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



Agency law is about asking when is one party responsible for the actions of another and what rights and obligations do those parties have to one another?
Situations in which an officer or employee is an agent for a business are common
Look out for situations where one person is acting on behalf of another

Need to decide: does a principal-agent relationship exist


The fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
Three Parts to Agency

Manifestation of consent by the principal that the agent act on the principal’s behalf
AND subject to principal’s control
AND the agent manifests consent

In order to create an agency there must be some form of agreement or understanding b/w the parties, But not necessarily a contract

Existence of agency may be proved by an evaluation of the facts in each particular situation
Look to what the parties said, what they did, how they acted, their course of dealing over time, even silence may be used to show a party’s consent*(obv make argument both ways on an exam)

It is not essential that the agent even receive compensation (however this factor might be an arguing point for no agency)

In Agency Questions we are interested in 3 players

The Principal
The agent
The third party

Some Basic issues that arise out of an agency relationship:

The agent has certain duties and obligations to the principal
The principal has certain duties and obligations to the agent
The principal is responsible for tortious acts committed by the agent that fall within the scope of agency (vicarious liability)
The agent has the ability to enter into binding agreements on the principal’s behalf, as long as the agreement may be traced to the principal’s authority

Helpful to distinguish between tort issues and contract issues

Tort – Who is responsible?
Contract – Who is bound?

In Torts

The question is not whether the principal was negligent, if principal was negligent they are liable under tort law
The question is, whether the principal may be found liable for the torts of an agent, even though the principal was not themselves negligent?



Mutual Consent b/w principal and agent
Principal consents that Agency will work on his behalf;
Agent consents mutually to Principal’s control
When the owner of a car authorizes an individual to drive that car for a specific purpose, the driver acts as an agent for the owner.
No compensation or business association between the parties is necessary to create a principal-agent relationship.

When someone decides to hire employees etc., they create a principal-agency relationship


2 Main Theories

Legal Rules of Thumb:

If you’re dealing with two legal persons, the alter ego theory its easier to prove because there are two people involved in alter ego.
If you’re dealing with more than two, enterprise is usually easier to prove.
But if the facts are complex, it’s advisable to plead in both.

oAlter Ego Theory

There’s no real factual distinction between the shareholder and the corporation. S/H using corporation as a dummy, no real meaningful distinction
That shareholder and entity are alter egos and are one in the same
Recognizing them as separate would promote injustice

oEnterprise Theory (WALKOVSKY)

Treat multiple corporations jointly liable for some action on the basis of being part of a shared enterprise, i.e “There aren’t really 10 cab corporations there is just one”

·Factors in Piercing the corporate Veil (SEA-LAND SERVICES v. PEPPER SOURCE)

Corp veil will be pierced when


Unity of interest

Factors that demonstrate unity of interest

Corporate formalities and corporate records
Comingling of funds or assets
One corp treating the assets of another as its own

These factors alone do not necessitate piercing of the corporate veil


Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice

·In Re Silicone

Minority Ru

derivative action, plaintiff may be reimbursed for litigation expenses.

Sometimes Derivative suits are abused, many derivative actions have been filed for the settlement fees not to right corporate wrongs

·Elements/Requirements to file a Shareholder Derivative Suit

(1) Must be a shareholder of the corporation you’re trying to sue.
(2) Must be a shareholder at the time of the ACT AND must REMAIN a shareholder when the suit is commenced.
(3) Plaintiff must be fair and adequate representative of corporate interest

The shareholder plaintiff must represent the bulk of the shareholder interests at large
Cannot have “unclean hands”

Cannot issue suit b/c of person vendetta against director (ie b/c they slept with your spouse or publically badmouthed you)


NJ State law requires $125k bond to bring a shareholder derivative action

The bond was to limit frivolous lawsuits brought by shareholders
Makes shareholders put some money in the game

If the lawsuit is lost by plaintiffs, it makes sure that the defendants are compensated
Also makes sure that potential plaintiffs are serious about the litigation
Higher barrier to suit

Purpose of bond: Gate-keeping Bond

Plaintiff argued that applying the statute to them was an unconstitutional hindrance to bring a suit (also argued would be unconstitutional because it was enacted after they initially brought suit)

Held that the bond was NOT unconstitutional and was allowable
Court said NJ Bond law was a substantive law, and not a procedural matter than would preempt federal rules

Remember Erie, in diversity cases, if the issue is procedural, then federal rules apply. If it’s substantive, relevant state law is applicable.