Business Organizations – Perino – Fall 15
Community Counseling Inc. v. Reily (1963)
Corp. raises $$ for Catholic Churches; D is an agent for the firm (e/ee) and decided to quit. Be4 he left, he talks to various priests while still employed & solicited business for himself.
Cmty. Counseling Claim: An Accounting- When D is under the duty to give such profits to the principle. (This dissuades the agent from breaching his FD)
General Rule (§387)
§388
§396à After an employee has been terminated, there is no duty not to compete
Hamburger v. Hamburger
: D is still employed @ Ace, but starts up his own business- supplier of Ace gives him a loan and then he starts contacting Ace’s customers and clients before he left Ace. [They should have included non-compete clause]
This remedy is an equitable remedy
Intro to Various Business Organization Forms
(1) SOLE PROPRIETOR; (2) PARTNERSHIP; (3) CORPORATION; (3) LLC
Factors that often influence the choice of form to organize under are:
Need for limited liability,
Free transferability of interests,
Continuity of existence,
Centralized management,
Costs,
Access to capital and taxation.
Business Organizations Laws [Basics]:
Function: To protect the reasonable expectations of individuals who jointly own firms
Sole Proprietorship: [the classical firm] the simplest form of business: individual decides to go into business as the sole owner- owns and manages the firm.
Two Main Tasks:
Directs the business and exercises the ultimate business judgment – what to make and how to make it.
This involves forecasting things like whether, at what price and in what quantities consumers will be willing to buy a particular product or service if it were produced and made available to the market. Also involves forecasting whether and how a team of employees can be hired and organized – basically managing the uncertainties.
Accepting full responsibility for the business decisions
The entrepreneur is the residual claimant.
The entrepreneur has unlimited liability and must be ready to draw from his personal wealth to satisfy the claims of creditors.
Entrepreneur agrees to take a salary last and only if the business is profitable.
Role of the Business Lawyer- transaction cost engineer:
The corporate lawyer is a planner: she must understand when opportunism is likely, and suggest an organizational structure that will minimize the expected cost of future opportunistic behavior by employees, managers or owners
A corporate lawyer must understand how to select and modify governance structures so as to optimally minimize the use of litigation as a governance tool, while preserving the availability of litigation to deal with circumstances that cannot be appropriately governed solely by private ordering – essentially corporate lawyers must de-emphasize governance via court ordering.
Organization chosen determines: (1) Legal relationships of the participants; (2) Their responsibilities for business debts; (3) Their tax liability
Economic Aspects of the Firm
There is the goal of informed rational choice between competing investment options:
Comparative Search for Best Investment: The search for maximum value requires rational investors to take both a comparative [weigh alternatives] and ex ante perspective [predict which investing strategy will yield best results]
Risk & Return: An investment with more than one possible return has risk. Risk means the degree to which the various possible outcomes will differ from the expected return. “Expected” return is the possible return- probability of possible return. Risk will increase when the range of possible outcomes increases.
Expected Return = [possible return 1 x probability of possible return] + [possible return 2 x probability of possible return]…
Transactional Costs and Choice of Organizational Form
Ask: What are the reasonable expectations of those who jointly own a firm? $$$
That both will use their best efforts to make the venture successful and;
That profits will be divided according to their relative contributions
*People go into business if they believe they can obtain a reasonable return on their investment.
Factors of Transaction Costs:
Bounded Rationality: Investors are unable to anticipate and plan for every contingency that might affect their venture.
: One participant might try to take advantage of the other; an opportunistic actor seeks to extract an advantage that would be denied him if the party with whom he deal had full information.
Team Specific Investment: When a person or asset has a higher value in its current team use than its value in its next best use, the person or asset is said to have team-specific value.
: If we have 3 assets: con Edison factory, railroad and a coalmine: does the value of these assets depend on the existence of the other one? – All of these assets depend on each other thus they are team specific
parties would prefer – in essence they seek the rule that will best protect the rational ex ante expectations of parties similarly situated to the contracting parties
Penalty Default rules
The goal of these is to force parties to specify their own rules ex ante, instead of relying on a default rule provided by law. For example, a default rule might be intentionally set so as to penalize some or all of the parties as a means of forcing them to negotiate a rule that they prefer.
Non-Judicial Mechanisms That Supplement & Reinforce Private Ordering
The governance Role of Markets: a variety of markets play an important role in the governance of firms. These markets act to ensure that team members perform their services diligently and loyally and otherwise protect the reasonable expectations of investors in jointly owned firms
The product Market
Firms compete in the production of goods/services – if team members perform without sufficient skill and diligence the firm will be at a competitive disadvantage and may go out of existence.
The Capital Market
Firms compete for investors – prospective capital providers will seek the best return on their investment. Firms that are not well run will see that their cost of capital (interest charges) will be high.
National Securities Market
Stock trading – these markets provide a constantly changing, accurate measure of the relative value of a publicly traded company, and by extension an accurate measure of the value of their managers.
Labor Markets
Employees compete with each other – if an employee is not considered to be diligent or loyal he is unlikely to advance within the firm and is unlikely to receive good evaluations and may be terminated.
For senior executives this discipline is supplemented by the valuations by the stock market.
The Role of norms
Most activity within a firm is governed not by judicially enforceable contracts, by norms – non-legally enforceable rule and standards (NLERS).
