Corporations Outline – Harner
A. Key Concepts in Corporate/Business Entity Law:
1. Sole Proprietor: A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity.
a. Financing Options:
i. Loan: SP can get a loan and still be a sole proprietor because he is still solely liable for the loan.
ii. No Investors: Cannot have investors, he will not be a SP.
2. Partnership: A voluntary association of two or more person who jointly own and carry on a business for profit.
a. Ease: This is the easiest business to form.
b. Unlimited Liability: Partners are subject to unlimited liability—not good.
3. Corporation: An entity (usually a business) having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock and exist indefinitely.
a. Most Popular: This is the most popular business entity in the U.S.
4. Debt: A specific sum of money due by agreement or otherwise.
5. Creditor: One to whom a debt is owed.
6. Equity: Ownership in interest in property, especially in a business.
7. Shareholder: One who owns or holds a share or shares in a company.
a. Owner and Residual Owners: Shareholders are usually both owners and residual owners of a business.
8. Owner: One who has the right to possess, use, and convey something.
9. Residual Owner: One who will reap the marginal dollar of the firm’s gain or suffer the marginal dollar of its losses.
10. Agency: Is the principle underlying all of these business entities.
A. The Agency Relationship Defined
1. Three Parties: An agency relationship consists of three parties. You cannot have an agency relationship with only two parties.
c. Third Party
2. Restatement Definitions of Agency Relationship:
a. R2A § 1(1): A manifestation of consent by one person (the principal) that another person (the agent) act:
i. On his behalf
ii. Subject to his control – and –
iii. Consent by the other (the agent) so to act.
b. R3A § 1.01: Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall:
i. Act on the principal’s behalf
ii. Control: Subject to the principal’s control
1. Example – Gorton v. Doty: Soccer mom let coach borrow car to drive players as long as he drove. Coach wrecked. Kids sued soccer mom as principal of coach. The condition that “coach drive” is sufficient control to create agency relationship.
2. Better: Don’t specify who drives. If no control, no agent.
3. Types of Control:
a. Right to control key decisions: This qualifies as control even if that right is never exercised.
b. Influence: Does not give rise to control. Has to be something more than mere influence.
4. Creditor Control: Typically does not give rise to an agency relationship.
a. R2A § 14: A creditor becomes a principal at the point at which it assumes de facto control over the conduct of the debtor.
i. Example – Cargill: Creditor exercised tremendous control over debtor. So much that court held creditor was principal and liable for defaulted contracts between debtor and debtor’s customers.
1. 9 Factors: Court gives 9 factors on pp. 10-11 of casebook.
b. R3A § 1.01 Comments: Posits that agency in the creditor/debtor relationship is a very rare example. Courts may follow Cargill to reach an equitable result, though.
iii. Agent Consent: And the agent manifests assent or otherwise consents so to act
1. Fiduciary Relationship Defined: Someone who has a duty of loyalty. Signifies that the agent must act loyally in the principals’ interest and on the principal’s behalf.
2. Manifest Assent – R3A § 1.03: A person manifests assent or intention through written or spoken words or other conduct.
a. Example – Gorton v. Doty: Don’t have to say “be my agent.” Can be explicit or implicit. Soccer mom let coach borrow her car as long as coach drives it. Although not stated, agency relationship created.
b. Writing Not Required: Manifestation by “other conduct” is OK.
3. Parties’ Labeling Not Important – R3A § 1.02: Agency relationship arises only if the above elements are met. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry/popular usage is not controlling.
a. Gorton v. Doty: Agency existed even though neither party said “be my agent.”
c. Definition for Exam Purposes:
i. Principle Manifests Consent:
1. To have someone act on his behalf – and –
2. Subject to his control
ii. Agent consents so to act
3. Agency Triangle: Illustrates two concepts:
a. Does an agency relationship exist between P and A?
b. What consequences flow to P from interaction between A and a third party (T)?
4. Must have Cause of Action: The existence of the agency relationship does not establish liability. Must have some underlying cause of action. The below sections illustrate this:
B. Liability of P to T in Contract
1. R3A Agency Attributes: Each attribute focuses on a different line on the triangle.
a. Actual: Focuses on the line between the principal and the agent.
b. Apparent: Focuses on the line between the agent and the third party.
i. Note: R2A has a fourth attribute: inherent. Don’t need to know this attribute for final.
2. Actual Authority: Claim the principal is liable for the alleged breach of K because of actual authority it gave to the agent.
a. Defined – R3A §2.01: An agent acts with actual authority when, at the time of taking action that has legal consequences for the P, the A reasonably believes in accordance w/ P’s manifestations to the agent that the P wishes the A so to act.
b. Created By – R3A §3.01: Actual authority is created by a P’s manifestation to an A that, as reasonably understood by the A, expresses the P’s assent that the A take agent on the P’s behalf.
c. Express Or Implied: Actual authority may be either expressed or implied.
i. Express: P tells A to do X. A does X. P is bound.
ii. Implied: What the agent needs to do to accomplish the goals stated in the express authority.
1. Example: P tells A to do X. In order to do X, A must take other steps. P is bound by A’s actions.
2. Policy: P can’t think
manage building (never said anything about keeping it clean). A hires a janitor to clean building.
i. Actual/Implied: A has actual implied authority.
ii. Questions to Ask: (1) did A reasonably believe he could hire janitor? (2) Is hiring customary for this role? If so, A/I authority exists.
c. Janitor II: P told A not to hire a janitor. A does so anyway b/c local custom gives A authority to hire a janitor.
i. No Actual: No actual express or implied authority b/c P specifically said no.
ii. May be apparent: We’re worried about the janitor in this case. P may be bound by A’s actions if:
1. Management Sign: If there was a sign that said P’s property was managed by A. Could be a representation from P to T.
2. T’s Reasonable Belief: The janitor must be reasonable in thinking P had given A authority. If customary for A to hire janitor, P would be bound.
iii. Inherent: If there was no sign from P. T could only argue inherent under some form of equitable relief.
6. Lowest Cost Provider: A principle that makes it easier to impose liability on the principal.
a. P in Best Position: The principal is in the best position to avoid or mitigate damage and can do so at a lower cost.
b. Protects Lots of Ts: If the P takes precautions, it protects many third parties, not just the one suing.
c. Not that P’s Are Bad: We don’t impose liability because P’s are bad, but because they are in the best position to prevent it going forward.
7. Undisclosed Agency Authority:
a. Undisclosed Principle – R3A §1.04(2)(b): A P is undisclosed if, when an A and a T interact, the T has no notice that the A is acting for a P.
b. Undisclosed Principal is Liable When – R3A §2.06(1): UP is subject to liability to a T who is justifiably induced to make a detrimental change in position by an A acting on the P’s behalf and without actual authority if the P, having notice of the A’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts.
i. Basically, requires the following elements:
1. P hides behind the scenes: The P doesn’t make it known that it’s the P.
2. P knows about A’s Conduct: P is aware of A’s conduct.
3. P knows others might rely: A’s conduct might induce others to detrimentally change their position.
4. P Doesn’t Notify Them of Facts: P doesn’t notify them of the facts.
ii. Undisclosed P Can’t Limit A’s Authority – §2.06(b): The P can try to limit A’s authority, but if A acts anyway, P will be bound