Corporations
Finbarr McCarthy
Spring 2016
Introduction to Agency (p. 1-15, 341-346)
CATEGORIES OF RISK
Controllable Risk → parties have some ability to influence – dependent on how well parties making decisions about the business and carry out assigned roles in operation.
Non-controllable risks → parties have no control and elements of risk remain even after all reasonable steps have been taken (i.e. weather, demand for resources)
Risk (quantifiable) v. Uncertainty (non-quantifiable) → quantifying risks associated with particular decision can determine the expected return of that decision.
RISK PREFERENCE → considerations of risk averse v. risk seekers → concept of gains/losses
ALLOCATING RISK
Non-Controllable Risks
insurance (fee at outset in exchange for right to payment if specified event occurs).
commodities market (contracts betting on expected occurrences)
diversification (participation in numerous ventures)
Controllable Risks
Party who bears the consequences of the risk will have a greater incentive to control the risk, but the other party will not (employer/employee)
Completed through monitoring, disciplining, and incentivizing.
Most risks effective borne by the those with right to firm’s profits.
Allocating Risks to the Employee
Place risk of shirking entirely on the owner (incur costs, reduce shirking)
Place risk entirely on employee (i.e. land lease, reduce profits)
Split risk between employer/employee (base compensation on success, flex profit)
Agency Costs → Cost of doing business; right to profit owner v. duty to perform employee
AGENCY CONCEPTS → agency/principal is consensual relationship between two parties
Standard Governance Model
Corporation → acts only through agency of human beings.
Board of Directors → central role in conduct of the corporation’s business
Doesn’t mean day-to-day (i.e. delegate responsibility) but remain informed.
Officers → all power is derived from statutory power derived from board of directors and set out in corporate by-laws or action of BoD.
Agent-Principal Relationship
Principal selects agent and has power to terminate agency relationship unilaterally, and can dictate how agent will perform duties.
Agent is a fiduciary of the principal → agent owes duties of care, loyalty, obedience
Actual Authority
Apparent Authority
Inherent Agency Power
Ratifying the Act of Another
g) Summit v. New Technology (Ore. 2004)
After its move, New Tech’s financial situation turned bad. IES fired Coleman. The COO received a copy of the lease in August 2002, but IES’s investigators reviewed the lease in 2003, concluding that the lease had not been entered under proper corporate authority. New Tech and IES served Summit with a complaint in Texas state court, alleging that Coleman and Crouser’s misconduct made the lease void.
h) Menard v. Dage-MTI (Ind. 2000)
Dage-MTI, a small manufacturing company, owned a tract of commercial real estate. Its longtime president, one Arthur Sterling, negotiated and signed a sales agreement to sell the tract to a sophisticated home improvement chain. Dage-MTI’s board had made clear to Sterling that he could not sell without board approval. When Menard made a first offer, Sterling forwarded it to the board – which said no. When Menard made a second offer, Sterling went ahead on his own. He said he had authority.
i) Koval → if one of two innocent parties must suffer due to a betrayal of trust — either the principal or the third party → loss should fall on party more at fault
3. Scientific Holding — where a corporation remains silent in authority ambiguity
Even where an agent lacks authority, a corporation’s failure to repudiate the authority or take action otherwise may imply authority.
Introduction to Corporate Law (17-49)
Corporations always created under the laws of a particular state and “incorporated” in that state. State law controls all matters of corporate governance.
finely-developed corporation statute and accompanying body of case law.
Separate entity: legal entity separate from investors who provide and manage
Perpetual existence: remains intact, forever until dissolution
Limited liability: shareholder’s liability limited to $ paid for shares
Centralized management: shareholders elect a corporation’s directors → power to manage and oversee the corporation. Directors delegate responsibilities for daily decisions.
Transferability of ownership interests: shareholders are free to transfer their stock without obtaining the consent of other shareholders, either on exchange or privately.
JUSTIFICATION FOR INCORPORATION
goals of corp. law : 1) promote efficient operation of business corporations 2) providing fairly for the interests of those who participate in corporations. || participants operating in environment of uncertainty, limited information, and bounded rationality. Differing goals.
reducing transaction costs given operating within relatively clear legal rules, with well understood division of risk and reward of ownership (Posner)
raising Capital by selling stock or borrowing money; corporation doesn’t pay taxes on money it raises by sale of stock; credit rating separate from personal
– owner of business can share the profits without giving up control by distributing stock
– entity may be transferred by simple assignment of a stock certificate
representing the same rights in the corporation or different classes of stock.
reducing liability and limit access to personal assets, encourages investment
CREATION → where to incorporate, internal affairs rule, and permissiveness of state
File article of incorporation with Secretary of State of state of incorporations
include: name of corporation, “purposes” clause, and number of shares the corporation is authorized to issue → amend through majority shareholder vote
M@10.03(b) – amending the articles of incorporation for number of authorized shares requires shareholder approval if <1 share class
by state official → DATE is retroactive to date of filing
M@1.23(a) → “at the date and time of filing, as evidenced by such means as the secretary of state may use for the purpose of recording the date and time of fil
terest over his or her own conflicting interests, and any competing interests renders the business judgment rule inapplicable. → Duty of Loyalty > BJR
Directors of a business corporation are not trustees and are not held to strict accountability as such.
DISSATISFACTION BY PERSON (Hirschman)
– sever connection with organization (i.e. sell stock)
by economists → increase efficiency or replacement by competition
voice – remain with organization and attempt to remedy situation (i.e. attend meetings)
based on prospects of success & loyalty to corporation
Corporation and the Constitution (51-52, 54-55, 69-70, 71-75, 85-97)
Corporation as a “person” → framed as whether a corporation is entitled to the same treatment as a natural person.
1. Dartmouth College → (Marshall) corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.
reservation of charter by state to amend or repeal authority granted
corporation entitled to equal protection of 14th – !! Southern Pacific
corporation entitled to due process of law – !! Beckwith
corporation protected against unreasonable search (NOT self-incrim) – !! Hale
First National Bank of Boston v. Bellotti – gov. may not restrict topics of speech for corps.
FNP is prohibited by state statute from spending “for the purpose of influencing the vote on any question that does not affect the corporation directly.” Petitioner wanted to publicize a view of a constitutional amendment that would allow state legislation to impose graduated tax on income of individuals.
It is unconstitutional to restrict corporate speech to items that are “materially affecting” its business. A corporation should not be treated differently than private persons. The corporation may freely discuss government affairs. They do not otherwise control or drown out the voices of individuals.
!! Austin – upheld constitutionality of Michigan statute that prohibited corporations from using corporate funds for contributions or independent expenditures for candidates.
intent to avoid unfair influence in electoral process, indivs. can’t match scale
!! Citizens United – court struck down federal prohibition on corporate funds for electioneering communication. → opposed suppressing corporate identity.
PUSH: disclosure of corporate political expenditures, currently inadequate.
