Wayne State University Law School
Corporations Fall 2014
Professor Eric Zacks
Part II: Agency
Section B: The Current Setting
Definition of the Agency Relationship
R, 1.01: Fiduciary relationship arising when principal manifests assent to another person (agent) that the agent shall act on principal’s behalf and subject to principal’s control, and the agent manifests assent or otherwise consents to so act.
1.03: Manifestation of assent: written/spoken words or other conduct
1.02: This relationship exists when the above elements are present; no K is necessary btw the parties and the parties may not even label their relationship as one of agency. Even if they disclaim such a relationship, however, the court may still find one exists based on the parties’ conduct.
8.01: Agent is a fiduciary to the principal meaning he has more duties than good faith/fair dealing
Duties of loyalty to act solely for principal’s benefit; the utmost good faith in furthering the principal’s interest; duty to disclose to principal all relevant info
Relation of the Principal to Third Parties
A principal can be liable to a 3rd party for the actions of its agent under 6 theories (subheadings):
(1) Actual Authority
Principal is bound to 3rd parties by anything the agent does that is in accordance w/the principal’s “manifestation” to the agent. The principal’s manifestation is determined by the agent’s reasonable interpretation in light of surrounding circumstances.
R, 2.01: Agent acts w/actual authority when he reasonably believes, according to principal’s manifestations to him, that principal wishes agent to act.
R, 2.02(1): Agent has actual authority to do collateral acts that are incident or are reasonably necessary to accomplish acts that principal has expressly authorized
(2) Apparent Authority
R, 2.03: The power held by an agent or other actor to affect a principal’s legal relations w/3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
Implied Apparent Authority: A principal will be bound by the agent’s actions (even if beyond actual authority), if they are within the scope of what a third party reasonably believed the agent was authorized to do.
What would NOT work to create apparent authority:
Business card, company car w/logo, company stationary
If P called the given number and asked to be connected to Arillota, that would still NOT be enough: it doesn’t mean Arillota is an employee of D that is authorized to enter into sales Ks.
Principal Liability to 3rd Parties for Actions Actually or Apparently Authorized
6.01: Agent acting w/actual OR apparent authority binds a disclosed principal to the K
NOTE: agent is NOT a party to this K
6.02: Agent acting w/actual OR apparent authority binds an unidentified principal K
3rd party knows agent is acting for principal but doesn’t know identity
In this case the agent as an individual is ALSO bound to the K w/3rd party
6.03: Agent acting w/actual authority ONLY binds an undisclosed principal to the K
3rd party has no notice agent is acting for principal
(no apparent authority here b/c principal has manifested nothing to the 3rd party)
In this case the agent as an individual is ALSO bound to the K w/3rd party
(3) Estoppel
2.05: Principal who has neither authorized nor apparently authorized an agent’s action is nevertheless liable to 3rd parties who have changed their position in reliance upon their belief that the action was authorized if
The principal caused (intentionally or carelessly) the belief; or
The principal, knowing of the belief, did nothing to notify the 3rd party of the true facts
(4) Ratification
4.01: Affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting w/actual authority
Ex: If A took action purportedly on behalf of B – regardless of whether A was B’s agent – but such action did not otherwise bind B, B may nonetheless ratify the action. If B ratifies, B is treated as though A originally had actual authority to take the action.
A person can ratify by:
Manifesting assent (of choice to treat action as authorized)
Need not be express nor communicated to A or any 3rd party to be effective
Conduct only explicable on the ground that you intend to ratify
(5) Restitution
2.07: Principal is liable for restitution to 3rd parties where the principal is unjustly enriched by the agent’s actions that are not w/in the agent’s actual or apparent authority
(6) Principal’s Liability for an Agent’s Torts
7.03(1): Principal is subject to liability to a 3rd party harmed by an agent’s conduct when
The principal authorizes the agent to engage in conduct that is tortuous even if the principal did not intend the conduct to be tortuous
7.03(2): Principal is subject to vicarious liability to a 3rd party harmed by an agent’s conduct when
The agent is an employee who commits a tort while acting w/in the scope of employment
i.e., performing work assigned by employer or while under employer’s control; NOT when employee engages in independent conduct which is not intended to serve any purpose of the employer
Agent acts with apparent authority in dealing w/a 3rd party on or purportedly on behalf of the principal – where ability to commit the tort is sufficiently related to the agency relationship
Principals are only vicariously liable for the actions of their employees. Whether one is an employee or an IC turns on typical test (K is NOT dispositive; can’t disclaim an agency relationship w/a K):
Employer’s control over details of work
Method of pmt (by hour, by job)
Is worker completely dependent on employer (or can he work other jobs too)
Skill
Who supplies equipment/place of work
Length of employment
Whether work is regular/integral to employer
Intent of parties
Liability of 3rd Party to Principal
If principal will be held to K under 6.01-.03, then likewise, the principal can enforce the K against the 3rd party.
Exception: where agent falsely represents he is not acting for a specific principal and the agent or principal knows that the 3rd party wouldn’t have dealt w/this particular principal
Relation of the Agent to 3rd Parties
Aside from being bound by the K under 6.02 (if principal unidentified) and 6.03 (if principal undisclosed), agent is bound under 6.10: Agent’s Implied Warranty of Authority à
Every agent who purports to K on behalf of a principal impliedly warrants that she is authorized to do so. If the agent is not authorized, the agent may be liable on the K, AND in tort (if there was an affirmative misrepresentation), UNLESS
The principal ratified the act
The agent gives notice to 3rd party that no warranty of authority is given
The 3rd party knows that the agent is acting without actual authority
7.01-.02: Acting as agent does not give tort immunity. The agen
ion).
NOTE: Mere incorporation is NOT enough to work a novation/adoption here. Once NewCo is formed, it must affirmatively adopt the K. This is so even if the K language stated the K was made in NewCo’s name w/understanding that all obligations would be btw NewCo and third party.
My take: to avoid liability there has to be all of these elements. A clear pre-incorporation K btw NewCo and 3rd party where performance is the obligation of NewCo only and, critical factors are:
After incorporation a formal adoption/novation
An express release of liability for the promoter
If all of this is not present, the promoter will be liable (even if mail was addressed to corp, even if pmt checks were made from corp account, etc.)
Why is this the rule? à If the K was formed before the corp existed, then the principal (corp) cannot authorize the agent to act
By later adopting the K, the corp ratifies the K and the actions of the agent; if the principal does NOT ratify the K, then the agent is responsible
Section B: Choice of Jurisdiction
Why the Corporation’s Jurisdiction Matters: The Internal Affairs Doctrine
The Current Setting
Corp may be incorporated in one state but operate elsewhere
Any actions the corp could take as an individual (breach a K, commit a tort) will be governed by the same choice of law principals applicable to individuals;
BUT, actions that could NOT be done by an individual (internal affairs of the corp) will be governed by the law of the state of incorporation
This includes: shareholder issues, adoption of bylaws, election of directors, mergers, piercing the veil, issuing shares, etc.
Rationale: uniform treatment of all shareholders although they may be from different jx, predictability to conform behavior, etc.
Exception (pg. 129) law of another state should apply in the unusual case where the other state has a more significant relationship to the occurrence and the parties à
Important state policy implicated; matter does not affect internal administration of the corp and couldn’t be determined differently in different states
The Special Role of Delaware
Many corporations will be incorporated in Delaware because of the low tax rate and 3 reasons
Delaware Corporate Law is widely taught and known by Corp lawyers
The large body of case law in Delaware for Corporate Law allows for predictability
Specialized Court for Corporations, the Court of Chancery, which handle cases frequently and rapidly compared to other trial courts.
MI Incorporation
MIBCA 450.1201- 1202 – At least one incorporator must file Articles of Incorporation with LARA
Corps’ name, purpose, shares, resident agent, duration (if not perpetual)
MIBCA 450.1343(1) – Preemptive Rights
450.1441-1451 – Changes to the one-vote-per-share rule
