INTRODUCTION TO ORGANIZATION IN FIRMS
AGENCY PRINCIPLES
1. Types of Agency
a. Actual Express Authority
i. Principal directly tells an agent to do some act
ii. Third party can enforce even if he doesn’t know the agent was acting for the principal
b. Actual Implied Authority
i. Actions necessary to carry out express instructions and done in the usual manner are binding
ii. P will be liable for reasonable actions of agents
c. Apparent Authority
i. Must have manifestation of agency from P that gives the 3rd party the idea that A is an agent
ii. Communication from
iii. Exists only to the point it is reasonable for third party to believe the agent is authorized (Lind v. Schenley—contract/new employment was reasonable)
d. Inherent Agency Power
i. Holds principals liable for actions not authorized, but were close to what the agent was authorized to do—within scope of authority.
ii. Principal liable for all the acts of the agent which are within the authority usually confided to an agent of that character. (Watteau v. Fennick)
e. Ratification: if the principal decides to adopt a contract negotiated by anyone, the 3rd party is bound and so is the principle even if agency was not present to begin with
2. Employee versus Independent Contractor
a. Issue is Control
i. If you want control, must also have to share in the legal liability
ii. Policy: we want the one in control to bear the risk b/c he is in a position to minimize liability
b. Elements to use in distinguishing: duration, risk of loss, return, degree of control
i. Lead to agency: reports to superior, utilities, equipment, planning, advertising terminable at will (Humble Oil)
ii. Lead to independent contractor: terminable by both parties, advice rather than obligation, no day to day control, Form over Substance. (Hoover v. Sun Oil)
iii. Bottom line: rent, risk utilities, hours, compensation, agreement, advice/reports
c. Agent or IC determined by right to control rather than actual control (Dominos)
i. Requirements v. Recommendations
d. Note:
i. if IC route, might require bonds, insurance, adequate capital to make sure any possible plaintiff would have a remedy
ii. always holding the parent/hiring company liable will result in undesirable micromanaging, but don’t have this problem b/c parents want control
3. Control and Liability of Creditors
a. De facto control can be executed by lender when there is an:
i. Apparent agency relationshipàmanifestations made by the principal to a third party.
ii. Evidence of Clear Control: supervising operation, disbursement of funds, guaranteeing financials
b. Factors West did not see as determinative: recommendations; first refusal; approval to enter into agreements; right of entry; correspondence and criticism; “strong paternal guidance”; Cargill’s name on contracts; financing; power to discontinue financing.
4. Fiduciary Duty / Duty of Loyalty
a. As an agent, you have a fiduciary duty based upon the trust and confidence the company puts in you. Employees (Bancroft); Clients (Town and Country).
b. Q’s
i. What is the scope of the agency? Peers v. Subordinates
ii. Are there other ways? Announce/mention, but don’t “recruit,” but safest to wait until you leave
5. Agency in a Corporate Setting
a. Shareholders are principals b/c they have economic benefits and control benefits through voting of leadership
b. Officers and Directors are agents of shareholders:
i. Officers: day-to-day running and can bind corporation through rules spelled out in corporate charter
ii. Directors: elected by shareholders to serve their needs—cannot bind company unless they are also officers
1. RST Agency §194: an undisclosed principal is liable for acts of an agent “done on his account, if usual or necessary in such transactions, although forbidden by the principal”
2. Fairness Rationale: P is liable for the mistakes of A
1. Principal to third party
2. Another agent to third party
3. Agent to third party as long as principal is included in the communication
a. creates actual express and apparent agency
Leading the third party to believe an agency relationship exists.
PARTNERSHIP
6. Partnership Definition
a. A partnership is an association of two or more persons to carry on as co-owners a business for profit
b. Key Points: share profits and control, can have partnership by estoppel, default shares are 50-50, but can contract around, need some formalities
7. Partnership v. Corporation
a. Partnership is a legal entity, but not treated that way for tax purposes
i. Taxation: double-taxation in corporation, but somewhat rectified by corporate law through S-Corps which have fewer than 75 individual US shareholders
b. Non-Tax Factors:
i. Liability: unlimited in partnership vs. limited liability in corporation
ii. Transferability: corporate shares transferable vs. non-transferability in partnership
iii. Life: limited life of partnership vs. unlimited life of corporation
iv. Flexibility: flexibility of partner structure vs. standard corporate form
v. Centralized management: centralized in corp vs. decentralized in partnership
vi. Expenses: corporations are more expensive
c. Traditional Test: whether there is a sharing of profits and control regardless of whether there is a partnership agreement
8. Partners Compared With Employees
a. Fine line can exist between partners and employees
i. Sharing profits
ii. Sharing loss (Fenwick)
iii. Control of property or ownership
iv. Representations made to third parties
v. Agreement
b. Substance v. Form
i. UPA § 18: the rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rule. . . (e) all partners have equal rights in the mgmt and conduct of the partnership business.
9. Fiduciary Obligations of Partners
a. Duty of loyalty and duty of care are owed between partners
i. General duty dependant upon scope and duration of partnership, but premised on idea of co-adventurers, thereby rendering honesty and loyalty (Meinhard)
ii. Fiduciary Duty: covers those situations where one partner has advantaged himself at the expense of the partnership
iii. UPA §404 on 414
b. Fiduciary duty does not extend to former partners (Bane v. Ferguson)
c. Partners have no duty to remain partners—trust, choice, not a right (Bohatch)
1. Duty of Loyalty
a. to account to the partnership and hold as trustee any property, profit, or benefit derived from the partnership
b. to not acquire for himself a partnership interest w/o consent or divert and use a partnership opportunity.
c. to refrain from dealing with the partnership as or on behalf of a party having an adverse interest to the partnership
d. to refrain from competing with the partnership
2. Duty of Care
a. to not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law
b. analogous to business judgment rule
1. disclosure is key
2. question of how the opportunity came up is also relevant—through partnership or because of individual capacity
10. Raising Additional Capital
a. Problem: if you need more money, partners/investors won’t usually contribute more for fear of risk/opportunity to free-ride
b. Solutions
i. Loans: basic problem with risk/free-riders
ii. Pro-Rata Dilution
1. create additional points sold at the same price if additional equity contributions are needed
2. but this asks people to invest money for equity interest below contribution
iii. Capital Contribution from General Partner
1. force managing partner to make loans if project goes sour
2. written into contract, but questionable as to whether general partner has sufficient funds
iv. Penalty Dilution
1. allows equity interest above contribution by giving extra credence to these shares and “diluting” original stocks.
a. Cheaper shares worth the
n is an agent of defendant
2. one corporation is directing the actions of another
ii. Enterprise Liability: corporations act as one, should be treated as one,
1. Especially pertinent in brother-sister subsidiary relationships
iii. Pierce: look past entities and say no corporation
iv. Reverse Piercing: pierce into shareholder and then pierce back into other corporations owned by that shareholder
c. Social Responsibility of Corporation Problem (Three Solutions)
i. Piercing the corporate veil
ii. Raise insurance minimums and leave the corporation along
iii. Let plaintiff pay for insurance
d. Piercing
i. Basic Two Prong Test
1. Must be such unity of interest and ownership that the separate personalities of the corporation and the individual are no long existent (Sea-Land)
a. Failure to maintain adequate records
b. Commingling of funds/assets
c. Undercapitalization
d. One corporation treating the assets of another corporation as its own
2. Adherence to fiction of corporation existence would sanction a fraud or promote injustice (Illinois Law)
a. Has to go beyond “creditor’s inability to collect”
b. Purpose to defraud and/or unjust enrichment
ii. Investigation (As a Possible Third Prong)
1. If it would be reasonable for a third party to investigate another corporation, then such a lack of investigation constitutes assumption of risk (Kinney—tenant was undercapitalized, but should have known)
2. Contract v. Tort Distinction: courts usually apply more stringent standards to piercing the corporate veil in contract cases than they do in tort cases (Perpetual Real Estate Services); also—Silicone for Torts.
e. Reverse Piercing: consider
i. Unity of interest: whether there is a true unity of interest–more than 1 shareholder
ii. Fairness: ends up hurting other parties
iii. Equity: theory of being too attenuated where reverse piercing makes sense
f. Alter-Ego/Agency (as an alternative)
i. Corporate lines should be erased when the corporate structure was one of complete control and was analogous to an agency relationship
ii. Common directors/officers; Common business departments; Consolidated financials; Financing of sub; Parent caused the incorporation; Grossly inadequate capital; Parent pays the salaries and expenses; No other business for sub; Same daily operations (Silicone)
iii. NOTE: DE courts do not necessarily require a showing of fraud if a subsidiary is found to be the mere instrumentality or alter ego of its sole stockholder.
g. Direct Liability Theory:
i. One who undertakes to render services to another which he should recognize as necessary for the protection of third persons is subject to liability to the third person for physical harm resulting from his failure to exercise care
ii. EX: negligently make third-party repairs
1. almost always entails a single shareholder
1. treat it as a partnership with shareholders as partners
1. Some courts also require an injustice element stemming from a totality of circumstances approach
1. Could be liable for fraudulent conveyances/improper dividends
2. Fraud is an independent basis for liability—reliance (formalities don’t matter)
