Corporations Outline

Corporations - Spring 2016

Prof. John Harrison

General Themes

• Tax: motivations, problems

• Finance

• Self dealing vs. Profit for shareholders

• Role of bad faith

  • To whom do your duties run?

  • 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

  • Formalism: DE; most other court interpretations of state corporation statutes; mergers

  • 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.

  • Agency is Harrison asking me to go buy milk for him in the snow.

  • 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

  • For corporations, there is an agency relationship with the legal entity that is the corp.

• Three Types: Depend on Degree of Control

  • Agent-Principal (for all agency that isn’t M/S or IC):

    • Cases: Gorton

    • 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)

  • 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.

  • 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.

  • 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?

  • 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.

  • 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...

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