Professor Jeremy McClane Business Organizations Spring 2016
Law of business enterprises: facilitating voluntary economic relationships.Property + K Law
Law of business organizations: how you organize groups of people.Who has control? Takes risk? Monitor?
Fundamental objective of enterprise law: increase social welfare
Principal objective of enterprise law: shareholder/investor law
Criterion for evaluating enterprise law: efficiency
Reduce costs of inputs, increase value of outputs
How to enhance efficiency?
Provide standard platforms for business entities, agency contracts, creditor protections. [Default Terms] Rules and Standards [fiduciary duties] intended to prevent or remedy self-interested opportunism (agent who agrees to act loyally on behalf of principal and is economically motivated to act against principal’s interests bc he can collude with 3rd parties in negotiating K’s. “Agency Problem”
As lawyers, how are we engineers of transaction costs?
Cost of doing business, friction in the system, mostly between owners and outside parties
How to avoid transaction costs?
Don’t hide lawyers; agree to certain norms ahead of time [default rules] Market Efficiency:
Weak Form: Market prices reflect all prior prices
Semi-strong form: Market prices reflect all public info about the company
Strong form: Market prices reflect all info (public + private)a out a company
SOURCES OF LAW
RESTATEMENT AGENCY 3- 2006. Mainly used
RESTATEMENT AGENCY 2- sometimes referred to.
Agency and Partnership Law:Chap 1,2
Formation: How are agency relationships formed?
Restatement 3rd Agency. P. 8. §1.01. Agency is fiduciary relationship that arises when principal manifests assent to agent that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
Special agent: agency limited to a single act or transaction
General agents: agency contemplates a series of acts or transactions
Disclosed principals: when 3rd parties understand that an agent acts on behalf of a particular principal
Undisclosed principals: when 3rd parties believe an agent to be the principal
Partially disclosed principals: when 3rd parties deal with an agent without knowing the identity of their principal
agent call this if principal secures from her agent the right to control in detail how the agent performs his task.
Independent Contractor: agent called this if the principal’s control rights are limited and the agent exercises considerable discretion
Termination: How are agency relationships terminated?
Principal or agent can terminate at any time
If K, principal who revokes or agent who renounces gives rise to a claim for damages for breach of K.(Damages= $, not specific performance)
Agency relationships may be implied
Jenson Farms Co. v. Cargill Minn. 1981
Π: 86 wheat farmers
∆: Warren: operator of grain elevator.Cargill: deals in commodities.
Action: to recover losses sustained when Warren defaulted on the Ks made with π for sale of grain.
Issue: Did Cargill become liable as a principal for Ks made by Warren with π.YES
Test: Existence of agency can be proved by circumstantial evidence which shows a course of dealing between 2 parties.
Cargill manifested assent that Warren would be its agent (by directing Warren to implement his recommendations), Warren acted on Cargill’s behalf in producing grain for Cargill as part of its normal operations which were totally financed by Cargill.
Holding: this is different from a bank debtor/financer relationship bc Cargill was an active participant in Warren’s operations rather than just a financer; the reason for Cargill’s financing of Warren was not to make money as a lender but rather to establish a source of market grain for its business.
Restatement §§1, 140 P. 13
Principal’s Liability: What are the principal’s responsibilities for the agent’s authorized and unauthorized K’s and for his unauthorized torts?
Liability in Contract: agency requires agent reasonably understand from the action or speech of the principal that she has been authorized to act on the principal’s behalf
Actual authority: that which a reasonable person in the position of A would infer from conduct of P.
: authority to do those implementary steps ordinarily done in connection with facilitating authorized act
: if communication was explicit
: if A’s actions were reasonably calculated to discharge P’s explicit instructions. (necessary to fulfill action)
Apparent authority: authority that a reasonable 3rd party would infer from actions or statements of P
Restatement §2.03 P. 13
Equitable remedy: takes into account any reasonable reliance of a 3rd party may have had
White v. Thomas 1991
Secretary of Appellant White once signed closing papers on property which Appellant was purchasing (secretary had never negotiated sales, never gone to an auction to buy property before).
White had directed secretary Betty Simpson to bid up to $250,000 on 217 acre farm. She bid $327,000 then approached appellees to buy some land off her, entered into offer and acceptance
Told appellees she was POA
Simpson told White, he went through with closing, did not know about appellees and repudiated offer and acceptance.
Actual Authority? No (no implied, no express) to sell land, just to buy land
[scope of authority] purchasing and selling are not so closely related that they are interchangeable.Appellees should have confirmed authorization
Apparent Authority?Yes, to buy land, not sell land.
Inherent Authority: could be called inherent power bc: consequences imposed on principals by the law rather than power conferred on agents by principals (Restatement 2d §§8A, 161, 194 P. 16)
Gives a general agent the power to bind a principal, whether disclosed or undisclosed, to an unauthorized contract as long as a general agent would ordinarily have the power to enter such a contract and the 3rd party does not know that matters stand differently in this case )
Restatement 3d: same result for the undisclosed principal
Provides agency by estoppel and restitution-
Gallant Ins. Co. v. Isaac 2000
Thomson-Harris was independent insurance agent with authority to bind Gallant on new insurance policies and interim events.
Had no written agreement, but record shows Gallant became bound to provide insurance coverage at time + date on which TH faxed or called required info to Gallant’s producing agent.
Isaac had insurance, upgraded car, bank required full coverage, she called TH, they told her she is bound and to come in on Monday.Dec. 3 ins. expired, Dec. 4 accident, Dec. 5 Monday.Effective Date Dec. 6.
Gallant says that TH had no actual or apparent authority to renew insurance policy or orally contract without approval of Gallant first.
Court: Inherent agency indicates power of an agent that is derived not from authority, apparent or estoppel, but from agency relationship itself.It exists for protection of persons harmed by or dealing with a principal’s servant or agent.
Part I: TH had common practice of telling insured they were bound even if they hadn’t faxed/received payment until later.
So although this violated instructions of Gallant, it was similar enough to actual authorized conduct, and was within ordinary scope of its authority.
Part II: Look at agent’s direct and indirect manifestations and determine whether 3rd party could have reasonably believed that TH had authority to act
General partnership:earliest form of a jointly owned and managed business
Partner: general agent of her partnership.Each partner binds the partnership by contracting in usual course of business.
: Revised Uniform Partnership Act: 1997: majority follow this, CT
Uniform Partnership Act: : MA + NY use it
Property: tenancy in partnership.creditors go after partnership property first, then individual partners
Order of priorities in bankruptcy: creditors of partnership then creditors of individual
Why joint ownership? P. 35costs of co-ownership are cheaper than agency costs of debt.
Problem between controlling and minority co-owners.. Scope of duty of loyalty owed by managing co-venturer to the passive co-venturer
UPA §6: have to carry on as co-owners. P. 44
UPA §9: partner agent of partnership as to partnership business- agent for carrying on the usual business of the partnership, as a partner
Meinhard v. Salmon 1928 [not good law anymore bc now we have default rules] ∆: Salmon, Gerry leased him Hotel Bristol (20 yrs).Π: Meinhard, investor.
Joint Venture: Meinhard pay Salmon ½ cost to reconstruct/alter/manage/operate property.Salmon pay Meinhard 40% of net profits for 1st 5 years and 50% of years after.Losses beared equally.Salmon had sole power to lease/manage/underlet/operate building. No clause about leaving the partnership- court fills in the gap.
Salmon is manager; Meinhard is passive investor or “silent partner”.Meinhard wants option to renew
Lease with Gerry from Midpoint Realty Co.: owned/controlled by Salmon for 20 years + renewal up to 80 years.Salmon didn't tell Meinhard.
When Meinhard found out, demanded lease be held in trust as asset of Joint Venture.
Have to allow opportunity for benefit from virtue of agency.
Owe a duty of communication.
“infection of secrecy and silence”
Salmon not guilty of purpose to defraud.Salmon wanted to just drop Meinhard at end of lease; Salmon gets 50% of the new lease plus 1 share, to retain control.Meinhard gets 50% -1 share
RUPA §§403, 404
Partnership Formation: UPA§§6,7 & RUPA §202. Agreement+ consent to act as partners+ capital account. P. 54-55
Vohland v. Sweet 1982:[consent] Sweet Π: hourly employee for Vohland ∆.Vohland father retired/ Vohland Jr. Took over 1963.Sweet was to receive 20% of net profit of enterprise after all expenses were paid.No partnership income tax returns filed ($ paid to Sweet was listed as business expense on tax return; Sweet's tax return said he was self employed salesman at nursery).
Vohland handled all financial matters.Sweet managed physical aspects of nursery.Sweets wants his partnership share from a dissolution.
Was this a partnership?
UPA §7: for determining if there had been an implicit partnership…. (3) + (4). Prima facie evidence= rebuttal presumption
UPA §7(4): receipt by a person of a share of the profits is prima facie evidence that he is a partner in the business. Lack of daily involvement is not per se indicative of absence of a partnership.