“Winning”
Corporations Outline – Spring 2011
I. Corporations
a. The Agent-Principal Relationship
i. Introduction to Agency
Common throughout the field of organization are the principles of agency. Since most businesses, at one time or another, act through third parties, it is necessary to determine when an agent can bind the principal, when the principal is liable for the wrongful acts of the agent, and when the duties and obligations of agents are to their principals and vice versa.
1. Analysis of Agency Problems. In analyzing agency problems, you can simplify the task if you first determine which of the following types of problems is involved:
a. Is the problem between the agent and the principal
b. Does it involve a third party trying to hold the principal to an agreement based on the agent’s conduct or and express agreement?
c. Does it involve a third party trying to hold a principal liable for the argent’s torts?
2. Proving Agency. The person asserting that there is a principal-agent relationship has the burden of proving it.
Weather an agency relationship exists is not depended on the intent of the parties involved. An agency relationship can arise even if the parties do not intend to be agent and principal to each other, and may not arise even if the parties so intend if certain conditions are not met.
The formation of an agency relationship depends on the existence of certain factual elements.
There must be an agreement between the parties that the agent will undertake some act on behalf of the principal, with the understanding that the principal is to remain in control of the undertaking.
3. Fiduciary relationship. Every agent is a fiduciary. This means that she owes a high standard of care to her principal. Fiduciaries must avoid conflicts of interest, self-dealing, disloyal acts, etc. This standard of care is similar to the duty a trustee owes his tractor and beneficiaries.
4. Gratuitous Agents. These are agents who perform their services without gain. Unlike other agents, gratuitous agents cannot be compelled to perform the duty they have undertaken. The principal may, nevertheless, be liable for the torts of gratuitous agents.
5. Principal’s Duty to His Agent. The principal is under a duty to compensate his agent, including reimbursing her for out-of-pocket costs, unless the parties contract otherwise. He also has a duty to cooperate with the agent and aid her in the performance of her duties.
ii. Who is an Agent?
Agency is defined as the fiduciary relationship that results from the manifestation of consent that one person (the Agent) shall act on behalf of and subject to the control of another person (the Principal).
The “manifestation of Consent” requirement is objective – it does not matter what the principal truly intended, but rather, the agency relationship depends on what the agent believed the principal intended.
Thus, agency relationship can arise even where the principal subjectively intended no such relationship. Moreover, agency power to bind the principal can arise even absent true mutual consent.
1. Creation of the Agency Relationship. There are several ways for an actual agency relationship to be formed:
a. By agreement.
b. By ratification. This occurs when the principal accepts the benefits or otherwise affirms the conduct of someone purporting to act for the principal, even though no actual agency agreement exists.
c. Agency by estoppel. A principal may act in such a way that a third person reasonably believes that someone is the principal’s agent; this is called agency by estoppel.
2. Agency arising from Use of a Vehicle:
Gorton v. Doty
Facts. Doty (D) loaned her car to Russell Garst, a high school football coach, to transport members of the team to a game. When Garst had a traffic accident in which Richard Gorton (P) was injured, Richard’s father, as guardian ad litem, sued Doty, arguing that Garst was Doty’s agent while transporting the team in Doty’s car, hence Doty, as principal in the agency relationship, was liable for the injuries resulting from the accident.
Rule of Law. Where one undertakes to transact some business or manage some affair for another by authority and on account of the later, the relationship of principal agent arises.
Holding. Yes, an agency relationship existed. Doty designated Garst as the driver, to act on her behalf.
Dissent. This was just a simple loan; Garst was not acting on her behalf.
3. Creditor Exercising Control over Debtor:
Gay Jenson Farms Co. v. Cargill, Inc.
Facts. Cargill, Inc. (D), in addition to loaning funds to Warren Grain & Seed Co. (D), also took control of the day-to-day operations of Warren.
Rule of Law. A creditor who assumes control over his debtor’s business may be held liable as principal for the acts of the debtor in connection with the business.
Holding. All elements of Agency Relationship met here. Warren acted on Cargill’s behalf in procuring grain for Cargill, and Cargill interfered in Warren’s internal Affairs. This goes beyond the normal creditor/debtor relationship. Cargill financed warren to establish a source of grain for its business not to make money as a lender.
iii. Restatement of the Law (Third) Agency
Chapter 1. Introductory Matters
§ 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.
§ 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 industry or popular usage is not controlling.
§ 1.03 Manifestation
A person manifests assent or intention through written or spoken words or other conduct.
§ 1.04 Terminology
(1) Coagents. Coagents have agency relationships with the same principal. A coagent may be appointed by the principal or by another agent actually or apparently authorized b
w with specific duties to the corporation and its shareholders. The rights of the corporate owners (shareholders) are spelled out by corporate law.
5) Corporate Powers. As a legal entity, a corporation can sue or be sued, contract, own property, etc.
b. Limited Liability
1) Liabilities belong to the corporation itself. Because a corporation is held to be a separate legal entity, the corporation normally incurs debts and obligations in its own name that are not the responsibility of its owners (shareholders). At the same time, the corporation is not responsible for the debts and obligations of its owners (shareholders).
2) Exceptions to the limited liability rule. In some exceptional situations, a court may “pierce the corporate veil” and dissolve the distinction between the corporate entity and its shareholders so that the shareholders may be held liable as individuals despite the existence of the corporation.
a) Situations where the corporate veil may be pierced.
i) Fraud or injustice. Where the maintenance of the corporation as a separate entity results in fraud or injustice to outside parties (such as creditors).
ii) Disregard of the corporate form / Alter Ego. Where the shareholders do not maintain the corporation as a separate entity but use it for personal purpose. The rationale here is that the shareholders have disregarded the corporate form, then the entity is really the alter ego of the individuals and decisions are being made for their benefit and not the entity’s, so the individuals should not complain if the courts likewise disregard the entity.
· Examples include:
§ use of corporations assets as if they were their own
§ comingling of funds (transferring money back and forth, or one bank account for shareholder and corporation)
· Most likely in a close corporation (because the shareholders can manage the assets and business of the corporation directly)
iii) Enterprise Failure. Where the corporation has not been manages properly. For example, corporate records are not maintained, required meetings are not held, directors or officers are not appointed.
· Sloppy administration is usually not enough, need to show abuse and unfairness.
iv) Undercapitalization. A prime condition for piercing exists where the corporation is undercapitalized from its formation given the liabilities, debts, and risk it reasonably could be expected to incur.
· Liability insurance as evidence of undercapitalization:
