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Business Associations/Corporations
University of Mississippi School of Law
Davis, Donna Raye

Corporations Donna Davis

Fall 2014

Chapter 1 Agency: Risks and Planning Challenges

A. Scope of Vicarious Liability – Company is responsible for those acts of its employees that are carried out within the scope of their employment. Planning requires an understanding of the scope of this third-party liability.

a. Ware v. Timmons – Timmons underwent surgery and died from post-surgery anesthesia complications. Estate is suing Dr. Ware under a theory of respondeat superior for Nurse Hayes’ actions.

i. Must establish a master-servant relationship between employer/employee.

ii. Alabama Law – Master must have the right to select the person claimed to be a servant. Must be a consensual relationship.

iii. Dissent: Control over picking agent is NOT as important as control over her actions at the time.

1. To prevail, Prove: 1) negligence at the time she was an agent of the Dr. Ware and 2) negligence occurred within the scope of employment by Dr. Ware

iv. Policy: A patient would want the doctor to be responsible for the agent/nurse whether or not the doctor had chosen him/her.

b. Gallant Ins. Co. v. Isaac – Isaac bought a new car and called her insurance agent on Friday to update policy which was due to expire the next day. Agent told her to come in Monday to update policy. Isaac had wreck and Gallant claimed she was not covered between expiration of old policy and payment of new policy. Isaac won.

i. The agent conducted an act which usually accompanies or is incidental to insurance transactions that it was authorized to conduct and

ii. The third party lacked notice that the agent did not have authority to act as such (in this case, to verbally bind coverage)

iii. If Gallant or its producing agent informed insured individuals or potential clients that Thompson-Harris could not verbally bind coverage, or if Thompson-Harris was required to give such notice, Gallant would have satisfied the notice requirement and Thompson-Harris would not have been granted inherent power.

B. Protecting an Enterprise from Acts of Its Employees

a. Case Problem 1-1: Brand Insurances Services (“Brand”) is a large, professional insurance agency. Its target customers include successful business owners, professionals, and executives. It has a 260-Person sales force, all of whom are employees Brand. Its top performing salesperson, by a huge margin, is Luke Jones. Luke’s annual volume typically exceeds that of Brand’s next two highest producers. Luke’s success is attributable to three factors. First, he is a workaholic in the truest sense. Second, he loves entertaining clients and referral sources, and he spends a large portion of his high income on expensive parties and exotic weekend trips that, in the words of Brand’s senior management, “often push the limits.” Beyond the ever-flowing booze, rumors of drugs and adult thrills abound. The third element of Luke’s success is his determination to not let a client’s lawyer get in the way of his sales efforts. Luke is well-schooled in the legal documents that are often needed to implement the insurance and related planning that he designs for his clients: wills, trusts, employment agreements, buy-sell agreements, and the like. He believes that lawyer involvement adds nothing substantive to the effort, delays the process, triggers mindless, negative dialogue, and balloons upfront costs for the client. To keep a client’s lawyer out of the process, Luke champions self-help legal services, helps clients use such services, and offers his own slate of stock “fill-in-the-blank” forms. And when a lawyer is needed to prepare a document, Luke steers his clients to his buddy Joe Marsh, a lawyer who dutifully follows Luke’s orders, quickly delivers the requested documents with no hassles, and charges the client and insignificant fee. Brand’s management cherishes the business that Luke delivers, but is concerned about Brand’s potential liability exposure for Luke’s “extreme entertaining activities” and his “proactive lawyer management practices.” They are concerned about the risks of personal injury or accident, a client receiving substandard legal documents or poor legal advice, or a claim (heaven forbid) that Luke is involved in the unauthorized practice of law. Brand Management has asked you for your advice on steps that Brand might take to limit its exposure for Luke’s activities.

b. Mitigation of exposure to vicarious liability

i. Four Wrongs by Employee that Create Vicarious liability

1. Employee exceeds his or her authority in making a deal on behalf of the company.

2. Employee negligently or recklessly injures third party in the process of carrying out his/her duties while acting on behalf of the business.

3. Employee ignores or violates a black letter law that has been established for the good of all. Ex. Hiring/firing discrimination, price fixing, breaks environmental regs., sexual harassment.

4. Intentional misconduct that may rise to the level of criminal conduct. Ex: fraud, bribery, extortion, embezzlement, slander, insider trading, unlawful disposal of hazardous waste.

c. Ten Steps to reduce vicarious Liability

i. Define the Scope

1. Carefully prepared job descriptions – spell out duties, responsibilities, limitations of employee’s authority

2. This can mitigate in 2 ways:

a. If defined at the outset, employee will most likely not cross that boundary.

b. Employer is in better position to defend in the case of a VL suit.

ii. Mind the Memos and Emails

1. Instruct Key Employees on appropriate preparation and retention of file memoranda and email documents.

2. Instruct executives to carefully document the substance, time, and place of key statements made by others that bay be helpful in a future dispute.

iii. Repudiate Fast

1. If employee goes beyond scope, owner should act fast in determining whether steps are going to be taken to repudiate actions of the employee.

2. Delay and equivocation may result in approval or ratification of unauthorized act. Move swiftly and decisively to eradicate the problem before there is a detriment to the other party.

3. In extreme cases, firing the employee may be necessary to show that they were outside the scope of employment.

iv. Watch the Titles

1. There are two problems with when owners use titles loosely and certain employees end up over titled.

a. Employee may focus on title and act in a way the owner never intended.

b. It is common practice to rely on the title of an individual in assessing the scope of that individual’s authority.

v. Customize the Insurance

1. Have an insurance program that covers specific risks of the business.

2. Find an insurance and risk management specialist who can tailor to the business’s specific risks to be protected against.

vi. Check the Pedigrees

1. Before hiring, conduct a careful background check. Could be grounds for a “negligent hiring” suit if company fails to check.

vii. Spread the Word

1. Let everyone know, supervisors and employees, the scope of acceptable activities.

2. May be necessary to specifically warn prospective customers that:

a. employees and agents have no authority to make verbal representations or warranties outside those written by the company,

b. negotiators do not have the authority to bind the company to any specified set of terms and conditions, or

c. All activities of employees outside normal working hours are NOT the responsibility of the company.

viii. Repeatedly Emphasize the six “Big Nevers”

1. Never talk or joke about hiring/firing discriminatorily.

2. Never discuss or attempt to resolve a conflict with the other side’s lawyer.

3. Never encourage another party to breach a contract.

4. Never sign what you do not fully understand.

5. Never discuss with a competitor or a prospective competitor any matter involving prices, existing or potential market divisions, or existing or potential actions to not do business with (boycott) a third party.

6. Never ignorantly look the other way. Don’t be ignorant in assessing the magnitude of the risk.

ix. Education

1. Employees need to be educated. Never assume employees know or appreciate basic laws or risks to the business.

2. Stay within your authority and be careful.

3. Inform employees of possible personal liability.

x. Reduce Turnover

1. A stable, seasoned workforce is much less risky than one with a high turnover ratio. It’s also more productive and efficient.

d. Three myths of vicarious liability

i. If I make my employees independent contractors, I won’t be liable for their actions

ii. If one of my employees does something wrong and I immediately fire that employee, I am off the hook.

iii. If I didn’t know about it, I am not responsible for it. As a general proposition, ignorance is no defense.

C. Agency Law Nuts and Bolts

a. Case Problem 1-2

i. Jane knows food and is a party animal. After much thought and analysis, she quit her job a year ago and started a catering busi

that the agent is authorized to do them and

c. Has no notice that he is not so authorized.

b. Menard, Inc. v. Dage-MTI, Inc.

i. Menard offered to purchase 30 acres of land from Dage. Sterling, Dage’s president, accepted the offer in a written agreement in which he represented that he had the authority to bind Dage to the sale. Dage’s board of directors did not approve and refused to complete the transaction. Trial court and appellant court held in favor of Dage.

ii. Supreme Court reversed, holding that he trial court’s conclusions of law employed the principles of “actual” and “apparent” authority when they should have employed principles of “inherent” authority. Sterling had inherent authority to bind Dage, as:

1. he operated with little board oversight over the past 20 years;

2. he had purchased real estate in the past on behalf of Dage (scope);

3. Menard reasonably believed that Sterling was authorized to buy real estate on behalf of Dage; and

4. Menard had no notice that board approval might be required for Sterling to purchase real estate on behalf of Dage.

c. Case Problem 1-3

i. Linda Walsh is the president and CEO of Wharton Inc. (“Wharton”). She is also its largest shareholder, owning 28 percent of Wharton’s outstanding stock. The balance of the stock is owned by 14 individuals. Wharton has a seven member board of directors that includes Linda, three other officers of Wharton, and three outside directors, all of whom own stock in Wharton. Two of the outside directors, Peter and Debbie, despise Linda for personal reasons that have nothing to do with Linda’s superb performance as Wharton’s CEO. Two days ago Linda learned that Wayne, a bona fide star sales VP for a competitor, was looking to make a move. Linda instantly jumped on a plane and went after Wayne. They cut a deal last night that would make Wayne the new executive VP of Wharton in charge of sales, provide Wayne with a five year no cut contract, pay Wayne a base salary of $300,000 a year, and provide Wayne with a bonus package that could potentially triple his base pay. Linda must contractually wrap the deal with Wayne immediately if she has any hope of getting him. Another competitor is knocking at his door, ready to offer even more. Linda has the inside track because Wayne likes the way Linda has built Wharton and how she treats her employees. Linda’s challenge to move fast is complicated by the fact that she needs approval of Wharton’s board of directors to hire Wayne as a new officer of the company with such a lucrative pay package. She has discussed the matter by phone with three board members who are officers of Wharton, and they all rubber stamped her desire to get the deal done. Linda fears, for good reason, that Peter and Debbie would likely object or, at a minimum, make a fuss that would drag the process out and end up killing the deal. The only other director is attending the funeral of a deceased grandchild in Germany and cannot be disturbed. Linda needs advice as to how to proceed. She knows that a deal conditioned on board approval would not be acceptable to Wayne. He would end up talking to competitors. Linda’s desire is to just go ahead and sign a contract with Wayne so the deal is done and Wayne can announce his switch and make the move. Then Linda, in due course, would call a meeting of the board and have the board approve her actions. She thinks that she has four votes in the bag. Is this an advisable course for Linda? What other option does Linda have? Assume Wharton is incorporated in a state that has the Model Business Corporation Act and the following MBCA provisions are applicable.

Chapter 2 Partnership and LLC Basics