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Business Associations/Corporations
South Texas College of Law Houston
Ricks, Val D.

Fall 2016
Corporations is a course primarily about legal fictions
None of these entities has real existence, but the law talks as if they do physically exist
The law considers investors to be a sort of owners of the corporation
Perhaps sometimes corporate law has something to do with the distribution of wealth and a variety of other things
First Standard
Pareto believed that utility is a subjective state of well-being that cannot be accurately assessed by outside observers
He reasoned that a given distribution of resources is efficient when, and only when, resources are distributed in such a way (within a given group or territory) that no reallocation of resources can make at least one person better off without making at least one other person worse off
In other words, someone must benefit, and noone can suffer a detriment, for there to be an optimal transaction
An imposition of costs on a party that is external to the transaction is an externality
Second Standard
Kaldor-Hicks efficiency
Under their definition, an act (or rule) is efficient – i.e., leads to an overall improvement in social welfare – if at least one party would gain from it after all of those who suffered a loss as a result of the transaction or policy were fully compensated
All this means is that there has to be a net benefit for the one who benefits to pay off the ones who did not
Measuring utility is a general rule
Efficiency will remain a controversial judicial standard, in part because determining what counts as a “cost” and what counts as a “benefit” in a world of incomplete markets, strategic behavior, and informational asymmetry inevitably involves guesswork
Agency is the fiduciary relationship that 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
In order to create an agency there must be an agreement, but not necessarily a contract between the parties
An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequence of the relation to follow
The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties
An agency is a consensual relationship between the principal, who grants authority to another to bind her in certain respects, and the agent, who accepts the responsibility.
Thus, an agent is a holder of a power to affect the legal relations of the principal within the scope of the agent’s agreed-on appointment (or “employment”) and beyond this scope in some circumstances, subject to the agent’s consent, the principal can define or delimit the granted authority in any way she pleases
Agents may be special agents or general agents
Special Agents
Agency is limited to a single act or transaction
General Agents
Agency contemplates a series of acts or transactions
Principals may be:
1) Disclosed
When third parties transacting with the agent understand that the agent is acting on behalf of a particular principal
2) Undisclosed
When third parties are unaware of a principal and believe that the agent herself is a principal
3) Partially Disclosed
When third parties understand that they are dealing with an agent but do not know the identity of the principal
For our purposes, the agency relationship is consensual and the principal or agent can terminate an agency at any time
If the contract between them fixes a set term of agency, then the principal’s decision to revoke or the agent’s decision to renounce gives rise to a claim for damages for a breach of contract
Once consent is gone, the basis of the agency relationship, consent, no longer exists
It is not true that every agent has the right to bind the principal to a contract; the agent must also have the authority to do so
While the declarations of an agent may be used to corroborate other evidence of the scope of agency, neither agency nor the extent of the agent’s authority can be shown solely by his own declarations or actions in the absence of the party to be affected
The law of agency incorporates two open-ended duties owed by the agent:
1) Duty of loyalty
Pervasive obligation always to exercise legal power over the subject of the relationship in a manner that the holder of the power believes in good faith is best to advance the interest or purposes of the principal or beneficiary and not to exercise such power for a personal benefit
2) Duty of care
The duty to act in good faith, as on believes a reasonable person would act, in becoming informed and exercising any agency or fiduciary power
Actual Authority
1) Manifestation of intent by the principal that the agent is authorized, such that;
2) The agent actually believes
3) Reasonably, that the agent is authorized
What is necessary for the agent to reasonably understand from the action or speech of the principal that she has been authorized to act on the principal’s behalf
Apparent Authority
1) Manifestation of intent by the principal that the agent is authorized, such that;
2) The third party actually believes;
3) Reasonably, that the agent is authorized
Equitable Estoppel
1) A person makes a sta

(d) The skill required in the particular occupation;
(e) Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
(f) The method of payment, whether by the time or by the job;
(g) Whether or not the work is part of the regular business of the employer;
(h) Whether or not the parties believe they are creating the relation of master and servant; and
(i) Whether the principal or is not in business.
Duty of Loyalty
Basically, the duty of loyalty requires an agent NOT TO:
(1) Acquire a material benefit from acting on the principal’s behalf or through the agent’s position;
(2) Deal adversely with the principal;
(3) Compete with the principal;
(4) Use the principal’s property for the agent’s or another’s purpose; OR
(5) use or communicate the principal’s confidential information for anyone’s purpose but the principal’s
Controls a trust, in which the trustee holds legal title to trust property, which the trustee is under a fiduciary duty to manage for the benefit of another person, the trust beneficiary
The trust resembles the agency relationship insofar as the trustee has obvious power to affect interests of the beneficiary
It differs from agency insofar as the trustee is subject to the terms of the trust, as these have been fixed by the trust’s settler (or creator); the trustee is not ordinarily subject to the control of the beneficiary
In In re Gleeson, the (Illinois) court stated that they have consistently followed a general principle of equity that a trustee cannot deal in his individual capacity with the trust property
As a trustee, when elected as a trustee the individual can not deal with himself
The Corporate Form
Corporations remain a superior structure for capitalizing large firms
One reason is that the corporation’s legal characteristics have strong complementary qualities
These attributes are:
1) Legal personality with indefinite life;
2) Limited liability for investors;
3) Free transferability of share interests;
4) Centralized management;
5) Appointed by equity investors