BRADFORD – FALL 2008
Chapter 1: What Do Businesses Do And What Do Lawyers For Businesses Do?
1) Reasons People Own a Business or Own an Interest Therein:
a. Epstein view à to make money
b. Roberts view à to create value (some purpose beyond making money)
i. Growth – increase the value of the business w/ the hope of anticipated future return on the investment
1. in order to determine if a business has a good earning potential (i.e. the ability to make profit in the future), need to look at several things:
a. present value (PV) – need to determine what the business investment is worth now compared to other alternatives (alternative investments)
b. expected value (EV) – investing in the business may be more risky than a bank account – need to take this into account when deciding which way to invest
i. if a no-risk option is going to return the same, then do that
c. Freidman view à focuses on what the people running the business ought to be doing – says that job of corporate managers / BoD is profit maximization
i. Principal v. Agent distinction:
1. principal = the one for whom the action is to be taken (in the corp setting, the SH’s are whose interests are at stake, and thus they are the “principals”)
2. agent = the one who is to act (directors and managers are the SH’s agents and thus they have to act in their best interests and subject to their control)
d. Ben & Jerry’s view à takes into account other possible interests of the principals, such as charity – may not make most possible profit, but other goals are met
e. View of Cts and Legislatures à
i. A.P. Smith Mfg. Co. v. Barlow – ct allowed a donation from the co to PU despite a challenge by the SH’ers of the co that such power was not provided to the BoD
1. Issue was whether the donation was ultra vires, or beyond the power of the corp, given that the co’s incorporation certificates didn’t expressly authorize the donation and that there were no implied powers to make it. Ct held it was intra vires, or within the power of the corp, and thus valid
2. Directors DID NOT have to show the donation provided a direct benefit to the company:
a. Ct said in general there will indirect benefits to the corp, such as increased goodwill in the community, aid of public welfare, production of future employees, etc.
3. Other justifications for allowing the donation:
a. State legislature expressly encouraged these kinds of donations.
b. Greater need for corporate donations due to change in wealth from private individuals to corporations; however, the problem with this argument is that the money only has to be distributed to the shareholders for the money to get back to private hands.
4. Conclusion: both statutory and case law support the action of corporations making donations, even if opposed by at least some of the owners.
ii. MBCA §3.02(13) – does not require that BoD show any benefit to the business and thus charitable purpose is allowed
1. not necessarily inconsistent w/ Friedman’s view – just not able to show the type of connections b/t this stuff and profit maximization so it is left up to the discretion of the BoD
iii. Shareholder’s options when corp donates part of its profits to charity, against SH’s wishes:
1. Sell his stock and get out of the corporation.
2. Get rid of board of directors, although this is extremely difficult
3. Sh won’t succeed on bringing a cause of action against corp. (Barlow and MBCA)
2) How Business Owners Make Money From the Business: 2 ways
a. Receive distributions from the business of all or part of the money the business has earned.
b. Sell all or part of ownership interest in the business for more than he paid for it.
3) Determining how much money the business has made and how much money it is worth
a. Justification for keeping accounting records:
i. Businesses are required to do so and to make the records available to the business owners (see MBCA 16.01(b) and 16.02(b)(2)).
ii. Necessary to make business decisions
iii. Regulatory requirements: income statements necessary for computing one’s taxes
iv. Internal controls: used to determine whether there is a certain amt of money or assets present in business.
v. Investment purposes: financial records enable investors to get a picture of the corp’s financial worth.
vi. Note: even if a business is not req’ed to keep such records by the SEC, they still will likely do so for the aforementioned reasons
b. Main financial statements:
i. income statement – computes the profit or loss of a business for the period in question – usually one year (some factors include: sales, cost of goods sold, salaries, depreciation of equipment, general and administrative, taxes, etc) – simply the difference b/t what it costs the business to make and sell the product vs. what is coming in
1. profit: increases equity on balance sheet
2. loss: reduces equity on balance sheet
ii. statement of cash flows – measure of how much more cash a business has at the end of the year than it had at the beginning of that year . . . (net cash flow to the business during a period à cash coming in v. cash going out)
1. Depreciation: not shown on cash flow statement; depreciation will only be paid out from the cash flow statement when it is first bought.
a. Cash flow v. Income statement:
i. Ex. In 2002, Company sells and delivers widgets to X. $5000 is due. X pays Company in 2003. Under accounting principles, $5000 is included as income in 2002, and is shown on the 2003 cash flow statement.
2. cash on balance sheet changes by net cash flow
a. can be the most profitable co in the world, but if you can’t come up w/ cash to pay your creditors when the notes become due, then there is obviously some trouble (thus cash flow is just as important as profitability)
iii. balance sheet – snapshot of a particular time (doesn’t tell how the co got to that point or what will happen after, just at that point) including the three sections of:
1. assets – anything of value the corp owns – for any of these things, the balance sheet will give a dollar amount
a. note that this is “historical terms” and thus the amount on the balance sheet is what the co paid for it even though it may currently be worth much more or much less
2. liabilities – what the corp owes (its debts) – purchase of supplies, notes payable, accounts payable, taxes payable à all the “negative” stuff
3. equity – what this is called will vary on the business (partner’s v. SHer’s)
a. difference b/t assets and liabilities
i. Assets – Liabilities = Equity OR Assets = Liab. + Equity
b. reason this difference matters à equity is representative of the owner’s residual interest in the business – i.e. if owners take all the assets and pay off the liabilities, what is left is the interest of the owners (remember – the dollar amounts won’t be exact b/c they are not listed as FMV)
4. Total of assets must equal the total of liabilities and equity: by definition, it MUST balance.
5. Depreciation expenses: deducted from the value of
e with P’s manifestations of consent
ii. RSA §8 (Apparent Authority): power to affect the legal relations of P w/ 3P’s, professedly as an A for P, arising from and in accordance with P’s manifestations to such 3P’s
iii. RSA §8A (Inherent Agency Power): indicates the power of an A which is derived not from actual or apparent authority or estoppel but solely from agency relation and exists for protection of those harmed by or dealing with a servant or agent
c. Types of Authority (how created):
i. RSA §26 (Actual Authority): created by written or spoken words or other conduct of the principal, which, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal’s account.
1. Actual Express Authority: P tells A that A has the power to act on P’s behalf
2. Actual Implied Authority: A has the authority to do what is ®’ly necessary to get the assigned job done, even if P didn’t spell it out in detail
ii. RSA §27 (Apparent Authority): created as to a 3P by written or spoken words or any other conduct by the P that, when reasonably interpreted, causes the third person to believe that the P consents to have the act done on his behalf by the person purporting to act for him.
1. Created by manifestations by P to third party, leading third party to conclude that A is an agent for P
3) Contractual Liability:
a. Liability of P for K’s entered into by his A (see p.39 and wk 1 notes for examples)
i. RSA §140 (Liability Based Upon Agency Principles): liability of the P to a 3P upon a transaction conducted by an A may be based upon the fact that:
1. (a) the A was authorized
2. (b) the A was apparently authorized, OR
3. (c) the A had a power arising from the agency relation, and not dependent upon actual or apparent authority. (inherent agency power)
ii. RSA §144 (General Rule for K situations): disclosed or partially disclosed P is subject to liability upon K’s made by an A acting w/in his authority if made in proper form and w/ the understanding that the P is a party
1. RSA §4 (Definition of disclosed principal): the principal is disclosed if, at the time of the transaction conducted by A, the 3P has notice that A is acting for a P and knows P’s identity.
b. Is an A personally liable to 3P for K’s made on behalf of his P to a 3P? (generally, NO . .
i. RSA §320 (Principal Disclosed): unless otherwise agreed, a person making or purporting to make a K with another as A for a disclosed principal does not become a party to the K
1. thus, if 3P was aware of P’s identity and knew A was acting for P at time of transaction, A is NOT a party to the contract, ergo not personally liable
ii. RSA §321 (Principal Partially Disclosed): unless otherwise agreed, a person purporting to make a K w/ another for a partially disclosed P is a party to the K