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Business Associations/Corporations
Temple University School of Law
Wells, Harwell

CORPORATIONS OUTLINE
Professor WELLS
 
I.                   AGENCY LAW
a.        § 1.01 Agency: Fiduciary relation 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 the principal’s control and the agents manifests or otherwise so consents to act.
                                                               i.      Essence is when someone asks another to do something for them
1.       Principal, Agent, 3rd Party     PàAà3d
a.        P asks A to do something and A interacts with 3rd party àcommits tort or K breach
                                                                                                                                       i.      Inward: Sometimes the issue will arise between pseudo principal and pseudo Agent
                                                                                                                                      ii.      Outward: Sometimes interactions happen between Agent and 3rd party
1.       E.g. Agent hit 3d with car and principal is now liable
a.        Someone is trying to get to both the agent and the principal.
                                                            ii.      Look for CONTROL. 3 factors:
1.       1) The right for principal to control the alleged agent
2.       2) The alleged agent’s duty to act primarily for the benefit of the principal
3.       3) The alleged agent’s power to alter the legal relations of the principal
a.        Rule: Even when principal tells agent not to do something, P might still be liable
                                                                                                                                       i.      Cyberheat: Porn site as principle didn’t have enough control over illegally spamming affiliate to be liable. Porn site told them not to break law.
1.       If there was past behavior that was seen, this might work in favor of finding affiliate relationship
                                                            iii.      Restatement 3d- Control: The right to give interim instructions or directions
1.       Cyberheat could regularly have monitored Affiliates actions. However, if you monitor more closely, than one can argue there is MORE CONTROL and more of an agency relationship. So it is a double edged sword
                                                            iv.      Agency is NOT contractual and can extend beyond agent relationship.
1.        So if they ACT as agent-principal, there is agency even if they say there is not.
a.         Neither the principal nor agents have to know this law on agency.
b.       3 things to remember:
                                                               i.      1) AGENCY RELATIONSHIP IS FIDUCIARY RELATIONSHIP.
1.       Fiduciary relationship-Has to put someone else’s interests ahead of their own
a.        Hence agent has to put principal’s interests ahead of agents
                                                              ii.      2) PRINCIPAL IS LIABLE FOR THINGS HE DIDN’T AUTHORIZE
1.       It’s more interesting when agent has done something principle didn’t specifically authorize.
                                                            iii.      3) Figuring out if one is an agent of principal is NOT ENOUGH
1.       E.g. You run restaurant business. You ask joe to buy six pack of beer. Joe comes back, he buys it and says you owe him money. This seems easy enough that you owe.
2.       E.g. What if you send Joe to buy beer and Joe comes back and says he bought brewery for 1.8 million.
a.        Joe is still an agent but YOU ARE NOT BOUND TO this agreement. So identifying if one is agent doesn’t solve all questions.
c.        CONTRACT AGENCY: 2 kinds:
                                                               i.      Actual Authority-There was an express communication between P and A authorizing A to do something
1.       EXPRESS:Agent is told by principal to do something very clearly (kind of boring since clearly liable)
a.        DO NOT COMPETE AGREEMENTS: (INWARD)
                                                                                                                                       i.      Policy: You have to draw non competes narrowly since one wants to encourage one to compete. Usually limited in geography
                                                                                                                                      ii.      Covenants not enforceable for attorneys and doctors.
1.       CA does not enforce non-compete agreements. Otherwise Silicon Valley wouldn’t have developed as well.
2.       IMPLIED: Agent is told to do something. However, there are other things agent has to do that weren’t mentioned explicitly. Includes what is NECESSARY, PROPER, and USEFUL
a.        e.g. Agent told to drive truck to Pittsburgh and back. However, agent has to buy gas for truck (even though this wasn’t mentioned). Gas is necessary, proper and useful
b.       Castillo v. Case Farms: Case Farms hired temp company expressly to get migrant workers (no written agreement). Temp also housed them in subpar conditions. But housing was not express.
                                                                                                                                       i.      Court says that housing was IMPLIED. So even if EXPRESS authority was recruitment, the proper, necessary and usual was housing and hence this is why Court found this. Hence there was agency and liability.
1.       If Principal had included statement that they expected minimal standards for housing, it would be risky because it would be easier to find that there was agency.
                                                              ii.      Apparent Authority-Principal leads the 3rd party to reasonably believe that another is an agent and authorized to do something..
1.       Inherent authority was scrapped in 3rd restatement:
a.        e.g. I run a small business. I name A purchasing agent. I told them that they can purchase anything BUT veal. A gets a card that says “purchasing agent.” A goes out and purchases 10k of veal. Restaurant owner said he won’t pay because he didn’t want veal.
                                                                                                                                       i.      There was no ACTUAL authority to make that purchase since there was express command not to do it and it was not necessary, proper, and useful.
                                                                                                                                      ii.      However, from perspective of butcher, A had authority because of the card from principal. This is example of principal communicating to 3rd party while secretly limiting Agent to certain things.
b.       Hypo: I hire someone to be purchasing manager but don’t give any card or information. If agent goes to buy 50k of meat and agent signs on behalf of restaurant. If principal bounds restaurant, is there authority.
                                                                                                                                       i.      The mere fact that I communicated to agent (i.e. P to A), creates Actual authority which binds Principal.
2.       RULE: Agent can NEVER create apparent authority on his own.
a.        Bethany v. QVC: QVCàNTAàIll’s DCCAàJanis. Janis hired for logistics. Question was whether she was agent because she represented herself as one. Vendor promised to be at show and then denied (really they were alternate) sued
                                                                                                                                       i.      No evidence QVC authorized J to do anything
                                                                                                                                      ii.      Communication has to come from Principal.
1.       The agent can’t without principal’s action create apparent authority.
                                                                                                                                    iii.      However, sometimes reliance by 3rd party could be enough to find agency. Need to look at reasonability of reliance.
1.       Estoppel: If Principal knows that 3rd party will detrimentally rely and does nothing to prevent relianceàmay be liable. Looking for:
a.        Control over A
b.       Benefit to Principal
                                                            iii.      For Franchises, with a K situation (not tort) like in Krispy Crème problem (e.g. buying dough) we will not be inclined to find Principal-Agent relationship, unless specifically in K.
d.       TORTS: (RESPONDEAT SUPERIOR § 2.04)
e.        Respondeat Superior: Employer can be held liable for the torts of the employee. Employer has the right to direct means and manner of employee doing his work. RIGHT TO CONTROL (doesn’t mean employer does every command but just that he has right to do so).
                                                               i.      SCOPE OF EMPLOYMENT: Employer not respons

eholder
                                                             v.      2 types of Corporations:
1.       Publically Traded
a.        Shares on a public market
b.       Millions of shareholders (for large corporations) scattered all over the world.
                                                                                                                                       i.      Even individuals who own large shares will at most hold 1 or 2% of the company.
c.        3 separate groups-Shareholders/Directors/Officers
                                                                                                                                       i.      There is a lot of worry of interactions
2.       “Closed” Corporation
a.        No public shares. Shares held within.
b.       Have individuals who play prominent role as shareholders, officers and directors
                                                            vi.      Sources of corporation law
1.       Operate in all 50 states. Every state has its own corporation law. But not all are equal.
a.        Delaware law
                                                                                                                                       i.      INTERNAL AFFAIRS DOCTRINE: Corporation located in one state can legally incorporate in another state and is governed by the laws of that state
1.       So if X corp. is in Philadelphia and incorporated in DE, then any suit will be heard in Delaware (X corp. still needs to obey certain PA law like environmental)
                                                                                                                                      ii.      DE à less restrictive laws; over 50% of publically traded companies incorporated. 2 theories:
1.       Theory 1: Race to the bottom. Go to state that allowed managers the right to line pocket. Hence theory is that DE law allowed managers to steal from shareholders
2.       Theory 2: In 70s-80s, a new one emerged. Why would any shareholder buy shares from a corp. that rips off? Hence new theory is that DE was stable and had a lot of corporation cases on its book.
a.        Also court of chancery meaning there are business courts Hence, less surprises.
b.       Federal Law:
                                                                                                                                       i.      In new Deal, Federal government introduced Federal securities laws. Need to worry about that
c.        Model Act: Other states have adopted the Model Act
                                                          vii.      Articles of Incorporation (Model Act Rule 4.01):
1.       Articles of Incorporation are like Constitution and hard to change
1.       Charter usually bare-bones
a.        Charter can only be changed if board of directors vote to change it and shareholders approve (like constitution and hard to change).
2.       Bylaws are like statutes and easier to change.
a.        By laws can be changed with either majority of board or majority of stockholders and hence easier to change. Want shareholders to be able to change bylaws.
3.       Shareholders HAVE to have independent way to change bylaws. Can’t lock bylaws into place.
a.        POLICY: Want to think about whether you want something to be changed easily or not. Hence, you would stick it in either charter or bylaws based on that and whether you trust board/shareholders.
b.        4.01 CORPORATE NAME: must contain the word “corporation,” “incorporated,” “company,” or “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.,” or words or abbreviations of like import in another language; and