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

Corporations 2012 – Wachter
–          History of Corporate Law
o    Big change in corporations began in 1900s, when separation began between ownership & control, but corporate law didn’t start to take traction till 1920s
o    Modern form of corporate law comes from 1970s-80s
–          Overarching Themes
o    Why has the corporate form been so successful?
o    Why do ppl invest in common stock w/o promise of return?
§  Because of the idea of the “faithful fiduciary” ® investors rely on reasonable enforcement of the duty of loyalty
§  For the system to work, have to get the directors to be faithful fiduciaries (developing a set of incentives to get there)
o    Interplay btw state corporate law & federal securities law (in both statues & case law)
o    Very few corporate cases go to trial on the merits – most settle or end on a motion to dismiss on the merits
–          Agency = liability of principle to 3rd parties
o   Restatement 3rd of Agency §1.01 Definition:  Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
§  Agent ® person who by mutual assent acts on behalf of another & subject to another’s control
§  Principal ® person for whom the agent acts
–          Sole Proprietorship
o   When there’s no distinction btw the person & the company, no stock, and no statutory form
o   They’re still businesses that may employ a lot of people, so the agency question comes up ® what is the employee’s power/authority to make decisions on behalf of sole proprietorship?
–          Two types of agents
o   General agent ® authorized to conduct a series of transactions involving continuity of service
o   Special agent ® authorized to conduct on a single transaction, or only a series of transactions not involving continuity of service
–          Three types of principals
o   Disclosed principal ® when agent & 3rd party interact, 3rd party knows the agent is acting for a principal & knows the principal’s ID
o   Partially disclosed or unidentified principal ® when agent & 3rd party interact, 3rd party knows the agent is acting for a principal but does NOT know the principal’s ID
o   Undisclosed principal ® when agent & 3rd party interact, 3rd party has no notice agent is acting for a principal
Actual Authority
–          3rd Restatement §2.01 on Actual Authority:
o   An agent acts w/ actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance w/ the principal’s manifestations to the agent, that the principals wishes the agent so to act.
§  Ex: you believe you have actual authority to close windows in room b/c you were instructed to do so
–          3rd Restatement §3.01 – Creation of Actual Authority
o   Actual authority is created by a principal’s manifestations to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent takes action on the principal’s behalf.
–          Express actual authority
o   When the principal actually tells the agent to do something
–          Implied actual authority
o   3rd Restatement §2.02 – Scope of Actual Authority governs implied authority
§  (1) An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act.
§  (2) Agent’s interpretation is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent’s fiduciary duty to the principal.
o   Incidental authority ® a common form of implied actual authority
§  Defined as the authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction, or that usually accompany it
–          Liability ® If A is acting w/ actual authority, then the P is bound and liable to a 3rd person even if the 3rd person didn’t know the A had actual authority.
o   P is liable to 3rd person as a result of act of transaction by the A on the principal’s behalf if A had actual, apparent, or (traditionally) inherent authority to act on P’s behalf.
§  P is also liable if the A was an agent by estoppel, or if the P ratified the act or transaction
o   3rd Restatement’s approach to P’s vicarious liability for an A’s torts
§  An employee is an A whose P “controls or has the right to control the manner and means of the agent’s performance or work”
§  §7.07(1) & (2):
·         An employer is subject to vicarious liability for a tort committed by its employee acting w/in the scope of employment
·         An employee acts w/in the scope of employment when performing work assigned by the employer, or a course of conduct subject to the employer’s control
Apparent Authority
–          Restatement 3rd §2.03 – Definition:  apparent authority is the power held by an agent or other actor to affect a P’s legal relations w/ 3rd parties when a 3rd party reasonably believes that the actor has authority to act on behalf of the principal and that belief is traceable to the P’s manifestations
–          To create apparent authority, it’s not the manifestations of the A that counts, i

the P to object to them is an indication that he consents to the performance of similar acts in the future under similar conditions
o   For the A, this gives rise to actual authority
o   For 3rd persons who knew of the acquiescence, it gives rise to apparent authority
Termination of Authority
–          P can terminate A’s authority at any time, even if it violates contract
–          Exception to rule – applies to an agency (or power) coupled w/ an interest
o   Such a contract will create liability damages for wrongful termination
Liability of Principal & Agent
–          Disclosed principal- when 3rd party has notice A is acting for a P and has notice of P’s ID
o   A’s liability where P is bound:
§  If P is bound by A’s act b/c A had actual, apparent, or inherent authority, or b/c the P ratified the act ® general rule is that the A is NOT bound to the 3rd party (b/c 3rd didn’t expect A to be bound, only the P to be bound)
–          Partially disclosed or unidentified principal – when 3rd party has notice A is acting for a P, but doesn’t know P’s ID
o   A’s liability where P is bound:
§  P & A are both bound to 3rd person (b/c 3rd person couldn’t investigate P’d credit or reliability and probably expected A to be liable as sole or co-promisor or surety)
–          Undisclosed principal- when 3rd party has no notice A is acting for a P
o   A’s liability where P is bound:
§  Generally the A is bound even though P is also bound (3rd person excepted A to be bound b/c he knew nothing about P)
§  Majority rule: if 3rd person obtains judgment against P, A is discharged from liability and vice versa
§  Minority rule: (favored by book) no discharge of liability
–          A’s liability where P is not bound
o   If P isn’t bound b/c A didn’t have actual apparent or inherent authority ® agent is liable to 3rd person based on theory that A made an implied warranty of authority to the 3rd person
§  Liability of contract theory: 3rd person will recover gains that would have derived under the K (expectation damages)
§  Implied warranty theory: 3rd person will recover only losses he suffered by entering into transaction (reliance damages)
§  The Restatements adopt implied warranty theory, but provides expectation measure damages (2nd Rest. §329, 3rd Rest. §6.10)