Unincorporated Business Entities Law

When talking to a former student, perhaps the most frequent observation is that they regularly use agency law in their practices.  For example, consider the opinion in Conwell v. Gary Loon Outdoor Marketing Group, Inc., No. 82S04-0806-CV-00309 (Ind. May 19, 2009).  Conwellinvolved the ownership of a website designed (and hosted) by Gray Loon for Piece of America (LP) (PoA).  When PoA didn't pay Gray Loon, it took the website off its server, and refused to give the website files to PoA.  Later the files were destroyed.  PoA sued, claiming that Gray Loon had converted its property. 

At this point, you may be wondering how agency law applies.  Under copyright law, the owner of the copyright in a work is the author of the work, unless the work was a "work for hire."  Apparently, in deciding whether there was a work for hire, it makes a difference whether the work was done by an employee or by an independent contractor.  If the former, it is presumed to be work for hire, unless otherwise agreed.  If the latter, it is presumed not to be a work for hire, unless agreed in writing.  Slip Op., at 12-15.

The only other interesting aspect of the case is the way the Court analyzed the status of Gray Loon.  The Court quoted the standard used by the U.S. Supreme Court, and then concluded:

Considering these factors, it seems plain enough that Gray Loon was an independent contractor rather than POA's employee. The website was thus not a "work made for hire."

Slip Op., at 15.  That's it.  Nothing about how the facts fit into the factors.  A great example of how not to write an opinion, or an essay on an exam. 

Speaking of exams, back to grading.

Hat tip to Ben Barros, PropertyProf blog.

posted by Gary Rosin

In Gantler v. Stephens, No. 132, 2008 (Del. Jan. 27, 2009)–an otherwise routine case involving a shareholder derivative suit involving the fiduciary duties of directors of a corporation, the Delaware Supreme Court affirmed that officers

owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.

Id., Slip Op. at 24.  It’s hard to imagine that anyone would imagine that they did not owe fiduciary duties; officers, employees and agents of corporate principals all owe the same agency-based fiduciary duties.

One interesting aspect of Gantler is the Court’s observation that fiduciary shield provisions in the certificate of incorporation do not apply to officers:

That does not mean, however, that the consequences of a fiduciary breach by directors or officers, respectively, would necessarily be the same. Under 8 Del. C. § 102(b)(7), a corporation may adopt a provision in its certificate of incorporation exculpating its directors from monetary liability for an adjudicated breach of their duty of care. Although legislatively possible, there currently is no statutory provision authorizing comparable exculpation of corporate officers.

Id., Slip Op. at 24 n.37.  By way of contrast, Section 18-1102(e)  an LLC Agreement may modify or liability for breach of fiduciary duties by "a member, manager or other person". 

I suspect that the Delaware legislature is already at work on an amendment to Section 102(b)(7) of the Delaware General Corporation Law.  I would not be shocked if they also expanded that section to allow elimination of liability for all fiduciary duties.  In a recent article, Professor Ann Conaway (Widener)suggested that they do so.  Ann E. Conaway, Lesson To Be Learned:  How the Policy of Freedom of Contract in Delaware’s Alternative Entity Law Might Inform Delaware’s General Corporation Law, 33 DEL J. CORP. LAW 789, 817-18 (2008).

Hat tip to Francis G.X. Pileggi, Delaware Corporate & Commercial Litigation blog.

posted by Gary Rosin

Update:  Over at the "Glom", Professor Usha Rodrigues (Georgia) argues that

now is not an opportune time for executives to be seeking exculpation due to the anti-executive social-political climate.

I’m not sure that will deter the strong contractarian push in Delaware for freedom to delete duties of all sorts, including fiduciary duties.  That said, even the statute gets amended, it would require an amendment to a corporations certificate of incorporations–and thus shareholder approval–to add exculpation of officers or deletion of duties.  Here, Prof. Rodrigues is probably right; shareholders will probably not be inclined to approve.  Also, for the large public corporations, the activist institutional investors would oppose it.  And if such a request got out into the press, it would draw strong negative reaction from the public.

GR

As discussed in "Partner Expulsions for Public Conduct: An Agency Perspective," agents can be dismissed for

conduct that is likely to damage the principal’s enterprise

Rest. 3rd. Agency, § 8.10 (Duty of Good Conduct).  In Lehto v. Board of Education, C.A. No. 07A-08-007 (DE Dec. 2, 2008), the Delaware Supreme Court affirmed the dismissal of a teacher in the public schools on the grounds of immorality.  The teacher was found to have engaged in sexual relations with a former student, who was still a minor.  In the view of the Court, while dismissal for off-campus conduct required

such immorality as may reasonably be found to impair the teacher’s effectiveness by reason of his unfitness or otherwise[,]

id. at 7 (quotation marks and citations omitted) the sexual relationship with a former student who was still a minor

Here, part of Lehto’s job as a teacher was to serve as a role model for his students. Because a teacher’s interpersonal relationships are observed by and reflected in the conduct of students, teacher-student relationships must be kept within the bounds of acceptable conduct. If proven, Lehto’s sexual contact with a minor directly related to his fitness to teach other minors and impacted the school community. There was a proper nexus between his alleged off-duty conduct and his fitness to teach.

Id. at 11.

Hat tip to Francis G. X. Pileggi, Delaware Corporate & Commerical Litigation blog.

posted by Gary Rosin