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Business Associations/Corporations
University of Pennsylvania School of Law
Bratton, William Wilson



Fall 2011

Corporations Outline

I. Background – Agency Relationships

a. Agency and Corporation Concepts

i. Corporation – a thought structure taking the shape of a legal entity that can do things: specifically, making contracts. However, for this thought structure to do something, a human being has to go forth on its behalf (Agent).

ii. Three building blocks to corporate law

1. Tort Law

2. Contract Law

3. Agency Law

iii. Agency has two key concepts:

1. Authority

2. Fiduciary Duty

iv. Agency (Restatement Definition) – Relationship arising when one person (principal) manifests assent to another (agent) that the agent act on the principal’s behalf and subject to the principal’s control. This is a lawyer’s definition of agency: concerned with liability for the principal.

v. Agency (Jensen & Meckling) – A contract under which one or more persons engage another to perform some service on their behalf which involves delegating some decisionmaking authority to the agent. Economists definition: concerned with breaches of duty.

vi. Both Agency definitions are correct, and you need both. However, the one note is that Agency need not be contractual: you can have a gratuitous agency (but this is atypical)

vii. Ambulatory Nature of Agency – Agency is an ambulatory concept: we judge the ability of the agent to act at the time he acted (not at the time the agency was granted/agreed upon). Restatement Second § 33.

b. Authority

i. Morris Oil Co. v. Rainbow Oilfield Trucking

1. Facts: Rainbow, a trucking company, wants to use certificate of public convenience held by Dawn and they enter into a contract whereby Dawn is to have complete control over the operations of Rainbow, all revenues will be sent to Dawn. Contract says Rainbow is not an agent and not empowered to incur debts other than in ordinary course of business. Says rainbow is an independent contractor and not an employee. Rainbow isn’t making any money on the contract, so they pull out. Plaintiff sold fuel to Rainbow during the contract time and got stiffed on the bill. This is not an inherent or apparent authority case: there was an undisclosed principal. This is a case where the contract is interpreted to authorize the diesel contract even though the contract says it doesn’t authorize it: When a contract both authorizes and deauthorizes ordinary course of business events, there’s a problem.

2. Rule 1: Restatement Second § 194 – An agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent.

3. Rule 2: Bloodgood v. Woman’s Ben. Ass’n – a principal may limit an agent’s authority and, further, that limitation will be binding upon a third party if the third party has knowledge of the limitation of authority. Where there is no knowledge of the principal-agent relationship, or of limitation on that relationship, the limitation cannot be used as a defense to liability against the principal incurred by the agent. Chevron Oil Co. v. Sutton – the limitations placed upon the authority of an agent must be known to the party dealing with the agent, or the principal is bound as if the limitations weren’t made.

4. Rule 3: If under a hypothetical change to the case, Dawn was not responsible for the indebtedness to Morris for the reasons urged on appeal, we get Ulibarry Landscaping Material, Inc. v. Colony Materials, Inc. – a principal may be held liable for the unauthorized acts of the his agent if the principle ratifies the transaction acquiring knowledge of the material facts concerning the transaction. Dawn never disputed the legitimacy or the amount of the open account. “Dawn seeks to retain the benefits of the agency with Rainbow (the money they were making for services by Rainbow), and yet at the same time disclaims responsibility for the business of the agent by which the benefits were generated.”

ii. Types of Authority

1. Actual Authority – can be express or implied.

a. Express Actual Authority – authority to act in such a way was expressly or actually given.

b. Implied actual authority – there is atypically a zone of implied authority from a grant of express actual authority (tasks necessary to perform the actually and/or expressly authorized tasks).

2. Apparent Authority – words or conduct of PRINCIPAL leading a reasonable third party to believe the agent has authority.

a. Apparent Authority by Power of Position – where the employee is a general agent of the principal with broad customary power (certain jobs typically come with certain responsibilities) and provides a series of transactions involving continuity of service (as opposed to a special agent – one transaction – when you have continuity of service, you have a general agent), there is authority by virtue of the position: treasurer, manager, clerk, etc.

b. Apparent Authority by Estoppel – Principal causes a third party to change position in reliance on principal’s representation (short of a manifestation that agent is authorized).

3. Inherent Authority – a general agent for a disclosed or partially disclosed principal can bind the principal for actions which usually accompany or are incident (foreseeable) to the transactions, even though forbidden, if third party reasonably believe agent is authorized.

a. This is a troubling concept, as it is authority arising from the agency relation that can bind the principal without principal authorizing the agent or communicating with third party. But, it does encourage the principal to monitor their agent.

b. Restatement 3d of Agency abolishes the concept of inherent authority. This is because the same result will follow from (a) apparent authority by power of position combined with (b) liberal interpretation of the terms of the agency.

c. Liability

i. Third Person to Principal

1. Restatement Third §§ 6.01-6.03 – If an agent and a third person enter into a contract, and the

Liability Company – An organization in which the owners, called members, are not individually liable for the company’s losses.

iv. Corporation – probably the LLC definition would work, except call them shareholders.

b. Financial Statements

c. Partnerships

i. Formation

1. Can be formed without any formal document filings. Note: RUPA permits certain partnership documents to optionally be filed (Authority of a Partner document).

ii. Four Element Test – Where there is no express partnership agreement, a relationship will be considered a partnership if four elements are present:

1. An agreement to share profits

2. An agreement to share losses

3. A mutual right of control or management of the business

4. A community interest in the venture.

iii. Other Definitions

1. RUPA – a partnership is an associate of two or more persons to carry on as co-owners of a business for profit.

2. Beckman v. Farmer – court said that the four element test is a good guideposts, but not conclusive.

3. Other formulations have held that once profit sharing is shown, there needs to be no showing of shared losses.

iv. Legal Status of Partnerships: Entity vs. Aggregate

1. An entity has its own legal rights, an aggregate is just the accumulation of the rights of the members.

a. Important things turn on this distinction: whether the association can be sued in its own name or can hold its own property. The general consensus is that a partnership is not an entity, it is an aggregate. The UPA adopts the position that it is an aggregate, except in discrete instances like owning property. RUPA offers entity status.

v. Voting

vi. Capital Structure

1. Default Rule – UPA 18(a) – equal share of the profits, equal share of the losses

a. Even if A contributes 90% of the capital and B does no work, the share is equal.

This means that losses are shared equally as well. If 3 of 4 partners kick in capital, and the partnership loses money, the 4th partner owes the first 3 cash in an amount equal to make them all have lost the same amount. (multiply the total losses times 1 over the number of partners to determine what each owes; partners who have not kicked in their share of capital owe the difference between this fraction of the losses and what they paid. They owe it to everyone else.) There is an exception to this in case law for partnerships that have a capital partner and a services partner.