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Business Associations/Corporations
Temple University School of Law
Hoffman, David A.

· Principle [1 – 15 (finish P.1-1)] § Definition:
· agent is any person who is auth to act on behalf of another (the principal). Law of agency governs the interactions among principals, agenst, and 3rd parties with whom agents deal on behalf of principles
§ Creation (U.S. v. Cyberheat)
· Rest 3rd of Agency states: agency relationship
o When (1)principal “manifests assent” to have agent act on principal’s behalf and under principal’s control; (2)agent manifests assent or otherwise consents to act
o Unexpressed reservations or limitations do not restrict [aprty’s] expression of consent
o No contract is required to form agency relationship
o There is no need even for an intent to enter into something called an “agency relationship”-just needs to have the substance
o Legal consequences
§ Inward between the principal and agent
§ Outward from agent to a third party affected
· Cyberheat
o Agency ultimately turns on parties’ intentions as demonstrated either by express agreement or by inference from their actions. This is fact question
o Crts examine whether principal agency exists by looking at 3 factors:
§ Principal’s right to control alleged agent
§ Alleged agent’s duty to act primarily for benefit of the principal
§ Alleged agent’s power to alter legal relations of the principal
o However, crts will look at entire context of the relationship and the substance
o Control
§ Principal will be held liable for agents wrong doing upon matter which the principal might reasonably expect would be the subject of representations, provided that the other party has no notice the representations are unauthorized
§ For vicarious liab, there must be a sufficient link between them. This is fact intensive
· Ex: when principal auth agent to conduct and conclude a transaction with third parties on principal’s own behalf, and principal benefits financially form the contracts, principal will be liable, based on agent’s foreseeable infringement actions upon which it would be reasonable for third party to rely, provided the third party has no notice that representations are unauth.
o Knowledge
§ Notice of the viol to D and whether D response to notice of the affil viol was reasonable under the circumstances is a fact Q
§ Where there is conflicting ev, then it is a Q for the jury
o Crt found there were Qs of fact Re the control and knowledge of Cyberheat so Summ J was denied for both parties
o Control was key in the case. Actions of the agent do not have to be in interest of the party, but just on behalf of it.
§ Agent’s fiduciary duties to Principal (Food Lion; Prob 1-1)
· Principals and Agents owe Fid duties to each other in the agency relationship.
· Principal’s duties:
o Performance of contract obl, good faith and fair dealing and indemnification under certain circumstances (Rest 3rd of Agency § 8.13-8.15)
· Agent’s duties:
o Performance of contract obl, care, competence, diligence, obedience, and disclosure (Rest 3rd §§ 8.07-8.12)
o The most important duty of ALL is the duty of loyalty to the principal
§ Agent must act loyally for the principal’s benefit in matter connected with the agency relationship (Rest 3rd § 8.01)
§ Duty of loyalty is multifaceted and includes:
· not to disclose confidential info of the principal for agent own purposes or purposes of 3rd party (Rest 3rd 8.05)
· duty not to compete with principal in any matter within scope of agency relationship (8.04)
· duty not to act as adverse party to principal in transaction connected with agency relationship (8.03).
§ if there is a breach of loyalty then remedies are damages and disgorgement of profits, if any
· Food Lion (4th Cir 1999)
o Duty of loyalty issue for two undercover ABC reporters working at Food Lion trying to expose unsanitary meat practices
o The interest of employer ABC to whom Dale and Barnett gave complete loyalty were adverse to the interests of Food Lion, the employer to whom they were unfaithful
o Tho the companies are not competing, FL and ABC interests were adverse in fundamental way-ABC wanted to expose FL for bein unsanitary. In promoting the interests of one master, they did at expense of another. They had the requisite intent of acting against FL, unlike a person who works a night job and is tired because of his day job.
· The duties will end when there is no longer an agency relationship. However, employers may make their empees sing non-competes for certain time length after employment or in certain geographic area
o Attribution [15 – 32, 45-51] § We attribute actions of the agent to the principal through 3 rationales: control, benefit, and consent (note that it takes more than one factor to call for attribution)
· Rest 3rd of Agency 1.01:
o Chief just for principal’s accountability for the agent’s acts are the P’s ability to slect and control the agent and to term agency relation, together with the fact that agent has expressly or implicitly agreed to act on P’s behalf
§ Actual Authority (Castillo)
· Rest 3rd of Agency § 2.01
o Actual Auth is action taken in acordance with the principal’s manifestation to the agent that the principal wishes the agent so to act.
· Rest 3rd Agency § 3.01
o Actual auth is created by a manifestation from P to A that P consents to A taking actions on P’s behalf.
o Thus, in eval actual auth, one would eval the COMMUNICATIONS from the P to the A.
· Actual Auth may exist though no written contract and typically includes both express and implied aspects
o Act as lawyer incl the rubric of being a lawyer
· Castillo
o Ps (migrant farm workers) sued Case Farms for viol of AWPA (Agr Wrkr Potect Act) and the FLSA (Fair Labor Stands Act) because ATC (Agr temp agency), in accordance with unwritten contract with Case Farms, hired Ps from TX to go to OH and promised reasonable housing and transportation and when they got to OH they found none.
o Case Farms argues that all it promised was a bus tic to the Farm in OH and that ATC was not its agent
o Crt found under prepon of the ev, reveals that housing and transport issues were well within the class of activities that were proper, usual, and necessary to recruit and hire workers’ for case farms.
§ Housing and transport were necessary parts of Case Farms recruitment process, ATC claims in those areas were within the scope of its relationship as an agent of Case Farms
§ Apparent Authority and Estoppel (Bethany Pharmacal)
· Even in absence of actual auth, agent actions may still be attributed to principal when 3rd person reasonably believes based on “manifestations” by the purported principal that actor is auth to act on behalf of the purported principal. Apparent auth does not req prior existence of agency relationship.
· May be basis for liab in 2 sits:
o Where persons appear to be agents even tho do not qualify under the def discussed above
o Where agents act beyond scope of their actual auth
· Rest 3rd of Agency § 1.03: Manifestation: person manifests consent or intention thru written or spoken words or other conduct.
o Most important implication is that comm. from the principal need not be directed to third persons before apparent auth is created. The manifestation can now come thru an intermediary (as long as manifestation is traceable to the principal) or by simply placing a person in a cert position
· Two key pts in find apparent auth:
o Manifestation must emanate from principal (or purported principal) and must be rec’d (directly or indirectly) by the 3rd person
o Scope of agent’s apparent auth depends on 3rd person’s reasonable interpretation of that manifestation
§ Whether it was reasonable for third person to believe has objective and subjective components
· Estoppel
o Two things distinguish estoppel from apparent auth
§ Estoppel reqs third party to change position in reliance on the principal, whereas a principal may be bound under apparent auth even in absence of such detrimental reliance
§ Stoppel allows third party to hold principal liable but does not give the principal any rts against the third party (tho principal can cure that by ratifying the T)
· There was a such thing as inherent agency power (attribution by virtue of the status of being an agent when undisclosed principal) but Rest 3rd doesn’t have it anymore. Now has this:
o Rest 3rd Agency § 2.06: make undisclosed principal liable for action of their agents-acting w/o actual auth-if a 3rd party detrimentally relies on agent and principal does not take reasonable steps to notify 3rd party of the misplaced reliance.
· Bethany Pharmacal Co v QVC (7th Cir 2001)
o Bethany thought it was selected to be showing its products on QVC though it was only an alternate because Janis (rep of IL Dept of Commerce and Community Affairs) sent them a letter congratulating them on being selected but they did not get the extra post-it saying it was an alternate. So they ordered all these products to be prepared for it to be sold on TV. But then they found out they were not one of the chosen. So tried tosue QVC and argue that Janis was acting as an apparent agent and acting under apparent auth to contract with Bethany for the product
o Crt rejected Bethany argu. Beth did not est that QVC took any steps that would make a reasonable person believe that Janis had the auth to contract on its behalf. QVC conistently maintained that the only way in which it would neter a binding contract was thru purch order issued by QVC. Further, no ev that QVC ever indicated to any vendor that someone other than a QVC buyer had the auth to contract on QVC behalf.
o Crt found Bethany belief unreasonable.
o Gen test: principal not liable unless reasonable person in principal position would have reasonably believed that there could be a agent relationship.
· Problem 1-2
o Rebar and cook-send the addendum to Birmingham and not Decatur (corp HQ). the agent in Birmingham accepts the letter and cashes the check. The Rebars think they get to sue.
o Not reasonable to sue because the HQ was the place to send the letter (letterhead)-no auth
o Case Study of Krispy Kreme
§ Franchisor-the party have the trademark (mark) and trade secrets and other services-Krispy Kreme, Inc. (a corp) incorp in NC—Winston Salem
§ Franchisee-two types
· Area developers-get a bunch of franchisees to work for them
o Must enter into development agreement
· Franchisees-contribute—20k-50k (franchise fee); royalties amount to 4.5% of gross sales for developers and 3% of gross sales for associates
§ Franchisors get a sweet deal-why would people want to franchise?
· Franchisors outsource business risk, and outsource start up costs
§ Franchisees-buy into the krispy kreme business-it is more reliable
· Get the method and the advertising
§ Risk for Krispy Kreme, Inc
· Franchisor runs the risk of the franchisee’s quality-separate the issue of control
· KKinc tries to lessen this through system stands, uniform equipment and supplies, non-compete, and training for mgrs, monitoring, and can term franchise agreement if franchisee not complying
§ 15 yr long agreement-you get stability a long term monopoly, relationship may be so long that it just may continue indefinitely
· why not generally have short term agreements-need time to grow a business
· relationship specific investment
§ material breach-a breach that will give a party reason or right to either suspend or terminate the contract-makes it impossible to perform-goes to the substance of the agreement-central purpose of the agreement is frustrated because of the breach
· the franchisee wants to walk away from the agreement?
§ Questions
· does the relationship paragraph that states you are not an agent, settle the agency question?
o No we still must examine the factors
§ Consent-there was consent here
§ Control-does KKinc have control over franchisee?
· It does have q

s a later effective date is specified.
· Called either the “articles of incorp” or in DE “certificate of incorp”. The gen term is “charter”
o Required to include-
§ Name of corp
§ # of auth shares of stock
§ name and address of a registered agent in the state of incorp.
§ Under DE law, req to include the purpose of the corp, which can be as general as “to engage in any lawful purpose for which a corp may be organized”
o Most well-advised corps also have
§ Initial directors
§ Corporate purpose (like above)
§ Mgt provisions
§ Bylaw provisions
§ Director liability
§ Indemnification
o Used to include, but no longer:
§ Duration
§ Initial capital
o Incorp is High on formality
§ There is no need that your corp be moral. It just needs to be filled in. we are responsible for the DE code and the Model Code (specifically as well). Once we decide to follow art of incorp, we are now incorp.
§ Incorporators are in charge of the charter
o Grant v Mitchell (Chancery 2001)
§ Facts
· Started an LLC in Phoenix to help businesses keep track of environmental state and fed reqs. In begin, each of three parties, Mitchell, grant, and Meltzer had 1/3 interest. Then grant put in more $ and got a 42% interest. Incorp in DE with Grant as sole incorp. Director’s consent had signature lines for both grant and Mitchell, but never signed. Moved corp to Mass. And signed foreign corp cert. and was signed both by Mitchell and by grant. Tho they never met formally as directors. All three held themselves out as directors when dealing with 3rd parties. Began hiring staff and giving stock options, tho none of the founders even had stock options for themselves. Relationship deteriorated. Grant tried to kick out the other two as his role as incorporator
§ Issue
· When did grant first exercise his auth as incorporator to name Epasys board?
o Grant says Aug 2000 when he tried to kick them out
o Mitchell says latest is Jan 2000 when he executed foreign corp cert
§ Law
· Title 8 §108(a) and (c):
o (a): after filing of cert of incorp, incorp can meet and do cert things like elect a brd
o (c): any action that could be taken at the first mtg, can be taken without a first mtg if each incorp (or in case of only one incorp) signs the instrument in the action so taken
§ Discussion
· Crt agrees with Mitchell
o Cites various evidence showing that the firm that held the docs believed it was a valid
§ The cert, the only signed thing indicates grant knew there was a board
o Grant can’t hide behind the formalism because he did not sign the consent agr. Judging from the surrounding ev it looked for all matters and purposes that everyone seemed to believe that Mitchell and Grant were both directors and there was also documentary evidence supporting directorship as early as Jan 2000
§ Class notes: the shareholders can vote out the board, they control the company. They get to do whatever they want to do.
· Grant says that to form a board, there must be an initial meeting and to name them. And that meeting was never held. That meeting was not held until things all fell apart and he named himself as the sole board. As the brd member, he fired Mitchell and Meltzer.
· There are some unsigned consents and he said he didn’t read it
· But there was a foreign corp doing bus in MA form. When did that first mtg happen? It never did but the crt acts like it did. There is pretty good documentary ev saying it consisted of grant and Mitchell. The stories are so different and it is pretty awkward to call the parties liars and really awkward to call a law firm a liar.
· Was there not att/cl privilege? Wasn’t grant the client? No the client was the company. He cannot side for grant. There is a conflict here unless the company waives its right. The notes are discoverable, the forms are discoverable. The backdates of the notes
· It does not require more than one incorp at the meeting-incorporators OR incorporator
· The brd decides who goes into bankruptcy. The crt told them to have a mtg.
· The DE law will force the shareholders to vote on the board. You must resolve who are the board. But until then you are stuck together. They didn’t figure out who the brd is. The DE will not help you out. The shareholders will decide who is the brd. I leave you folks to your own purposes. Eventually this will be figured out, but you will do it yourselves. Very close attention to the agreements. Little care about fairness and justice. They are about enforcing the parties’ settled expectations. Because you kind of know what you are going to get.
· The point: if it looks, sounds, and smells like a duck, it is a duck. Even if you call it a chicken
o Articles of incorporation exercise
§ See exercise and DGCL and MC