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Business Organizations
University of Dayton School of Law
Gerla, Harry S.

Business Organizations
1.     University of Dayton School of Law – Summer 2009 – Professor Harry Gerla
2.     Text- Corporations and other Business Enterprises – Abridged Edition- Second Edition by Thomas Lee Hazen and Jerry W. Markham
3.   Agency- The fiduciary relationship which results from the manifestation of consent by one person (the principal) to another (the agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and consent by the agent so to act. Restatement of Agency 1(1).
3.1.                Agency empowers one person to act on behalf of another provided that is pursuant to the authority created by the relationship. It also permits the agent to cause the principal to incur obligation and liabilities. As a general rule, the principal will be responsible for the acts of the agent where the agent is acting within the scope of the agent’s authority.
3.1.1.   To create an agency relationship the things that are needed to create a contract are not necessary such as consideration. The agent does not have to receive anything. If the agreement were a contract that would have by the statute of frauds needed to have been in writing it still doesn’t need to be in writing. If the agent was a minor the agency relationship is still good as long as the minor had the capacity to be an agent. Though contractual in nature an agency relationship is not a contract.
3.1.2.   The agents primary actions are to be for the principal. It does not change anything when an agent is paid, it doesn’t change the fact that they are still carrying out the principal’s wants.
3.1.3.   Elements of an Agency relationship:
4.    Fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf AND
5.    subject to his control AND            How much control does it take by the principal in order for an agency situation to exist? If the principal can specify the task the agent is to do then it’s enough control for there to be a relationship.                Control is the key to agency. “With great power comes great responsibility” or “control” in business. Courts say “if you’re going to be in control then you’re going to be responsible.”                “Where an agency threatens to impinge upon another then the courts want to see more control than with other relationships.” What does that mean? On a third person?                Exceptions-?            Right of control- The right of control is very important. If the principal can tell the agent what to do, even if they cannot make sure the agent did what they’re supposed to.
6.    consent by the other so to act.            Consent is required by the principal and agent.            Example- If I hire a landscaper I have the right to tell him how to cut the lawn. Even if I let him decide how to cut the lawn I still have the right to tell him how to cut it.            Consent through circumstantial evidence-            Restatement Second of Agency 1- In order to create an agency there must be an agreement, but not necessarily a contract between the parties. Restatement 2nd – 1, comment b- An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.            The conduct must show that the principal and agent are in agreement to their agency relationship.            When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter.       Creditor/Debtor- Agency relationships. Whenever a special relationship exists courts will increase the amount of control that the principal must exert over the agent. “More than a little is needed”.       Gay Jenson Farms v. Cargill- The creditor was found to be so controlling and active in the business relationship the court found that an agency relationship was created and that the creditor was also responsible for the agents debts.
6.2.              Agent Authority- An agent can only bind the principal contractually for the things they have the authority to do.
6.2.1.   Actual Authority- Can flow from a contract, title, job description, past course of dealing between principal and agent, etc.       Expressed Authority- A specific authorization of agency, from the principal to the agent.            Expressed Authority trumps implied authority.       Implied Authority- Express Authority trumps implied authority. No expressed authority but taken from circumstances or common knowledge.            Once a person has been instructed that they cannot do something they believed they had the implied authority to do; they now have express authority not to do it.            Does it seem like a “normal” or “customary” thing for that person to be doing?            Example- The title “cashier” at a bank carries with it certain implied authority, such as accepting checks, cash, and cashing checks.       Apparent Authority- Can exist in the absence of actual authority where the Principal (not the agent), gives a third party reason to believe that actual authority exists.            Deals with third parties.            Apparent Authority is similar to the doctrine of estoppel.            This authority could be created if a store owner told the cashier not to sell something to customers, customers might still believe that the product was for sale.            Reasonable Reliance-                Did the third party reasonably rely on the agent? is this an objective standard?                How usual is the transaction? If a third person is doing something that is normal then the burden is on the agent/principal that they have the authority.                Hypo- (previous exam question) A VP of purchasing (an agent) usually made purchases of 1000 units but this time he purchased 1,000,000 units even though the VP didn’t have the authority to purchase that much. Could the third party reasonably rely on the VP’s purchase? What is the custom in the industry? What was the business relationship between the two?       If yes….       If no….                Hypo #2 (more complicated)- The owner of a pub told an agent that he could only purchase from certain vendors. The agent purchased from unauthorized vendors, the agent then quit. Can the vendors sue the owner for enforcement of contract?       Why wouldn’t express authority work? Because the agent had been told not to buy from them.       Why wouldn’t implied authority work? Because actual authority trumps implied and he was told not to buy it.       Why wouldn’t apparent authority work? The third party needed to have been dealing with the principal and they were only working with an agent!!!                Hypo #3- A sales agent takes money as a down payment from customers for a couch purchase. The sales agent turned out not to be an employee but an imposter. He didn’t have express authority, implied, or apparent authority.       Where a principal has either purposely or negligently given someone the reasonable impression that someone else is their agent they will in effect be bound to the usual transaction carried out by the person.           What if it was a usual transaction?       The store owners were also negligent in leaving the store door open while they w

then the principal is like an employer for that limited purpose. So in essence you can have an agent who is an independent contractor for most of the job but then be an employee for a different specific part of the job.
7. Chapter Four: Corporations–Formation and Finances
7.1.              Formation of a Corporation- Delaware General Corp. Law 102(a) lists all of the things that a certificate of incorporation is required to have. 102(b) lists the different things that may be put into the certificate of incorporation.
7.1.1.   102(a)(1)- Name of the corporation.
7.1.2.   102(a)(2)- Address of the corporation’s registered office in the State, and the name of its registered agent at such address.
7.1.3.   102(a)(3)- Nature of the business or purposes to be conducted or promoted. Okay if it says that the corporation is to engage in ANY lawful activity. Compare with 3.01(a).
7.1.4.   102(a)(4)- Classes of stock
7.1.5.   What Articles of Incorporation Must Contain According to MBCA MBCA 2.02 (p. 211) what the articles MUST contain.       The articles of incorporation must set forth: corporate name, number of shares, street address and name of registered agent, and name and address of each incorporator.       2.02(b)- Lists what the articles MAY set forth.       “Articles of Incorporation” are also known as “Certificates of incorporation”
7.1.6.   Date of Incorporation-       MBCA 2.03(a)- “Unless a delayed effective date is specified, the corporate existence begins when the articles of incorporation are filed.”       MBCA 2.03(b)- “The secretary of state’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation EXCEPT in a proceeding by the state to cancel or revoke the incorporation or involuntarily dissolve the corporation.”
7.1.7.   Promoter’s Liability- see p. 17 bb.       MBCA 2.04- “All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting.” Thus as a general rule, if a promoter enters into an agreement with a third party to benefit a planned, but as of yet unformed, corporation, the promoter is personally liable for the agreement.       How the promoter can be protected- Add “any liability of this contract is condition upon the creation of this corporation.” or “If the corporation is not formed the promoter is not personally liable.”            What if the corporation is formed yet never adopts the contract? To protect the promoter you should say that even if the company doesn’t adopt the contract the promoter is not liable.       As a default rule promoter is on the hook even after the corporation has been formed and the corporation later adopts the contract as its own.       Agent- The promoter is not an agent because the corporation doesn’t really exist yet.       O’Rorke v. Geary- They worked to get contracts in advance so once it was formed they would be able to “hit the ground running.”