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Business Associations
Elon University School of Law
Molony, Thomas J.

 
Business Associations
Molony, Fall 2014
 
 
 
 
Introduction to Business Structures
The Role and Purposes of Corporations
A.P. Smith Mfg. Co. v. Barlow
                                                              i.      RULE:  A corporation can make charitable contributions as long as: (1) It’s consistent with state law; (2) There is some form of corporate benefit; (3) The contribution is modest; and (4) The contribution was made in furtherance of corporate rather than personal ends.
Dodge v. Ford Motor Co.
                                                              i.      RULE: Ford owes a duty to shareholders to operate his business to profit his shareholders, rather than the community as a whole or employees.  A court will not interfere with decisions that come under the business judgment of directors; however discretion does not extend to the reduction of profits or the non-distribution of profits among shareholders in order to benefit the public.
Internal Affairs Doctrine: internal affairs of a business are governed by the law under which the business is created. 
Types of Business Structures and Their Attributes (HANDOUT)
Agency
The Relationship
Restatement
                                                              i.      R-2 § 1: Agency is the fiduciary relation which results from (1) the manifestation of consent by one person (principal) to another (the agent) that the other shall act (a) on his behalf and (b) under his control, and (2) consent by the other person (agent) to so act.
Gorton v. Doty
                                                              i.      RULE: There is NO contract or compensation necessary to form an agency relation. Just an agreement and mutual assent is all that is needed.
                                                            ii.      RULE: Presumption that driver is the agent of the owner, regardless of the presence or absence of the owner in the car at the time of the accident.
A. Gay Jenson Farms Co. v. Cargill, Inc.
                                                              i.      THREE ELEMENTS OF AGENCY: (1) principal consent to the agency; (2) agent act on behalf of the principal; and (3) principal exercises control over the agent.
                                                            ii.      RULE: A buyer-supplier or debtor-creditor relationship is NOT an agency relationship. Lenders normally are not liable for the debtor’s actions, but they can be if they have too much control and influence over the debtor.
                                                          iii.      RULE: The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties
Contract Liability
FIVE WAYS A PRINCIPAL CAN BE LIABLE FOR AGENT: (1) Actual Authority (Express or Implied); (2) Apparent Authority; (3) Inherent Authority; (4) Ratification; and (5) Estoppel.
The Agent’s Authority
                                                              i.      RULE: Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Focus on agent’s understanding and what a reasonable person would believe based on the communications between the principal and agent (R-2 §§ 7 and 26). 
                                                            ii.      RULE: Apparent authority is the authority an agent is held out by the principal as possessing and focuses on a third party’s reasonable belief the principal desires the agent to act based on communications between the principal and third party). (R-2 §§ 8 and 27).   Apparent authority has to be created by the principal’s actions; an agent cannot create apparent authority. (if undisclosed principal, never apparent authority)
                                                          iii.      RULE: Inherent authority is the authority held by an agent by virtue of their position.  It does NOT rely on knowledge of a third party.  Agency relationship creates authority – focus on the position of the agent (R-2 § 8A).
                                                          iv.      RULE: If an agent is acting on behalf of an undisclosed principal and has actual authority to act, the principal is bound and it is as if the agent entered into the contract himself.  
                                                            v.      RULE: Marriage or owning land jointly, in and of itself, cannot create an agency relationship. 
                                                          vi.      WHEN ANALYZING:
1.      Is there an agency relationship?
2.      Agency + Actual Authority (Implied or Express)?
3.      Agency + Apparent Authority?
4.      NO Agency + Apparent Authority? (agent fired)
5.      Agency + Inherent Authority? (usually when inherent authority, also actual or apparent)
The liability of a principal to third parties for the acts of an agent may be shown by proof disclosing
                                                              i.      Express or real authority which has been definitely granted
                                                            ii.      Implied authority, that is, to do all that is proper, customary incidental and reasonably appropriate to the exercise of the authority granted.
                                                          iii.      Apparent authority, such as where the principal by words, conduct, or other indicative manifestations has “held out” the person to be his agen

ing), he is not using his authority. 
2.      If servant gets enriched solely because of his position, not merely because of an opportunity due to his position, then benefits should be conferred to the master.
                                                            ii.      RULE: Unless otherwise agreed an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.
                                                          iii.      RULE: Fiduciary owes a general duty of full disclosure respecting matters affecting the principal’s interests and a general prohibition against the fiduciary’s using the relationship to benefit his personal interest, except with the full knowledge and consent of the principal.
                                                          iv.      RULE: Fiduciary duties agent owes to the principal:
1.      Account for profits/ opportunities arising out of the employment/agency
2.      Not to act as, or on account of, an adverse party  (conflict of interest)
3.      Not to compete with the principal on his own account or for another in matters relating to the subject matter of the agency (competition)
4.      Deal fairly with the principal in all transactions between them
5.      Deal openly with the employer and to fully disclose to the employer information about the matters affecting the company’s business (fair dealing)
6.      DOES NOT owe duty of absolute loyalty to employer
Duties During and After Termination of Agency
                                                              i.      RULE: An employee can owe a fiduciary duty to their employer for the employer’s trade secrets after their service has been terminated
                                                            ii.      RULE: Even where a solicitor of business does not operate fraudulently under the banner of his former employer, he still may not solicit the latter’s customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained.
                                                          iii.      RULE: Former agents are free to compete, but can’t take things from their former principal.