CHAPTER 1. WHAT DO BUSINESSES DO AND WHAT DO LAWYERS FOR BUSINESSES 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 is 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 (Amazon.com example).
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 (Public service, charity)
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.
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
Milton Friedman – goal of business is to make as much money as possible while conforming w/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.
RSA § 1:
Agent – acting on behalf of the principal and subject to his control
Principle – acting for own goals
Ben and Jerry support projects which are models for social change. Friedman would not like this, b/c it’s not making money for the principal. Instead of Ben & Jerry’s taking a portion of the investors’ money and donating it to these social organizations, Ben & Jerry’s should be giving the money to the investors and allowing them to decide whether or not to donate – the managers are the agents of the investors, the principals.
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).
The court holds that it is not ultra vires, 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 past. However, this company has donated to other purposes in the past.
Why do you think the Board decided to donate this money to Princeton? O’Brien, who is President of the company, actually graduated from Princeton. Does that make a difference? What would Friedman say about that? You can use your own money to donate to Princeton as your alma mater, but you shouldn’t use the company’s money.
Did the donation provide any benefit to the company (direct/indirect)? Does the court approve it b/c it finds a benefit? Look at the MBCA that the court talks about.
Look at Question 1.7. Read assignments 3-4.
Did what the directors do provide any benefit to the company?
By funding Princeton, you will get better employees.
Problems w/ this argument:
Not a very targeted move.
Marketing/advertising tool by showing support of public activities and thus getting corporation’s name into public.
Improves public image – community expects corporations to acknowledge their public responsibilities.
Employees will think more of the company.
This debate is reoccurring: what are the social responsibilities of corporations?
Model Business Corporation Act § 3.02(13): to make donations for the public welfare or for charitable, scientific, or educational purposes.
There is no requirement that the donation have a benefit for the corporation (especially in comparison to (15), “that furthers the business”).
Does this mean that the drafters of the MBCA in drafting this section rejected the Friedman view, or is there some other explanation?
Would Friedman allow this if it benefited the corporation? Yes, anything that results in increased 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.
Question 1.7, pg. 11:
Roberts owns 100 shares of Unilever stock. Unilever is acquiring Ben & Jerry’s. Although Roberts loves Ben & Jerry’s ice cream, he disagrees with its corporate philanthropy. What can Roberts do?
He could try to bring a claim against Unilever, but under § 3.02(13), we know that would not be successful.
He could sell his shares, not knowing for sure if he would make or lose money. This is probably his only real option.
He could try to change the policy, however, he only owes 100 shares, so he is only one small investor, and therefore has little power.
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?
Accounting helps those managing the company know how the company is performing.
Accounting systems are internal monitoring systems – where your cash is, what people in the company are doing, where your assets are.
If you are trying to sell interest in the company to investors, they are going to want to know how the company is doing, and this is the best way to show them.
3 Financial Statements:
Financial picture at one point in time.
i. Doesn’t really tell you what’s happening within the company.
1. Assets – Liabilities = Equity
2. Assets = Liabilities + Equity
Profit or loss over a period of time (typically annual).
i. Gives you a better understanding of what’s happening within the company.
ii. Comparing the amount that it’s costing the company to make its products and services to what the company is gaining by selling its products and services.
Profit: Increases equity on balance sheet.
Loss: Reduces equity on balance sheet.
Statement of Cash Flow
Net cash flow to the business during a period
i. Cash coming in
ii. Cash going out
Tells you whether over the course of a year there has been more cash coming into the company than being paid out.
Cash on balance sheet changes by net cash.
i. There is also a relationship between the balance sheet and statement of cash flows. If we take the balance sheet at the beginning and at the end, the amount of change in cash should be equal to the amount indicated on the cash flow statement.
Cash flow statement and income statement are inconsistent.
i. Cash flow v. income
1. 2002: company sells and delivers widgets = $5000 due
a. On 2002 Income Statement
2. 2003: customer pays $5000
a. On 2003 Statement of Cash Flows
Questions pg. 26. Assignments 5-6.
Looking at the Balance Sheet,
a. Is the business worth $189,000?
i. This doesn’t take into account liabilities – only assets.
ii. Assets are $189,000; Liabilities are $109,000; so the equity is $80,000.
b. Is the business worth $80,000?
i. This is the net worth from the balance sheet.
ii. Only the physical assets are reflected in the balance sheet. There migh
ent owes duties to the principal.
b. “Manifestation of consent by one person to another that the other shall act on his behalf and subject to his control”: implies consent needed by principal
c. “Consent by the other so to act”: implies consent needed by agent
You must ask yourself if there is such a relationship, and if so, to what extent is the principal liable for the actions of the agent acting on their behalf.
B. WHAT ARE THE PROBLEMS IN OPERATING A BUSINESS AS A SOLE PROPRIETORSHIP?
Problems, pg. 39:
Is § 1 satisfied? There is an agency relationship here b/c there was consent on both sides. Propp manifested his consent by hiring her, and telling her to order food. Agee consents to act by her actions – starting to work & ordering the food.
Does she have authority to order the food? §7 – Yes b/c she acted in accordance w/the principal’s manifestations of consent.
Is Propp liable to pay for that food under agency law? §140(a) – Yes b/c the agent was authorized & therefore the principal is liable to the 3rd person.
Is Agee personally liable to TP??
§ RSA § 320: Principal Disclosed
· Unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract.
§ RSA § 321: Principal Partially Disclosed
· Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract.
§ RSA § 322: Principal Undisclosed
i. An agent purporting to act upon his own account, but in fact making a contract on account of an undisclosed principal, is a party to the contract
Is Propp liable to TP for the full $2200?
Not under §7, b/c she’s not acting w/in his consent, so there is no actual authority.
Is there any other way the agent can bind the principal? §140(b), §8 – If Propp has done something to make TP think that Agee has this authority (which he has by paying for the previous orders), then she has apparent authority, and therefore Propp is liable.
i. Apparent authority is different than actual authority – we have manifestations from the principal to a third person. So the consideration is whether TP believes Agee has the power and authority to order $2200? Yes, b/c he has done so before and it has been paid by Propp.
ii. How does Propp protect himself in a situation like this?
1. Tell TP that Agee does not have the authority anymore to order.
Is Agee liable to TP in this situation?
i. §320 still applies b/c she is purporting to make a K w/another.
ii. But, under §329 – she is making a warranty to TP that she has authority to do this.
Is Agee liable to Propp?
i. §377 – Agee has a duty to act in accordance w/her promise to Propp.
ii. The principal/agent relationship is a contract, so Agee is liable under that contract. Propp would have to pay TP, but could then go after Agee.
Is Propp liable to the newspaper?
§140 – The agent is not authorized (§7 – actual authority), and not apparently authorized (§8) b/c Propp had done nothing to make the newspaper think Agee was authorized to do this. What about §140(c)? Need to look at §8A (inherent agency power). Even if the principal never says you can do something, b/c of the agency relationship you have an inherent power – nature of the position you have. This doesn’t seem to apply to this situation b/c it’s not likely that in the job as a cook you would be inherently authorized to place newspaper ads. Propp shouldn’t be liable b/c just b/c he hires an agent, it doesn’t mean he should be liable for everything she does.