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Business Associations/Corporations
University of California, Hastings School of Law
McDonnell, M.

Corporations Outline
McDonnell, Fall 2004

I. Introduction – The Nature of the Firm and Agency
1. Introduction to Corporate Law
A. Sources of Corporate law
1. State corporate law (Delaware, RMBCA)
2. federal securities law
3. exchange rules (NYSE, NASDAQ)
4. private rules (certificate of incorporation, bylaws, agreements)
5. accounting rules
6. other laws (e.g. anti-trust, labor, employment, environment, etc.)
B. Forms of Business Entities
1. Sole proprietorships
2. Corporations
3. Partnerships
4. LLP’s/LLC’s
C. Forms of financing
1. Debt
a. Personal liability
b.Creditors have a claim on assets
c. Return is set at the interest rate
2. Equity
a. Higher risk
b. Greater possible return
c. Investors have less of a claim on the company’s assets if there is no return of capital
d. Retained earnings
i. Most important way to fund expansion
D. Corporation advantages
1. diversified holdings
2. limited liability (to amount of the investment)
3. shareholder liquidity (free transferability of interests)
4. Centralized management coordination (board)
5. Duration- continuity of existence
E. Corporate disadvantages
1. Conflicts of interest
a. Controlling shareholder v. minority shareholders
b. Shareholders v. board or managers (the most important issue)
c. shareholders v. creditors
d. employees v. managers
e. Employees v. shareholders
2. formalities (shareholder meetings records, etc.)
3. Double taxation
F. Corporate Issues
1. What does the law do to regulate manager misbehavior?
2. But what other mechanisms do shareholders enact to regulate manager misbehavior and how does the law affect them?
a. compensation (performance based)
b. managerial labor market
c. shareholder votes
d. monitoring (directors/big shareholders/auditors)
e. takeover threat
f. product competition and bankruptcy
g. norms (ethical rules/morals)
h. shareholder suits
2. For whom the Corporation be run?
A. Corporate power (Del. Statute): Powers conferred upon the corporation:
1. To make contracts of guaranty and suretyship
2. To participate with others in any corporation, partnership, or other association
3. To make donations for public welfare/charitable/scientific/educational purposes. (SUBJECT TO REASONABLENESS TEST!)
B. ALI Principles (p. 38)
1. Sec. 2.01: A corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.
(b) Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business:
(1) Is obliged, to the same extent as a natural person, to act within the boundaries set by law.
(2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and
(3) May devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purpose
C. Traditional problem areas
1. Guaranties: this power can only be exercised in furtherance of the corporate business.
2. Donations: General view: objective of the business corporation is to conduct business activity with a view to corporate profit and shareholder gain.
a. Traditional view: a corporation could use its resources for public welfare if the use was likely to produce a direct benefit to the corporation.
b. Modern view: REASONABLENESS TEST: Use of corporate resources for public welfare is limited to its reasonableness. Direct benefit test DROPPED on either of 2 grounds:
(1) Profit maximization view: use of corporate resources for public welfare are profit-maximizing and within the board’s business judgment. (Wrigley)
(2) Legitimate end view: use of corporate resources for public welfare is a legitimate end in itself on ground that:
i. it maintains a healthy social system that serves the long-run corporate purpose.
ii. social policy to maintain diversified centers of charitable activity which justifies corp. support.
D. Corporate Constituency Statutes Defense: say that corporations are allowed and in some states, are required to take into account other interests than the shareholders
1. Not used much in court; unenforceable because most statutes allow for the consideration of other interests but no requirement to actually do so
2. How can they be used? As a defense to shareholder actions when a corporate officer does not sell the company.
a. But not often used because management would rather argue that the decision is in the best interest of shareholders.
E. Employee vs. Shareholder Interest Conflicts: Policy Arguments
Hypo: Tender offer to sell corp., buyer plans to fire all employees.
1. Shareholder protection argument: Protect shareholders since they take on risks that other participants don’t.
a. Other groups can protect themselves contractually; shareholders have a harder time of protecting themselves.
b. Shareholders are the residual claimants as they get paid what gets leftover after other groups have taken what they are owed contractually.
c. Marketability of shares is a counter-argument: shareholders can always sell.
d. Shareholders are uniquely suited to bear the risk by diversifying
2. Employee protection argument: Protect employees since they take risks in being specially trained and thereby, harder to switch to other jobs.
a. Society is also hurt by having these employees not working elsewhere
i. employees are specially trained and thus, more value when working for the specific firm
F. Creditor vs. Shareholder Interest Conflicts: Policy Arguments
1. When a company becomes insolvent, the residual claimants, in effect, become the creditors because of the limited liability of the shareholde

iable to a 3P as a result of an act/transaction by A done on the principal’s behalf, if A had:
(1) actual, apparent, or inherent authority.
i. actual authority= if P’s words or conduct would lead a reasonable person in the agent’s position to believe that the P had authorized him to so act.
ia. Express
ib. Implied= often incidental authority (authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction)
ic. If A has actual authority, P is bound even if 3P didn’t know A had actual authority.
ii. Apparent authority= if the words or conduct of the principal would lead a reasonable person in 3P’s position to believe that the principal had authorized the agent to so act.
ia. Power of position= apparent authority can be created by appointing a person to a position
iii. Inherent authority= Not actual, not apparent or estoppel; exists for the protection of persons harmed by or dealing with a servant or other agent (like respondeat superior)
ia. Rest. 161= More or less apparent authority (for disclosed or partially disclosed P)
ib. Rest 194= For undisclosed P, if A subjects his P to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them.
v. Ratification=if A purported to act on the principal’s behalf, and the principal, with knowledge of the material facts, either:
(1) affirms the agent’s conduct by manifesting an intention to treat the agent’s conduct as authorized,
(2) engages in conduct that is justifiable only if he has such intention.
vi. Acquiescence= If in the past, P let A do certain things, the failure of the P to object to them is an indication that he consents to the performance of similar acts in the future under similar conditions.
*NOTE: D. Menard, Inc. Rule: When the nature of the specific transaction undertaken the by agent is unusual or extraordinary and thus sufficient to require inquiry by the third party, if the third party does not perform inquiry, the third party will bear the loss.
C. Should we treat contractual 3P’s differently from tort 3P’s?
1. Yeah, contractual 3P’s have more of a duty to investigate
2. Protections for tort 3P’s always better (punitives vs. no punitives, etc.)

4. Agency – Fiduciary Duty