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

CORPORATIONS

Professor Bratton

University of Pennsylvania Law School

Fall 2009

I. BACKGROUND

Introduction

· 4 principal ways of organizing a business:

1. Sole Proprietorship—business org owned by a single individual

1. As a matter of law, a sole proprietorship has no separate identity from its owner and has unlimited personal liability for obligations incurred in the conduct of business

2. Partnership (General and Limited)

3. Association

4. Corporation

AGENCY RELATIONSHIPS

· Principles of Agency

o Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “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 so to act. (Rest.3rd of Agency §1.01).

§ Since most businesses, at one time or another, act through third parties, it is necessary to determine when an agent can bind the principal, when the principal is liable for the wrongful acts of the agent, and what the duties and obligations of agents are tot their principals and vice versa

§ Economists’ Definition—Business requires delegating some decision-making authority to the agent

· Lawyers care about control to figure out liability; Economists care about rational agents doing whatever is in their self-interest

o Agency is a Consensual Relationship, and it does not matter what label parties give to such relationship (Morris Oil)

§ Whether or not an agency exists is a Legal Conclusion

o AGENT—a person who by mutual assent acts on behalf of another and is subject to the other’s control (Rest. 2nd)

§ General Agent—an agent who is authorized to conduct a series of transactions involving continuity of service

§ Special Agent—agent who is authorized to conduct only a single transaction, or only a series of transactions not involving the continuity of service

o PRINCIPAL—a person on whose behalf and subject to whose control an agent acts

§ Disclosed Principal—if when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s ID

· Agent not liable; Principle is liable

§ Partially Disclosed or Unidentified—same as above, but third party does not have notice of the principal’s ID

· Agent and Principle are both liable

§ Undisclosed—when an agent and a third party interact, the third party has no notice that the agent is acting for a principal

· Agent and Principle are both liable

Authority—Authority of Agent to Bind Principal

Morris Oil Co. v. Rainbow Oilfield Trucking, Inc. (1987)

· FACTS: Dawn entered into a K whereby Rainbow was permitted to use Dawn’s certificate of public convenience and necessity in operating a truck enterprise in NM. In return, Dawn reserved the right to complete control over Rainbow’s operations and was to collect all charges due from Rainbow’s customers

o K stated that all operations utilizing fuel were to be under the direct control and supervision of Dawn, but stated that Rainbow was an independent contractor and not an employee of Dawn.

o K stated that there was no agency established and Rainbow could not incur debt/liability for Dawn other than “in the ordinary course of business”

o P was owed $25K by Rainbow for diesel fuel; Rainbow went bankrupt and P contacted Dawn for repayment (who had $73K left from Rainbow’s operation)

o Trial Court found Dawn liable for the debt based on a PRINCIPAL-AGENT RELATIONSHIP

· ISSUE: Are contract terms specifying the legal relationship b/w contracting parties binding on third parties? NO

· HOLDING: Recitation of the parties in their won Ks need not bind third parties who deal with one of them in ignorance of this relationship.

o The undisclosed principal is subject to liability to third parties with whom the agent contracts where such transactions are usual in the business conducted by the agent, even if the K is contrary to the express direction of the principal (Rest. 2nd)

§ K; however, did state that Rainbow could create liability for Dawn in the ordinary course and D’s debts to P fit in this category

§ Agency by Ratification (D said it would cover the debt)

o Secret instructions or limitations on the agent’s authority by the principal must be known to the party dealing w/ the agent, or the principal is bound as if the limitations had not been made

o A principal may be held liable for the unauthorized acts of his agent if the principal ratifies the transaction after acquiring knowledge of the material facts concerning the transaction

· Scope of Authority—Agents acts must be within the scope of the power granted (w/e the source of authority is)

o Agent powers are strictly construed, the agent having only the powers specifically given or reasonably required to perform in accordance w/ the authority grated

· Termination of Agent’s Authority

o At will Termination—Generally, a principal has the power to terminate an agent’s authority at any time, even if doing so violates a K between principal and agent, and even if it had been agreed that the authority was irrevocable

§ K’s on specific performance are not enforced

LIABILITY OF PRINCIPAL TO THIRD PERSON

· Authority of the Agent—after establishing agency, third party must demonstrate the scope of the agent’s authority to act for the principal. Sources of Authority:

o ACTUAL AUTHORITY—P’s words and conduct would lead a reasonable person in the A’s position to believe that the P wishes the A so act

§ May be expressly conferred on the agent or reasonably implied (by custom, usage or by the conduct of the principal to the agent)

§ Incidental Authority (implied)—authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction, or that usually accompany a transaction of that type

o APPARENTAUTHORITY—results when the principal manifests to a third party that some person is his agent

§ If it would lead a reasonable person in the third party’s position to believe that P had authorized the agent to so act

§ Apparent Authority by Power of Position—where Agent is a general agent with broad customary power (there exists a customary zone of authority)

o AGENCY BY ESTOPPEL (subsumed in Apparent Authority)—When a principal negligently or intentionally causes a third party to believe that his agent has authority, and the third party detrimentally relies thereon, the principal is estopped from denying the agent’s authority

§ This type of authority creates no enforcement rights in the principal against the third party

§ Rest. (Third) § 2.05: liable if

1. The person intentionally or carelessly caused such belief, or

2. Having notice of such belief that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.

o INHERENT AUTHORITY (analogous to doctrine of Respondeat Superior)—doctrine recognizes that it is inevitable that in the course of performing her duties, either by mistake, negligence, or misinterpretation of her instructions, an agent may harm a third party or deal with one in an unauthorized manner

§ It is an agency power that arises even in the absence of actual or apparent authority or by estoppel

· General Agent; Disclosed or Partially Disclosed Principal

§ Doctrine is based on a reasonable foreseeability rationale

· A loss that results from a foreseeable deviation is better placed on the P

· Imposes burden on Principal to monitor a General Agent

§ TEST: Whether the principal could reasonably foresee that an agent would take the action he did

· Was the T reasonable in believing the Agent was Authorized

§ Gap filler for where there seems to be authority. Disappears from the third restatement. Has been incorporated into a broader definition of apparent authority

· Ratification—When an agent has no authority (either actual, apparent, or inherent), a principal may affirm or ratify a prior act supposedly done on his behalf by another that was not authorized at the time it was performed

o Principal w

ally calling for the destruction off the hotel and building a large building

o P found out about the new lease and demanded that it be held in trust as an asset of their joint venture

§ Lower court held that P was entitled to ½ interest of the new lease and must assume responsibility for half of the obligations. D appealed

· ISSUE: Does the new lease come within D’s fiduciary obligation to his joint venture partner as a joint venture opportunity? YES

· HOLDING: Co-adventurers (especially partners) or joint venture partners have the highest obligation of loyalty to their partners. D has a fiduciary duty to P.

o This includes an obligation not to usurp opportunities that are incidents of the joint venture. (The duty is even higher of a managing co-adventurer)

o There was a close nexus between the joint venture and the new opportunity that was brought to the manager of the joint venture, since the opportunity was essentially an extension and enlargement of the subject matter of the existing venture

§ D could have told P about the enlargement and both could’ve competed for it

o Since D was to control the project, he should receive 51 shares of the corporation that holds the lease on the new project (P is left with 49)

Notes:

· Andrews thinks the joint venture was a single project with an expiration date which had passed

o Applying the Rest. in this view means that D had no duty to P

FINANCIAL STATEMENTS

Introduction to Accounting

· ACCOUNTING—the recording, classification, summary, and interpretation in money terms of transactions affecting the accounting unit

· TERMS

o The Accounting Equation—The fundamental accounting equation is;

§ ASSETS = LIABILITIES + OWNER’S EQUITY

§ Assets—things of value owned by the business entity

§ Liabilities—claims on assets by creditors of the entity

§ Owner’s Equity—the difference between assets and liabilities

· Assets — Liabilities = Owner’s Equity

· OE represents the stake or claims of the entity’s owners on the company’s assents and is also called “Proprietorship”

o The Balance Sheet

§ Presentation—the Balance sheet is a restatement of the accounting equation in a chart form with assets listed on the left hand side and the sources of the assets (the liabilities and equity) listed on the right hand side

§ Purpose—the Balance sheet shows the financial condition of the entity as of some specific moment in time

o Income Statement

§ Revenue—Revenue or income is derived from the sale of things of value (services or goods) for money

§ Expenses—Expenses are the costs associated with producing revenue

§ Losses—Losses are costs that do not result in producing revenue, e.g., buying a building for $1,000 and selling it for $500

§ Purpose—The income statement indicates what has happened to the accounting entity over some period of time (Jan 1 to Dec 31)—how much revenue was produced and the expenses associated with producing that revenue

· At the end of the accounting period, the net effect of the transactions for the period (either net income or net loss) are transferred to the balance sheet.

· All accounts making up the income statement are cleared, and the process of tracking income and expenses for a new period begins again