ROLES AND PURPOSES OF THE CORPORATION
I. CORPORATION: A legally recognized entity, which is considered to have two citizenships: the state in which it is incorporated and the state from which it principally conducts business.
a. Ultra vires: Beyond a corporation’s power.
b. Intra vires: Within a corporation’s power.
c. ARTICLES OF INCORPORATION: A controlling instrument that is filed w/ the appropriate gov’t agency, which sets out a corporation’s purpose, share classes, duration, and terms.
i. A.P. SMITH MFG CO. v. BARLOW (Princeton Donation)
1. Facts: NJ company donated $1,500 to Princeton U. NJ statute provided that “any corporation [could provide] community funds & charitable…conducive to public welfare…as the directors deem expedient…. and to the protection of the corporate’s interests.” This statute further provided the corporation to provide notice to its stockholders within 10 days if the donation was more than 1% of capital stock & stockholder’s approval if a holder of more than 25% of the stock had a written objection.
2. Holding: While the corporate charter did not specifically authorize these kinds of donations, it did not bar them. Moreover, corporations have a great deal of wealth and community contributions must come from somewhere. Charter alterations may be sustained even if they affect contractual rights between the corporation and its stockholders if it advances the public interest. This issue was a “public interest” question and if the legislature passes a statute to further public interest it is retroactively applied; whereas, if it only applies to shareholders’ relationships than it is not retroactively applied.
i. Corporations exist to make money for its shareholders. (Dodge v. Ford Motor Co.)
1. Directors have the broad latitude to determine what is in the best interest of their shareholders.
ii. A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns. (Dodge v. Ford Motor Co.)
1. A business corporation is organized & carried on primarily for the profit of the stockholders. (Dodge v. Ford Motor Co.)
iii. DIVIDENDS: Payments made to a class of shareholders from corporate profits. Companies have discretion in deciding to pay dividends or not pay dividends.
1. Courts “will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds or refuse to declare a dividend when the corporation has a surplus of net profits, which it can, w/o detriment to its business, divide among its stockholders, and when a refusal to do so would amount of such an abuse of discretion as would constitute fraud, or breach of that good faith which they are bound to exercise towards stockholders.” (Dodge v. Ford Motor Co. quoting Hunter v. Roberts).
a. The refusal to pay dividends has to constitute fraud or lack of good faith.
b. “Good faith” is never defined.
iv. DODGE v. FORD MOTOR CO.: (No Special Dividends)
1. Facts: Ford Co.’s profits were growing and had a total profit of $60 million. Ford announced that no special dividends would be paid in the future b/c profits would be reinvested in the business. Dodge brothers’ share of the regular dividend was $120,000 and their share of the special dividend was $1 million; therefore, Dodge brothers’ would receive only $120,000 per year.
2. Holding: A business exists to conduct business on behalf of its shareholders. Although a corporation may choose to invest in future ventures, Ford had done that in prior years and still managed to pay special dividends. These actions, combined w/ Ford’s statements about putting profits into the business to provide for the workers, suggest that the decree against new special dividends was not motivated by any business concern. By taking an action w/ no business concerns motivating it, Ford and its directors were acting arbitrarily, to the direct detriment of the shareholders in whose interest they were supposed to be acting.
e. BUSINESS PURPOSE
i. The courts will give a business’ decision great deference as long a corporation’s directors can show a valid business purpose for their decision. (Shlensky v. Wrigley).
ii. SHLENSKY v. WRIGLEY (Stadium Lights)
1. Facts: Every team, except the Chicago Cubs, played night games. The President of the Chicago National League Ball Club, Philip Wrigley, opposed night games and claimed that night games would be damaging to the neighborhood in which the Cub played. Shlensky, a minority stockholder, filed a suit and claimed that it would be financially practicable for the Cubs’ stadium to install lights and play night games and would be profitable in the long run. Shlensky further alleged that Cubs did not play night games only because Wrigley felt it was against the spirit of baseball.
2. Holding: A corporation’s president and its board of directors had to make a decision on a valid business question; therefore, it was within their discretion to make a decision as long as that decision is motivated by a valid business purpose. Wrigley and the board could have decided that night games were not enticing to fans or expressed concern for the costs of operating the lights. Shlensky did not prove that night games would increase ticket sales, and did not prove that any potential increases in ticket sales would offset potential increases in cost. There was no showing that demonstrated that Wrigley and the board were acting in anything but the corporation’s best interest. Furthermore, even if the defendant was losing money, the defendant is not required to follow the lead of other corporations. Directors are elected for their business capabilities and judgments and the courts cannot require them to forego their judgment.
II. WHO IS AN AGENT?
a. AGENT: A person who acts w/ a principal’s authority on the principal’s behalf.
b. AGENCY: There are three principal forms of an agency:
i. Principal-Agent: This relationship exists when two persons agree that one person will act on behalf of, and subject to, the control of another person.
1. Compensation and/or contract are not necessary to establish this relationship. (Gorton v. Doty).
iii. Employer/Proprietor-Independent Contra
5. Liability of an Undisclosed Principal
i. ACTUAL AUTHORITY
1. Actual authority is based on manifestations by the principal to the agent.
2. Restatement (Third) of Agency §§ 2.01-02.
3. There are two forms of actual authority: (1) express actual authority and (2) implied actual authority.
a. EXPRESS ACTUAL AUTHORITY
i. The agent has authority to do those things explicitly authorized by the principal.
ii. Example: Church gave Bill express authority to paint the church. (Mill Street v. Hogan).
b. IMPLIED ACTUAL AUTHORITY
i. The principal acted in a manner that would lead an agent to reasonably believe that the principal intended for the agent to have such powers as are practically necessary to carry out the duties delegated.
ii. The agent has authority to do things that are necessary for or incidental to the task that she was explicitly authorized to do.
iii. MILL STREET CHURCH OF CHRIST v. HOGAN (Brother Painters)
1. Bill had implied authority to hire Sam.
2. Facts: Church regularly hired Bill to paint the church and had routinely allowed Bill to hire his brother Sam as an assistant. When the church hired Bill, it did not mention hiring a helper. Eventually Bill reached a point that he could not complete the painting on his own and approached a Church Elder about hiring a helper. The parties agreed that a helper was necessary and the Church Elder acknowledged that Mr. Petty was difficult to reach. Bill offered Sam the assistant job and Sam accepted. A half hour after he started work, Sam fell and hurt himself.
3. Holding: The Church had previously allowed Bill to hire Sam to assist in painting projects. The Church Elder acknowledged that Bill would need help in finishing the job and stated that Petty would be hard to reach. Additionally, the Church paid Bill for the time Sam worked on the project. The Church’s actions led Bill to reasonably believe that he had authority to hire Sam.
ii. APPARENT AUTHORITY
Apparent authority exists when the principal acts in a way that would lead a reasonable person to believe the agent has such authority, particularly when the agent does things that are usual and proper to the principal’s business.