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Business Associations/Corporations
Temple University School of Law
Lin, Tom C.W.

Corporations Outline

Temple Law

Fall 2015

Checklist of Basic Issues

Agency

Means through which agency can arise
Master / servant vs. independent contractor
Liability of principals for acts of agents
Fiduciary obligations of agents

Partnerships

Existence and dissolution
Management and property rights
Profit / loss sharing
Fiduciary duties

Shareholder Actions

Injuries to the corporation (derivative) vs. injuries to individuals or shareholders as shareholders (direct)
Demand requirements (incl. SLCs)
Purposes of corporations

Duty of Care

Business judgment rule in most situations
Breaches: Uninformed decision, failure to monitor, nonfeasance / gross neglect of duty
No requirement of substantive due care

Duty of Loyalty

Self-dealing transactions: burden of approval, ratification, or intrinsic fairness in most situations
Corporate opportunity doctrine
Special Sinclair Oil duty of majority shareholder
Duty of good faith (incl. failure to monitor)

Disclosures in Securities Offerings

Securities act only applies to publicly traded “securities”
Exemption for private placements
Civil right of action for MMOs: due diligence defense for nonissuers

Fairness in Securities Trading

Rule 10b-5 applies to all securities, whether publicly traded or not
MMOs in connection with sale of a security; FOM theory
Inside information: disclose-or-abstain rule; insiders, tippees, misappropriators
Short-swing profits
Indemnification: exculpation clauses, indemnification statutes, insurance

Shareholder rights and corporate control issues

Proxy fights: use of corporate funds MMOs in solicitations
Shareholder proposals, exclusion
Shareholder inspection rights
Classes of stock
Interference with shareholder voting rights (Blasius)

Special rules for closely held corporations

Vote-pooling agreements
Fiduciary duties among shareholders, despite at-will employment
Freeze-outs
Statutory dissolution

Mergers and acquisitions

Sale of control block for a premium
Sale of substantially all assets & mergers: approval and appraisal rights
Tender offers: Williams Act and state antitakeover statutes
Freeze-out mergers: independent business purpose?
Greenmail
Unocal review vs. Revlon review
Blasius review of measures affecting shareholder voting / enfranchisement

I. Agency

A. General principles and policy themes

1. Definition of agency: According to RSA § 1(1), agency is the fiduciary relationship that results from (i) the manifestation of consent by one person (the principal) to another (the agent) (ii) that the agent shall act on the principal’s behalf (iii) and be subject to the principal’s control and (iv) consent by the agent to so act.

B. Doctrinal overview

1. Types of agency relationships

a. Agency can exist in a master / servant (employer / employee) relationship or an independent contractor relationship. Courts look both to contract and conduct to determine relationship.

(i) As defined by RSA § 2(1)–(2), in a master / servant relationship, the master controls or has the right to control the physical conduct of the servant in the performance of the services.

(ii) As defined by RSA § 2(3), in an independent contractor relationship, the principal has no right to control and does not actually control the physical conduct of the independent contractor in the performance of the services.

b. Determining the type of relationship: Courts consider several factors when deciding whether an agent is a servant or an independent contractor (main issue is legal right to control). RSA § 220(2).

(i) A finding that an agent is a servant turns largely on the extent to which the principal (i) controls the details of the agent’s work, (ii) realizes the ultimate profit or loss risk from the agent’s conduct, and (iii) has control over the agent’s decisions regarding personnel. (Humble Oil, TX 1949); (Sun Oil Co., DE 1965).

(ii) Franchisee / franchisor: There may be a presumption of independent contractor agency in franchisee / franchisor relationships, even if the circumstances are such that the degree of control and residual economic interest would support a master / servant relationship absent a franchise agreement. (Murphy v. Holiday Inns, VA 1975); (Arguello v. Conoco, 5th Cir. 2000).

(A) However, if franchise contract goes beyond setting standards and gives the franchisor right to control daily operations of franchisee, master / servant relationship exists (Miller v. McDonalds). A contractual disclaimer of agency is not dispositive.

2. Fiduciary duties of agents to principals

a. Within the scope of agency, an agent’s duties are fiduciary in nature (rather than contractual). RSA § 13.

b. Duty of obedience (RSA § 385): Agent must (i) obey all orders of principal and not act contrary to directions of the principal

c. Duty of care (RSA § 379): Agent must act with standard skill and care for the kind of work he is authorized to do. Negligent conduct breaches the duty of care

d. Duty of skill (RSA § 387 (?)).

e. Duty of loyalty (RSA § 387): Includes (i) a duty not to make secret profits through kickbacks or assume personal benefits of power, transactions with the principal of conflict-of-interest transactions, or use of position, property, assets, or knowledge of the principal in dealing with others (Reading); (ii) a duty not to usurp business opportunities of the principal (Singer); and (iii) a duty not to take property, defined broadly to include intangible property, when leaving (Town & Country).

(i) Confidential information (RSA § 386): After termination of agency, agent has duty not to use or disclose trade secrets, lists of names, or other confidential matters given to him only for principal. But, agent may use general information about business methods, and names of customers retained in his memory, if not acquired in violation of his duty as agent

(ii) Profits arising out of employment (RSA §§ 388 & 404): Agents must account to the principal for profits made in connection with conduct within the scope of the agency relationship.

(iii) Conflict of interest (RSA § 389): Agent has duty not to deal with principal as an adverse party in a transaction connected with the agency relationship (without the principal’s knowledge)

C. Means through which agency can arise (actual, apparent, or inherent authority; estoppel; ratification)

1. Actual authority

a. Actual authority arises when the principal manifests consent to the agent. RSA § 7.

(i) Something as simple as an oral grant of permission (e.g., permission to drive another’s car) may provide a reasonable basis for a jury to find that agency exists. (Gorton v. Doty, ID 1937, car borrowing).

b. When assessing whether there is a reasonable basis for a jury finding that the principal controlled the agent, courts look to the totality of the circumstances and look at several factors, none of which are dispositive in either direction. (A. Gay Jenson Farms Co. v. Cargill, Minn. 1981, grain buyer with right of first refusal of supplier’s wheat, right of entry into books for audits, and financing of a significant portion of supplier’s activities; supplier was buyer’s agent).

c. Implied actual authority: Actual authority can also be implied from

cks through nearby building).

(i) With respect to incompetence, it is unclear whether the requisite proof is merely that the contractor was incompetent or is that the contractee was negligent or reckless in selecting the contractor (perhaps because contractor financially incompetent)

(ii) An “inherently dangerous” activity is one which can be carried on safely only by the exercise of special care and skill, and which involves grave risk of danger to persons or property is negligently done (RA § 416)

3. Statutory liability

a. Conduct within the scope of employment also gives rise to statutory liability for the principal. (Arguello v. Conoco, 5th Cir. 2000).

4. Definition of “scope of employment”

a. Under RSA § 228, conduct of a servant is within his scope of employment only if (a) it is of the kind the servant is employed to perform, (b) it occurs substantially within the authorized space and time limits, (c) it is actuated in part by a purpose to serve the master (rejected by Bushey), and (d) if force intentionally used by servant against another, the use of force is not unexpectable by the master

(i) Alternative views: One view of the scope of employment doctrine is that all actions of the agent that are reasonably foreseeable by the principal are within the scope of employment. (Bushey, 2d Cir. 1968, coast guard drydock). Another view is that the employee must be acting in the interests of the employer to be within the scope of employment.

b. An act is not outside the scope of employment just because it is tortious or criminal. RSA § 231.

c. Conduct is within the scope of employment only if it is of the same general nature as that authorized or incidental to that authorized. RSA § 229(1)

(i) An agent’s response to conduct interfering with the agent’s ability successfully to perform his duties falls within the agent’s scope of employment (Manning v. Grimsley, 1st Cir. 1981, pitcher throws ball at heckler in stands)

E. Fiduciary obligations of agents

1. An agent must disgorge secret profits obtained from misuse of his position, even if the principal could not have made this profit directly or legitimately. (Reading, UK 1948, soldier riding on contraband truck in uniform); RSA § 388 & 404

2. An agent must disclose to the principal all relationships and business opportunities that arise as a result of the agency relationship, even if the agent makes a good-faith reasonable determination that the principal could not have benefited from the opportunities. Rejection of the opportunities is in the principal’s discretion. (Singer, WI. 1963, exec sends orders company can’t fill to another company, in return for cut of profits); RSA § 389

3. Departing agents are probably under a continued duty not to appropriate trade secrets, such as customer lists that cannot be readily ascertained, of the principal. (Town & Country, NY 1958, house cleaning service employee forms rival business, solicits customers of old employer); RSA § 396