Agency – when one
person acts on behalf of another
-
three principle forms of agency
o
principle and
agent
o
master and
servant
o
employer and
independent contractor
Who is an agent?
-
three part test for agency. Gordon v.
Doty.
o
consent – principle
gives consent to agent
o
act on behalf
– allowing the agent to act on behalf of the principal
o
control – subject
to the principal's control
-
ownership –
fact of ownership alone creates prima
facie case for agency; presumption that driver of car is agent of car's
owner
-
disclaimer –
disclaimer of agency not effective if facts indicate agency relationship to
third party
control - A. Gay Jensen
Farms v. Cargill
-
creditor who
assumes control of debtor's business
may be held liable as principal for acts of debtor in connection to business
Restatement (Second) § 14 O (1958)
-
agency requires
neither intention nor contract; simply an agreement may create agency
o
creditor becomes
principal – assumes de facto control
over conduct of debtor
o
shown by
circumstantial evidence
buyer-supplier vs. principal-agent – factors
indicating one is a supplier rather than an agent. Restatement § 14 K
o
receives a fixed
price for property regardless of price paid for property
o
acts in own name
and receives title to property that he thereafter transfers
o
has an independent
business in buying and selling property
Liability of Principal in Contract
o
person alleging
agency and resulting authority had burden of proving that it exists. Mill Street Church of Christ v. Hogan
Authority
-
implied authority vs. apparent authority. Mill Street
Church v. Hogan
o
implied authority – actual authority circumstantially proven which principal actually
intended agent to possess
§
includes such
powers as are practically necessary to carry out duties actually delegated
o
whether agent reasonably
believed that the principal wishes him to act in a certain way or to have
certain authority
§
present or past
conduct
§
nature of the
task or job
§
existence of
prior similar practices
§
specific conduct
of the principal in the past permitting agent to perform similar tasks
§
belief of third
party relying on representation of agency - important
Apparent Authority
-
apparent authority – not actual authority
o
whether third
party came to rely on actions of principal indicating agent authorized to act
on behalf
-
actual authority vs. apparent authority. Lind v. Schenley Industries
o
actual authority – principal expressly or
implicitly give agent authority to act
o
apparent authority – principal, by his actions, conveys to a third party that agent has
certain powers which he may or may not actually possess. Three-Seventy Leasing v. Ampex
§
where third
person changes position in reliance upon manifestation of authority, there is apparent
authority
·
reliance is not
necessarily required
§
where third party
knows agent does not have authority to act, there can be no apparent agency
Inherent Agency Power – principal designates agent as type which ordinarily
possesses certain powers
-
liability of a
principal for acts of his agent within scope of employment is a survival from
the ideas of status, which is now
preserved from motives of policy. Kidd v.
Thomas A. Edison
o
inherent agency power refers to the power of an agent which is derived not
from authority, apparent authority, or estoppel, but solely from the agency
relation and exists for protection of persons harmed by or dealing with a
servant or other agent. Nogales Service
Center v. Atlantic Richfield
Ratification– the affirmance by a person of a prior act which did
not bind him but which was done or professedly done on his account. Restatement (Second) Agency § 82
-
requires
o
acceptance of
results of act
o
an intent to
ratify, and
o
full knowledge of
all material circumstances.
-
mere receipt of
benefits, or failure to repudiate, do not constitute ratification in absence of
above prerequisites. Botticello v.
Stefanovicz
-
employer did not ratify actions of employee by not
suspending or firing employee. Arguello
v. Conoco
o
after employer
was notified of employee's actions, employer told consumers that employee had
acted inappropriately, and employer counseled employee about behavior.
Estoppel – apparent authority
of an alleged agent cannot be established by mere proof that the alleged agent
in fact exercised it.
-
duty of a proprietor
of a store encircles exercise of reasonable care and diligence to protect a
customer from loss occasioned by deceptions of an apparent salesman. Hoddeson v. Koos Bros.
o
rule that those
bargaining without inquiry with an apparent agent do so at their own risk of an
absence of the agent's authority is inapplicable. Hoddeson v. Koos Bros.
Agent's Liability on the Contract
-
partially disclosed principal – where party
to transaction has notice that agent is or may be acting for principal but has
no notice of principal's identity.
Atlantic Salmon A/S v. Curran
o
person purporting
to make contract w/another for partially disclosed principal is a party to
contract.
o
where agent fails
to disclose his representative capacity or identity of principal, agent does
not avoid personal liability on contract entered into by him on behalf of
principal
§
actual knowledge
is the test – that parties dealing with agent may have had the means to determine
principal's identity is irrelevant
Liability of Principal to Third Parties
in Tort
Employee vs. Independent Contractor
o
issues arising in
employment relationship but not independent contractor relationship – minimum
wage; employment discrimination laws; tax reporting and payment
-
master-servant relationship – Restatement §§ 1, 2 –
o
exists where
servant has agreed to:
§
work on behalf of
master
§
be subject to
master's control or right to control physical conduct of servant
-
independent contractor relationship
o
agent – one who
has agreed to act on behalf of the other (principal) but is not subject to
principal's control over how job is accomplished
o
non-agent – work
independently and enters into arms length transactions
Franchisee-Franchisor Relationship –
o
whether franchise
agreement goes beyond stage of setting standards and allocates to the
franchisor the right to exercise control over daily operations of the
franchise.
-
franchisor
sells know how and products to the franchisee
o
franchisee –
upside and downside of the overall relationship
o
franchisor –
startup cost, markup for products, commissions, financing profits
-
purpose
o
uniformity –
there is an interest in the qualities associated with the brand
§
experiences and
associations (positive and negative) are carried through to each franchise
o
control – franchisor
exerts a certain amount of control
§
this is where
franchisors get into trouble in terms of agency and the employee-employer
relationship
-
advantages to the
public good
§
provides
opportunity for small business owners
§
presents an
efficient way of creating business and business opportunity
-
downside to the
public good
§
limited control
for the business owner
§
community
preferences can not be accounted for
-
whether franchisee is the agent of the franchisor. Murphy v.
Holiday Inns
o
key inquiry – the
nature and extent of the control agreed upon in franchise agreement
§
principal-agent
– agreement designed to give franchisor control
or right to control day-to-day operations, methods or details of doing the work
§
independent contractor – agreement designed to achieve system-wide standardization of business identity, uniformity of
commercial service, optimum public good will, for benefit of both contracting
parties
-
Gas Station Cases – whether oil company has retained the
right to control details of the day to day operation of the service station
o
factors indicating gas station operates as agent of
oil company – Humble Oil & Refining v. Martin
§
oil company
·
retained
ownership of products sold in station until purchased by consumer
·
maintained strict
financial control over station
·
allowed station
to maintain little business discretion
·
furnished station
location, equipment, advertising, products, operating costs
·
decided hours of
operation
·
could terminate
relationship at will
o
factors indicating gas station operated as independent
contract of oil company. Hoover v. Sun Oil
§
oil company
·
provided training
for station operator
·
sold products to
operator
·
made suggestions,
rather decisions, on day to day operations
·
advice offered
upon request w/no obligations
·
required no
written reports
·
assumed no risk
of profit or loss
·
did not determine
operating hours, pay scale
-
Apparent Agency in the Franchise Context[1] – whether franchisor controls, or has the right to
control, the business of the franchisee. Billops
v. Magness Construction
o
actual agency
– is indicated when franchisor controls or has the right to control the
business of the franchisee
§
vicarious tort
liability flows from actual agency
o
apparent agency
– manifestations by the alleged
principal which create a reasonable
belief in a third party that the alleged agent is authorized to bind the
principal create an apparent agency
from which spring the same legal consequences as those which result from an
actual agency
§
two part test -
third party must show
·
reliance on
the indicia of authority originated by principal, and
·
such reliance must have been reasonable
§
key – logo,
name use
Scope of Employment
-
Restatement Standard
o
conduct of
servant is within scope of employment
if it is actuated with purpose to serve
the master. Restatement § 228(1)
-
Bushey Standard
o
employer
responsible for conduct of employee not
actuated by purpose to serve the employer if conduct is reasonably foreseeable. Ira S. Bushey v. United States
§
what is
reasonably foreseeable in context of respondeat superior is quite a different
thing from the foreseeably unreasonable risk of harm that spells negligence.
§
employer should
be held to expect risks to the public which arise out of and in the course of
his employment of labor.
-
Manning v.
Grimsley
o
employer liable
for tortious acts of employee where employee's
conduct was in response to plaintiff's conduct which was presently interfering with employee's ability to perform his duties
successfully. Manning v. Grimsley
-
Arguello v.
Conoco
o
employer liable
for torts of his employee while acting in the scope of their employment Restatement
(2nd) Agency §§ 219, 228.
§
factors used to
determine whether acts are within the scope of employment:
·
time, place and
purpose of the act
·
similarity to
acts which the servant is authorized to perform
·
whether the act
is commonly performed by servants
·
extent of departure
from normal methods
·
whether the
master would reasonably expect such act would be performed.
o
there is no
presumption that simply b/c employee acted unacceptably
employee was outside scope of employment.
Arguello v. Conoco
-
Liability for Torts of Independent Contractors
o
where person
engages a contractor who conducts an independent business by means of his own
employees to do work, he is not liable for negligent acts of contractor in
performance of contract. Majestic Realty
Associates v. Toti Contracting
§
exceptions
·
where landowner
retains control of manner and means of doing work,
·
where landowner
engages an incompetent contractor, or
·
where activity
contracted for constitutes a nuisance per
se.
o
nuisance per se – two standards
§
ultra-hazardous work - landowner's liability for work done on his land for him
by independent contractor is absolute
where work is ultra-hazardous
§
inherently dangerous work – liability is contingent on proof of negligence in
failing to take necessary precautions if work is only inherently dangerous.
o
duty to exercise care commensurate with risk of damage
to others – non-delegable duty
-
Faragher v. City of
Boca Raton – vicarious agency
Partnership
Partnership
vs. Corporation
|
PARTNERSHIPS |
CORPORATION |
|
limited
life; they do not go on forever (death, withdrawal terminate partnership) |
perpetual
life |
|
joint
and several liability |
limited
liability |
|
limited
transactions |
unlimited
transactions |
|
flexibility
of structure |
much
more standardized |
|
no
action required; partnership is deemed to exist |
an
action is required to form a corporation |
|
no
double taxation |
double
taxation |
What is a Partnership and Who are the
Partners
-
Uniform Partnership Act – two elements to a
partnership
o
two or more
parties
o
co-owners of a
business for profit
-
partnership
results from contract, express and
implied; if denied, may be proven by
o
production of some written instrument
o
testimony as to some conversation
o
circumstantial evidence
§
elements which
individually may be immaterial may, taken together, indicate that a partnership
exists. Martin v. Peyton
partnership vs. corporation
-
partnership
(personal liability) – more than one person acting together for some reason
o
does not require
a written agreement
o
each partner is jointly and severally liable for the
actions of the partnership
-
corporation
(limited liability) – shareholders are not liable
o
closed vs. open corporation
§
close corporation – not publicly traded; stock is closed to the public
§
open corporation – shares are freely sellable and purchasable
o
parties interest in the corporation:
§
shareholder
§
manager
§
employees
§
consumer/public
Partners Compared with Employees
-
factors courts use to determine whether a partnership
has been formed[2]. Fenwick v.
Unemployment Compensation Commission
o
whether the
parties intended to create a partnership – this factor is generally not
conclusive
§
intent to form a partnership may be overcome by evidence showing that effect of the agreement was not creation
of a partnership
o
sharing of profits – floor (minimum requirement)
§
prima facie
evidence in favor of partnership
·
overcome by showing
that shared profits was a form of
payment
o
sharing of losses
o
ownership and control of the partnership property and
business
§
actual control or
management issues
·
day-to-day
operations
·
hiring decisions
·
wage control
·
raising of
money/mortgaging/location
o
community of power in administration
o
language of the agreement
§
fact that parties
call themselves partners, and call business a partnership, does not necessarily
mean that a partnership has been defined
o
conduct of the parties w/resp. to third parties
§
how do they hold
themselves out to other people
o
rights of the parties upon dissolution of the
partnership
Partners Compared with Lenders
o
sharing of profits – prima facie evidence that
a party is a partner in the business
§
presumption of
partnership rebutted if profits were received in payment:
·
as a debt by
installments or otherwise
·
as wages of an
employee or rent to a landlord
·
as an annuity to
a widow or representative of a deceased partner
·
as interest on a
loan, though the amount of payment very with the profits of the business
·
as the
consideration for the sale of a good will of a business or other property by
installments or otherwise
§
totality of circumstances – alternative to five
factors above – prima facie evidence
of partnership may be overcome by totality
of circumstances which indicate no partnership. Southex Exhibitions v. Rhode Island Builders Association
o
estoppel – party
who represents himself as a partner of another person to a third party will be
held liable to that third party if, on the basis of the representation, third
party gives credit to the actual or
apparent partnership. Young v. Jones
§
requires proof of
·
actual reliance
·
credit was given
Fiduciary Obligations of Agents and
Partners – the duty of utmost good faith and loyalty[3]
-
agent owes fiduciary duty to principal. General
Automotive Manufacturing v. Singer
o
utmost good faith and loyalty
o
not to act adversely to the interests of the
principal
o
to act in the furtherance and advancement of the
interests of the principal
o
duty of disclosure
§
where servant
takes advantage of service and violates
duty of honesty and good faith to make profit for himself, he is
accountable to his master for that profit.
Reading v. Regem
§
where servant is
unjustly enriched by virtue of service w/o master's sanction, profit shall be
taken from servant and given to master
§
where agent
violates fiduciary duty to principal, agent is liable for accounting of all
profits earned in violating the duty
-
partners owe fiduciary duties to one another and to
the partnership. Meinhard v. Salmon
o
fiduciary duty of
partners
§
assets of
partnership can not be used for partner's
gain
§
no clandestine profits
§
no competition
w/partnership
§
no partnership opportunities taken for one's self
o
requirements of
disclosure – all opportunities in which the partnership would be able to be
involved must be disclosed
Grabbing and Leaving – Agency and
Partnership
-
agency – taking
trade secrets is a violation of fiduciary duty. Town & Country v. Newbery
-
partnership - as
a fiduciary, partner must consider his or her partners welfare, and refrain
from acting for purely private gain.
Meehan v. Shaughnessy
o
fiduciaries may
plan to compete with the entity to which they owe allegiance, as long as in
doing so they do not violate their duty in some other way
o
partner has an
obligation to render on demand true and full information of all things
affecting the partnership to any partner
Expulsion – expulsion of a partner must be bona fide and done in good faith. Lawlis v. Kightlinger & Gray
-
results of a bad faith expulsion
o
dissolution of
the partnership
o
an action for
damages which affected partner has suffered as a result of expulsion.
Management of Partnerships
-
Uniform Partnership Act
o
§ 18(e) – all partners have equal rights in the
management and conduct of the partnership business
o
§ 18(h) – any difference arising as to ordinary
matters connected with the partnership business any be decided by a majority of
the partners. Summers v. Dooley
-
what either
partner does w/resp. to a third party is binding on the partnership. Nabisco v. Stroud
o
partner is an
agent for the partnership w/resp. to third parties
o
partner w/o power
to act on behalf of partnership still binds partnership unless third party has knowledge
o
partnership
agreement may not be contravened w/o consent of ALL partners
-
basic fiduciary duties of partnership –
o
no secret profits
o
no acquisition of
partnership assets
o
no competition
with partnership
-
failure to
disclose information the result of which produces neither profit for offending
partners nor loss for partnership does not support claim for breach of
fiduciary duty. Day v. Sidley & Austin
Dissolution – whether a partner may
leave the partnership.
-
Uniform Partnership Act – partnerships,
unless otherwise stated, are at will
o
if agreement is
for a term – partner can not leave w/o consequences
§
liability for
breach of contract
o
movement away
from fault towards no fault
§
old law – for
court to dissolve partnership – one
partner must be at fault; it was not enough to simply say "we're not
making money"
§
Uniform Partnership Act § 801.5 – partnership is dissolved when:
·
economic purpose
of partnership is reasonably frustrated
·
another partner
has engaged in conduct which makes
it not reasonably practical to carry on
business w/that partner
·
not reasonably practical to continue the
partnership
o
decree of dissolution
§
equitable
distribution of assets
§
neutral decision
maker
§
eliminate the
possibility of future lawsuits
§
end of liability
to third parties
-
right to dissolve
o
generally – dissolution
is equitable relief - partner can
not obtain dissolution when frustration
of purpose stems from own wrongdoing. Collins v. Lewis
o
old law - trifling
and minor differences which involve no permanent mischief will not authorize
court to decree a dissolution of partnership. Owen v. Cohen
§
all confidence and cooperation between the parties must be destroyed, or
§
misbehavior must materially hinder a proper conduct of the partnership business
o
new law – Uniform Partnership Act – a partnership may be dissolved by the
express will of any partner when no definite term or particular undertaking is
specified; however
§
power to dissolve must be exercised in good faith. Page v. Page
·
partner may not,
by use of adverse pressure freeze out
a co-partner and appropriate business to his own use
·
partner may not
dissolve a partnership to gain benefits of business for himself, unless he
fully compensates co-partner for his share of prospective business opportunity
-
After Dissolution – a partner is a fiduciary of his partners, but not of his former
partners, for the withdrawal of a partner terminates the partnership as to him. Bane v. Ferguson
Corporations
partnership vs. corporation
-
partnership
(personal liability) – more than one person acting together for some reason
o
does not require
a written agreement
o
each partner is jointly and severally liable for the
actions of the partnership
-
corporation
(limited liability) – shareholders are not liable
o
closed vs. open corporation
§
close corporation – not publicly traded; stock is closed to the public
§
open corporation – shares are freely sellable and purchasable
o
parties interest in the corporation:
§
shareholder
§
manager
§
employees
§
consumer/public
Piercing the
Corporate Veil
-
corporate veil piercing – courts will disregard
corporate form whenever necessary to prevent
fraud or to achieve equity. Walkosvsky v. Carlton
o
undercapitalization alone, absent something else, does not justify veil piercing
§
veil will not be pierced simply b/c assets of Δ corporation are
too low to allow recovery
o
undercapitalization + ______ = court will pierce
the corporate veil
§
where corporation appears to be purposefully undercapitalized, or
appears to be a dummy corporation under which people are working simply for
their own personal gain, plaintiff will seek to pierce the veil
-
four factors for
determining whether one corporation is so controlled by another as to justify
disregarding separate entities[4]
o
failure to maintain adequate corporate records or to comply w/corporate
formalities
o
commingling of funds or assets
o
undercapitalization
o
one corporation treats the assets of another corporation as its own
-
Van Dorn test – two requirements
which must be met in order for corporate entity to
be disregarded and veil of limited
liability pierced[5]:
o
unity of interest and
ownership - separate personalities of corporation and
individual (or other corporation) no longer exist
o
fraud or injustice – adherence to fiction of
separate corporate existence would sanction
a fraud or promote injustice
§
requires evidence of actual
wrongdoing, such as unjust enrichment
o
third prong – applicable in certain cases. Kinney Shoe
v. Polan
§
where contracting
party is such that constructive
knowledge of information which a reasonable credit investigation would disclose
can be assumed, party will be deemed to have assumed risk of gross
undercapitalization and will not be permitted to pierce the corporate veil
-
role of due diligence in contract vs. tort situations
o
contractual relationship – requires due
diligence to inquire into the relationship - essentially preemptively piercing the veil of the
corporation
§
when it is
discovered that other corporation is less than stabile, etc.
·
one choice –
don't do business
·
other choices –
demand personal guarantees
·
get President to
guarantee the debt of corporation
o
tort situation
– no opportunity for due diligence[6]
§
piercing the corporate veil in court makes more sense.
·
these tests don't
quite make sense in tort
o
lack of corporate
formalities - tort plaintiff doesn't care about this
o
under capitalized
– this is the only thing that a tort plaintiff cares about
o
fraud or
injustice
o
should the tests
for tort and contract be bifurcated
·
corporate
formalities – allow 3rd party to come in and "do due diligence"
·
to the extent
that a corporation does not recognize the corporate form, why should anybody
else?
·
why should
liability be passed on to anyone else?
-
substantial domination – in determining whether
parent corporation was alter ego of subsidiary corporation, courts look to
find substantial domination of the
subsidiary by parent under totality of
the circumstances test. In re
Silicone Gel Implants
o
factors
§
parent and
subsidiary share common directors and
common business departments
§
file consolidated financial statements, tax
returns
§
daily operations are not kept separate
§
parent finances
the subsidiary, caused the incorporation of the subsidiary, pays the salaries and
other expenses of the subsidiary, uses subsidiary's property as its own
§
subsidiary
operates with grossly inadequate capital, receives no business except that
given to it by the parent, does not observe basic corporate formalities, such
as keeping separate books and records and holding shareholder and board
meetings
o
not substantial dominance – where corporation's officers and directors
conscientiously keep affairs of corporation separate from their personal
affairs, in absence of fraud or manifest injustice perpetrated upon third
persons, corporation's separate entity should be respected. Frigidaire Sales v. Union Properties
-
creditor of
limited partnership knew corporate partner was only party with general
liability, limited partners were not liable to creditor though they were
officers, directors or shareholders of corporate general partner
The Role and Purpose of Corporations – limited
liability
– law permits incorporation of a business for purpose of enabling proprietors
to escape personal liability
-
Business
corporation's contribution of funds for general maintenance of privately
supported educational institution was not an ultra vires act. A. P. Smith
Mfg. v. Barlow
o
courts will
generally defer to business judgment of board of directors w/resp. to charitable
donations
-
a business
corporation is organized and carried on primarily for profit of stockholders;
powers of directors are to be employed to that end. Dodge v. Ford
-
courts of equity
will not interfere w/management of directors w/o
o
appearance of
guilt of fraud or misappropriation of
corporate funds
o
refusal to declare a dividend when corporation has a surplus of net profits without
a good faith corporate plan, which it could, w/o detriment to business, divide
among its stockholders, and
§
whether a dividend
is to be declared is exclusively a matter of business judgment for Board of
Directors Kamin
v. American Express
§
a refusal to do
so would amount to such an abuse of discretion as would constitute fraud, or
breach of that good faith which they are bound to exercise towards stockholders
§
a corporation can
not organize its purpose with the view that corporate benefit is purely
incidental
-
business judgment rule – in the absence of fraud, illegality, or
self-dealing, the court will not review a board decision Shlensky v. Wrigley
-
what are the
policy reasons for a strong business judgment rule?
o
finality
o
efficiency
o
allowing boards
of directors to take risk w/o looking over their shoulders increases the
chances of achieving innovation; high risk equals high reward
o
encourages the
best people to serve on boards of directors
§
higher the
liability, less enticing board of directors becomes
Duty of Care – Directors and Managers
-
nature of duty
o
directors have a duty to act in informed and deliberate
manner when making decisions on behalf of corporation and shareholders. Smith v. Van Gorkom[7]
§
may not abdicate duty by leaving to shareholders alone
decision to approve or disapprove agreement. Smith v. Van Gorkom
o
managerial roles – directors have underlying
fiduciary duty to corporation, shareholders
§
duty to act in informed and deliberate manner. Smith v. Van
Gorkom
§
requires more
than mere absence of bad faith or fraud
·
acting on behalf
of others – requires absence of faithlessness
or self-dealing.
·
representation of
financial interests – affirmative duty
to protect those interests and to proceed with critical eye in assessing
information.
-
business judgment rule
o
whether business judgment reached by board of
directors was informed one.
§
turns on whether directors have informed themselves,
prior to making business decision, of all
material information reasonably available to them.
o
presumption – board's business judgment was informed
one
§
there is a presumption in absence of allegations or proof of fraud, bad faith, or self-dealing
§
party attacking
decision made under rule must rebut
o
purpose – to
protect and promote full and free
exercise of managerial power
o
protections afforded by rule
§
no protection
for unintelligent or unadvised judgment.
§
director liability – based on gross negligence – in making business decisions,
directors must consider all material information reasonably available;
directors' process is only actionable if grossly negligent
·
board is
responsible only for information reasonably available, not for facts which are
immaterial or out of board's reasonable reach
§
good faith vs. bad faith reliance
·
reliance on expert – creates presumption that directors properly exercised business
judgment, which may be rebutted by facts which show:
o
directors did not in fact rely on expert
o
reliance was not in good faith
o
directors did not reasonably believe expert's advice
was within expert's professional competence
o
directors failed to use reasonable care to select expert
o
subject matter which was material and reasonably
available was so obvious that board's failure to consider it was grossly
negligent regardless of expert's advice or lack of advice
o
decision by board was unconscionable as to constitute
waste or fraud
·
reliance on reports of officers
o
report must be pertinent
to subject matter upon which board of directors is called to act, and be
entitled to good faith, not blind, reliance
o
procedural due care vs. substantive due care – due care in
decision making context is process due care only; irrationality
is the outer limit of the business judgment rule. Brehm v. Eisner
§
procedural due care - good/bad decision vs.
violation of fiduciary duty
·
analogous to political question – courts will not decide whether board of directors
made bad, or even incompetent, decisions – this is for shareholders to
determine using their votes; courts decide whether violation of fiduciary
duties occurred
o
informed business
judgment is not shown by evidence that per share offer price was good bargain, and even substantially above market price
§
determinative
issue is how the price was arrived at, procedurally, rather than whether price
was a good one, substantively
§
substantive due care
·
waste test –
an exchange so one-sided that no business person of ordinary, sound judgment
could conclude that corporation has received adequate consideration
·
important point – size and structure of executive compensation are inherently matters
of judgment
o
cases which constitute actionable substantive due care
violations generally involve directors irrationally squandering or giving away
corporate assets
Duty of Loyalty – Directors and Managers
-
rule of undivided loyalty
o
business judgment rule yields to the rule
of undivided loyalty. Bayer v. Beran
-
purpose – to
avoid the possibility of fraud, temptation of self-interest, and obliterate all
divided loyalties which may creep into a fiduciary relation
-
inquiry – whether action of directors was intended or
calculated to sub-serve some outside purpose, regardless of the consequences to
the company, and in a manner inconsistent with its interest
o
action taken
ideally serves legitimate and useful corporate purpose, and corporation
receives full benefit thereof.
-
directors acting separately and not collectively as a
board cannot bind the corporation; two reasons
o
necessity of collective procedure – allows
deliberate action after discussion and interchange of views
o
directors as agents of stockholders – given by law no power to act except as a board
§
failure to adhere not fatal – upon showing of a close, working directorate as
opposed to distant, uninvolved, disinterested board
Duty of Disclosure – a board of directors has a fiduciary duty to disclose
fully and fairly all material facts
within its control that would have a significant effect upon a stockholder vote
(reasonable shareholder)
-
duty of disclosure – director must disclose to
shareholders all material facts bearing upon a merger vote; results from combination of fiduciary duties of care
and loyalty. Cinerama v. Technicolor
o
existing law and
policy have emerged into a virtual per se
rule of awarding damages for beach of fiduciary duty of disclosure
o
various factors to consider in analysis of entire
fairness of transaction
§
timing, initiation, negotiation, and structure
of transaction
§
disclosure to and approval by directors
§
disclosure to and approval by shareholders
Doctrine of Corporate Opportunity
-
corporate
fiduciary agrees to place interests of corporation before his or her own in
appropriate circumstances. Broz v. Cellular
Information Systems
-
director or
officer must analyze situation ex ante
to determine whether opportunity is one
belonging rightfully to corporation
o
if director
believes that it is not then he may seize if for himself; four part test –
intrinsic fairness standard
-
four part test for whether director or officer may seize a
business opportunity for himself ; whether opportunity is
o
one which the
corporation is financially able to
undertake,
o
from its nature, in the line of the corporation's business
and of practical advantage to
corporation
o
one in which the
corporation has an interest or a
reasonable expectancy, and,
o
such that, by
embracing opportunity, self-interest of the officer or director will be brought
into conflict with the interest of
the corporation
-
presentation of opportunity to board of directors
o
not a
pre-requisite to exoneration, but
o
provides safe harbor for director or officer,
removing specter of a post hoc
judicial determination that director or officer has improperly usurped
corporate opportunity
-
important question – what constitutes a corporate opportunity
o
how did person
find out about the opportunity
o
whether
opportunity being offered to person on behalf of corporation or personally.
o
whether
opportunity was learned of through use of corporate information or property
o
whether
opportunity would be of interest to the corporation
o
whether
opportunity is in line of business of corporation
Dominance
-
duties owed to minority stockholders/subsidiary
corporations by majority stockholder/parent corporation
o
two ways to create
fiduciary duty b/t parent and subsidiary
§
parent-subsidiary dealings
§
domination of subsidiary by parent
·
factors showing domination
over board of subsidiary corporation
o
parent corporation nominates all members of subsidiary's board of
directors
o
board is composed of officers, directors, and employees of parent
corporation and other subsidiaries of the parent corporation
o
fiduciary duty + nothing
else – relationship
must meet business judgment test
o
fiduciary duty + self-dealing[1]
– relationship must meet intrinsic
fairness test
§
intrinsic fairness test – burden is on parent to
show transactions w/subsidiary objectively
fair
§
business judgment test – simply requires no gross and palpable overreaching
Sinclair Oil v Levien
o
majority stockholder(s) owe as much a fiduciary
duty to minority stockholders as officers or directors. Zahn
v. Transamerica Corp.
o
majority stockholder voting
as stockholder vs. voting as director
§
voting as a stockholder – allowed to vote in
self-interest w/view towards his own benefits and to represent himself only
§
voting as a director – not allowed to vote in
self-interest at the expense of the stockholders
o
board of directors have a fiduciary duty as directors and holders of the majority of the
shares
Ratification
-
shareholder ratification of an interested transaction shifts the burden to objecting shareholder to show
terms are so unequal as to amount to a gift or waste of corporate assets. Fliegler v. Lawrence
o
requires formal
approval given by majority of independent, fully informed shareholders
o
invokes business judgment rule. In re Wheelabrator
Technologies
Indemnification and Insurance – Waltuch v. Conticommodity Services; Citadel Holding v. Roven
Closed Corporations – stock is held by a few and is not, or only rarely,
bought or sold
-
two central issues at play in cases dealing w/close
corporations
o
public policy
considerations and corporation regulations are relaxed in favor of allowing
close corporations to contract freely
§
reflection of low
possibility of harm to public, for example
o
shareholders in
close corporations are held to stricter standards w/resp. to duties owed to one
another
§
corporate form of
close corporation supplies an opportunity for majority stockholders to oppress
or disadvantage minority stockholder
-
treated more leniently than publicly
traded corporations. Galler v. Galler
o
role of board of directors – business of a corporation shall be managed by its
board of directors. general corporation
law § 27
o
bar on limitation of role of board of directors. McQuade v. Stoneham
§
contract
precluding directors from changing officers, salaries, or policies, or
retaining individuals in office except by consent of contracting parties is
void.
§
decision making
power of a corporation lies in its directors or officers, and as such contracts
should not be made which constrict their ability to make legal decisions
o
no harm no foul
– contract whose enforcement damages no one, and creates intrusions upon power
of directorate so slight as to be negligible should not be held void for
technical violation of § 27. Clark v.
Dodge[8]
§
possible harm to
bona fide purchasers of stock, creditors, or stockholding minorities are more
substantive concerns than public policy, legislative intent, detriment to
corporation.
·
rationale – no
duty to minority shareholders can be violated by decisions of shareholders
o
shareholder-director agreements which technically violate Business Corporation Act
have been upheld in light of existing practical circumstances:
§
no apparent
public injury
§
absence of
complaining minority
§
no apparent
injustice to creditors
§
no clearly prohibitory
statutory language is violated
o
freedom of contract is valued more highly than public
policy considerations when no one is hurt[9]
-
duty owed by stockholders in close corporation – a strict obligation on part of majority of
stockholders in close corporation to deal w/minority w/utmost good faith and
loyalty – strict good faith duty. Wilkes
v. Spring-side Nursing Home
o
fiduciary duty – same in close corporation as in
partnership
§
utmost good faith and loyalty
§
directors
discharge duties in conformity w/strict
good faith standard
·
directors may not
act out of avarice, expediency, or self-interest
-
freeze out –
technique unique to close corporations
o
whether
shareholder is deprived of some right as shareholder
§
opportunity for
employment
§
reasonably fair
purchase value of stock
§
opportunity to
purchase additional stock
§
duty to exercise complete candor must also be breached. Sugarman v. Sugarman
·
requires failure
to disclose all material facts and circumstances surrounding or affecting
transaction
o
termination of minority shareholder – not a per se violation;
nevertheless, terminating employment/role as director may frustrate minority
shareholder's purpose for entering venture
§
particularly
suspect b/c of deprivation of return on investment
·
earnings in a
close corporation are distributed in major part via salaries, bonuses, and retirement benefits
o
freeze out ping-pong game
§
minority –
alleges breach of strict duty of good
faith
§
majority –
introduces legitimate business purposes
– majority should show misconduct or
desire to injure or destroy corporation by minority
§
minority – must
demonstrate business purpose could have been achieved through a course of action less harmful to
minority's interest
o
factors which indicate freeze out (totality – individual factors alone do not indicate freeze out)
§
excessive payment
in form of bonuses, excessive fees to majority(self-dealing)
§
offer alone may
will merit damages if minority can prove offer was capstone of the majority plan to freeze out minority
-
employee at will vs. minority shareholder
o
where
shareholders in close corporation occupy several relationships w/resp. to one
another, court will base holding on which relationship governed action upon
which claim is premised. Ingle v. Glamore Motor Sales
§
court makes
distinction b/t duties owed to employee and duties owed to minority shareholder
§
this relationship
is defined by Ingle's role as employee
o
whether this is a freeze-out
§
at first glace,
no; fired in good faith
§
but – issuance of
initial shares diluted his investment; domination of the board allowed them to
do this
§
firing resulted
in very low return on his investment
o
Smith v. Atlantic Properties
-
duty to disclose. Jordan v. Duff
o
close
corporations that purchase their own stock must disclose to sellers of stock
all information that meets standard of materiality
set out in TSC v. Northway
§
substantial
likelihood that under all circumstances,
·
omitted fact
would have assumed actual significance in deliberations of the reasonable
shareholder and
·
would have been
viewed by the reasonable investor as having significantly altered total mix of
information made available
o
special facts doctrine – must inform seller of new events that substantially affect the value of the stock
o
Posner's dissent – why liability for failing to disclose, as distinct from liability
for outright misrepresentation, depends on proof of duty
§
mere existence of
a fiduciary relationship between corporation and shareholders does not require
disclosure or material information to shareholders
§
b/c plaintiff was
employee at will, he could have been fired for no cause, and his rights were
not hampered simply b/c he chose to leave rather than being fired
§
employee-at-will
should not be modified by shareholder minority status, or
§
in the
alternative, as a contingent shareholder,
he is not a real shareholder and is not entitled to 10b5 fiduciary duties
§
is Posner's
argument hampered by 5 year stock resolution
§
Posner on fiduciary duties
·
fiduciary duties
create market inefficiencies
·
fiduciary duties
are redundant – employer's self-interest alone will prevent poor treatment of
employees
Disclosure and Fairness Great Lakes
Chemical v. Monsanto; Doran v. Petroleum Management
The Limited Liability Company
-
contractarian concept
o
1988 – IRS allows
LLC to be treated as an LLP for taxation purposes
o
unlike
Corporation, about which there is assumption that it exists in nature – LLC are
entirely creation of state
o
absolute victory
of contractarian principle
§
governed by operating agreement
§
composed of members; two component
·
management – running
the show
·
equity – who
has an interest in the show
-
Lieberman v. Wyoming.com, LLC – LLC is about contract; where members of LLC fail to
contract certain terms, they are stuck
o
withdrawal does
not force dissolution of LLC
§
where remaining
members elected to continue LLC at special meeting after withdrawing member's
departure; withdrawing member is not entitled to distribution of assets,
o
withdrawing
member can not compel dissolution of LLC
§
under provision
of LLC Act allowing for dissolution when a withdrawing member's rightful demand
for the return of his capital contribution has been unsuccessful, where LLC
offered to return member's $20,000 capital contribution.
o
member does not
forfeit interest in LLC upon withdrawal
§
member's demand
for his share of the current value of LLC, whose value he estimated at
$400,000, based on a recent offer from majority shareholder, indicated he would
not easily part with, much less forfeit, his interest.
-
Formation –
LLC are formed w/an eye towards freedom of contract. Westec v. Lanham
-
The Operating Agreement
-
freedom of contract – policy behind LLC – to give maximum effect to freedom
of contract and to enforceability of LLC Agreement. Elf Atochem North America v. Jaffari
-
Piercing the LLC Veil – veil piercing standard in LLC is same as in corporations.
Kaycee Land and Livestock v. Flahive
-
Fiduciary Obligation – issue – whether we look
to partnership law or corporation law for fiduciary duties
o
Delaware does not impute any default fiduciary duties
§
to what extent
will court go in and impute fiduciary duties
o
fiduciary duty
§
may be defined
entirely by contract
§
members – need
not have fiduciary duties – essentially
§
managers – would
seem to have fiduciary duties; may contract out of duties. McConnell v. Hunt Sports Enterprises
Uncovered Material[10]