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Business Organizations
University of Connecticut School of Law
Kwak, James Y.

BusOrgs Outline

Prof Kwak

Fall 2013

I. Role/purposes of Corps

A. Corps primary purpose is to provide profits for its S/Hs. In general, however courts defer to the director’s judgment about what is in the interests of S/Hs.

1. The case about Henry Ford

a) Facts: despite enormous profits Ford announced that no special dividends would be paid but invested in the business so that the car prices would be reduced and everybody-public will benefit. S/Hs sued.

b) Rule: courts will not interfere in management of directors unless it is clear that they are guilty of fraud or misappropriation or refuse to declare the evidence when the Corp has a surplus of profits which it can, without detriment, divide among its stockholders, and when a refusal to do so would amount to abuse of discretion or breach of good faith which are bound to exercise doors of the stockholders.

c) Holding/reasoning: a Corps primary purpose is to provide profits for its stockholders. Corps director’s discretion is to be exercised in the choice of means to attain that end. However, this discretion does not extend to a change in the end itself, to reductions profits, or to the non-distribution of profits to devote them to other purposes. Given the companies clearly prosperous outlook, Ford was not entitled to arbitrarily refuse to pay dividend, however, the court allowed expansion of the business.

2. The case about installation of lights in the football field

a) Facts: the director of the Chicago Cubs baseball team who was also the majority S/H refused to install lights so that night games could be played. A minority S/H sued: we must compel lights installations so that revenues could be increased, it was a personal not business decision (baseball is that they support! And installation of lights and 90 games will have deteriorating effect on the neighborhood) and was not in the best interest of S/Hs.

b) Issue: does a S/Hs action that seeks to overturn the board’s decision and does not make allegations of fraud, illegality or conflict of interest state a cause of action?

c) Business judgment Rule: derivatives actions can be based only on conduct which borders on fraud, illegality, or conflict of interest. It is not the function of courts to resolve for Corps questions of policy and business management.

(1) What about negligence and waste?

d) Holding/reasoning: this action does not state a cause of action. Where not satisfied that the motives assigned to their director are contrary to the best interest of the Corp and stockholders. There is no fraud, illegality or conflict of interest. Effect on the neighborhood might be considered – patrons would not come to the games. Moreover, there is no proof that night games will benefit the Corp by bringing new revenue.

B. Corps may make donations to charities, so long as the donations contribute in some way to the Corp’s interest. Charitable contributions are generally reviewed as ordinary business judgments.

1. That Princeton university charitable donation case – exception

a) Facts: S/Hs of a Corp challenged its authority to make a donation: not within the power and statute authorizing was enacted after creation of the Corp.

b) Issue: whether Corps can donate money in the absence of any specific authorization in the charter or state statutes?

c) Holding/reasoning: donation sustained. Donation made to accomplish corporate ants, advance interests of P is a private Corp and is part of the community in which it operates. Under common law Corps could make charitable donations unless company benefited. However as wealth increased many find public support for corporate donations as to promote corporate objectives. Public policy argument: charities, particularly private universities, a crucial to the nation – promote good government, protects private enterprise, fights communism – and we need them supported by Corps because individuals can no longer afford to. Even though the statute authorizing corporate charitable donations was enacted after the creation of Corp, state constitution and another act enacted before its creation reserved to the state power to outer spend and repeal any corporate charter at the discretion of the legislature. Reserved power argument

II. A-cy

A. an A-cy (where one person acts for another) relationship results from (1) one person’s manifestation of consent that (2) another will act on his behalf (3) and subject to his control (4) and the other person’s consent so to act.

1. The football coach as a driver case – not a business transaction. Also T liability

a) A mother loaned a car to a football coach to transport members of the team. When one of the kids was injured in the accident, his father sued the mother as principal

b) Issue: was the coach an agent?

c) Holding/reasoning: Yes, principal agent relationship arises not only when one transacts business for another but also when one is generally authorized to “manage some affairs for another.” The mother volunteered to use vehicle on express condition that coach drive it. So, she specifically and exclusively authorized coach. So, as there was consent on both parts. Even though parties did not executive a contract or paid compensation, the coach was the mother’s agent= substance important, not form.

(1) Dissent: A-cy means more than mere passive permission. It involves request instruction or command. Here the mother simply loans your car – it was nothing more or less than a kind the gesture.

d) Comments: in this case 2 elements – on behalf and under control – are questionable.

2. The creditor who took control of the day-to-day operations of a seed elevator business case – special case of a debtor turned agent. Also K liability.

a) Facts: seed elevator business purchased grain and seed from local farmers. Its creditor provided working capital and slowly became more and more involved and eventually took over its daily operations. When the business defaulted, local farmers sued the creditor.

b) Issue: may a creditor who assumes control of his doctors business become liable as principal?

c) Holding/reasoning: Yes, A-cy need not arise from a formal contract and need not be understood as such at the time both parties give their consent. Instead, once one party gives its consent to another to permit control over one’s activities an A-cy is created and the principal is liable for agent’s debts. Creditor indicated consent to the business when it insisted that it implement its recommendations for operations and internal affairs, establishing credit doors control. De facto control over the management is determinative. Here, consistent recommendations, right of 1st refusal, power to inspect and audit financial statements, and prohibition of mortgages, stock purchases, or dividend declarations indicate creditor’s control. The business sold nearly all incoming grain to the creditor. So, the relationship transcends that of a debtor and creditor.

3. The farmers couple case – special case of a husband as purported agent. Also ratification.

a) Facts: a couple of farmers where tenants in common off a farm. P wanted to purchase it. He and the husband agreed for a lease with an option to purchase and sign papers. The P didn’t know that the husband did not own the property outright. When the couple refused to honor the option, Ps sued.

b) Issues: (1) can an A-cy be established where fair preponderance of evidence does not indicate that purported principal has authorized purported agent? (2) Can a person ratify a prior act where the person neither intends to do so nor has full knowledge of all the material circumstances?

c) Holding/reasoning: (1) No, A-cy requires a manifestation from a principle that an agent will ask for him, acceptance by the agent of the undertaking, and an undertaking between the parties that the principal will be in control. Neither the marital status nor joint property ownership alone establish A-cy. Although the wife indicated she would not sell the property for less than 85K no evidence suggests that she actually agreed to sell it. Moreover, the fact that one spouse tends more to business matters than the other does not constitute delegation of power as to an agent. That life had consistently signed any deed mortgage or mortgage note in connection with joint property held. (2) No, a person cannot certify a prior act where the person neither intends to do so nor has full knowledge of all material circumstances. The facts do not indicate the wife’s intention and knowledge of all the material circumstances. At most, she observed P occupying and improving the land, receiving rents from him, use that she had an interest in the property and news that use occupancy and rentals where DU to a written agreement she didn’t signed. None of these indicate that wife rectified the agreement, especially since husband had the right to lease he’s half interest in the property. Moreover, since husband never intended to act on wife’s behalf she cannot be seen as rectifying agreement by merely accepting the benefits and by failing to repudiate it.

B. Liability of principal in a contract. Principal is liable for a contract entered into by an agent only if the agent had authority or some substitute for it. 5 theories under which a principal may be liable:

1. Actual authority

a) Express AA – agent has authority to do those things explicitly authorized by principal. Is based on manifestations by the principal to the agent

b) Implied AA – agent has authority to do things that are necessary or incidental to the tasks authorized. The scope of implied authority is determined by the agent’s reasonable belief given the principle’s manifestations. Factors: agent’s reasonable belief, the nature of the task, prior similar practices.

c) The church case

(1) Facts: the church hired a contractor to paint its building, who hired his brother to help in completing a difficult part of the job. While painting employee broke his leg. Worker’s Compensation Board held that he was an employee of the church and entitled to workers comp. Church petitioned for review.

(2) Issue: does a person process implied authority as an agent to hire another worker where such implied authority is necessary to implement the agent’s express authority?

(3) holding/reasoning: Yes, to establish implied authority the agent must establish through circumstantial evidence and especially course of dealing, that the agent reasonably believes the principle wished him to act in a certain manner because he’s had been similarly authorized in the past. Here contractor had implied authority to hire since in the past the church allowed it whenever he needed assistance on the project. Even though the board of elders discussed at different arrangement at this time, it did not mention into contractor or employee. Moreover, the hiring was necessary to complete the job – the interior could not be painted by one person. Finally the employee believes that contractor had authority to hire, since it was practice in the past. The church even paid the employee half of the hours he worked.

2. Apparent authority

a) It is the authority the agent is held out by the principal as possessing. It is objective authority – a matter of appearances on which 3rd parties come to rely. Must be based on previous conduct on that of the principal. It is inferred from the conduct of the principal and agent Implied authority is what agent beliefs. Apparent authority is what 3rd parties’ belief.

b) The church case – the employee believed that contractor had authority to hire, since it was practice in the past.

c) The computer leasing equipment case

(1) Facts: computer dealer contacted computers seller and negotiated with the salesperson purchase of 6 core memory units. Written document was sub

t are within the authority usually confided to an agent of that character, notwithstanding any limitations placed on the A-cy and not disclosed to 3rd parties. Just as a secret partner in a P-ip cannot escape liability, and undisclosed principal may not avoid the liability for the actions of an agent who incurs usual and ordinary debts necessary to conduct the principles business. Here, in the context of the public house, one dealing with the manager clearly would expect such manager would have authority to purchase pub-related related items.

C. Liability of an agent in contract

1. General rule: if principle is disclosed to the third-party, the agent is not liable to the third-party for actions taken with actual or apparent authority (under rules above the principal is liable).

2. If the principal is undisclosed (the third party does not know that there is a principal) or partially disclosed/unidentified (the third party knows there is a principal, but does not know who it is), and the agent has actual or apparent authority, then both the principal and the agent are liable (unless otherwise specified).

a) Atlantic salmon case

(1) D dealt with Ps as a representative of “Boston international seafood exchange Inc.” and sold salmon to other wholesalers. His checks bear the same name and it was signed by D designated “treasurer”. Same with wire transfers and business cards. At the same time D revived an old Corp of his under the name “Boston seafood exchange”. Ps are owed for salmon sold to business known as “Boston international seafood exchange” during the period such company was actually owned by the old Corp of D, for member informed Ps of the existence of that old Corp and they didn’t know about it until the beginning of the litigation.

(2) Is an individual personally liable for debts if they were incurred on behalf of at partially undisclosed or am identified principle?

(3) Yes, it is the duty of an agent in order to avoid personal liability on a contract entered into on behalf of principle, to disclose not only that he is an agent, but also the identity of the principal. Here it is not sufficient that the Ps may have had the means through a search of the records of the Boston’s city clerk to determine the identity of D’s principal. Actual knowledge is a test. The agent must either bring forward the knowledge or what to a reasonable person is an equivalent to knowledge. Here the agent notified P that he was an agent but didn’t tell them about identity of the principal. Curran was individually liable for the contracts he entered into on behalf of either nonexistent Corps or an unidentified Corp.

D. Liability of principal in tort

1. Servant v. Independent contractor

a) 4 liability in tort the 1st thing that matters is the presence and nature of the A-cy relationship. If P hires A to do something, A can be one of 3 things (1&2 are agents):

(1) A servant/employee: A acts on P’s behalf and P has the right to control the physical conduct of the task

(2) An agent type independent contractor: A acts on P’s behalf and subject to P’s control but P does not have control over physical conduct

(3) At non-agent independent contractor: P specifies the outcome alone and has no control over A’s conduct

(a) Note: the amount of control necessary for a person to be a servant is greater than the amount necessary for him to be an agent. Put another way, servants are a subset of agents

b) Basic rule: masters/employers are liable for torts committed by their servants/employees, as long as they committed within the scope of employment. See below.

(1) The car rolled out of a service station case– b)

(a) P and his children were injured when they were struck by a vehicle that rolled out of a service station owned by D and operated by independent contractor. D exercised substantial control over the details of stations operation

(b) May a party be liable for a contractor’s torts if he exercises substantial control over the contractor’s operations?

(c) Yes, normally a party is not liable for the torts of independent contractors. However if it substantially controls the manner of contractor’s operations, the contractor relationship breakdown and a master-servant relationship is formed. Here independent contractor was obligated to perform any duty the D might impose on him. D paid some operation expenses and controlled stations hours, he retained title to the service station and products sold, paying contractor a commission on profits. Although contractor had power to hire compensate manage and discharge employees the remaining operations where under D’s control, who paid advertising costs. D here is liable.

(2) Gas station customer got burned case – c)