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Business Associations
University of North Carolina School of Law
Hazen, Thomas Lee

 
Business Association – Spring 2014 – Hazen
 
HAPTER 2: AGENCY AND PARTNERSHIP –
 
SECTION 1: INTRODUCTION TO AGENCY PRINCIPLES –
 
–       Partnership and Corporate law = Combination of Agency and Contract law.
o    Agency = Fiduciary relationship which results from the manifestation of consent by one person [the principal] to another [the agent] that the [agent] shall act on [the principal’s] behalf and subject to [the principal’s] control, and consent by the [agent] so to act.
§  Requires “consent” (can be short of a contract) from both the principal AND the agent to create an agency relationship.
 
–       Identifying the Existence of an Agency Relationship –
o    There is no one particular evidence that points towards the existence of an agency relationship, but rather it’s the cumulative of all the facts, such as:
§  (1) The principal exerts day-to-day control of many of the daily activities of the Agent.
§  (2) The agent acts solely for the benefit of the Principal. (Agent does not exist as an independent entity.)
§  (3) Agent is “holding out”—the principal allows the agent to use the Principal’s stationary and checks. [Gay Jenson Farms Co. v. Cargill Inc. (Minn. 1981)] [Butler v. McDonald’s Corporation (D.R.I. 2000)]  
–       Fiduciary Obligations in an Agency Relationship –
o    Agents owe fiduciary duty to the principal and are held to “extraordinarily high standards.”
o    Basic Categories of Fiduciary Duty – (cannot completely contract out of fiduciary duty)
§  Duty of Care – Counterpart of common law negligence.
§  Duty of Loyalty –
·         (1) Agent is under a duty to act SOLELY for the benefit of the principal.
o    Does not apply after hours or during break, unless otherwise agreed upon.
·         (2) Unless otherwise agreed upon, an agent may not deal with the principal as an adverse party (no “self-dealing”).
o    Self-dealing = any contract between agent and principal in which an agent receives some benefit (e.g. agent deciding his salary – because principal paying the salary).
·         (3) Unless otherwise agreed upon, an agent who makes a profit while working for a principal (e.g. attains confidential information that company has struck oil) is under a duty to give that profit to the principal.
o    Only goes one-way—no loss sharing.
 
–       Scope of an Agent’s Authority – (existence of an agency relationship does not necessarily address the scope of the agent’s authority) –
o    Authority = Determines which of an agent’s acts fall within the scope of the agency relationship so as to bind the principal.
o    Two Types of Authority – (In practice, type of authority doesn’t matter as long as authority to act exists) –
§  (1) Actual – (communication or manifestation of authority between principal and agent).
·         (i) Express – (e.g. employment contract containing description of employee’s duties)
·         (ii) Implied – (e.g. employee has express authority to make deposits; bank is 20 miles away; employee has implied authority to drive to the bank during work)
§  (2) Apparent – (principal gives a 3rd party reason to believe that actual authority exists).  [Gay Jenson Farms Co v. Cargill Inc] [Lee v. Jenkins Brothers – p. 38] ·         Agent CANNOT create his own apparent authority. Doing so would result in the agent being held responsible to the 3rd party UNLESS the principal has “ratified” after the fact.
o    Ratification = Principal’s after the fact approval (expressly or implicitly via acquiescence) of the agent’s unauthorized act.
 
–       Vicarious Liability –
o    As long as the agent is acting with the scope of his agency relationship, the principal is vicariously liable for the acts of the agent. [Butler v. McDonald’s Corporation]  
General Partnership – [Uniform Partnership Act (1914)] [Revised Uniform Partnership Act (1997)] à NC follows UPA.
–       What is a Partnership? – (non-corporate form of doing business)
o    An association (no formal agreement necessary) of two or more persons to carry on as co-owners (key concept) a business for profit (not talking about whether it actually makes money, but more “aspirational”). [Martin v. Peyton] [Peed v. Peed] §  The default form of business – under common law, unless expressly stated otherwise, a business involving co-owners and for profit is presumed to be a general partnership – formation not dependent on statute.
 
–       Fiduciary Obligations –
o    Because partnership is essentially an agency relationship, partners owe certain fiduciary duties to one another. [Meinhard v. Salmon]  
–       Partners’ Authority and Governance –
o    A partner is an agent of the partnership and has the authority to bind the partnership and copartners when acting in the ordinary course of business. [UPA § 9] [RUPA § 301] o    A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a MAJORITY of the partners. [UPA § 18(h)] [RUPA § 401(j)] [Summers v. Dooley] [National Biscuit Company, Inc. v. Stroud] §  Acts outside the ordinary course of business and amendments to the partnership agreement may be taken ONLY with the consent of ALL of the partners.
 
–       Entity v. Aggregate – Are general partnerships treated as a separate entity from its partners or are they viewed as having no separate existence, making them just an aggregate of partners?
o    The UPA has some aspects of the entity theory, but generally views general partnership as an aggregate of partners – (each partner is severally and jointly liable for the acts of the partnership, but partners do have right to contribution).
§  Most states have statutes treating general partnerships as entities for certain purposes:
·         (1) Legally allows general partnerships to hold property in its own name and be sued in its own name;
·         (2) For tax purposes, partnerships have to file an “information” return as an entity, but gains and losses are passed through the individual partners.
§  RUPA also treats partnership as a separate entity rather than an aggregate of partners.
 
–       Partnership Liabilities and Duties –
o    Partner’s Liabilities –
§  Partners are jointly and severally liable for the wrongful acts (tortious acts) of a partner (or the partnership) [UPA §§ 13 – 15] with a right of contribution against copartners. [UPA § 40(f)] ·         All other liability (e.g. contracts) for partnership obligations is jointly—i.e. all partners must show up to court. [UPA § 15(b)] (minority rule)
o    Under RUPA, all liability (tort and contract) is jointly and several. [RUPA § 306(a)] (majority rule)
·         Partnership must indemnify every partner for any personal liability reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property. [UPA § 18(b)] ·         Is there a way to limit a partner’s liability to 3rd party? –
o    By agreement – only way a 3rd party would not be able to sue jointly and severally the partners is if the 3rd party waives that right (agrees) to do so.
§  Partners are agents of the partnership for the purpose of its business and will bind the partnership, UNLESS the 3rd party had knowledge of lack of authority on the part of the partner. [UPA § 9] ·         Partnership is bound to admission made by the partners. [UPA § 11] ·         Partnership is charged with the knowledge of individual partners. [UPA § 12] ·         Partners must render true and full information to other partners – fiduciary duty. [UPA § 20] o    Partner’s Voting Rights –
§  Unless other

duties to the other partners, unless the terms of the partnership agreement state otherwise. [ULPA § 305] o    (4) Limited partners cannot take active roles in the business. Doing so will likely result in the termination of limited status and treated as a general partner.
 
–       Why Limited Partnership Over Corporation? –
o    Tax Benefits – (also true for LLP and LLC)
§  Partnerships do NOT pay taxes. Corporations do.
·         Profits taxed directly to the partners at his pro rata ownership. Corporations have a problem of double tax issues.
·         If partnership loses money, then those losses can be passed onto the partners. As a result, partners can pay less tax and offset partner’s other incomes.
 
Limited Liability Companies – (LLC)
–       Most favored form of business today –
o    Less complicated to establish (just need to file with the Secretary of State paper work showing intent to create LLC); and
o    Allow all partners to actively participate in the business without losing limited liability status.
 
–       Two Main Categories of LLC –
o    (1) Member managed – members are the actual participants
o    (2) Non-member managed – members are passive investors; centralized management
 
–       A general partnership CAN be converted into an LLC –
o    However, limited liability would only apply to transactions occurring AFTER the conversion.
§  Earlier liability could only be wiped out if all relevant creditors agree to waive earlier liability.
 
Limited Liability Partnership – (LLP)
–       Some lawyers agreed that converting a general partnership into an LLC is too cumbersome—have to write a new agreement.
o    Therefore, state legislatures got together and created the limited liability partnership.
 
–       What’s the Form of Choice between LLC v. LLP? –
o    In most states, there is no significant difference, other than what you call it and what statute you organize the business under.
o    One potential reason why LLC is generally favored –
§  If you call it LLP, it’s still a partnership and therefore, the members owe a fiduciary duty to one another.
 
CHAPTER 4: CORPORATIONS—FORMATION AND FINANCES –
 
The Role of Corporate Lawyers –
–       When attorney takes on a corporation as a client, whom does he represent? –
o    The corporation (the entity).
 
–       What Do Corporate Lawyers Do? –
o    Represent the “entity.”
o    Help draft the by-laws.
o    Defend management if they get sued.
o    Some may also choose to represent shareholders’ interests.
 
Forming the Corporation –
–       Important Questions to Decide when Incorporating –
o    (1) Are there any potential issues of conflict of interest in representing the particular client?
o    (2) Should you incorporate?
§  When in doubt, do NOT incorporate. There are many formalities and costs that other forms of businesses do not have to deal with. 
o    (3) Where should you incorporate?
§  Ideally, want to incorporate where client will actually do business.