Illig / Business Associations / Fall 2011
Agency and Partnerships
o Types History and Evolution of Business Entities
o What Role Does Law Play In Corporations:
§ To what extent should the law of business associations be left to private contract, and to what extent should the law regulate the terms on which the parties enter into business associations?
o The Contractarian View
§ A business association is viewed simply as a nexus of contracts.
§ This view is supported by the economic theory and by many different types of private arrangements that have arisen to minimize the cots of productive activity.
§ The law plays two basic roles:
· (1) The law provides a mechanism for enforcing the parties arrangements. However, the courts are not the only enforcement mechanism and because the judiciary is often costly and slow, the parties may rely on other enforcement devises.
· (2) The law provides a way of determining the parties’ contract terms. The law minimizes costs over determining the details of ambiguous and incomplete contracts by providing standard terms (gap-fillers) that the parties can opt into or that apply unless the parties opt out. Statutes and common law can provide additional standard terms.
o The Regulatory View
§ Introduction
· The law should dictate some of the terms of business associations.
· Government regulation is believed to be necessary to protect public corporation shareholders from terms to which they have not actually consented, and to rescue them from a position of weakness in the corporation.
o Race to the Bottom
§ Railroads changed everything by making things interstate. We started to want our companies to have perpetual life (so banks could feel secure lending money to them). The race to the bottom started with New Jersey, who created a form statute where corporations would fill in the blanks. New Jersey’s rules were very generous, and a whole generation of companies were formed in New Jersey. Woodrow Wilson became an official for New Jersey, (1913) and ends up putting limitations on Corporations back on the charter. Not long after this, Delaware creates generous corporation laws, and everyone moves from New Jersey to Delaware to form their corporations. Over 50% of corporations are formed in Delaware today, because the corporate laws are (1) pro-management, (2) not demanding, (3) and judges are business experts in Delaware (because it’s always on the docket), and corporations want to be in front of judges that know corporate law and businesses. The race to the bottom really takes off because all states start copying Delaware. Even though the rules are now the same elsewhere, Delaware still remains the place to incorporate, because they have carved out a nice niche with the (1) legislature and (2) there are expert judges in Delaware.
o Federalization
§ We should rename this court “State Business Law.” This is because state law has traditionally catered to the corporations, as they love having the business in their home state. Because of this apathy, the federal government has begun intervening in this field, and created certain regulations because State’s were racing to the bottom. Originally, these federal statutes were merely “I don’t care what you do, just as long as you disclose it. Go ahead and lie, cheat, steal or pollute, but just tell your investors in the Corporation.” Over time though, federal statutes have become more regulatory in telling corporations how to run their business.
o Distinguishing Agency and Non-Agency Relationships
o A. Gay Jenson Farms Co. v. Cargill, Inc.
§ Warren’s company, financed by (D) Cargill, went belly up and ran out of money. Warren had contracted with 86 angry (P) farmers. These farmers are pissed and decide to sue (D) Cargill based on the theory that (D) Cargill was the principal, and Warren was the agent.
§ Illig: The real argument here is that if Cargill is the principal, it’s actually Cargill’s contract. The agent is like your right arm. You can’t sign papers without the head sending neurons to the arm to sign papers. The argument is that these are actually Cargill’s debts. This is not about fairness, but that these debts and contracts are actually Cargill’s. With agency, we’re trying to figure out how much control is going on.
§ Agency: Is there (1) consent by both parties (2) the agent acts on the principal’s behalf, or (3) they are subject to principal’s control
§ Affirmative Control: Although Cargill just claimed that it financed Warren’s company, the main factor that determined agency here was affirmative control. Cargill’s control became affirmative when they started telling Warren what to do. At the point the control becomes affirmative, then Cargill becomes the principal, and Warren becomes the agent.
· Cargill constantly made recommendations to Warren by telephone
· Cargill had the right of first refusal on grain
· Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval.
· Cargill’s right of entry into Warren’s premises
· Financing of all Warren’s purchases of grain and operating expenses.
· Cargill’s power to discontinue the financing
rection of Mueller. The document specified key provisions of the contract, and also contained a signature block for a representative of 373 and a signature block for a representation of Ampex. Joyce received this document on Nov. 3, and executed it on Nov. 6. The document was never executed by a representative of Ampex.
§ Issue: Ampex claims no authority was ever given to Kays (agent) to accept/send a contract.
§ Apparent Authority: An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. An agent has the authority to do those things which are usual and proper to the conduct of the business which he is employed to conduct.
· Kays was employed by Ampex in the capacity of a salesman. It is certainly reasonable for third parties to presume that one employed as salesman has the authority to bind his employer to sell. Ampex did nothing to dispel this reasonable inference.
· Kays submitted the document to Joyce for signature
· Ampex agreed to have all communication with Joyce be done through Kays.
· When Joyce received Kays letter, Joyce had every reason to believe, based on Ampex’s prior actions, that Kays offered the contract on behalf of Ampex.
§ Illig: For apparent authority, the principal has to manifest his authority through the agent in some way to make the third party reasonably believe the agent has the authority to do something..
§ Important: As practical legal advice, always ask whether someone has the authority to do an action. Say: “Give me the corporation’s information documents and let me know who has the authority to make this deal. If you do this, you’ll never have to rely on an apparent authority theory.
o Watteau v. Fenwick
§ Facts: Fenwick owned a pub called Humble. The pub used to be owned by Humble who was now the manager, and the face of the pub. Humble was explicitly told not to make any purchases outside of alcohol. Instead, Humble purchased cigars from Watteau.
