Business Organizations

26 May

• Here is life: read some stuff, then go to a meeting, where you and the client try and hash out what to do based on what you've learned.
• So read the cases, and the relevant statutes (or restatements). This mostly about black-letter law. The cases are illustrations about how the law works. They're nice fact scenarios to talk about, and the help identify gray areas or soft parts of the statutes. Policy is the third most important thing here.
• Food Lion is a great example: reporters submit fraudulent employment applications, and then film bad practices in the meat department. They get sued after this gets broadcast. The grounds for the suit was breach of the duty of loyalty: employees of the market have a duty not to work against the interests of the market when they are employed. The court finds in favor of the grocery store. Well, what about whistleblowers? These guys maybe saved some lives. This is where policy comes in: when you're advising someone (an employer or an employee), you need to know why it's important for employees to be loyal to the employer. The reason for the employees' duty is to make the economy work better. But if following that duty would actually cause a bad economic impact, maybe there's an exception.
• His office is 150 E. Gillman (about a block east of the Edgewater)
• The problems are worth thinking about, but don't freak out about them. No need to over-prepare.
• Don't let yourself not understand a statute: that's what's important here.
• We'll look at forms wherever practical, so we can see how things actually work.
• A lot of the rules are default rules (as opposed to mandatory rules). Basically: if you didn't put anything about this in your contract, here's how we'll deal with X, Y, Z.

  Mandatory rules (generally to protect the public and investors) can't be varied.

• Typical exam question: define a partnership.

  Alternate: the founder of this company wants to raise money, but wants to keep blablabla...; give me an example of what he might do (i.e., get a loan, bring in preferred shareholders, etc.).

• LLCs are pretty wide open. That's part of why we like them so much.
• Attendance is voluntary. Hopefully it brings value. At the very least, there will be guidance about what will be on the test (i.e., what's important vs. what's just kind of fun to talk about).
• We will go 10 weeks: class will end at 7:15. Last class will be 7/30 (review). Exam will be 5:30-8:30 the following Tuesday 8/4.
• Exam will be closed-book. Short questions: specific definition or rule. (e.g., what's the default rule for how many shareholders it takes to elect a director) or application of a rule (if you have 3 shareholders and you want each to have an independent say on the board, how would you structure their ownership). What's the difference between an S-Corp and a C-Corp? That sort of thing.
• The Restatement (Third) sections in the supplements don't have the notes, which is bad. So it's OK to refer to additional sources; he may give us some of the notes.
• General overview of the class:
  The first topic is agency law: the common law theory underlying a lot of what we're going to do.

  	Principal ------(authority)------>  Agent
  	      _    <------(duty)--------     
               |\      [inside consequences]     /
                 \                              /
                  \                            /  
                   \                        (duty)
                   (liability)        [outside consequences]      
  		    \                     /
  		     \                   /
  		      \                 /
  		       \               /
  		        \             /
  			 \          |/_
  			   3rd Party
  	

  Examples of agency include power of attorney, incidentally. They don't always have to be employees. In fact, there are additional rules that apply to employees that don't apply to independent contractors or volunteers. Agency is largely based on common law; there's not a whole lot that's codified (exceptions: some real estate stuff, durable power of attorney, etc.).

  Then partnerships, fiduciary duties, etc. A lot of that is going to fall back on agency, so it's good to look at agency first. Agency authority and liability. Those are big. And taxes a little bit (i.e., consequences of what kind of business you've set up).

  So agency first, and then general partnerships. GPs are on their way out, but they're the default for two-owner business entities. Each of the partners is liable for all the obligations of the partnership (in tort, and in contract). Every one of the partners is a principal, but also an agent of the other partners.

  So then we get other types of entities: corporations, LPs, LLCs, LLPs. We're not going to get to spend much time on LPs. That's kind of a hybrid: you have General Partners and Limited Partners. You used to see this a lot with real estate ventures: it was a way of getting investment for development. This, too, is getting more rare, because LLCs are so much more attractive.

  LLCs are a hybrid as well. You've got members, and they all have liability shields. They're very flexible, can have many classes of stock, etc. An S-Corp is taxed like a partnership but is less flexible. In an LLC, members are not necessarily agents of the LLC or of the other members. You can have a manger with fiduciary duties, etc., who is not a principal, and who is liable only for the manager's duty.

  All of these things are the creatures of statutes-- they wouldn't be allowed otherwise. WI just allowed LLCs as of 1998. The tax code just has to keep up with what the states are doing, entity-wise.

  After LLCs, we'll talk about corporations. A three-tiered structure: Shareholders (who own the equity in the company, but who do not usually run it), Directors (don't run day-to-day business, but appoint officers), and Officers (who run the operation). Obviously, directors and officers owe a fiduciary duty to the shareholders. There are rules about these that differ from C to S corps.

• Read the first 31 pp (through the apparent authority section; read the preface as well). That's 3 cases: CyberHeat, Food Lion, and Castillo
• We will tend to read 25-30pp/session.

28 May

• A lot of agency law is just deciding whether the law of agency applies. If you're reading a case about it, the chances are good that the parties disagreed.
• Elements of the agency relationship:
  1. Consent
  2. Control
  3. Benefit
  All three of those have to be there, but the cases usually focus on just one or two. Note that there's no third party in the definition here. Not every employee, for example, interacts with third parties. This is also not in the definition, but: an agent is someone having the power to affect the principal's legal relationship with a third party. Legal consequences turn up in § 2.01 (actual authority), but not in the initial definition.
• R3A § 1.01: Agency is a fiduciary relationship. But what is that? A relationship with a duty of loyalty and the duty to act in the best interest of the principal. And the relationship arises when a principal manifests (orally, written, or through conduct) assent (not "consent:" unexpressed reservations do not restrict this) that the agent shall act on the principal's behalf and subject to the principal's control. And the agent has to manifest assent to to do.
• R3A § 1.02: it doesn't matter what you call it-- it's the relationship that matters, not the label.
• Default rules are gap-fillers: if you don't contract for something, these are the terms that apply. Mandatory rules can't be varied by contract-- they may also apply in the absence of terms in a contract, so they can be "default" in that sense as well.
• So we look at the creation of the relationship, and the fiduciary duties it imposes, and then the attribution (i.e., the liabilities that are imposed with respect to third parties on the parties involved in the agency relationship).
• Cyberheat
  The CAN-SPAM act conflates things here (there might be liability even without agency, argues the government).

  Three factors to determine agency:

  1. Ability to control
  2. Benefit
  3. Power to alter legal reglations with the principal
  Intent is a fourth element (consent to do something).

  Cyberheat's "finder's fee" plan is basically attacking the element of control. But when you have consent to one thing, there's also an implied consent to "necessary and proper" precursors.

  Ratification: you might not have assented to an action up front, but if you pay them for it, you might be retroactively consenting to it, in a way.

  So what is "control" and what degree of it needs to be present? One indicator is whether the principal can terminate the relationship. "Interim control" is important-- see the notes (example 4 on p. 27 of the PDF he sent out). So, can Cyberheat come back to the webmasters and now tell them not to do it via spam? The § 1.01 notes, section f talks about interim control and how it differentiates agency from simple contract.

  Cyberheat is certainly trying not to make it seem like an agency relationship, and it looks like probably it's not.

• Principals aren't always liable for their agents' torts; in employment relationships they are, or in relationships where the agent is being asked to commit a tort.
• So CyberHeat was about the establishment of an agency relationship. Food Lion is about the fiduciary duty.
• Fiduciary duty is defined in R3A § 8.01 (et seq.). Food Lion is about § 8.03, really. See the horse-riding example in the notes to § 8.05.

  Fiduciary duty is very hard to contract around, but it can be varied in some ways, and that's § 8.06. It's a mandatory rule, but some instances of breach of duty can be waived by the principal's consent.

• Food Lion
  So they sue the reporters for breach of the fiduciary duty as employees. They didn't get damages for wages, because the loss of business was caused by the broadcasting, not the videotaping.

  Remittitur: knocking down of damages.

  The three flavors of disloyalty:

  1. Competing with the employer
  2. Misappropriating funds or property
  3. Breach of confidences
  This isn't one of those things exactly, but the court says that ABC's interests were adverse and the employees put the interests of one employer before the other. And that's disloyal. Of course, it's immaterial that they were employed by ABC-- the question is whether they were loyal to Food Lion.

  One misleading thing, the court says the employees neeed to have the intent to do harm-- this is probably not correct.

• Does it matter at all that what Food Lion was doing was wrong? There's not an exception for whistleblowers. Legislatures have started to supply one, and some courts have tried to develop an exception through common law. There's a prohibition against a principal asking an agent to do something illegal, but R3A doesn't say that an agent can breach its duty of loyalty if the principal is doing something illegal.

  You'd basically have to make the argument that it would be against public policy to enforce the duty of loyalty here, but that might not fly. And note that if you're asked to do something illegal, you can't be liable for refusing, but that doesn't give you the right to report or publicize, at least according to the law of agency. Maybe you've got a statutory exception on your side, maybe not.

• Disloyalty is kind of hard to spot sometimes: is it disloyal to stop a company from doing something illegal? Is it in the best interests of a company not to report stuff like this? We'll be dealing with this more.
• By default, the duty not to compete terminates when you leave employment. This can be varied by contract (i.e., a non-compete agreement), but only within the parameters of the law (i.e., there are tests of reasonableness).
• Attribution relates to the "outside consequences" of agency. Whom can the 3rd party hold responsible for the activities of the agent? What are the things we need? Control, benefit, consent-- that's what makes the principal liable, generally. But there are also cases where the principal can be liable for the torts of the agent.
• Types of attribution:
  1. Actual: this is determined based on what the agent reasonably believes he's been authorized to do. Why not require that the principal really intended it? Because agents will never take action if they think they're going to be hung out to dry. Comes in two flavors:
     • Express
     • Implied
     The question here is what the last thing the agent knows about what the princiipal wanted.
  2. Apparent
  3. Vicarious (respondeat superior)
• Read the R3A sections on fiduciary duties.
• Finish Chapter 1, and related sections in the supplement; just stop at page 45. Skip Krispy Kreme and the questions.