Business Associations
Wenger Fall 2017
When we enter into a business organization, whether intentionally or not, we come within a set of rules governing that kind of organization. The rules for different types of organizations are not the same. Know what type of entity you’re dealing with, and what the rules are that govern that type of entity.
Midterm – any statutes you need will be included. No close corporations on the midterm. Know the differences between organizations. Agency relationships, general partnerships, LLCs, corporations. Partnerships and Corporations are the big parts. Agencies don’t require writings, just require intent to do the work Know duty of loyalty. Know the different levels of authority. Express authority is revoked, then you need to properly publish this fact. An apparent agent acting alone is not credible. (I will take this car, bill Kobe Bryant.) Inherent authority – some jobs come with a package of authorities. Partnerships – can be entered into by accident. Know the RUPA unwaivables – duty of good faith, rights of third parties, duty of loyalty. Partnership entered? Profit sharing is one indication, a primary way, but there are others. Partners are agents of the partnerships, and have apparent authority to do things, unless it is in the partnership agreement, as well as on the website. You must destroy the actual and the apparent authority. Vote of the partnerships, unanimous for new partners, majority for decisions. Partners have a duty of loyalty and a duty of care. If a partnership is worth less than the value of the company, the partners put up their own cash. No excuses, no concern about who did the wrong-doing. So, third parties take the money from you when you are a partnership. Big downside. Scary – you can get into a partnership easily, and you can get into debt for that easily. Disassociate and that can lead to dissolution. Is the partnership at will, or a specific undertaking? LLP – partnership structure with limited liability. LP – limited partners that don’t participate in management. Dominant hybrid form is the LLC. They are taxed like a partnership – pass through taxation, better than a corporation. But they also have a liability shield. You need to say LLC on your company letterhead. It should show people that if they deal with you they have no cover. Corporations – make a charter, include name, share structure, purpose, incorporator name, initial directors, address and agent in DE. Incorporator run until the first meeting of shareholders or directors until the first shareholder meeting. Change the charter? You need to hold a board meeting, adopt a resolution to amend, then send to the shareholders to vote. For the board to act, you need a valid meeting, requires a quorum, one half of the total members, and the vote needs to be a majority of the present members. 9 directors, 5 come to the meeting, 3 can vote anything. You can change this in the charter. Committees have a lot of powers, look them up. To remove people from the board, just wait them out. Shareholder meetings require plurality, not majority. Corps can declare dividends on any money beyond the aggregate of par value. Bond holders don’t want the company to give dividends – they are worried more about getting their money back! They don’t have protections beyond their bond contract.
Bylaws change? Once we have shareholders, they have the power to change, and can give power to do so to the board. But the board can’t overrule the board. Some bylaws are shareholder created – only they can change. The board can create them as well, then the board controls.
Agency: Establishing that an agency relationship exists is important because in such a relationship duties are owed—amongst our two players, Principals and Agents, as well as outside third parties. An agent is any person who is authorized to act on behalf of another (known as the principal).
Creation of the Agency Relationship: consensual relationship between a principal and an agent. Neither intent nor “magic words” are necessary; entering an agency relationship inadvertently is possible. No writing is required.
Ingredients: An agency relationship is created when:
Manifestation of desire for agent to act on principal’s behalf,
Under the control of the principal, and
The agent consents to so act.
When all these elements are in place just stating, “I did not intend to create an agency relationship” is NOT a defense.
Nears v. Holiday Hospitality Franchising: You can sometimes be held liable for the acts of your agents. Although Nears believed that Marshall had authority to act as an agent, there is no evidence that Marshall was acting under the control of HHFI. There was no express or implied authority flowing from defendant to local management pertaining to the treatment of hotel employees
Agent’s Fiduciary Duties to Principal: Both the principal and agent owe each other duties; however, the main focus is the agent’s fiduciary duty to the principal, particularly the duty of loyalty: That is, “the agent must act “solely for the benefit of the principal in all matters connected with [the] agency” (Rest. § 387).
The agent’s duty of loyalty also includes duties: To keep principal’s information confidential; not to compete with the principal in any matter within the scope of the agency relationship; and not to act as an agent for another with interests that conflict with the principal’s interests. Agents violate this duty by stealing, by taking trade secrets, etc.
Food Lion: ABC reporters went to work for Food Lion with the intent to expose its egregious business practices. The court does not like this behavior and sees this as a breach of the duty of loyalty. Although there will be public policy concerns that override this duty to the principal, Food Lion’s bad behavior does not warrant such exception. The focus, here, is on adverse interests. Is bad intent needed for a loyalty breach? Not really. You could be just negligent.
POLICY: Where two priorities butt heads—one upholding public concern and the other upholding agency loyalty—agency loyalty always wins out.
P&G Case “No Compete” Agreements: No compete agreements are generally enforceable if reasonable in time, scope and geographical constraint (but CA is fairly liberal in not liking these). Whether one has been violated will depend on the level of knowledge used from prior relationship.
Authority and principles of attribution to agents: The existence of an agency relationship has both inward-looking consequences, through the imposition of fiduciary duties, and outward-looking consequences. The outward-looking consequences come about because principals can be held liable for the tortuous actions of their agents, and can be required to fulfill contract into which their agents have entered. “Qui facit per alium facit per se” (“he who acts through another acts himself”).
hird party to reasonably believe he was consenting to have the apparent agent act on his behalf (direct and indirect).
Reasonableness: Whether it was reasonable that the third person believed that the actor he had transacted with had the authority to do so has subjective and objective components. Consider prior dealings and nature of transaction. It can be inferred from custom, tradition, design, and even acquiescence, but only where it is unequivocal that the purported principal is aware and would otherwise correct the impression. Unreasonableness and disclaimers will defeat a third party’s apparent authority claim (Bethany).
Estoppel: Is a non-agency principle that looks a lot like apparent authority. In practice, “estoppel” and “apparent authority” are used synonymously. The main academic differences though are: (1) estoppel requires detrimental reliance, while apparent authority technically does not; and (2) estoppel, unlike apparent authority, is a one-way street; i.e., it allows the third party to hold the principal liable but does not give the principal any rights against the third party.
Inherent Authority – if you have job title, it includes inherent job authority. New thinking is its just apparent authority.
Respondeat Superior: (Tort Doctrine) Finding in an employer-employee relationship that an employer is vicariously liable for the torts committed by an employee within the scope of his employment (Rest. § 219(1)). The basis for imposing this liability is the level of control; it is limited to the scope of employees, acting within the scope of their employment, and even then, only for torts. “Employees,” who are treated as agents, are distinguishable from “independent contractors,” who may or may not be agents, depending on the principal’s ability to control their actions.
Factors to consider in determining employee vs. independent contractor:
(i) Where the work is done (at principal’s place or elsewhere); (ii) whose tools are used; (iii) who directs the specifics of the work; (iv) how the person is paid, etc (this is a very fact-specific inquiry).
Dias: Reflects de-emphasizing particularized inquiries into control where the employment relationship is admitted. Also discusses the policies for imposing vicarious liability for employer-employee relationships: “Places the burden of liability on the party better able to bear that burden.”
Doctrine of Least Cost Avoider: A law and economics approach, whereby whoever can bear it with less cost should bear the burden. Does this theory always work? Should they only find control when it makes economic sense? Easiest to justify and utilize this when the questionable party is a rich corporation trying to pass on responsibility to individuals.
