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Business Associations/Corporations
University of Kansas School of Law
Hecker Jr., Edwin W.

Business Associations 1

Main Elements of any Business Enterprise:
(1) Risk – Who takes the first hit? Who takes the biggest hit?
–          If business goes under, who takes the loss and by how much?
(2) Return – Who gets paid first? Who gets paid most?
(3) Control – Who has the ability to control the decisions affecting risk and return?
–          Usually the person with the most invested

Three Main Sources of Corporate Law:
(1) DGCL – very corporate-friendly statutes, so many companies are incorporated there; single most important state in terms of state law; other states, like KS, copy or even plagiarize them; if KS cases aren’t on point, the next best authority is DE case law
(2) RMBCA – drafted by a joint committee of ALI an ABA; a bunch of states have adopted it
(3) PCG – started out as a RS, but turned into a statement or rather the “Principles of Corporate Governance;” the judges think it is a RS, and they are adopting it as part of the common law of their state. It is fast-becoming corporate common law.

1. Agency

I.                    Introduction
a.       Agency defined (RS of Agency §1): legal rules when 2 people agree that one is to act in place of the other à 4 essential parts
Focus on all 3 relationships to properly analyze the situation
(P, A & T)
(1) mutually consensual relationship between two persons (principal and the agent) and either has the ability to withdraw that consent, terminating the relationship
ii.      (2) also a fiduciary relationship – discretionary authority over someone else’s person or property (held to a higher standard)
1.       Guardian / ward relationship
2.       Principal / agent
3.       Trustee / trust
iii.      (3) A acts in place of the principal for P’s benefit
iv.      (4) A is subject to P’s right of control within the scope of the agency
1.       If there is a difference of opinion, the principal wins
Does the person on the left have a way to control the actions of the person on the right? If so, employee, and not I.C.

Principal: the one for whom action is being taken
c.        Agent: the one who is to act on behalf of another and subject to the other’s control
i.      Agent is a fiduciary with respect to matters within the scope of his agency – RS 2d §13
d.       Sole Proprietorship – business organization owned by a single individual, and is not cast in a special legal form of organization
i.      No separate identity from its owner
ii.      Unlimited personal liability on individual owner
iii.      Typically doesn’t conduct business by self, but will engage other people to act of her behalf and subject to her control
e.        Master (P) – Servant (A) relationship (aka Employer / Employee)
i.      Not the actual exercise of control, but the right to control
1.       What time you show up, when you take breaks, etc
ii.      §220(2) – Definition of Servant
f.        Principal – Independent Contractor
i.      P still has ultimate, residual right of control over the relationship, but it doesn’t extend to how the person employed does the work – not subject to control of physical conduct in the performance of the undertaking (may or may not be an agent)
1.       Ex – lawyer in private practice hired by client; stockbroker working for investor; accountant for person wanting taxes done; real estate agent for homebuyer
g.        Non-agency
i.      Contractee – Independent Contractors
Are you on the I.C. side of the line or the employee/employer side of the line?
Person for whom the work is being done has no right to control the work
a.       Contractor does not owe fiduciary duties to contractee
i.      Ex – someone owns a vacant lot and contracts to build a house – not agency
2.       There are 2 kinds of independent contractors??

II.                  Tort Liability
a.       General Liability
i.      Tortfeaser is always liable – RS 3d §7.03
ii.      All about which of 2 equally innocent parties has to suffer the risk
b.       Vicarious Liability / Respondeat Superior
i.      Faultless employer can be liable to person injured – if employer is liable, he has a COA against the employee
ii.      Liability on faultless person – rationale is cost allocation
1.       Actual tortfeaser remains primarily liable to the victim
2.       Employer is also liable if (2 necessary elements):
a.       Employment relationship is “master-servant” &
P-T à P is liable if both elements are present

A-T à A still liable even if during the course of business

P-A à If T sues P and wins, loss shifted from one innocent party to another, P has right to indemnify A (recover)
Every M-S relationship is a kind of agency relationship (same as Employer-Employee)
b.       Tortious conduct occurred while in the scope of employee’s employment – RS §219(1)
i.      Only issue really litigated – what ties the tortuous conduct to the business
ii.      Factors courts look to – §228 of RS 2d
1.       Conduct – was it the like for which the person was employed?
2.       When – within working hours?
3.       Where – within the right place?
4.       Negligence or intentional?
iii.      Negligence
iv.      Intentional torts (harder to prove than negligence)
v.      Classic detour case – employer is liable
1.       Slight deviations aren’t sufficient to take the person out of the scope of employment
iii.      Policy Rationales:
1.       Enterprise is in a better position than the injured 3rd person to spread the risk of loss (insurance / price adjustments)
2.       Promotes proper allocation of resources by requiring an enterprise to include risk adjustment in price of its goods
3.       Placing the risk of loss with P rather A could lead to greater safety because A is subject to P’s control
4.       Societal preference for making certain losses a cost of business rather than a cost to be borne by individual households
5.       Cost of doing business – more employees doing work, the greater the risk of harm to the public
iv.      “Exceptions” – vicarious liability assumes totally faultless conduct on part of employer – negligence is a separate form of liability (involves personal fault on behalf of the person who hired the tortfeaser)
1.       “Hirer” personally at fault
a.       Negligence (Negligent Employment)
i.      Conduct is outside of scope of employment, but employer is at fault by continuing to employ someone who presents a risk
b.       Intent
i.      If you hire someone to commit a tort, it is your to

ave to be a second writing in which P purports to authorize A to sign K on his behalf? (written manifestation of assent to sign K on P’s behalf)
1.       Underlying transaction has to be signed
2.       Conveyance of land à A must be lawfully authorized by writing – KSA 33-105 and 33-106 (pg 55)
3.       Sell goods of $500 or more by K à writing not required – 84-2-201 (some writing signed – UCC)
4.       For lease à writing not required – 84-2a-201(b)
iii.      Estoppel – when someone makes a misrepresentation or is responsible for one, and an innocent party changes position in response to it (only a small amount of cases where there is estoppel but no apparent authority, usually P’s misrepresentations will give rise to apparent authority)
1.       Disclosed and partially disclosed Ps
a.       Valet hypothetical – no manifestation by P (restaurant); if P was at least negligent, then P will be estopped to deny that person was A, with power to bind, when P is sued by T
2.       Undisclosed Ps
a.       Inherent Agency Power – RS 2d, repealed by RS 3d
b.       Estoppel of undisclosed principal
i.      Nothing to do with misrepresentation, just not allow to impose secret restrictions on A if you are an undisclosed P – not effective
ii.      Secret limitations are ineffective when P tries to assert them on an unaware T

V.                  Ratification (after the fact / retroactive conferral of actual authority)
a.       If NO actual authority, NO apparent authority, NO estoppel:
b.       Four Elements Required:
i.      Affirmance (knowing, voluntary election) – P must say something or engage in some nonverbal conduct that amounts to affirming what A has done
1.       Words (caveat: SOF if oral)
2.       Conduct (caveat: SOF) – most common is knowing receipt of other party’s performance
a.       Receipt and Retention has to be with knowledge
i.      If not, no affirmance
ii.      T would have COA for unjust enrichment
iii.      Damages = reasonable value of benefit conferred, not K price if it were a breach
b.       Subsequent disaffirmance would have no effect
ii.      Knowledge of all material facts
iii.      Actor purported to be an agent for the principal
1.       T mistakenly believes that we have a transaction
2.       P has the advantage; P can elect to opt in by ratifying or to stay out by disaffirming
iv.      Conduct not binding at the time
1.       Only need ratification if A’s act wasn’t binding at the time it happened; A lacked actual and apparent authority
2.       But, there can be affirmance by inconsistent conduct