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Business Associations
Elon University School of Law
Haile, Andrew J.

Business Associations – Fall 2010 – Professor Andy Haile
I.       General
A.     Background
                                                  i.      Organization: Corporation à Officers à Directors à Shareholders
                                                ii.      Corporate Social Responsibility – Corporations should do more than simply maximize the profits of their shareholders
                                              iii.      Authority to make charitable contributions: Model Business Corporation Act § 3.02(13) (NC Gen Stat. § 55-3-01(13)) gives every corporation the power to make donations. However, usually you need some link between the corporation and the donation
                                              iv.      Sarbanes Oxley Act – requires certifications from CFO & CEO that financial statements are correct
                                                v.      Pass Through Entities: Sole proprietorship, Partnership, Limited Partnership, Limited Liability Company
B.     Foundational Theories
                                                  i.      Dodge v. Ford – Dodge brothers were shareholders in FMC. FMC paid dividends but wanted to retain a large sum of cash for expansion into buying a mine. FMC also said they wanted to reduce the price of the car and increase the volume and also it is a social business trying to help the employees. Holding: the court ordered the FMC to pay 25% after the expenditures for the expansion were made.
RULE:  “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and doesn’t extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.”
                                                ii.      Milton Friedman – “the doctrine of ‘social responsibility’ is . . . a fundamentally subversive doctrine” in a free society, and I have said that in such a society there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” ; the money isn’t the corporate manager’s money but rather the shareholders as the profits are the property of the shareholders
                                              iii.      Joel Bakan – shareholder profits are not necessarily the only thing we should focus on. Corporations are psychopathic entities b/c the focus is solely on maximizing profits. (Recall the Ford Pinto case)
                                              iv.      AP Smith MFG v. Barlow (p. 5) – AP makes $1500 contribution to Princeton and shareholders complain. AP argued that the contribution would eventually benefit them. Other arguments are that charity should be the role of individuals: You make the $ and then donate, Holding: AP prevailed.
RULE: Management and shareholders don’t always agree
                                                v.      A Corporation Has No Soul
II.    Sole Proprietorship (use 2nd Restatement of Agency Law)
A.     General
                                                  i.      Most common & simplest business entity
                                                ii.      Individual owner (must be only 1 owner) that conducts business and holds assets personally (usually small retail or service)
B.     Formation – No organizational documents required
C.     Governing Law – None but subject to general rules of law & regulatory restrictions
D.     Tax – Proprietor reports business income on his/her individual tax return but may offset other income w/ losses from sole proprietorship
E.     Liability – Individual proprietor is personally liable for obligations of the business, including claims that result from acts committed by employees within the scope of their employment Agency Law governs
                                                  i.      § 1 – Agency
Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other so to act
      2 Parties:
      (1) Principal – the one for whom action is to be taken
      (2) Agent – the one to act
                                                ii.      §7 – Authority
Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him
a.       §26 – Actual authority to do an act can be created by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account. 2 ways
1.      Express – the principal expressly authorizes the agent to undertake an act on his behalf (ie. I tell you to do XYZ)
2.      Implied – the agent needs to undertake an action to accomplish a task authorized by the principal
b.      § 27 – Apparent – authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.
c.       § 8A – Inherent agency power – power . . . is derived . . . solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent (Note: 3rd Restatement eliminates this provision and thus the power comes in by virtue of apparent authority)
Example: If I am the President of a Corp, I is treated as having the authority to enter into contracts on behalf of the Corp. There may not be express or apparent authority but is rather by virtue of being the president.
                                              iii.      Contract Liability
a.       § 140  – Contract Liability for the Principal: The liability of the principal to a third person upon a transaction conducted by an agent may be based upon the fact that: 
1.      The agent was authorized;
2.      The agent was apparently authorized;
3.      The agent had a power arising from the agency relation and not dependent upon authority or apparent authority (i.e. inherent agency power)
b.      § 320 – Contract Liability of the Agent: Unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract
Example: If you are trying to sell your home, you engage a realtor who is your agent. They themselves aren’t liable, but rather you, except when they exceed the authority you gave them.
Hayes v. National Service (p. 40) – attorney for Hayes settled employment discrimination claim for $15,000 and Hayes later argued that her attorney did not have authority to sign the settlement agreement so that it is void. Hayes did have an engagement agreement with her attorney. Holding: No, Hayes is bound by the settlement agreement.
RULE: In Georgia, unless otherwise stated, the attorney has plenary authority to act on behalf of the client. “The client is therefore ‘bound by his attorney’s agreement to settle a lawsuit, even though the attorney may not have had express authority to settle, if the opposing party was unaware of any limitation on the attorney’s apparent authority.’”
Problems, p. 36 #1-3
c.       Tort Liability
1.      Definitions:
                                                                                                                          i.      Master (subcategory of principal) – Master is a principal who controls or has the right to control an agent’s physical conduct in the performance of service
                                                                                                                        ii.      Servant (subcategory of agent)- is an agent whose physical conduct is controlled or is subject to the right to control by the master.  See RSA § 220 for factors distinguishing a servant from an independent contractor:
·         Extent of control which, by the agreement, the master may exercise over the details of the work;
·         Whether or not the one employed is engaged in a distinct occupation or business;
·         Kind of occupation
·         Skill required
·         Whether the employer or workman supplies the tools & place of work
·         Length of time employed
·         Method of payment (by time or by the job)
·         Whether or not the work is part of the regular business of the employer
·         Whether or not the parties believe they are creating the relation of master & servant
·         Whether the principal

à partnership continues unless more than ½ says they don’t want to
                                                                                                                        ii.      At-will à must have unanimous consent of remaining partners to continue
g.       Wrongful withdrawal
1.      UPA – all of the partners must elect to continue or else it will be liquidated (§ 38(2)(b))
2.      RUPA – *its easier to continue here than UPA
                                                                                                                          i.      Term or undertaking à continue unless at least ½ of remaining partners elect to liquidate (§ 801(2))
                                                                                                                        ii.      At-will à partnership will continue if all of the remaining partners waive the right to have the partnership’s business wound up and the partnership terminated (§ 802(b)) (same as UPA)
C.     Fiduciary duty
                                                  i.      General
a.       Business Judgment Rule: you can’t be held liable to members and shareholders and the LLC if you are wrong or negligent, however if you are grossly negligent then can be held liable. We don’t want people to be afraid of taking risks, however you can only go so far.
b.      Is it good to allow partners to contract in or out of fiduciary duties?
1.      Yes – freedom of contract
2.      No – disparity between partners
                                                ii.      UPA § 21
a.       Trustee-like duty to account for profits (§ 21)
b.      Applies common law fiduciary duties to prohibit:
·         Competing with partnership
·         Taking business opportunities from the partnership
·         Using partnership property for personal gain
·         Self-dealing
                                                  i.      RUPA  § 404– these are the only duties:
a.       Duty of loyalty to
·         account as trustee
·         avoid self-dealing
·         avoid competition
b.      Duty of care to refrain from engaging in
·         grossly negligent
·         reckless conduct
·         intentional misconduct
·         or a knowing violation of the law
c.       Obligation of good faith (subjective test) & fair dealings (objective test) –  (§ 404(d))
d.      See § 103(b)(2)-(4) – Authority to limit fiduciary duties of partners
Meinhard v. Salmon (p. 70) – Meinhard & Salmon were in business together and Meinhard didn’t tell Salmon of opportunity to purchase the surrounding properties. Judge Cardozo found that Meinhard did have a duty to disclose the new venture to Salmon. This is a high standard for relationships between partners.
·         “Fiduciaries owe each other duties that exceed the standards of the market-place”
·         “Joint ventures, like copartners owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties.”
B.     Partnership Property
                                                  i.      UPA
a.       All property contributed to the partnership or acquired by the partnership is partnership property – § 8(1)
b.      Property purchased with partnership funds is presumed to be partnership property – § 8(2)
c.       A partner is co-owner with his partners of specific partnership property holding as tenant in partnership – § 25(2)