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

Corporations Outline
Prof. David Hoffman
Spring 2010

Unit 1: Agency

Rule: An agency relationship exists when the principal consents to the agent:
1. acting on principle’s behalf
2. subject to principle’s control
· Plaintiff minor was injured in a car accident, car was owned by the teacher, and driven by the coach. The teacher volunteered her car, she claims it was a loan, but the coach never asked for the car. The court held that the coach was an agent, and the teacher was the principle, therefore by agency concepts, the teacher was liable. Garton v. Doty, Idaho 1937 2/1

Note^: It is important to note that the jury was informed that the driver was insured. The court reasoned that the teacher wanted the kids to get to the game, and would’ve driven herself, therefore the coach was acting on her behalf.

Agency between Creditor and Debtor
Rule: A creditor becomes a principle, and a debtor an agent, when it is clear that the creditor exhibits de facto control based on circumstantial evidence.
· Creditor company Cargill was held to be a principle over debtor grain dealer Warren based on 1. Cargill’s recommendations on business conduct to Warren, 2. Cargill’s right of first refusal of grain, 3. Warren’s inability to enter mortgages without Cargill’s consent, 4. Cargill’s right of entry to Warren’s premises, 5. Constant criticism, 6. determination that Warren needed paternal guidance, 7. provision of drafts and forms which Cargill’s name was printed, 8. Financing (not actually weird), 9. power to discontinue (also not weird). A Gay Jenson Farms Co. v. Cargill, Minn. 1981, p. 2/7

Note^: If Warren’s operation was independent of Cargill, it would be a relationship of buyer-supplier, not agent-principal.

With any terms of agency, a principal gives interim instructions, says “shall” do something (specifically or implicitly).

Fiduciary Duty
Rule: An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of principle.
· UK soldier was transporting people in a lorry in Cairo in a Royal Army uniform when he was off duty, and pocketing the profits. The court held that he breached fiduciary duty to the Crown, and ordered the money be paid to the UK government. Reading v. Regem, UK 1948, p. 3/76
· Auto-worker Singer signed contract to act solely for the benefit of General Automotive the entire time, got side business which he did not pay to the company. The court reasoned that Singer breached the fiduciary duty to act solely for the company when engaging in his own enterprise, and received a benefit for being on the premises. General Auto v. Singer, Wis. 1963, p. 4/79

Rule: An employee has a fiduciary duty not to use confidential work-related information to benefit themselves.
Rule: Fiduciary duty to employer extends beyond the duration of employment.
· Cleaning company broke off from former employers and used the list of customers to solicit them for their own business. This is a breach of fiduciary duty. Town and Country House v. Newberry, p. 4/83

Unit 2: Formation and Promoters

Critical Legal Attributes of a Corporation
· In closely held company, you can’t sell your share to a stranger, with a publicly held company, a shareholder can sell their share on a secondary market
· Limited Liability: MCBA 6.22(b): Unless otherwise provided in the articles of incorporation
· Separation of ownership and control: Board of directors make more decisions.
· Director can be removed by shareholders
· Each director has one vote

MBCA § 1.40. ACT DEFINITIONS

§ 2.01. INCORPORATORS

§ 2.02. ARTICLES OF INCORPORATION

§ 2.03. INCORPORATION

§ 2.04. LIABILITY FOR PREINCORPORATION TRANSACTIONS

§ 2.05. ORGANIZATION OF CORPORATION

§ 2.06. BYLAWS

DGCL § 102. Contents of certificate of incorporation.

§ 3.01. PURPOSES

§ 3.02. GENERAL POWERS

§ 3.03. EMERGENCY POWERS

§ 3.04. ULTRA VIRES

§ 6.01. AUTHORIZED SHARES

§ 6.21. ISSUANCE OF SHARES

§ 10.03. AMENDMENT BY BOARD OF DIRECTORS AND SHAREHOLDERS

§ 10.20. AMENDMENT BY BOARD OF DIRECTORS OR SHAREHOLDERS

DGCL § 109. Bylaws.

Hypos P. 182

Ann buys land for $125,000, sells it to Sean for $200,000 and Sean asks what she paid, is she obligated to tell the truth?

She can be liable for misrepresentation if she lies.

If Art is land owner and paid $125k for land and sells property in their line of business to Paula for $200k, who is his boss, without revealing interest. Must Art give the profits to Paula?

So long as its in the scope of their business, Art must give all profits to Paula.

Pre Incorporation Liability
Rule: One who treats an entity as a corporation is estopped from denying corporate existence.
· Southern-Gulf (P) entered into a contract with contract with Camcraft (D) to buy a ship. Southern Gulf was not yet a corporation, but entered into the contract as a corporation. Camcraft (D) didn’t want to finish the ship, and is asserting that since P lacks corporate capacity the contract is void. The court held that since there was consideration, parties and mutual promises, the fact that the plaintiff acted as a corporate entity estops defendant from asserting lack of existence. Southern-Gulf Marine Co. No 9 v. Camcraft Inc. (La. 19

orporation, but it was remanded to determine if injustice would occur. Sea-Land Services, Inc. v. Pepper Source (7th Cir. 1991), p. 10/194

Note^: On remand the court found Marchese has committed serious tax fraud, and that constitutes injustice, and pierced the corporate veil and found him personally liable.

Piercing the Corporate Veil of a Parents Company
Rule: To determine whether to pierce the corporate veil of a parent corporation for the debts of a subsidiary, examine whether:
o Substantial domination by parent
o Parent and subsidiary have common directors or officers
o Parent and subsidiary have common business depts.
o Same tax returns
o Parent finances the subsidiary and caused the incorporation of sub.
· Bristol owned Medical Engineering Co, two of MEC’s directors were Bristol directors, they used the same auditing committee, used the same healthcare plan, filed consolidated tax returns. The court held that there was a material issue of fact that MEC was Bristol’s alter ego. The court denied Bristol’s motion for summary judgment. In re Silicone Gel Breast Implants Products Liability Litigation, (ND Ala 1995), p. 10/204

Unit 4: Purposes, Roles and Judgments

Charitable Donations and Corporations
Rule: A corporation may make a charitable donation.
o Corporation made donation to Princeton university stating that it would benefit public welfare as well as the interests of the private corporation. The court held that reasonable charitable contributions are expressly authorized. AP Smith Mfg. Co. v. Barlow (NJ 1953), p. 12/264

Note^: Still cannot be pet charity for personal ends.

DGCL §122: Every corporation shall have the power to make donations for the public welfare or for charitable, scientific or educational purposes. But they also may sue and be sued for not making sound investments. The donation must reasonably further business purposes.

California Code 207; PA Code §102(d); NYBCL §202(a)(12): Allows donations regardless of corporate benefit.

Duty to Shareholders vs. Public Good
Rule: A corporation has a duty to act in the financial interest and maximize profits of