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

Corporations Outline
Bratton – Fall 2014
1.      Agency Relationships
a.       Corporate Law Building Blocks:
                                                  i.      Tort Law
                                                ii.      Contract Law
                                              iii.      Agency Law
b.      Definitions of Agent:
                                                  i.      Restatement (3): (lawyers)
1.      Agency is a relationship arising when one person (principal) manifests assent to another (agent) that the agent act on the principals behalf and subject to the principals control.
                                                ii.      Jensen & Meckling: (economists)
1.      Agency is a contract under which one or more persons engage another to perform some service on their behalf, which involves delegating some decision-making authority to the agent.
c.       Distinguishing between Agency and Contract:
                                                  i.      Agency does not REQUIRE a contract
1.      BUT
a.       P and A usually have a contract
2.      SO
a.       To determine if there is an agency relationship, ask if A is allowed to represent and bind X
                                                ii.      NOTE:
1.      Termination of agency is at will
a.       Ex)
                                                                                                                          i.      Hire caretaker for 2 year contract
1.      Agency exist
2.      K rights exist
                                                                                                                        ii.      Fire after 3 months
1.      Agency ends
2.      Contract rights remain (he can sue for breach)
d.      Types of Principals and Resulting Liability
                                                  i.      Disclosed
1.      A principal is disclosed if the 3rd person is on notice both that the agent is acting on behalf of a principal and of the principal’s identity.
2.      Resulting Liability to 3rd Parties
a.       Agent NOT bound to Third party
b.      Principal bound to Third Party
                                                ii.      Partially Disclosed
1.      A principal is partially disclosed if the 3rd party knows that the agent is acting on behalf of someone else but is not on notice of the principal’s identity.
2.      Resulting Liability to 3rd Parties
a.       Agent is bound to Third party
b.      Principal is bound to Third Party
                                              iii.      Undisclosed
1.      A principal is undisclosed if the 3rd person has no notice that the agent is acting on behalf of a principal rather than for himself alone.
2.      Resulting Liability to 3rd Parties
a.       Agent bound to Third Party
b.      Principal bound to Third Party (if transaction w/ agent was usual and necessary)
e.       Types of Authority
                                                  i.      Actual Authority:
1.      An agent has actual authority to transact with third persons in a given manner on a principals behalf if the principals words or conduct would lead a reasonable person in the agent’s position to believe that the principal wishes the agent to so act.
2.      Subsets:
a.       Express
                                                                                                                          i.      Usually comes about by an explicit grant of authority to the agent to act on behalf of the corporation (i.e through by-laws or a resolution adopted by the board of directors).
b.      Implied
                                                                                                                          i.      Where an act is implicitly necessary to carry out an authorized transaction or board has implicitly granted actual authority to agent to act in certain way.
3.      Power to Bind
a.       If agent has actual authority to engage, the principal is bound by agent.
                                                ii.      Apparent Authority:
1.      An agent has apparent authority to act in a given way on a principals behalf in relation to a third person if manifestation of the principal to the third person would lead a reasonable person in the third person’s position to believe that the principal had authorized the agent to so act.
2.      Subsets:
a.       Power of Position
                                                                                                                          i.      The agent is a general agent with broad customary powers
1.      Ex)  Treasurer, manager
                                                                                                                        ii.      The “position” amounts to a communication from the principal to the third party 
                                                                                                                      iii.      President:
1.      Has authority to bind corporation to ordinary business transactions (hire or fire officer-level people/ enter into ordinary contracts) but has no authority to do extraordinary actions (lifetime employment contracts/real estate leases/sell all of corporation’s assets/issue and distribute stock/settle litigation).
                                                                                                                      iv.      Chairman of the Board:
1.      Can sometimes also be CEO or other times be honorary position – no guarantee on any authority to bind.
                                                                                                                        v.      Vice president and treasurer:
1.       No authority.
                                                                                                                      vi.      Secretary:
1.      Has inherent authority to certify records of the corporation, including resolutions, with binding results on corp.
b.      Agency by Estoppel (rest 3d §2.05)
                                                                                                                          i.      A principal who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable to a 3rd party may become liable after the 3rd party is induced to make a detrimental change in his position if:
1.      Principal intentionally or carelessly caused 3rd party belief, OR
2.      Having notice of such belief and that it might induce others to change their positions, the principal didn’t take reasonable steps to notify.
3.      Power to Bind
a.       If an agent has apparent authority and acts within the scope of that authority, the principal is bound
                                              iii.      Inherent Authority:
1.      Disclosed or Partially disclosed Principle: (R2d 161)
a.       A principle is liable for an act done on his behalf by a General Agent  (series of transactions involving continuity of service) even if the principal had forbidden the agent to act IF:
                                                                                                                          i.      The act usually accompanies or is incidental to transactions that the agent is authorized to conduct, AND
                                                                                                                        ii.      The third person reasonably believes the agent is authorized to do the act
2.      Undisclosed Principal: (R2d 194)
a.       General Agent authorized to conduct transactions subjects principal to liability for acts done on principal’s account “if usual and necessary in such transactions” even though forbidden
                                                                                                                          i.      Restatement (Third) rejects the concept
                                              iv.      Ratification
1.      The principal will be bound to the 3rd party if the agent purported to act on the principal’s behalf and the principal, with knowledge of the material facts, either:
a.       Express
                                                                                                                          i.      Affirms the agent’s conduct by manifesting an intention to treat the agent’s past conduct as authorized.
b.      Implied
                                                                                                                          i.      Engages in conduct that is justifiable only if he has such an intention.
2.      In most cases where ratification is applied the corporation has received benefits and kept them or 3rd party relied to his detriment on his assumption of the existence of the agent’s authority
                                                                                                                          i.      Ex post
3.      Acquiescence
a.       A series of ratifications creates prospective authority
                                                                                                                          i.      Ex ante

te, no vested right to be brought into the new deal.
2.      Selection of the Form of Business Enterprise
a.       Options
                                                  i.      Sole Proprietorship
                                                ii.      (General) Partnership (UPA §6(1))
                                              iii.      Limited Partnership (RULPA §101(7)
                                              iv.      Limited Liability Partnership
                                                v.      Limited Liability Company
                                              vi.      Corporation
b.      Considerations
                                                  i.      Limited liability
                                                ii.      Management and control
                                              iii.      Continuity of operations
                                              iv.      Transferability
                                                v.      Organization and maintenance costs
                                              vi.      Money concerns: capital structure, capital raising, tax consequence
c.       Partnerships:
                                                  i.      Definition:  An association of co-owners for profit
1.      To determine if there’s a partnership, UPA §7 says sharing of profits is prima facie evidence that someone is a partner, but no such inference is drawn if payments were received as: debt, wages, annuity, interest on loan, consideration for good will
2.      To determine whether someone is a partner, look at whether he has (Martin v. Peyton):
a.       A financial stake in the enterprise including profit sharing AND
b.      An affirmative right to participate in control.
3.      Each partner is liable for the debts of the partnership.
a.       All partnerships are general unless the particular statutory requirements for a limited partnership are complied with, and it can be created merely by operation of law without filling out any paperwork. 
                                                ii.      Cases
                                              iii.      Martin v. Peyton: NY, 1927.
1.      A brokerage firm is about to go under and so its lender friends agree to loan securities.
a.       The issue is whether they are liable due to partnership status.
2.      Court looked into whether creditor (D) was a partner because a contract gave him considerable control and profit sharing with the underlying partnership. The agreement consisted mainly of negative covenants:
a.       Trusteeship
b.      Life insurance policy
c.       Assignment of interest in firm
d.      Information reporting
e.       Periodic returns subject to floor and cap
f.       Option to buy 50% of business at a set price
g.      Prohibition on profit distributions
h.      Veto on speculative business
i.        Envelope with resignations
3.      Held:
a.       Court holds that despite some agreements, no partnership was formed.
                                                                                                                          i.      The control existed mainly through the use of negative covenants designed to protect the creditor’s loan – so there was no affirmative control being asserted by D and he was thus not a partner.
4.      Why does Andrews not see a partnership?
a.       Because the closing is full of negative covenants, it is all prohibitions, not affirmative controls over the business
                                                                                                                          i.      Had they taken affirmative control, this would have been a partnership