Prof. Michael Wachter, Fall 2010
I. What questions does this course answer?
1. Why has the corporate form become so successful?
2. What enabled investment in corporations?
3. Why would you invest in an entity where you have no access or guarantee of return?
II. Four overarching themes
1. Federal Law: interplay of federal securities laws that protect the buying and selling of securities
2. Corporate Law: Corporate law involving the interplay between corporate board of directors and shareholders
B. Procedural Element
1. Great majority of cases fail to survive a motion to dismiss or the claim survives the motion to dismiss at which point the corporation settles
1. Most corporate lawyers are dealmakers, not litigators
D. Corporate Ethics
1. Always look for the faithfulness or the faithlessness of directors
2. Purpose of corporate and securities laws are to make the directors faithful fiduciaries
Agency (Use 3rd Restatement)
A. What is Agency?
§ 1: Agency relationship is the fiduciary relation that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control.
B. Types of Principals – § 1.04(2)
1. Disclosed Principal: When A and 3rd party interact, 3rd party has notice both that A is working for a P and notice of P’s identity
2. Undisclosed Principal: When A and 3rd party interact, 3rd party has no notice that A is working for a P.
3. Unidentified (or Partially Disclosed) Principal: When A and 3rd party interact, 3rd party has notice the A is working for P, but not notice as to P’s identity
II. Liability of Parties
A. Agent to Principal – § 8.09, comment (b)
If A takes action that he has no actual authority to perform, and P is liable to 3rd party, then A is liable to P.
B. Agent to Third Party
Whether A is liable depends on whether P is liable.
1. If P is bound:
a. Disclosed P – § 6.01: When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
i. (1) the principal and the third party are parties to the contract; and
ii. (2) the agent is not a party to the contract unless the agent and the third party otherwise agree.
b. Unidentified P – § 6.02: When an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal,
i. (1) the principal and the third party are parties to the contract; and
ii. (2) the agent is a party to the contract unless the agent and the third party agree otherwise.
c. Undisclosed P – § 6.03: When an agent acting with actual or apparent authority makes a contract on behalf of a undisclosed principal,
i. (1) unless excluded by the contract, the principal is a party to the contract;
ii. (2) the agent and third party are parties to the contract; and …
2. If P is not bound:
a. § 6.10: If A had no authority of any kind to act, A is liable (based on implied warranty of authority, or even on the K itself).
C. Principal to Third Party
P is liable to a 3rd party for an act or transaction of A, if A had actual or apparent authority, was an agent by estoppel, or P ratified the act or transaction.
D. Third Party to Principal
1. §§ 6.01-03: If P is liable to 3rd, party, then 3rd party is liable to P
2. § 6.03, comment (d): 3rd party is not liable to undisclosed P if A or P knew that 3rd party would not have dealt with P if he had known identity.
E. Principal to Agent – § 8.14
If A acted within actual authority, P is under a duty to indemnify A.
A. Actual Authority – §§ 2.01-02
1. § 2.01: An agent acts with actual authority when, at the time of taking action that has legal consequences for the P, the agent reasonably believes, in accordance with the Principal’s manifestations to the agent, that the Principal wishes the agent so to act.
a. Note: P is bound, even if 3rd party didn’t know of authority.
a. Express Authority: minute expression of what the agent is to do
b. Implied Authority: powers implied or inferred from the words used, from customs and from the relations of the parties
c. Incidental Authority: powers necessary or incidental to achieving the P’s objectives
3. § 2.02, comment (e)
a. Whether an agent’s belief is reasonable is determined from the viewpoint of a reasonable person in the agent’s situation under all of the circumstances of which the agent has notice.
b. The standard requires that the agent’s belief be reasonable, an objective standard, and that the agent actually hold the belief, a subjective standard.
B. Apparent Authority – § 2.03
1. § 2.03: Apparent authority is the power held by an agent or other actor to affect a 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.
2. Whose manifestation creates this authority?
a. P’s manifestations to T, or
b. A’s manifestations to T that P authorized A to employ
3. Power of position – 2nd Restatement § 27, comment a: If a principle puts an agent into, or knowingly permits him to occupy, a position in which according to the ordinary habits of persons in the locality, trade or profession, it is usual for such an agent to have a particular kind of authority, anyone dealing with him is justified in inferring that he has such authority in the absence of reason to know otherwise.
C. Agency by Estoppel – § 2.05
1. § 2.05: P is liable to a 3rd party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on P’s account, if
a. (1) P intentionally or carelessly caused such belief, or
b. (2) Having notice of the belief and that it might induce others to change their positions, P did not take reasonable steps to notify
D. Inherent Authority
1. 2nd Restatement § 161: “…acts done on his account which usually accompany or are incidental to transactions which agent is authorized to conduct…”
2. 3rd Restatement has a broader reading of actual authority, in an expansive manner in § 2.02(1) and thus does not use inherent authority language: “An agent has actual authority to take action designated or implied….”
E. Ratification – § 4.01
1. Morris Oil: A principal may be held liable for unauthorized acts of his A if the P ratifies the transaction after acquiring knowledge of the material facts.
t he has so received, its value, or its proceeds, and also the amount of damage thereby caused.
· It matters not that the principal has suffered no damage or even that the transaction has been profitable to him.
I. Partnership Formation
A. Uniform Partnership Act (UPA)
1. UPA § 6: Partnership Defined
a. (1) A partnership is an association of two or more persons to carry on as co-owners a business for profit.
2. UPA § 7: Rules for Determining Existence of Partnership.
a. (3) The sharing of gross returns does not of itself establish a partnership.
b. (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: as debt, as wages, as an annuity to a widow or rep. of deceased partner, interest on a loan, or as the consideration for the sale of goodwill of a business or property
B. Revised Uniform Partnership Act (RUPA)
1. RUPA § 202: Formation of Partnership (pp. 148-49)
a. The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
b. Rules to determine whether there is a partnership…
i. (2) Sharing of gross returns does not establish a partnership.
ii. (3) Sharing in the profits makes a presumed partner, except if profits received in payment: of a debt, for services, of rent, of an annuity to a beneficiary of a deceased partner, of interest on a loan, or for the sale of the goodwill of business or other property
2. RUPA § 202, comment 1: Partnership turns on “each having power of ultimate control.”
C. Practical Approach / Analysis
1. Look to see whether there is an element of control, and whether it is day-to-day.
2. From creditors’ perspective–do you have foot on the accelerator or the brakes? If accelerator, you are actually the one driving the business.
3. Need to establish facts of relationship between two parties–did one party think it had to follow the other party’s suggestions?
4. Can look at the four-element test as evidence.
a. An agreement will be considered a partnership if there is:
i. An agreement to share profits;
ii. An agreement to share losses;
iii. A mutual right of control or management of the business; and
iv. A community of interest in the venture.
b. UPA/RUPA Comments: Loss-sharing, for example, not necessarily required–just each having power of ultimate control. The four elements are evidence, not requirements.