Business Organizations
Susan Hamill
Fall 2015
Table of Contents:
UNIT ONE—INTRODUCTION TO THE FIRM AND THE GENERAL PARTNERSHIP
A. Economic and Legal Concerns & Overview of the Types of Business Organizations
B. The Law of Agency & the Agency Relationship of General Partners
C. Defining a General Partnership, Sharing Profits and Losses, & Fiduciary Duty
D. Dissociation, Dissolution & Expulsion
UNIT TWO—THE CORPORATION AND ITS SHAREHOLDERS
A. Historical Development of the Corporation, Formation & Basic Corporate Characteristics
B. Election/Removal of Directors, Basic Corporate Governance & Rights to Information
C. The Role of Federal Law
UNIT ONE—INTRODUCTION TO THE FIRM AND THE GENERAL PARTNERSHIP
A. Economic and Legal Concerns & Overview of the Types of Business Organizations
Sole Proprietor
The classical firm. The entrepreneur:
1. Directs the business and makes the ultimate business judgments. Makes all forecasting on all price, quantities, and methods of distribution.
2. Accepts full responsibility for his decisions by being the residual guarantor and claimant. In other words, unlimited liability/ultimate profits.
3. Coasean Firm—the perspective that the essence of the firm is the entrepreneur’s management and conscious direction of resource allocation decisions.
The Business Association
Business organizations:
· Partnership
· Corporation
· Limited Liability Company (LLC)
Modern Corporation and the Berle-Means Critique
Theory about governance in public corporations where the ownership and control is separated, and the owners (shareholders) rely on the board of directors to represent their interests. The theory states that over time the boards become so dominated by the management that their supervisory role becomes ineffective and the executives get to have the final say.
BM predicted that power of the modern corporation would grow and eventually take over all sectors. Possible solutions to future problems:
1. Bend the modern corporation and its managers to the will of the shareholders, so that they could collectively act as the real owners.
2. Society could recognize that corporate managers have absolute power, constrained only by their sense of morality and public duty.
3. Treat the interest of both managers and shareholders as subordinate to the paramount claims of society.
a. Policy makers followed this after the New Deal.
i. Right to hire and fire whomever they wanted.
ii. Right to set wages and working conditions
iii. Right to pollute
Return of the Free Market Ideology: The Firm as a Nexus of Contracts
~1980: Deregulation begins. To solve principal-agent problem, the nexus of contracts perspective takes hold. Nexus of contracts exists between not only management and employees, but with all of its constituent relationships (customers, suppliers, lenders, etc.)
Principal-Stockholder. Agent-Management. In Modern Corporation, power is given almost exlusively to managers. To limit the potential costs and risk of ceding the power, agency cost limiting devices include:
· Direct monitoring of manager’s actions
· Bonding agreements by managers that will result in the imposition of penalties or other costs if certain objectively verifiable events do or do not occur.
· Incentive schemes to align managers’ interest with shareholders.
The New Millennium: Corporate Scandal, Financial Cries, Corporate Gov & Regulation.
2001:
· Enron
· Fraudulent accounting
· Artificially inflated stock values
2008:
· Collapse of major financial and industrial institutions
· Excessive risk taken on by financial institutions
ORGANIZING THE FIRM: SELECTING A VALUE-MAXIMIZING GOVERNANCE STRUCTURE.
Business Planning and Corporate Lawyers
Corporate lawyer:
· Planner
f firm:
· Avoidance of haggling costs
Negatives:
· If employee surrenders autonomous control of her own business, she is subject to employer’s opportunism.
· Can be dealt with by contracting key management rights and responsibilities.
State-Provided Governance Structures
Don’t have to contract from scratch, can choose from below list and receive benefit of state-provided rules and dispute resolution processes.
Include:
· Employer-employee relationship
· Corporation
· Partnership
· LLC
These off-the-rack rules can be modified. But, some are Immutable. They cannot be trumped by private contracting. Good business lawyers:
· Understand which rules are defaults
· How the default rules of each form differ
· What makes the rules efficient or inefficient for prospective team members.
· Which rules are Immutable?
· Will these rules serve one individual team member more than others?
Default Rules:
· Tailored Rules—designed to give contracting parties the exact rule that they would themselves have chosen if they had been able to bargain costlessly.
o Helps avoid the need of parties to address every possible contingency.
o But, may discourage ex ante contracting
· Majoritatian rules—designed to provide investors with the result that most similarly situated parties would prefer. Ex-post judges will look to benefit the most people.
· Penalty default rules—designed to motivate parties to contract around the default. Forces parties to specify rules from the beginning.
