will work on generating demand for the pizza shop in her spare time, while continuing to run her agency.

Kathy and Louis are childhood friends. They still spend a lot of time together. The idea for the pizza shop started at a recent dinner where they were both unhappy with the pizza. They concluded that they could do this better, and that there would be demand for better pizza in Cambridge. Over the next couple weeks, they worked out a business plan. They believe the pizza shop will be quite profitable.

They initially thought that Louis should set up the shop by himself, and that Kathy would just help out with the initial marketing. The problem is, however, that Louis doesn’t have the cash to make the required investments. To be more exact, Louis is totally broke. A bank is willing to lend $100,000 to buy the pizza oven (the single biggest expense), taking a security interest in the oven. But the bank is not willing to lend unsecured for the initial operating expenses (supplies, drivers’ salaries, etc.). Kathy and Louis are confident that the store will be profitable eventually. But they reckon it will take a couple months to get there. In the meantime, expenses will need to be paid, including Louis’s living expenses.

As a solution, Kathy offers to invest some of her retirement savings in the pizza shop. The number they envision – roughly their estimate of six months of expenses – is $60,000. She and Louis also hope that Kathy may eventually join the business full time if things go well – in the long run, they dream of developing a chain.

Question: How would you advise Kathy and Louis to structure their business relationship? What eventualities should they be prepared for? To make this more concrete, assume that the only reasonable entity to form is a corporation (in reality, they might use an LLC). Which, if any, provisions would you advise they write into the charter or into the bylaws?

Read: model charter; DGCL 102(b)(1), 109, 141(a)/(b), 212, 216, 242, and 275(a)/(b) (for present purposes, it is sufficient to read the simplified versions at simplifiedcodes.com)

Skim: model bylaws.

Optional: take a glance at DGCL 273 (joint venture dissolution) and 341 et seq. (close corporations).

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