Business Association
Yockey Fall 2015
Why business association?
Legal
Business
Personal
The course: Outline
AGENCY (5 classes)
PARTNERSHIPS (5 classes)
CORPORATIONS (13 classes)
LLC (1 class)
4 Themes in Business Associations (Think of people)
Risk of loss
What happens in an adverse outcome (if the business fails) at any stage
Return
What do I get out of it
Control (complicated)
Who calls the shots?
Who has the highest risk?
Duration
Open-ended expiration?
How do you deal with the above elements?
Applicable Laws
Private Law & Order (Contracts): hashing out in the contracts
Public regulations: (Gov’t regulations; such as taxes)
Actual Example: Finding the Right Kind of Business Association
Take into account the four elements 1) Risk of Loss 2) Return 3) Control 4) Duration
Sole Proprietor
Rob the solo practitioner
Risk of Loss: Rob
Return: Rob
Control: Rob
Duration: Rob
You do face all the four thing above in engaging
What happens if you cannot meet the rent? Foreclosure
Who bears the liability? Rob
GOAL#1: how and when can parties minimize personal liability and shift risk of loss to the entity?
Shift the risk to an inanimate entity (non-human)
Hire Employees (Principal and Agency Relationship)
Risk of Loss
Transaction costs (Costs of doing a deal)
GOAL#2: lower transaction costs (the costs of doing a deal, time, money, etc)
Agency Costs
An agent does something in her own self-interests and to the detriment of the principal
GOAL#3: lower agency costs (costs when an agent does something in her own self interest and to the detriment of the principal)
How to deal with it?
Salary-based incentive structure
Hire another employee as a supervisor (disadvantage: possibility that he also not working)
General Partnership
Bringing in a partner “Laura”
Risk of Loss: Tied (interests are tied because they share the risk)
Return
Control: Supervisor
Duration
Partnership (almost automatically) brings agency cost down
Corporation
Becoming an incorporated with shareholders
Investment from shareholders (becomes owners)
Rob gives up his control
Risk of Loss: Shareholder do not have liability
Return: Market Price
Control: Shareholder has none
Duration
Who monitors the corporations?
Board of Directors
Hires officers to make decisions
What can shareholders do to reduce agency costs?
Stay
Sue
Sell
Business Association Law
Where do lawyers come in the process?
Adding Value
Minimize personal liability
Transaction cost “Engineers”
Lower agency costs
Bring people together
Compliance / litigation
How do lawyers add value?
Example of buying a suit
Off the rack: cheaper, convenient, easier to replace but may not fit well and cheaper
Customs: perfect fit but expensive and takes longer
Buy off the rack and go see a tailor: what lawyers do (Lawyers are the tailors!)
Role of State Law
Gives us our standard forms of Business Associations and default rules of internal governance
“Hypothetical Bargain” (Off the rack)
Lawyers already have set of tools, then they go tailor these laws to fit the situations of clients
Example: Delaware’s Corporate Codes
If a client does not like the default rules provided by a statute, then use different sources
Make contract with others in the group
Social Impact of Corporations
Corporate Law’s Role in Society?
Financial Crisis
BP Oil Spill
Recent events, crises, and scandals
Corporate gridlock
What is the corporate law’s relevance and society?
The importance of corporate culture
The importance of norms of ethics, compliance, risk-management, and responsibility
Who speaks for the corporation?
Should Corporations be viewed as tools for social change?
Who decides whether corporations are “good”?
How should changes in Corporate Law or behavior be effected?
Topic I – Agency
Minimizing Agency Cost
Definition of Agency
Creation
Legal implications of agency
Business Attorney: minimizing Risk of Loss
Risk of Loss: Transaction Cost, Agency Cost, and Personal Liability
Agency Defined
Gorton v. Doty
Football game & Car accident case
Triangle – principal, agents, third party
Legal Standard
Restatement § 1.01: Agency is
nt to so act. How?
Does everything and did not resist – enough to infer consent
Restatement § 14: when does a creditor become a principal?
When it assumes de facto control over the conduct of the debtor
9 factors re: control (pp.10-11)
Looking at factors 3/4/9 seems normal debtor-creditor relationship
creditor has veto power (to protect their investment; common routine practice)
However, looking at other factors gave more than enough
Notes
This was a close case; what did the court see as the deciding factor (control)?
Manifestation from Cargill to the farmers that you are ok
Cargill’s employees were actually present on the premise and did aggressive control (proved control) – operatives came in
Future
How can a Principal like Cargill protect themselves in the future?
Account for risk of agency liability up front (increase the interest premium)
more risk means more interest premium
factor into amount of interest
Passive or negative authority
Just maintain veto power only; don’t do more
Preventing some from doing someone
Ex: no more independent loan
Active authority
Ask for financial reports more frequently, strict monitoring (exit if necessary)
Insist on up-to-the-minute financial reports, with exit/penalty rights if they are not forthcoming
Law as Business Cost
McDonald’s (franchisor) & franchisees (McD controls a lot like parental controls of the franchisee)
Agency relationship issues
Here, McDonald’s is assuming liability
Acceptable business cost of the vicarious liability
To preserve and control the accessibility and predictability
McDonald’s lawyers’ role is to lay out all of these costs of the liabilities
The executives of McDonald’s bears the risk
Controlling the food, etc.
