Corporations Outline LipsonI. IntroductionA. All contracts can be mapped along two axis (duration and specificity) – because corporations originates from agency law, it deals mostly with contractual relationships of low specificity and undetermined durationB. What is business law about?1. Control a. Agency costs – the cost to get stuff done2. Risk – allocating loss 3. Exit – how do you get out of a relationship?a. Shareholders exit by selling their stockb. Corporations can exit by liquidating, merging, selling, etc. 4. Economics II. Units 1 & 2: AgencyA. Formation: Restatement (Second) Agency § 11. Principal consents to have agent act on principal’s behalf (R2A § 1)2. Agent consents to act (R2A § 1)3. Issues:a. “On behalf of”b. Manifestationc. “Control”d. Substance > form (R2A § 1)4. Examples:a. Employer (corporate)/employeeb. Celebrity/managerc. Client/attorneyd. Buyer/Broker (real estate, perhaps securities)e. Customer/Bank5. Bottom line: Pure contract v. unspecified duty?6. Basile v. H&R Block, Inc.a. Class action suit of Block for breach of fiduciary duty by customers who participated in a refund anticipation loan (RAL) program with Mellon facilitated by Block where the participants were charged an exorbitant interest rate and Mellon’s payments to Block for providing it with customers were not disclosed b. Court held that Block was not the customers’ agent and thus owed them no fiduciary duty because there was no showing that the customers intended Block to act on their behalf in securing the RALs (there was a choice of refund options and customer applied while Block only facilitated) > the customers retained ultimate control and entered into the agreement with Mellon (Block couldn’t do anything without their authorization/signature, i.e. they bound themselves), while Block was simply an intermediary for the taxpayers’ obtainment of the RALc. Block was agent for the customers for tax preparation and an agent for Mellon for the RAL d. Without a fiduciary duty, the “manners and morals of the market place govern” (caveat emptor)e. If Block had played an integral role in arranging the RALs, the outcome could be different but here, their actions did not rise to the necessary level of a matter of consequence or trust (ex. the ability to actually bind the principal) because Block was given no authority to acquire the RALsf. Dissent 1(1) There was an unquestionable agency relationship with regard to the completion of the taxes, which extended to the RAL because the customers manifested consent to participation in the program, Block facilitated, and Block consented to act on behalf of the taxpayers’ need by matching them with a lenderB. Agent’s (Fiduciary) Duties to Principal – Internal rules1. Dutiesa. Principal(1) Performance of contract obligations(2) Good conduct(3) Noninterference(4) Cooperation(5) Indemnification (under certain circumstances)b. Agent(1) Care(2) Disclosure(3) Obedience(4) Act within the scope of authority(5) Loyalty (most important) > must act solely for the benefit of the principal in all matters connected with the agency (R2A § 387)i. Keep information belonging to the principal confidentialii. Not to compete with the principal in any matter within the scope of the agency relationshipiii. Not to act as an agent for another with interests that conflict with the principal’s interestsc. Remedies(1) Damages(2) Disgorgement of profitsd. Issue: Default rules v. Mandatory rules2. Food Lion, Inc. v. Capital Cities/ABC, Inc.a. Food Lion sued ABC and the employees for fraud, breach of duty of loyalty, trespass, and unfair trade practices for ABC’s undercover expose on Food Lion’s unsafe food handling created through the use of fake employees who made secret videotapes b. The court held that the employees had breached their duty of loyalty because the duty of loyalty is breached when an employee’s acts are inconsistent with promoting the best interest of their employer at a time when they were on its payroll or when the employee deliberately acquired an interest adverse to his employerc. Case presents a new addition to the traditional examples of breach of duty of loyalty (competition, misappropriation, breach of confidence) > like the recognized breach of competition because the employees actively sought work at Food Lion while really serving the adverse interests of ABCd. Probably no finding of breach of confidence due to the lack of confidentiality agreement (or at least the lack of one covering this issue)e. Case exposes the tension between employee loyalty and whistle blowing > people have been wary of this case because of its public policy implicationsC. A principal is liable for an agent’s actions (R3A § 1.01)D. Rules of Attribution – External Rules1. Issuesa. “Manifestation” (R3A § 1.02)(1) A person manifests consent or intention through written or spoken words or other conduct if the person has notice that another will infer such consent or intention from the words or conduct(2) One person may bind another in a transaction with a third person, even in the absence of actual authority, when the third person reasonable believes – based on “manifestations” by the purported principal – that the actor is authorized to act on behalf of the purported principal > does not require an agency relationshipb. “Control”c. “Reasonable reliance”2. Actual Authority (P A) – when a principal communicates consent to an agent to take certain actions on his behalf (R3A § 3.01) > may be written or oral (unless real estate or other transaction where the statute of frauds requires a writing)a. Types(1) Express Actual Authorityi. Can be given to an officer either by the corporation’s bylaws or a resolution by the board(2) Express Implied Authorityi. The authority inherent in the officeb. Castillo v. Case Farms of Ohio, Inc.(1) Case used ATC to recruit migrant farm workers in Texas to work at their Ohio chicken slaughtering facility but upon arriving in Ohio, the workers found that their actual working conditions were different from those promised and there were numerous problems with housing and transportation(2) The workers successfully sued for violation of the Migrant and Seasonal Agricultural Worker Protection Act (AWPA) and Fair Labor Standards Act (FLSA), as well as breach of contract, fraud, and negligent misrepresentation when the court held that Case was liable for the misdeeds including those perpetrated by ATC because ATC was its agent as indicated by the fact that ATC had express and implied authority as evidenced by communications between the two companies to recruit and hire workersi. Implied authority included issues of housing and transportation as they were proper, usual, and necessary for the recruiting and hiring process(3) Note: It is irrelevant whether the workers were technically employed by ATC or Case because of the agency relationship(4) Single most damning fact (in footnote) = There was only an oral agreement, leading to a presumption that the lack of documentation was to protect itself from the liability associated with its indecorous operation(5) ATC was probably not sued because it’s a shadowy operation that is difficult to find and serve3. Apparent Authority: P (A) T (R2A §§ 8 & 27)a. Elements(1) Consent(2) Reasonable belief(3) Reasonable relianceb. Key points to finding apparent authority:(1) The manifestation must emanate from the principal and must be received (directly or indirectly) by the third person; and(2) The scope of the agent’s apparent authority depends on the third person’s reasonable interpretation of that manifestationi. When at issue, courts consider prior dealings, customs, and the nature of the transaction to make a determination(3) Note: Reliance is not requiredc. May be the basis for liability where(1) Persons appear to be agents, even though they do not qualify as one(2) Agents act beyond the scope of their actual authorityd. Implicates the issues of control (principal’s control over the 3rd party’s expectations), benefit (prospective benefit to the principal), and consent (principal responsibility for that which he brings to pass)e. Bethany Pharmacal Co. v. QVC, Inc. (1) Bethany received a letter from the DCCA, who was working with QVC and its agent NTA to select local vendors for a special show, which led it to believe that it had been selected for the show even though it was just an alternate (2) Bethany claimed the DCCA letter was a binding contract with QVC to let it sell but the court held that DCCA was not QVC’s agent because QVC did nothing to give them appearance of authority (i.e., there was no basis for a reasonable belief that they were on the show), instead, it consistently maintained that a PO was the only valid contract, it tried to correct Bethany’s incorrect perception once they l
(DGCL § 102; MBCA § 2.02)a. A charter typically includes the name of the corporation, the number of authorized shares of stock, the name and address of a registered agent, the purpose, initial directors, management provisions, bylaw provisions, director liability limitations, and indemnification (duration and initial capital are not required)b. To amend a charter:(1) The board of directors have to propose a change;(2) The shareholders must vote to approve; and(3) The amendment must be filedc. When a limitation is expressed in a corporation’s charter, there are three means of enforcing it:(1) A shareholder suit against the corporation;(2) A suit by the corporation against directors or officers for actions beyond the purpose; or(3) An involuntary judicial dissolution proceeding by the attorney general4. Organizational Meeting (DGCL § 108; MBCA § 2.05)a. Follows the filing of the charterb. Doesn’t always happen or isn’t always formal)c. Things like directors are appointed, address is established, bylaws are adopted (most important) etc.d. Documented in minutes or consent5. Bylaws (DGCL § 109; MBCA § 2.06)6. Grant v. Mitchella. Grant provided financial backing for Phoenix, a company developing Monitor software through the efforts of Mitchell and Meltzer > company relocated to Boston, changed its name to Epasys, and incorporated in DE > Grant was the sole incorporator > though the parties dispute it, it appears that Grant and Mitchell were directors per a Foreign Corporation Certificate signed on 1/7/00 naming them as such > the relationship between Grant, Mitchell, and Meltzer fell apart amidst delays in obtaining venture capital financing and slow product development > Grant sought to remove Mitchell and Meltzer > Grant executed a written consent of the sole incorporator naming himself as sole director and then removed Mitchell and Meltzer > Mitchell and Meltzer sued Grant seeking a determination of collective ownership and a compulsory annual meeting > Mitchell and Meltzer removed Grant from Phoenix and demanded that Epasys cease using Monitor software on ground that Phoenix still owned it > Grant sought to have Epasys put into bankruptcy to protect his control over the company but was unsuccessful > Grant the sued for determination that he is the sole director of Epasys, and that Phoenix is dissolved and all of its assets were transferred to Epasys b. Grant first executed his authority as sole incorporator to name Epasys’s board of directors when the Foreign Corporation Certificate was signed > serves as evidence of a meeting with himself to determine directors > probably occurred shortly after formation of the corporation > not realistic that Mitchell and Meltzer would have let Grant have free reign > Egan’s (the attorney) testimony about what happened between his meeting with Grant, Mitchell, and Meltzer is not convincing > it seems that the three did not follow his sweat equity advice as it appear that the equity to was be divided as at Phoenix (approximately 40-30-30) > the behavior and documents of the corporation’s law firm indicate a belief that both Grant and Mitchell were officers and this belief was most likely derived from Grant since he had most interaction with the firm > there is no conflict between the initial naming of two directors with the plan to add more > formalism argument (the absence of a written consent until 9/00) fails because the Foreign Corporation Certificate sufficesc. Paper trail(1) Charter > said Grant was the sole incorporator
