CORPORATIONS
PROFESSOR JILL FISCH
FALL 2015
Introduction (mostly from Holten)
Law of Biz Enterprises – concerned w/ voluntary economic relationship
Provides standard legal forms for people to choose from to solve problems
Can be customized, but it’s limited by laws of equity – can’t just do whatever
Two THEMES in enterprise law:
Policy: The fundamental objective of enterprise law is to increase social welfare.
The goal of enterprise law is to maximize long-term SH wealth.
These two themes / goals can sometimes conflict.
Economic efficiency: Once SH/investor welfare is identified as the principal objective of enterprise law, it follows that econ efficiency is the logical criterion for evaluating enterprise law.
3 ways enterprise law can enhance efficiency of enterprises:
By providing std platforms for biz entities and agency Ks and C protections.
Adds value by permitting business actors to modify 3P property rights when K alone cannot
Provides rules and standards – “fiduciary duties” intended to prevent or remedy self-interested opportunism by parties within enterprises.
Corp law deals with allocation of rights and power within the corporation. Focuses on:
The internal affairs of the corporation
Decision making procedures
Transactional fairness (but in limited contexts)
Corp Law is based on separation of ownership & Control – key attribute to success
Separation is important b/c 1) provides check on mgmt. 2) optimal incentives are imperfect in public companies– this misalignment comes in the form of agency costs
Profit Maxing is a decent objective to mitigate these costs, easy to measure too
Why do we use centralized mgmt.?
B/c it’s specialized, SH can’t do it, allows SH to diversify and hedge risk; We like SH to be able to aggregate capital and increase scale
Coase is all about reducing txn costs like going to market cost; Here we’re reducing txn costs by consolidating but increasing agency costs
In house counsel vs. Outside – cost effective, but lack of mkt discipline
Secs law regulates cap markets used to obtain funding through disclosure requirements (as opposed to ensuring fair dealing. A disclosure-based system is different from corporate law.)
Attributes of the firm: according to Jensen & Meckling, the firm is a “black box” operated to maximize profits/value. Implicates three separate concepts of the firm:
Firm is a separate entity from its constituents: A firm is an entity that is different from the people related to it and the objectives of those constituencies.
Goal of firm is to maximize long-term value: Most believe the corp should be run to maximize the long-term value of the company.
Operation:
Firm achieves its goal by reducing costs. Several kinds of costs:
Production costs: Enjoy economies of scale and allow business to grow.
Txn costs (Coase): Arise whenever a firm transacts with people outside the firm. Can be eliminated by bringing the function within the firm
But agency costs arise (must balance): (i.e., if one agent doesn’t pull weight, other members of firm pay the price and can be liable)
Traditional types of firms
Sole proprietorship is a firm with a single owner.
Partnership is an association of 2+ persons to carry on as co-owners a business for profit.
Corporation is a special business form affirmatively created by state law; complex but stable
Modern firms have additional options
LLCs, LLPs, Business Trusts, etc.
Key components distinguishing one form from another are:
Nature of ownership
Formality of structure (much more formal for corps than partnerships)
Consideration of rules:
Is a penalty default rule appropriate? Forcing people to contract around it.
Is it best to consider what most parties would have agreed to ex ante? What possible contingencies should be planned for?
Effect of rule on the parties’ incentives? Effect on agency costs? Align interests?
Jensen & Meckling: Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
Agency costs: Generally impossible for P/A at zero cost to ensure A will make optimal decisions from P’s viewpoint. Most of the time P/A will incur positive monitoring and bonding costs (non-pecuniary and pecuniary), and there will be some divergence between A’s decisions and those which would maximize P’s welfare. $ equivalent of the reduction in welfare experienced by P as a result of this divergence is also a cost of the agency relationship, and we refer to this latter cost as the “residual loss.” Agency costs as the sum of:
Monitoring expenditures by P, Bonding expenditures by A, and Residual Loss
Firm as a legal fiction: Most orgs are simply legal fictions which serve as a nexus for a set of contracting relationships among indivs. Includes firms, non-profits, mutual organizations, some private clubs, and even governmental bodies
Private corporation as a legal fiction: The private corp or firm is simply one form of legal fiction which serves as a nexus for contracting relationships and which is also characterized by the existence of divisible residual claims on the assets and cash flows of the org, which can generally be sold without permission of other contracting indivs.
Agency Law – Introduction
One person extends the range of her activity by engaging another to act on her behalf
The agent / 3P relationship must be governed by legal fiat, not just contracts
Tough w/ big corps b/c principal is diverse SH and agent is management
JF – SH are not the principal, the corp is the principal – the SH are the owners
3 Problems:
How are agency relationships formed/dissolved?
What is the principal’s responsibility for the agent’s (un)authorized Ks/Torts?
What are the duties of the agent to the principal?
1.2.1 Formation
3RSA 1.01 – Agency is the fiduciary relationship that arises when one person manifests assent to another person 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
Can be special agents – 1 task or general agents – series of txns
Existence of principal can be disclosed, undisclosed or partially disclosed
Can be 1) Employee (principal control) or 2) Ind. Contractor (agent discretion)
Key elements of an agency relationship are consent, benefit, and control. 3RSA § 1.01; Kynast.
Consent: Don’t need specific consent to an agency, Cargill, but must be some sort of voluntary agmt w/ attributes of an agency involving the grant of authority to another to bind her in certain respects, w/ A accepting. Can’t be forced. Parties must have full info and know what they’re agreeing to. No agency K required, just A to objectively understand from P’s speech/actions that she has been authorized to act on his behalf.
Benefit: P has to benefit from A’s actions. A cannot be acting purely to benefit self.
Control: P must exhibit a certain degree of control over A’s actions. Kynast; Cargill. The degree of control necessary is fact-specific, although courts have examined various factors in determining whether sufficient control exists. Hanson v. Kynast.
Factors include: 1) Indiv is performing in the course of the P's business or
in some ancillary capacity; 2) compensation from P; 3) Did P supply tools / place of work; 4) Does A offer his service to the public or to one at a
time; 5) length of the employment; and 6) right to terminate the employee at will.
Termination
Either can terminate at any time – Hard/Fast Rule (think Ks no SP)
If K has time, decision of P to revoke or A to renounce gives claim to damages for breach of K
Parties’ Conception Does Not Control
Agency relationship may be implied even if not explicitly (think bank assumes too much control)
See Cargill.
Circ ev / course of dealing: May prove agency by circ ev that shows a course of dealing between the two parties, considering the totality of the circs. (Cargill).
Policy question: Is it is fair to hold the principal liable for the agent’s actions?
Spectrum: Any K may require the parties to do various things. Spectrum of control over the other party’s actions though – If ongoing, excessive control over the other party, an agency relationship may be found. Cargill
Creditor/debtor relationships can come close to the border: issue may arise whether the terms of the lending agreement made C a p. Factors: Veto rights over ordinary decisions, Active participation in management decisions, Benefit other than making interest on the money lent;
Look for aggressive financing (more like equity than debt), a party that effectively exists for the benefit of the other party, ability to set the agenda or objectives of the other.
JF – Kynast is holding P liable for A’s action in Tort while Cargill is about Contracts
In Ks and Ts we have limiting principles:
Ts – respondeat superior requires agency and within scope of agency
Ks – must be acting within scope of authority
Limiting principles are here b/c P has limited control which seems unfair and we need to reduce the costs of agency relationships b/c we like them!
Jenson Farms Co. v. Cargill, Inc. – MN 1981 (Implied Agency Contract)
Facts:
Cargill lends money to Warren Grain, slowly starts taking over
Memo: this org needs very strong paternal guidance; running the books, approving management decisions
WG goes under, owes 4M to Cargill and 2M to Ps
Ps – WG was an agent for Cargill
CoA: Agency by Estoppel
Transaction Type: Basically a creditor becomes more of a CSH
Below: Trial by jury for Ps
Issue: Was C jointly liable for WG’s indebtedness; Was GS C’s agent on WG’s Ks w/ Ps?
Held: Yes, C/WG had a principal/agent relationship
Rule: Even without a K, agency relationship can be formed if there is circumstantial evidence showing a course of dealing btwn parties; Consent/benefit/control are all you need
Discussion:
C was playing too many roles; Should be viewed as a single entity (90% was going to C)
Looks like a D/C relationship, but look at this as a WHOLE
Source of grain = benefit; involved in ops = control; WG was doing it = consent
POLICY
1) Amicus – Cs will stop making loans (Court, LOL, this was way diff than typical financing)
2) If we use A as a shield w/ no lia, that’s an unfair externality on 3)s
Liability creates a monitoring incentive for the P
[Parties’ conception does not control whether an agency (and therefore liability as a principal) exists; Agency determined by totality of the circumstances; A lending agreement coupled with active participation in management may indicate an agency]
Hanson v. Kynast – SC OH 1986
Facts: Lacrosse player body checked and paralyzed another – sued the school under respondeat superior (looking for that deep pocket); Remember this is SL – no fault
CoA: Intentional tort under respondeat superior
Issue: Was there a P/A relationship btwn school and athlete?
Held: No
Rule: Relationship btwn school and student athlete is contractual and not agency
Discussion:
Student is a buyer of education
the law (often when P undisclosed)
Traditional approach: gives a general A the power to bind a P, whether disclosed or undisclosed, to an unauthorized K as long as a general A would ordinarily have the power to enter such a K and 3P does not know that matters stand differently in this case.
2RSA §§ 161, 194. 3RSA seems to provide the same result for the particular case of an undisclosed P. 3RSA § 2.06.
Ask: If P gave A this job: what usually goes along with that job? This is common in corporate law. (i.e., when can CEO or CFO bind the corporation? )
Note: can be inherent in A’s position, the task, or the course of dealing btwn A/P
3RSA relies instead on agency by estoppel and restitution
REVIEW 3RSA 2.05 and 2.07, only for undisclosed Ps
Gallant Ins. Co. v. Isaac (IN ‘00)
Facts: Isaac asked if she would be covered over the weekend under lapsing insurance plan; TH (insurance agent that binds Gallant to new policies); She crashes; Gallant claims that A couldn’t extend policy orally
CoA: Breach of K; G claims there is no K – wants declaratory judgment
Transaction Type: Agency contract
Issue: Could TH bind G in oral K to extend insurance policy?
Held: Yes. Insurance policy is valid under b/c there was inherent authority to bind
Rule: Inherent agency power indicates the power of an A that is derived not from authority, apparent or estoppel, but from the agency relation itself. This inherent authority theory exists for the protection of persons harmed by or dealing with a P’s servant or A.
Notes
Court looks to A’s direct and indirect manifestations and determines whether 3P could have reasonably believed that A had authority to conduct the act in question
Here – authority comes from inherent authority doctrine – 3P would believe this authority existed – this was a common practice that G knew about
Renewal is incidental to the authorized conduct
Class Discussion:
Might seem inconsistent w/ White b/c we’re relying on A’s actions, but this isn’t a one-off statement – this is the procedure and P was aware of it
Scope of authority arises through C/D w/ P/A, nature of position, industry, nature of act
Inherent authority is a catchall to protect 3Ps
Agency by Estoppel or Ratification
Can still be bound even when A’s act isn’t authorized and there is no inherent power by:
Ratification – 3RSA 4.01 and 4.07 – also White v. Thomas – accepting benefits under unauthorized K usually counts
Estoppel – need failure to act when knowledge and an opp to act arise plus reasonable change in position on the part of 3P; Estopped from disclaiming agency
Compared to apparent authority: Similar. In both cases, legal consequences follow a manifestation or other conduct on the part of P.
But in agency by estoppel P’s conduct leads to an ascertainable loss on the part of another party. This requirement of ascertainable loss or detrimental reliance is not a necessary prerequisite in apparent authority cases. Further, stopped is characterized by P’s failure to act, whereas apparent agency focuses on affirmative acts of P.
Hoddeson v. Koos (NJ 1957) – Case Not Assigned
Woman buys furniture from unknown salesman; pays cash; no receipt; no furniture; back to store; say they never heard of her; no name tag or any basis for finding apparent authority; court finds estoppel; store in better position to stop this; other people there; store knows who its As are; happened over a long period of time; so don’t go so far as saying he is the store’s A, but use an equitable principle that still holds the store liable for the fake A nevertheless; fills in gaps in an unusual case
Rule – Where a party seeks to impose liability upon an alleged P on a K made by an alleged A, as here, the party must assume the obligation of proving the agency relationship. It is not the burden of the alleged P to disprove it.
Main rule / estoppel: Duty of the proprietor also encircles the exercise of RC and vigilance to protect the customer from loss occasioned by the deceptions of an apparent salesman. If a party has allowed a fraud that would lead an ordinary person of ordinary prudence to believe that the imposter is the proprietor's A the law will estopp the defense of the imposter's lack of authority.
Note: the court doesn’t say the store is definitely liable. Just says she can get a new trial. She still has to prove the case.
In this case, note that there is no P-A relationship.
