BUSINESS CORPORATIONS OUTLINE
I. POLICY OVERVIEW
A. SOCIAL WELFARE
i. Defined: social benefits less social costs arising from economic activity
ii. Shareholder/investor welfare often used as a proxy for social welfare
iii. Goal of laws of business corporations is to advance social welfare by increasing economic efficiency (kaldor hicks)
1. Laws achieve promote economic efficiency by controlling externalities through tort, criminal, and regulatory law which force businesses to pay or assume these costs and to price their products more accurately as a result
a. Helps balance over & under production
b. Laws are not explicitly evaluated in context of economic efficiency, rather it is a concept that in inherent in the courts and legislatures
2. Externality defined: cost of producing a product which is not fully internalized by the producer, e.g. pollution
iv. iPhone Example:
+ corporate benefit
+ social benefit
– corporate cost
– social cost
Labor, raw materials
=28 net benefit
B. ECONOMIC THEORY
i. ECONOMIC EFFICIENCY
1. Kaldor hicks efficiency: net overall increase in size of economy resulting in net social benefits where the advancement of some participant’s interests outweighs the impairment of others’
a. Generally accepted as best measure of efficiency
b. Taxes may be used to redistribute wealth from those whose interests are advanced to those whose interests are impaired, thus mitigating losses for some
2. Pareto efficiency: overall increase in size of economy resulting in net social benefits where interests of all participants are advanced or remain constant, no participant’s interest is impaired
a. Generally difficult or impossible to achieve
3. Business law helps increase economic efficiency by providing:
a. Standard organizations forms
b. Agency relationships
c. Fiduciary duties
ii. TRANSACTION COST THEORY
1. Theory: costs arising from the transfer of goods which are additional to those costs necessary to produce goods reduce economic efficiency of an individual transaction
iii. AGENCY THEORY (MONITORING, BODNDING & RESIDUAL COSTS)
1. Includes actual costs arising from having a third party act on one’s behalf
2. Principal: one who authorizes another to act on his or her behalf as an agent – Black’s
3. Agent: one who is authorized to act for in place of another, a representative – Black’s
4. 3 specific types – principal must evaluate and balance each of these costs against the benefits of appointing an agent:
a. Monitoring costs: costs incurred to monitor an agent to ensure that the agent is acting in the best interest of the principal, i.e. hiring an third party auditor or accounting firm
b. Bonding costs: costs incurred to find and compensate an agent that will protect and further the interests of the principal, i.e. higher pay for agent that attended law school
i. Principal may use incentive pay or other mechanisms to motivate agents to protect and further principal’s interests and thus offset other agency costs
c. Residual costs: any additional costs arising from agent’s conduct which could not otherwise be classified as a monitoring or bonding cost
5. Business forms help mitigate agency costs by provide standardization and reduce and prevent legal costs (residual cost) incurred to form and address issues during an agency
6. Threshold issues in evaluating agency costs:
a. Is the cost an agency cost?
b. If yes, is there a net benefit to justify the cost?
7. Publicly traded companies – focus of course
a. Principals are the shareholders
b. Exchange listing requirements help protect principal by requiring some degree of disclosure and transparency
i. 5,000 publicly traded companies in US
ii. Fortune 500 produce 80% of all goods produced by public companies
C. MISC. DEFINITIONS & CONCEPTS
i. Derivative actions: suits brought by shareholders on behalf of corporation in which settlement goes to corporate coffers
ii. Court review of settlements: some settlements must be reviewed and deemed to be fair by court before they can be finalized
II. PRINCIPAL-AGENT BUSINESS RELATIONSHIP/ASSOCIATION (RESTATMENT (3d) AGENCY)
i. DEFINED – §1.01 , SS 20: “agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that an agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to so act”
1. Alt: a consensual relationship between the principal, who grants authority to another to bind her in certain respects, and the agent, who accepts this responsibility – AKS p. 8
B. BASIC CLASSIFICATIONS
i. TYPES OF AGENCIES
1. Employee: P has significant control over A’s actions, thus P is liable for A’s actions
2. Independent contractor: P has little c
, then there is no apparent authority and P may not be held liable.
5. INHERENT AUTHORITY (EQUITABLE REMEDY FOR THIRD PARTIES)
a. GENERAL RULE – §161, SS 10: P is liable for A’s conduct that is expressly prohibited by P but which usually accompanies or is incidental to other conduct which is authorized to perform. Equitable remedy which allows a third party harmed by A’s conduct that is outside of A’s actual or incidental authority to hold P liable anyway.
i. Distinguishable from apparent authority on ground that it is not based on a third parties’ observations of P’s conduct.
b. UNAUTHORIZED CONDUCT THAT IS COMMON PRACTICE – Gallant Ins. V. Isaac
i. RULE: When third party is not on notice that A’s conduct is expressly prohibited and A’s unauthorized conduct is a common practice from the third party’s perspective, P is liable for A’s unauthorized conduct.
ii. CONSEQUNCES: Increasing P’s burden to monitor A’s conduct and common practices.
ii. LIABILITY IN TORT (RESPONDEAT SUPERIOR & VICARIOUS LIABILITY)
1. GENERAL RULE – §2.04, SS 23; §7.07, SS 35: P is only liable for torts of their A’s when the A’s are employees of P (matter of the extent of P’s control over A) and when the torts are committed within the scope of A’s employment. Conduct is within an A’s scope of employment when 1) it is specifically assigned to the A by P or 2) it is within a course of conduct subject to P’s control and A intends it to serve any purpose of P.
2. WHEN EMPLOYEE RELATIONSHIP EXISTS – Humble Oil v. Martin, 1949, AKS 21
a. RULE: Employee relationship exists and P is liable for tortious acts by A when there is a contract between P & A which indicates a master-servant relationship. Specifically, the contract provides for one or more of the following: strict financial control over one party (A) by the other (P), A has little or no business discretion in products offered and choice of operating hours, rents due to P based on amounts of P’s products sold by A or a provision making specific stipulations about how A is conduct day-to-day operations.