Business Organizations Outline

BUSINESS ORGANIZATIONS OUTLINE- Professor Anna Han- Santa Clara University- Fall 2012
 
 
 
·         Business organization lawyers focus on the legal status of a business entity & the legal rules that govern it
o    Company’s formation, structure, ability to raise capital & distribute earnings & the relationships among the company, its owners, managerial employees and its creditors
–       Different views of corporation
o    Contractual theory of corporation (private K where role of state is limited)
o    Entity created by the state (supports state intervention)
Factors in Determining what entity to choose
–           liability
–           transferability
–           lifespan
–           management
–           tax consequences
–           time formation
–           profits & losses
 
Agency Principles
–           Every legal entity operates through agencies
o    Entities are an artificial concept [Entity Theory] §  someone (agent- officers, directors, e’ees) acts for these agencies
·         EX: corporation is separate from the people who own the corp. & the people who mange the corp.
o    b/c everything a co. does is done thru agents- business lawyers face a special ethical problem that arises from the fact that their business clients don’t exist in a form that can be dealt with directly
–           Fiduciary relationship that results from
o    1) the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control AND
o    2) consent by the other to do so
–       Principal is the one who gives authority to the agent
o    Both can either be legal entities or indiv.
o    Allows the principal to do a lot more than if the principal were acting alone
o    Principle is liable for authorized acts of agent (must supervise/monitor agent)
§  BUT principal can always ratify an agent’s act
·         EX: I give someone power to go out & buy something. If they go out &* buy something more expensive, but I still accept the goods- I’ve ratified the act, even tho the agent at the time exceed his scope
§  EX: agency law comes into play in many areas of business associations (ex: governance)
·         business entity= principal
·         real people who act on its behalf= agents
§  agents are authorized to conduct business for the principal and enter into Ks that bind the principal – so issues of authority & fiduciary duties arise in business contexts
 
o    so principal will be liable if the agent had actual or apparent authority (& acting w/in the scope of his authority)
o    agency relationship can be created by conduct (verbal or by writing)
§  formal agency
·         actual authority
o    created by the principal’s manifestations to the AGENT
o    focus on the principal’s communications to the agent & the agent’s reasonable understanding of these connections         
o    Manner in which the agent’s authority is created
§  Express authority
·         Authority created by principal’s oral or written communications to the agent concerning the scope of the agent’s authority
o    EX: provision in partnership agreement that “managing partner shall have the authority to enter into Ks binding the partnership to pay up to 5K, w/tout obtaining the approval of the other partners.”
§  Implied/incidental authority
·         scope of the agent’s authority as determined by the principal’s conduct or other related circumstances
·         authority that gives agent authority to complete what he/she is intended to do
·         agent is authorized if the agent is reasonable in drawing an inference from the principal’s actions that the principal intended to confer authority
·         every time there’s express authority, there’s almost always implied authority
o    Koval: agent atty has implied authority to bind a client to procedural actions performed in ct (ADR proceeding)
o    EX: e’ee who is working fast food stall, implicit/implied in that power to take orders, give, fries, etc.
o    EX: real estate transactions (conveyance of property, sign deed, etc.)
·         apparent authority
o    created by the principal’s manifestations (verbally, written, action) to a THIRD party that he consents to have the act done on his behalf by the agent
§  EX: partnership agreement contains ^ provision, but partnership has regularly paid X, a 3rd party supplier, under Ks for more than 10K even tho the managing partner didn’t obtain the approval of the other partners. X enters into a new 10K K w/ the managing partner to supply products to the partnership. The partnership is liable under the K, even tho managing partner didn’t have actual- he had apparent
§  EX: If I own fast food chain & put Kyle in a costume & never say anything to customers- still an agent
§  Fennell: Fennell’s atty negotiated w/ defense counsel & agreed on settlement amount w/out Fennell’s consent. Agent atty did not have apparent authority b/c regardless of whether his atty mediated, etc., there was no apparent agency w/out fennel manifesting to D counsel that his atty was authorized to settle the case
·         agent atty is required to disclose the settled offer to client
·         in order to create apparent authority, the principal ahs to positively, objectively do something in order to cloth the person w/ the look of an agent
·         US v. Int’l Brotherhood: actual & apparent authority
o    Actual= atty stated in open ct that he had authority to & asked for new settlement terms
o    Apparent= after atty’s offer to settle, negotiations continued for 16 months before clients attempted to deny atty’s authority, so they can’t say settlement caught them by surprise (conduct after fact can retroactively give agent the authority)
 
§  implied by law agency
·         agency-principal relationship can be implied by law- no consent needed
·         Gay Jenson Farms v. Cargill: Jenson Farms (P) sues Cargill (one of largest corps. in world) & Warren to recover losses sustained when Warren defaulted on Ks for grain. In order to get Cargill liable, use agency theory
o    Authority– Did Cargill ever appoint Warren as an agent?
§  No formal app’t, so need to form agency
o    Implied by law agency—Control?
§  RS Agency: security holder who takes over management of debtor’s business either in person or thru an agent & director what Ks may or may not be made becomes a principal, liable as a principal
o    Cargill is liable b/c Warren was an agent for Cargill – Cargill became a principal w/ liability for the trans. entered into by its agent Warren b/c of their control/influence over Warren
 
–       Principal’s liability for the Agent’s Unauthorized Acts
o    Aggrieved party can sue agent & principal & recover on theories of
§  Ratification
·         Whether or not an agent is initially authorized to act on behalf of a principal, the agents’ actions may be attributed to the principal if the principal ratifies the agent’s K
o    Daynard v. Ness, Motley: ratification used to get jx over MI law firm, find someone who acted as an agent of the other law firm. Get Ks in writing!
·         NEED manifestation of assent or other conduct indicative of consent by the principal
o    Conduct after the fact can retroactively give agent actual authority
§  Estoppel
o    Disclosed/Undisclosed Principals
§  When 3rd party knows IDENTITY of principal + AGENT was acting on principal’s behalf
·         Principal= is considered to be fully disclosed= principal liable
§  When 3rd party knows AGENCY relationship, but NOT identity of principal
·         Principal= partially disclosed= both agent & principal liable
§  When 3rd party knows neither
·         Principal= undisclosed= both liable
 
1) SOLE PROPRIETORSHIP
–           Definitions
o    business owned directly by one person who has sole decision-making authority, an exclusive claim to business profits & direct ownership of all business assets
o    most popular business organization in US (esp. small start-up ventures)
–           Factors
o    liability
§  unlimited personal liability- owners are personally liable for co.’s financial obligation
§  owners are subject to vicarious liability- so liability may not be a concern if business is small, but once there are managers & workers- liable for vicarious liability
o    transferability
§  Freely transferable (can sell you assets, but can’t sell good will) difficult b/c involve personal service
·         EX: Can you sell practice of law?
o    Yes, they sell business/client list (technically)
·         EX: Can you sell liability?
o    By agreement- yes. But a good atty would say not taking liability, only assets
o    lifespan
§  life of the owner, as long as the person is alive, competent & not bankrupts
o    management
§  sole proprietor- “whatever I say goes”
o    tax consequences
§  taxed at owner’s personal rate- income added to their personal income, losses deducted
§  file it on 10-40 like everything else
§  this is why a lot of business are sole proprietorships
o    cost/time
§  minimal/no formalities/no cost other than as necessary to run business sine legal identity of sole proprietorship & owner are the same- no business entity to form
o    profits/losses
§  income in-expenses out (right pocket & left pocket)
 
 
2) PARTNERSHIP
–       Development of Law
o    CL- partnership was a label for relationship b/w the participants when 2 or more indiv. agreed to operate a business for profit- didn’t treat it as an entity
o    UPA – Uniform Partnership Pact 1914
§  Law of agency applies
o    RUPA- Revised Uniform Partnership pact (1994 w/ 1997 provision)
§  Partnerships are regarded as a single entity- not as an aggregation (makes it easier for the atty to represent b/c not representing aggregation of people)
§  Joint & several liability for all partnership obligations
§  Avoids procedural hurdles that 3rd parties enforcing claims against partnership had to contend w/ under old act-
§  RUPA 1997= formation of LLP (Limited Liability Partnership)
·         When you encounter partnership, ask Q “under what version of the Act were they formed?” (may be under old law in 1914)
Ô  GENERAL PARTNERSHIP
o    if more than one principal & no formed agreement has been met, defaulting status is general partnership
o    “association of 2 or more persons to carry on as co-owners a business for profit”
o    GPs are considered
§  aggregates  (separate entities) for some purposes (tax & unlimited personal liability) but
§  entities (separate and distinct from partners) for other purposes (owning property & bringing legal actions in name of partnership)
–       Factors
o    liability
§  Unlimited joint & several liability (UPA 1997)
·         creditors must exhaust partnership assets before partners’ personal assets are used to satisfy creditor’s claims
§  No matter what you invest in it, all partners are jointly & severally liable for the death & if it exceeds the partnership assets, your personal assets are liable
·         EX: rich people would NOT want this if others are poor
o    transferability
§  Financial Interests (partner’s share of profits & their right to receive distributions)
·         Default rule= partners may freely assign to 3rd parties their financial interests in partnership (right to profits)  (don’t need agreement)
§  Management rights
·         If you want to assign partner’s other interests (management/admin.partner)- need consent of all partners- oftentimes difficult
o    RUPA 1997- may transfer interests, including managerial interests, (w/out dissolving partnership) but requires unanimous consent of each partner b/c each partner is an agent of the partnership
o    EX: If agreement says “I transfer all my legal rights as partner”- under the new law, it includes managerial right
§  May assign income, but requires unanimous consent!
·         Partner can take income, use as collateral & put down for home mortgage, but bank doesn’t become a partner in the firm
·         Partnership interest may NOT be assigned until you have consent of all parties
o    Casey v.Chapman: partnership interest in collateral for a loan- decided on 1914 UPA- no evidence that the partners agreed to anything more than the sale of the right to receive a pro rata share of profits. Doesn’t get manager or voting rights
§  If you were getting a partnership interest in collateral for a loan, contract out of liabilities. These statutes are permissive for a reason & allow freedom of K b/