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Business Associations/Corporations
Temple University School of Law
Ellers, Edward S.

§   Business Organizations:
o    Types:  sole proprietorship, partnership, corporation, LLC
o    Considerations in choosing a type:  continuity, liability, ease of mgmt, transferability of interest, taxation, ability to raise capital
§   What is a Corporation?
o    An artificial person or legal entity created by or under the authority of a state.
§   Corporations can own property, sell property, enter/breach contracts, sued/be sued, etc.
§   Can only act through agents (directors, officers, employees, etc.)
§   Has no expiration date.
o    Divided into 3 groups –
§   1) Shareholders
·         Legal owners
§   2) Directors
·         Elected by shareholders to oversee operations            
§   3) Officers
·         Appointed by directors to run the corporation
§   EXAM NOTE:  be aware of how relationships are formed and be able to identify when they exist and what the consequences are. 
§   Restatement 3rd 1.01: Fiduciary relationship which results 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 principal’s control and the agent manifests or otherwise so consents to act.
o    No contract required, can be formed verbally, by deed, simple writing, or by employment
o    Creation of agency has both inward-looking and outward looking elements
§   Inward – legal questions about alleged principal and alleged agent
§   Outward – focus more on interactions between agent and 3rd party
§   § 1.02: Agency arises when the factors from §1.01 are met.  The relationship does not have to be characterized as an agency relationship to in fact be one. 
o    2 types of authorization – 1) Express; 2) Implied
§   Express – specifically said agent could do activity
§   Implied – agent has act to achieve, so can do what is implied to complete that act. Principal is liable for things he didn’t authorize.
o    § 1.03: Assent/Intent is manifested through written or spoken words or other conduct. 
o    § 1.04:  Provides definitions for person, diff’t types of agents, notice, etc..
o    U.S. v. Cyberheat (Cyberheat’s affiliates sent unconsented to emails, violating statute. Gov’t contends that Cyberheat should be held liable based on actions of affiliates)
§   3 Factors:
·         1) the principal’s right to control the alleged agent;
o    Control is the right to give interim instructions/directions
·         2) alleged agent’s duty to act primarily for the benefit of the principal;
·         3) alleged agent’s power to alter the legal relations of the principal
§   It is the substances of the relationship, not the label the parties give it.
§   A principal will be held liable for agents wrongdoing upon matters which they might reasonably expect would be the subject of representations, even if unauthorized, as long as 3rd party doesn’t know they are unauthorized.
§   Up to a jury to look at whether Cyberheat exerted or could/should have any control/supervision over affiliates based on materials provided. Also look at knowledge of Cyberheat regarding violations, and if actions taken were reasonable under circumstances
§   RULE: Control is the key.  Consider: the ability of the principle to direct the actions of the agent, penalize the agent, and whether or not the agent was acting on the principles behalf.  If you control the agent, then there is agency, if no control then no agency.
o    Once an agency relationship is established, the agent owes the principal 3 fiduciary duties: 
§   Loyalty:  agent will refrain from self-interested behavior that wrongs the principal.
§   Care:  agent won’t perform work in a negligent manner
§   Duty to disclose:  agent will disclose things that are adverse to the principle
§   Loyalty
§   § 8.01: Agent must act loyally for principal’s benefit in all matters connected with the agency relationship
o    Includes obligations to: (8.05)1) not use or communicate confidential info of principal for agent’s own purposes or those of a 3rd party; (8.04) 2) don’t compete w/ principal in any matter w/in scope of relationship; (8.03) 3) don’t act as adverse party to principal in transaction connected w/ agency relationship
o    Food Lion v. Capital/ABC – (ABC employees went undercover and worked at Food Lion, and exposed bad practices. Is this a violation of duty of loyalty?  Yes, found breach of duty b/c requisite intent to act against interests of employer.)
§   3 ways for Tort of Breach of Duty of Loyalty:
·         1) Employee competes directly w/ employer; or
·         2) Misappropriates employer’s profits or property; or
·         3) breach employer’s confidences (ex: stealing trade secrets)
§   Default duty of loyalty: don’t do activities against interests of employer. Act solely for benefit of principal in all related matters.
·         This is the rule in place if no contract or agreements state otherwise
·         Duty of loyalty ends at the end of the principal/agent relationship
·         Policy:  makes economic sense b/c individualized contracts would take forever. Lowers cost of transactions and catches loose ends.
§   Mandatory Rules: ex. criminal laws. Always wrong to kill someone, so can’t agree otherwise.
·         Duty of loyalty ends at the end of the principal/agent relationship
o    Exceptions: trade secrets & confidential info (defined by state statute), and Non-Competes
·         Non-Competes:
o    Must be reasonable in 1) Geography, 2) Scope, 3) Time
o    Matter of State Law: some states (CA) don’t allow them.  2-3 yrs of no-compete is longest any court will allow.
o    Policy: must balance employers needs against employee’s rights to earn a living
·         Injunctions:
o    Remedy for violations of non-compete by employee. 
o    Requires: 1) probability of success on the merits, 2) irreparable harm, 3) money damages will be inadequate compensation.
o    The higher a position one holds and the more consideration provided, the more likely a non-compete is to be enforced. 
o    Rules of Attribution: Outward Looking Consequences – Bind Principals & 3rd parties
o    Principals can be held liable for tortious actions of their agents, and can be required to fulfill contracts into which their agents have entered.
o    Restatement 3rd 1.01 comment: the chief justification for principal’s accountability for the agent’s acts are the principal’s ability to select and control the agent and to terminate the agency relationship, together w/ the fact that the agent has agreed expressly or implicitly to act on principal’s behalf
§   Control, Benefit, Consent important concepts
·         Those who gain from the actions of another should sometimes be held to answer for costs inflicted by those actions
·         Consent is central to finding when agency relationship exists, and thus when it’s fair to impose liability on the principal for actions of the agent.
§   Vicarious liability – respondeat superior
o    Actual Authority (two types): Principal has actually said to the agent go and do something on my behalf (i.e. principal has manifested authority in agent). Principal consents to the agent taking actions on principal’s behalf.
§   Express Actual Authority: all the details of Authority is specified in the communication between Principal and Agent. Must be conveyed orally or in writing.
§   Express Implied Authority:  When you give someone ACTUAL AUTHORITY (ex. run my business) there is many things that are implied w/ this authority to fulfill the agency
§   Castillo v. Case Farms of Ohio, Inc (Under oral contract ATC was recruiting for Case Farms, but employees promised so much and when they got to the job they got nothing/treated badly. Plaintiff’s sought to recover from Case farms believing they were the Principal to ATC.  Yes, Case Farms is responsible for ATC’s actions.)
·         Must evaluate the communications from the principal to the agent.
·         There was agency here. Express authority to recruit and hired people, and Implied authority to do all things proper, usual, and necessary to exercise that authority.
o    Also no distinction between employees; and paychecks came from Case Farms.
·         Common law: Where there’s express authority, there’s also implied authority
·         RULE: Principal is liable for actions of agency only if those actions are taken in scope of agent’s employment.
·         Very fact specific inquiries to determine type of authority.  Defining what is usual, proper, and necessary is the key here. 
o    Apparent Authority – R3dA 2.03-04, 3.03
§   One person may bind another in a transaction with a 3rd party, even in the absence of actual authority, when the 3rd person reasonably believes based on “manifestations” by the purported principal that the actor is authorized to act on behalf of the purported principal.  Always contingent on the specific facts. 
§   Apparent Authority is basis for Liability in 2 situations:
·         Where person appear to be agents, even though they don’t qualify under the definition
·         Where agents act beyond the scope of their actual authority
§   Difficulties revolve around notion of Manifestation – person manifests consent or intention through written or spoken words or other conduct.
·         Ex. Prior Dealings; “My agent will contact you…”
·         Communications from the principal need not be directed to 3rd person before apparent authority is created and need not use word “authority”
·         But, there must have been communication b/w principal and 3d party at some point to have led to manifestation of authority
§   2 key points to finding apparent authority
·         1) manifestation must emanate from the principal (or purported principal) and must be received (either directly or indirectly) by the 3rd person
·         2) Scope of the agent’s apparent authority depends on the 3rd person’s reasonable interpretation of that manifestation.
o    Subjective and objective components: Ct’s consider prior dealings b/w parties, customs that apply in particular setting, reliance, and nature of the proposed transaction.
§   Implied Apparent – you know someone is doing things not authorized to do as your Agent but you don’t stop them
·         Implicates issues of control, benefit, consent
§   Policy:  do not want to hold principals liable solely b/c of status. 
§   Custom:  Ct’s will hold principal liable to the extent that custom would justify reliance by the 3d party
§   Limitations:  Apparent Authority NOT present when 3rd party believes that an interaction is with an actor who is a principal. AA can’t exist in cases involving an undisclosed principal
§   Inherent Agency Power –Principal hasn’t authorized agent at all, but principal is bound by agent’s action for reasons of fairness. This has been Abandoned!!
§   Bethany Pharmacal v. QVC – (Company was going to sell their product on QVC believed they were chosen b/c they thought Janis was an agent of QVC b/c of certain manifestations of assent) Janis initiated contact with vendors, her conduct did not constitute a manifestation by QVC to 3rd party that Janis had autho

t, noninterference
·         Law doesn’t provide remedy really for principal’s hurting agents
§   Reasons for barring suit by agents against principals: Franchise agreement is meant to shift risk from principal to agent.
§   Note:  In order to defeat apparent agency in tort cases, you must convince someone that it’s not reasonable to believe that the franchisor has agency.  You must do this despite the obvious manifestations that the franchisor takes to imply that it is their store.  Do this by putting “independently owned/operated” on the door/work order/etc…  This must be displayed prominently enough that a finder of fact would find it to be reasonable.
§   Consider the risk/return.  The party who beras more risk and retains more profits will typically have more control. 
§  Fiduciary Duty Arguments for Franchisors/ees 
·         If there’s no principle/agent relationship then there’s no fiduciary duty
·         Inter se
o   There is no p/a relationship
o   The parties are protected via contracts, covenants, etc…
·         Fiduciary duty argument is used by franchisee’s when the franchisor tries to terminate the agreement
o   The franchisor argues that there is no agency relationship, and even if there was, it only goes from franchisee to franchisor.  Franchisor wins this argument.
o   Ellers says he is not aware of any case that imposed a fiduciary duty on the franchisor
·         Good faith argument
o   Franchisee’s can try to get around the lack of agency relationship by arguing that the franchisor, b/c of the longstanding relationship, does have an equitable duty of good faith
§  Ex:  GM terminating a bunch of dealerships, this is what the dealers argued.  It can win, though it doesn’t always.
·         Indemnity v. Hold Harmless
o   Indemnity:  the party doing the indemnifying (franchisor) agrees that they will pay for the defense and control what goes on in the case for the defense
o   Hold Harmless:  the franchisor says you go and defend the case and we’ll pay for it at the end
o   The difference is who has control over the case.
·         If the franchisor trains the franchisee then they have some control and that can work against them
o   They will never train in discrimination and diversity so that they can avoid liability here
o   Ex: Denny’s discriminating against certain customers, corporate got held responsible for this b/c they had trained their franchisees on this
·         If it’s only something in the manual, rather than something the franchisor trained the franchisee in, then there’s less control and it’s a more difficult, though winnable, argument
§   MBCA . 2.01 – 03, 2.05-06
§   Corporation: legal fiction with qualities:
o    1) Centralized Management
o    2) Continuity of Life
o    3) Transferability of ownership
o    4) Limited Liability
§   For shareholders
§   Participants
o    Shareholders (equity)
§   Have limited Rights:  Right to Vote on fundamental transactions, and elect directors, Sell their stock, Sue
§    “owners” of the corp.
§   Limited liability
§   Control in public corps: through annual elections of directors, and voting on specific proposals when allowed
§   Control in close Corps: mechanisms of control exercised by SH, often govern by prior agreement in contracts among selves, very dominant.
o    Directors
§   Elected by shareholders, to manage Corporation, supervise officers. No authority to act as individuals.
§   They are the agents, they can be sued by shareholders if they don’t do what they promise to do
·         If they promise to do X but do Y and the value of the Stock goes down directors will get sued by Stockholders
§   Hire and Fire officers
o    Officers (CEO, President, CFO)
§   Do the day to day management of the corporation. Make many of the decisions that define a corp’s activities. Little law about officers.
o    Employees (non-officers)
o    Creditors (Debt)
§   Invest money into the Corporation, they have no right to vote but they have a lot of interest in the Corp b/c they are affected by what the corp does.
§   Get paid first if the Corp liquidates or gives out dividends
§   2 kinds of corporations
o    Publicly Traded Corporation
§   Separation of control, Directors, Shareholders, Officers
§   Disparate constituencies
§   Federal Securities Law (SEC) disclosure
·         Disclosure obligations – quarterly and annually
o    Federal fees are huge when people do not follow securities law