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Business Associations/Corporations
University of Pennsylvania School of Law
Fisch, Jill E.

Corporations Outline –Jill Fisch – Fall Semester 2012
I.             Introduction
a.     Agency deals with:
(i)            Border between the firm and the world
(ii)           Firm an its agents and 3rd parties
(iii)          Fiduciary duties
b.    Securities
(i)            Capital markets
(ii)           Disclosure requirements: US do not impose standards of fairness
c.     Corporate
(i)            Internal affairs
(ii)           Decision making
(iii)          Transactional fairness (limited context)
II.          Theories of the firm
a.     Basic information
(i)            What is a firm?
Business, NGO´s non-business type and entity, identity and objective dif. From that firm.
(ii)           Who determines the objectives?
Shareholder groups and other groups
(iii)          Why profit maximization?
·         Capitalizing earnings
·         Investor reaction to changes
·         Stock price
·         How you measure the firm in the long time
·         Objective measure: stock $$
(iv)          Why we use the firm?
Efficiency, costs and transaction costs, firm reduces them
b.    Types of firm
(i)             Sole proprietorship: single own firm
(ii)            Partnership: 2 or more co-owners / business for profit
(iii)           Corporation: state law, not only by contract
(iv)           Modern firms: LLC, LLP´s, Business, Trusts
III.        Agency Relationship
a.     Restatement 3rd Agency 1.01/ 2nd
b.    Key elements:
(i)            Consent (ppal v. agent)
(ii)           Benefit
(iii)          Control
·         Lacrosse game, altercation, player injured
·         Can the player sue using agency? How is it useful to demand Ashland:$$
·         Legal rule: claim under doctrine of respondeat superior it must be demonstrated that a ppal-agent relationship existed and a tortious conduct was committed by agent in the scope of his agency.
It is not necessary to demonstrate recklessness, just the relationship scope, just prove consent, and control (Key elements)
·         Consent: in the agency, agreement, voluntarily, doesn’t mean you have to name it agency;
·         Benefit: ppal has to benefit of the agents perform objective as serving as an agent.
·         Control: Ashland didn´t show any kind of control. School´s duty is to supervise
c.     Additional points
(i)            Characterization doesn’t matter
(ii)           Agency must exist even when parties have not formally agreed to one.
(iii)          Consent requirement of agency law doesn’t mean agreement to an agency relationship.
·         Creditor – debtor is not typically an agency.
·         When is a creditor liable for the obligations of the debtor?
1.    Not normally, it is not an agency relation
2.    When it become one? Key elements…consent, benefit and control.
·         In this case, power of veto and the interference on the ongoing business can may think in an agency.
·         Sometimes they were both seen as one entity to third parties, they looked as a firm, not as an independent player.
·         Aggressive financing, that seemed more like equity than debt.
d.    Liability of the principal in an agency
(i)            Contract liability: bound to the agents contract “on behalf”.
(ii)           Tort liability: respondeat superior. Most ppal don’t authorize agent to act tort.
(iii)          Limiting principles: liability of ppal protects 3rd parties, increases the costs of agency relationships
But, for contract liability it is necessary:
(i)            Actual authority: expressed or implied
(ii)           Apparent authority
(iii)          Inherent or implicit authority
(iv)          Agency by Estoppel (exclusion):legally binding agency relationship that may arise where, in fact, no formal agency agreement is in effect. A principal may give an appearance of agency relationship by, for example, furnishing his or her firm's call cards or other stationery to the agent. In such cases, the existence of an agency may be presumed, and the principal may be bound by the acts of the agent performed on the principal's behalf. Also called presumption of agency. See also partnership by estoppel.
·         Purchase of land
·         Agent buys more and spend more (overall expenditure), she spent more and disobeyed the amount.
·         Is there an alternative basis for holding while liable for the purchase? Yes because of the ratification he made.
·         Ratification occurs in the moment in which the ppal accepts the behavior of the agent; ratification can supply authority.
·         Ratification can be made through conduct
e.    What is the basis for apparent authority?
(i)            Statement made by the ppal
(ii)           Action or words by the ppal, the agent can´t create apparent authority
(iii)          Apparent authority is binding
·         Replacement of car
·         Needs to extend coverage calls the agent, car crash
·         Insurance claim that the person wasn’t covered
·         Why can’t we use apparent authority? Isaac wasn’t dealing with the insurance
·         Inherent authority: is not conferred on agents by principal but represents consequences imposed on ppal by the law. “Power to bind the ppal”
CASE: Hoddeson v. Koos (AUTHORITY)
·         Furniture
·         Was there evidence supporting a finding that salesman was a store agent? NO
·         Koos was in the position to inquire if the person was an employee
·         Here there was no evidence of authority and not even elements of agency
f.      Agency costs
What kind of costs?
·         Monitoring expenditures
·         Bond expenditures
·         Residual costs: agent objectives are not perfectly aligned sometimes – gap between the parties of the agency.
g.    Liability in Tort/ Respondeat Superior
·         Imposes liability based on the fact of the agency relationship.
·         Requirements?
(i)            Master/servant relationship
(ii)           Scope of employment
(iii)          Mere agency is not enough
CASE: Miller v. Mc Donalds (LIABILITY)
·         Franchises are typically operated under a license agreement
·         Are franchises the equivalent of employees for purposes of agency law?
CASE: Clover v. Snowbird (LIABILITY)
·         Skiing case –employee
·         Argument in favor of agency: employer premises and on his way to work
h.    Fiduciary duties
·         Duty of care: reasonable person will act (NEGLIGENCE)
·         Duty of loyalty: ppal first (act in the best interest of the ppal)
IV.          Uniform Partnership Act (1914)
a.     Definition:
·         2 or more persons to carry on a business for profit
·         Any association under other statute of state is not a partnership under act if is not partnership for purposes of the statute
b.    Rules for Partnership
·         Persons that are not partners to each other are not partners to 3rd parties
·         Joint tenancy is not partnership
·         Share of joint returns is not

n liability are forms that can be avoided or modified in the agreement or contract
·         LLP statutes usually require insurances such as mal practice
e.    Entity v. Pass- through tax treatment
·         Corporation = corporate level tax
·         Sometimes taxes can pass through to the partner
·         Business sometimes are taxed twice: in the company and in the shareholder
·         Partnership record the profit but doesn´t pay income tax, it passes through to the partners. It is taxed at an individual level
·         After 1997 with check the box Businesses can choose if they are pass through or not, corp. that trade publicly are subject to corporate tax treatment.
·         Rules may vary from state to state. In Delaware partners and other persons duties may be expander, restricted or eliminated by provisions in the partnership agreement.
CASE: Pappas v. Tzolis (PARTNERSHIP)
·         Similar to Meinhard, it expands its analysis
·         Defendants argument: any member can engage in some other business without telling its partner (right to compete)
·         Nature of the claim: breach of Fiduciary Duty, breach of loyalty and conflict of interest.
·         Court says that being in a partnership and competing is not dis-loyal  except if its previously agreed by the parties.
·         The court does a contractual analysis.
f.      Corporate characteristics:
·         Limited liability
·         Transferrable interest
·         Continuity of existence
·         Centralized management
·         Costs and formalities of formation and operation.
g.    Benefits of a corporation
·         Eliminates messy problems/limited liability
·         Investors entry and exit
·         Simplifies issues of authority
·         Dominance of statutory default (rather than individual tailoring by contract)
h.    Variation among corporations
·         Closely held
·         Controlled corporations
·         Publicly traded with disperse ownership
CASE: Citizens United (CORPORATIONS)
·         Corporation is a distinct legal entity characterized by special rules
·         Case raises the question of whether Congress can restrict political speech
i.      Formation of the corporation
·         Charter, articles of incorporation: charter is public and filed to the secretary of the state, it should include name, capital structure, classes and number of shares
·         Charter doesn’t contain the by-laws
j.      Internal affairs doctrine
·         State of incorporation dictates which corporate law rules apply under the doctrine
·         State charges annual franchise taxes based on the income, assets etc
·         Firms can reincorporate in other states.
·         Delaware dominance is based in:
(a)   Better law
(b)  More predictability
(c)   Specialized and superior courts
(d)  Network alternatives
(e)  Interest group behavior by corporate advisers