2. Acting Through Others: The Law of Agency
2.1 Introduction to Agency
i) Agency: the simplest form of joint economic organization.
2.2 Agency Formation, Agency Termination and Principal’s Liability:
i) Agency Formation: agency is the fiduciary relationship that results from (1) the manifestation of consent by one person (the principal) to another (the agent) that the other shall act on his behalf and subject to his control and (2) consent by the other so to act. Do not need a formal agreement. The agent is the holder of power to affect the legal relations of the principal w/in the scope of the agent’s agreed upon appointment.
ii) Agency Termination: At will. Either Principal or Agent can terminate at any time. If breach occurs, injured party gets $ damages.
iii) Parties’ Conception of Relationship Does Not Control: Agency relations may be implied even when the parties have not explicitly agreed to an agency relationship. Court can infer an agency relationship even if there was not meeting of the minds/consent for agency relationship. NB: One can inadvertently fall into an agency relationship.
· Jentson Farms v Cargill: Cargill lent $ to Warren Grain. WG defaulted on loan from ∏. Did an agency relationship exist such that Cargill became liable to ∏ as a principal on Ks made by Warren? Held: Agency relationship existed. Agency is created by agreement and existence of the agency can be proven by circumstantial evidence. Cargill exerted a lot of control over WG such that it was more than a debtor/creditor relationship.
2.3 Agent’s Duties: Agent has to act to further the interest of the principal. The agent-fiduciary is bound to exercise his good faith judgment in an effort to pursue the purposes established at the time of creation of the relationship.
i) Fiduciary Duties of an Agent (2nd RST Agency):
· Duty of Obedience
· Duty of Loyalty: must be loyal in advancing the wishes of the principal. Turn over all profits. Can’t act in a way adverse to P (and if you do disclose that you’re conflicted). (Tarnowski: P hires A to investigate and negotiate for the purchase of jute boxes. A made false representations and collected kick backs from sellers. Held: Principal has a right to recover profits made by the agent in the course of the agency. Principal gets his down payment, the bribe $, attorneys fees and expenses.)
· Duty of Care: Must act in good faith as a r/s person would act in becoming informed.
ii) Trustee’s Duty to Trust Beneficiaries: Trustees manage the trust for the benefit of the beneficiary. Duty of loyalty is very important and the trustee is accountable for any profits. (In Re Gleeson: Trustee failed to tell beneficiaries that he was leasing trust premises. Held: Trustee cannot be both executor and beneficiary. Trustee cannot profit from the trust assets.
3. THE PROBLEM OF JOINT OWNERSHIP: THE LAW OF PARTNERSHIP
3.1 Introduction to Partnership
i) General Partnership: earliest and simplest form of jointly owned and managed business.
· Basics: All partners are liable as principals while at same time all partners are general agents of the partnership.
· Benefits: Simplest form of joint ownership. Avoids double taxation. Flexible.
· Negatives: Unlimited, Joint and Several liability (i.e. never enter into a general partnership). Formation requires subjective intent
ii) Agency Conflicts among Co-Owners: Co-owners have fiduciary duties to one another. “Joint venturers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty … A trustee is held to something stricter than the morals or the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior.” Courts are unwilling to support co-partners who make side deals w/o transparency and complete disclosure.
· Meinhard: Salmon and Meinhard form a partnership to manage a piece of property. LL approaches Salmon about a
y of choice for small businesses.
Þ Benefits: pass through taxation, greater protection in terms of personal liability (torts & K), no minimum capitalization requirement, flexible to K.
Þ Risks: More complicated and expensive to set up than an S-Corp. NB: Most new small entities form LLC’s.
4. THE CORPORATE FORM
i) Characteristics: the basic characteristics of the € form offset the weaknesses of the general partnership form. Most incorporated in DL b/d of positive legal framework and cheap incorporation.
4.2 Creation of a Fictional Legal Entity:
i) Fictional legal personality w/indefinite liability: € can secure loans w/ its own assets. Raises 1st Amendment issues b/c the entity has a right to speech. Problem: Can’t really punish this artificial entity.
4.3 Limited Liability for Investors:
i) shareholders have no liability for the debs or obligations of the €. Encourages investment. Shareholders can only lose the amount of their investment.
4.4 Free transferability of shares:
i) permits firm to conduct business uninterruptedly as the identities of its owners change.
4.5 Centralized Management appointed by Equity Investors
i) Shareholders appoint the managers.
ii) Under DL § 141: the business and affairs of the € are controlled by the BOD. Shareholders vote, sue and sell.
iii) Many agency problems!!
· BOD governs the € and protects shareholders.
· In theory, the BOD is the agent of the €.
iv) Hierarchy: Shareholders, BOD, Management
· BOD not required to follow the wishes of the majority shareholder.