CORPORATIONS
HENNING
FALL 2013
Introduction:
· Types of Rules: Default, Immutable, Majoritarian
· Formal analysis is fact based so does not lead to consistent results
· Organizational Forms
o Sole Proprietorship
o Partnership: Joint ownership with shared management
o Corporation: Range in size from large publicly-treaded companies to small, closely held businesses
o Hybrid entities: firms blend partnership and corporate rules (LLC, LLP)
· Sources of Corporate Rules:
o Contractual agreement/internal governance rules (e.g. corporate by-laws, partnership agreements)
o State and federal statutes (function a default rules typically)
o Common Law Rules (fiduciary duty, fail dealing, good faith)
o Litigation: this is the least cost-efficient means of creating/enforcing corporate law rules
· Corporate Constituencies: Who Control the firm?
o Directors, Managers, Shareholders, Employees, 3rd party stakeholders
o Litigation/Legal system resolves disputes when:
§ 1. Parties do not agree in advance on the rule, OR
§ 2. One party needs protection from the opportunism of another party who misuses internal governance rules or statutory rights to gain an unfair advantage (fiduciary duty)
· Principal (Walter White/Employer) – Agent (Jesse Pinkman/Employee) Relationship
o R§1.01: Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (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.
o R§8.01: An agent has a fiduciary duty to act loyally for the principal’s benefits in all matters connected with the agency relationship.
o Contractual agreement, internal governance rules (NLERS), state statute, common law rules (fiduciary duty, fair dealing, good faith)
Self-Dealing
1. Generally: Comes up because when the agent is acting on behalf of the principal, the agent must put the principal’s interest before that of the agent.
a. Reilly [22] and Hamburger [26] – In both of these cases, we see agents who are leaving the principal-agent relationship and are favoring themselves by trying to get jobs after the employer-employee relationship will terminate
i. Reilly – R worked as a campaign manager for P’s fund raising practice, and solicits business from churches. R leaves, but it became apparent that he solicited business in his personal capacity and not for P while still an employee.
1. Held: This is a breach of the duty to act solely for the benefit of the principal
ii. Hamburger – D works for his father and uncle. Relations with the uncle soured, and the uncle threatens to fire D repeatedly. D wants to start his own business venture, and enters into an agreement with a supplier to fund it. After resigning, D begins to solicit his old customers.
1. Held: Not a breach of duty to act
2. Moral: allowed to make certain preparatory steps when contemplating leaving. However, you still may not take any concrete steps, nor can you take from the principal while still in the relationship.
b. Why are they different?
i. Reilly: Employment as a sales rep demand the employee the HIGHEST duty of loyalty
1. Until the relationship is SEVERED the employee must prefer the interests of the employer over his own
ii. Hamburger: Solicitation did not commence in any significant way until AFTER quitting
1. Was entitled to use his general knowledge, experience, memory and skill in establishing NEBW including “remembered” information
2. Customer lists are not considered secrets if the information is readily available from published sources
c. How can lawyer protect the employer?
i. Non-competition agreement – where activities do not entail misuse of proprietary info
Duty of Principal Toward Agent – At-Will Doctrine
1. Basic Principle: An employee is at will unless there is some other kind of contractual agreement that affords the employee protection for their employment.
2. Changing the Basic Principle
a. Of course, if there is an express written contract, this will be enough to limit the employer’s ability to terminate the relationship.
b. Implied Oral Contract – Foley v. Interactive Data Corp [30] – P is hired by D in 1976 and receives numerous promotions. He is given oral assurances that he would only be fired for good cause and in accordance with published procedures. P rats out his boss (that he is under investigation by the FBI), and is fired shortly thereafter.
i. Court holds that a change in the at-will doctrine can be based on an implied oral contract.
ii. In finding an “implied oral contract,” look to:
1. Factors of policies and practices of the employer
2. Duration of service
3. Actions or communications of the employer (assurances)
4. Whether or not a non-compete agreement exists
5. Total course of performance
Dealing With Third Parties
1. Generally: Here you are trying to find a way to get the agent to have the authority to bind the principal
a. Even though the principal might never deal with the third-party, the principal could be liable for the agent’s conduct
2. Three Types of Authority
a. Actual: Agent acts with ACTUAL authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agents, that the principal wishes the agent so to act (§2.01)
b. Apparent Authority: 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 ot eh principal and that belief is traceable to the principal’s manifestations (§2.03)
i. Interpretations must be REASONABLY interpreted to convey that the authority was granted, even if it was not
ii. Creation of Apparent Authority: Apparent authority…is created by a person’s manifestation that another has authority to act with legal consequences for the person who make the manifestation, when a third party reasonably believes the act to be authorized and the belief is traceable to the manifestation (§3.03)
c. Inherent Authority: Here, not communication is necessary but the principal can be held liable just from the nature of the agent’s relationship to the principal
i. Creates a reasonable assumption that this person can engage in certain acts that bind the principal
ii. Must be a reasonable interpretation of the acts
d. Blackburn v. Witter [40] – Agent, while employed at Witter, convinces P to buy stocks in a made-up company. Even after he was fired, continued to sell the stocks and told her that the company was new and was still printing their stationary.
i. Held: Still liable, and court uses the basic idea that the principal is in the better position to control the conduct
ii. This type of case would go to arbitration now not to court
3. Steps in the Analysis
a. Is the person an agent? Yes continue
b. Does the person have actual authority?
i. Yes bound
ii. No continue
c. Are there communications with the principal and the third party that could create the reasonable assumption that the agent has authority (“manifestations”)?
i. Yes bound under apparent authority: Depends on the position the agent held and the authority conveyed by the position as types of “manifestations” of authority
ii. No continue
d. What type of position did the principal put the agent in? Does it look like they have authority by virtue of their position?
i. Yes bound under inherent authority
ii. No not bound
e. Did the 3rd party act reasonably, or did person have notice (which may be constructive) of the absence of authority? (Essentially the same question)
Partnerships and Related Firms: Fiduciary Duties and Management
Smaller Business Organizations
· Sole Proprietorship, Partnerships, Limited Partnerships (LP), Limited Liability Company (LLC), Limited Liability Partnership (LLP), Limited Liability Limited Partnership (LLLP)
· Federal & State tax issues ar
ibility of opportunism
– Courts acting in their equity/chancery role.
Duty to Disclose Information – UPA § 403(c) – Each partner and the partnership shall furnish to a partner:
– 1. WITHOUT DEMAND, any information concerning the partnership’s business and affairs REASONABLY REQUIRED for the proper exercise of the partner’s rights and duties under the partnership agreement (or the act); AND
– 2. ON DEMAND, any other information concerning the partnership’s business and affairs, EXCEPT if the demand is unreasonably or otherwise improper
Managing the Partnership §401
§ (f) Each partner has equal rights in the management and conduct of the partnership business – UPA § 401(f)
§ (j) A difference arising as to the matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement ay be undertaken only with the consent of all of the partners
o How do you deal with difference of opinion? – UPA § 401(j)
§ Ordinary course of business majority of the partners
§ Outside the ordinary course or amendment to the partnership agreement consent of all partners
o Of course, this can be changed by agreement of the partners
Partner Conduct §404(d)-(e)
§ (d): A partner shall discharge the duties to the partnership and the other partners under this Act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing
§ (e): A partner does not violate a duty or obligation under this Act, or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest
Covalt v. High (87) – Here, there are two partners who are at a head as to whether to raise the rent on the building they own through the partnership for a company in which they are also shareholders.
§ Court says that in situations like this, when partners are at loggerheads, the only option is to dissolve the partnership and sell off the business???
Starr v. Fordham [91]: Partnership agreement provides that name partners determine each partner’s profit share. Starr express concern but joined firm, only to leave a year later. Receives 6.3% share although his billings accounted for 15% of the firm total.
Partners as Agents – UPA § 301(1) Each partner is an agent of the partnership for purpose of its business. An act of a partner…for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner has no authority to act for the partnership in the particular matter, and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority
Liability – if not changed, partners are liable to third parties jointly and severally for the obligations of the partnership
§ UPA § 305 – Liability to Third Parties for Partner Misconduct:
o (a) A partnership is liable for loss or injury caused to a person…as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership – if in ordinary course
o (b) If, in the course of the partnership’s business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a third party and the money is misapplied by a partner, the partnership is liable for the loss
§ PA Properties, Inc. v. B.S. Moss’ Criterion Center Corp. [136] – True even if the third party had no idea that this person was acting on behalf of a partnership
Way around this is to form an LLC or LLP
