1. Intro and History
A. All corp forms are creatures of statute; they cannot have any more power, substance, or do anything that is not provided for in the statute.
i. Corp charters were the original charters of most of the 13 colonies
B. History: Originally formed to get investment started up again after South Sea Bubble; Monarch would specifically charter each individual one
i. Framers of Con left the corp charter power to each state legis.
ii. Corps were initially hugely regulated, but each state began loosening the restrictions in order to attract more business
iii. Trustees of Dartmouth College v. Woodward (1819). Early definition of corporation. “An artificial person, existing in contemplation of law.” May sue and be sued and may enter into contracts.
C. Increased power with increased size. Corporation has evolved into a dominant institution affecting economic, social and political conditions in modern society.
D. Transfer of individual wealth. Large amount of wealth of individuals has shifted from ownership of physical property to ownership of stock.
E. Ownership separated from control. The responsibility and substance which has been a part of ownership in the past are being transferred to a single group in whose hands lies control.
i. Conflicts of interest that result. The separation of ownership from control gives rise to conflicts of interest between passive owners and active managers. The manager’s quest to maximize their utility does not lead to decisions that maximize the value of the firm.
a. Agency costs. The costs of bonding, signaling and monitoring, as well as the amount of misbehavior that occurs despite these steps, are referred to as agency costs.
b. Neoclassicists view the corporation as a nexus of contracts – the numerous contracts b/t owners, managers, creditors and workers. View holds that corporation is a means for efficient contracting.
i. Criticism: allows no room for a higher principle or purpose to resolve corporate law questions. Disputes are reduced to looking at intent of contracting parties. Thus, law is not an engine for social change and improvement.
F. Features of Corp: an artificial person under the law, it has all the rights and duties of natural people, and although those actions must be acted on by actual persons, they are considered as being vested in the corp itself. It has the right of perpetual succession, and can act by the collected will (or votes) of its members.
i. A problem with modern corps that the day-to-day running of the company (managing) is not done by those who own the company. This issue can be minimized by tying manager compensation to the success of the company:
a. Bonding: eg, a modern stock options plan. The better the corp does, the better the manager is compensated–their fortunes are bonded together
b. Signalling: Tying manager compensation to corp success also signals to potential investors that the corp is serious about being run correctly
c. Monitoring: Outside boards of directors and accountants can check to ensure the managers aren’t screwing up. This only makes sense if the cost prevented by keeping managers from screwing up is more than the cost of implementing the monitoring.
G. Advantages and Disadvantages:
a. Limited Liability. The liability of stockholders is limited to the amount of their investment. This encourages the risk taking that is necessary for society to advance.
b. Separation of Ownership and Control. Allows efficient allocation of capital and professional management of the company’s operations.
c. Perpetual Life. The death of an owner does not terminate the corporation.
a. Double taxation. The corporation is taxed for any profits it receives. The shareholders are then taxed again as income is distributed to them.
i. Subchapter S status – in small corporations allows pass through of profits directly to shareholders.
b. Managers may manage for their own interest rather than the good of the corporation.
c. Heavy Expenses because of reporting requirements (if public co.) and accounting and legal issues.
iii. Reasons for Creation
a. The modern corporation was brought about in order to attract investors and limit liability further.
i. Encourages capital formation
ii. Although employees may be hurt if the corporation goes bankrupt, encouraging capital formation and limiting liability were necessary evils to encouraging progress and investment
H. Other Business forms:
i. Partnerships are the default method for doing business. If one of the other statutes is not applied, the business will be a partnership. The law of partnership is a combo of contract and agency law. This is the only business form provided for in the common law. If one of the statutory forms is not used or followed correctly, the business is Part by default
a. Uniform Partnership Act (“UPA”). Created in 1914 to achieve uniformity among state laws on partnerships
b. The Revised Uniform Limited Partnership Act (“RULPA”) approved in 1976 w/ amendments in 1985
c. Advantages and Disadvantages are the same as Proprietorships
ii. Limited Partnership: General partners have unlimited liability(including their personal assets); passive members, or investors have their liability limited to the size of their investment.
a. Uniform Limited Partnership Act (“ULPA”) created in 1916 in order to achieve uniformity among state laws on limited partnerships. Adopted by a few states.
i. Limited Liability for the Limited Partners. Liability of the limited partners is limited to their investment. The general partner remains subject to unlimited liability.
ii. Separation of Ownership and Control. Allows limited partners ability to invest in a business that they do not have the time or expertise to manage.
iii. Fewer Expenses.
i. Unlimited Liability for the General Partner.
ii. This may be avoided by making the general partner a corporation.
iii. Limited Transferability. The limited partner usually can not readily sell her ownership interest unless it is registere
age, purchase stock, or pay dividends w/o D’s approval. D claimed W needed ‘strong paternal guidance.’ D actually exercised control over some of W’s actions. Corp held itself out as working for D, and both parties agreed to this; therefore, there was agency.
B. Features of Agency:
i. Fiduciary Duty: Meinhard v. Salmon: a punctilio of an honor the most sensitive. There are two duties expected within this:
a. Duty of care is common law negligence. These duties are in all relationships and are not too exceptional
b. Duty of loyalty has several parameters, all of which can be modified if the parties agree to do so:
i. Agent must act solely for the principal
ii. Agent may not deal with the principal as an adverse party. This means more than not suing or acting contrary to the principal’s interest; it means the agent cannot be on both sides of the transaction. Any type of self-dealing is suspect.
iii. An agent who profits on a deal must give those profits to the principal (expected gratuities excepted)
An agent who acquires confidential information in the course of his employment or in the violation of his duties has a duty to give any profit he makes from acting on that info to his principal.
B. Agency can be created by a manifestation of consent; there is no req for K to be formed
C. Principal may terminate agency at any time
C. Authority in Agency determines which of the agent’s actions are covered by the agency relationship. There are two broad categories:
i. Actual Authority: runs from the principal to the agent. It may be express or implied.
a. Express: It is very clear, expressed in words (employment handbook, code of conduct, job description, etc)
b. Implied: Can be implied over a course of conduct or from an express grant, it includes the authority necessary to perform duties expressly authorized. If agent believes what he did was in the scope of his authority, we have this kind of authority.
ii. Apparent Authority: is created when the principal gives a 3d party reason to believe the agent has authority to act.
Ratification: It’s better to seek forgiveness than permission. If an agent acts outside his authority, but the principal later agrees to (ratifies) the act, it is within the agent’s authority. A principal can make an after the fact authorization of a previously unauthed act. Principal’s knowledge of agent’s actions plus acquiescence gives this. This can also be express or implied. It is