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Business Associations/Corporations
University of Mississippi School of Law
Czarnetzky, John M.

I.                  Introduction
–   Importance of Delaware
o       New Jersey passed corporations statute that was attractive to corporations and benefited from the taxes
o       Delaware copied the legislation, NJ repealed and Delaware got all the corporations
o       Attractiveness: Corporations statutes that give maximum flexibility to shareholders
o       Delaware judiciary is extremely familiar with corporate law as a result of the number of cases arising from the statutory provisions
II.                AGENCY (CHAPTER 4) – fiduciary relationship that arises when 1 person (principal) manifests assent to another person (agent) that A shall act on P’s behalf & subject to P’s control, and A manifests assent or otherwise consents so to act. Restatement (Third) Agency § 1.01
 
–   Moral Hazard – risk that party w/discretion to act will choose action that decreases expected value of transaction to other party in a way that other party can’t prohibit. Always present in agency relationships.
o       EX: Flying first class b/c employer doesn’t prohibit
–   Ratcheting – type of MH: danger for agent where principal increases task w/o increasing compensation
–   Shirking – agent chooses to perform less well than anticipated (either in quantity or quality)
o       Private Benefits – using discretion to benefit opportunistically without bearing cost
–   Agency Costs – costs to business of principal involved in having agents
–   Agency law is mostly common law influenced by Restatement (Agency)
–   Agency Relationship – 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 consents so to act
o       Assent can be manifested by words or actions
 
            Elements of Agency Law:
–         Manifestation by P that agent shall act for him
–         A’s acceptance of undertaking
–         Understanding of parties that P is to be in control of undertaking
 
NOTE
–         Parties don’t have to intend to form agency relationship (inadvertent)
–         Parties CANNOT specifically disclaim any intention to create agency relationship as long as the parties meet definition. No K needed.
–         Agent is a fiduciary w/regards to the principal – a higher duty standard than just good faith and fair dealing
 
Who is an Agent?
1.      Partners of a partnership ARE
2.      Directors of a corporation are generally NOT agents because they don’t have authority to act on behalf of the corporation
3.      Officers of a corporation ARE generally agents because they are hired by the BOD to conduct the business of the corporation
a.Corporations have to have agents in order to do business – business cannot sign checks, etc.; agents of a corporation have to
b.      WARNING: Be careful when analyzing actions of an agent to analyze all their funct

ns when the TP can prove:
o       Actual Authority – P is bound to 3rd parties by anything A does in accordance w/P’s “manifestation” to A
§         General Question: Is the principal liable when an agent, believing he had authority based on principal’s action, binds the principal?
§         Manifestation Test – determined by A’s reasonable interpretation in light of all circumstances
·        Look at what the agent was authorized to do, did he do it?
·        Was there a manifestation?
·        What was the boundary of authority given?
·        Was the agent acting within it?
§         Principal is liable as long as agent was reasonable in believing he had authority based on principal’s actions and acted accordingly; liable when principal has bound agent (by direct manifestation)
§         Can be express or implied – if sell a car, express – “sell my car for no less than $2K; implied – advertise in paper for sale – must be reasonably necessary to accomplish acts that P has expressly authorized
 
o       Apparent Authority – based on TP’s belief
General Question: When an agent is not authorized to bind a principal, who takes the fall, the principal or the third party?