CAB Agency & Partnership

a consensual relationship that arises when one person (principal) manifests an intention that another person (agent) shall act on principal's behalf

• 1. Liability of Principal to 3rdPs for tort of and Agent
• 2. Liability of Principal to 3rdPs for Ks entered by an Agent
• 3. Duties which Agent owes Principal

Respondeat Superior / vicarious liability

• Two part test: Principal will be held liable for torts committed by Agent if:
• 1. Principal-Agent relationship exists
• 2. Tort was committed by agent w/in the scope of the relationship

• 1. Assent
• 2. Benefit
• 3. Control

• Agency agreements must be in writing when the agent is to enter into certain contracts w/in the SoF or
• when the agency agreement would fall w/in the SoF

Informal agreement between principal w/ capacity (Ktual and mental) and agency w/ capacity

Agent's conduct must be for the principal's benefit

Principal must have the right to control the agent by having the power to supervise the agent's performance

• There is no vicarious liability for a subagent's tort unless there is assent, benefit, and right to control the subagent.
• Often there is no assent or control, and thus no Vicarious Liability

• There is no Vicarious Liability for a borrowed agent's tort unless there is assent, benefit, and right to control the subagent
• Rarely is the right to control present

• There is no right to control an independent Ktor b/c:
• - no power to supervise the manner of an independent Ktor's performance
• - fact based determination (parties' determination not controlling)
• - for torts and not for Ks

• Rule: there is no VL without the right to control - therefore no VL
• Exceptions: 
• 1. Ultra-hazardous activity - You can be held VL if your IC engages in tort during UH activity
• 2. Estoppel - creating the appearance of agency w/ your IC, you are estopped from raising claim on lack of control

• 1. Was the conduct of "the kind" the agent was hired to perform? (i.e. job description)
• 2. Did the Tort occur on the job? Frolic (no VL) or Detour (VL)?
• 3. Did the agent intend to benefit the principal?

• If not VicLib, pursue negligence against the principal directly
•  - e.g. negligent supervision

• Frolic: a new and independent journey - thus outside the scope of agency
• Detour: mere departure from assigned task
•  - w/in scope of agency
•  - E.g. personal errand between HQ and assignment

If the agent (even in part) indented to benefit the principal by conduct, that is enough to keep activities w/in the scope of agency

• Rule: Intentional torts are outside of the scope of agency
• Exceptions:
• 1. intentional conduct w/in scope if authorized by principal
• 2. w/in scope if natural to the nature of employment (e.g. bar bouncer)
• 3. if tort was motivated by desire to serve principal

• Principal is liable for Ks entered into by it agents if principal authorized the agent to enter the K.
• Four types of authority: Actual Express Authority,  Actual Implied Authority, Apparent Authority, Ratification

• authority that the agent reasonably thinks she possesses based on the principal's dealings with her
• aka- if the principal's words or conduct would lead a reasonable person in the agent's position to believe that the agent

when the principal "holds out" another as possessing authority and a 3rdP is reasonably led to believe that authority exists

• Apparent authority may be established through an agent's title/position if created a reasonable belief in 3rdP that agent was authorized to act in ways typical to one with that title
• Actual authority can be created by implying to agent he has authority typical to one with that title

• Principal uses words to express authority to agent (oral or private/whisper)
• Narrowly construed to the actual words used
•  - Exception - if K itself must be in writing, then the expression of authority must also (think SOF like land sale)
• Revocation of authorization by:
• 1. unilateral act of either principal/agent
• 2. Death/incapacitation of principal
•  - exception: DOA (in writing with conspicuous survival language)

• Authority which the agent reasonably believes the principal has given b/c:
• Necessity: implied authority to do all the tasks necessary to accomplish an expressed authorized task
• Custom: implied authority to do all the tasks customarily performed by persons with agent's title or position
• Prior Dealings: implied authority to do all the tasks which the agent believes to be authorized to do from prior acquiescence by principal

• 2 part test:
• 1. Principal cloaked agent with appearance of authority; and
• 2. 3rdP reasonably relies on appearance of authority
• Ex. Secret Limiting Instructions: agent has actual authority but principal has secretly limited that authority and agent acts beyond scope
• Ex. Lingering Authority: Actual authority terminated, but agent continues to act on principal's behalf

• Authority can be granted after agent enters into K if
• - Principal has knowledge of all material facts regarding the K and
• - Principal accepts its benefits
• (ratification cannot alter K's terms)

• If no authority, principal not liable & agent is liable under the K.
• If authority, principal is liable & agent is not liable under the K.
• Exception: If principal is partially disclosed (only identify of principal concealed) or undisclosed (fact of principal concealed), authorized agent may nonetheless by liable at the election of 3rdP.
• Principal indemnifies agent for legal liability reasonably incurred by agent in acting for principal, unless liability was agent’s own fault.

• L.O.C.: Loyalty/Obedience/Care
• Duty to exercise reasonable care
• Duty to obey reasonable instructions
• Duty of Loyalty

• The Principal must have knowledge of all material facts regarding the contract
• The principal must accept the entire transaction
• Ratification cannot be used to alter the rights of intervening parties

• Self Dealing: Agent cannot receive benefit to detriment of the principal
• Usurping Principal’s opportunity
• Secret Profits

• IF actual/apparent/ratification - agent is liable
• Undisclosed or partially disclosed principal - agency is also liable

• Principal may recover losses caused by the breach.
• Principal may also disgorge profits made by the breaching agent.
• Where agent has breached his fiduciary duties, the principal may refuse to pay the agent for compensation attributable to the particular transaction in question.

• None.
• No filing, no writing requirements.
• Unique among business forms

• General partnership is an association of two or more persons who are carrying on as co-owners of a business for profit.
• Look to persons receiving share of profits/losses and control over business

• Contribution of capital, money, or services in return for a share of profits creates a presumption that a general partnership exists.
• Not - share of gross returns, rent, salary, debt payment

• All partners get equal voting rights (regardless of contribution)
• majority vote wins on regular business matters
• unanimity required for matters outside ordinary course of business
• Unless partnership agreement says otherwise
• Admitting new partner requires unanimity

• Profits split equally
• losses follow profits

• Agency Principles Apply
• Partner are agents of partnership for carrying on usual partnership business
• Partnership is bound by torts committed by partners in scope of partnership business
• Partnership is bound by Ks entered by partners w/authority (actual or apparent)

• Each partner is jointly and severally liable for all of the obligations of the partnership (whether arising from tort or K)
• P must first recover from partnership resources before seeking from an individual partner
• A partner paying partnership obligation is entitled to indemnification from the partnership

Pre-existing: No general liability, but money paid in by incoming partner can be used to satisfy debts

• Dissociating partners retain liability until actual notice of their dissociation is given to creditors OR until 90 days after filing notice of dissociation w/State.
• If dissociating partner notifies other partners that he wants to dissociate partnership, but other partners nonetheless K with a 3rdP, dissociating partner is still liable to the 3rdP, but would not be liable to the other partners (who knowingly exceeded their authority).

One who represents to a 3rdP that a general partnership exists will be liable as if a general partnership exists. [Will be on exam]

• Partnership w/ at least one general partner and at least one limited partner.
• Formation: File w/state “Limited partnership certificate” that includes names of all general partners.
• Liability and control:
•  - General Partners: Liable for all limited partnership obligations. Also have right to manage business. 
•  - Limited Partners: Not liable for limited partnership obligations.  No right to manage business w/o forfeiting limited liability status

• Formation: Register w/state by filing “statement of qualification” and annual reports.
• Liabilities: No partner is liable for debts and obligations!
• (can always sue individual for wrongdoing)

• Original Purpose: Designed to give members the same limited liability given to owners (i.e. members) of shares of stock in corporations and also benefits of partnership tax status. (Corporate tax bad, partnership tax good.) 
• Formation: Must file Articles of Organization + an operating agreement
• Liabilities: Member-owners have limited liability. Not liable for obligations of the company itself. 
• Partnership Characteristics:
•  - Members control, but Articles may delegate control to managers
•  - Limited Liquidity: member interests not freely transferable
•  - Limited life: Events of Dissolution
•  - Therefore, LLC = Limited liability + limited liquidity + limited life + limited tax.

• GPs are fiduciaries of each other and the partnership
• Duty of loyalty: may never 
•  - engage in self dealing
•  - Usurp partnership opportunities
•  - Take secret profits at partnership expese
• Duty of Care - refrain from grossly negligent/reckless conduct
• Duty to Disclose
• Duty of loyalty
• Action for Accounting - partnership may recover
•  - losses caused by breach & disgorged profits

• Each partner must disclose
• - (without request) information reasonably required to undertake partnership activities
• - (upon demand) other information about the partnership (unless unreasonable)Created by statute rather than fiduciary

• Specific partnership assets are land, leases, equipment owned by the partnership itself
• No individual partner may transfer those assets w/o partnership authority

• Partner’s share of profits is personal property owned as such by individual partners
• Individual partners may transfer their share of profits to 3rdP

• This is an asset owned only by the partnership itself.
• No individual partner may transfer their share in management to some TP.
• Pick Your Partner Rule: the partnership must vote unanimously for new partners
• - only financial rights can be transferred

• Test: Whose money was used to buy the property?
• If partnership money…becomes partnership property
• If personal money…becomes personal property

• Absent an agreement each partner entitled to equal control (vote)
• If A B C agree to contribute money and share profits 60/30/10. They have EQUAL control: One partner, one vote.  Money is not relevant – just control.

• Absent an agreement, partners get no salary
• They get profit sharing instead.
• Exception: Partners do receive compensation for helping to wind up the business.

• Absent an agreement, profits shared equally
• Absent agreement, losses shared like profits

• First, w/o an agreement on profits, profits are shared equally.
• W/o agreement on losses, losses are shared just like profits and therefore equally as well.

Without an agreement on losses, losses shared just like profits. Thus losses shared 60/40.

Without an agreement on profits, profits are shared equally.

• Partner gives notice (dissociation by "express will")
• Partner's expulsion, death, or bankruptcy
• An agreed upon event
• Appointment of a receiver for a partner

• W/o agreement that specifies events, a general partnership dissolves automatically upon notice of expressed will of any single general partner to dissociate.
• In term partnership - wrongful dissociation or dissociation by death/bankruptcy is required if a majority of partners vote to dissolve w/in 90 days

Termination

Period btw dissolution and termination in which remaining partners liquidate the partnership assets to satisfy the partnership’s creditors.

• Compensation: Yes for winding up business
• Partnership Liability
•  - Old business: Partnership and therefore the individual general partners retain liability on all transactions entered into old business w/existing creditors.
•  - New business: partnership and thus individual general partners still retain liability on all new business until actual notice of dissolution is given to creditors or until 90 days after filing “Statement of Dissolution” w/State

• Each level of priority must be fully satisfied before beginning next level
• First: All outside, non-partner trade creditors + all partners who have loaned $$ to partnership (thus becoming creditors) must be paid
• Second: capital contributions/loans by partners must be repaid
•  - Partnership must repay its own partners.
•  - Thus if not enough to pay STILL LIABLE to B.
•  - General partners are liable: Default rule = if profits shared equally, losses just like profits, thus shared equally as well.
•  - But if 2 partners, and owe B 200K, partner A and B must pay in 100K…Thus B only gets 100K.
• Finally: profits and surplus, if any are shared equally w/o agreement
• Rule: “Each partner must be repaid his loans and capital contributions, plus that partner’s share of profits or minus that partner’s share of losses.”

Each partner must be repaid his loans and capital contributions, plus that partner’s share of profits or minus that partner’s share of losses.

• General Partners: liable for the obligation of the LP
• Limited Partners: NOT personally liable for an obligation of the LP
• - only liable for investment in LP

• Based on partners' contributions
• (compare to GP, where default is equal distributions regardless of contribution

• General Partners: same as GP (Loyalty/Care) to both partners and LPs
• Limited Partners: NONE

• General partnership where general partners are not personally liable for obligations of the LLP (whether in torts, contract, etc.)
• Must publicly file with secretary of state

• Hybrid between corporation and partnership
• Members have limited liability as well as the benefits of partnership tax treatment
• Formation must be filed w/ Sec. of State.
• Operating agreement: the operating document

• Members manage a member-manage LLC by default
• Manager-managed LLC: outside managers are specified in operating agreement
• - must be

Default: contributions

• Follows those who control the LLC
• - members in member-managed
• - managers in manager-managed
• Duty of Care - must be gross negligence/recklessness
• Duty of Loyalty - like LP

• Financial rights are unilarterally transferable
• Management rights are not - only with unanimous consent

• the conduct of the all/most of LLC's activities are unlawful
• not reasonably practicable to carry out LLC's activities in conformity w/ operating agreement
• If managers/members act illegally/fraudulently
• If managers/members act or will act oppressively/harmfully to member seeking dissolution

• Pass-through taxes
• Reported on individual's tax returns
• Corporation is double taxed (taxes on profits, owners on distributions)

• People: individuals to serve as board members
• Paper: Art. of Incorporation (name, info on incorporators & directors, name of registered agent, statement of purpose)
• Act: Follow formalities of state law (file with Sec.ofState)

• Corporate name: must include key words (corporation, company, incorporated)
• name and address of each incorporator
• name and address of each director
• name of registered agent and address
• General statement of purpose (may be to "engage in all lawful activity:)
• Capital structure- voting rights & preferences of your stock

• Corporate activities that fall outside of the general purpose of the corporation
• Ultra vires contracts are valid as to 3rdP's
• Shareholders can seek an injunction to stop ultra vires act
• The Co. can sue responsible managers for ultra vires losses

• Requirements: No more than 100 shareholders (human)
• Only one class of stock
• Not publicly traded
• Benefits: not double taxed

• No liability for what the entity does
• "limited liability" - can only lose the amount that they invested in the company

• Shields owners from being considered as partners (limiting their liability)
• Anyone asserting either doctrine must be unaware of failure to properly
• De Facto Co: must be relevant, parties made a good faith attempt, some exercise of corporate privileges
• Co. By Estoppel: One who treats a business as a corporation may be estopped from denying it is a corporation
• - Only applies to contracts claims

• Corporation: not liable for the pre-incorporation contract, unless it adopts
• - expressly- board takes action adopting K
• - implied- accepts the benefits of the K
• Promoter: Liable for pre-incorporation contracts
• - until there is a novation (K where 3rdP replaces promoter w/ Co.)
• Note: adoption make the Corp. liable too, but the promoter is still liable

Full board required to add new members and determine dividends

• Director owes the Corporation the duty
• must act in good faith and do what a prudent person would do with regard to her activities

• The director fails to take an action
• The company must demonstrate harm

• When the board does something that hurts the corporation
• Business Judgment Rule: A court will not second guess decision if
• - it was informed
• - on good faith
• - without conflict of interest
• - had a rational basis

• Director owes the Corporation the duty of loyalty
• She must act in good faith and with a reasonable belief that what she does is in the corporation's best interest

• The interested transaction will be set aside UNLESS the director shows:
• 1) the transaction was fair to the corporation, or
• 2) her interest and he relevant facts were disclosed and transaction was approved by board or disinterested committee

• You may not compete against the corporation
• Disgorgement of the profits - they are held in constructive trust

• Cannot usurp a corporate opportunity until: 
• - tell the board
• - wait for board to reject
• Corporate Opportunity:
• - something that Co. had an interest in or had an expectancy in
• - that the Director found on company time or with company resources

• when held liable to the corporation
• when held to have received an improper personal benefit

when she prevails in defending the proceeding on the merits or otherwise

• Small number of shareholders
• No public market for the stock
• Shareholders may remove the board and run the corporation
• - unanimous consent
• - articles/bylaws
• the managing shareholders owe fiduciary duties

• Shareholders have limited liability (courts are unlikely)
• Unless Court Pierces the Corporate Veil (CLOSE CORPORATIONS ONLY)
• Standard:
• -shareholders must have abused the privilege of incorporating and
• -fairness must require holding them liable
• Ex.
• -Undercapitalization
• - parent corp. forms subsidiary to avoid obligations
• -tort claimants

• A Shareholder is pursuing a lawsuit on behalf of the corporation
• - done when the corporation does not bring a suit on its own behalf
• "Could the corporation have brought this suit?"
• Corporation receives judgment
• - costs are reimbursed

• Stock ownership when the time arose or obtained it through operation of law from someone who owned stock at that time (i.e.  
• Adequately represent Corp's interest
• Must make written demand on Corp that the Corp bring the suit (then must wait 90 days, unless futile)
• Corporation is Joined as a defendant
• Judicial dismissal - independent panel determines suit is not in interest of corp. (may ask shareholders)

• The "record shareholder" as of the "record date" have the right to vote
• Exceptions:
• - Corp reacquires stock
• Death of Shareholder
• Proxy votes

• An agency relationship whereby an individual receives an authority to vote at Board Meeting
• Proxy is valid for 11 months unless otherwise stated
• All proxies are revokable, except those coupled with another interest (ex. option to buy the shares)

• Voting Trust: Transfer shares to trustee, all ownership rights are returned to stock owner, valid for 10 years
• Voting Agreement: In writing, signed

• Annual meetings: to elect directors (min. once every 15 months)
• Special Meetings: called by baord, president, 10% of shareholders
• Notice: Must give notice to all shareholders
• - special meetings require special notice

• Quorum is a majority of outstanding shares (number of shareholders is irrelevant)
• Not lost if shareholders leave the meeting
• Action deemed 'approved' if votes cast in favor exceed votes case against

• Number of votes = Multiply the number of shares times number of shareholders
• Helps empower minority shareholders
• Must be expressly provided for in articles

• Default - unrestricted transferability
• Stock transfer restrictions will be upheld if reasonable
• - cannot be complete restrictions on alienability

• Any shareholder may request
• Must be in writing and related to proper purpose (role as a shareholder)
• Compare: Directors have unfettered access

• In the Board's discretion - can only force upon showing abuse of discretion (subject to BJR)
• Corporation cannot make distribution if insolvent or if distribution would cause insolvency

• Requirements:
• - Board action requesting shareholder approval
• - Notice to sharehlolder- Shareholders approval
• - Deliver document to Sec of State
• - Dissenting Right of Appraisal

• Only available for close corporations
• Eligible Transactions:
• - Merger/consolidation
• - Transfer of substantially all assets (>75%)
• - Transfer of shares in a share exchange

• Before vote, file with corp written notice of objection and intent to demand payment
• Abstain of vote against proposed change
• After vote, make timely written demand to be bought out and deposit stock with corps.

• Director abuse, waste of assets, misconduct
• Director deadlock that harms the corporation
• Shareholders have failed at 2 consec. annual meetings to fill vacant board position

• When the investor lends capital to the corporation
• Secured by corporate assets: bond
• Unsecured: debenture

• Prohibits Fraud or Lack of disclosure
• Must use an instrumentality of interstate commerce
• Subject Transactions:
• misrepresentation of material information
• Insider Trading: (directors/officers/controling shareholders/employees w/ access to confid. info) trading on the basis of material inside information
• Misappropriation: A person who owes a duty of trust and confidence to the source of information has a duty to abstain or disclose
• Tipping: insider receives renumeration or personal benefit

a fact a reasonable investor would consider important in making an investment decision

• SEC
• Private action for damages by buyer or seller

• Company that issues a misleading press release
• Buyer or Seller of securities who misrepresents material information
• Buyer or Seller of securities who trades on material inside information
• Tipper or tippee (must have received a benefit, but reputation is enough)

• Must have an intent to deceive, manipulate, or defraud.
• Recklessness may be enough
• Reliance: Generally a separate element, but is presumed in public misrepresentations and nondisclosure cases
• Damages are measured by an out-of-pocket measure