Business Associations
Dibadj Fall 2015
I. Introduction
Sources of Authority
State Law, especially Delaware
Corporations codes (e.g., DGLC)(internal affairs doctrine: corporate organization is governed by the law of incorporation. If incorporated in DE, governed by DE law)
State common law
Supreme Court
Delaware Court of Chancery
Federal Law (e.g., proxies, takeovers, antifraud and insider trading)
Securities statutes and regulations
Federal common law.
II. Forms of Business Enterprise
The Law of Business Enterprise
The goal of the law is to facilitate voluntary economic relationships
The law provides standard platforms consisting of default terms open to contractual modification
Beyond contractual duties, fiduciary duties within the law prevent or remedy opportunism
The law also permits business actors to modify third party property rights (e.g., by providing limited liability to shareholders)
Three Forms that the law uses to facilitate its goals
Agency → Introduction to “fiduciary duty”
Partnership → Separate entity with own identity and pool of assets
Corporation → Separate entity with own identity and pool of assets
Policy Methodology: Two Themes
How to evaluate and critique the law of business enterprise?
If the law increases social welfare, it is said to be “efficient.” We evaluate laws to see if it increases social welfare.
One theory is if the goal is shareholder welfare, then any transaction that increases the value of enterprise is “efficient”
Impacts on third parties are ignored because and so long as third parties could hypothetically be compensated (“Kaldor-Hicks” efficiency)
The scholarship can be diverse and complicated, what should we take away from it?
Remember that courts rarely focus on economic jargon (e.g., “efficiency,” “transaction costs,” “collective action problems”), but instead the focus is on notions such as “fairness”
Remember, as much as scholarship emphasis the rational actor model, business actors cannot be easily reduced to such in practice
Distinguish between insider and outsider articles: “Interior” perspective of lawyers vs. “exterior” perspective of social scientist
A. Partnership
Why Joint Ownership?
Beyond agency: allows partners to pool capital as owners and agents.
Conceptual shift from “partnership as aggregate” to “partnership as entity”
As creditor, more attractive to contract with entity that possesses its own property
Key historical step in the development of business entities
General partnership: earliest form of jointly owned and managed business enterprise (no lawyer would recommend)
“Pass-through” taxation
But personal liability for partners
Limited Liability Successors (creditors can contract for personal liability (default rule is opposite))
generalpartner(GP)controlsenterpriseandfacespersonalliability
states requireminimumcapitalizationor insurance
Asan alternativetocan andelectSubchapterS Revenue
Advantages:easier to convert to more to morelegalprecedent; tax
Formation and Fiduciary Duties
Is there a GP/LP/LLLP/LLP/LLC (“Partnership”) formed?
General partnership can be inferred without formal agreement
E.g., receipt of profits as prima facie evidence of partnership
Once partnership is inferred, fiduciary duties emerge.Meinhard.
Duty of Loyalty: The standard of behavior is “[n]ot honesty alone, but the punctilio of an honor the most sensitive.” Meinhard. Cf. Tarnowski; In re Gleeson.
Two important caveats
Does Justice Cardozo articulate the specific nature of the business enterprise; for example, is it a partnership, joint venture, or trust?
Current articulations of fiduciary duties not as robust
Overall decline in strictness of fiduciary duties across legal disciplines (e.g., Wills & Trusts)
Specific and significant debate surrounding contractual flexibility in unincorporated associations
Policy: Current Issues
How can we change the unincorporated forms to encourage growth?
Delaware trying to build on its leadership of corporate law by competing for LLCs
Growth of LLCs and LLPs at expense of LPs and general partnerships, not corporations
Any enterprise with publicly-traded equity faces 2-tier tax structure of C-Corporation
One idea is to simply the “alphabet soup” of unincorporated enterprises?
Should be change the emphasis from fiduciary duties to contract?
Delaware Limited Liability Company Act (DLLCA) gives “maximum effect to the principle of freedom of contract” (6 Del. Code § 18- 1101)
But does this allow members to opt-out of fiduciary duties? How explicit does the opt-out need to be? How far can it go?
E.g., debate between majority and dissent inPappas et al. v. Tzolis (NY App. Div. 2011)
MAJ:
Operating agreement didn’t “clearly” permit behavior to “surreptitiously engineer lucrative sale of sole asset”
Certificate acknowle
when 3rd parties have changed their position to their detriment in reliance on representations made or if agent accepts benefits under unauthorized contract.
Ratification (not discussed at length) (authority granted after the fact)
Some cases do not differentiate among types of authority. See e.g., White v. Thomas
P’s Liability in Tort: Can we hold P liable for tort by A?
Respondeat superior (Vicarious Liability): a P typically liable if A is employee, not general contractor (I.e., master/servant relationship)
As a proxy, we look to the ability of the P to control A’s actions
As a proxy for control, we look to the extent of A’s financial responsibility.
Humble Oil v. Martin (TX 1949) (P liable)
P exercised substantial financial control and supervision,
P furnished station location and equipment, advertising media,
a paragraph deeming P an “independent contractor”, and A’s employees did not consider P an employer/master)
Hoover v. Sun Oil (DE 1965) (P not liable)
A assumed profit/loss,
P had no control over details of day-to-day operation,
contracts do not appear to be a sham, nothing in lease contract &
dealer’s agreement beyond landlord/tenant and independent contractor relationship)
But might other factors explain the different outcomes?
See supra Humble; Hoover.
We look to actual authority.
Emerging (litigation has limited success / “not important” / “focus on respondeat superior and not really on the others”)
Apparent authority
P liable for intentional tort when A acts on P’s behalf with apparent authority to do so
E.g., Corporation (P) can be liable if CEO (A) (manifesting title to company) makes fraudulent misstatement
Inherent authority: analogize to respondeat superior?
Actual authority
Does not apply in the sense that P would not authorize A to commit tort
However, can analyze actual authority given to A to assess respondeat superior liability (e.g., whether employee or contractor)
