Enterprise Organization Outline

I.       INTRODUCTION
A.    Corp-Magr/ShHldr relationship is an agency; Corp is principal; Mgr/ShHldr are agents
B.     Agency Costs
1.      Monitoring Costs: costs associated w/ monitoring/supervising agents to ensure perf. and theft
a.       Agent does not always do what Principal wants
i.        Mistakes: insufficient detail in Principal’s directions, misunderstanding
ii.      Malfeasance: Agent just ignores instructions
2.      Residual Loss: difference between what P desires and what A does
a.       e.g. All of the stolen paperclips add up
3.      Bonding Costs: costs associated with creating agency
a.       e.g.: interview: must shave, dress well, research firm
C.     If agency costs are too high, then not likely to enter agency relationship
1.      Legal rules come in to reduce agency costs
2.      Gov’t wants to create agency relationships because specialization increases social wealth
a.       But, if specialized, then must delegate to another for things P cannot do
b.      Must request another to do it for you
II.    AGENCY
A.    Definition:
1.      Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consent so to act. R.3d Agency §1.01
B.     Formation
1.      Types of Agency
a.       Agent holds power to affect legal relations of the principal w/in scope of agent’s agreed appointment
i.        Special agents: agency is limited to a single act or transaction
ii.      General agents: agency contemplates a series of acts or transactions
iii.    Employee/Servant: principal controls the details of how agent goes about her task
iv.    Independent Contractor: agent who is bound to provide independent judgment
b.      Principal
i.        Disclosed: third parties know that agent is agent of principal
ii.      Undisclosed: third parties believe that agent is the principal
iii.    Partially Disclosed: third parties know agent is agent but do not know ID of principal
2.      Express Consent:
a.       P and A agree that one will work on behalf of other
b.      A agrees to be controlled by P
3.      Implied Consent
a.       Course of Dealing creates agency relationship
i.        P had ability to influence A, P was in best position to monitor A
ii.      Jenson Farms v. Cargill (Minn. 1981)(18)
A)    Cargill lent money to Warren Grain Elevator, Cargill accessed books, made recommend’s
B)    Δc and Δw met 3 elements of agency
1)      Manifestation of consent: Δc directed Δw to implement its recommendations
2)      The other shall act on his behalf: Δw procured grain for Δc, financed by Δc
3)      Subject to his control: number of factors (above) show Δc’s control over Δw
C)    Different than regular creditor-debtor; Δc focused on grain, not on profiting from loan
C.     Termination
1.      Either principal or agent can terminate (may give claim for damages under breach of K)
a.       Revoke: principal terminates
b.      Renounce: agent terminates
2.      Can not have irrevocable agency; either party can terminate
3.      If agency is for period of time, agency terminates at that time unless renewed.
4.      If special agent, agency terminates when act contemplated is performed or after reasonable time
D.    Liability in Contract (Unifying principle: Who is in best position to monitor?)
1.      Actual Authority: P actually gives A authority (PàA)
a.       Includes incidental authority (authority to do intermediate steps) unless specifically w/held
b.      Express or implied
2.      Apparent Authority: P communicates to reasonable 3rd party that A has authority (Pà3p)
a.       Intended to prevent fraud \ applies even if P secretly limited A
b.      3d Party in best position to monitor A
c.       White v. Thomas (Ark.App. 1991) (22)
i.        A had power to buy; bought land at auction, resold portion to a 3d party
ii.      3d party only asked if A could sell, did not ask to see power of attorney
A)    A can not create apparent authority by his words
iii.    Ct: no reasonable 3rd party would think that POA to buy would cover sales
3.      Inherent Authority: Not conferred from P to A, but imposed by principles of law (Law à A)
a.       P in better (cheapest) position to monitor A
b.      Gallant Ins. Co. v. Isaac (Ind. App. 2000) (26)
i.        Insurance agent orally approves insurance on Friday; accident over weekend
A)    Insurance underwriter (P) is undisclosed
ii.      Friday requests for insurance are ordinary occurrence
A)    If A had said “free insurance”, then extraordinary
1)      If extraordinary 3p should have suspicions raised \ becomes best monitor
4.      Agency by Estoppel
a.       Failure to act when knowledge and an opportunity to act arise
b.      And reasonable change in position on the part of a third person
5.      Agency by Ratification
a.       Accepting benefits under authorized K constitutes acceptance (“affirmance”)
E.     Liability in Tort (If monitor, then liable)
1.      P is liable for torts committed by employees, but not by independent contractors
a.       In both cases attendants employed by station, which buys gas from oil company
i.        Cases hinge on relationship (control) between oil company and station
A)    Humble Oil & Refining (Δ) v. Martin(Π) (Tex 1949)(30)
1)      Love drops of car for repairs at Δ, car rolls downhill, hits Π; Π wins
2)      Humble refuses to share profits \ micromanages = control
3)      Since micromanaging, does not take much extra to monitor \ held liable
B)    Hoover (Π) v. Sun Oil Co. (Δ) (Del. 1965) (32)
1)      Π getting gas, attendant lights cigarette; Π’s car catches on fire; Δ wins
2)      Sun does not micromanage b/c shared profits, local employee motivated to do wel
3)      Since only monitoring every 6 weeks, costly to monitor \ no liability
2.      Spectrum of distribution possibilities
a.       Independent Owner: Local operator, A, sells P’s good with no restrictions
i.        A shares profits, does good work, low monitoring from P \P has no liability, lo profits
b.      Franchise: Local op., A, licensed to use P’s logos with certain limits/condition;
i.        A gets % profit, does good work, low monitoring from P \P has lo liability, med profits
c.       Wholly owned: P opens its own store, total control; hourly wage to employees
i.        Hourly wage, worker not motivated, hi monitoring from P \ P has hi liability, hi profits
d.      Risk management balances keeping profits vs. insulating from tort liability
F.      The Governance of Agency (The Agent’s Fiduciary Duties)
1.      A is a fiduciary of P         
a.       Duty of Obedience (R3d Agency §8.09): Obey P’s commands
b.      Duty of Loyalty: good-faith use of power to advance P’s interest, not personal interests
i.        Tarnowski v. Resop (Minn. 1952) (36)
A)    P want jukebox; A recommends 3p; 3p gives A $2k kickback; P buys for $11k
B)    P recovers kickback from A; if A profits while dealing for P, then profits go to P
1)      If take away everything that A got the time they were caught is deterrence
a)      Not likely A got caught first time stealing \ punitive effect
2)      If A informs P of conflict of interest then A cannot be sued for kickback
ii.      In re Gleeson (Ill. App. 1954) (38)
A)    Trustee was leasing land; appointed trustee of estate;
B)    Trustor/trust = P; trustee = A, trustee has fiduciary duty to benficiaries
1)      Court is lowest cost monitor; does n