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

Corporations Outline
I. Agency
   A. Notes
 1. Imposes fiduciary duty
      – cheapens economic transaction b/c Ks aren’t necessary
      – 3rd RST → (1)Principal “manifests assent” to have agent act on their behalf with Principal in control
                           and (2) the agent “manifests assent or otherwise consents” so to act
      – party can be a fiduciary without being an agent
      – can be agency without parties knowing it
      – inward consequences → between the principal and agent; governed by Ks or law of fiduciary duties
      – outward consequences → relationship among the principal, agent and 3rd party; governed by principles
                                                  of attribution
      – agents can bind principals to 3rd parties
      – respondeat superior – “scope of employment requirement”
      – Principal must have the power; P has no duty of loyalty to the agent
      – Duties:
                  1) Disclosure
                  2) Loyalty: Food Lion: 2 investigative reporters go undercover and begin working at FL. Ct says
                                    they broke duty of loyalty to FL (but at least they were still loyal to the TV station?)
 
2. Principles of Attribution
      a) To justify a principal’s liability for an agents action, courts look to:
                  1 – control → “he who acts through another, acts himself” (not sufficient by itself )
                  2 – benefit → if you benefit from an agent, you may have to fall with them sometimes
                  3 – consent → of the principal to what the relationship is with the agent    
      b) Castillo (p.16) – RULE: P may be held liable for A’s actions based on agency created by Ps express                                            or implied authority (here it is implied actual authority)
                                  – FACTS: migrant workers sue plant for actions of 3rd party who hired the workers
                                  – REASONING: express authority to undertake certain acts includes implied
                                       authority to do things proper, usual, and necessary to exercise that authority
   3. Apparent Authority and Estoppel
         a) AA may be basis for liability in 2 situations:
                     1 – where person appears to be an agent, even though they don’t meet the definitions of agency
                     2 – where agents act beyond the scope of their actual authority
         b) AA is similar to Estoppel in that both lead 3rd party to believe that an agent is working on principal’s
             authorization, even though no such authority was granted
         c) Bethany v. QVC (p.25) – RULE: to create apparent authority, P must do something to lead 3rd party to
                                                       believe that the agent is authorized to act on its behalf
                                                   – FACTS: 3rd party Rep. told vendors they had been selected, but QVC had
                                                                    not selected them; Ct holds for QVC
                                                   – REASONING: apparent agency exists when:
                                                                     i. P consents or knowingly acquiesces to agents conduct
                                                                    ii. 3rd party has reasonable belief that agent possesses authority to
                                                                        act on Ps behalf
                                                                   iii. 3rd party relied to his detriment on agents apparent authority
                                                                     * no evidence of QVC’s intent regarding representative as agent
                                                                        and vendor also unreasonably relied on rep.
    4. Franchises
         a) Benefits to being franchisee:
                     – less risk because it’s a tried product
                     – benefits from a nationwide advertising campaign
         b) Franchisor wants to minimize the risk of franchisee producing a bad product, so they require
             franchisee to purchase raw product & equipment
                     → also monitor the franchisee to ensure compliance and require at least a 5 year contract
         c) Termination: by material breach – a breach that goes to the essential purpose of the agreement
                     → upon material breach, relationship is terminated and franchisee doesn’t get to keep…..?
            d) When franchisees sue franchisors, courts generally don’t find an agency relationship.
                When franchisor sues franchisee, court tends to find an agency relationship.
            e) What about from a third party perspective?
            – Could a third party fall and break his neck and sue the corporation, instead of the franchisee?
Put a contract provision in the franchise agreement that says that
Put a sort of conspicuous sign saying that “Mr. Patel owns and operates this store and is solely responsible”. Don’t make the sign too visible in case people take it seriously and feel less confident that the franchisee is part of the real Krispy Kreme.
 
II. Organization & Structure of a Corporation
 A. Notes
            1. “internal affairs doctrine” – the place where you incorporate, that State law governs relationship b/w
                                                             SH, officers & directors
            2. “race to the bottom” – States want to provide the most friendly terms on incorporation so business
                                                    incorporate there
  B. Public corporations v. Closely-held Corporations
            1. Public = shares owned by large number of investors and traded in public securities markets
                        i. fed securities law deals with these; disclosure requirements
                       ii. susceptible to hostile takeovers if another co. gains control of outstanding stock
            2. Closely-held = shares owned by small number of SH w/out access to public securities markets
                        i. overlapping roles b/w officers, directors, and SH
 
C. Incorporation
            1. DGCL §102 – Contents of Certificate of Incorporation
                        (a) required in charter:
                                    (1) name (must include corp., inc., co., ltd, etc.)
                                    (2) address of registered office in DE, and name of registered agent
                                    (3) purpose (can be any “lawful activity”)
                                    (4) total number of shares
                                                → if more than one class, must say number of each class
                                                → powers, preferences, rights of each class as well
                                    (5) name and address of incorporator(s)
                                    (6) initial Directors (until first meeting)
                        (b) what is optional in the charter (p.207 in supplement)
 
 
            2. MA §2.02 – Articles of Incorporation
                        (a) required in charter:
                                    (1) name (must include corp., Inc., Co., LTD under §4.01)
                                    (2) number of shares (common, preferred, etc., under §6.01(a))
                                                → 6.01: number and class designation required
                                    (3) address of initial registered office and name of registered agent at that office
                                    (4) name and address of each incorporator(s)
                        (b) what is optional in the charter (p.21 in supplement)
 
                                    → look also to §6.01, 8.01, 10.03
                                    → look at Mozart Bakery on blackboard for an example
 
            3. Grant v. Mitchell (2001) – RULE: When dispute over control of the corporation, documents that show
                                                                        intention will be decisive
                                                        – FACTS: Forms showed D and P as directors, but P later issued doc that
                                                                         named himself as sole director and then fired D
                                                        – REASONING: P acted as incorporator to name both P and D as directors;
                                                                                   form shows intention; parties still need to work out on own
                                                        – DGCL §108(a) – when was the meeting to choose directors happen?
 
D. Capital Structure
            1. Equity: SH own stock, and stock is an equity claim against a corp. Equity connotes a power to
                            control, through voting, and right to receive the fruits of the business thru dividends, etc.
                        i. Articles of Incorporation state the type & number of equity interests a corp can sell
                                    a) class of stock → equity holders with same rights are in same class
                                    b) series/tranches of stock – a further breakdown of “class”
                       ii. All equity interests put together = “Capital stock”
                                    a) unit of capital stock are shares, which are “outstanding” as long as SH holds them
                      iii. Common Shares v. Preferred Shares
                                    a) Common → unlimited voting rights and rights to residual assets of the corp after
                                                             payment of all corp liabilities
                

ate form
                                                                        b) piercing is jury issue
                                                             → so if you don’t follow corp formalities and corp requirements, you
                                                                  shouldn’t get the benefit of the limited liability
 
            5. Minno v. Pro-Fab (2007-OH)
                        – RULE: Piercing the veil is available to those Ps that demonstrate the D-corp actions meets the
                                       Belvedere test
                        – FACTS: D hired sister-corp as subcontractor (holds no liability insurance) → P is injured on                                                job and thinks D is liable for sister corp since same ownership and officers
                        – REASONING: the Belvedere 3-prong test for determining whether a parent corp is liable for
                                                   the torts of its subsidiary:
                                                            1) Control over the corp by those to be held liable was so complete that
                                                                the corp has no separate mind, will or existence
                                                            2) control over the corp by those to be held liable was exercised in such a
                                                                manner as to commit fraud or an illegal act against the person seeking
                                                                to disregard the corp entity
                                                                        → fraud or illegal act is interpreted as acts that would lead to
                                                                             unfair or unequitable consequences
                                                            3) injury or unjust loss resulted to the Pl from such control and wrong
                                   
            6. Reverse Veil Piercing- In Re Phillips (2006-CO)
                                    – RULE: Corps, in limited circumstances, may be liable for the debts of a controlling SH
                                                   or other corp insider where the SH treated the corp as his alter ego to perpetuate
                                                   a fraud or defeat a rightful claim and an equitable result is achieved by piercing
                                    – much more limited than traditional in that courts won’t use it if it harms any individual
                                       SH; also much more based in fairness when used
                                    – Court hear allows the outside reverse piercing here since b/c Ds corp creditors are same
                                     as his individual ones, so no random people will be injured
 
            7. Problem 5-1 (p.299)
                        – Facts: Local Nigerian subsidiary of Royal Dutch Shell Petroleum committing human rights
                                     violations by having local military suppress any opposition to Shell’s oil development.
                                     Ps are trying to go up the corporate veil to Royal Dutch Shell for liability
                        – Notes: – illegality by itself will not be enough to pierce → seems like the Ct respects the Shell
                                        make-up of individual entities
                                     – Ct will center on the abuse of corporate structure (the formalities) → comingling,
                                        records of meetings, etc.
           
 
 
IV. State Regulation of Corporate Governance
    A. Directors
            1. Presumptively control operations
                        i. DGCL §141 and MA §8.01(a), (b)
                       ii. DGCL §351 allows control by SH;   MA §7.32(1) allows elimination