August 15, 2012
Business Associations
Professor Kenneth Anderson
Fall 2012
Information Memo and First Readings Syllabus
General Course Information
Business Associations is the gateway course to the WCL business law curriculum, as well
as one of the standard law school courses for nearly all law students, whatever field of
law they might ultimately practice. As a four-credit course, it is demanding in time and
effort, and even demanding materially – it requires several expensive books. You should
take the course only if you are prepared to put the time and effort into it. This memo sets
out the basic structure and information regarding the class, as well as the reading
assignments for the first several weeks. A full course syllabus will be distributed just
after Labor Day (September 3); it will be revised periodically to take account of exactly
how quickly we move through the material and a finalized “final exam prep” version of
the syllabus issued in November.
Requirements
Students are required to attend class and do assigned readings and any other class
assignments such as quizzes or short homework during the course of the term. Class
participation is encouraged and will receive a positive boost in the final grade (this
includes everyone, such as those who might feel that they lack a background in
“business” or “economics” and hence might say something wrong – people know less
than you think, and many people will have the same question/comment as you do).
Everyone has to miss class occasionally, and I understand that – but please do so only
rarely and it’s a good idea to email me to advise if you will not be in class (you assume in
a class of 80 students that the professor doesn’t notice … but you would be surprised!)
However, if you are sick, do not attend class – for the sake of the professor and your
classmates, as well as yourself. I have requested that the classes be podcast and listed on
the mywcl class page (no guarantee that the AV people will do this successfully –
sometimes there are problems, so be prepared to get notes from others if you need them).
But please do not abuse the discretion to miss class or rely on the fact that the sessions
will be podcast. It is easy to do in a late evening class which, to be perfectly blunt,
drones on for a couple of hours until 9:50 pm – but you are responsible for getting to and
preparing for class.
Apart from the usual readings, one unusual requirement of this class is the newspaper
requirement: You are required to subscribe to the WSJ student edition, online or print or
both; the link will be posted in class on the first day, and I will describe what we focus on
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and why. In general, however, we are reading to try and understand basic business
concepts that arise in business law generally, and specifically to understand current
company issues in business organizations law – final exam questions are often twisted
versions of current newspaper stories. I want everyone to have access to the same articles
for discussion at the beginning of some classes, so I do require that everyone subscribe to
the WSJ, rather than any other paper (it is also a lot cheaper than the Financial Times for
students).
The final exam format has not been finalized – I am thinking it over in consultation with
some colleagues who teach in this area – but for now, assume the worst: 4 hour final,
closed book and closed note. If that changes, I will advise you with plenty of notice.
Assuming the technology does not change, I think this means Exam4 registration. But
the jury is still out on the final exam format as of now; I might change things.
Grading is intended to be on par with the other WCL BA classes, so that there is no
incentive to game as between professors. This means, to be perfectly blunt, that whether
you have KA or anyone else, a B+ is a perfectly respectable BA grade, irrespective of
grade inflation in the rest of the upper level curriculum. If there is anything special about
my grading in relation to other BA professors, it is that the curve is relatively flat – I give
very, very few straight A’s but very few bad grades; this is intended to make the class
less “risky” from a GPA standpoint for those of you worried you might lack the
background for a business law course. The grading curve is consistent with other BA
profs mean, but less volatile – less at the top and bottom – if you prefer greater upside
and downside grading risk, you should think about whether this is the right class. That is
the only difference between my grading and the other BA professors that I am aware of.
If you think you lack background in business – well, you need to remedy that if you want
to be a lawyer in almost any area; law is mostly about money in one way or another, and
about business (licit or illicit). Without altering the grading mean, the flatter grading
curve is intended to make that a less risky proposition.
My method of grading involves reading every exam at least twice, sometimes three times
– once to put exams “horizontally” where I think they should go, and a second time
“vertically” to be sure I think exams with the same grade should in fact get the same
grade. Given that exams are read multiple times in relation to other exams, however, it
would be unfair to other students to re-grade an exam individually after the fact, and I
will not do so – please do not ask. After the exam grades are posted, I will post a memo
to the class mywcl pages generally discussing approaches to the question and how
students generally did, good things and bad things.
Books and Materials
Required Textbooks:
William T. Allen, Reinier Kraakman, Guhan Subramanian, Commentaries and
Cases on the Law of Business Organizations ( WoltersKluwer-Aspen 3rd ed).
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Allen, Kraakman, Subramanian, Statutory Supplement. NOTE: On August 15,
Aspen sent without prior notice to professors a new Statutory Supplement 2011-2012.
For those who already got the 2009-2010 Supplement, that will be fine, and the missing
Dodd-Frank materials will be posted to the mywcl class page. You do not need to get the
2011-2012 Supplement if you already have the 2009-2010 version.
Arthur Pinto and Douglas Branson, Understanding Corporate Law (3rd ed 2009,
Lexis Nexis). You will need the 3rd edition, not the 2nd ed.
Stephen Bainbridge, Directors as Auctioneers: A Concise Guide to Revlon-land.
This is an e-book which is under revision and so no longer available on Amazon. But we
are able to use a pdf version of this quite short, but important, text. You do not need to
buy anything – you can download the pdf (or a Word Doc version if you prefer) from the
mywcl website. This book will not show up as a required reading until midway through
the class, however.
Wall Street Journal, student subscription, either online or print or both. The
signup link will be given in the first week of class.
Additional Materials on MyWcl. These included longer versions of some of the
key corporate cases than our main textbook provides, in order to give greater factual
context and more discussion of the legal issues. It also includes other articles and
materials that will be assigned in the syllabus, such as the first week reading of Ronald
Coase articles.
Strongly recommended:
James D. Cox and Thomas Lee Hazen, Corporations (Aspen 2nd edition). This is the
treatise-hornbook, not their casebook. Buy it as cheap as possible on Amazon, which
should be no more than a few dollars. Our casebook is great on the law and economics of
BA, but lighter than it should be on black letter law rules, especially non-Delaware law. I
will be making reference to it in class as the black letter law rule book for corporations,
even though ten years old at this point. It also provides an important counterpoint to
Chancellor Allen’s views in the main text book.
If it helps you:
Baron’s dictionary of finance and business terms, any cheap edition on Amazon. If you
do not have a background in business or finance, this will be helpful for many classes.
Any of the case note supplements keyed to the cases in our textbook. You might or
might not find these useful; I think the case readings in the text are quite short and highly
edited, perhaps too much so, but if you find this a useful study aid, by all means.
As you can see, this class involves a lot of readings ranging from black letter corporate
law to law and economics of business organizations.
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General Topic Outline of the Course
The general order of topics covered in the course is the following; it roughly tracks the
TOC to the AKS main text:
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The nature of business organizations, the law and economics theory of the firm,
and the law of fiduciary duty;
Agency and agency failure, and the responses in both law and economics;
The unincorporated business, from sole proprietorship to LLC, or, “the
uncorporation”;
From privately held to closely held to public corporations, including the role of
capital markets, or, from “uncorporations” to corporations;
Organizing the corporation, and the fundamental legal characteristics of corporate
form;
The corporation and its creditors, and financing the corporation, or, capital
structure;
Normal Governance 1, The public corporation and the role of shareholders in
governance;
Normal Governance 2, The Board of Directors and the duty of care (and duty to
obey the law);
Normal Governance 3, the Board and the duty of loyalty;
Extraordinary and Abnormal Governance: Changes of control and Delaware’s
special jurisprudence, or, Revlon-Land;
Corporate law federalism, and the interrelated roles of state and federal law.
If this does not mean very much to you as a list of topics, don’t worry, it will be
explained as we go.
The general methodological approach of this course, including the main textbook, is
drawn (very) loosely from law and economics – an emphasis on examining rational
strategies of economic actors, efficiency as an important rationale for the structure of
regulation of the business organization, and an awareness of the consequences of legal
rules and judicial holdings – all highly typical of the approach taken in sophisticated
business organization law practice today, whether on the part of judges, regulators, or
private lawyers.
However, there is an important emphasis as well in the course on black letter law
understanding of business organization law, as well as attention to how to learn to read
and analyze complex business litigation cases and decisions. This is a litigation class in
the sense that it is about how to spot issues that might be disputed in court, generally in
the courts of Delaware.
Readings for First Several Weeks
Since the first week of class is add-drop week, many students – if they are uncertain
about remaining in the class – would prefer not to buy a bunch of expensive textbooks
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and then have to return them if they drop. After thinking it over, this year I have decided
to try the first week of class without readings from our class textbooks – you do not need
to have purchased the texts for the first two class sessions. We will start with the regular
textbooks in Week 2.
The first week readings, for that reason, however, are very unusual and not typical of the
rest of the course, though they are very important as framing materials intellectually.
They are mostly economics oriented, and might be unfamiliar as a way of writing and
thinking. That’s okay. But you do need to work your way through these writings, and
absorb important lessons for how to think about the issues of law in the rest of the course.
But these are not typical readings.
The Nature of Business Organizations and the Law
Week 1
Monday
Introduction to Business Associations
Duties to People as an Agent and Fiduciary
How Does BA Fit with Other Basic, First Year Fields of Law?
Law of Loyalty; Law of Business; Law of Institutions & Organizations; What Else?
Reading: NOTE THAT NONE OF THE FIRST WEEK READING REQUIRES THAT
YOU BUY THE TEXTBOOKS. This makes it very unusual and unlike the rest of the
semester. All of the reading can be found either as a pdf or link on mywcl class page.
Coase, Chapter 2, The Theory of the Firm. Mywcl in the Coase folder. You can spread
this over the first week.
Coase, Chapter 5, The Problem of Social Cost. Mywcl in the Coase folder. You can
spread this over the first week; we will not discuss it until the first class of the second
week.
Mankiw 10 Principles of Economics (1 Page summary on mywcl). We will use this
during the first week, perhaps in the first class, but definitely in the second class.
Pinto, Chapter 1 – but not sections 1.05 or 1.10. Spread over the first week as an
introduction to the law (rather than economics) of business organizations, with particular
emphasis on corporations. Note that the link takes you to Amazon, where you can read
this opening chapter as part of the Kindle preview – click “read inside this book” or
Kindle preview, in order to get to the opening chapter for free. You do not have to buy
the book to get access, although if you stay in the class, you will need it.
This Information Memo for students.
Hour 1:
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This first hour introduces the subject, but mostly introduces the course – requirements,
practical stuff, and an introduction to how this course fits with the rest of the WCL
curriculum and with the business law curriculum. Once all the practical stuff is done,
we’ll take a break and if the class is not for you, you can abandon ship. This might take a
shorter or longer amount of time; we’ll take a break whenever it makes sense.
Hour 2:
We now start the substance of the course, first by situating the law of business
organizations within a number of substantive questions in law: These include
understanding BA as the first big introduction to the law of agency, agent-principal
relations, and the idea of legally enforceable duties to people and entities with whom one
has a relationship. That’s one perspective on BA; the law of agency, fiduciary obligation,
and trust and loyalty. A second is to understand it as the gateway to business and the law
of business and economic activity. A third is to understand BA as the law of
organizational decision-making and “running things”; this could include practically any
kind of organization or institution – authority, legitimacy, decision-making,
accountability, which are concepts basic to government, nonprofits, criminal
organizations (!), lots of things.
These different ways of understanding BA involve different background fields – law as
such, economics, game theory, sociology and social theory, etc. But let’s start with Pinto
and walk through a little of the history of business organization law, as well as Mankiw’s
basic principles of economics, particular the fundamental precepts of microeconomics.
Wednesday
Markets and Institutions (Firms)
Agents and Principles, and Agency Failures
Economic Efficiency in Markets and Institutions
Firms as Collections of Agents and Principles that Reduce Transaction Costs
Same reading for whole first week. Emphasis in this class session on Coase and The
Nature of the Firm, and Pinto’s introduction.
BA – what are its fundamental issues? Agent-Principal relationships and duties, as
expressed by the law of fiduciary duty, the duties of care and loyalty. But also the
problems of failures of the relationship between agent and principal and what to do about
them – in law after the fact of failure, but also in structuring the front-end incentives of
agents. BA is also a class about how organizations run themselves, the procedural rules
of organizations of all kinds. It is also a course trying to figure out from the standpoint of
economic rationality why there are “firms” and why different kinds of business models fit
particular legal structures in business organization. Thus, we introduce the basic idea of
sole proprietorship, partnership, limited partnership, LLC, and finally the general
corporation.
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Why is economic efficiency in business organization the organizing principle for our
textbook, and what does it say about the basic idea of efficiency? What is the difference
between an market and an “institution” such as a firm? What is the price mechanism and
what role does it play in markets, and why does it have problems in many conditions of
commodity production? Why should anyone care for purposes of BA? If Coase’s
fundamental insight is that firms replace markets because under certain circumstances,
firms and the hierarchical structure of agents and principles are the best means of
reducing transaction costs – that is the same as saying that firms in those circumstances
are the most efficient mechanisms of production.
Notice that if we look to the separate perspectives of “law” and “economics,” they
convey different, and somewhat competing, messages. Law tells us that people have
relationships, fiduciary and otherwise, and that the “law” should respect and in various
ways enforce those relationships.
Economics very often tells us both that although that might be desirable, people will tend
to cheat in the direction of their self-interest, and we should not expect more than weak
compliance in the absence of very strong – and perhaps self-defeating – legal sanctions
for failures. So economics tells us that rational behavior by strategic actors will very
often lead them not to do what the fiduciary law commands, and invites us to consider the
limits of law and what might be a better, or at least important, adjunct – to reconfigure
incentives through law and other means to get better compliance without resorting to
legal sanctions.
What do you think? How strong is the force and tug of law in these situations where the
law imposes duties on people related by their economic institutional relationships? Is law
alone enough? Moreover – separate but related question – how much should we favor
the efficient way of organizing economic life? What do we mean by efficiency?
The Law, and Law and Economics, of Agency and Agency Failure
Week 2
Monday
Efficiency and the Problem of Social Cost (Coase)
Is the Transaction Cost-Saved Model of the Firm Adequate? Is that all it is?
Production, Distribution, Consumption of Commodities (Goods and Services)
Agency Cost Theory and Introduction to Agents and Principals
Introduction to the Black Letter Law of Agency
Reading: Coase, Chapter 5, The Problem of Social Cost (mywcl). AKS, Chapter 1 (all
of it; not long), on efficiency and agency. Review Pinto, Chapter 1 (not 1.05 or 1.10).
Reading for whole week: AKS, 2.1 and 2.2.1, 2.2.2, 2.2.3. Also related sections of
Restatement 3rd Agency in Supplement: Chapters 1, 2, 3, 4, 5, 6, 7. You can spread the
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reading over Week 2. We will have one last class on Agency Law on Wednesday of
Week 3 (Monday is Labor Day) but NOTE:
There will be a Quiz on Tuesday of Week 3 – consisting of 10-20 TF questions on black
letter law of the Restatement 3rd reading.
Hour 1:
Coase and The Problem of Social Cost. We are going to walk through this article and try
to relate the underlying economics concepts to law. The basic issue is transaction costs,
and in particular the transaction costs created by agents who do not act in the best
interests of their principals. This idea is so basic to law these days, we need to start from
the most important statement ever given of it – Coase’s article is the single most cited
article in all of academic legal literature.
AKS Chapter 1 gives a quick and basic understanding of Coase’s point, so you might
want to start with that. However, compare AKS’s characterization of what Coase says
with what Coase actually says – is Coase quite so cut and dry as, there are firms because
they’re cheaper than not having firms? Or is Coase more sensitive to “institutional”
culture and structures (and if this has an echo for some of you coming from political
science or other fields in which the institutions debate has salience, you’re not wrong)?
Are institutions as simple as AKS more or less make them out to be? Something else
going on at a deeper social level than is captured by pure microeconomic theory? Look
at Pinto’s account of the corporation and its history to get a sense of this.
Before the break, let’s compare this kind of analysis to the black letter law of agency –
what is the source of law here? What is a Restatement, anyway?
Hour 2:
We now start into the law of agency as a black letter law subject. Start with the basics of
agency law, and take up both AKS and the Restatement to understand the questions that
the law must answer – nature of agency, formation, termination, how evidenced. What
does it mean to say that it is a matter of “status” evidenced by agreement? Is this
historically how agency has been created, at least outside of pure economic fields – such
as family law?
Contrast agency with the pure model of voluntary obligation – contract. What are the
differences between agency and contract, conceptually? What does the law do with these
differences and similarities, in a Restatement 3rd that is frankly trying to square legal
obligations arising from “status” with the idea, deeply embedded in “modernity,” that
what matters is consent – people should have consented to the burdens and benefits of
law that they take on. (Once again, if you sense threads of a similar argument in political
theory or history, concerning social contract theory, etc., you are not wrong.)
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Picking up with the question from Week 1 – agents and principles leading to business
organizations structured around the needs of production, and the reduction of transaction
costs … we are left with the concept of business organizations consisting of agents and
principles, with a need to ensure that agents do what principals want and intend. But this
is very hard to do for many reasons – what are they? Moreover, anything that is done to
ensure that agents act “on behalf of” and “faithfully” for their principals, and not for their
own interests, incurs transaction costs. To explore these questions, to provide a
framework for discussing agency failures, we start with the legal notion of an agent, as
set out in the common law, via the Restatement 3rd.
How does the black letter law of agency deal with these opposite-tugging conceptions of
obligation – status-bearing and consent (or contractual)-bearing? Look at both the
Restatement and the cases in the text closely.
Wednesday
Continue discussion of formation and termination in agency
Principal’s liability in agency
What relevance is the parties’ conception for creation of agency (Jensen Farms)
Liability of principal in contract: actual, apparent, and inherent authority
Liability of principal in tort:
Introduction to Agent’s Duties to Principal
Readings: Same for whole week, plus: AKS 2.3 (including cases).
Hour 1:
AKS starts out with the notion of an agent, and how an “agency” is established in the
common law; likewise its termination and terms. With agency established, the last part
of the chapter deals with the obligations of agents to principals (fiduciary duties and
trustee and stewardship duties in the common law). And when you have an agency
relationship between agent and principal – what does that mean as a matter of liability to
third parties? When is the principal liable for acts of the agent; when is the agent alone
liable? In tort and contract. What are the distinctions between actual, apparent, and
inherent authority in agency, and why do these terms matter? You need to know all the
definitions in the opening section of the Restatement for the quiz.
Hour 2:
The first hour considered the liability of principals to third parties for acts of agents. We
now take up a different question – the liability of agents to principals, which is found at
AKS 2.3. This is, in effect, to talk about the failure of agent-principal relationships,
which is one of the most important aspects of “social cost.” Think about all the different
situations in which one cannot effectively police the behavior of agents – how does the
law, and how does law and economics, try to overcome this problem? How does this
raise a problem of efficiency?
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The T/F Agency quiz is on Wednesday of Week 3.
Capital Raising, Commodity Production, and Efficient Business Form
The Range of Business Organizations in US Law
The Principal-Principal Problems of Joint Ownership and General Partnership
Week 3
Monday
No Class – Labor Day Holiday
Wednesday
Completion of Agency Discussion
Quiz on Agency Definitions and Terms
Risk, return, control, cost of capital
Sole proprietorship and the Range of Business forms
Capital raising and the need for joint enterprises
Co-Agency: Principal-Principal Conflicts in the General Partnership
Reading: Review all the Agency black letter law materials for Quiz at the beginning of
class. Read AKS Chapter 3.1 for the basic economic rationales for joint ownership, and
read 3.1.2 for the special agency problem of co-principals who are also co-agents to each
other – the famous case of Meinhard v Salmon. Finally, watch a You Tube video on
agent-principal relations (it will be asked as an extra-credit question on the quiz); link
will be posted to mywcl.
Hour 1:
Short Agency quiz at beginning of class. Then complete the discussion of agency as its
own body of law. Turn to discuss the economic and financial determinants of Business
Organization – the question is no longer, why are there firms rather than markets, but
instead why is there joint ownership rather than simply individual enterprises? One can
answer that question by reference to Coase and transaction costs, but to answer it more
than saying, “Transaction costs, transaction costs!!”, we need to give an account of the
factors of production – labor (services, including management) and capital (money for
plant, equipment, distribution, etc.). How does joint ownership address the problems of
factors of production, particularly capital and capital raising? So, what is a sole
proprietorship and why is it the analytic “unity” of all these things – but at the same time
not able to do it all in most cases?
Hour 2:
Given the need for joint ownership, what are the available business organization forms
starting with the sole proprietorship and ending with the public corporation? What
differentiates them, as a first cut at defining them? Finally, assume that we have
managed to create a joint ownership structure – a basic partnership – how should we
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characterize for legal purposes the relationship between the principals – co-principals, coagents, what exactly and what are the implied differences in how the law sees the
relationships? This starts us with the famous partnership of the co-venturers Salmon and
Meinhard in Manhattan a century ago … what happened and what did Cardozo’s famous
opinon opine?
*
To be continued.
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