CHAPTER 1. WHAT DO BUSINESSES DO AND WHAT DO LAWYERS FOR BUSINESES DO?
A. WHY DOES SOMEONE OWN A BUSINESS OR AN INTEREST IN A BUSINESS?
Why people invest in businesses:
Epstein-to “make money”
Roberts-to “create value”
What distinctions are Roberts trying to make w/ “value”?
We may lose money/not make any money going into the business, but ultimately be creating value, and as a result make money in the long term.
As an investor, it is not essential that the business is generating out money/making a cash payment, so long as the value of the business is increasing (i.e., a home that you’ve invested money into will be worth more and make you money when you sell it).
Other goals of the investor than money
Risk of the investment
Opportunity Costs – what other opportunities have been lost/forgone in lieu of this opportunity
Present Value of the Investment – comparing your investment w/ the alternative investment – did I or can I do better with this investment than w/ my alternative investment
Roberts is saying that you must think of value and return in a general sense, including the above factors.
Milton Friedman – goal of business is to make as much money as possible while conforming with the roles of society.
When he’s running a business he’s an agent, when he’s running his own life he’s the principal.
Restatement § 1:
Agent – acting on behalf of the principal and subject to his control
Principal – acting for own goals
A.P. Smith Mfg. Co. v. Barlow
The action being challenged here is that the board of directors of A.P. Smith Mfg. is donating $1500 to Princeton University.
In making this decision, was the board of directors acting as a principal or an agent?
They are acting as an agent.
Who is the principal?
The money is coming directly from the company’s account. The corporation is being treated as if it were a person.
When we are talking about corporate management and principal/agent, the law treats the corporation as the principal, so the employees and directors are acting as agents of the business.
The plaintiff is one of the investors, and is challenging the decision, arguing that the donation is ultra vires (beyond the power of the corporation-something the company can’t do). They argue that the corporation was established prior to the statutes allowing the corporation to make donations. Court dismissed this argument on numerous policy reasons.
The court holds that it is not ultra vires (beyond the scope of the corporation), but rather intra vires, or within the power of the company to do.
When the investors invested in the company, did they know they were going to donate to Princeton? No. The article of incorporation does not specifically state that the company was going to donate to Princeton, and the company had not done so in the
ased profit is good.
So why would a drafter, taking Friedman’s position, not take that position on this subsection?
There is a cost associated w/ requiring a showing that the donation benefited the corporation, and you may not be able to show it.
Therefore, you might not necessarily be rejecting Friedman’s idea, but there might be areas out there that are profit maximizing, which would cost too much to prove every time.
(13) is not necessarily inconsistent w/ Friedman’s view.
B. HOW DOES THE OWNER OF A BUSINESS MAKE MONEY FROM THE BUSINESS?
C. HOW DOES THE OWNER OF A BUSINESS (AND HER LAWYER) KNOW HOW MUCH MONEY THE BUSINESS HAS MADE AND HOW MUCH MONEY THE BUSINESS IS WORTH?
Purpose is to let you know how a company is doing financially.
Companies are required to make their financial statements public and file them with the SCC. Companies are also required to provide the financial statements to their shareholders.
Even in the absence of these requirements, companies were keeping and preparing accounting records and financial statements. Why, if there wasn’t any regulation to do so?