CORPORATIONS OUTLINE
Johnson | Spring 2014
AGENCY
I. Who is an Agent?
a. Restatement (Third) Agency
i. § 1.01 Agency Defined
Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “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.
ii. § 1.02 Parties’ Labeling and Popular Usage Not Controlling
An agency relationship arises only when the elements stated in § 1.01 are present. Whether a relationship is characterized as agency in an agreement between parties or in the context of an industry or popular usage is not controlling.
iii. § 1.03 Manifestation
A person manifests assent or intention through written or spoken words or other conduct
b. Reasons a principal should be held liable for acts by an agent
i. Deeper pockets
ii. Cheapest cost avoider
c. Control
Most important element when analyzing why a principal should be held liable for acts by an agent – a principal’s control over his agent creates liability
i. “Control” only means that the principal is in charge, not that the principal has control over every last detail of the job
d. Elements of Agency
i. A manifestation of consent by one person that the Agent
1. Act on Principal’s behalf
2. Subject to Principal’s control
ii. Consent by the other to so act
*The elements create a triangle with principal, agent and third party at each point
e. Principal-Agency Relationship
i. Defined
Where one, the agent, undertakes some business or manages some affair for another, the principal, by authority and on account of the latter
ii. Liability
The principal is responsible for the acts of his agent –the principal is in the best position to prevent the harm
iii. Formation
Contract and/or compensation are not necessary – Restatement of Agency §15, §16
f. Types of Organizational Structures
i. Agency Relationship —
1. Corporations – Directors and officers (CEO, CFO)
a. Other types —
i. S Corporations
ii. C Corporations
ii. Partnerships – Partners are agents (to the partnership)
1. Other types–
a. General Partnerships
b. Limited Liability Partnerships
c. Limited Partnerships
d. Master Limited Partnerships
e. Limited Liability Companies
iii. Sole Proprietorship – one owner of a business with “assistants” (act as agents)
g. Gorton v. Doty, p. 1
A teacher allowed a coach to drive the football team with teacher’s car – the teacher stated, “You can have the car, only if you drive it.”
The teacher (Principal) consented to the agency relationship by making a condition precedent and the coach (Agent) consented.
i. Manifestation of Consent by the principal via condition precedent.
ii. Agent acted on principal’s behalf when driving the team in the teacher’s car.
h. A. Gay Jenson Co. v. Cargill, p. 7
Cargill engaged in a paternalistic relationship with Warren – Cargill made key economic decisions and kept Warren in existence
Cargill engaged in de facto control over Warren, thus creating a principal-agency relationship – Cargill liable
II. § 8.41. Duties of officers (and their authority)
a. Each officer has authority and shall perform duties set forth in the bylaws, or prescribed by BOD (e.g. in employment agreement), or by direction of any officer authorized by the bylaws or the BOD to prescribe the duties of other officers.
i. Authority refers to the officer’s power to act for and enter into Ks on behalf of the corporation. Officers have TWO KINDS* (UNLIKE directors who only have actual):
b. ACTUAL Authority – (Objective Test) Exists where the agent reasonably believes, based upon the conduct of the principal, that he or she has actual authority. This can be either:
i. Express grant – In AI, bylaws, employment agreement, resolution (passed by BOD), or “go do X”
ii. Implied – Two possible sources:
1. Past conduct/Customary – perhaps action initially taken without actual authority, but corporation because aware, does not object. If this happens repeatedly agent eventually assumes actual authority. Therefore actual authority can exist where officer reasonably believes that he has actual authority based on past conduct. May be either specific to that officer and that BOD, or general, as in “what do CIOs usually do?”.
2. Incidental – tell an agent to do X, but in order to do X must also do Y and Z, therefore its implied from express authority.
c. APPARENT Authority – (Subjective Test) Exists where the third party reasonably believes, based upon the conduct of the principal, that the agent has actual authority to bind the corporation.
i. This can be implicitly created by status, title, OR prior conduct.
d. Note — actual and apparent authority overlap, they are not mutually exclusive and may be difficult to distinguish
i. In most cases, both exist. E.g., in naming someone President, a corporation is announcing to the world that this person has all the powers that normally adhere to a President, and any internal limitations affect actual but not apparent authority (unless a 3rd party knows about them).
III. Fiduciary Obligations of Agents – Duties During Agency
a. Restatement (Third) Age
within the scope of the agent’s actual authority.
(2) An agent has a duty to comply with all lawful instructions received from the principal and persons designated by the principal concerning the agent’s actions on behalf of the principal.
viii. § 8.10 Duty of Good Conduct
An agent has a duty, within the scope of the agency relationship, to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise.
a. Reading v. Regem, p. 69
Plaintiff used his position in the British Army to escort cargo through Cairo under the authority of his uniform. Plaintiff was receiving bribes and the Crown wants the money. If the agent uses his position to become enriched, then it is the employer’s right to the money
i. Duty of Honesty and Good Faith – plaintiff manipulates relationship with employer to get money and is secretive about it
ii. Duty of Loyalty – “unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency”
Principal is entitled to recover secret profits in order to create a rule that encourages loyalty of agents for principles
IV. Fiduciary Obligations of Agents – Duties During and After Termination of Agency: Herein of “Grabbing and Leaving”
a. Town & Country House & Home Service, Inc. v Newbery, p. 75
Defendant’s worked for plaintiff’s cleaning company and quit and solicited plaintiff’s customers. Defendants did not use their own efforts to compile their own client list.
i. Rule: A former employee may not solicit customers who are not openly enraged in business in advertised locations or availability as patrons cannot readily be ascertained
Plaintiff went through a timely process to accumulate clients and it would be unfair for defendants to effortlessly solicit the list of clients — Prevents former employees from making unfair competitive advantage.
b. Way to lure away customers without incurring liability
i. General solicitation to all potential customers avoids liability
The court wants to create a barrier between those that are employees from becoming potential competitors and to protect former employer from unfair competition practices – general solicitation is a way to avoid this concern
