Business Associations
Hill
Fall 2015
Overview of limited liability
Doctrines:
Veil piercing: to co-mingle the shareholders’ assets with the corporate assets
Two elements:
1) disregard of formalities, and
2) use of corporation for something bad – injustice, fraud or …
If Carlton treats the corporation not as separate and if he abuses the corporation, he will be liable.
Enterprise liability: is a legal doctrine under which individual entities (for example, otherwise legally unrelated corporations or people) can be held jointly liable for some action on the basis of being part of a shared enterprise
Reverse piercing: (whereas in reverse piercing a creditor of the shareholder is typically trying to hold the corporation liable for debts of the shareholder), up to personal assets of Carlton: down to corporations as their obligations
Accounting, finance and valuation
What you buy it at (Book) vs. what it’s worth at a particular time (FMV)
Book – allowance for item wearing out over the years
Discounted cash flow = the discounted present value of future cash flow, Less valuable to have money later than money now
Investment (future earning power) vs. consumption (present/maybe future experience)
Sunbeam: “bill and hold” approach, Makes it look as though sales are higher than they are in particular period (and of course, lower in some subsequent period…)
SEC: The Commission has set forth criteria to be met in order to recognize revenue when delivery has not occurred. These include:
1. The risks of ownership must have passed to the buyer;
2. The customer must have made a fixed commitment to purchase the goods, preferably in written documentation;
3. The buyer, not the seller, must request that the transaction be on a bill and hold basis. The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis;
4. There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer’s business purpose (e.g., storage periods are customary in the industry);
5. The seller must not have retained any specific performance obligations under the agreement such that the earning process is not complete;
6. The ordered goods must have been segregated from the seller’s inventory and not be subject to being used to fill other orders; and
7. The equipment must be complete and ready for shipment.
Autonomy
Many fancy accountants apparently justify the $11.1 billion number that is soon written down to $2.3 billion
How could this happen?
HP: Autonomy lied (about what?)
Prospects for ‘higher margin’ activities?
Distinguish higher vs. lower margin
Lower: grocery store sells cereal for 5 cents more than its own price
Higher: Apple sells iPhone for much more than its costs
Many others
HP overpaid- wanted a ‘glam’ software business because printer business is like the grocery store and nobody is buying PCs anymore and they (HP) don’t have a tablet
Business Organization:
Agency: between the entity and the human acting on its behalf
Source of Law:
Agency Law, and other state law in various fields
Also, Restatement, as law if formally adopted, but even if not formally “law”
For partnerships, limited partnership, LLC and other LL entities, also state laws, and also Uniform laws
For corporations, state corporate laws
Large public companies, often Delaware corporate law, federal securities law, federal corporate law (including parts of Sarbanes-Oxley and Dodd-Frank)
Agency law: between agent and principal, agency relationship is fiduciary – agent is to act only for principal and not for self (except in negotiating the terms of the relationship)
Principal “manifests assent” to agent, and agents “manifests assents” or “otherwise consents” to act as agent for P. (1.01)
Disclaimer between A and P is not enough. (1.02 & 1.03)
Cargill: Notwithstanding the limited liabilities doctrine, the law sometimes imposes liabilities on you if you try hard to get rid of it.
Principal/agent relationship given extent to which Cargill directed what Warren did for Cargill’s ‘benefit’
Actions dealing with farmers within that scope– actual authority
Source of Authority (to bind P or make P liable)
Actual authority: manifestation by P to A that A should act on P’s behalf (and subject to P’s control) (Actual agent, actual authority/within scope of agency)
The Agent consents. (2.01; 3.01)
Act is within the scope of express and implied/incidental agency
For implied can be based on A’s reasonable bel
n, parties’ disclaimer not necessarily respected.
Oil station cases: Humble: liable as P; Sun is not
P is liable if tort within scope of employee’s employment (7.07)
Some courts: actuated at least in part by purpose to serve the employer
Employer may be liable for violence of employee if “incidental” to conduct authorized
Pitcher injuring heckler to shut him up may be “to serve the employer” and hence ball club may be liable
Other courts: conduct is foreseeable to employer and arises out of and in the course of his employment of labor (drunken seaman returning to his ship)
Beyond employer/employee scenario
P generally not liable except:
P has control over A’s performance of job even though A is IC (more like an agent-type IC)
P negligently employed incompetent A
Performance involves “inherently dangerous activity”
Premises demolition case: Majestic: independent contractor, not P/A
“Inherent dangerous” is different from ultra-hazardous which is subject to strict liability. The former has less liability if it has duly checked the contractor.
future cash flow= how much the company will make in the future?
The seller has nothing left to do (for this purpose delivery does NOT necessarily count as something the seller would have to do-the deal might be buyer pick up or some other mechanism by which the seller and buyer agree to proceed). Both are getting at this, so in most cases where one is satisfied the other will be too
The doctrine of estoppel is closely related to that of apparent authority, and in many cases where estoppel would apply apparent authority would also apply. One significant difference is that apparent authority does not require detrimental reliance to bind the principal, whereas estoppel does. On the other hand, apparent authority requires a “manifestation” by the principal whereas estoppel does not.
