Enterprise Organization Outline

ROUGH OUTLINE:

Goal of Corporate Law: To reduce Agency Costs

1) Fiduciary Duties (require you to enforce via court)
2) Firing Agent via voting system
3) Selling shares (reduce pay if tied to stock price, signal that they are a bad agentàM&A, or sell to a bad agent)
4) Federal Securities law

Common Themes to keep in mind

1) The motivation of the parties
2) The opportunistic behavior (misbehavior) that we’re worried about here
3) Costs to contain that opportunistic behavior
4) Role of the courts; what do we expect them to do?
5) Agency Costs/Collective Action

Agency:

Formation & Termination: basically a contractual relationship between agent and principal;
Types: General: Can act in many different ways, Limited: limited to a specific task/transaction
Consent: can be express or implied

When will the principle be liable for contracts the agent enters into?

Actual authority: communication from P to A which leads a reasonable agent to believe they have the authority to act;

Communication here is to the AGENT
Can be express or implicit

Apparent authority: That which a reasonable third party would infer from a communication of the principal to the third party (third party assumes agent has some type of power)

Communication here is to the THIRD PARTY
Can be express or implicit

Incidental/inherent authority: presumes no communication from the principal to anyone; usually occurs in undisclosed principal, the agent deals with the third party

Must have belonged to the powers of the position the agent actually holds; can be problematic though because companies can dream up titles—and the basis of inherent power is that the third party is using the title to infer the power the agent has

When will principles be liable for the torts Agents commit?

Respondeat superior:

Master responds for the servants misbehavior; section 220 of the restatement;
Must have an agency relationship and the agents behavior must be within the scope of employment, and must be done with at least partial intent to benefit the principal.
Generally employment relationships qualify, independent contractor relationships doesn’t qualify however
Section 220 gives you a list of factors the courts will look at to determine whether the person is an employee or independent contractor; Control is ultimately a very important factor (the more control principal has then more likely M-S relationship)

Why impose liability on P for torts of A?

A may be Judgment proof
P can influence/control A & P is not judgment proof as often as A
How do we know if P really controls A?

Humble, Hoover—contract, course of dealing

Balancing deterrence gains and monitoring costs

Joint Ownership

Why bother to have more than one owner?

Money: need more and more desirable than a loan
Risk: other person bears some of the risk (without fixed obligation of loan)
Skills: Might need the skills that they can bring to the venture

What are the problems when you have joint owners?

Have to share the profits
Have to make joint decisions (hold out problems—always risk of someone behaving strategically for incentives)

Accounting Statements

Balance Sheet: The assets, the liabilities and equity—tells you that as of now (date of dissolution), what the assets, liabilities and equity are; A= L+Eq

At a point

Income Statement: in-flows/out-flows, is the company taking in more than its spending? Might see who’s responsible for each purchases (has partner taken money?)

Over a period of time

Methods of Accounting: cash, accruals, etc.

Accruals; when did the right to the money accrue to the company
Cash-flow statement; different way of measuring—only measures actual cash coming into the company, and cash going out at that period of time

Forms

Partnership: Partners have unlimited liability and joint management
LLPs: Partners have limited liability for the amount that they invested; with exception of General partner who is liable (and who exercises control)
LLCs: Provides limited liability, centralized management (everyone who invests gets to make decisions—to a limited extent) and also combines partnership tax

The Corporate Form

Core Characteristics

Legal personality with indefinite life: can continue even if one of it’s members dies or leaves
Limited liability for investors
Free transferability of share interests; liquid assets, can move things around easily
Centralized management; valuable because you can’t have every day to day decision made by all your investors. Might keep important decisions open to the shareholders

Types of Corporations

Closely held—Public

Closely held: small group of shareholders, tend to work together with regards to management, much more muted conflict between shareholders and managers because the groups overlap. Instead you’ll have conflicts among the shareholders.
Public: generally the shareholders are not manager, so a conflict may exist here. May also have a conflict among the shareholders.

Controlled—Dispersed

Controlled: Amongst the shareholders, some group of them effectively have control of the en