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Business Associations
Rutgers University, Newark School of Law
Eakeley, Douglas S.

Business Associations
Eakely – Spring 2013



Types of Organizations

General Characteristics of a Corporation:
·         Limited Liability for Owners, Directors, and Officers
o   The owners (“shareholders”) generally are not personally liable for the obligations of the corporation; neither are the corporations officers and directors.
o   Owners risk only their investment in the business (shares).
·         Centralized Management
o   Board of Directors – delegate day-to-day management to officers.
·         Free Transferability of Ownership
o   A shareholder can sell shares to whomever, whenever, at whatever price.
o   May be restricted in an agreement.
·         Continuity of Life: exist perpetually and generally not affected by changes in ownership.
·         Taxation
o   C Corporation: Taxed as an entity distinct from its owners.
o   S Corporation: Taxed like a partnership.

Other Entities (the basics):
·         Sole Proprietorship
o   A form of business in which one person owns all of the assets of the business.
o   Generally does not exists as an entity apart from its owner, and thus little formalities in formation.
o   Personal liability.
o   Cannot exist beyond the life of the owner.
·         Partnerships
o   Similar to Sole, but at least two owners.
o   Little formalities in formation.
o   Partners are personally liable.
o   Management spread among the partners.
o   Generally not continue beyond the life of the partners.
o   Profits directly to partners.
·         Limited Partnerships:
o   Partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to partnerships.
o   Formation dictated by limited partner statutes.
o   Must be at least one general partner, who has full personal liability  for partnership debts and has most management rights.
·         Limited Liability Partnerships:
o   Relatively new; designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership.
o   No general partner who is liable.
o   Must file “statement of qualification” with the secretary of state.
·         Limited Liability Company
o   Like LLP, very flexible business form: owners may choose centralized management or owner management, free transferability of ownership or restricted transferability, etc…

Why Incorporate in Delaware:
·         Delaware is the de facto standard of corporate law in the US
·         Easy to incorporate.  Corporation-friendly. 
·         Other states start following suit and altering their laws.
·         New Jersey and Delaware are extremely similar.


4 deal points that apply to every transaction
·         Risk of loss
·         Return
·         Allocation of control  (who does what)
·         Duration  (how long the relationships will last)


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 consent by the other so to act.  Agency concepts arise throughout the study of BA, and in situations in which an officer or employee is an agent for a business are common. The agency principles of whether the agent has the authority to act on behalf of the business, when the business is bound by, or liable for, the actions of its agents, and what duties and responsibilities an agent might have to a business, are core concepts that arise in this course.  Agency law deals with the reasonableness of the agent’s interpretation of the principals given authority. Objective by principal and reasonable interpretation by the agent.   In order to create an agency there must be some form of agreement or understanding between the parties. The existence of the agency may be proved by an evaluation of the facts in each particular situation. Agency law is based in common law.

There are some basic issues that arise out of an agency relationship:
·         The agent has certain duties and obligations to the principal.
·         The principal has certain duties and obligations to the agent.
·         The principal is responsible for tortious acts committed by the agent that fall within the scope of agency.
·         The agent has the ability to enter into bidding agreements on the principal’s behalf as long as the agreement may be traced to the principal’s authority.
·         The agent’s knowledge (in the subject matter of the agency) is imputed to the principal.


Gordon v. Doty
Id – 1937
Agency from use of vehicle
Garst was a high school football coach whose team was playing against a school in another city. Private automobiles were to be used to transport the team to and from the game. The day before the game, Doty (D) offered Garst the use of her car to help him transport some of the team members. Garst was involved in an accident while driving D's car, and one player, Gorton, was injured. Gorton's father sued D on behalf of his son to recover damages for injuries he sustained, as well as to recover the costs of his medical treatment. Issue. Whether the driver (the coach) was acting as an agent of the car owner when the accident occurred? Holding. Yes. An agency relationship results when one person allows another to act on her behalf and subject to her control. D consented to Garst acting on her behalf in driving her car to and from the football game. She volunteered the use of her car, with the express condition that Garst drive it. She did not say anything about loaning Garst the car, and he did not say anything about borrowing it.
Rule of law: An agency relationship is created once a party agrees to act on behalf of a second party subject to the second party’s control.

Notes
There are several ways to create the agency relationship:
·         By agreement. Created though an explicit arrangement between the parties.
·         By ratification. When the principal accepts the benefits or otherwise affirms the conduct of someone purporting to act for the principal, even though no actual agency agreement exists.
·         By estoppel. A principal may act in such a way that a third person reasonably believes that someone is the principal's agent; The principal is “estopped” from raising lack of authority. This is called agency by estoppel.


·         Agent’s Authority

After establishing that an agency relationship exists, a third party wanting to hold the principal liable must demonstrate the scope of the agent's authority to act for the principal. Creation of agent authority involves (1) words or conduct, (2) reasonably interpreted (3) that leads the agent to believe that he has the authority to act for the principal.  There are several sources of authority:

·         Actual authority may be expressly conferred on the agent, or reasonably implied by custom, usage, or the conduct of the principal to the agent. Such authority may be either express or implied.
o   Express authority. Express authority is actual authority contained within the agency agreement.
o   Implied authority. Implied authority comes from the words or conduct between the principal and the agent. It is often labeled to signify how it has arisen: (i) incidental to express authority; (ii) implied from conduct; (iii) implied from custom and usage; and (iv) implied because of emergency.
·         Apparent authority. Apparent authority results when a principal manifests to a third party that an agent is authorized, and the third party reas

39;s actions are contrary to the principal's directions.
·         Inherent agency power. Inherent authority is not well defined, but is thought to be analogous to the doctrine of respondeat superior in torts. That is, the doctrine of inherent authority recognizes that it is inevitable that in the course of performing her duties, either by mistake, negligence, or misinterpretation of her instructions, an agent may harm a third party or deal with one in an unauthorized manner. It is an agency power that arises even in the absence of actual or apparent authority or by estoppel. It arises from the designation by the principal of a kind of agent who ordinarily possesses certain powers. The doctrine is based on a reasonable forseeability rationale. The test js whether the principal could reasonably foresee that an agent would take the action she did. (NOT ON EXAM)






·         Ratification

Botticello v. Stefanovicz
Conn. – 1979
Ratification requires full knowledge.
Mary and Walter Stefanovicz (Ds), who were husband and wife, owned a farm as tenants in common. Botticello (P) made an offer of $75,000 to purchase the farm. Mary told P that she could never sell the farm for less than $85,000. Later, P and Walter agreed on a price of $85,000 for a lease with an option to purchase. An agreement was prepared by Walter's attorney, and signed by Walter and P. At no time did Walter indicate to P, P's attorney, or his own attorney that he was acting as an agent for his wife. P took possession of the property and made substantial improvements. He then attempted to exercise his option to purchase. Ds refused to honor the option, and P sued Ds for specific performance of the contract. Issue. Does a principal ratify the conduct of a co-principal when she received the proceeds from the agreement at issue? Holding. No. Walter was not acting as an agent on behalf of Mary. No apparent authority existed because Plaintiff never knew that Mary was a principal. There was no ratification by Mary for Walter’s conduct because she was unaware that the benefits she received from the agreement stemmed from a lease with an option to buy.
Rule Of law: Ratification of an agency relationship by the principal requires full knowledge of the material circumstances, regardless of the principal receiving the proceeds or benefits of the agent’s work.

Notes
·         A person may affirm or ratify a prior act supposedly done on his behalf by another that was not authorized at the time it was performed. Ratification causes the agent's act to be treated as if the principal had authorized it at the outset.
·         Transactions can be ratified by express, implied (acting in a way that seems like you are agreeing), silence or inaction (you cannot be silent forever), or affirmed in court.
·         Ratifications requires (1) the intent to ratify (2) knowledge of all the material circumstances, (3) a chance to accept or ratify.
·         It must be the entire contract. It needs to be COMPLETELY ratified.