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

I. Introduction
s Most wealth is created inside corporations
s History
o Before about 100-150 years ago there were very few corporations, particularly few private corporations (ex. British East India Company)
o Much of the business in the world was conducted through partnerships
s Two parts to the Corporation
o Entrepreneurs who run the corporation
o Investors
s Critical question about Corporations: Why are we willing to put money in an organization with no promise of a return when we have no idea about the personalities who are running the show?
o Because we have legally enforceable fiduciary duties to the shareholders
o Risk isn’t minimized, but it’s lessened
o For the corporation to be successful it had to solve that problem
s Themes to Keep in Mind
o What makes the Corporation so successful?
o Interplay of State Corporation law (particularly Delaware) and Federal Securities Laws
o Procedural Theme – Very few of the cases that we will read have gone to trial on the merits. Virtually 80% of the cases that we read will have been decided on a motion to dismiss. What we’ll be reading largely are court opinions granting motions to dismiss. Be aware of what the normal standards are for the defendant succeeding in having the case dismissed as distinct from what would have to be shown on the merits. Distinguish between cases decided on motion to dismiss, summary judgment or on the merits.
o There are other kinds of cases as well where we’ll be reading judicial opinions decided on a settlement between the plaintiff and the defendant on a class action where the court has to sign off on the settlement.
o If you go into Corporate law, most lawyers will not be litigators but dealmakers. They negotiate the deals where corporations are selling themselves, buying other corporations. This is a booming business and has been for more than 100 years because corporate restructuring is a modern phenomenon. The litigation is actually handled by a relatively smaller group of corporate lawyers (many of whom will handle the knitty gritty cases are in Delaware)
o Business Ethics: One of the reasons MBAs higher lawyers is that they do not want to get into trouble. Corporate lawyer’s job is to keep MBA types out of court. Look at cases as moral lesson.
o Purpose of Corporate Law à to teach individuals who are going to be fiduciaries how to be faithful fiduciaries and not faithless ones.
s Some states are RUPA states and some states are UPA states.
s There are 3 types of rules:
o Default Rule – this is the rule if you don’t say anything else about it, but you can contract out of them
o Mandatory Rule – look at RUPA to see which things cannot be changed
o Enabling Rules – asks you to write in what you want to have

II. Agency
s Agency Definitions
o § 1 Agency relationship is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control.
o All types of authority are based on manifestations initially made by the Principal – this makes sense because someone else cannot bind you, only what YOU manifest may bind YOU
o Actual authority (§ 2.01 Rst 3rd of Agency): Agent acts with actual authority when at the time of taking action that has legal consequences for the principal, the agent reasonably believes based on the principal’s manifestations to the agent that the principal wishes the agent so to act
§ Inquiry: Based on reasonable interpretation from A’s perspective of what P said to A, would A believe that A had actual authority?
§ May be Express or Implied
§ Scope of Authority:
· If A acts within the scope of his actual authority, then P is bound.
· Scope:
o Any action designated or implied by P
o Necessary or incidental to achieving P’s objectives
o A’s interpretation is reasonable if the interpretation reflects any meaning known by the agent to be ascribed by the Principal
o Apparent Authority (§ 2.03 Rst 3rd of Agency): The power held by an agent or other actor to affect Principal’s Legal Relations with Third Parties when a Third Party reasonably believes the Actor has authority to act on behalf of the Principal and that belief is traceable to the Principal’s manifestations
§ Inquiry: Does a reasonable person in T’s position reasonably interpret P’s manifest

the agent purported to act on his own behalf) the general rule is that agent is bound even though the principal is bound too
§ Majority Rule: if Third person, upon learning of undisclosed principal’s identity, obtains judgment against principal, agent is discharged; undisclosed principal if third person obtains judgment against the agent
§ Minority Rule: neither agent nor principal is discharged by judgment against other, but only by satisfaction of judgment
s Morris Oil Co. v. Rainbow Oilfield Trucking, Inc. (NM 1987)
o BL: Example of actual authority, ratification, and undisclosed principal.
o Dawn = Principal, Rainbow = Agent, Morris = Third Party
o Actual Authority: Dawn let Rainbow use its special certificate to allow it to operate an oilfield trucking company. Contract between Dawn & Rainbow gave Rainbow the authority to run the facility. Rainbow was NOT allowed to contract debt in Dawn’s name. Rainbow WAS allowed to incur debts so long as the transaction came about in the usual course of business.
o FACTS: Rainbow is running facility, Morris has trucks that bring supplies to facility. Rainbow ran up a debt for diesel oil fuel and then went out of business without paying Morris. Morris doesn’t know of Dawn’s existence until Rainbow went out of business. Morris sues Dawn for the $$. Dawn says Rainbow was not its agent.
o HOLDING: Court says that Rainbow IS Dawn’s agent because
(1) the language of the agreement said that Rainbow could incur debts in ordinary course of business, and these debts were incurred in the ordinary course of business;
(2) Dawn ratified because Morris contacted Dawn when they realized that Rainbow was an agent and at NO time did Dawn dispute the legitimacy or amount of open accounts