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Business Associations
University of Illinois School of Law
Aviram, Amitai

Business Associations I Outline 2014 Fall — Prof. Aviram
I.                     Agency
A.      Agency: General Concepts
1.       Private Paternalism: Introduction to Corporate Law
Summary of intervention solutions
Branch of business law
Private ordering
Government enforces voluntary agreements
Commercial law
Public paternalism
Government mandates terms to firm;
firm & stakeholders lobby government
Regulatory law
(& constitutional law)
Private paternalism
Government ensures actors pursue the interests of a protected class of stakeholders
Corporate law
a.       Relationships between actors and beneficiaries are internal governance; other relationships are called external governance
2.       The Agency Relationship
a.       RULE—the agency relationship
i.                     An agency relationship is created when agent (A) and principal (P) manifest assent that A shall (1) act on P’s behalf and (2) Subject to P’s control. Rest. 3d of Agency §1.01.
Ÿ   It does not matter that, in practice, A does not subject himself to P’s control and chose to ignore instructions—the test is what parties agrees to.
Ÿ   Discretion upon exigencies is probably ok.
ii.                   Parties’ labeling & popular usage do not control. Rest. §1.02.
Ÿ   Disclaim the risk in the contract doesn’t work.
iii.                 An agency relationship may be created retroactively by P’s ratification, if A purported to act as P’s agent. Rest. §4.03.
b.       Cargill, p. 22 (managing risk of becoming a P): Cargill (P) was Warren (A)’s customer and creditor. It had a right of first refusal to purchase from Warren. Farmers are third parties (T). Issue: Whether Cargill (D), by its course of dealing with Warren, became liable as a principal on contracts made by Warren with Ps. Held: Yes, Cargill, by its control and influence over Warren, became a principal with liability for the transactions entered into by its agent Warren.
i.                     Key fact: Provision of forms to Warren upon which Cargill’s name was imprinted. FN 7: Warren pays for the grain with drafts (checks) drawn on Cargill.
Ÿ   Cargill culpable in making farmers think it was backing Warren.
Ÿ   Other facts: Right of first refusal + financing = on P’s behalf? [Probably not] Ÿ   Other facts: Allowing supplier to pay T with P’s checks = on P’s behalf? [Senseless]  
ii.                   Rationale to sue creditors: Creditors protect their interests via contractual provisions. Techniques include: covenants & acceleration; convertibility; collateral; guarantees; insurance. If these techniques are seen as giving creditors control over the debtor and resulting in the debtor being the creditor’s agent, then creditors become liable for the debtor’s debts.
iii.                 Policy argument (not Rest test) “Gatekeeper liability”: Cargill is more able to prevent Warren’s risk taking.
c.        Relationship similar to agency—Organs
i.                     Organs of a firm act on behalf of the firm as the firm’s voice, and control the firm’s agents. E.g., BoD.
ii.                   Organs are NOT agents, nor are directors (unless they have other position in the corporation?).
iii.                 Organs are NOT legal entities (though individual directors are). So an organ can’t owe a FD. To keep the organ accountable, a director owes a FD to the corporation.
d.       Relationship similar to agency—Power given as security—contractual
i.                     Hypo: transferring control in a firm: C owns Acme Corp.  C signs a contract to sell Acme to B for $1B. The deal requires regulatory approval, which will take several months. Until deal closes, C controls Acme. To assure B that C will act to maximize Acme’s value, in the contract, C gives H (B’s trusted friend) the power to vote C’s Acme shares (at H’s discretion).
(1)     Purpose: assure B.
(2)     Parties: C is the cre

y apparent authority (but not actual authority), A has the power, but not the right, to bind P: P is bound to T by A’s act, but P can sue A for acting without (actual authority)
Ÿ   Actual authority is relevant for both internal & external governance; apparent authority is relevant only for external governance
(2)     Actual Authority [Rest. § 2.01] Ÿ   Test—2 Elements [Rest. § 2.01/3.01] (a)     A reasonably believes that s/he is authorized to act in a certain way;
(b)     This reasonable belief is traceable to manifestations by P.
Ÿ   A can be granted authority (legal power to act on B’s behalf)
(a)     By law (for agents, use actual authority test, with the relevant law as P’s manifestation)
(b)     By agreement b/w B&A (for agents, use actual authority test, with the agreement as P’s manifestation)
(c)     By B’s unilateral approval (for agents, use approval test explained later in this section, applying the actual authority test for the “unambiguous” element)
Ÿ   Rest. 2.02(1): A has actual authority for acts that are “necessary or incidental” to achieving the principal’s objectives.
—            If you find there’s actual authority for act Z under Rest. 2.01, you can use Rest. 2.02(1) to expand actual authority to other acts that are “necessary or incidental” to act Z
(3)     Apparent Authority [Rest. § 2.03] Ÿ   Test—2 Elements
(a)     T reasonably believes that A is authorized to act in a certain way;
(b)     This reasonable belief is traceable to manifestations by P.
iii.                 Governance Solutions in Agency Law (See PPT 1a, p. 52)