Business Associations Outline

1. Economic and Legal Aspects of Firm
a. Introduction
i. Definitions of a Business Firm
b. Agency Law
i. Default Rule
ii. Agent’s Fiduciary Duty
iii. Employment at Will
iv. Agency and Relations with Creditors
2. General Partnership and Other Noncorporate Business Associations
a. Traditional and Emerging Standard Forms
i. Sole Proprietorship
ii. General Partnership
1. Determining Whether a Partnership Existed
a. Problem 2-1
2. Sharing Profit and Loss
a. Problems 2-3
b. Problems 2-4
iii. Joint Venture
iv. Limited Partnership (LP)
v. Limited Liability Company (LLC)
vi. Limited Liability Partnership (LLP)
b. Fiduciary Duties of Partners, Duty of Loyalty
i. Problem 2-5
c. Partner’s Power to Manage the Partnership; Duty of Care
i. Problem 2-6
d. Dissociation and Dissolution
i. Problems 2-7
ii. Problems 2-8
e. Allocating Losses to Third Parties
3. Corporate Form and the Roles of Shareholders and Managers
a. Overview
i. Problem 3-2 (1)(a-d)
b. Shareholder Voting for Election of Directors
i. Problem 3-6
c. Shareholder Action after Electing Directors
i. Annual Meeting
ii. Removal
d. Governance of Publicly-Held Corporations
i. Problem 3-12
ii. How Publicly Owned Corporations are Different
iii. The Role of Federal Law for Publicly Held Corporations
1. “Socially Significant” Shareholder Proposals
2. Governance-Related Shareholder Proposals
iv. State Law: Access to Shareholder Voting Rights
4. Fiduciary Duties of Officers and Directors

1. Economic and Legal Aspects of Firm
a. Introduction
i. Definitions of a Business Firm
1. Sole Proprietorship – owned by one person
a. Do business by K – suppliers, truck driver, etc.
2. The Firm– sole proprietorship becomes a “firm” when we have an employee
a. an economic concept of a business as a unit that is separate from the market
b. Distinction between people inside the business (e.g. an employee) and people outside (e.g. K with truck driver)
i. Difference of degree:
1. Discrete K – single, self-contained, independent K (e.g. K with truck driver on random basis). No real requirement of good faith
2. Relational K– K on continual basis (e.g. agreement with truck driver to pick up every day, etc. Higher duty of good faith.)
ii. Spectrum between platonic idea of K (e.g. no relationship – make and then separate, never see each other again) and relational K.
3. A Business Association – a jointly owned firm – horizontal relationship.
a. Does not focus on who calls the shots, but instead, who owns the business.
b. When have joint ownership, then opportunism needs to be heeded to
i. “Shirking (slacking) and Sharking (stab back)”
c. Look at internal and external relations of people
i. Example: J&M co-owners – J makes deal with supplier. J breaches. M liable?
1. M’s liability to external player depends on internal arrangement.
ii. There is always someone you have to rely upon, unlike a sole practitioner.
d. Partnership – a small number of people owning a business together.
e. Corporation – Shareholders are the owners and corporation is divided into shares.
1. Not the office doing work like partner, but they are still owners.
ii. Types of capital
1. money capital(e.g. raw money available)
2. human capital(e.g. intellectual capability)
iii. Transaction Cost Factors
1. Bounded Rationality – you don’t know everything, so not all decisions are rational and calculated
2. Opportunism – possibility that someone will stab you in the back to benefit themselves so you want to control and monitor the person (e.g. Enron executives – people kept their day jobs and invested money in Enron, without knowing what Enron did)
3. Team Specific Investment – investments specific to this venture and money/assets cannot be used for something else (e.g. take job at brewery, and if business goes under, she loses her job)
a. Locking – if invest money, take job, etc., then you are stuck and cannot back out. If you lose 50% of bottling machine, then she cannot just take bottling machine home or sell it – because there is joint ownership
4. Risk Averse, Risk Neutral, Risk Preferring – will dictate what kind of investment you’ll make
b. Agency Law
i. Default rule – The Principal is the boss and the Agent is the employee. The Agent owes a Fiduciary Duty to the principal that stems from trust, as the principal has entrusted the agent with certain things.
1. Use default rule of principal-agent relationship, unless otherwise stated.
a. This is a common law principle – modern PC name for “Law of Master and Servant”
b. Can be tailored through rules of contract
2. Fiduciary duties: (1) duty of loyalty, and (2) the duty of care
a. Fiduciary duty goes 1 way – agent owes fiduciary duty to principal but principle does not owe duty to agent
i. Unlike a contractual relationship, which is a 2-way relationship
b. Look at whether employees (inside firm) or independent contractors (outside firm)
ii. Agent’s Fiduciary Duty – Agent owes his principal a fiduciary duty of loyalty.
1. Duty requires agent to act in best interest of his principal and refrain from self-interested behavior.
2. Duty substitutes for express contractual specification of exactly what an agent may or may not do.
3. It is a one-way duty; agent owes it to principal, but principal does not owe to agent.
4. Community Counseling Services v. Reilly – Riley was sales rep for CCS. CCS runs fundraisers for Catholic parishes. Riley quits, engages in similar clients (solicited clients while still employee of CCS). Riley argues that there is no K term saying he can’t do this. CCS sues. Court holds that Riley violated duty. An agent owes fiduciary duties to the principal.
a. If he had quit, this would be ok. But part of his duty as agent is not to engage in such behavior as to work against CCS, even though there is no agreement between them.
b. If you’re an independent contractor, then you’re not an agent (employee) so you can do this. However, Riley was agent because he had contract and ageny relationship.
5. Hamburger v. Hamburger – Began lining up new business while employed, then quit job and solicited clients after he left. Argued that he took company lists of customers after he left. Hamburger’s behavior