Corporations
Zacks
Fall 2014
8.25.14
Rules of Professional Conduct (RPC) requires
· Lawyer must object when anyone associated w/ the organization is engaged/intends/refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization
· Law ordinarily should challenge an action up to the highlight corporate authority, typically BOD
· Allows a lawyer to disclose client info to people outside the business if
o Despite lawyer’s efforts the highest authority insists upon or fails to address in a timely and appropriate manner an action or refusal to act, that is clearly a violation of law, AND lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization
o If the lawyer reasonably believes necessary to prevent reasonably certain death or substantial bodily harm, prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another, to prevent/mitigate/rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud
Business entities law comprises the law governing corporations, partnerships, and limited liability companies (LLCs).
· Partnerships – governed by the Uniform Partnership Act (widely adopted)
· LLC governed by state statute
Agency law is almost entirely common law
Sarbanes – Oxley Act § 307 requires the SEC to include a rule requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent, and if the counsel doesn’t adopt appropriate remedial measures or sanctions with respect to the violation, requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee the board of directs comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors. (lay terms – implemented “up the ladder” reporting)
· Doesn’t require the lawyer to report misdeeds outside the corporation nor to withdraw from representing the client
Business/Firm engages in sustained profit-seeking efforts, meaning that the intent to undertake activities that generate more wealth than they use
· For Profit: corps that are seeking to turn a profit
· Non Profit/Charitables: purpose is not to turn a profit
If a business is owned by >1 person than it is a business entity
You can have a business w/>1 person that is not an entity
You can form a business that doesn’t need to be incorporated (i.e. partnership)
Horizontal Dimension – 3 firms with a national scope with multiple business locations (ex.)
· One function across many entities
Vertical Dimension – a single business undertaking all 3 activities in a single locale
· Many functions w/in the organizations
Levi Strauss – went from being a supplier to a supplicant with the retailers calling the shots
· Power has swung to companies that deliver goods: retailers and other distributors who literally get products into the hands of the consumer
· Increased cost of selling goods to walmart put pressure on the business
o Levi would have benefited from buying the retailer instead of negotiating b/c Walmart was squeezing profits
o Walmart would not have benefited though
· Need to know who really has the negotiating power when transacting these types of deals
The Visible Hand – once you develop RR on a large scale, then business would distribute their good more efficiently
· This involves more people in the distribution, so owners are not involved in the day-to-day activities of the corporation
· In a corporation, the owners rely heavily on managers and employees to disseminate info to them à managers become much more important
o This allows for more abuse, b/c managers interest isn’t same as owners or feel pressured by the owners to deliver; also may be more reckless
· Until after 1840, the partnership was the standard legal form of the commercial enterprise; normally a family affair, consisted of 2-3 close associates
When businesses are held by a large # of widely scattered owners, power over the business resides entirely w/ the managers
· In corporate law, traditionally owners, the shareholders, have the ultimate power over the enterprise
An enterprise controlled by its managers – managerial
A system dominated by managerial firms – managerial capitalism
Locking in Capital – The corporate form became the preferred way to organize large-scale business because of the ability to amass large amts of capital, limited liability, and the centralization of control, but mostly for the ability to commit capital for extended periods of time
· Incorporation gave the enterprise “entity” status and required governance rules that legally separated business decision-making from contributions of financial capital
o Entity status for incorporated businesses meant that a chartered corporation was recognized as a distinct legal entity, separate from any of its investors or managers for purposes of buying, selling, or holding property, of making Ks, and of suing and being sued
o Creation of a separate legal entity allows business organizers to partition that assets used in the business
§ Partitioning allows individual participants in the business are not held personally responsible for the debts/liabilities of the business (aka limited liability), and participants and 3rd parties are assured that the pool of assets used in the business will be available to meet the needs of the business first before these assets can be distributed to shareholders.
o Incorporation played a role in establishing a pool of assets that was not subject to being liquidated or dissolved by any of the individual participants who might want to recover their investment
o Incorporating a firm created a governance mechanism which separated the role contributing financial capital from the role of operating the business and making regular decisions about the use of assets in the business
§ Initial investors yield control over the business assets and activities to a board of directors that is legally independent of both shareholders and managers
· Singer Sewing Machine Company: partnership btw Clark and Singer
o Clark wanted to incorporate the business to protect the company from being dissolved or have to pay $ b/c Singer was forced to financially pay for his multiple children w/ multiple women
LLC didn’t develop into important legal entities until the mid 1990s
Delaware Used the Federal-state System to Attain Corporate Eminence – James B. Dill instituted in NJ that the state “liberalize’ its general corporation laws and form a corporation to advertise this fact in the business community à resulted in the corporation act of 1896
· NY eventually granted a special charter to GE which incorporated most of the favorable provisions of NJ’s act
· In 1899 Delaware did the same thing but they also had generous tax rates
· Delaware is the business law center; judges are deferential to management and understand corporate law very well; well-settled law there
· Incorporating in DE doesn’t allow a company to escape being taxed
Globalizing Corporate Governance
· Some corporate governance systems are built on the foundation of a stock market-centered capital market
Global Convergence in Corporate Governance
Corporations are abstract; created purely by statute
Shareholders are not liable for the debts of corporations
Corporate lawyers deal w/matters prospectively – something has already gone wrong so deal w/how to handle it
· Must be the risk adverse party
· Quantify the risk
Transactional lawyers deals with anticipating problems that could occur if the client does what they are suggesting
You don’t represent the president of the company; you represent the company so have to be careful who you are sharing info with
Outside lawyer might have a narrow scope of focus in their representation for the corporation, so limited in ability to disclose issues to outside parties
Entity status: the bank account, assets, and K w/ employees are housed in the corporation and is treated separately than the owners and the shareholders have no share in those
· Any 3rd party that deals w/ the corp can only look to the corp to ensure they are satisfying their duties
8.27.14
An agency r’ship – an agent (A) and a principal (P) agree that the agent will use some degree of judgment to perform a service for the principal’s benefit
· Reciprocal r’ship
· Economic definition: anytime A and P agree on the delegation of power, then you have an agency r’ship
· P’s role: many not know how competent/qualified A is or how well A will do the job (motivation)
· Agency is a manifestation of info asymmetry which exists before and after the agency is created
o Asymmetry matters because the motivations of A and P differ
e 3rd party’s reasonable interpretation of P’s manifestations in light of all the circumstances
· A has apparent authority to do collateral acts that are incidental, that usually accompany or are usually done in the business, or that are reasonably necessary to accomplish the acts that A is apparently authorized to do
· Manifestation by P to a 3rd party creates apparent authority
· Apparent authority ends when it is no longer reasonable for the 3rd party to believe that A has actual authority
Where the manifestations P makes to A are identical to those P makes to a 3rd party, A’s actual authority and apparent authority are coextensive
Udall v. T.D. Escrow Services, Inc. (p. 101): P purchases real property in a nonjudicial foreclosure sale but never received the deed b/c the auctioneer had started the bidding at $100K lower than D authorized
· Appropriate analysis should focus on whether P believes, based on D’s manifestations, that ABC had authority to act for D to sell the property on their behalf, and whether that belief was objectively reasonable
o P may make a manifestation by placing A in charge of a transaction or situation (R3 Agency 3.03 (b) at 174)
o Based on D’s representation, P could reasonably believe that D (or its authorized A) would conduct the sale
o When ABC conducted the sale, P was reasonable in believing that she did so as D’s authorized agent
· ABC acting with apparent authority when they accepted P’s bid and closed the sale; D was bound by that acceptance and must deliver deed to P
· D made no showing that unfairness prejudiced the borrower, and the price, can’t be deemed grossly inadequate which would be sufficient to set aside a nonjudicial foreclosure
· Holding: reverse Appeals court and reinstate the trial courts award of SJ quieting the title to P
· There may have been apparent authority based on what the TDC communicated to Buyer
o TDES advertised the auction, then hired ABC to conduct the auction thus it was reasonable that Udall thought ABC had apparent authority to act on behalf of TDES
Power of Position – when P that is an entity appoints an individual to a particular position, that apt may carry w/ it a great deal of implied actual authority even where the corporation is vague about the actual authority expressly given to that person
CSX Transp., Inc. v. Recovery Express, Inc. (p. 105): Arillotta, a partner at IDEC sent an email to CSX expressing interest in buying rail cars for scrap; Arillotta represented himself to be from D via his email address
· D and IDEC refused to pay P b/c Arillotta was not authorized to represent or transact business on behalf of D or IDEC
· The only relevant conduct of D is their issuance of the email address to Arillotta; there is no evidence of the manifestation of those facts by D to Whitehead and CSX until after the K was entered and collection efforts began
o Only had the email address because the 2 companies shares resources
o To show authority must show that P gave him the email address
· D’s manifestation cannot be sufficient to sustain a claim of apparent authority
· No reasonable person could conclude that apparent authority was present just b/c of someone’s email domain name
· Holding: there is no genuine issue of material fact as to whether Arillotta possessed the apparent authority of D to entered in K w/ CSX – he didn’t possess the authority – and bc there is no evidence that D had the benefit of FSX’s railcars, D’s motion for SJ is allowed and judgment will enter for it
· Express authority: there was no mutual assent that Arillotta was acting on behalf of Recovery
· Apparent authority: CSX felt there was AA b/c of the email address
