Business Associations/Corporations Outline

Hypo = Mrs. Smith sell pies out of the back of her home
Sole Proprietorship – single owner, no other employee
This is default form of business
Really no “separateness” b/n Mrs Smith and her business
What if someone gets sick off her pie and sues … = everything Mrs Smith owns is liable under sole proprietorship
How big of a business can this be? = there is a limit
What if she hires part time help (Sam) to do taxes and deliver pies?
She would be paying someone to take part of the business, BUT the fact that you are paying someone to perform services doesn’t necessarily mean that there is an employee… could be an independent contractor
Does Mrs. Smith have “control” over Sam?
Either way, (with or without control) Sam is considered her agent
Mrs. Smith hires Sally to take orders and manage certain things
This effects her relationships to 3rd parties b/c an agent can bind the principal to a third party
Agency Costs = Mrs. Smith has ppl working for her who may not be worried about her business 24/7
Have to hire agents, but agents can be unreliable
Agency = a fiduciary relationship … a legal relationship where you’re held to a higher std of care
Fiduciary = owes a legal duty to another where they don’t negotiate at arms length with that person, where the duty is that the agent must further the interests of the principal
Blackburn v Witter
Did the D have actual authority to recommend that P buy these stocks?
NO he did not = the firm didn’t give authority to sell bogus investments
How do we know when an agent has actual authority? – look only at communications b/n Principal and Agent
What did the Principal say to the Agent
Communications can be express or implied
There was no actual authority here, but what about apparent authority?
Look at communications b/n Principal and 3rd party
What were the sources of apparent authority?
Firm did research and they hold themselves out as providing this great research to their customers
Mrs. Blackburn read this advertisement and relied on it
Ct says this reliance was reasonable
Although = evidence here suggests that Mrs. Blackburn found out abt the research from the broker and apparent authority must come from the Principal, but the Ct ignores this
Another Source of apparent authority – broker did business with company letter-head, business cards, title… this communicates that the Broker had the authority that those things normally imply
Title = can be source of actual AND apparent authority … if someone has the title “Executive vice president” – it is acceptable for ppl to assume that that person has the authority that title normally implies
What are the defects in Mrs. Blackburn’s case?
This transaction doesn’t proceed normally… ie – there were no receipts, personal checks given to the broker, no statements were given to Mrs. Blackburn, etc
The Ct found that the company knew this guy had problems and yet they hired him and sent him out to harm customers
Principal must be responsible b/c they are in the best position to monitor/stop their agents
Inherent Agency Authority
Very similar to Apparent Authority 
 
8-23
 
Cont talking abt Mrs. Smith
Assume that Sally is expanding the business to include catering and Sally b/o’s part owner
What does it mean to be an owner –
More control over the business
Participate in the gains of the business instead of just getting a salary
More will be expected of Sally – she will be an entrepreneur now… not just an employee
Sally will have to invest some capital (usually $) in the business
Suppose that Sally and Mrs. Smith only had an oral agreement (didn’t formalize any legal documents) as to Sally’s partnership
Partnership = default position where there is more than one owner
Each partner has the power to bind the partnership
Therefore = need a great deal of trust in ppl you make partner
Quest for limited liability
One possibility is a limited liability company (LLC)
Most small businesses use this form
Advantage = owners can achieve flexibility and informality of a partnership, but with limited liability
Corporations = these come in all shapes and sizes from Mrs. Smith and Sally all the way to Proctor and Gamble
Closely Held Corp (Closed Corporation)
Few SH
Stock isn’t publicly traded
Most SH – active participants in the business
One person can create a corporation (instead of a sole proprietorship) for the purpose of getting limited liability
Corp is a separate legal entity unlike sole proprietorships
Separate from SH’s and managers
Corp has an indefinite existence (can last forever)
It continues in existence until there is a definite act of dissolution
SH and managers are generally not personally responsible for debts of corp… therefore all an investor can lose is the amt of the investment
Notion of Centralized Management
Separation of ownership from control
SH are considered to be the owners
They have the right to vote on things like Bd of Directors
They participate in gains if Bd decide it’s in the best interest of the corp for them to receive dividends
They can get gains by selling stock
They don’t control the business though, neither do they manage the business
Managers don’t have to own shares, although they usually do
SH exercise their control by electing the Bd
Bd – oversees the corp
Bd acts as a collective body (there’s usually more than one director)
They meet as a group, discuss things, and vote
Directors are not generally employees of the corp
They can be officers of the corp (management directors or Inside Directors)
Independent/outside/non-management directors are generally seen as a good thing to have at least a few of b/c the deirectors oversee the management, and you don’t want managers overseeing themselves
Board = appoints the officers of the corp
Have to worry abt Agency Cost = how are we going to assure that these officers are working for the best interests of the Corp? 
What laws apply to the corp
Fed law to some extent (b/c of supremacy clause)
Have to pay attention to Fed Law b/c of Sarbanes Oxely Act
NYSE and NASDAQ = these groups have their own rules that the Corps have to follow
St Corp law
Both statutory and case law – have the stat, the cases that interp the stat, and regular old case law
Every St has its own St Incorporation Stat
Corp can decide to set up their corp anywhere they want
They can pick which law they want to be governed by
For small corps it doesn’t make sense to incorporate anywhere other than their home state
For larger corp that does business in lots of states and has SH everywhere – it makes more sense for them to chose
 
8-24
 
Hypo = Sally and Mrs. Smith are a corp… they cater an event… someone gets seriously ill (lots of $ in health care bills) … can they get sued?
Why do we have limited liability?
To encourage small businesses and entrepreneurs (want ppl to be a little freer to take risks)
But does this encourage carelessness? – is enlightened self-interest enough to stop carelessness (ie = ppl don’t want to lose their business/reputation)
How can judges tell if the corp is just poor of if there is duplicity involved
Walkowsky
Test for piercing the veil = only to prevent fraud or produce equity
Piercing the veil is an equitable concept… meant to achieve fairness
Should it be considered fraudulent to do business like this without some sort of liability insurance
Ct said this question was for the legis
If cabbies need more insurance – the legis should rule on that
Just b/c cabbies carry min insurance doesn’t make them wrong and if ppl think so, the legis should fix that not the Ct
Whenever person uses the business to further his own, rather than the corp’s, business… he will be responsible
BUT – in the case of a small business, those 2 interests are very closely related and hard to separate
How do you determine when they are using the business to further their own interests?
No one really knows yet, there is a lot of disagreement
Look for…
Operating the business with fewer assets than would be req’d to pay foreseeable liability in NOT fraud
There has to be something else
There has to be a Misuse of the corporate form
What const’s a