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Business Organizations
Rutgers University, Camden School of Law
Ryan, Patrick J.

Agency. 2
Actual Authority – Express or Implied. 3
Express Authority – (Focus: Principal to Agent)3
Implied (Focus: Principal to 3rd Parties)3
Apparent Authority (2nd Restatement of Agency § 8)3
Inherent Agency Power (2nd Restatement of Agency § 8A)4
Binding Principal in Tort4
Ratification. 6
Agency by Estoppel6
Fiduciary Obligations of Agents. 7
Partnerships. 8
Fiduciary Obligations of Partners. 9
Expulsion. 10
Partnership Property. 11
Raising Additional Capital12
Rights of Partners in Management13
Dissolution of Partnership (UPA §§ 29, 30, 31, 32, 33, 34)14
Buy-Sell Agreements. 16
Limited Partnerships. 17
Corporations. 19
Piercing the Corporate Veil19
Shareholder Derivative Actions & Direct Actions. 20
Role & Purpose of Corporations (BACKGROUND READING)21
Limited Liability Company (LLC)22
Formation of LLC.. 22
Operating Agreement (ULLCA §101(13) & 103)22
Piercing the LLC Veil (ULLCA §303)23
Fiduciary Obligation (ULLCA §409)24
Dissolution of LLC (ULLCA §801 – 808)24
The Duties of Officers, Directors & Other Insiders. 26
Duty of Care. 26
Duty of Loyalty. 27
Directors & Managers. 27
Corporate Opportunities (ALI § 5.05)28
Dominant Shareholders. 28
Ratification. 29
Control Issues – Closely Held Corporations. 30
Control in Closely Held Corporation (RMBCA §§ 7.30, 7.31, 7.32; DGCL §§ 141, 142, 218, 342, 351)30
Oppression of Minority Shareholders (Abuse of Control)33
Mergers & Acquisitions. 35
Appraisal Rights (DGCL § 262)35
Redemption (DGCL § 151(b))35
BOD Powers (DGCL § 141)35
De Facto Merger Doctrine (DGCL §§ 251, 271)35
Freeze-Out Mergers. 36
De Facto Non-Merger37
LLC Mergers. 37
Takeovers (Hostile Bids)39
Takeover Defenses (DGCL § 160)40
Extension of Unocal/Revlon Framework to Negotiated Acquisitions. 41
Corporate Debt42
Debtor’s Sale or Substantially All Its Assets. 42
Incurrence of additional Debt42
Exchange Offers. 43
Redemption & Call Protection. 43
Introduction to Federal Securities Regulation. 44
Definition of a Security (§2 of the 1933 Act; 1934 Act Similar)45
Registration Process. 45
Private Offering Exemption. 46
Agency
1. IMPORTANCE: CORPORATIONS CAN ONLY ACT THROUGH AGENTS BECAUSE LEGALLY, CORPORATIONS ARE CONSIDERED SEPARATE ENTITIES FROM THEIR SHAREHOLDERS.

2. Agency: Relationship where one person acts on behalf of another.
a. 3 Basic forms of Agency:
i. Relation of Principal to Agent.
ii. Relation of employee to employer.
iii. Relation of master and servant.
iv. Relation of Employer/Proprietor and Independent Contractor.
b. 3 Types of Individuals Involved with Agency:
i. Principals
ii. Agents
iii. 3rd Parties

AGENCY ANALYSIS:
1. Are relationships voluntary or involuntary?
a. No contract required by there must be a voluntary relationship between 2 parties.
2. Does agency only exist where there is an economic transaction?
a. NO

3. BURDEN OF PROOF: Where party seeks to impose liability upon an alleged principal on a contract made by an alleged agent, the party assumes the obligation of proving the agency relationship. (Hoddeson v. Koos Bros.; man impersonating a salesman for store took money from customer in exchange for furniture to be delivered at a later date but the furniture was never delivered).
a. BURDEN OF PROOF MET BY SHOWING: (Hoddeson v. Koos Bros.)
i. Express or real authority which has been definitely granted.
ii. Implied authority (to do all that is proper, customarily incidental, and reasonably appropriate, to the exercise of authority granted.
iii. Apparent authority (where the principal by words, conduct, or other indicative manifestations has held out the person to be his agent.

4. Types of Authority:
a. Actual Authority: 2 types
i. Express (Issue between principals and agents).
ii. Implied (Issue between principals and agents).
b. Apparent Authority (Usually at issue between 3rd parties and agents and principals).
Actual Authority – Express or Implied
Express Authority – (Focus: Principal to Agent)
1. Significant Relationship: Express authority deals with the relationship between the principals and agents.

2. Written or Oral Agreement: Express Agency agreement can be either (1) written (2) oral based upon parol evidence. (Gorton v. Groty; woman had allowed school athletic director to borrow car in order to transport kids to football game. Car was involved in accident and court held that athletic director was acting as agent for woman who lent car).
Implied (Focus: Principal to 3rd Parties)
1. Significant Relationship: Implied authority deals with the relationship between the principals and the agents. (Mill Street Church of Christ v. Hogan; church hired Hogan to paint church and told him that he could hire someone else to help him and even recommended someone but left it up to Hogan. Hogan selected friend who was hurt on the job and church was held liable because although the church did not give the okay to hire person who was hurt, it was implied in the instructions to Hogan that another person would have to be hired.).
Apparent Authority (2nd Restatement of Agency § 8)
1. Definition: Power to affect legal relations of another person by transactions with 3rd persons, professed as agents for the other, arising from and in accordance with the other’s manifestations of consent to him. (2nd Restatement of Agency §8).

2. Significant Relationship: Apparent Authority concerned with relationship of 3rd parties, agents, and principals.

3. Court looks to following:
a. Parties Expectations
b. Reasonableness of reliance.
c. 3rd Parties perceptions become important.

4. RYAN”S NOTE: Corporations need people to act as agents in order to enter into transactions. Corporations can protect themselves from actions of Agents by training employees and establishing controls.

5. Relationship to Actual Authority: Apparent authority can coexist and be coextensive with actual authority.

6. Consequences of Apparent Authority: For contracts, apparent authority creates the same results as does actual authority. If an apparent agent, acting with apparent authority, makes a contract on behalf of an apparent principal, then the principal is bound just as if the principal had itself entered into the contract. The 3rd party is likewise bound to the contract.

7. Principal/Agent Relationship vs. Debtor/Creditor Relationship: (Gay Jenson Farms Co. v. Cargill, Inc.; farmers brought lawsuit against grain elevator company (Warren) and company who helped to finance and oversee the management operations of Warren (Cargill). Court held that actions of Cargill were more than the actions of creditor and therefore, Warren was an agent of Cargill).

8. Special Situations:
a. Liability of Principals to 3rd Parties of A Contract:
i. Authority: (Mill Street Church of Christ v. Hogan;)
Inherent Agency Power (2nd Restatement of Agency § 8A)
1. Overall Notes: Inherent Agency Power is a “Catch-all doctrine based upon FAIRNESS. In some situations, an agent has neither actual nor apparent authority, estoppel does not apply, and yet the agent has the power to bind the principal.
a. 2 Functions of Inherent Agency Power: Holds principal responsible for:
i. Certain unauthorized acts of an agent whom the principal has entrusted with ongoing responsibilities, and for,
ii. Certain false representations of an agent or apparent agent.

2. Purpose: Protects 3rd parties who deal with principal’s employees or designees. Making intermediaries into independent contractors or brokers is a theoretical way to break the liability chain; but it adds transaction costs.
a. 2nd Restatement of Agency §8(A): Indicates the power of an agent which is derived not from authority, apparent authority, or estoppel but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
3. Situations:
a. Undisclosed Principals: There is an express principal/agent relationship. (Watteau v. Fenwick; Agent buys goods that are not approved by the principal and the court holds that the 3rd party can enforce there claims against the principal even though the principal expressly told the agent what he could and could not buy).
i. In order to limit the agent, the principal should emerge so that agent didn’t get the wrong impression and think that agent had apparent authority
ii. Kidd v. Thomas A. Edison, Inc.;.
iii. Nogales Service Center v. Atlantic Richfield Co.; agents looking for principals.

4. BASIC RULE: THE MORE CONTROL, THE GREATER THE POTENTIAL LIABILITY.

a. 2nd Restatement of Agency §194: Undisclosed principal is liable for acts of an agent done on the principal’s account if usual and necessary, even if the acts are forbidden by the principal.
b. 2nd Restatement of Agency §195: Undisclosed principal who entrusts agent with management of his business is subject to liability to 3rd persons with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.

5. Differences Between Apparent Authority and Inherent Agency Power:
a. Formal differences:
i. Apparent authority argues 3rd Parties’ reasonable understandings of P’s relationship with agent.
ii. Inherent agency power looks at the structure of the principal/agent relationship.
b. Both Covers a lot of the same factual ground:
i. Apparent authority and inherent agency power usually argued in the alternative.
ii. Both doctrines tend to impose liability.
Binding Principal in Tort
1. Background: Agency law contains rules for attributing an agent’s tort to its principal, even though the principal has not itself engaged in any wrongful conduct including:
a. Respondeat Superior: A master (employer) is liable for the torts of its servants (employees).
i. Master-Servant Relationship: Exists where servant has (1) agreed to work on behalf of the master AND (2) to be subject to the master’s control or right of control the “physical conduct” of the servant. (2nd Restatement of Agency § 2(2).)
b. RYAN NOTES:
i. Primary Issue = Control.

2. Servants vs. Independent Contractors: Servants are distinguished from independent contractors.
a. General Rule: Usually compare master/servant relationship with independent contractors because masters are not liable for torts of independent contractors but they are responsible for torts of employees.
b. 2 Types of Independent Contractors:
i. Agent-Type Independent Contractor: Acts on P’s behalf, but no direction of contractor’s methods.
1. (Humble Oil & Refining Co. v. Martin; Humble set the hours of operation and the prices, operator has significant reporting duties to Humble, most operational costs borne by Humble – the court held that humble was liable as a principal because the extent of control that it exercised over the daily operations of the gasoline station).
2. (Hoover v. Sun Oil Company; the station was leased to the operator of the station, trained the operator but allowed him to take control of the daily operations of the company – court held there was no agency relationship between ∆ and the independent contractor).
3. RYAN NOTES: Humble & Hoover are close cases, why decided differently:
a. Humble asserted more operational and financial control.
b. Sunoco had more balanced or mutual terms.
c. Bar tends to regard DE as pro-c

ic Salmon A/S v. Curran; ).
d. Burden of Disclosure: On Agent (REASON: Agent the most cost efficient cost bearer; it is much easier for the agent to disclose than it is for the 3rd party to do a search to see who the agent represents.
Fiduciary Obligations of Agents
1. General Rule: If a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies, are the real cause of servant obtaining any monetary benefit; the servant is answerable to the master.
a. It does not matter that the master has not lost any profit nor suffered any damage, nor does it matter that the master could have done the act himself.
b. SPECIAL NOTE: Does not apply to cases where the service merely gives rise to the opportunity of making money.

2. Duties during Agency:
a. Loyalty: Agent is subject to duty to his principal to act solely for the benefit of the principal in all matters connected with his agency. (General Automotive Manufacturing Co. v. Singer; Employer bought employee’s skill and reputation; on the side, the employee took orders and money fro himself that could have gone to the employer’s business. Court held that employer USURPED corporate opportunities and owed a fiduciary duty of loyalty to the employer. Court holds that there is duty for the employee to disclose to the employer the relevant facts).
i. NOTE – USURPATION DEFENSE: My principal could not handle the work.
b. Disclosure:Disclosure gives choice to the employer, or chance to see the agency’s limits.

3. Duty After Termination of Agency: (Town & Country House & Home Service, Inc. v. Newbery; Employees from cleaning service set up there own business and attempted to take the clients from there old employer. Court held that accepting work from former employer’s clients was not a breach of a fiduciary duty but using information on clients from old employer to go after the clients is a breach of the fiduciary duty).

Partnerships
1. Partnership Defined:
a. UPA Definition: Association of two or more parties to carry on as co-owners of a business for profit. Sharing of profits is prima facie evidence partnership but no inference shall be drawn.
b. Partnership results from a contract express or implied. If denied, it can be proved by the production of some written instrument by (1) testimony as to some conversation, (2) by circumstantial evidence. (Martin v. Peyton).

Uniform Partnership Act (1997): §202 Formation of the Partnership
(a) Except as otherwise provided in subsection (b), the association of 2 or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
(b) An association formed under a statute other than this [Act], a predecessor statute. or a comparable statute of another jurisdiction is not a partnership under this [Act].
(c) In determining whether a

2. Types of Partnerships: 3 basic types of partnerships:
a. Partnership at Will: Each partner has the right to cause the partnership to come to an end, at any time and without having to state or have “cause.”
b. Partnership for a Term: Partnership comes to an end at the end of the time period specified in the partners’ agreement.
c. Partnership for a Particular Undertaking: Partnership comes to an end when the particular task or goal specified in the partners’ agreement has been accomplished.

3. Power of Partnership Agreement: Partnership agreements can be structured in many ways

4. Characteristics of Partnership:
a. Unlimited Liability of partners including their personal assets.
b. Profit Sharing and loss sharing in the business.
c. Mutual agency/principal relationships. (Everyone has the authority to bind the business).
d. Partnership has a limited life.
e. Differential tax treatment (complex).
f. Default setting when individuals join to form economic collective. (If no form of business is selected, partnership is the default).
g. Limited Life
h. Default Setting when individuals join to form economic collective.

5. Partnership v. Joint Venture: In many states, joint venture because it has a more narrow scope than a partnership formed to conduct an on-going business.

6. ISSUES:
a. Partners Compared with Employees w Profit Sharing Rights: Factors looked at by the court to determine if person is employee or partner: