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Business Associations/Corporations
Wayne State University Law School
Davidoff, Steven M.


A. Capital + Labor = $$
1. In a capitalistic society, to make money, you need capital and labor, and sometimes the capital and labor come from different places
2. We have business association class to determine power, rights, and liability in corporate settings and to determine the cost of capital which deals with macroeconomics which = growth, stability, and efficiency
3. A shareholder can not be held liable for the debt, obligation, or liability of the corporation because the corporation generates liability
a. Boulder Service Example
i. Steve gives Joe $5K for company. Joe then runs a lady over – who is liable? Who has duty, control?
b. Party Example
i. You have a party, serve alcohol. You make a guest have one more, then let him drive home. Under general C/L a social hose owes not duty to supervise guests drinking. Proximate cause is consumption of alcohol, it is not provision of the alcohol
ii. So it is with business associations


A. Introduction
1. Courses in corporations or business associations are, in large part, courses in organizational law
2. The most common forms of business organization in this country are
a. sole proprietorships
b. corporations
c. general and limited partnerships, and
d. limited liability companies
3. A sole proprietorship is a business organization that is owned by a single individual, and is not cast in a special legal form or organization, such as a corporation, that can be utilized only by filing an organic document with the state pursuant to an authorizing statute
a. an individual who owns a sole proprietorship has unlimited personal liability for obligations incurred in the conduct of the business
4. An agent is a person who by mutual assent acts on behalf of another and subject to the other’s control
a. a general agent is an agent who is authorized to conduct a series of transactions involving continuity of service
b. a special agent is an agent who is authorized to conduct only a single transaction, or only a series of transactions not involving continuity of service
c. agency law governs:
i. the relationship between agents and principals
ii. the relationship between agents and third persons with whom an agent deals on a principal’s behalf
iii. the relationship between principals and third parties when an agent with a third person on the principal’s behalf
5. Principal is a person on who’s behalf the agent acts
a. a principal is disclosed if at the time of a transaction between the agent and a third person, the third person knows that the agent is acting on behalf of a principal and knows the principal’s identity
b. a person is partially disclosed if at the time of the transaction the third person knows that the agent is acting on behalf of a principal, but does not know the principal’s identity
c. a principal is undisclosed if the agent, in dealing with the third person, purports to be acting on his own behalf
i. an undisclosed principal is liable for her agent’s authorized activities
ii. one reason the undisclosed principal is liable is that she set the transaction in motion and stood to gain from it
iii. the second reason is that even if the undisclosed principal was not directly liable to the third person, the agent would be and would then sue the principal for indemnification
6. Although agency is a consensual relationship, whether an agency relationship has been created does not turn on whether the parties think of themselves as or intend to be agent and principal (objective test)
7. Agency is a legal concept which depends upon the existence of following elements:
a. the manifestation by the principal that the agent shall act for him
b. the agent’s acceptance of the undertaking and
c. the understanding of the parties that the principal is to be in control of the undertaking
8. To constitute the agency relation, there must be an agreement, but not necessarily a contract
9. The relationship of principal and agent is similar to the liability of a master for the tort of a servant that is referred to as liability in respondeat superior
B. Authority
1. Liability of Principal to Third Person: under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, A, on the principal’s behalf, if A had actual, apparent, or inherent authority, or was an agent by estoppel, or if the principal ratified the act or transaction
2. Actual authority: an agent has actual authority to act in a given way on a principal’s behalf if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal had authorized him to so act
a. actual authority may be either express or implied
b. a common type of implied actual authority is incidental authority, which is the authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction, or that usually accompany it
3. Apparent authority: an agent has apparent authority to act in a given way on a principal’s behalf in relation to a third person, T, if the words or conduct of the principal would lead a reasonable person in T’s position to believe that the principal had authorized the agent to so act
4. Agency by estoppel: a person who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him
5. Inherent authority: inherent authority power is a term used to indicate the power of an agent which is derived not from actual authority, apparent authority, or esttopel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent
a. the principal’s liability under the doctrine of inherent authority is based upon the theory that, if one appoints an agent to conduct a series of transactions over a period of time, it is fair that he should bear losses which are incurred when such an agent, although without authority to do so, does something which is usually done in connection with the transactions he is employed to conduct
b. another theory is that it would be unfair for an enterprise to have the benefits of the work of its agents without making it responsible to some extent for their excesses and failures to act carefully
c. the doctrine of inherent authority can be justified on the ground that it is or should be foreseeable to a principal, when he appoints an agent, that as a practical matter the agent acting in good faith for the benefit of the principal is likely to deviate occasionally from instructions
d. therefore, a loss that results from a foreseeable deviation is better placed on the principal
6. Authority by Ratification: even if an ag

s authorized or made necessary in executing the principal’s affairs
13. Cases:
a. Morris Oil v. Rainbow Oilfield Trucking (New Mexico, 1987)
i. OVERVIEW: The old and new trucking companies contracted for the new company to use the old company’s certificate of public convenience and necessity in the operation of a business. The old company collected all charges due for the new company’s transportation, deducted a clerical fee and a percent of profits, and remitted the balance to the new company. It was responsible for paying its operating expenses, but all operations utilizing fuel were under the old company’s control, and all billing was under its name. The new company filed for bankruptcy. The old company set up an escrow account and assured the oil company that it would be paid. Instead, the old company paid other creditors and took an administrative fee. The trial court found for the oil company in its action to recover its indebtedness. The court affirmed and held that a principal could be held liable for the unauthorized acts of its agent if the transaction was ratified after knowledge was acquired of the material facts concerning the transaction. Where the old company retained the benefits of its business relations with the new company with knowledge of the material facts, the old company ratified the debt to the oil company.
C. The Agent’s Duty of Loyalty
1. To preserve the duty of loyalty, the law will not permit the agent to place himself in a position in which he may be tempted by his own private interests to disregard those of his principal
2. The general rule is that all profits made by an agent in the course of an agency belonging to the principal, whether they are the fruits of performance or the violation of an agent’s duty
3. The right to recover profits made by the agent in the course of the agency is not affected by the fact that the principal, upon discovering a fraud, has rescinded the contract and recovered that with which he parted
4. Managerial Behavior, Agency Costs and Ownership Structure
a. Agency relationship is a contract under which the principal engages the agent to perform some service on the principal’s behalf which involves delegating some decision making authority to the agent
b. The principal can limit divergence from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent
c. It is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the principal’s viewpoint
d. The costs of the agency is the sum of:
i. the monitoring expenditures by the principal,
ii. the bonding expenditures by the agent,
iii. the residual loss