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Business Associations/Corporations
University of Cincinnati School of Law
Black, Barbara

Corporations

Professor Black

Fall 2010

I. Basic Concepts

1. Agency – fiduciary relationship created by mutual consent

R2d Agency:

– § 1 – Agency

– § 7 – Authority

– § 8 – Apparent Authority

– § 8A – Inherent Agency Power

– § 26 – Creation of Authority: General Rule

– § 27 – Creation of Apparent Authority: General Rule

– § 140 – Liability Based Upon Agency Principles

– § 161 – Unauthorized Acts of General Agent

o Ms. Smith sells fruit pies from the back steps of her rural home. She buys the fruit from local farmers and bakes the pies one day a week, and those lucky enough to know about it show up and buy them, first come, first served. What do we call this business, and what laws apply?

§ Sole Proprietorship – default form of doing business

· Limitations on size and growth, tort and contract law all that necessary

o Assume now that Ms. Smith hires part-time help to deliver pies on “special orders” and to prepare her taxes.

§ Created agency relationship and fiduciary relationships

o Assume now that Ms. Smith opens a store in her home and hires Sally to manage it, take phone orders, do the billing and other office functions. She also hires a second baker. Does any of this change our previous analysis?

§ Greater duties for manager and increases confusions of who is in charge and erros

· Agency Costs – cost businesses must incur when using agents

§ Must be alert to employee’s actions, proper hiring practices, training, etc…

– Agent – person who thru consent acts on behalf and subject to control of another

– Principal – person on whose behalf and subject to whose control the agent acts

– Authority

o Actual – agent acts on principal’s behalf if words or conduct would lead a reasonable person in agent’s position to believe that principal wishes the agent to so act

o Apparent – a reasonable third party would believe principal authorized the agent to act based on conduct displayed

§ Agent has authority in eyes of the third party

o Incidental – authority to do incidental acts necessary to accomplish authorized actions

o Inherent – principal liable for acts, even if told agent not to do, if the act usually accompanies or is incident to transactions that agent authorized to conduct (foreseeable)

o Ratification – principal bound if, knowing the material facts, affirms the agents conduct by manifesting intention to treat agents conduct as authorized

§ Need not be communicated to third party to be effective and must occur before third party has withdrawn of material change in circumstances

o Acquiescence – agent performs series of acts and principal doesn’t object, consented

– Liability of Agent to Third Person

o If principal is bound and disclosed – agent is not bound

o If principal is bound and undisclosed – agent is bound even though principal bound too

o If principal is bound and partially disclosed – agent and principal are bound

o If principle not bound – agent liable to the third party

Blackburn v. Witter (1962) (California)

– Facts: Π is widow, selected Δ as advisor while working at an investment company. Discharged and began working at different another company. While working at company, persuaded Π to invest in fictional company to get higher rate or return. Π trusted him and believed working for his employer.

– HOLD: Liability based on agents employment facilitated fraud from point of 3rd party and transactions seemed in regular course of business. Reasonable person would believe Δ acting for the company under apparent authority. Δ held out as registered representative of securities firm.

o Research services used to induce client

o Investment company knew Δ gambling heavily, drinking heavily, and encouraging quick trades to increase commissions, broker better position to stop.

o NOTE: not on company stationery, not in account statements

2. Characteristics of the Corporate Form

OH Corporate Statutes

– ORC 1701.04 – Articles of Incorporation (p. 1)

o Select state of incorporation à Organize corporation (file certificate, articles, or charter) à Corp comes into existence

o Requirements for Articles of Incorporation

– ORC 1701.05 – Corporate Name, Transfer, Reservation (p. 2)

– ORC 1701.08 – Acceptance of Articles of Incorporation, Filing Not Constructive Notice of Contents (p. 3)

– ORC 1701.10 – Initial Directors Holding Organizational Meeting (p. 4)

– ORC 1701.11 – Adopting, Amending, and Repealing Regulations (p. 4)

– ORC 1701.14 – Issuance of Shares and Release of Obligation of Subscriber (p. 7)

Hypos

– Sally turns out to be a real go-getter and, with Ms. Smith’s permission, expands the business to include catering. She also has some money to invest in the business, so Ms. Smith and Sally agree that Sally should become a part owner. How does this change their relationship? Specifically, Ms. Smith wonders if any steps should be taken to formalize their relationship.

o General Partnership – default form of doing business with multiple owners

§ Partners personally liable for debts of the business

§ Each partner has the power to bind the business (must have trust in partner)

– Attributes of a Corporation

o Limited Liability – shareholders not personally liable (advantage)

o Free Transferability of Ownership (advantage)

o Continuity of Existence (advantage)

o Centralized Management – managed under a board of directors

o Entity Statutes – a corporation is a “legal person” or “legal entity”

– Close Corporation

o Few stockholders and shares not publicly traded

o Most shareholders involved in management of the corporation

o Business Tax – doing business in state, Franchise Tax – incorporated in state

§ Close corporations tend to overlap to save money on taxes

o Model Business Corporation Act (MBCA) adopted in most jurisdictions

§ Not in Delaware, NY, and California, strong preference for Delaware

· Highly regarded for expertise in corporate law and body of law

– Board of Directors

o Provide supervision; responsibility of oversight over the business, supervising the corp

o They are not employees of the business; they act together as a board

o Elected by shareholders are annual meetings

o Appoint officers, but officers can be directors (inside directors)

§ Officers execute corporate policy; Control = BOD, Ownership = Shareholders

o Initial Directors created two ways:

§ Corporations’ incorporators have power of shareholder until stock issued

§ Initial directors can be named in certificate of incorporation in some states

– Shareholder’s Rights

o Vote- elect Board of Directors and fiduciary relationship

o Dividends if declared by Board of Directors

o Capital Gains –

oration (piercing the corporate veil) when:

§ (1) Control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will or existence

· Mingling of personal interest with corporation, indistinct

· Undercapitalization, not decisive

· Looting the corporation, taking money for personal use

· Absence of corporate record

· Must have control and power to run the business

§ (2) Control over the corporation by those held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity (typically Π), and

· Must show control over corporation and personally involved in the fraud

o Π must plead evidence to show he personally entered into the lease, relied on the fact that majority shareholder

§ (3) Injury or unjust loss resulted to the Π from such control and wrong

· Causation element – must show wrongdoing caused the injury

– Dombroski v. Wellpoint, Inc. (2008) (VERTICAL PIERCING) (OHIO)

o Facts: Π deaf and had implant put in ear but denied insurance coverage. Filed suit alleging breach of contract and insurer bad faith (tort claim) against WellPoint who was majority shareholder in smaller corporations responsible for the insurance.

o HOLD: Unjust and inequitable conduct not sufficient to satisfy 2nd prong of Belvedere. Added “similarly unlawful act” to the 2nd Belvedere prong. “Insurer Bad Faith” is basic unjust conduct (tort) and not an exceptional wrong.

§ Plaintiff has to demonstrate that a Δ shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act

§ WellPoint could still have been found directly liable but need evidence of involvement in the tort…

– Minno v. Pro-Fab (2008) (HORIZONTAL PIERCING) (OHIO)

o Facts: Π brought suit after injured on worksite. See-Ann failed to provide safe worksite. Pro-Fab in control of worksite and alter-ego. Two companies had same shareholders but no ownership in each other. Pro-Fab has liability insurance.

o Hold: Failed to meet 1st element of Belvedere, not seeking to impose liability on a controlling shareholder. Sister corporations have no ability to exercise control over one another.

§ Had same line of work, shareholders and officers, but incorporated separately

o Corporation’s veil may not be pierced in order ot hold a second corporation liable for the corporate misdeeds of the first when the two corporations have common individual shareholders, but neither corporation has any ownership interest in the other corp

§ Court failed to recognize different kind of piercing, Black thinks mistake

· Horizontal piercing will never work in Ohio