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Corporations - Spring 2016 Prof. John Harrison General Themes
Tax: motivations, problems
Self dealing vs. Profit for shareholders
Role of bad faith o To whom do your duties run?
o Upon whose duties did you act?
Law and equity
Role of courts in questioning transactions (think Delaware vs. MA/PA)
Business judgment rule: courts defer to business decisions
Formalism vs. Economic Substance o Formalism: DE; most other court interpretations of state corporation statutes; mergers o Economic Substance: CL agency/apparent agency (Cargill, Humble, Miller v. McDonalds)
Contracts vs. Torts
Purpose vs. power of corporations: power is what corporations can legally do, purpose is what they're trying to do by exercising those legal powers.
Remedies: prices (e.g. tax - disincentivise and pay for what you've done) vs. fines (deter: super compensatory to deter this activity)
Agency Relations and Agency Law
Agency: Agent (A) acts on the principal's (P) behalf, and to some extent, at the principal's direction. o Agency is Harrison asking me to go buy milk for him in the snow. o Not Agency is Harrison borrowing my 4WD car to go get milk in the snow.
POLICY: any business organization is about someone acting on behalf of another o For corporations, there is an agency relationship with the legal entity that is the corp.
Three Types: Depend on Degree of Control o Agent-Principal (for all agency that isn't M/S or IC):
P liable when A does what P tells him; generally not when A acts against P's wishes
Weaker form of vicarious liability than respondeat superior (M/S) o Master-Servant (M/S or Employee/employer): requires physical control (control over actions)
Cases: Jenson, Humble Oil (franchise); Vandemark v. McDonalds (mixed MS/IC)
Respondeat Superior: P liable even when A goes against his wishes (form of Vicarious Liability)
Negligence: master is liable because you were negligent in instructing servant (or lack of instruction, negligent hiring, etc.)
Strict Liability: there is no amount of due care on the master's side which could prevent liability running to master from servant's actions (e.g., master is strictly liable for servant's negligence)
Strongest form of vicarious liability: always. o Independent Contractor (IC): control is based on the end product
Cases: Hoover v. Sun Oil (franchise); Murphy v. Holiday Inn (franchise); Vandemark v. McDonald's (mixed MS/IC)
KEY: (1) what decisions are made at center, and what at local (IC); and (2) does local have a stake in the equity or gross (IC)
Only liable when A doing what P said
Creation: Can be done through a social promise that does not rise to the level of an enforceable K. No consideration need change hands.
Employees (Master/Servant) and Independent Contractors Pp. 1-12, 31-43. o Gorton v. Doty (ID 1937) (p. 1) - (Torts) third party injuries, A/P purpose served?
FACTS: coach borrowed player's mom's car to go to game. Mother suggested he use it. Coach crash car, hurt kid (3P) sues the mom.
RULE: presumption of agency when using someone else's vehicle not overcome by the evidence here.
HARRISON: question to jury should have been whose purpose was being served?
o A. Gay Jenson Farms v. Cargill (MN 1981) (p. 6) - (Contracts) scope of control and disclosed principal
FACTS: Cargill would lend Warren $ to go buy seed which it would sell back to Cargill (acting as bank). Warren goes where the woodbine twineth. Up the spout. Jensen (grain seller), wants $
from Cargill. Toward Warren's end, Cargill took significant control of financial decision.
RULE (1): A/P relationship is a question of degree of control, de jure (contractual) and/or de facto (in practice). A high degree of control is needed to establish M/S; lower degrees of control give you IC or standard A/P.
RULE (2) : Disclosed Principal - where A has disclosed that he is an A, a contract he makes with a 3P is between the 3P and the P
HOLDING: (1) because in practice Warren acted at direction of Cargill, there was de facto M/S relationship. (2) Since P was disclosed to Jenson (3P), Jensen's K was with P, and thus P liable.
HARRISON: case was wrongly decided on (1) because control only went to finances, but not to grain buying business decisions. Scope of control. o Humble Oil v. Martin (TX 1949) (p. 32) - (Torts) - generalized control
FACTS: Station operator (Schneider) had to comply with all of Humble's demands (contractually and in practice). Humble owned station, set price, and took all profits; Humble paid him
commission on sales (stake in the gross) rather than operator paying Humble (and retaining the profits). Formalities of contract made it sound like IC (e.g., commission was called a "rental")
RULE: generalized control implicates respondeat superior (M/S).
POLICY: commission ≠ equity stake
POLICY: economic substance over formalism Hoover v. Sun Oil (DE 1965) (p. 34) - (Torts) IC
FACTS: Station operator 1) had risk/equity stake in station and 2) had power to disregard Sun's suggestions (e.g., could decline to open at night because it could be a net loss).
RULE: Independent contractor, not subject to strict respondeat superior. Murphy v. Holiday Inn (VA 1975) (p. 38) - IC
FACTS: Corporate gives general, but not specific, goals (local decides how to meet them) and collects a fixed rate on sales instead of a share of profits.
RULE: IC. This is more like use of brand fee - independent contractor Vandemark v. McDonald's Corp. (NH 2006) (p. 41) - areas of control, bifurcated IC M/S
FACTS: McD's employee hurt during robbery. McD's controls sales, quality, burger formula, etc. but NOT security.
RULE: because no control in the area of security, no vicarious liability from franchise to McD's
HARRISON: not all jurisdictions decide this way
Agents' Authority Pp. 12-28. Two Types:
Actual Authority: created by consent of P and A. May be express (contract) or implied
Implied Actual Authority: where prior course of dealing established that there was authority
Apparent Authority: Created by interactions between P/A and 3P. Must originate with manifestations of P.
Can be created entirely through A's representations if he has actual authority to make those representations. If A makes manifestations pursuant to his actual authority, apparent authority may be created if 3P reasonably gets impression from those manifestations that A has additional authority. E.g., Three-Seventy Leasing, it is P's duty to designate A as a "small salesman" to prevent apparent authority that A could make large sales.
Tort: P is in a better position to manage risk and take precautions Mill Street Church of Christ v. Hogan (KY 1990) (p. 12) Implied Actual Authority
FACTS: painter hired to paint church, he hires brother who is hurt and sues Church for worker's comp. Painter had hired brother in the past.
ISSUE: did the painter have the authority to hire a helper without asking?
RULE: Look to prior course of dealing in similar situations to determine scope of authority. (Yes here) Three-Seventy Leasing Corp. v. Ampex Corp. (5th Cir 1976) (p. 15) - Apparent Authority
FACTS: Sale negotiation over memory units - Kays (A) (salesman from Ampex, introduced to Joyce as such) authorizes sale to Joyce (3P). Kays' scope of employment didn't provide him this authority.
RULE: When 3P is given impression by P about A that a reasonable person would consider to grant this type of authority, apparent authority can arise from manifestations of P. P had put A out as a salesman, so apparent authority existed and 3P's K for sale was enforceable against P.
Res 3d of Agency: the manifestation must originate with P, no need to be made by P - must be reasonable
Factors: action/inaction, statements
POLICY: boundary of the firm - was K acting on behalf of firm, or rogue?
See also Watteau for Undisclosed Principal, but might have been a better case for apparent authority Botticello v. Stefanovicz (CT 1979) (p. 22) Ratification
FACTS: Botticello bought husband's share of tenancy in common, unaware wife was also a tenant. Husband never held himself out as agent of wife, and wife did not ratify.
(1) A must have claimed to be acting on P's behalf, AND
(2) P must have act of ratification (e.g., something that a reasonable 3P would think is acceptance, can be circumstantial evidence)
(3) P must have intent to ratify, i.e., P must accept the burden/benefit of the K (cannot blindly cash a check, can be inferred from the act)
EXCEPTION: if 3P relies on A's lack of authority and concludes no deal, P cannot subsequently ratify
Here: no ratification Hoddeson v. Koos Bros (NJ 1957) (p. 26) Agency by Estoppel/Negligence
FACTS: Crook held himself out as salesman at furniture store, and took customer's (Hoddeson) money. Hoddeson tries to enforce crook's "contract" against store.
RULE (Estoppel): Agency established if (1) 3P reasonably relied, and (2) party to be bound (P) manifested crook as A.
RESULT: liability bc P negligent/agency by estoppel
HARRISON: exceptional case, but prefers to think of it as negligence not as estoppel. Store failed to take precaution against crooks running scams.
Agents and Principals Liability Contracts Pp. 28-31.
Disclosure of Principal: default rules that can be contracted around
(1) Fully disclosed principal: 3P knows that there is a P and who it is
RULE: contract is with P not A
(2) Partially disclosed principal: 3P knows that there is a P, but 3P does not have all relevant facts about P-A relationship
RULE: contract is with A not P (But both can be liable)
See e.g. Atlantic Salmon
(3) Undisclosed principal: 3P knows neither that there is a P or who P is
RULE: contract is with A not P. (P can still be found liable, see Watteau)
See e.g. Watteau
HARRISON General Rule: When 3P (1) knows there is a P, (2) knows who it is, and (3) P exists, then 3P bound to P, but otherwise, 3P bound to A
POLICY: about how much information 3P has to assess risk
Atlantic Salmon v. Curran (MA 1992) (p. ) Partially Disclosed Principal (Strange)
FACTS: 3P enters into K after being told they are dealing with a corporation (P), but the corporation no longer exists. A of defunct corporation tries to avoid liability by arguing that he disclosed.
RULE: this is partially disclosed principal, so K is with A not P, as this is what 3P would have understood and they were in a position to assess the risk. A did not disclose that P was defunct, so A is liable.
Watteau v. Fenwick (QB 1892) (p. 18) - Undisclosed Principal Liability
FACTS: Watteau (3P) sold cigars to Humble (A), who was unaware of Fenwick (P). P never gave A authority to buy cigars, only ales, etc. 3P sued P when didn't get $ from A and A left town.
RULE (General): In fully undisclosed P situations, K is between 3P and A, but P can be liable to perform K reasonably entered into by 3P. Liability here
Analogy to dormant partner: ordinary agreements made by one partner must be performed by dormant partner
R. 2D Agency: Strict liability rests with P because P chose to withhold information. Information asymmetry creates strict liability.
R. 3D Agency: Negligence. Undisclosed principal subject to liability to a third party who is justifiably induced to make a detrimental change by an agent acting on the principal's behalf, if the principal having notice of the agent's conduct and that it might so induce, did not take reasonable steps to notify third party of these facts.
Would have come out differently: P did not know of A's dealings
POLICY: this is like torts and promissory estoppel in contracts - managing risk o Torts Pp. 43-55, 59-63.
Miller v. McDonald's (OR 1997) (p. 43) Franchise Apparent Agency (Apparent M/S)
FACTS: lady bites into sapphire in her burger, sues McD's. Franchisee is not an employee of McD's, but by holding out the Big Mac for sale, frachisee and McD's implied that it would be of the same quality as all other Big Macs.
RULE: Apparent agency applies when 3P relies on representations made from P about its relationship with "A", even if it isn't an agency relationship. Here, this was apparent M/S, so respondeat superior applies.
POLICY: contracts (reliance) and torts (liability of P on negligence of A) Ira Bushey v. US (2nd Cir 1968) (p. 48) (Friendly) Physical Control/Scope of Employment
FACTS: drunken sailors come back and lets water into dry-dock
RULE: foreseeability w/in scope of employment. Key question is does the fact that this person engages in this business make this accident more likely
OLD RULE: actions in scope of employment with intent by employee to further employer's interests
POLICY: Shift makes respondeat superior less about employer incentives (we already have negligence torts for that) and more about insurance (who is in best position to manage risk). Manning v. Grimsley (1st Cir 1981) (p. 52) Employee Intentional Torts (Exception to the Exception)
FACTS: Baseball player throws a ball at a heckler and injures him.
GENERAL RULE: respondeat superior
EXCEPTION: not for employee's intentional torts
EXCEPTION to the EXCEPTION (here): respondeat superior when an employee's intentional tort is so closely connected to the employer's business (silence heckler so they can win). Majestic Realty v. Toti Contracting (NJ 1959) (p. 59) Subcontractor IC Liability
FACTS: P (primary contractor) hired IC (wrecking ball subcontractor) for demolition, did it the wrong way, damage to neighbor's property
RULE: No respondeat superior in IC cases. BUT, primary contractor liable for negligence if he did not take reasonable steps to ensure subcontractor competence.
POLICY: Only the primary contractor was insured. Undisputed that subcontractor can be sued and is liable, but trying to sue primary contractor.
Fiduciary Obligations In Agency Pp. 63-72 o POLICY: fiduciary duties in corporate law flow from principles of agency law o Disgorgement: If 3P pays A for services done in name of P, and A pockets it, P can recover money by suing for disgorgement Two theories on why:
(1) A receives $ on behalf of P, but failure to turn it over does not expand the pie it simply takes someone else's slice from the pie, thus disgorgement takes away these ill-gotten gains (when A is self-dealing within A/P relationship). We need super-compensatory remedy to deter this behavior. (like criminal law, see Reading below)
(2) Contractual Theory: A receives $ on behalf of P, so contract says it belongs to P. If A wanted some they should have contracted around the default rule of agency. A received $
only as a result of relationship with P. HARRISON likes this one o Reading v. Regam (KB 1948) (p. 63) - Remedies FACTS: Inspector (A) was paid 1000 pound bribe not to inspect truck. Government (P) seizes funds, Inspector sues for them back on theory that government is not in the business of profiting from bribes. RULE: P (gov't) get's Disgorgement. HARRISON: This case makes more sense policy wise (inspector was a criminal, and we don't want precautions but rather super compensatory remedy to dissuade and take away benefit of breaking the law), but could also argue contract theory above. o Rash v. J.V. Intermediate (10th Cir. 2007) (p. 66) Agent Duty of Loyalty Disclosure
FACTS: A (general contractor, and salaried employee who also got commission) did not disclose to P that he operated a subcontractor scaffolding company that P was considering hiring. Terms of employment K stated that A would devote all of his time to P. RULE: Burden on A to disclose. A liable for self-dealing when he (1) does not give P all relevant facts about his side business OR (2) violates terms of K by running competing business on P's time. POLICY: Prophylactic (must disclose information) and compensatory (will have to compensate if breach of duty) o Town & Country v. Newberry (NY 1958) (p. 69) Trade Secrets FACTS: Cleaning company employee left, started own business and solicited former employer's clients. RULE: (1) Implicit provision in employment K prevents A from using P's confidential business information. (2) General duty not to profit from former employer's trade secrets
NOTE: courts generally will not infer a general non-compete clause
Vs. Corporations: o Corporation always created by government in accordance with statute; partnership independent of government (mandatory rule)
No need to file papers to form partnership: just agree o Partnership passes on liabilities to partners in their personal capacities, Corps have limited liability (corporations are liable but, e.g., shareholders are not)
Partnership workaround: partners themselves incorporate (PC)
Exception: many times people will require contract to include the single wealthy owner of a corporation o Partnership control is more decentralized; not required to have board, CEO, etc.
Thus partners each have more authority on their own to conduct business o Partnership shares are by default non-transferrable, and corporations are default transferable o Partnerships end by default when partner dies (most provide for immediate reformation with all living partners), and sometimes via documents at other specified events. Corporations have perpetual existence. o Partnership default distribution is per capita by partner, not per share like corporations, although many use eat what you kill instead
Fiduciary Obligations In Partnerships Pp. 89-100. o Revised Uniform Partnership Act (RUPA) § 404 General Standards of Partner's Conduct (p. 95)
(a) only fiduciary duties are duty of loyalty and duty of care
(b) Duty of loyalty is limited to:
(1) Account to the partnership and hold any property, profit, or benefit as a trustee
(2) Refrain from behaving adversely to the partnership
(3) Refrain from competition w/partnership
(c) Duty of care: no (1) grossly negligent or reckless conduct; (2) intentional misconduct; (3) knowing violations of law
(e) Party does not violate duty by consulting his own self-interest
This is what makes Cardozo in Meinhard wrong and Andrews right o Scope of the Partnership
Meinhard v. Salmon (NY 1928) (p. 89) - Scope (Time) of Partnership and Duty of Loyalty (partnership opportunities)
FACTS: Partnership owned lease in a property. One partner approached business opportunity on that same property after the lease. Didn't tell other partner.
CARDOZO (majority): Breach of fiduciary duty of loyalty to the partnership in not informing about partnership asset: opportunity (assumes partnership wasn't limited to this one lease). "Punctilio of honor in the most sensitive"
ANDREWS (dissent): Not a general partnership (which requires partners to do all business together). This is not a partnership opportunity because it would begin after the current venture ends. Partners have no duty to report their own business opportunities outside the partnership's current scope. Partnership does not require one to "renounce thought of self" - you simply must not personally profit at the expense of other partners
HARRISON: Andrews would be right today as RUPA (p. 95) in effect.
POLICY: distinction between business vs. partnership opportunity
Sandvick v. LaCrosse (ND 2008) (p. 96) Scope of Partnership - modern Meinhard
FACTS: Dispute over whether a top lease proposal (new lease to begin after current lease) is part of an ongoing partnership
RULE: Partnership agreement covers all leases that relate to this property, and this lease thus triggers duty to account. (Focus on terms of agreement)
DISSENT: Partnership only about current lease (i.e. it's a joint venture); lease to begin after current lease ends is outside partnership.
HARRISON: just make a contract
Partnership Property and the Partnership Entity Pp. 113-117
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