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Business Associations/Corporations
Temple University School of Law
Mehra, Salil K.

–Corporations –
Spring 2010- Mehra
Agency and Responsibility
I.        Distinguish Relationship
1.     Master – Servant– servant (1) works on behalf of master, & (2) subject to master’s right to control how job performed (as oppose to result alone)
2.     Independent Contractors – agents or non-agents
A.    Agents: work (1) on behalf of principle, but (2) NOT subject to principle’s control over how result is accomplished
B.    Non-Agents – operates independently and simply enters into arm’s length transactionswith others
II.Principle and Agent – Principle is liable to and indemnifies agent.
1.    Think about this in relation to Liability of Parent Company/ Subsidiary (Bristol Meyers)
2.    Does Master Servant Relationship Exist or is this an independent contractor (non-agent type)?
A. Apparent Authority
B.   Control – who manages things day to day
C.    *Risk/Reward (who assumes risk of profit/loss) + who has the Incentive to make better – least cost avoider.
For Humble Oil Liability* (master/servant)
Against Humble oil Liability
    H retained title to service station
oH Required operator to report to him
oH decided the hours of operation
oH Required station owner (Schnieder) to operate at his direction
oH pays 75% of biggest operational expense – utilities
oH furnished operating equipment, ad media, products
o    Humble (parent company) appears to bear more at risk re: profits, utilities, etc.
o    wouldn’t be fair if person operating had risk of loss when he couldn’t benefit from the upside
oRejection
o    No nexus with harm (parking brake-not gas product)
o    Schneider (station owner) hires/fires staff attendant at gas station (“boss”) – staff thought S was the boss.
For Sun Oil’s Liability (Baron = an agent)
Against Sun’s Oil’s Liability (Barone = an I/C)*
o    Ownership – Parent Company (Sun) owned property, equipment, etc
o    Parent Company OWNS the stations
o    competition allowance program (sun cushions losses for station owner bc allowed to sell products other than sun oil)
o    Apparent authority
o    Sunoco sent a sales rep weekly
o    Sun had training program for station owner – baron attended
o    Could set own hours
o    No reporting requirements
o    Station owner (barone) alone assumed risk of profit/loss and benefited from the reward
o    Showed economic risk bc the fee was a flat fee, NOT commission. If it was a commission there would be argument that there was economic risk.
o    There were more n the for column but ct really focused on the economic risk!
 
D.     Found Master Servant Relationship
1.    Humble Oil & Refining Co. v. Martin -Facts: service station sold a particular brand of oil products, but was operated by proprietor. Customer didn’t set parking brake when came for service and car rolled down and hit someone. Neither Humble Oil nor owner of gas station(Schneider) considered Humble an employer or master. EEs were paid by Schneider, directed by Schneider as their boss. Issue: who is liable for the injury – Humble Oil or Manager of the store? Holding: Ct found a master servant relationship existed – the gas station “owner” (manager) was Humble Oil’s servant, so Humble was liable. Rational: ct based its decision on the risk/reward incentive test..
a.    Harm caused by neg. of the car owner and the ees who accept car for service (didn’t realize break off)
b.    Apparent Authority – sign on the station says Humble oil. Ct didn’t go this way though.
c.    Control – Schneider managed day to day
d.   Risk/Reward Test- humble bears more of risk (incentive) so contract items like terms of agreement were not given conclusive effect.
i.       just bc tried to disclaim liability in contract by saying we’re not master servant relationship but you are an independent contractor doesn’t mean it will happen! you can’t K out of liability
ii.     Humble oil required station operator to do weekly reports, set hours, paid utilities (biggest operating expense), leased store to sell only Humble’s products. Humble paid all add costs, purchased products. Humble retained title to service station, paid Schneider a commission.
iii. Ct says all of this shows Humble Oil exercised a lot of power over what Schneider did, and carried the reward and risk of loss to the station. Schneider no different than a store clerk hired by Humble and paid on commission. Schneider performed duties & obligations humble required
E.    Found to be Independent Contractor, so parent company is not liable
1.    Hoover v. Sun Oil Company –Facts: An EE sets the car on fire while filling it with gas. Sun Oil owns service Station; Barone is operator. Sun says Barone is I/C so Sun not liable; Barone argues it= agent. Holding: Gas station operator was I/C – parent company not liable.
a.    What causes the harm- fire at gas station caused by Barone’s EE’s negligence. – but We don’t focus though on the kind of neg. and harm involved, otherwise these cases would come out differently.
b.    Apparent authority – cts don’t focus on this, otherwise these 2 cases would have been same.
c.    Station operator selects EEs and oversees them on day to day (like in Humble).
d.   Control and Risk/Reward –station operator is a lot more independent, and sun bears less of the risk/reward of profit or loss. The operator has more freedom in setting hours, can buy some non-sun products. (contra Humble where Humble set the hours and the station sold only humble products)
2.    Alternatives – parent company can require franchisee to carry insurance, can put indemnity clause in K
Partnerships – 92-101 & 105-111 & UPA §§ 6-9, 11-15, 18-21, 23-27, 29-33 and 40 (need to look up UPA when study)
I.         Does a partnership exist?
1.    Against finding partnership by estoppel –imposes huge liability, each partner liable for debts of partnership (> than just what you invested)
A. Martin v. Peyton (ny 1972) – Partnership v. Lender. KN&K was in financial difficulties, and Peyton (D) offered to become partners in the biz, but KN&K rejected the offer. Instead, Peyton loaned KN&K 2.5 million and in return received
1.    Provisions giving control: speculative stock, 40% of profits until loan repaid, Peyton had option to become partner, right to inspect borrower’s books, right to veto any proposal deemed too speculative.
2.    Arguments: Ps KN&K sued Peyton claiming that Peyton is actually a partner bc has exerted some control so that Peyton will be liable for the debts of KN&K. Peyton saying we’re only creditors.
3.    They do not call themselves partners anywhere.
4.    Issue: Ds Peyton lends $ to KN&K. Are Peyton, et al Lenders or partners?
5.    Holding: they are lenders, not partners. Against accidental partnerships.
a.    Provisions in the K that gave lenders control were specifically to protect their investment à not enough to create partnership.
b.    Never exercised the option.
 
2.    Need more than just Form to find a partnership, need Substance of actual relationship & Intent to be partners
3.    If partnership exists must be determined under Totality of circumstances test.
A. Southex v. RIBA –Partnership v. Contract. L.T. agreement to put on trade show. Refer to themselves initially in agreement as partners, yet trade show producer already said we don’t want ownership of trade show and don’t want to be on the hook for losses. Years later, RIBA fires show producer, who sues saying we’re partners, you can’t fire us, and if you do then you owe us our share in this show.
1.    Holding: NOT a partnership even though agreement uses the word partner and share in P&L.
2.    Rule:
a.    Form test not enough: not enough to use word “partner,” fill out partnership form, or share P&L
b.    Must do that and have the substance of a partnership, ie must intend that it be like a partnership
3.    Reasoning: even though Agreement use the term “partnership” once and they share profit and loss, that’s not definitive here – need the substance (ct reasons they used word more in colloquial than legal sense). Ct thinks they didn’t envision an ongoing relationship. It was a once a year relationship, not in partnership and if they were then they didn’t intend to be. This was more like hiring an EE.
a.    See UPA §7 Rules for Determining Existence of a Partnership –while the 5 things listed create presumption of partnership formation, this case overcomes that presumption. Sharing in profit and loss wasn’t definitive here.
4.    Ct won’t just find a partnership where it’s not pretty clear the partners intended it.
4.    A partnership can be created without a partnership agreement. So, cts look at totality of circumstances
A. Substance over form – ct value substance over form in deciding whether a partnership exists. (which in corporations is the opposite)
 
II.       Duties- Partners have a fiduciary duty to inform one another of biz opportunities that arise during partnership.
1.    Partners owe each other the duty of finest loyalty, which includes honesty, disclosure, and equal opportunity to all partners.
A. Meinhard v. Salmon (1928) –. Facts: . (investor v investor+hotel mngr) Meinhard & Salmon are co-adventurers in 20 year lease: meinhart is 50% investor; Salmon 50% investor+ manager. Toward end of lease, LL approaches manager about building new hotel on the prop. Manager doesn’t tell silent partner about this opp., but signs a new lease for just himself. Manager investor thought it was okay bc their lease ended in 3 mos. & this was to start right after. (Cardozo said relationship itself creates the obligation & this was an opp. for the partnership).
B.   Dissent’s view: Just a K – partnership to manage bldg for 20 yr term, deals for after 20 yr period don’t matter
1.    Cardozo’s view when enter a K that envisions a partnership relationship, it’s different than just a k.
a.    At min –should have told other partner about opportunity (prob ok to say if u bid too good luck)
i.      Reasoning: must look out for one another anytime during 20 years. Since they contracted partnership, it should be partnership info.
b.    Uncertain if also must take other partner along(bid as a partnership) (hard bc then 20 yrs ¹limit).
2.    Analysis: breach of fiduciary duties can occur by something less than fraud or bad faith.
a.    Consider relationship btwn subject matter of opp. & joint venture of partnership – Ct suggests it could be diff. if less relation. But here, hotel opportunity =same subject matter as partnership
Corporate Law
1. Formation of a Corporation182-200
I.     Promoters.
1.    When there is improper formation:
A. Law will privilege substance over form to the extent that the form was NOT material to the agreement
1.    (ie no substantive reason why form mattered; not harmful-doesn’t make K worth less, no tax

not make one subsidiary liable for another subsidiary’s actions merely bc the same parent controls both subsidiaries
A. Roman Catholic Archbishop of San Francisco v. Sheffield (DOG CASE)
1.    Swiss Monastery stiffs man on dog, who sues San Fran arguing it’s all 1 church so San Fran Diocese should be responsible for what monastery did. Didn’t get past SJ. Didn’t get to second prong.
2.    Holding: Even though both are subsidiaries of the Vatican, you can’t recover from one subsidiary by going to another subsidiary. Need to go through the parent. Or prove unity of interest btwn them.
3.    Reasoning: he failed to prove the alter ego prong, P proved that both San Fran and Swiss Monestary disregarded the corporate form individually, but he didn’t prove unity of interest/alter ego between Swiss Monestary and San Fran, which is what he would have needed. So didn’t get to 2nd prong (see PS where moved & btwn entities)
4.    Hypo-even if he had proven the alter ego, wouldn’t have proven recognizing Corp. form sanctions fraud. It was just more convenient for him to sue in San Fran than rome or Switz.
 
9.    Parent Subsidiary – substantial domination test. More lenient in finding parents liable in tort actions.
A. In Re Silicone Gel Breast Implants (deleware)– Bristol Meyers was sole sh of MEC who supplied breast implants. Parent Corp Bristol Meyer exercised almost total control over its subsidiary to extent that BM prez didn’t even realize that MEC had its own board & they disregarded form in a substantial way! After problem, MEC ceased operations and now is a shell nothing. If Ps can’t pierce MEC to get to BM they get 0. Held: pierced veil to hold parent corp. liable for its subsidiary.
1.    Follow form and don’t commingle- then can’t get pierced.
2.    A parent corp. is liable for its subsidiary’s liabilities if the parent controlled subsidiary as its alter ego.
3.    Ct Found Alter Ego/Unity satisfied- disregarded form in a substantial way & Total Control
a.    Form – Board didn’t call meetings, if they did no one knew about it. some didn’t even know they were on the board. Beyond the form, unity of interest suggested by –
i.      (a) Reporting requirements;
ii.    (b) Apparent authority relationship – if you had product, BM’s name was on it.
iii. (c) When problems occur, Bristol is the 1 who deals w/ it (Bristol provides lawyers, pr)
b.    TEST for parent subsidiary:
i.      Alterego prong – To find alter ego, holding parent liable for subsidiary’s need to prove substantial domination:(note different words and diff. factors for parent/sub)
a      Factors:
1      Common directors or officers;
2      Intertwined Operations;
3      Consolidated financial statements and tax returns;
4      Whether Parent finances the subsidiary;
5      Whether parent pays subsidiary’s salaries and expenses;
6      Whether subsidiary receives no other biz except what parent gives it;
7      Whether parent uses the subsidiary’s property as its own
ii.    Non-tort cases and non-Delaware would still have had to prove the second prong here! (ct just didn’t deal w/ 2nd prong here bc treated it as tort issue and this was De)
3. Lawsuits Against Directors and Officers
(1) Mechanics: How do you sue, what limits exist (214-223, 264-280)
I.       Shareholder Litigation
1.    Distinguish Kind of Lawsuit:Category affects who pays litigation expenses, who recovers, what procedures apply the to SP (security posts) and whether the suit can be dismissed by the corporation. 
A. Focus on who was injured & who will receive the relief. Some are hard to categorize. (C) will always argue it’s derivative.
B.   Direct Action – shareholder sues in her personal capacity to enforce her rights as a shareholder
1.    SHs seek to characterize suit as direct to avoid procedural requirements applicable to derivative
2.    Shareholder represents self and own interest, not corporation
3.    Structural financial liquidity and voting rights (see E&E pg 354 for list)
a.    Basic Rights of Shs (voting rights, etc) (e.g. Eisenberg denied right to vote via merger)
b.    Fail to pay dividends at all w/out good faith belief that reinvesting is better for corp.
c.    Defect in election process
C. Derivative Action – Sh sues on behalf of the (c) to enforce rights of the (c) which affect them only indirectly