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Business Associations/Corporations
University of Pennsylvania School of Law
Wachter, Michael L.

Corporations
Sunday, November 15, 2009
 
Why Do We Trust Corporations
1.       The market works: management is properly controlled by the market
2.       The state laws on directors’ fiduciary duties are stringent and effective
3.       The stock market is fair because of federal securities regulation
 
 
1.AGENCY (using Rst. 3d of Agency)
1.     INTRO
1.       Agency = fiduciary relationship that arises when a principal manifests assent to an agent that the agent shall act on principal’s behalf and subject to principal’s control, and agent manifests assent/consents so to act (§ 1.01)
 
2.       General agent has continuity of service, special agent does not (limited # of transactions)
 
B.    ACTUAL AUTHORITY
1.       Definition: Agent has actual authority when (§ 2.01):
a.      The action being undertaken has legal consequences; and
b.      The agent reasonably believes, in accord w/ principal’s manifestations to agent; that
c.       The principal wishes the agent so to act
 
B.      Creation of Actual Authority: created by P’s manifestation to A that, as reasonably understood by agent, P has expressed assent that A take action on P’s behalf (§ 3.01)
 
3.       Express Authority: P has explicitly authorized agent to take the action
 
4.       Implied Authority (§ 2.02): 
a.      Agent has actual authority to take action designated or implied in P’s manifestations to A and acts necessary or incidental to achieving P’s objectives, as A reasonably understands P’s manifestations and objectives when determining how to act
b.      A’s interpretation is reasonable if it reflects any meaning known by A to be ascribed to the P. Absent this, reasonable if a reasonable person in A’s position would interpret manifestations thusly in light of the context (including A’s fiduciary duty to P)
c.       Incidental authority: A has authority to do incidental acts that are reasonably necessary to accomplish (or usually accompany) an actually authorized transaction
d.      (Comment b) Agent may act in a way knowingly at variance with P’s original instructions if A believes:
                                                                                   i.         Circumstances have changed since original instructions
                                                                                 ii.         If P reconsidered circumstances different instructions would have to be given
                                                                               iii.         It’s impractical to get clarification from P before action needs to be taken
 
3.     OTHER TYPES OF AUTHORITY
a.      Apparent Authority: power held by an actor to affect a principal’s legal relations with 3d parties when 3d party reasonably believes that the actor has authority to act on behalf of P and such belief is traceable to P’s manifestations (§ 2.03)
 
2.       Agency by Estoppel (§ 2.05): If P has not made a manifestation that actor has authority as an agent, and P is not otherwise liable as a party to a transaction purportedly done by actor on behalf of P, P is nonetheless subject to liability to 3d party if:
a.      3d party is justifiably is induced to make a detrimental change in position, and
b.      3d party believes A to be acting on behalf of P, and
c.       P intentionally or carelessly caused such belief, or, having notice of such belief and that it might induce others to change their positions, did not take reasonable steps to notify others of the facts
 
3.       Inherent Authority (Rst. 2d of Agency § 8A)
a.      The power of an agent which is derived solely from the agency relation and exists for the protection of 3d parties harmed by or dealing with a servant or other agent
b.      Justification: Foreseeable that A acting in good faith will deviate occasionally from instructions; better that P bears the loss from foreseeable deviation than 3d party; also, P is in better position to monitor A and select a good agent
c.       3d Rst. does away with inherent authority, incorporating it into apparent authority (like respondeat superior)
 
4.       Ratification of Authority
a.      Occurs when P affirms the act done by another, whereby the act is given effect as if done by an agent with actual authority (§ 4.01)
b.      A person ratifies an act by:
                                                                                   i.         Manifesting assent that the act shall affect the person’s legal relations, or
                                                                                 ii.         Conduct that justifies a reasonable assumption that the person so assents (this includes retaining the benefits or proceeds of business relations with agent)
c.       Ratification doesn’t occur unless:
                                                                                   i.         The act is ratifiable under § 4.03
                                                                                 ii.         The person ratifying has capacity under § 4.04
                                                                               iii.         Ratification is timely under § 4.05, and
                                                                                iv.         Ratification encompasses the act in its entirety under § 4.07
 
4.     LIABILITY
a.      Disclosed Principal: P is disclosed when 3d party has notice A is acting for principal and has notice of the principal’s identity
§ P is liable to 3rd parties whenever A is acting with actual, apparent, or inherent authority, when an actor is P’s agent by estoppel, or when P ratifies the act or transaction of A (agent is not liable when P is disclosed) (§ 6.01)
 
         Partially disclosed or unidentified when 3d party has notice that the agent is acting for a P but doesn’t have notice of P’s identity
§When A is acting with actual or apparent authority, Principal and agent are bound to 3d party (§ 6.02)
§A will be a party to the contract unless A and 3d party agree otherwise
 
         Undisclosed Principal: 3d party has no notice A is acting for principal
§When A acting with actual authority makes a contract on behalf of undisclosed P, Principal and agent are bound (§ 6.03)
§Secret instructions or limitations on authority of agent must be known to party dealing with the agent
 
         Agent is Solely Liable to 3d Party when A lacks any authority and P isn’t bound (§ 6.10)
         Agent is Liable to Principle when A acts outside scope of authority and P is bound and sustains losses (§ 8.09)
         Principle must indemnify Agent for payments A makes under actual authority or other expenses of A that arise fairly out of the agency relationship (§ 8.14)
 
E.     AGENT’S DUTY OF LOYALTY
1.       An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship (§ 8.01).
2.       Agent can’t use his position as an agent to acquire a material benefit from 3d party (§ 8.02)
§ Principal risks being bound by agent’s actions, so he should reap the benefits
3.       Agent can’t double deal, act for adverse party (§ 8.03), compete (§ 8.04), or use P’s property/confidential info for his own purposes or those of 3d party (§ 8.05)
4.       Principal can modify these duties per § 8.06
 
2.PARTNERSHIPS
A.    GENERALLY
1.       Partnership Formation (UPA = aggregate theory; RUPA = entity theory)
§ UPA § 6: a partnership is an association of 2 or more persons to carry on as co-owners a business for profit
                                                                                   i.            § 7(3): sharing of gross returns doesn’t necessarily establish partnership, even if joint property owners
                                                                                 ii.            § 7(4): receipt by person of share of profits is prima facie evidence he’s a partner unless payments are (a) debt in installments; (b) wages or rent; (c) annuity to partner’s widow; (d) interest on loan; (e) consideration for sale of business’ goodwill or other property in installments or otherwise
§ RUPA § 202(a): the association of 2 or more persons to carry on as co-owners a business for profit; whether or not the persons intend to form a partnership
                                                                                   i.            § 201(a): a partnership is an entity distinct from its partners
                                                                                 ii.            § 101(6): pa

Without demand, any info concerning pship’s business & affairs reasonably required for proper exercise of partner’s rights & duties under pship agreement or RUPA; and
·         On demand, any other info concerning pship’s business affairs
·         EXCEPT to extent the demand or info demanded is unreasonable or otherwise improper under the circumstances
 
         Partnership Agreements (Distribution, Remuneration, & Capital Contributions)
               Under UPA § 18 (subject to agreement btw the partners)
                     18(a): each partner shall be repaid his contributions and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; AND must contribute towards the losses sustained by the pship according to his share in the profits
                     18(b): pship must indemnify partners for payments made and personal liabilities reasonably incurred in ordinary and proper conduct of business or for preservation of pship business or property
                     18(c): partners who make extra payment or advance to pship beyond agreed pship capital is to be paid interest from date of payment/advance
                     18(d): this interest is only to be paid from day when repayment should be made
                     18(f): no partner is entitled to remuneration for acting in pship business, except that a surviving partner is entitled to reasonable comp for his service in winding up pship affairs
               Under RUPA § 401 (subject to pship agreement)
                     401(a): each partner is deemed to have an account that is
·         Credited with an amount equal to the money partner contributes PLUS the value of any other property (NET of the amount of any liabilities) the partner contributes to the pship; AND
·         Charged with an amount equal to the money distributed by the pship to the partner PLUS the value of any other property (NET of the amount of any liabilities) distributed by the pship to the partner PLUS the partner’s share of the pship losses
                     401(b): each partner is entitled to equal share of pship profits and is chargeable w/ a share of the pship losses in proportion to partner’s share of the profits
                     401(c),(d): pship shall reimburse and indemnify a partner…if some payment becomes an obligation to the pship, then it’s a loan to the pship to accrue interests
                     401(h): a partner is NOT entitled to remuneration for services…except for services rendered in winding up the pship
               Indemnification vs. Contribution: indemnification means pship bails you out if you get sued; contribution means you have to pay if pship takes on new debts
 
         Authority of a Partner
               Apparent authority is often the key
               UPA § 9: every partner is an agent of the pship for purpose of pship business, and can bind the pship in the usual way that pship business binds the pship; UNLESS he has no such authority AND the person he’s dealing with knows it (actual knowledge)
               RUPA § 301: partner’s actions bind pship provided he is apparently carrying on pship business or business of the kind carried on by pship UNLESS person w/ whom partner was dealing knew or had received notice that the partner lacked authority
               RUPA is more explicit than UPA as far as binding a pship; protects partners