I. Agency – Fiduciary relationship which results when one person, a PRINCIPAL, manifests assets to another person, an AGENT, that the agent shall act on principal’s behalf and subject to principal’s control and the agent manifest or otherwise so consents to act.
1. Is the Principal Liable for the acts of its agents (Cyberheat)?
i. R3dA: 1.01-1.04
a) Principal’s ability to control
· Interim instructions and Directions
b) Act Committed for Principal’s Benefit
c) Agent has right to alter legal relationship of the Principal.
d) Agency relationship is a fiduciary relationship between the principal and the agent.
e) Fiduciary relationship – principal/ agent places someone else’s interest before his own.
· Principal can be liable for things he did not authorize
ii. There are two types of Authority:
a) Actual – there was a communication (Express) between Principal and Agent authorizing the later to do something
· Implied (necessary to complete Express)
b) Apparent – principal leads the third party to believe the agent has authority.
iii. Tort Liability: Respondeat Superior
iv. Fiduciary Duties:
a) R3dA – Agent has a fiduciary duty to act loyally in all matters concerning agency relationship.
b) Must have intent to act adversely is the measure of whether fiduciary breach occurred.
c) Imperfect performance at a second job is not enough.
v. Duty of loyalty – not to do anything against the party you owe such duty
a) Default – a lot of rules in restatements are rules that apply when parties have not agreed otherwise.
· You can agree otherwise.
· Default rules lower the cost of transactions
2. Actual Authority – R3dA: 8.01 – 8.05
i. We need to show the Agency First:
a) By showing Control (implied), or
b) By showing existing agreement (express
ii. Implied Actual Authority: Agent’s Actions must be “Necessary, Usual and Proper” (Case Farms)
a) Usually Agent will be charged with performing some explicit tasks and along with it agent has to do something else to complete it (e.g. fill the gas tank for a car to go across the State).
3. Apparent Authority
i. The creation/ manifestation of reasonable belief must come from the principal.
ii. Purported Agent cannot create Apparent Authority (Bethany)
4. Respondeat Superior – R3dA: 2.03, 2.04, 3.03
i. EE – principal controls body and manner of person’s work.
a) R3dA – 2.04; “vicarious Liability”.
· Scope of Employment
ii. Temporal boundaries
· No need to show principal did anything wrong.
i. If Agent committed Tort, want to sue Principal.
· Must only show that:
i. Agent is an EE
ii. Tort committed in the scope of Employment
b) Principal – Agent relationship involves control and consent. Control must involve ability to choose whom to work with. (Ware)
5. Estoppel – R3dA: 2.05
i. Principal manifested that Agent has powers
ii. Principal is careless knowing that other party will rely on Agent, did not deny existence of such power.
iii. Why do we make Principle liable for the Agent’s actions, even if Agent may have been told not to do something?
6. When Suing Principal:
i. In tort claims by 3rd party there is a chance for a win.
ii. If you are one of the co-signors (franchisee) likely you will not win.
a) K liability probably no…
b) Tort liability more likely yes…
II. Organizing a Corporation
1. How to start a Corporation?
ii. Charter (minimal & tough to change) à Bylaws (more substantial & easier to change)
i. 2.02(a)(1) à 4.01: Name must contain “Corp. or Ltd.” Or similar
a) People dealing must know liability limitations
ii. 2.02(a)(3) àNeed name of the initial Registered Agent
a) For Contact Purposes
iii. SH’s must have power to change bylaws, unlike almost unchangeable charter
iv. Want an odd number of directors to avoid deadlocks
v. Upon filing of Articles of Incorporation, the Corporation comes into being.
3. Articles of Incorporation. Organization.
i. MBCA: 2.01,.02,.03,.05,.06
ii. Must have in articles of incorporation (2.02(a))
a) Name with Corp. or Ltd.
b) Number of Shares to be issued
c) Name and Address of the Registered Agent at that address.
d) Name and Address of Each incorporator
4. Distinguishes between Incorporation and Organization (Grant)
i. Initial Directors may hold a meeting at Incorporation (2.05)
ii. If not named, Incorporator(s) will elect the directors
iii. Court will go by the Articles of Incorporation if they conflict with Organization.
5. Power to Change Capital Structure:
i. MBCA 6.01; 6.21:
5. In Re Phillips
i. Reverse Veil Piercing – Corporation may be liable for the debts of the controlling shareholder.
ii. Similar to veil piercing
iii. In Veil Piercing we look at:
a) Unfairness – equitable doctrine
b) Alter-Ego – failure to follow corporate formalities.
· In RVP it would be use by an individual of the corporate form to hide assets, etc.
e) Money being pulled out of the corporation
IV. Closely Held Corporations
1. May Eliminate the Board of Directors completely per shareholder
2. Shareholder Agreements:
i. If a shareholder has proxy agreement to vote for another shareholder, he can do so to elect Board of Directors (Ronnen)
ii. Voting Proxy must be approved by all persons who are shareholders at the time of the agreement.
iii. There must be a warning to the buyer of the share of notice to such agreement.
iv. MBCA 7.32 – Governs Shareholder’s Agreement
v. MBCA 7.30 – Board of Directors
3. Transfer Restrictions:
i. MBCA 6.27 Governs Transfer Restrictions
ii. Transfer restriction must be reasonable – (Capital Group)
a) Particularly if you cannot sell ever (absolute transfer restriction), then court will strike down such restriction.
b) Reasonableness does not require looking at a particular situation
· Rather, look at a general restrictive contract itself as being reasonable or not.
4. Voting Trust (Wareheime)
i. MBCA 7.30
ii. Trustee who is also a CEO of a corporation and a trustee holding that corporation’s voting stock:
a) “Good Faith”: May exercise his right to vote trust in good faith for the benefit of the Corporation and minority shareholder’s
b) Does not owe duty of absolute loyalty to the stock-owners
iii. Creating trusts for too long though, may create ability as abuse.
iv. Voting trust in not simply pool of votes agreed to vote together. In a voting trust the shares are out of the hands of shareholders and they cannot be reached. Must sue the Trustee.