Business Associations Attack Sheet FOR Final PDF

Preview

Summary

Download Business Associations Attack Sheet FOR Final PDF

Description

1

BUSINESS ASSOCIATIONS ATTACK SHEET FOR FINAL

Partnerships vs. Corporations Sole prop./General part.

Corporation

Limited liability?

No (but can include Yes (but creditors may seek guarantees) indemnity provisions)

Ownership transferable?

No (default)

Yes (default)

Continuity

At will (default)

Indefinite (default) Care/loyalty (default)

Fid. Duties Management

Done by partners (default)

Centralized & separation of ownership and control

Voting

Equal voting rights

Dependent on class of stock

Profit sharing

Equal across partners

Dependent on class of stock

Flexibility

Highly able to adapt

Sometimes awkward

Formation

Informal

Formalities required

Tax

“Pass through”

Corp & owners separately taxed

HOW TO START BREACH OF FIDUCIARY DUTY ISSUE The first is whether the directors have breached their fiduciary duty of care, and if so, whether they can assert the business judgment rule as a defense. The duty of care is implicated when directors or senior officers fail to discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. By contrast, the duty of loyalty is implicated when directors or senior officers are accused of acting in their own self-interest, to the corporation’s detriment. BUSINESS JUDGEMENT RULE ISSUE

2

The directors could rely on the business judgment rule (BJR) to defend against liability for breaching their duty of care, as the BJR is the corporate director’s most common—and perhaps most effective—defense against that liability. To successfully invoke the BJR, the directors would have to establish that the challenged business decisions were made (i) in good faith and in the best interests of the corporation, (ii) based on reasonable investigation, and (iii) by individuals disinterested in the subject at issue. One fact complicates the use of this defense, though. The BJR can be asserted only to protect action that was taken or a decision that was made. Arguably, the BJR does not protect an omission based on ignorance or a lack of diligent inquiry → True, the BJR could protect this inaction, if it arose from the board’s affirmative decision not to act. However, the defense would not apply to inaction based on inattention. RELIANCE ON REPORTS To evaluate the directors’ reliance on those sources, a court would apply MBCA § 8.30(e). This section provides that directors are entitled to rely on information, opinions, reports, and statements prepared by employees and non-employee professionals; this is true even if the information, opinion, report, or statement is incorrect or systemically flawed. However, § 8.30(f) imposes additional requirements. As to employees, § 8.30(f)(1) provides that misplaced reliance is justified to the extent the directors reasonably believe that the employees in question are reliable and competent in the functions performed or the information, opinions, reports, or statements provided.

AGENCY An agent is a person or entity that acts on behalf of another, the principal. For an agency relationship to exist there must be assent by the agent to the existence of the relationship and its duties, the agent must act for the benefit of the principal, and the principal must control the agent's actions on its behalf. An agent has a duty to act with the reasonable care, skill, and diligence that would ordinarily be exercised by an agent in similar circumstances. While this is an objective standard, agents who have particular or specialized knowledge or skills are expected to use them and will be held to a standard of care that would be observed by agents possessing those special skills. THIS CAN BE DETERMINED BY LOOKING TO:

3

● Whether there has been an acception of employment and the duties and privileges that come along with it (salary, benefits). ● Whether they act for the benefit of the corporation in this capacity ○ This is because there is a duty of care to the corp. And must therefore act in good faith and as a reasonably prudent person would with his or her business ○ In addition to the duty of care, there is also a duty of loyalty whereby they must act in the best interest of the corporation before others, including themselves ○ These duties ensure that the “agent’s” actions should be for the benefit of the corporation and ensure that they are for the benefit of the corp. ● Third, look to whether the corporations itself has control over them ○ This is b/c they, as an employee, serve at the will of the board of directors and at its direction. Can their employment be terminated? *IF THESE PRONGS HAVE BEEN SATISFIED, THEN THE PERSON IN QUESTION IS AN AGENT OF THE CORPORATION NEXT, LOOK TO WHETHER THEY HAD THE AUTHORITY TO ACT: ACTUAL EXPRESS AUTHORITY Actual express authority is the authority that is expressly given to an agent by a principal for some particular task. This authority can be orally conveyed or it can be in writing. According to the equal dignity rule, if a writing would be required for the transaction or action at issue if the principal were to act directly for himself instead of through his agent, the principal is required to expressly give the agent express written authorization to undertake the action on the principal's behalf. LOOK TO: ● Whether the facts suggest that there was either a written or oral express authority for them to enter into contracts on the corp’s behalf. ● Further, even if the board or shareholders expressly passed a resolution stating that they had such authority, or that the President of the corporation has such authority, the resolution and authorization it granted must be in writing. ○ This is due to the equal dignity rule. Because the contract that was actually signed by them (if it has) called for [the corp’s] services to be rendered over the course of 10 years, the Statute of Frauds requires a signed writing (because performance necessarily will take longer than one year by the terms of the contract). Look to whether they signed such a writing. ● If these requirements have not been met, then this agent does not have actual express authority

4

ACTUAL IMPLIED AUTHORITY Actual implied authority is that authority which is necessary for it to carry out its expressly authorized actions and in fact was implied from that authorization, or authority that comes with virtue of the position the agent has with respect to the principal and the duties associated with this position ● Look to whether they have received express authority from the board to manage all sales regarding the corp’s services (this is the first potential prong for implied authority) ● The second possibility that can show implied authority is if the agent by virtue of their position and the duties associated with such a position has the authority to enter into a contract ○ Have they been appointed by the board to be the president? ○ Look to their position in the corp and whether they are responsible for overseeing the day-to-day operations of the corp; then you might be able to argue that the position comes with it implied authority to act on the corporation’s behalf in their management of the corp APPARENT AUTHORITY Apparent authority is the authority that arises when a third party reasonably believes that the agent has such authority because the principal "cloaked" the agent with the appearance of such authority. Agency is the fiduciary relation, which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent. There needs to be manifestation, acceptance, and control Apparent authority is power created in an agent as a result of the principal’s dealings with third parties. When a principal, whether by words or by conduct, holds out an agent to a third party as having authority to act on his or her behalf, the principal will be bound by the agent’s acts and representations to that third party. Note, however, that apparent authority will only be created when the principal’s conduct creates a reasonable belief in the mind of the third party that the agent is authorized to act and the third party is induced to act in reliance on the principal’s conduct. Restatement (Third) of Agency § 2.03. 1. Manifestation: the principal must manifest that the agent will act for him; consent of the principal 2. Acceptance: the agent must accept the undertaking; act on behalf of the principal 3. Control: an understanding that the principle is the party in control

5

SCOPE: the scope of agency is usually determined by contract between the principal and the agent or by the nature of the instructions given by the principal to the agent. The scope of the agent’s fiduciary duty may be shaped by the terms of the contract, but the fiduciary obligation exists even though the contract is silent as to the duties of the agent or purports to abolish this duty ● Look to the person’s position within the corp ○ Did they hold themselves out as such when they entered into the k? ○ Did they act with a “cloak” of authority? ○ Do they have the ability to negotiate contracts? Difference: the between apparent authority and actual authority can be most easily envisioned in that actual authority flows directly from the principal to the agent while apparent authority flows from the impression created by (or permitted to exist by) the principal in the mind of a third person. In many instances, the scope of apparent authority is as broad as an agent’s actual authority when the statements of authority are made directly or indirectly by the principle to a third party. RATIFICATION Ratification: even if an agent acted without authority, a principal will be held liable if the agent purported to act on the principal’s behalf, and the principal: 1. manifested intent to treat the conduct as authorized; or 2. engaged in conduct that showed intent. A principal is bound for any unauthorized acts of his agent that the principal later ratifies. A principal ratifies an agent’s act by manifesting assent that the act shall affect the principal’s legal relations or by conduct that justifies a reasonable assumption that the principal so assents. Restatement (Third) of Agency § 4.01(2). A principal that ratifies an unauthorized act is estopped from denying the ratification if the principal’s conduct reasonably induces a third party to detrimentally change the party’s position in reliance on the ratification. ACQUIESCENCE Acquiescence: the failure of a principal to object to an action undertaken by an agent can be taken as an indication of consent. If the agent performs a series of acts of a similar nature, the failure of the principal to object to them is an indication that he consents to the performance of similar acts in the future under similar conditions LIABILITY OF AGENTS Generally, persons are liable for their own negligent conduct. While employers can be vicariously liable (discussed below) for an employee's tortious conduct, this liability is in addition to the employee's liability. However, if an employee was acting within the scope of

6

their employment, to further the goals of the business, they could seek indemnification from the business. Consider a driver injuring a pedestrian while working: ● Was this solely due to their own negligence? Then the company/employer might not be vicariously liable ● However, if they were acting in the course of their employment (and for the purpose of furthering their company’s business, they can seek indemnification from the corp. ● If the conduct is negligent rather than intentional (in which case, indemnification would not be possible) ○ Also consider whether the corp. Is actually a corp. If you determine it is not a valid corp., then they would need to seek indemnification from the “partnership” There is no question that a principal may be held liable for the torts of his or her agent. Under the doctrine of respondeat superior, it is well settled that an employer can and will be held liable for the tortious acts of his or her employees committed within the scope of their employment. Restatement (Third) of Agency § 2.04. It is clear from the very definition of respondeat superior that liability may only be established by satisfaction of a two-part test. First, there must be an employer-employee relationship between the tortfeasor and the party to be held liable. Second, the employee must have committed the tort while acting within the scope of his or her employment. See generally Bussard v. Minimed, Inc., 105 Cal.App. 4th 798 (2003). How do we know if an employer-employee relationship exists? This seems like a simple enough question, but the issue is somewhat nuanced. An individual hired by an employer to perform work may be an employee or an independent contractor, and this distinction is critical for purposes of respondeat superior. This is a highly factual inquiry, and courts will often look at a number of factors to guide their determination. A fairly useful definition of what it means to be an independent contractor is set forth in Murrell v. Goertz, 597 P.2d 1223 (1979): “An independent contractor is one who engaged to perform a certain service for another according to his own methods and manner, free from control and direction of his employer in all matters concerned with the performance of the service except as to the result thereof.” This definition focuses on who controls the manner of performance.

7

By way of analogy, we might define an employee as an individual hired to perform work for an employer under the supervision and direction of the employer regarding all (or at least most) aspects of the completion of the work. Other factors that courts often consider when making the determination: the agreement or understanding of the parties; the type of business involved; the right to control the details of the work, such as the hours worked, materials used, or routes taken; whether the employment is temporary or long-term; the manner in which the work is compensated (Hourly? Flat rate?). Bostic v. Connor, 524 N.E.2d 881 (1988). If the tortfeasor is an employee, and not an independent contractor, the next question is whether the tort was committed within the scope of employment. An employer will only be held vicariously liable for the torts committed by employees acting within the scope of their employment. Restatement (Third) of Agency § 2.04. By extension, there is no vicarious liability for the employer for torts committed by an employee acting outside the scope of employment. What actions will fall within an employee’s scope of employment? In short, most of them. Courts have taken a fairly broad view of what falls within an employee’s scope of employment, and generally even wholly personal actions taken by employees deemed “necessary to the comfort, convenience, health, and welfare of the employee while at work” will be deemed to fall within the scope. Bussard v. Minimed, Inc., 105 Cal.App. 4th 798 (2003). An employee concurrently engaged in work-related activity and personal activity will be deemed to be acting within the scope of employment. Id. An employee acting in direct contravention of the employer’s rules may nevertheless be held to be acting within the scope. Id. Whether an action falls within the scope of employment is really a factual question, but here are a few important distinctions. First, you must determine whether the action is a frolic or mere detour. A frolic is a serious or major departure from the employee’s duties. The deviation must be substantial. A frolic falls outside the scope of employment. The employer will not be held vicariously liable for acts of an employee on a frolic, and vicarious liability will not resume until the employee returns to work. By contrast, a detour is a comparatively small deviation from the employee’s duties for personal activities. A detour is generally within the scope of employment. We’ve talked about deviations from assigned duties during the course of the workday, but when does the workday begin and end? The going-and-coming rule generally stands for the proposition that an employee is not acting within the scope of his or her employment while

8

commuting to work. Bussard v. Minimed, Inc., 105 Cal.App. 4th 798 (2003). Thus, an employer generally will not be held liable for torts committed by employees during their commutes. It is important to note that intentional torts will almost always be deemed outside the scope of employment. Maxine Gerard, Inc. v. William B. May & Co., 51 Misc. 2d 711 (1966). Nevertheless, an employer may still be held vicariously liable for intentional torts that the employer authorized, done for the employer’s benefit, or that are incidental to the nature of the employer’s business. See Chuy v. Philadelphia Eagles Football Club, 595 F.2d 1265 (3d Cir. 1979). Further, a principal may be held vicariously liable for the fraudulent misrepresentations of an agent if the agent was authorized to speak on the matter. See Chase Manhattan v. Perla, 65 A.D.2d 207 (1978). An employer will only be liable in tort under the theory of respondeat superior if a two-part test is satisfied. First, there must be an employer-employee relationship. Second, the tort must have occurred’ within the scope of employment. Is the worker is an employee or will be held an independent contractor? This is a factual inquiry, but the more control the employer has over the means of performance, the more likely the worker is an employee. Did the tort occur within the scope of employment? The scope is broad. Detours, or minor deviations, are within the scope, but major deviations, called frolics, are not. Intentional torts are typically not within the scope of employment. An employer may be held liable for contractor’s torts involving inherently dangerous activities or non-delegable duties A CORP./EMPLOYER VICARIOUS LIABILITY A corporation/partnership/principal can be vicariously liable for the tortious conduct of its agents if those agents act in furtherance of the principal, under the principal’s control, and with the principal’s express, implied, or apparent authority ** was the employee acting as a principle? Or as an agent? An employer will be held vicariously liable for torts committed by employees acting within the scope of their employment. Restatement (Third) of Agency 2.04. If there is no employer-employee relationship because the tortfeasor is an independent contractor, then an employer will not be held vicariously liable. Whether a tortfeasor is an employee or an independent contractor is a fact-intensive inquiry; however, one of the most important facts focuses on who controls the manner of performance. See, e.g., Murrell v. Goertz, 597 P.2d

9

1223, 1225 (Okla. Civ. App. 1979). The greater level of control an employer has over the method and manner of a tortfeasor’s performance, the likelier that tortfeasor is an employee and not an independent contractor. UNINCORPORATED ENTITY LIABILITY A principal must be either an individual or a recognized legal entity, like a partnership or corporation, which is capable of holding rights and undertaking obligations. Restatement (Third) of Agency § 1.04. An unincorporated noncommercial organization has no capacity to act as principal. However, individual members of an unincorporated noncommercial organization may act as principals in their personal capacities. Under the doctrine of respondeat superior, an employer is jointly and severally liable for her employees’ tortious acts committed within the scope of their employment. Id. § 2.04. TERMINATION OF AGENCY RELATIONSHIP Termination: the relationship between an agent and principal is a consensual relationship; and that relationship terminates when: 1. The objective of the relationship has been achieved; 2. when the agent dies or becomes...