BRATTON CORPORATIONS FALL 2016
1. Agency Relationships
1.1. Authority and Vicarious Liability [pp. 1-24] (including the Jensen and Meckling paragraph on p. 24).
Governs the relationship between agents and principals; between agents and those and those the agent deals with on the principal’s behalf; and between principals and those the agent deals or purports to deal with.
Agency is a 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
Jensen & Meckling:
Agency is a contract under which one or more persons (the principal) engage another (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. Principal and agent as utility-maximizers
Principal incurs monitoring expenses to limit the aberrant activities of the agent
Agent will incur bonding costs to guarantee he will not take certain actions which would harm the principal or to ensure that the principal will be compensated if he does take such action
It is impossible for the principal or the agent to ensure at zero cost that the agent will make optimal decisions from the principal’s viewpoint
Residual loss = dollar value of reduction in welfare experienced by the principal due to divergence between agent’s decisions and those decisions that would maximize the welfare of the principal
Agency costs = monitoring expenses incurred by the principal + bonding expenses incurred by the agent + residual loss
= a person who by mutual assent acts on behalf of another and subject to the other’s control
Principal: Person for whom agent acts: 3 Categories of Principals:
= Third person is on notice both that the agent is acting on behalf of a principal and of the principal’s identity
Partially Disclosed AKA Unidentified = Third person is on notice that the agent is acting on behalf of a principal, but is not on notice of the principal’s identity
= Third person has no notice that the agent is acting on behalf of a principal rather than on his own behalf
Whether an agency relationship exists is a legal conclusion that is not based on the intent of the parties. Rather, such fiduciary relationship that arises when:
“One person (principal) manifests assent to another person (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 to the act. ” R3d §1.01
In all probability there is a contract between the agent and the principal; however, where the agency relationship is gratuitous there is no consideration and thus no contract
Liability of principal
Liability of principal for torts:
Committed by agent is respondeat superior: liable if agent was acting w/in scope of employment (i.e. when performing work assigned by the employer or engaging in a course of conduct that is subject to the principal’s control)
Liability of principal for Contracts:
Entered into by agent depends on (1) whether the agent acted, or purported to act, on the principal’s behalf and (2) had actual, apparent, or inherent authority to do so, OR the principal ratified the agent’s act
(1) Actual authority: If principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal wishes the agent to so act. If so, principal is bound.
Actual authority binds the principal even if the principal was undisclosed, or even if the third party did not know the agent had actual authority
Actual authority is contractual — its scope is determined through contractual interpretation principles. Interpretation of an agency contract is ambulator
—focuses on the reasonability of the agent’s interpretation of his authority at the time he acts
The agent’s authority may therefore by increased, decreased, become dormant or destroyed not only by further manifestations by the principal, but also by the happening of events dependent upon what the agent knows or should know as to the principal’s purposes
R3d 2.02 Comment c: interpretations have a temporal focus that moves through time as the agent decides how to act
(1)(a) Express Authority: agent is given detailed explanation of what he is authorized to do.
(1)(b) Implied Authority: there are powers implied or inferred from the instructions used, from the customs, or from the relation of the parties
(1)(c) Incidental Authority: implied actual authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction or that usually accompany a transaction of that type (2) Apparent authority: If manifestations of the principal to the third person (or manifestations by the agent to a third person that the principal authorized the agent to make) would lead a reasonable person in the third person’s position to believe that the principal had authorized the agent to so act. If agent has apparent authority and acts w/in scope of that authority, principal is bound.
(2) Apparent authority: If manifestations of the principal to the third person (or manifestations by the agent to a third person that the principal authorized the agent to make) would lead a reasonable person in the third person’s position to believe that the principal had authorized the agent to so act.
If agent has apparent authority and acts w/in scope of that authority, principal is bound.
Subset of apparent authority = power of position (ex: treasurer; generally recognized duties)- where agent is a general agent (series of transactions involving continuity of service) w/ broad customary power®position amounts to communication from principal to third party
(3) Inherent authority: 2 versions
Of general agent, if principal is disclosed or partially disclosed: principal is bound even if the principal had forbidden the agent to so act if (1) the act usually accompanies or is incidental to transactions that the agent is authorized to conduct, AND (2) the third person reasonably believes the agent is authorized to do the act R2d § 161
Of general agent, if principal is undisclosed: principal is bound even if the principal had forbidden the agent to so act if (1) the act is usual or necessary in conducting transacting the agent is so authorized to conduct. R2d § 194
(a) it is or should be foreseeable to the principal that, when he appoints an agent, when the agent is acting in good faith for the principal’s benefit, is likely to deviate occasionally from instructions.
(b) it would be unfair for principal to have the benefit of agents but not the responsibility to some extent for their excesses and faliures®principal should bear the costs, not third parties
If third partes bore the costs, they would not conduct transactions with agents without explicit actual authority®increase transaction costs
Restatment (third) rejects the concept
Ground: the same results will follow from (a) apparent authority from power of position combined with (b) liberal interpretation of the terms of the agency
BUT, does say that agent has authority to act in a way that is knowingly at variance with principals original instructions if agent belives that: (1) changed circumstances; (2) impracticable to communicate w/ principal before action needs to be taken; and (3) were the principal to reconsider the matter, he’d give different instructions
(4) Agency by estoppel: A person who has not made a manifest
that were necessary in executing the principal’s affairs
1.2. Fiduciary Duty [pp. 114-124] Stat. 24-28.
Rst 2d §387 – Agent has duty to act solely for the benefit of the principal
Rst 2d §389 – Agent cannot act as an adverse party (even if principal is not harmed)
Note: for both above, “unless otherwise agreed”—procedure by which P and A can shift from fiduciary relationship to more arm’s length posture
Rst 2d § 390: agent who wants to self-deal must take steps to put Principal back in an independent position, so that P can self-protect
Agent must disclose and be fair—“all facts affecting the desirability of the transaction”
RUPA 404(e) – No violation merely b/c partner’s conduct furthers partner’s own interest
Meinhard v. Salmon: Usurption of Partnership Opportunity
Facts: Gerry leased to S a hotel in NYC for 20 years. S wanted to change hotel to shops, so entered into partnership w/ M. S renewed lease without telling M. Lease was for just S; cut out M. Thus, S didn’t tell the S-M partnership about it. M sues for breach of fiduciary duty.
Holding: “Copartners owe to one another, while the enterprise continues, the duty of the finest loyalty”
Holding: Opportunity was incident to the joint enterprise, so new lease is connected to p’ship
Holding: M excluded his copartner from any chance to compete. Had a duty to disclose
Andrews: were this a general partnership, the majority's decision would be correct, but here, the parties joint venture had a 'very limited oject and was to end at a limited time' (at end of lease)
Note: Under Rst 2d 387 and 389, if the new lease was held to not be connected to agency, then there is no duty for the agent (S) to disclose to principal (the partnership)
What S should have said: “I am negotiating w/ Gerry for a lease to build a new skyscraper. You are free to consult your own interests” à but risks M calling Gerry and stealing the deal
WB thinks P got a free ride here. Got 1 share shy of 50% of skyscraper project
Latta v. Kilbourn – one partner cannot directly or indirectly use partnership assets for his own benefit
A partner can vindicate her rights against other partners by a suit for an accounting
UPA § 22: right to an accounting when a partner is wrongfully excluded from the business or when the right to an accounting is granted under the partnership agreement
UPA § 13 interpreted to block a partner from suing partnership for damages. So a partner can only sue for an accounting or dissolution (RUPA § 305 permits money damages suits
2. Selection of the Form of Business Enterprise–Corporations and Alternative Forms of Business Organization
2.1. Overview [pp. 73, 159-160, 191-193] 5 characteristics of a corporations: (1) limited liability; (2) free transferability of ownership interests; (3) perpetual existence; (4) cerntralized management; (5) entity status—can exercise powers & has rights
2.2. Financial Statements [pp. 33-43.] Fundamental equation: assets = liabilities + owners’ equity