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Business Associations/Corporations
Temple University School of Law
Ellers, Edward S.

FALL 2011
When people come to you to start corporation, first thing to worry about is :
·         Make it clear who your client is
·         What do you want control over?
o   Sale, management, issuance of shares
·         If you use classified shares for board seats, worried that all shares will not be treated equally
o   Can separate shares into different pricing, especially when they are classified
o   Can say that everyone will get the same price
o   Correlation between classified shares and pricing
·         What if they want to bring in more people?
o   Can say that either of the others can have the right to get out
·         If either terminated, either for cause or because they quit, shares subject to a buy-sell
·         If company fires them without cause, may have different formula
o   Wasn’t there fault, perhaps higher compensation
·         For test:
o   Who did what to who?
o   Legal standard?
o   Analysis?
·         Corporation is separate legal entity
o   Separation of ownership and management is distinguishing feature
·         How going to control?
o   Default rule is majority rules
o   Can change it
§  Need to know where change from default rule is going to go
·         Articles or bylaws?
·         Must know the difference between them
o   Shareholders cannot propose amendments to bylaws
§  Backdoor theory: amend on one hand but then someone re-amends on the other hand
§  Wounded bird theory:
·         Balsius example
·         BoD and corporate counsel need to be constantly looking at bylaws and articles to make sure they are up to date
·         Need to heal a wounded bird outside of hunting season
·         Same persons can be officers/directors
o   Understand test for piercing the veil
o   When planning, must say what are objective
§  How going to allocate power
·         Who did what to who?
o   Standard by which that conduct will be judged
·         When incorporating, best to plan for staggered board/cumulative voting/etc. because much easier first time around
·         Tools to raise money
o   Common stock
§  Authorized in articles
o   Preferred stock
§  Authorized also but contract to specific buyer
·         Dealing with Delaware and MPCA here
o   Big difference in how they treat oppression
o   For the most part, the rest of the rules are default rules
§  Some immutable rules
o   Tool box
§  Cumulative voting
§  Classified voting
§  Supermajority
§  Buy/sell agreement à not on list
·         §1434 limited default buy-sell
·         What triggers them
·         What price
·         What if they can’t agree on a price
o   Arbitration? Binding? Sue in court?
§  Etc.
·         Difference between public and closed corporations
·         Power/control allocation tools to reflect parties’ expectations
o   Oppression
·         Used for different purposes
o   Management/officers and directors want to keep control
o   People like to be in Delaware because friendly towards management
·         Shareholders have limited and specific rights when
·         CA case important to outline relationships
·         Look at how federal law is starting to intrude
Business Entities
·         Business: person or group of persons engaged in sustained profit making or profit seeking efforts
o   Non-profit is when a person or persons is performing a public good
o   Businesses utilize legal structures to all them to raise capital, manage business and manage risks
·         Forms:
o   Sole proprietor: person conducting business in her/her name (or a d/b/a)
o   Partnership: two persons conducting business
§  General: all partners responsible for what goes on
§  Limited: one person “running” the partnership
·         Other partners passive and don’t have liability
o   LLC (limited liability company): hybrid between corporation and partnership created by statute
o   Corporation: entity created by state statutes
§  Only federal involvement is that SEC and IRS each have rules that deal with corporations
§  Need to file appropriate documents with the state
·         Defective filing leads to sole proprietorship or partnership
§  Statutes and case law provide certainty and predictability, something every client wants in a transaction
·         Defaulted provisions exist in State law
o   Many chance be changed by contract
o   “Immutable” provisions cannot be modified
§  Entity:
·         Corporation has perpetual existence
·         Owners of corporation have limited liability
·         Corporation has centralized management
·         Interests in corporation are generally freely transferable
·         Corporation is taxed at entity level and on distributions
§  Corporation exists separately and apart from shareholders, directors, officers/employees
·         Can own property, enter into contracts, sue and be sued
·         Ownership legally distinct from management
§  Owned by shareholders
·         Shareholders do not run the company
·         Shareholders elect Board of Directors that oversee the corporation
·         Officers carry out direction given to them Directors
o   Separation of ownership and management
·         Most senior officers of corporation are also directors
§  In US corporations do not consider the role of the community/customers/society in general à shareholder capitalism
·         Principals in position to control actions
·         Agents executes those actions
·         Corporation, as principal, cannot act on its own
o   Needs an agent to act on its behalf
§  Directors are agents of the shareholders
§  Owe fiduciary duties to the shareholders and to the corporation
o   Agency determines who can bind the corporation, whose actions the corporation will be liable for
·         Two questions to consider:
o   Was there a principal-agent relationship established?
o   Did the principal convey authority to the agent?
·         Creation of relationship: No statute when it comes to agency à Restatement offers guidance
o   § 1.03: Manifestation
§  “A person manifests assent or intention through written or spoken words or other conduct”
§  Have to look inward and outward
·         What are the parties themselves thinking?
·         What does it look like to other people?
o   § 1.04(5) Person: a person is (a) an individual; (b) an organization or association that has le

y should know that certain measures necessary in order to carry out orders, can be liable à Castillo v. Case Farms of Ohio
o   Court looks to custom, practice, industry standards to determine reasonability
§  Principal liable for actions of agent only if those actions are taken in the scope of the agent’s employment
·         Apparent Authority: manifestations by principal to third party
o   One person may bind another in a transaction with a 3rd person, even in the absence of actual authority, when the 3rd person reasonably believes (based on manifestations by the purported principal) that the actor is authorized to act on behalf of the purported principal
o   Test for determining apparent authority:
§  1) The manifestation must emanate from the principal
·         Agent cannot create apparent authority unless the principal puts agent in a position to do so
o   3rd party must reasonably believe that agent has authority to do what they are doing
§  Person may have authority to perform certain acts (i.e. solicit participants) but not another (i.e. execute contracts) à Bethany Pharmacy Co. v. QVC
·         Apparent authority cannot come from an undisclosed principal (no manifestation possible)
o   Disclosed principal: principal disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity à Restatement (Third) s. 1.04(2)(a)
o   Undisclosed principal: a principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal
·         Can arise if principal is silent when they knowingly allow another to act for them as their agent à Bethany Pharmacy Co. v. QVC
§  2) The scope of the agent’s apparent authority depends on the 3rd person’s reasonable interpretation of that manifestation
·        In determining reasonable interpretation, courts consider
o   Prior dealings
o   Customs that apply in the particular setting
o   Nature of the proposed transaction
§  Reliance not technically required to establish apparent authority
o   Apparent authority can exceed actual authority
§  i.e. agent usually bids X amount, principal authorizes only half of X for this transaction, apparent authority higher for seller
o   Better to find actually authority than apparent authority
§  Must be careful in a contract to designate who can do what
§  Ultimately doesn’t matter what type of authority proves
·         Trying to put loss on person who could have most easily/economically prevented the problem