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Corporations Professor Dibadj Spring 05 I. INTRODUCTION TO LAW OF CORPORATIONS a. Efficiency as organizing principle – Wealth creation & efficiency are the goals of corporate law. To the extent that a system is „efficient,‟ the definition of efficiency is mutable, but generally efficiency is concerned most w/minimizing waste in the delivery of goods/services to consumer mkt. The argument exists about to what extent non-monetary concerns should enter the picture. Is it right to concentrate mos
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  Corporations Professor Dibadj Spring 051 I.   INTRODUCTION TO LAW OF CORPORATIONS a.   Efficiency as organizing principle  –  Wealth creation & efficiency are the goals of corporate law. To the extent that a system is „efficient , ‟ the definition of  efficiency is mutable, but generally efficiency is concerned most w/minimizingwaste in the delivery of goods/services to consumer mkt. The argument existsabout to what extent non-monetary concerns should enter the picture. Is it right toconcentrate most wealth among those at the top of corp structures?i.   Pareto Efficiency    –  no reallocation of resources can make at least oneperson better off w/out making at least one other person worse off. Theidea that parties voluntarily make exchanges that benefit both. But thereality is that someone will always be made worse off.ii.   Kaldor-Hicks  –    efficiency can exist w/one made worse off as long asthere is the mere  possibility that the worse off party will be somehowcompensated.iii.   The problems of both of the above include the initial distribution of wealth: Neither theory addresses where these resources srcinate. Alsohow is compensation or net improvement measured? In these theories,compensation is always monetized, w hat about those who don‟t want this type of compensation, & don‟t want to be involved in a situation of  having to be compensated.b.   Coase’  s Theory of the Firm  –    Firms exist b/c mkt mechanisms are not feasiblew/in organizations, hierarchies not driven by price quantity but b/c managementdirects workers. Firms run by fiat to facilitate this & deal w/transaction costs. Notevery movement workers make can be attached to a corresponding transactioncost.c.   Costs of Agency  –    3 sources of costs associated w/P-A relationships:i.   Monitoring costs  –  costs incurred ensuring A loyalty to Pii.     Bonding costs  –  costs incurred by As to ensure reliability of ownersiii.     Residual costs  –  costs arising from differences in interest that remainafter the above costs have been incurred.d.   3 Problems of Agency i.   Managers/Investors  –  Risks & rewards w/re to each may not be inalignment, mgrs may not receive all the benefits of their wise decisions,etc, or may bear large liability for their decisions.ii.   Majority Control  –  Those in the majority may act to control returns in a way that doesn‟t benefit minority owners. iii.   Firm/Creditor  –  Problems arising between a firm & outside parties w/whom it transacts or Ks. These problems are K‟d around or the K‟ing parties will demand higher returns.  Corporations Professor Dibadj Spring 052 II.   LAW OF AGENCY    –  The concept of agency emerges from the reality that a principal actor can‟t be everywhere nor do everything req‟d to conduct business efficiently . Agentsempowered w/authority, tools & a workplace to carry out principal‟s wishes. Think of agency in the context of being a foundation of corps.  Respondeat superior  is a key exampleof agency.a.   Restatement 3 rd    –  Agency is a fiduciary relationship that arises when one personmanifests assent to another person that the agent shall act on the principal ‟ sbehalf and subject to the principal ‟ s control,and the agent manifests assent orotherwise consents so to act.b.    Agency Formation    –  Usually formally established through agreements, but ctsmay infer an agency relationship despite the desires of a party or parties.Different types of agency relationships may be formed:i.   Special Agent  –  one-off dealsii.   General Agent  –  Reps a P across multiple transactions(a series of actsand transactions )iii.   Disclosed Principal  –  Where a 3 rd party is aware of P l‟s IDiv.   Undisclosed - 3 rd party unaware of principal. ( not disclose the agentcy)v.   Partially disclosed  –  3 rd    party knows there‟s a P, but not her ID. ( notdisclose the principle )c.   Termination Principle revoke or the agent ‟ s decisionto renounce , give rise to aclaim for damages for breach of contrastd.   Cargill  –    [П, A‟s creditors, sue. A owns grain elevators, in debt/default. Cargillfinances A, takes on „paternal‟ relationship w/A: C‟s name on bank notes, etc. Пs claim agency relationship in order to recover from Cargill] Ct: П must show Cargill controlled A, no arms-length transaction. Despite no mtg of the minds,unique fabric of the relationship/  totality of circum‟s = inference of aprincipal/agent relationship   despite absence of explicit P/A relationship.e.   3rd Parties: Authority & Liability  i.   3 types of authority held by agents:1.    Actual Authority    –    RP in A‟s position would infer from P‟s conduct that the A has been given authority.a.   Ex: P tells A to negotiate the deal.2.    Apparent Authority (External appearances) - A 3 rd party, fromthe actions or statements of principle , reasonably infers anagency relationship. The P ‟s conduct is key, the 3 rd party infersfrom that P ‟s conduct , & may rely on it.a.   Ex: P wants to sell factory to X, P tells X his agent Awill finalize the deal. X infers A will have the power to execute the deal, even though P hasn‟t laid out specifics.  3.    Inherent Authority    –    Based on neither the P‟s nor    the A‟s behavior. Not power conferred by a P, but where a 3 rd partyreasonably believes the A is authorized to act as she does. P maybe disclosed or undisclosed. 3 situations where this kind of power exists:a.   Where an A enters transaction w/3 rd party similar to that which he normally does, but against a P‟s orders. P may be bound, even if undisclosed (Restatement 2 nd §161)i.   Nogales  –    [ARCO finances П‟s gas station, Δs‟regional mgr promises П loans, price break, etc.  Corporations Professor Dibadj Spring 053 Δ claims mgr had no authority] Ct: Atty failed to argue for inherent authority in jury instructions  It could be argued that the mgr created liability for the Δ by his actions thru inherentauthority.b.   Where an A enters into a transaction for his ownpurposes, & would be authorized to take the action if actuated by proper motives.c.   Where an A disposes of goods, but departs from theauthorized manner of disposal. P may be disclosed or undisclosed, thus the authority flows from A‟s actions (contrast w/Apparent). A 3 rd party may bind a P to a Keven if that P repudiates the deal.ii.    Liability in Tort     –  Torts committed by As in the scope of employmentusually bind the P through vicarious liability.1.    Restatement 2 nd  §2(1)  –    Master is the P who employs an A,whom he can control2.    Restatement 2 nd  §2(2)  –  Servant is an A employed by a P toperform a service3.    Restatement 2 nd  §2(3)  –    Independent K‟er K‟s w/another to perform, but who is not controlled by the other nor subject to hisright to control him. May or may not be an A.a.   Humble  –    [П injured by car rolling off Δ‟s station lot, Δ claims station mgr is indie K‟er.] Ct: Agreement errs onside of independent K‟er, but in reality Δ insinuated itself into mgmt of station/paid utilities, etc. Thesecontradictions = P/A relationship. Look at degree of control of em over ee.b.   Hoover  –    [П injured in gas station fire run  by B, Δclaims B is indie K‟er.] Ct: B under no obligation tofollow Δ‟s advice on day -to-day operations, set his ownhrs, etc.    In the absence of a P’s control over A, & where the parties are driven by mutual interest there is an indieK relationsip . He is an indie K‟er, & as such the Δ is not bound/not liable.4.    Restatement 2 nd  §215  –    P who unintentionally authorizes conductof an A which results in tort to a 3 rd is liable5.    Restatement 2 nd  §216- P may be liable to a 3 rd whose interestshave been invaded by tortuous conduct of A despite the P notviolating a duty to the 3 rd or authorizing the conduct of the agentcausing the invasion.6.    Restatement 2 nd  §219  –    P isn‟t liable for the torts of As acting outside scope of employment unlessa.   P intended the conduct/consequencesb.   P was negligent/recklessc.   Conduct violates a non-delegable duty of the Pd.   A purported to act for the P & there was reliance onapparent authority, or was aided in committing the tortby existence of agency relation.f.   Agents‟ Duties    –    Fiduciary duty of an agent is acting with an eye to further theinterests of the P at all times. Wills/trusts situations give rise to the most abuse of   Corporations Professor Dibadj Spring 054the P/A relationship. Fiduciaries‟ duties (see these also below in Corp duties)include:1.    Duty of Obedience to the documents creating the relationship, duty to obey P‟s commands. 2.    Duty of Care    –  RP standard, A must act in the way a reasonableperson in the same situation would.3.    Duty of Loyalty    –  G/F advancements of interests of P, not forpersonal gain.ii.   Tarnowski  –    [Jukebox agent Δ misrepresents terms to П, gets secret commissions.] Ct: The fruits of an A‟s work belong to a P, whether or  not they were gotten by proper performance or otherwise. П gets back  his investment & the secret commissions from Δ.  (Deterrent effect sought by ct in showing this Δ was the antithesis of an agent? )iii.   In Re Gleeson  –    [Trustee leases decedent‟s land, becomes co -tenant,paying rent. Heirs sue.] Ct: Agent can be a tenant OR a trustee, not both.Bright line rule: Trustees forbidden from personally benefiting from thatwhich is in their trust (monitoring costs for trustors would be infinite,plus this one is dead!  )g.   Agency Termination  –  Agencies may be terminated at will. If a term of agency isfixed, early termination gives rise to damages for breach of K.
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