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Business Entities

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General Def of Agency
Someone who has agreed to act on someone else’s behalf and is subject to that person’s control.
R3 § 1.01 Agency Defined
Agency is the fiduciary relationship that arises when
i) one person (a "principal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and
ii) subject to the principal's control,
iii) and the agent manifests assent or otherwise consents so to act.
Agency gives rise to a fiduciary duty. 2 broad categories of duties.
1) Duty of care (can’t act negligently—different from Tort duty tho)
2) Duty of Loyalty (encompasses lots of things—in general, the agent has to put the interests of the principal above the agent’s interest; can’t self-deal; can’t bargain on the other side with the principal w/o disclosure)
4 broad categories of ways that an agent can bind a principal
1. Actual authority
2. Apparent Authority
3. Estoppel
4. Ratification
Agency: Actual authority.
From whose perspective is actual authority analyzed and what is the creiteria?
Principal has to manifest that they are imbuing agent with authority. Actual authority analyzed from objective Agent’s POV.
Agency: 2 main types of actual authority
Express (written/oral)
Implied
Agency: Actual Authority: Implied Authority.
3 categories
1) Reasonable & Incidental to main objective/scope of agency
2) Business Custom
3) Positionality (Implied authority based on Title or position in the business entity)
Agency: Actual Authority: Implied Authority.
How does implied actual authority difffer from apparent authority?
Implied auth rests on Agent’s reasonable belief that what they are doing is actually authorized. [Don’t’ confuse w/ apparent authority]
Agency: Apparent Authority §2.03
From whose perspective is apparent authority analyzed?
doesn’t care about Agent. Manifestation of principal to the 3rd party—focuses on objective reasonable belief of 3rd party.
Agency hypo:
Rich chick tells guy in WA to ‘buy blackacre’ in NY. What kind of actual authority does guy have?
i) Express authority: buy blackacre
ii) Implied authority: fly to NY; do title search; inspect property, etc.
Agency: Apparent auth: 2 types
i) Express
ii) Implied
Agency: Hypo 2: Guy goes to WaMu and asks teller for a loan. Teller gives guy a check. Is WaMu bound?
i) Teller had no Actual authority (analyzed from Teller’s POV)
ii) However, Teller did have implied Apparent authority (analyzed from guy’s POV). Guy had a reasonable belief that Teller could enter into this kind of transaction. Therefore, WaMu is BOUND by the Teller’s action.
What are the elements of agency by estoppel?
Elements:
a) Justifiable [reasonable] detrimental reliance of a 3rd party [don’t need to prove reliance for actual/apparent authority]; AND EITHER
b) Principal’s fault (negligence), OR
c) Principal has knowledge or notice [of the possibility that a 3rd party could think there was an agency relationship] but does not take steps to correct
Agency: Ratification
4) Ratification §4. Was no agency at the time, but after the fact, the principal ratifies the act [only go here if no actual/apparent auth]
a) Express: principal says, I will abide by agent’s action §4.01(2)(a); OR
b) Implied by conduct that shows the principal intended to ratify §4.01(2)(b). e.g.
i) Retaining benefits (P wanted to benefit)
ii) Failure to repudiate
iii) Silence or acquiescence – silence alone can cause a ratification
c) AND Must be effective before 3rd party withdraws
Categories for when principal is subject to Ks made by agent
1) Disclosed principal:
2) Unidentified Principal:
3) Undisclosed Principal:.
Disclosed principal:
Agent not liable; principal & 3rd party liable
Unidentified Principal:
3rd party knows they are dealing with an agent, but the principal is not disclosed. All 3 parties will be liable on the K. Little more responsibility on the part of the 3rd party. But 3rd party takes greater risk then when P is disclosed
Undisclosed Principal:
3rd party doesn’t know it is dealing with an agent. Presuming that agent had actual authority, all 3 parties are bound to K unless the principal is specifically excluded from the K.
§ 6.01 Agent For Disclosed Principal
When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
(1) the principal and the third party are parties to the contract; and
(2) the agent is not a party to the contract unless the agent and third party agree otherwise.
§ 6.02 Agent For Unidentified Principal
When an agent acting with actual or apparent authority makes a contract on behalf of an <i>unidentified</i> principal,
(1) the principal and the third party are parties to the contract; and
(2) the agent is a party to the contract unless the agent and the third party agree otherwise.
§ 6.03 Agent For Undisclosed Principal
When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,
(1) unless excluded by the contract, the principal is a party;
2) the agent and the third party are parties to the contract; and
(3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally, subject to § § 6.05-6.09.
Principal will be liable for tortious acts of Indep Kter if:
1) Torts were authorized
2) Tortious act was strongly related to the agency
3) A non-delegable duty (most common: inherently dangerous activity). If your wrecking crew who is blowing up your bldg harms people, you are liable. That duty not delegable to the indep Kter.
4) N supervision/N hiring
DGCL §141(a)
The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
Promoter Liability
What is the Trad Common Law rule:
Promoter is liable by default.
Mechanics for shifting liability from promoter to corp (2 ways)
1) Novation.
2) K assumes that the corp will take on obligations of indiv. However, corp must specifically adopt the K (but don’t need novation)
Novation. Common law elements:
a) Clearly intend new K
b) Clear substitution for old K (not merely clarification or addition)
c) consideration
Which corp actions are governed by the law of the state of incorporation?
1) Corporate actions which could not be done by an individual (“internal affairs”) are governed by the law of the state of incorporation
When is the law of the state of incorp not applied?
2) Law of state of incorporation is not applied when corp has little contact w/ state of incorp and the rules of the other state embody important policy and the matter doesn’t involve corp’s organic structure. Only the rarest situations.
De Facto corps
elements
1) Tried to incorporate [had honest and sincere belief that they had done all that was necessary to incorporate && had no actual or constructive notice of failure to incorporate]
2) Had legal right to do so
3) Acted as corp
Does a promoter who knows that the corp is not yet formed get limted liability?
Person who acts as corp knowing that there is no incorp does not get limited liability.
Corp by estoppel. Trad rule
Q is whether creditor is estopped from arguing that the principals s/be personally liable when both parties reasonably belive that they are dealing with a corp. (Pretty similar to de facto incorp). [Trad rule is that the party to be estopped (usu creditor) has reasonable belief that the firm was a corp & would earn a windfall if the firm were not a corp.]
What is a stock Redemption?
repurchase by corp. at shareholder’s option
What is convertable stock
option to exchange shares for fixed amt of another security in the corp. (e.g. from preferred -> common; debt -> preferred -> common)
What is callable stock?
corp has power to require shareholder to return shares to corp for a predetermined price.
What are the advantages of debt over equity?
1) Tax: interest payments on debt are deductible to corp, debtholders are taxed on the interest they collect; Corp pay tax on dividend distributions, then shareholders pay tax on dividend.
2) Leverage: may or may not be ‘real’ advantage, but it gives you flexibility in using debt. ‘Force multiplier.’ Debt magnifies both the risk and the potential reward.
How to tell whether payment is interest on debt or equity disguised as interest

trad. indicia of debt test:
(unconditional obligation to pay sum certain; fixed maturity date; interest paybable regardless of ability to pay)
How to tell whether payment is interest on debt or equity disguised as interest

Economic realities test:
objective inquiry whether unrelated 3rd party would have made a similar loan on such terms. Debt/equity ratios vary by industry
What is "blank check" stock?

What jurisdictions allow it?
In DE, articles can define ‘blank check’ stock: gives BoD power to issue stock with characteristics determined by the board at a later date.
What are the 2 requirements for a stock to be "issued"?
when board has authorized issuance and the corp has received appropriate consideration, the shares have been ‘validly issued’ and ‘fully paid’ and are “nonassessable”.
How is a stock issuance authorized?
i) Board authorization: by maj. Vote at mtg; price set by directors (absent actual fraud, director’s determination of price is conclusive)
When are shares "outstanding"?
c) Outstanding. Shares are outstanding when they have been authorized, validly issued, and remain in the hands of someone not the corp. Only outstanding shares can vote/get dividends.
Under the MBCA, when can a corp NOT issue a dividend?
2) MBCA: may not pay dividend if afterward, the corp would be unable to pay its debts as they come due in the usual course of business || if the corp’s assets would be less than its total liabilities. But directors can use judgment to use any reasonable method of valuation. (insolvency test—fairly rarely used: hard to find against corp)
What test does DGCL use to determine whether a corp can issue a dividend?
3) DE: legal capital test. [does not protect creditors]
a) Capital: some portion of consideration for shares (must be >= par value)
b) Surplus = (total assets – total liabilities) – capital
c) Dividends can only be paid out of surplus

If no surplus, dividends must be less than net profits for current & preceding fiscal year.
In DE. what happens to capital & par value in a stock dividend?
Stock dividend decreases capital [haven’t sold the new shares for new consideration, so have to contribute from equity to capital stock]. Par value is unchanged.
In DE, how is a stock dividend authorized? A split?
DE rule: BoD can unilaterally approve stock dividend, but shareholders must amend articles for split.
Under MBCA, how is a stock dividend authorized? A split?
MBCA: board can approve both split & dividend
In DE. what happens to capital & par value in a stock split?
share split (not issuing new shares; adjusting the par value for the split) means capital remains constant, but each share’s par value decreases proportionately
Why would a SH typically care whether a corp issues a split or a dividend?
In T&E, dividends are freq allocated to income; splits to the principal
What is the NYSE rule for determining whether a distribution is a split or a dividend?
NYSE rule: if # of shares increase by less than 25% (5-4), is a stock dividend; if shares increase by more than 25%, is split.
What limitations are placed on stock repurchases?
Limitations
1) Subject to same economic test as dividends
2) At least one share w/ full voting rights & right to assets on dissolution must remain outstanding
T/F: Repurchased shares are not outstanding
T
1) Repurchased shares are not outstanding (by default become authorized/unissued, but may be retired if articles so provide)
What happens to repurchased shares in DE?
In DE, repurchased shares become treasury stock (auth’d/issued/not outstanding). BoD is free to sell at whatever price (even below par). May be retired by BoD action.
What is Piercing the Corp Veil?
Equitable doctrine: SHs liable for corp debts in certains circs where the corp is unable to pay—to prevent fraud or injustice. Practically only applies to closely held corps. If more than 2-3 SHs, little chance of piercing.
What are the elements for a court to pierce?
Applied when (basically 2 elements)
1) Such unity of interest & ownership that separate personalities of corp & SH are indistinct or non-existent.
2) Not piercing would sanction fraud, promote injustice or inequity or lead to evasion of legal obligations. [can’t usu prove fraud // OTOH, simply, I haven’t been paid is not enough inequity]
3) [ Court finds it appropriate to pierce. ]
What factors does the ct use to determine whether there is unity of interest in a piercing claim?
a) Degree to which corp legal formalities have been maintained [sh meetings/quorums/ minutes; sec reqs] (Absence of corp records)
b) Degree to which indiv & corp assets have been commingled (pymt of indiv obligations by corp)
c) Undercapitalization – SH did not put enough $ into corp at formation that corp could pay its foreseeable debts. Measured at the time the corp is created. Tends to be a difficult claim to make. Usu biggest issue is whether corp has enough insurance.
What is Enterprise Liability?
Holding a corp parent liable for its subsidiary’s debt. (Some call this ‘piercing’ & refer to enterprise liability as between affiliated corps – children of the same parent corp.)
How do courts treat piercing and enterprise liability differently?
1) Some cts treat it similarly to piercing, but cts somewhat more inclined to aggregate affiliated corps. Also less insistence on inequity or fraud.
2) Some cts impose ent liability where corps are indistinct & equity best served by aggregating.
What are the 4 approaches courts commonly take towards enterprise liability?
1) Just like piercing, but with corps
2) Emphasize equity (Smith)
3) Emphasizes relationship betw related corps
4) Parallel corps (divide up the business into tiny units—Taxicab case)
How could a person set up a 'taxi cab' series of sister corps & avoid enterprise liability?
To set up a taxi corp like this, have to follow principles:
1) Does not fail first prong of piercing analysis
2) Every corp has suff ins
3) Don’t commingle
4) Not undercapitalized
What are the 4 broad categories of priority in bankruptcy?
1) Judgment creditors
2) Secured Creditors—have security in some property (or instrument or accounts receivable or inventory…). Must be perfected (by filing).
3) Unsecured Creditors—can include employees, unperfected secured creditors…
4) Equity—preferred SHs usu have pref over common stock (by default, but can be altered in articles). This group usu gets little.
When is equitable subordination justified?
1) the claimant engaged in inequitable conduct;
2) the misconduct resulted in injury to the creditors or conferred an unfair advantage on the claimant; and
What are the 3 main ways to combine corporations?
1) Sale of assets—acquiring corp (A) doesn’t inherit liabilities of target (T)
2) Sale of stock—buy all shares of T. A becomes parent of T & acquires liabilities
3) Statutory merger—A buys all shares of T; Ts SHs approve merger; T becomes merged w/ A.
What is the difference between a forward & reverse triangular merger?
a) Forward Triangular Merger—MS merges w/ T; MS survives as new child of A
b) Reverse Triangular Merger—T survives as child of A, but with different tax ramifications than if A merely bought all the stock of T.
What are the 4 exceptions to the rule that a corp assumes no liability when it purchases the assets of another corp?
a) A corporation that purchases the assets of another corporation assumes no liability for the transferring corporation's debts and liabilities. Exceptions arise only in four circumstances:
i) the buyer agrees to be held liable;
ii) the two corporations consolidate or merge;
iii) the buyer is a "mere continuation" of the seller [Under the traditional approach, the focus was on continuation of the corporate entity: must prove continuity of mgmt & ownership. Must be common officers, directors, & SHs]; or
iv) the transaction amounts to fraud.
Direct Liability of Corp Officers

What is the Participation theory of liability?
When an officer participates in a tort committed by a corp, that officer may have personal liability.
2 kinds of issues where we will find officers personally liable under participation theory:
intentional torts (usu fraud or conversion);

negligent acts that cause personal injury.
What is Ultra Vires?
Granted relief when corp acted beyond the purpose states in its articles. Sometimes applies to permissible actions that were not properly auth’d. Also Corp waste is always beyond the power of the board.
Generally according to DE case law, what is the duty of layalty?
officers/dirs can’t use their position of trust to further their private interests. Technicolor.

Officers/dirs must act in best interests of Corp & SHs generally
Who are beneficiaries to whom FD is owed?
In USA, to Corp, then 2ndarily, to SHs.
What is the Corp opportunity doctrine?
When dir, officer, or controlling SH takes a business deal for themselves when the corp might have accepted that deal. Fiduciary has obligation to give opp first to corp.
What are the elements of the DE “line of business” (Guth) Test for determining when a corporate officer or director may not take a business opportunity for his own:
1) the corporation is financially able to exploit the opportunity; [usu corp must be able to reasonably borrow the $]
2) the opportunity is within the corporation's line of business;
3) the corporation has an interest or expectancy in the opportunity; and
4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. [resulting conflict]
5) [in almost every duty of loyalty analysis, courts insert some element of fairness]
According to the ALI, A director or senior executive may not take advantage of a corporate opportunity unless:
i) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest and the corporate opportunity;

ii) The corporate opportunity is rejected by the corporation; and

iii) either:
1) The rejection of the opportunity is fair to the corporation;
2) The opportunity is rejected in advance, following such disclosure, by disinterested directors, or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule; or
3) The rejection is authorized in advance or ratified, following such disclosure, by disinterested shareholders, and the rejection is not equivalent to a waste of corporate assets.
A corporate opportunity means:
i) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either:
1) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or [context of how you get the info is important—is determinative for directors. This term mostly is applied to directors.]
2) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or
ii) any opportunity to engage in a business activity of which a senior executive becomes aware [don’t care about context] and knows is closely related to a business in which the corporation is engaged or expects to engage. [expectancy test—applies only to officers, not directors. Context in which the opp arises is not determinative.]
What 2 things does the duty of loyalty demand of a director who wishes to enter into a self-dealing K with the corp?
a) The duty of loyalty requires, inter alia, that a director or an officer act in good faith toward the corporation and that transactions or contracts into which he or she enters with the corporation be fair to the corporation.

i) Good faith in this context means full and honest disclosure by the fiduciary of all material facts to allow for a disinterested decision maker to exercise its informed judgment.
ii) Fairness to the corporation requires that a transaction or contract benefit the corporation and the stockholders thereof and not confer undue or unjust advantage on the fiduciary. [Court is primarily concerned that the transactions be fair to the corp. Fairness is measured at the time of the transaction.]
What are we concerned about WRT duty of care claims?
We are really concerned with the process the directors use to inform themselves/monitor so that they could make reasonable business decisions.
What are the 3 main categories of duty of care claims (where the BJR has been rebutted)?
1) Failure to be informed when making decisions (gross N standard). (has been successfully litigated)
2) Failure to monitor. (has never been successfully litigated)
3) Waste (comes up occasionally). Act in manner not attributable to rational bus purp. Treated as a separate theory, but might really be just ev of a failure of duty to inform.
How does the duty of care differ from Tort Negligence?
1) In Duty/Care: don’t have to show damage or prox cause. Whereas Harm in tort often doesn’t arise unless someone was N, Harm in business context can arise from perfectly sound business risks that don’t come out right.
Under the MBCA, what is a director's standard of care in duty of care claims?
the ord. prudent director or officer
Under <i>Caremark</i>, how might a board lose BJR protections in a duty of care claim?
In Caremark, part of d/care is to monitor what’s going on beneath them. If you don’t have a system to monitor, you may not have business judgment rule (BJR) protection for d/care violations.
What does the BJR do?
BJR is generally viewed as rule of abstention—ct will abstain unless there is strong reason to intervene. Creates rebuttable presumption that bd is acting reasonably, on informed basis, in best interests of SHs.
When does BJR not apply to duty of loyalty claims?
fraud, bad faith, self-dealing
What does a P need to plead to survive SJ due to BJR on a duty of loyalty claim?
need to make colorable claim that:
1) Maj of bd was interested , or
2) Maj of bd lacks independence, or
3) do not act in GF
(can have, e.g., 30% interested, 30% lacks indep)
What happens when the P rebuts or circumvents BJR in d/loyalty claim?
shifts the burden to the D dirs/officers to show that the transaction was “entirely fair”.
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