Susan Hamill—Business Organizations Fall 2012
1. GENERAL PARTNERSHIP
a. Formation
i. A partnership is formed by the “association of persons whose intent is to carry on as cow-owners a business for profit, regardless of their subjective intent to be ‘partners’”.
1. If the partners associate themselves to “carry-on” as co-owners a business for profit, they will be deemed to have formed a partnership relationship regardless of their subjective intent to form such a legal relationship
a. Partners do not need to “be aware” of their status as partners
b. Focus is on whether the partners intentionally acted as co-owners of a business for profit, and not whether they consciously intended to create the legal relationship of “partnership.”
ii. You do not have a general partnership if you have something more formal (LLC, Corporation, Limited Partnership, etc.)
b. Splitting up Profits/Losses
i. It is the general rule that in the absence of an agreement to the contrary, the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise, irrespective of any inequality in the amount each contributed to the capital in the venture, with the losses being shared by them in the same proportions as they share profits
1. In some jurisdictions, an agreement to share losses appears indispensable to the existence of a partnership. Individuals must agree to share the losses as well as the profits if their agreement is to be regarded in law as a partnership
ii. Split when one partner provides capital and the other provides services
1. Courts are split on this default rule; Two views
a. Where one party contributes money and the other contributes services, then in the event of a loss, each would lose his own capital, the one his money and the other his labor (Kovacik v. Reed)
b. The default would still require a partner putting forth only services against capital to equally incur losses with someone who only supplied capital (AL rule)
c. Dissolution
i. The general rule applicable to dissolution is that in the absence of an express agreement to the contrary, the person advancing capital is entitled to its return before there is a division of income or profits.
1. The general rule is that each partner is entitled to the amount of capital that he contributed, this being regarded as a debt of the firm to be repaid in full if the firm assets are sufficient, and pro rata if firm assets are insufficient. Absent an agreement, a partner is not entitled to compensation for rendering services for the partnership other than profits.
d. Agency and the Agency Relationship of Partners
i. Former Employees: Duty of Loyalty
1. Usual rule is that a former employee, after termination of his employment, may compete with his former employer. The only restraint being that he may not use confidential information or trade secrets obtained from the former employer, appropriating, in effect, to his competitive advantage what rightfully belongs to his employer.
a. Until the employment relationship is finally severed, the employee must prefer the interests of his employer to his own
2. Former employees, however, are still entitled to use general knowledge, memory, and experience in establishing their new business
a. This includes “remembered information” such as customer lists/strategies, etc.
3. Non-Compete Agreements: Courts will enforce non-competition agreements if they are reasonable given the duration, geographical coverage, and the nature of the employer’s risk from such competition
a. The court will balance the legitimate interest of the employer in protecting its business against the legitimate interest of the employee in seeking to redeploy his human capital
i. Such covenants will not be enforced if the employee has no ability to seize team-specific value to which th
principal on the basis of apparent authority only if the 3rd party reasonably believed that the agent was authorized
i. A principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit a fraud upon 3rd persons is subject to liability to such 3rd persons for the fraud
1. Even if the agent acts solely for his own purposes and the principal receives no benefit from fraudulent transactions
2. Liability is based upon the fact that the agent’s position facilitates the consummation of the fraud, in that from the POV of the 3rd person, the transaction seems regular on its face and the agent appears to be acting in the ordinary course of business confided to him. (Blackburn v. Witter, the ‘elderly widow investor case’)
a. However, there is the question of “reasonable belief”, especially when it comes to more sophisticated 3rd parties.
c. Inherent Authority: Doesn’t arise from manifestations of consent such as the two mentioned above, rather, it springs from a desire to protect the reasonable expectations of outsiders who deal with an agent
i. This is best viewed as an implied term in the contract between a principal and all who deal with his agents.
ii. Inherent authority is a gap-filling device used by courts to achieve a fair and efficient allocation of losses from an agent’s unauthorized actions
