Business Associations Outline

Bus As, Spring 2008 Joo

I. Economic and Legal Aspects of the Firm

a. Intro to Business Associations
i. Factors involved in Choice of Organizational Form
1. Sharing of money (incl cost), control, responsibility
2. Sole Proprietorship: one owner w/ authority to make/carry out business policies
a. When sole proprietor hires EE, she now has “firm”
3. Business Association: jointly owned firm; most often partnership, corporation, LLP
4. Investment Options: depends on risk tolerance (holy grail = low risk, high return)
a. Risk: degree to which various poss outcomes differ from the expected return
5. Transaction Costs: EX) costs to buy book, also effort to get out of bed, use internet to buy book, interest on credit card, etc. Factors incl bounded rationality, opportunism, team-specific investment.
6. State-Provided Governance Structures
a. Default Rules: generally “enabling”; provide parties w/ default rules that govern the relationship if the parties do not provide otherwise (subject to modification)
b. Immutable Rules: certain mandatory rules exist to protect firm members from mistakes or negative effects of allowing firms to adopt different rules
ii. Economic Concepts of “The Firm”
1. Old Understandings
a. Firm as economic unity
i. Firm: O actually owns. If sole proprietor, makes discrete contracts w/ 3d parties; only the owner inside the firm.
ii. Coasean Firm: Includes owner and employees w/in the firm, but not 3d parties. Contracts take place in the market, outside the firm.
b. BA as entity; a “firm” that is co-owned
2. New Understandings
a. Firm as Nexus of Contracts
i. Nexus of Contracts: Everything affected by the market (eg EE will take job based on market considerations, & will get fired based on market considerations). Firm as crossroads where all contracts intersect.
b. BA as joint ownership structure

b. Agency Law
i. Basic Terminology; Intro to Agency
1. Agency Law: set of standard form rules that provide backdrop for Ks or market transactions among team members; govern relations b/w team members in firm & relations b/w firm and outsiders
2. Agency Cost: cost of doing business is poss that agent may slack off, backstab, etc.
a. Phenomena of shirking or sharking (Dickens); agent not doing what you want
b. Minimized by trust
3. Agent: Someone who works for somebody else. BUT, if S/J are partners, they are each the agent and they are each the principal.
4. Theme of Deregulatory Impulse: preference over last 100 years for ind’s to deal w/ things among themselves rather than the State
ii. Background Rules
1. Agent owes duties to Principal
a. Fiduciary duty; duty of loyalty; duty of care
b. A is put in a position of trust; must put Ps interest first
c. Specific duties depend on the agency context
2. Agent has power to bind (create legal obligations for) the Principal
a. Subject to limitations, eg where A has gone so far “off the leash”
iii. Agent’s Fiduciary Duty; Employment at Will
1. Fiduciary Duty: Device for economizing on transaction costs; gen obligation to act fairly. Implied term of employment contract.
2. Duty not to Compete
a. Generally, ER owns right to have EE not compete while working a agent
b. If mandatory legal duty, you can’t compete at all.
c. If contractual, everything is negotiable. More default rules now; each can be “reset”. Modern presumption that everything is negotiable.
d. CCS v Reilly: ER-EE. Sales rep R accused of sharking (church ads). Agent w/ FD to principal couldn’t look out for #1. Duty of loyalty by person who was given trust.
e. Hamburger v Hamburger: Nephew stealing EEs, BUT nephew had tried to do things the right way. ER has right to compete after he leaves. Diff result if ER used non-competition agreement.
3. Employment-at-Will
a. Right to discharge somewhat limited by deterrent factors/costs to ERs incl lost reputation, subsequent service by less skilled / diligent work force
b. Exceptions: (1) Violations of public policy, (2) Violations of EE handbooks which constitute a unilateral K, (3) Violations of Covenant of GF/FD
c. Foley v Interactive Data Corp: D fired P, wrongful discharge. Covenant of GF/FD implied in K. Evidence that there is FD from Principal to Agent.
iv. Agency & Relations w/ Creditors (Power)
1. Generally: Authority is about relations w/ the outside world; when A deals w/ world, to what extent does it affect the P, or the firm as a whole?
2. Actual Authority: Principal manifests consent directly to agent, expressly/impliedly.
3. Apparent/Ostensible Authority: 3d party reasonably believes based on something P has caused or allowed.
a. First: look whether 3d party reas believed A had authority
b. Second: principal caused or allowed 3d party to think this (by negligence)
c. Blackburn v Witter: Long as agent of Walston, and of Blackburn (client). Held: Long has apparent authority, principal Witter liable. 3d party belief indicted by supporting documents (receipts, papers, past dealings).
d. Sennott v Rodman & Renshaw: Jordan’s dad worked for P, dad covered up for J. S has action against J, but not D. No reliance upon agency in transaction.
4. “Inherent” Authority: No longer incl in most recent Restatement of Agency; implied term in K b/w principal and all who deal w/ his agents.

II. General Partnerships and other Non-Corporate Business Associations

a. Issues in Business Associations
i. Internal Relations
1. Ownership (esp Profit and Loss)
2. Fiduciary Duty
3. Control (right to manage business)
4. Withdrawal (“dissociation”)
ii. External Relations
1. Liability to 3d parties for business debts / torts / Ks
2. Partners: personal liability (unlimited)
3. Taxes
iii. Relations w/ Gov’t

b. (General) Partnership
i. UPA (1997) §§103, 202, 301, 306, 401, 601, 801
ii. Partnership Def