Business Associations/Corporations Outline

Corporations Outline

Prof. David Hoffman

Spring 2015

Unit 1: Agency

– Restatement § 1: Agency

– The manifestation of consent by P to A that A shall act

– On P’s behalf

– Subject to P’s control

– A’s consent to so act

– Restatement Third:

“Control is a concept that embraces a wide spectrum of meanings, but:

– “Within any relationship of agency the principal initially states what the agent shall and shall not do, in specific or general terms.

– “Additionally, a principal has the right to give interim instructions or directions to the agent once their relationship is established. …

– “A principal’s control over an agent will as a practical matter be incomplete because no agent is an automaton who mindlessly but perfectly executes commands. …

– “The power to give interim instructions distinguishes principals in agency relationships from those who contract to receive services provided by persons who are not agents.”

– Agency relationships can be implied

– Agency relationships cannot be disclaimed

• A “principal need not exercise physical control over the actions of its agent” so long as the principal may direct “the result or ultimate objectives of the agent relationship.” Green v. H & R Block, Inc., 735 A.2d 1039, 1050 (Md. 1999).

• “when one … asks a friend to do a slight service for him, such as to return for credit goods recently purchased from a store,” an agency relationship exists even though no compensation or other consideration was contemplated. Restatement (Second) § 1(1) cmt. b.

Garton v. Doty, Idaho (1937) p. 1

· Plaintiff minor was injured in a car accident, car was owned by the teacher, and driven by the coach. The teacher volunteered her car, she claims it was a loan, but the coach never asked for the car. The court held that the coach was an agent, and the teacher was the principle, therefore by agency concepts, the teacher was liable.

Rule: An agency relationship exists when the principal consents to the agent:

1. acting on principle’s behalf

2. subject to principle’s control

Note^: It is important to note that the jury was informed that the driver was insured. The court reasoned that the teacher wanted the kids to get to the game, and would’ve driven herself, therefore the coach was acting on her behalf.

Agency between Creditor and Debtor

A Gay Jenson Farms Co. v. Cargill, Minn. (1981) p. 7

· Creditor Company Cargill was held to be a principle over debtor grain dealer Warren based on 1. Cargill’s recommendations on business conduct to Warren, 2. Cargill’s right of first refusal of grain, 3. Warren’s inability to enter mortgages without Cargill’s consent, 4. Cargill’s right of entry to Warren’s premises, 5. Constant criticism, 6. Determination that Warren needed paternal guidance, 7. Provision of drafts and forms which Cargill’s name was printed, 8. Financing (not actually weird), 9. Power to discontinue (also not weird).

· Rule: A creditor becomes a principle, and a debtor an agent, when it is clear that the creditor exhibits de facto control based on circumstantial evidence.

Note^: If Warren’s operation was independent of Cargill, it would be a relationship of buyer-supplier, not agent-principal.

With any terms of agency, a principal gives interim instructions, says “shall” do something (specifically or implicitly).

Principal-Agent “Problem”

– The principal must allow agents to make decisions for her or make decisions on the basis of information provided by the agent

– The principal is concerned that the agents will not do what she herself would have done

– Agents have preferences of their own. These are usually private information

Opportunism

– The discipline of the market is lost:

– Competitive markets deter opportunism because non-cheating party can readily find alternatives

– In the press example, no longer have a competitive market; instead, a bilateral monopoly

Shirking by agents

– Any action by a member of a production team that diverges from the interests of the team as a whole

– Includes not only culpable cheating, but also negligence, oversight, incapacity, and even honest mistakes

– In other words, shirking is simply the inevitable consequence of bounded rationality and opportunism within agency relationships

Corporate Law: A set of background rules largely default that govern the relationship between board, managers, and shareholders

– The rule are informed and shaped by the law of agency

Agency

– Agency arises by consent, not contract

– Control is a sliding scale, fact specific inquiry

– More practical control = more legal responsibility

– Default rules to control agency costs

– However, agency costs are inevitable result of having someone else do your bidding

Agent’s Fiduciary Duties

– Care

– Loyalty

– Kickbacks (Restatement § 388)

– Secret Profits

– From transactions with principal (Restatement § 389)

– Use of position (Reading v. Regem (1948))

– Usurping business opportunities from principal (Rash (2007))

– “Grabbing and Leaving” (Town & Country)

Duties owed by Principals to Agents?

– Compensation

– Indemnification

– Good Faith

– (Commercially unreasonable actions under the circumstances)

– Krispy Kreme example: Forced the franchisees to purchase excess donut mix

Fiduciary Duty

Reading v. Regem, UK (1948) p. 69

· UK soldier was transporting people in a lorry in Cairo in a Royal Army uniform when he was off duty, and pocketing the profits. The court held that he breached fiduciary duty to the Crown, and ordered the money be paid to the UK government.

· Rule: An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of principle.

Rash v. J.V. Intermediate, Ltd. (2007) p. 72

· Rash is hired to manage the Oklahoma branch. Given $125,000.00 and 20% of net profits. Two year contract, promises to “devote full work time and efforts”. After two years, Rash forms his own scaffolding business, and JVIC contracts with the scaffolding business for several projects.

· Rule: Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances.

Note ^: An agent’s duty to the principal is commensurate with the level of skill and specialty. Restatement (Third) § 8.08

Town and Country House v. Newberry, (1958) p. 75

· Cleaning company broke off from former employers and used the list of customers to solicit them for their own business. This is a breach of fiduciary duty.

· Rule: An employee has a fiduciary duty not to use confidential work-related information to benefit themselves.

· Rule: Fiduciary duty to employer extends beyond the duration of employment.

– The law of trade secrets is incorporated as the default rule

– Accordingly, ex-employees may not use a customer list that qualifies as a trade secret

– Exceptions for lawyers, Ethical rules state that Clients have a right to choose their lawyer; therefore, they can choose if they want to leave and follow the lawyer

– Picking majoritarian rules, reduces lawyering costs

– Fiduciary duties are cheap up front, and expensive in litigation

– Contract duties are expensive up front, and cheaper in litigation

Unit 2: Formation and Promoters

Corporations

Public or publicly held

– E.g., IBM or Microsoft

– Characterized by a public secondary market in which shares of the company are listed or traded

– E.g., NYSE or NASDAQ

Close or closely held

– Characterized by absence of a secondary market for stock

– Often (but not always) a relatively small number of shareholders actively participate in the firm’s management

– May display many characteristics of partnerships

– Some are, in a sense, incorporated partnerships

Types of Corporations

Professional Corporations:

– Physicians, dentists, lawyers, accountants