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Business Associations/Corporations
Temple University School of Law
Wells, Harwell

CORPORATIONS

WELLS

SPRING 2011

1) rights and obligations of officers, directors, and shareholders, 2) corporation’s role in society/economy, 3) lawyer’s role advising corporations

I. AGENCY

a. Creation:

i. RST 3D § 1.01: Agency is the fiduciary duty that results when:

1. one person (a principal) manifests assent to another (an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control,

2. and the agent manifests or otherwise so consents to act

b. Note that no K is required, parties need not have intent. Whether relationship is characterized as agency in agreement of context of industry or popular usage is not controlling.

i. Parties’ labels and popular usage not controlling RST § 1.02

ii. Manifestation = written or spoken words or conduct RST §1.03

iii. Other Terminology RST §1.04

1. Co-agents

2. Disclosed Principal: 3rd party has notice agent is acting for a principal

3. Undisclosed Principal: 3rd party has NO notice agent is acting for a principal

4. Unidentified Principal: 3rd party has notice of principal, but not identity

c. Consequences are both inward and outward

i. Inward: Terms of K, fiduciary duty

ii. Outward: Duty to 3rd party, principles of attrition

d. Default v Mandatory rules

i. Default – rules provided unless otherwise specified. Can contract around (agency law)

ii. Mandatory – criminal laws, federal laws, etc. cannot contract around

e. Formation: US v. Cyberheat (D. Arz. 2007)

i. Facts: DOJ sues Cyberheat to enforce rule requiring warning label on sexually-explicit email. Cyberheat claims not responsible for actions of affiliate promoters.

ii. Issue: Was there formation of agency relationship?

iii. Rule: The substance of the parties’ relationship, not the label they give it, controls

iv. Factors to consider:

1. Principal’s right to CONTROL (give interim directions or instructions)

2. Alleged agent’s duty to act primarily for benefit of principal

3. Alleged agent’s power to alter legal relationships of principal

v. Joint tortfeasor may be vicariously liable, if in apparent or actual agency

vi. Outcome: remanded for material issues of fact 1) control over content and 2) knowledge of violations and was response reasonable? Notice?

f. Fiduciary Duty:

i. RST 3D: General Fiduciary Principal

1. § 8.02: Duty not to acquire a material benefit from a third party through use of agent position

2. § 8.03: Duty not to deal with principal as or act on behalf of an adverse party in a transaction connected to the agency relationship

3. § 8.04: Duty to refrain from competition during duration of agency relationship

4. § 8.05: Duty not to use principal’s property for agent’s own purposes of those of a 3rd party, and not to communicate confidential information for those purposes

ii. Food Lion v. ABC

1. Facts: Food Lion sues for torts- breach of loyalty and fraud- against undercover employee-reporters, documenting unsanitary practices

2. Rule: RST 3D 8.01: An agent has a duty to act loyally for principal’s benefit in all matters related to agency relationship

a. Note that this is the default rule, even when parties have not created duty in K

3. Breach of loyalty applies when:

a. Competes directly with employer (

b. Misappropriates employer’s property, profits or business operations

c. Breaches employer’s confidence

4. Court’s Rule: An agent must have INTENT to act against interests of employer at a time when on the payroll (promote interest of one to detriment of another)

iii. Covenants not to compete enforceable in most states for most professions (except attorneys, CA), usually must be limited in geography/scope

g. Principals of Attrition

i. In General:

1. Principals can be liable for torts or contracts of agents

a. Contract à Actual or implied authority (“necessary, proper and usual”)

b. Torts à Respondeat Superior: Short-cut to tort liability, only need show that actor was 1) agent and 2) acting w/scope of authority. No need to show principal acted wrongly.

2. Justifications (comment to RST § 1.01)

a. Control (ability to select, control, terminate)

b. Benefit

i. The existence of benefits to the principal does not necessarily lead to liability for the agent’s actions – ID circumstances where benefit seems to play an important role in a court’s decision and to try to determine whether the benefit, standing alone, may be sufficient to justify imposition of liability

c. Consent (express or implicit)

ii. ACTUAL AUTHORITY:

1. When an agent acts with authority, her action has legal consequences for the principal. Such action, when taken in accordance with the principal’s manifestations to the agent that the principal wishes the act so to act

a. Evaluate communication between the two (may exist even if there is no written contract)

2. Castillo v. Case Farms of Ohio

a. Facts: Case Farms contracts with ATC to recruit and hire migrant farmworkers. No written agreement between ATC and Case Farms

b. Rule: Giving an agent express authority to undertake a certain act ALSO includes implied authority to do things reasonably proper, necessary, and usual while exercising that authority. (ex.) actual authority to recruit and hire, and implied authority to do all things proper, necessary, and usual to exercise that authority

c. Principal is liable whether or not he was aware of specific actions (so need to monitor express agent)

d. So express delegation doesn’t always make principal liable- must also see if acting w/in express scope, or implied b/c passes necessary, proper and usual test

iii. APPARENT AUTHORITY:

1. RST 3d § 2.03: Apparent authority is the power held by an agent or other actors to affect a principal’s legal relations with 3rd parties when the 3rd parties reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

a. Based on prior dealings, customs, and context (nature of proposed transaction

2. Creation of Apparent Authority à RST 3D § 3.03: Apparent authority is CREATED by a person’s manifestation that another has authority to act with legal consequences for the person who makes the manifestations, if a 3rd party reasonable believes the actor to be authorized and the belief is traceable to the manifestations

3. Ex) Bob has purchased supplies for Mary for 6 months, each month Mary pays for it. In the 7th month, Bob bought supplies for himself and charged to Mary. Since Mary, by her lack of action, led Staples to believe Bob was her agent with authority, she will be liable bc of apparent authority. It’s fair bc Mary is in the better position to control Bob than Staples.

4. Bethany Pharmcal v. QVC

a. Facts: QVC contracted with NTA, who solicited help from Il. State Agency (including Janis) for help organizing nationwide-showcase of vendors. Janis sent letters, Bethany claims didn’t know it was an alternate, sues for breach of K.

b. Issue: Could Janis’ letter serve as basis for K and bind QVC- was she an agent?

c. Rule: Agent cannot unilaterally create an apparent agency relationship through words or conduct—MUST COME FROM PRINCIPAL

d. IL Law Requires:

i. Principal consents or knowingly acquiesces (manifestation)

ii. 3rd party has reasonable belief

e. Holding: A reasonable person would not believe Janis was agent of QVC who could contract on its behalf. QVC consistently stated that Purchase Order was only valid K, and that Bethany was an alternate.

5. General Def: One person may bind another in a transaction with a 3rd party, even in the absence of actual authority, when the third party reasonably believes, based on “manifestations” by the purported principal, that actor is authorized to act on behalf of principal

a. Can be basis for liability where 1) actors appear to be agents, or 2) are agents, but acting outside scope of actual authority

6. R. 3d § 1.02- Def. of Manifestations: “A person manifests consent or intention through written or spoken words or other conduct if the person has notice that another will infer such consent or intention from the words or conduct.”

a. Implication of this new definition – communications from the principal need not be directed to third persons before apparent authority is created.

7. ESTOPPEL: Non-agency doctrine

a. Requires: 1) unambiguous promise, 2) reliance to detriment, 3) reasonable belief and foreseeable

b. Distinguished by:

i. Requires 3rd party to change position in reliance

ii. Allows 3rd party to hold principal liable, but does not give principal any rights against 3rd party

8. RESPONDEAT SUPERIOR:

a. RST 3D § 2.04: An employer is liable for torts committed by employees while acting in the scope of their employment.

i. Based on concept of control. Employer has control over how employees work is done

b. Ware v. Timmons (Al. 2006)

i. Issue: Should Dr. Timmons be liable as principal for actions of nurse, in

ul business unless more limited purpose is set forth in AOI

2. Under DGCL, still need purpose

v. AMENDMENTS:

1. Power to amend bylaws should generally rest w/shareholders, NOT BOD, to encourage flexibility.

2. It is very difficult to amend charter (like constitution). Wouldn’t want provision like this in charter

3. Most management provisions should be in bylaws or by statute, not charter

vi. BOARD:

1. Number of directors should generally be in bylaws, not charter, b/c easier to amend.

2. Can name initial directors in charter, or call meeting after to elect (then appt. officers, sale of capital stock, other administrative tasks)

vii. LIABILITY: Can include exculpatory clauses for directors in bylaws.

1. Example: No director liable except for

a. Amount of financial benefit received by director to which he is not entitled

b. Intentional infliction of harm

c. Intentional violation of criminal law

d. Violation of Model Act § 8.33

2. Sometimes self-executing in states, sometimes optional and need to include

viii. DURATION: Assumed perpetual unless otherwise stated

ix. Optional under Model Act: Provisions not inconsistent with law re:

1. purpose

2. management of business affairs of corp

3. defining/limiting, regulating powers of corp, board, shareholders

4. par value

5. imposition of personal liability on shareholders for debts of corp to specified extent

g. Model Act § 2.15: Secretary of State shall file articles, and upon filing act of incorporation occurs

h. INCORPORATION:

i. Upon filing incorporation occurs

ii. Model Act § 2.05: Organization of a Corporation

1. After incorporation

a. If initial directors are named in AOI, they shall hold an organizational meeting, at call of majority of directors, to complete organization- appoint directors, adopt bylaws, carry out other business,

b. If initial directors are NOT named in AOI, incorporators shall hold an organizational meeting at call of majority of incorporators to

i. elect directors and complete organization,

ii. or elect a board of directors who shall complete organization

2. Or actions can be taken w/out meeting with signed written consent by each incorporator

iii. Grant v. Mitchell (Del. Court of Chancery 2001)

1. Take-aways:

a. Corp law is high on formalities

b. Incorporation and Organization are DIFFERENT acts

2. Facts: Grant, Mitchell and Melzter formed LLC w/1/3 ownership each. M&M came up w/software (but not “sweat capital”); later Grant invested more $ and took 42& of stock. Then incorporated.

a. Court relies on 1) actions of attys and 2) important documents:

i. Articles: List grant as sole incorp.

ii. Directors Consent: Ratify action, list G&M as 2 directors, never signed

1. Can file this is lieu of meeting

iii. Foreign Corporate Certificate: Says more than one officer, sworn signed, him as president and Mitchell as treasurer

iv. In 2000, Grant filed consent naming himself as SOLE director

1. Trying to argue he never organized co. until now- as sole incorporator, would have this power exclusively.

3. Holding: Grant’s attempt to name himself as sole director invalid and judgment granted for Mitchell.

4. Note: INCORPORATOR files charter, names board, who then decides bylaws.

5. DGCL § 108(a): After filing AOI, the incorporator(s) or board if named in charter, shall meet

6. DGCL § 108(c): Any action permitted to be taken by the incorporator(s) or board at organizational meeting can be taken by (unanimous) signed instrument (consent)