BUSINESS ORGANIZATIONS OUTLINE

SPRING 2019 – MAY 9TH, 2019

Agency
A. Is there an Agency Relationship?
1. Manifestation of consent by principal to agent
2. Agent will act on Principal’s behalf, subject to Principal’s control; &
3. Consent by Agent to do so.
B. Did the Agent have the authority to act in “X” manner?
1. Actual authority:
a. Express: authority granted orally or in writing
b. Implied: includes powers practically necessary to carry out the duties actually delegated. Factors to determine:
i. Agent believes he has authority
ii. Nature of the task
iii. Prior similar practices
2. Apparent authority:
a. Principal makes a manifestation that the;
b. Agent acts on principal’s behalf; and
c. Third party must have reasonable belief that agent can enter into K.
C. If an Agent committed a Tort; when is the principle liable on the Agent’s tort?
1. What kind of Agency Relationship and Scope of Employment?
a. Employee: Where the employee has agreed to work for employer and has agreed to be subject to the employer’s control.
i. Respondeat Superior: an employer is liable for the torts of his employees when in the scope of their employment.
ii. Scope of Employment:
1) It is of the kind he is employed to perform;
2) It occurs substantially within the authorized time and space limits; and
3) It is actuated, at least in part, by a purpose to serve the master.
iii. Time/Place:
1) Frolic  no scope; a frolic occurs when the employee leaves their scope to do something for personal reasons.
2) Detour  within scope; a detour occurs when the employee is still engaged in scope but veers only slightly from
scope.
iv. Minority Rule:
1) It is foreseeable that this would happen;
2) It is somehow related to employment; and
3) Conduct different from that normally engaged in by the general public.
b. Independent Contractors
i. Agent Type: one who has agreed to act on behalf of the principal but not subject to the principal’s control over how the
result is accomplish.
ii. Totality of the Circumstances Test:
1) Work Factors; and
2) Level of Control.
iii. Tort Liability: No liability to the principle for the negligence of an independent contractor.
1) Exception:
a) Where the principal retains sufficient control of the manner and means of doing the work
b) Where the principle engages in incompetent contractor (negligent hiring); or
c) Where the activity is inherently dangerous (a nuisance per se)
c. Franchise Agreement
i. No commitment of Agency relationship: Offer franchisee’s brand name and product use with minimal oversight by
Franchisors.
1) Tort Liability: Based on the exercise of control by Franchisor.
a) Franchise agreement states agency relationship; or
b) Reasonable reliance of a third party due to the steps taken to exercise control.
D. If an Agent enters into a contract; Is the Plaintiff bound by the contract?
1. Actual or Apparent Agency;
2. Principal Ratified the Contract;
a. Ratification: Agent entered into a contract without the authority to do so. Principle may ratify by:
i. Acceptance;
ii. Intent to ratify; and
iii. Full knowledge of the material facts.
3. Principal is Undisclosed; and/or
a. Disclosed: Agent acts with actual/apparent authority and Principal is disclosed, the principal and third party are parties to the K.
i. Principle strictly liable.
b. Partially-Disclosed (Unidentified): Third party has notice that the agent is or may be acting for a principal but has no notice of
the principal’s identity.
i. Both agent and principal are on the hook
c. Undisclosed: Agent and third party are the only parties to the K.
i. Agent is liable. Principal is liable if the agent had actual authority and is acting within the scope.
4. Estoppel Demands.
a. Principle will be prevented from denying liability because principal allowed the situation to be created and failed to refute the
presumption that agent had authority.
 i. Creation of appearance of authority;
ii. Reasonable and good-faith belief; and
iii. Reliance/change in position.
E. Duties Owed in an Agency Relationship
1. Agent owes to Principal
a. Duty of care, competence and diligence:
i. Agent has duty to principal to act with the care, competence and diligence normally exercised by agents in similar
circumstances unless the agent has special skills or knowledge which would require the agent to act at the higher level of
skill or knowledge.
b. Duty of loyalty:
i. A has duty to act loyally for the p’s benefit in all matters connected with the agency.
ii. Self-Dealing: Duty of not to acquire material benefits arising out of the agency.
1) A may not acquire a material benefit from a third party in connection with transactions or actions taken behalf of the
p or otherwise through the a’s position.
iii. Conflict of Interest: Duty not to act as (or on behalf of adverse party)
1) A may not deal with the p as, or on behalf of, an adverse party in a transaction connected with the agency
relationship.
c. Duty not to compete:
i. A may not compete with the p or take action on behalf of or otherwise assist the p’s competitors. *This duty ends once the
agency relationship ends and does not prohibit an agent from preparing to compete.
d. Duty of good conduct:
i. A must act within the scope of the agency, act reasonably, and refrain from conduct that is likely to damage p’s enterprise.
2. Principal owes to Agent
a. Duty to indemnify:
i. P must indemnify a for costs, expenses and/or damages incurred by a in scope of agency (provided an act within scope of
a’s actual authority) or when a acts for the p’s benefit, or pursuant to agreement.
b. Duty of good faith and fair dealing:
i. P must deal with its agent fairly and in good faith. Duty includes, obligation to inform agent about risks of physical harm
or financial loss that the p knows, has reason to know or should know are present in a’s work and unknown to a.

Corporations
A. The Corporate Form
1. The Corp is owned by SH.
2. The SH elect the BOD.
3. The BOD elects the Officers.
B. Purpose of Corporation
1. The primary objective of a corporation is to maximize the profits for the shareholders.
C. Personal Liability of Shareholders
1. SH ≠ personally liable for the debts and obligations of the corporation. Personal liability of SH (for debts/obligations of the corp.) is
limited to the amount the SH invested (typically amount SH paid for share in co).
D. Corporation Liability – Piercing the Corporation Veil
1. General Rule: The law permits the incorporation of a business for the purpose of enabling its proprietors to escape personal liability,
exceptions apply:
a. Exception:
i. Unity of Interest: a corporation is so controlled by another to justify disregarding their separate identities
1) The failure to maintain adequate corporate record or to comply with corporate formalities
2) Commingling of funds or assets
3) Undercapitalization
4) One corporation treating the assets of another corporation as its own.
a) Vertical: whenever anyone uses control of the corporation with a unity of interest, the corporations will be
pierced and treated as one; creates individual liability.
b) Horizontal: when there are multiple corporations with a unity of interest, the corporations will be pierced and
treated as one, creating enterprise liability.
ii. Not piercing the veil would promote fraud OR injustice
b. Alter Ego Theory: Parent liable for the actions of a subsidiary, which it controls, but it does not mean that where a parent
controls several subsidiaries, each subsidiary then becomes liable for the actions of all other subsidiaries. There is no
respondent superior between the subagents.
E. General Limitations of Corporation
1. Commits Waste
a. Plaintiff must prove that the exchange was so one sided that no business person of ordinary sound judgment could conclude that
the corporation has received adequate consideration.
2. Donate Excessive Charity
a. Today’s rule: we have broadened the definition of promoting corporate objectives. Can donate if directors “deem donation to be
expedient and in their judgment will contribute to the protection of the corporate interests”
b. Pet charity: when directors are not doing anything that will benefit corporation, but they are doing something in furtherance of
personal rather than corporate ends (self-dealing issue).
F. Liability of Directors
1. No personal liability for directors of corporations in monetary damages when they have breached their duty of care, unless:
a. Breach of duty of loyalty;
b. Act or omission not done in good faith; or
 c. Director gets improper personal benefit.
G. Fiduciary Duties – Subject to Business Judgement Rule
1. Directors and Officers (only Loyalty)
a. Duty of Care - The duty of care requires that each member of the BOD’s, when discharging their duties of a director shall act:
(1) in good faith and (2) with that degree of care, and skill which ordinary, prudent men would exercise under similar
circumstances in like positions.
i. Directors must have some, even if rudimentary understanding of the business; and
ii. Directors must keep selves informed and maintain familiarity.
b. Duty of Loyalty - The duty of loyalty requires that officers and directors put the interests of the corporation ahead of their
own. The duty of loyalty is violated when there is a conflict of interest. Conflicts of interest occur when an officer/director
engages in: (1) self-dealing, and (2) the taking of a corporate opportunity.
i. Self-dealing: occurs when officer/director of corp. enters into a transaction with self or with entity he/she/family member
as a substantial financial interest in.
ii. Taking of a corporate opportunity occurs when an officer/director takes an opportunity that belonged to the company.
c. Obligation of good faith - Encompassed in the duty of loyalty and the duty of care. If a director or an officer breaches duty of
good faith, they will be held liable.
i. In order to Breach:
1) Intent to harm the corporation;
2) Intentional disregard of one’s responsibilities;
3) Gross negligence (intent to have bad faith).
d. Duty of Oversight - Duty to implement a corporate system of oversight. Liability for failure to attempt to create and breach of
good faith. Breach when:
i. Fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties
2. Business Judgment Rule
a. The BJR acts as a shield, protecting director(s) from liability relating to business judgments/transactions, unless the director(s):
i. Made an uninformed decision,
ii. Failed to investigate, and/or
iii. Failed to act + failure not accompanied by a decision not to act (in no judgment no to act  no judgment for BJR to
shield).
b. BJR may otherwise not shield a director/transaction when the plaintiff can show:
i. Fraud;
ii. Illegality/wrongful conduct; and
iii. Breach of loyalty - conflict of interest or self-dealing.
3. Dominant Shareholders
a. Shareholders do not owe fiduciary duties to other shareholders, unless there are dominant shareholders, then a duty is owed to
minority shareholders.
b. Parent Companies as Dominant Shareholder
i. Self-Dealing- Situations where the parent has received a benefit to the exclusion and at the expense of the subsidiary.
1) Was there self-dealing? (If yes, apply test)
2) Intrinsic Fairness Test: Must show that the transaction would have been the same should they have contracted with
a third party.
H. Corporate Opportunities: A director cannot usurp an opportunity that belongs to the corporation.
1. Elements:
a. Is the corporation financially able to take advantage of the opportunity?
b. Is the opportunity in the line of business and of practical advantage to the corporation?
c. Is the opportunity one in which the corporation has an interest or a reasonable expectation?
d. Is the director in a position that is harmful to the corporation?
2. Directors Steps: The director must analyze the situation first to determine whether the opportunity is rightfully one belonging to the
corporation.
a. If yes, the corporation is entitled to the opportunity and he may not take it for himself.
b. Safe harbor: presenting an opportunity to the broad creates a safe harbor. Do not need to present it to the board; can ask the CEO
because he has apparent and actual authority to decline the opportunity for the corporation.
I. Shareholder Ratification – Contracts by Directors
1. § 144: Contract is only voidable if someone challenges it. If any of the following factors are met, the contract will survive.
a. (a)(1) Disinterested Directors Ratified: we must know the director’s interest in the contract to be disclosed, then the disinterested
directors may vote, and a majority will ratify the contract.
b. (a)(2) Shareholders Ratified
c. (a)(3) Transaction is fair to the corporation at the time that it is ratified by the board or the shareholders.
J. Shareholder Direct or Derivative Actions
1. SH DIRECT ACTIONS:
a. When SH makes claim in her own name against a: third party defendant, the corporation, or a director, or an officer of the
corporation for a wrong done directly to the SH.
2. SH DERIVATIVE ACTIONS:
a. Shareholders bring this action on behalf of the corporation, the corporation is not pursuing it, so I as a shareholder am bringing
suit on its behalf to recover damages so the corporation can be made whole again.
1) Demand mechanism: Shareholder makes a demand to the Board for a remedy.
a) Accepted/Refused—Entitled to Business Judgement Rule
b) EXCUSED— Allege with particularity (beyond a reasonable doubt) why the stockholder was justified in not
having to make demand:
1. A majority of the board has a material financial or familial interest (Conflict of Interest);
 2. A majority of the board is incapable of acting independently for some other reason such as domination or
control; OR
3. The underlying transaction is not the product of a valid exercise of business judgment.
2) Special Litigation Committee: Once excused, SLC may dismiss; Review of dismissal of litigation (Yes to all 3
required for deference to BRJ):
a) Was the litigation committee disinterested and independent?
b) Did the litigation committee have adequate resources and ability to operate?
c) Did the litigation committee act in good faith?
d) Delaware Minority (4th Step): Courts will employ own BRJ
K. Indemnification and Insurance
1. § 145: Gives corporations the power to indemnify a director in certain situations.
2. Will be on Supplement
L. Securities
1. Definition will be on Supplement.
a. Investment Contract
i. Investment of money
ii. In a common enterprise, and
iii. Profits to come solely from the efforts of others
b. Stock: Right to receive dividends contingent upon an apportionment of profits
2. Private Offering Exemption (Registration)
a. Number of offerees and their relationship to each other and the issuer
b. Number of units offered
c. Size of the offering
d. Manner of the offering

Closely Held Corporations

A. Voting agreements: shareholders can agree to do whatever they want with their shares to vote for directors (pooling agreement) so long as
not illegal or against public policy.
1. Proxy: corporations will also allow you to give your right to vote to someone else.
2. Pooling agreements: agreement between, or among, two or more SH that states that the parties shares will be voted in a certain way
based upon contracted criteria.
B. Fiduciary Obligations of Closely Held Corporations
1. Rule: There is a strict obligation on the part of the majority stockholders in a close corporation to deal with the minority with the
utmost good faith and loyalty (same as partnership fiduciary duties)
2. Test: When minority stockholders in a close corp. bring suit against the majority alleging a breach of the strict good faith duty owed to
them by the majority, we must carefully analyze the action taken by the controlling stockholders in the individual case. It must be
asked whether the controlling group can demonstrate a legitimate business purpose for its action.
a. Burden: Majority stockholders must show that there was a legit purpose
b. Burden Shift: When an asserted business purpose is advanced, the minority can demonstrate that the same legit objective could
have been achieved through alternate means less harmful to the minority’s interest.
C. Freeze-Outs: Where the majority frustrates the minority’s reasonable expectation of benefit from their ownership of shares.
1. Remedy: To restore the minority shareholder as nearly as possible to the position she would have been in had there been no
wrongdoing. (this position should not be of significantly more or less value – but should match the reasonable expectations)

Partnerships

A. General Rule - An association of two or more persons to carry on as co-owners of a business for profit. In order to establish the presence of
a partnership relationship:

1. Intent to be partners;

2. Co-ownership; and

3. Profit motive.

B. No Partnership Agreement – Totality of the Circumstances Test; To show a partnership existed or was non-existent.

1. Partnership by Estoppel: Partnership by estoppel creates a liability to third parties who rely upon representations that a
partnership exists. 

C. Once Partnership determined: Rights/Obligations

1. Each partner is jointly and severally liable for the debts of the partnership,
 2. Profits/losses to be shared among the partners;

a. To determine % share of profits/losses:

i. MAJ. Approach:

1) If agreement is silent on profit share  equal

2) If agreement is silent on loss share  same proportion as how partnership profits are shared

ii. MIN. Approach:

1) Only liable for what you contributed, capital/skill

3. Right to share of partnership property;

4. Right to control in management of partnership;

5. Partners owe fiduciary duties to each other and to the partnership.

D. Fiduciary Duties

1. Duty of Care: A partner must not engage in gross negligence, reckless conduct, intentional misconduct, or a knowing violation of the
law. Furthermore, when discharging duties- do so consistent with good faith and fair dealing.

2. Duty of Loyalty: Each partner has an obligation to:

a. Account to the partnership for profits and property, or benefits, from the conduct of partnership business or use of partnership
prop (winding up);

b. to refrain from acting as a party with an adverse interest in the partnership, or from acting on behalf of a party with an adverse
interest in the partnership;

c. refrain from competing with the partnership in subject matters of the partnership biz, and

d. perform all duties to the partnership and other partners consistent with good faith and fair dealing.

E. Expulsion – When a partner is involuntarily expelled from a business, his expulsion must have been in good faith for dissolution to occur
without violation of partnership agreement.

1. Applies where there is a provision in the agreement that allows for involuntary expulsion

2. One can involuntarily expel someone pursuant to the agreement so long as it was in good faith
F. Dissolution
1. Partners always have the power to dissolve, but they don’t have the right. MEANING- you can always dissolve; it just won’t be free.
Death of partnership in three phases: dissolution, winding up and termination.
a. Dissolution: signals the end of the prior constitution of the partnership.
b. Winding up: is neutral period where partnership must conclude its business, sell its assets, pay creditors and make distributions
to its partners.
c. Termination: occurs once the winding up is complete.
2. Judicial Dissolution: A court may compel the dissolution of a partnership when:
a. Partner conduct prejudicially affects the carrying on of the partnership;
b. Partner persistently and willfully breaks the partnership agreement in a manner that makes the carrying on of the partnership
impracticable; and
c. Any other circumstances that warrant dissolution.

G. Disassociation

1. Partnership does not dissolve because when one partner leaves so long as another party bought out share.
 2. Timing: Power to Dissolve v. Right to Dissolve

a. Term: Partner may not dissolve or leave until term expires.

b. At Will: Partner may leave anytime unless implied term based off loan or lease.

3. Buy-out Agreements

a. an agreement that allows a partner to end his or her relationship with the other partners and receive a cash payment, or series of
payments, in return for his interest in the partnership (triggers: death, disability, will of any partner)

H. Limited Partnerships – A limited partner will be held liable as a general partner if the limited partner acts to take part in the control of the
business

Limited Liability Company

A. Piercing the LLC Veil

1. Whether the entities in questions operated as a single economic entity; and
2. Whether there was an overall element of injustice or unfairness.
B. Business Judgment Rule: The courts will not interfere with business decisions without any time of fraudulent, collusive, or destructive act.
C. Fiduciary Obligations of LLC’s: Members of an LLC can agree to limit the scope of the fiduciary duty they owe to the LLC. 
D. Additional Capital: There is no personal liability for an LLC’s debt unless the member or members have agreed through the operating
agreement or other written agreement to assume personal liability.