CORPORATIONS CLARKE FALL 2012

AGENCYFiduciary Duty from Agent to Principle: Agent’s duty to principle: owes a duty of loyalty to the principle to put the principles interest over his own, agent

cannot solicit business for his own, and has to be open and transparent with his employer. Competition not ok b/f severance except preparation, ok after with limitations: Employee may compete with

employer after severance based on knowledge, experience, skill or memory only restraint is confidential information that would give employee competitive advantage to employee. Before severance employee may make logistical arrangements when still an employee to start his or her own new business with out breaching fiduciary obligation to the employer.(Hamburger).

o Employer may limit competition with contract: Employer if wants more protection can negotiate for a non-compete clause however the non compete clause would be invalid if: (1) Skill not unique, and (2) not traceable to employer in some sense.

Also invalid on public policy grounds if: (1) Not for a reasonable duration, (2) reasonable geographic coverage, (3) the nature of employer’s risk from competition, which results in a balancing between employer protecting business and legitimate interest of employee to redeploy human capital.

Fiduciary Duty from Principle to Agent: Presumption of at will employment: Unless agreement to contrary an employer can discharge employee for any

reason as long as not opportunistic or irrational. Unlawful Reasons for discharge:

o Torturous discharge in contravention of public policy: Situations where threat of discharge could be used to coerce the employee into committing crimes, concealing wrongdoing or taking other actions harmful to the public. This does not include: firing someone for fulfilling a duty to disclose information.

o Breach of employment contract: A company policy regarding termination may create limitations on the ability to terminate an employee, even if no written or oral contract between the parties.

o No implied covenant of good faith and fair dealing in employment relationships: only remedy for a breach of contract, were there would be punitive damages available.

Duty to Creditors(Actual, Apparent, and Inherent Authority): Actual Authority: Principle manifests consent directly to agent, i.e. principle really wanted to give authority to the

agent by manifesting their consent directly to the agent in writing or orally regarding the scope of the agent’s authority. Bound if: principle is bound by agents authorized actions even if the third party did not know that the agent had actual authority.

Apparent Authority: The third party reasonably believes agent is authorized to act on behalf of principle as result of principles manifestation, and this could be either expressed or implied.

o Two part test: (1) The third person reasonably believes that the agent has authority, (AND) some type of manifestation makes it reasonable, i.e. have to find someway to blame the principle for something that they did.

Inherent Authority: Agent derives authority from the agency relationship itself, this is designed to protect third parties where the doctrine of apparent authority fails. Designed to protect third parties where the doctrine of apparent authority fails. Because the person is vouched for should not disclaim b/c does not have authority for task.

Liability of Principles for Agents Actions: Principle puts agent in position enabling agent to commit a fraud on third party: If agent is acting under the

apparent authority of the principle then the principle is liable. Principle would be liable even it did not benefit from the fraud: The principle would be liable even if the principle

did not benefit from the transaction b/c liability is based on the fact that the agents position facilities the consummation of the fraud b/c the agent seems to be acting in the ordinary course of business.

Principle benefits from fraud: the principle will bear the loss if benefits off of the fraud. (Blackburn) Scenarios were partnership will not be vicariously liable: (1) If the principle did not knowingly assist and

participate in efforts to defraud (AND) the fraud victim did not rely on the apparent authority of the defrauder. (Sennott)

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PARTNERSHIPSFormation: Partnership is: An association of two or more persons to carry as co-owners of a business for profit. RUPA 202(a). Formation can be unintentional: The intent of the parties is arbitrary, all that matters is that the actors intend to

carry on a business for profit. So, even if you intend not to be partnership, can get sucked into it unintentionally.o It does not matter what documents say: A paper document cannot alone show intent to form a partnership.

The entire agreement and all of the attendant circumstances must be taken into consideration in reaching the determination that a partnership has actually materialized

o Unless affirmatively organize as something else: Except when you affirmatively organize as something else like corporation or a limited liability entity & file with the secretary of state.

General Characteristics of partnership: there is equal sharing of ownership and management functions, and so such things as:

o (1) Each partner is residual claimant,o (2) Each partner has equal right to participate in management of firm, ando (3) Each is responsible for an equal share of losses or profits.

Default rules alterable as long as no third parties hurt: Rules can be altered by third parties, but rules cannot be augments so that the rules negatively effect third parties.

Contribution to partnership must be money or property unless changed by K: If it is not money or property it is not contribution to the capital account. If do not like the result change it in the partnership agreement.

Profits: Sharing of profits; RUPA 401(b): (1) Default rules are equal sharing of profits, (2) to be deemed a partner have to

have right to profits. Partner vs. Employee Distinction: (a) if a Partner profits are based on the economic fortunes of the firm, but if a

(b) Employee then compensated by salary.Loses: Sharing of losses: Losses follow profits One party provides money the other services:

o Common law: If one party contributes money, and the other services if the agreement does not specify otherwise and there are not outside creditors let the losses lie where they fall.

o Contribution to party that provided money by party that provided services: (1) Majority view is that the party that contributed money cannot recover from the party that contributed services, however, (2) some cases have held the opposite.

Liability; RUPA 306(a): Unlimited liability: Misconduct of on partner can have consequences for everyone who is in the partnership. Partner is personally liable for debts of partnership: Partners are personally liable for the debts of the partnership

and creditors can go directly after the debts and they are jointly and severally liable. Internal agreements do not affect the rights of third parties: No internal agreement in the partnership may affect

the rights of third parties, who may not even know that the person that they were suing was a member of a partnership.

Steps of suing a partnership: (1) First look to assets of partnership, RUPA 307(d), (2) Partner must be joined as defendant in action against the partnership, RUPA 307(c), (3) then partners must seek contribution from other partners, RUPA 807(b)-(d).

Management: Management: The ability to engage in policy making, participate in voting power with regard to firm governance

and the ability to assign work and direct the action of employees with in the firm. The more of these qualities exist the more that the person would be considered to be a partner.

Partners have an equal right to manage; 401(f): Partners have equal rights to manage and conduct business, however, are constrained by fiduciary duty.

Equal rights to management can be augmented by express agreement: Except where the partners expressly agree to the contrary it is a fundamental principle of the law of partnership that all patterns have equal rights in the management and conduct of the business of partnership. Covalt.

Voting rights: (1) One person, one vote, (2) Routine Matters i.e. hiring and firing, majority vote, (3) Extraordinary matters, unanimous vote RUPA 401(j), (4) If expressly assign management role may not have the right to vote.

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If no majority status quo remains: If there is no majority deadlock results and the status quo previalsFiduciary Duty: Duty to disclose information; RUPA 403: Requires a partner on demand to furnish the requesting partners with full

and complete information about partnership affairs. Duty of loyalty in partnerships: partners must account to the partnership and hold in trustee any profit or benefit

gained form the partner in the conduct of the partnership business or business derived from the used of the partnership assets.

o Meinhard v. Salmon: “ Not honesty alone, but the punctilio of honor most sensitive is then the standard of behavior”

o Employer/Employee Setting: Employee is obligated to prefer employer’s interest to his owno Cannot restrict adventurer right to compete for something that should be his due to virtue of agency: Cannot

restrict an adventurer the chance to compete for any chance to enjoy the opportunities for benefit that had come to him by virtue of his agency. It does not matter if the value vests in the partnership.

o Self dealing: A partners is a fiduciary and may not engage in self-dealing, it does not matter if there is injury the rule is prophylactic in nature and is based need not only to compensate but to deter conduct that possess a risk of causing a damage to the partnership.

Burden and self dealing on the defendant: The burden on the defendant is whether the defendant can demonstrate a legitimate business purpose for his action and that his actions did not result in harm to the partnership.

Business judgment rule does not apply if: the business judgment rule does not apply if the plaintiff can demonstrate that self dealing on the part of the allegedly wrong doing partner.

Burden of proof: Clear and convincing evidence that fulfilled your fiduciary obligations.o Conflicts of interest: If conflict of interest can be shown then party with conflict (if a fiduciary) bears burden

of proving that he/ she dealt fairly with the other party. Duty of Care: Partners owe each other a fiduciary duty of the highest degree of good faith and fairdealing. Starr v.

Forham.o Burden: The plaintiff has to prove that the defendant was recklessly uninformed or acted outside the bounds

of reason. Cincinnati Bell.o Duty of care employer/employee setting: Unless otherwise agreed a paid agent is subject to duty to the

principle to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform.

o Mere negligence is not a violation; RUPA 404(c): Mere negligence is not violation have to show gross negligence. Fergueson.

Duty of disclosure: (a) partner must tell partners full information about everything that affects the partnership, (b) have an obligation of disclosure as long as involved in a common enterprise.

Converting an asset belonging to partnership for own use: It is only when there is a breach of trust, such as when one partner or joint venture holds property or assets belonging to the partnership or venture and converts such to his own use would this type of action lie.

Not waivable, but can be reduced if not unreasonable:o Duty of loyalty; 403(b):

(a) Not waivable in partnership agreement, but may be defined more specifically to make it more rectifiable,

(b) The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable.

o Duty of Care; 404(C) or 603(b)(3): may not be unreasonable reduced Sanctions for breach of a duty:

o (1) Actual damages: Actual damages from the breacho (2) Ill-gotten gains from the breach: Damages incudes profits made from the breach and the partner has the

right to receive compensation form anything improperly received.o (3) Compensation paid: Damages for compensation paid during the period of breach if it caused duties to be

performed inadequatelyo (4) Does not result in automatic forfeiture: Does not cause automatic forfeiture of partnership interest

Other relief: (1) the court may grant a money judgment in favor of a partner if appropriate, and may grant injunctive or other equitable relief.

Fiduciary duty in limited partnerships: General partners owe limited partners duty of loyalty and care in the

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exercise of management functions.Agency/ Ability to Bind Partnership: Partner Agent of Partnership; RUPA 301: Depending on a statement of authority under 303:

o (1) Can bind partnership if in ordinary course of business, third-party has no notification that the partner lacked authority: Each partner is an agent of the partnership for purpose of business. An act of a partner including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course of business or business of the kind carried on by the partnership bind the partnership unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partners was dealing knew or had received a notification that the partner lacked authority.

o (2) If not in the ordinary course of business only binds partnership if other consent: An act of a partner which is not apparently for carrying on in the ordinary course of the partnership business binds the partnership only if the act was authorized by the other partners.

Each partner is the agent of partnership: Each partner is an agent of the partnership for the purpose of the partnership and so if they may bind the partnership

Each Partnership has apparent authority to bind partnership: In the absence of contrary evidence to the contrary a partner’s actual, apparent, or inherent authority is equivalent in scope to the authority that can be implied from the position of a general agent as distinguished form one who merely engages in ministerial acts or acts only related to a particular phase of business.

Partner can band the partnership even without the right to do so, but will bear the loss: Partners can have power to commit partnership even if the other partners do not grant them the right to do so, however, the erring partner may have to pay his co-partners. Hamond.

Can bind partnership after it dissolves: A partnership may be sued for claims arising after dissolution b/c the conduct at issue was appropriate for winding up the partnership.

Partnership by Estoppel: A person who represents himself or is represented by others as a partner in an existing partnership can bind the partnership to such representations the same as if he were a partners in fact. Apparent authority will be presumed from the persons conduct. Dow v. Jones.

o This is also mirrored in RUPA; 702: Partners power to bind partnership: For two years after the partner dissociates w/o causing dissolution and winding up of the partnership business, the partnership including a surviving partnership is bound by the acts of a dissociated partners that would have bound the other partners under 301 if at the time of entering the transaction the other party:

(1) reasonably believed that the dissociated partner was then a partner. (2) did not have notice of that partners dissociation, and (3) is not deem dot have knowledge or notice that not a partner

Dissociate if do not want to be liable for others in partnership: If do not want to be liable for others in the partnership then dissociate.

Dissociation does not discharge liability for incurred debt unless creditor consents; RUPA 703: A partner’s dissociation does not itself discharge a partners obligation incurred before dissolution; however a dissociated partner may be released from liability for a partnership obligation by consent of the partnership and the partnership’s creditors.

Dissociation: At will partnership will continue as long as members assent: A partnership is formed with out agreement that the

partnership shall continue for a specified term or undertaking and the at-will partnership may continue as long as members assent.

Partner can always leave even if non wrongful or wrongful: A partner can always leave regardless if the is wrongful or non-wrongful.

Non-wrongful Dissociation; 601:o Non wrongful if:

(1) Dissociation through expression of will or manifestation, (2) Agreed event, (3) Expulsion due to partnership agreement, (4) Expulsion by vote of partners, (5) Judicial determination, OR (6) Death or incompetency

o If non-wrongful then: Wrongful Dissociation; 602:

o Wrongful only if: 4

(1) It is a breach of an express provision of the partnership agreement, or (2) For a partnership for a term or undertaking leaves before the expiration of the term or undertaking

o Exception: Can leave if all of the other partners agree to let the partner agree. (i) However, can dissociate and not be wrongful if partner dissociates w/ in 90 days of

another partners death or dissociation.o Liability: A partners who wrongfully dissociates is liable to the partnership and to the other partners for

damage’s caused by the dissociation.o Still entitled to partnership interest: The partner who wrongfully dissociated is entitled to their partnership

interest. No market value test for interest: There is most likely no market value test to determine the

partnership intersto May also be entitled to good will: If violate partnership agreement may also be entitled to the future earning

capacity of the business.o Wrongful Dissociation by Expulsion by judicial decree on application of partner; RUPA 601(5):

(1) Partner’s wrongful conduct actually hurt’s partnership business (2) Partner willfully breached the partnership agreement or a duty owed to the partnership (3) Partner engaged in conduct relating to the partnership business that made it not reasonably

practical to carry on business of the partnership with that partner. See Drashner.o If wrongful other partners may continue: As long as the remaining partners pay the dissociating partners what

they owe him minus damages that they have incurred. The consequences of a wrongful dissociation: If the dissociation is wrongful then the other parties may keep going

and do not have to dissolve the partnership Non wrongful dissociation will lead to dissolution: A non wrongful dissociation will lead to dissolution unless the

parties agree otherwise Effects of a partner’s Dissociation; RUPA 603:

o (1) If a partner’s dissociation results in dissolution and winding up: Go to article 8o (2) If it does not lead to dissolution: Go to Article 7

Partnership does not dissolve; RUPA 701: If there is no dissociation then go to article 701:

o (a) Buyout Option: The partnership shall cause the dissociated partners interest in the partnership to be purchased for a buyout price.

o (b) Buyout Price: The buyout price is equal to what it would have been if the partnership had dissolved under 801, which is a price equal the liquidation value or the value based on a sale of the entire business as a going concern w/o the dissociated partner and the partnership were wound up as that date.

If cannot agree litigate: If the buyout price cannot be agreed on this may lead to litigation.o (c) If the dissociation was wrongful: Any damages resulting from a wrongful dissociation will be offset by

the buyout price.o (h) Partners wrongfully dissociates before end of term: A partner who wrongfully dissociates b/f the

expiration of a term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking unless the partner establishes to the satisfaction of the court that the earlier payment will not cause undue hardship to the business of the partnership

Dissolution under RUPA 801: If the partners decide to dissolve and wind up affairs go to Article 801:

o A partnership must be wound up only on the happening of the following events: (1) In an at will partnership dissolves non-wrongfully, (2) If for a term or undertaking: (a) If partner dies, (b) wrongfully dissociates at least half of the

remaining partners decide to dissolve with in 90 days of the triggering event. The following constitutes the remaining partners expression to wind up the partnership

business:o (1) express will of all partners to wind up,o (2) the term or undertaking is over.

(3) An agreed event in the partnership agreement is triggered and results in the winding up of the partnership,

(4) An event makes it unlawful for all or substantially all of the business to still function

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(5) Application by a partner for judicial determination that: (i) Economic purpose of partnership unreasonably frustrated (ii) It is not reasonably practical to carry on business as a partnership b/c of another partners

conduct relating to the partnership business. (iii) not otherwise reasonable practical

Winding up period; RUPA 802: (a) A partnership continues after dissolution only for the purpose of winding up its business and it is terminated once the winding up period is complete; (b) however at any time after the dissolution of the partnership and before the dissolution of its business is completed all of the partners including any non wrongful dissociating partners may waive the right to have the partnership business wound up and terminated and can carry on the business.

Settling of accounts; RUPA 807: (1) assets are liquidated and auctioned, discharge obligations owed to creditors and give back contributions to partners who were creditors, (2) split up the rest of the money left over.

Fiduciary Duty in Dissociation and Dissolution: Content of fiduciary duty departing partners owe departing/dissociating partners remaining; RUPA 603(b):

o (1) Duty of loyalty terminates: The partners duty of loyalty terminateso (2) However still remains for events b/f dissociation: The partners duty of loyalty and duty of care continue

only with regard to matters and events occurring b/f the partners dissociation, unless the partner participates in the winding up.

Fiduciary limits on dissolution at will: Prevents partners from leaving opportunistically at the money that they get hired to force distribution of a big profit and prevents the majority from benefiting from the fruits of the leaving partners work.

o (1) Permissible: It is permissible to force the liquidating sale of the partnership and there is nothing binding the partner to stay at the partnership.

o (2) Not permissible: It is not permissible to “freeze out” a co-partner and appropriate the business for his own use

o (3) Must compensate other partner: A partner may not dissolve a partnership to gain the benefits of the business for himself unless he fully compensates his co-partner for his share of the prospective business.

If partner violates fiduciary duty it is a wrongful dissociation: If the partner violated a fiduciary duty then dissolution is wrongful and the partner would be liable.

Fiduciary Limits on the rights to Expel an Unwanted Partner: If wrongful expulsion could lead to liability of partnership: Expelling a partner can be considered to be wrongful

and open a partnership up to liability, however, sometimes the parties will negotiate in advance for terms governing expulsion and to the extent that they ado not agree the right to expel is governed by partnership law including fiduciary duty.

Partner has no duty to not expel a partner for reporting unethical conduct: a partner has no duty not to expel a partner for reporting unethical conduct. Bonatch.

Expelling partner under common law w/o breaching a fiduciary duty: (1) Can expel for a business reason, (2) to protect relationship with the firm and with clients, and (2) partner can expel to resolve a fundamental schism in the firm.

Court does not want to get involved in partnership decisions: The court does not want to get involved in internal partnership decisions. Does not override the idea that you do not have to associate with some that you do not want to.

Duty of Partner that dissociates to old firm: Setting up to compete with the firm: Fiduciaries may plan to compete with the entity to which they owe allegiance

provided that in course of such arrangement they do not otherwise act in violation of fiduciary duties. Soliciting Partners to Leave with you: The solicitations of one’s own partners to make a joint move simply does

not quality as a breach of fiduciary duty even if it will damage the firm that they are leaving. However, if leaving the firm have a duty to answer inquiries of fellow partner; RUPA 403(c)(2): Each partner in

the partnership has the duty to furnish to partner any information concerning the partnership business and affairs so this could include having to answer direct questions about plans of leaving a partnership.

Joint Ventures: A partnership for a term: it is a partnership for a limited purpose. The associates join together to exploit a particular

opportunity. Defined as: A relationship between two or more person in some specific venture to seek a profit jointly with out the

existence between them of any actual partnership, corporation, or business entity. Some jurisdictions have a six part test:

(1) An intent to enter into a joint venture6

(2) An agreement, expressed or implied among members of a group(3) A common purpose to be acrid out buy the group(4) An equal right to a voice in direction and control of the group(5) A right to share profits and losses.

To bind a partnership in a joint venture it is necessary to determine the extent of the joint venture: The party seeking to bind the joint venture must establish the extent of the agent’s actual authority. This is b/c the court does not presume that the partners are entitled to bind each other forever, i.e. not after the venture is done.

Limited Liability Partnership: LLP: Every partner has the ability to bind the LLP if they are acting with actual or apparent authority. Agency LLP Statutory Shield: Provides a statutory shield which limits liability of individual members form

individual misconduct of its members. The partners are however still liable for there own actions to third parties. Exception: There are exceptions if a partner was directly involved in or had written notice or knowledge of the

specific conduct at issue.

CORPORATIONS: THE DEFAULT STRUCTURE AND GOVERNANCEStarting a corporation: Process: (1) draft and file documents with the appropriate state official, (2) provide document with name of

corporation, registered office, agent for service and process, and the number of shares to be issued. After the shares are issued: (a) initial organizational meeting at which directors are elected, (2) shares are issued in

exchange for consideration, (3) bylaws that govern the corporations procedure are adopted. Determining how many shares to issue: (1) Shares must be issued that have voting rights in order to elect

directors, (2) Shares of same class must have the same rights to other shares that are in that classExternal Constraints on Governance: State laws: Differing state or corporate law Rules of exchanges: The rules of certain stock exchanges.The Members of A Corporation: Shareholders: Three main actions (a) Vote,(b) Sell, (c) Sue

(1) The Role of the Shareholders: (a) Provide capital and elect directors, (b) have no direct function in management(c) function via majority rules

(2) Ownership: Corporate ownership interest are represented by shares and these shares are usually a pro-rata share of the firms profits and net assets.

(3) The shareholders are the residual claimants: The shareholders are the residual claimants and get money back after the creditors have been paid through (1) dispersal of dividend, (2) sometimes in self tenders where the company buys back its shares.

(4) Role in Shareholder Democracy: o Approve directors and changes to governance structure: Shareholders collectively have the

power to elect the corporations directors and approve fundamental changes to the governance structure

o Do not have the ability to make decisions about corporate policy: Despite the ability to vote even a majority of shareholders may be unable to make business decisions for the corporation or require the director to make or change policies and procedures. The management of corporate affairs are given to the directors unless otherwise provided in the articles of incorporation.

(5) Transferability: Treated like fungible property interest and are freely transferable by their owners and recovering value is by transferring shares and not liquidity form the corporation.

(6) Limited Liability: No obligation to the corporation or its creditors beyond what is paid for the shares. Directors:

(1) The Role of Directors: 1. MCBA; 8.01: All corporate powers shall be exercised under the authority of the board of director of the corporation

and the business and affairs of the corporation shall be managed by or under the direction. Role’s oversight responsibilities in a public corporation: include attention to

Business performance and plans Major risk to which the corporation may be exposed The performance and compensation of senior officers The policies and practices to foster the corporations compliance with the law and

ethical conduct Preparation of financial statements

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The effectiveness of the corporations internal controls Compensation of the board taking in account the important role of independent

directors.2. DELAWARE: The business and affairs of every corporation organized under Delaware law shall be managed by or

under the direction of a board of directors exception as provided otherwise in the articles of incorporation. This allows for the board to appoint management

(2) Keeping the board from being opportunistic: (a) Provide directors with share of ownership such that the directors financial interest are aligned with those of the shareholders, (b) fiduciary duties, (c) having the board comprised of mostly outside directors.

(3) Directors protecting themselves from being fired: Directors can protect themselves from bing fired through employment agreements

(4) Liability: (a) not liable for the debts of the corporation, (b) the board cannot bind the corporation. Officers:

(1) Definition of officers: o An officer is a person who ranks above a corporate employee in the management hierarchy.

(2) The Role of Officers: 3. MCBA; 8.40-8.41: Appointed by the board of directors and function to perform functions set forth in the bylaws, the

functions set forth by the board of directors, or by direction of an officer authorized by the board of directors to prescribe the functions of other officers.

4. Delaware 142: The position and duties of directors are spelled out in the bylaws and will be appointed in a method that is set out by the bylaws, board of directors or governing body.

Incorporation Documents/Constitutional Documents: Articles of Incorporation MCBA

(1) Required content of articles of incorporation: (a) Name of corporation, (b) address, (c) individuals who are to serve as initial directors

(2) Amending the Articles of Incorporation: o The Amendment is adopted by the board of directors and approved by shareholders; MCBA 10.03: An

amendment to the articles of incorporation shall be adopted in the following matter: (1) adopted by the board then put to shareholder vote, and the approval of the directors of the Amendment unless prohibited from doing so b/c of a conflict of interest.

o Certain Amendments do not need shareholder approval unless it says otherwise in the articles of incorporation; MCBA 10.04: Extremely minor changes such as deleting addresses from the articles or very simple things

Certificate of Incorporation DELAWARE:(1) Amending the Certificate of Incorporation:

o Proposed by the board of directors approval by shareholders: Board of directors will adopt the resolution and then it will be put to the stockholders for a vote at the next annual meeting of the stockholders.

o For the Amendment to be ratified a majority of outstanding shares must approve: For an Amendment to be approved the majority of the outstanding shares(not just those present) must approve of the Amendments.

Bylaws: MCBA:

(1) The adoption and permissible content of the bylaws; MCBA 2.06: Initially bylaws are adopted by the starts of the corporation.

(2) A corporation’s shareholders and directors(w/ limitations) may amend the corporations bylaws MCBA 10.20: o Shareholders: A corporation’s shareholders may amend or repeal a corporation’s bylaws.o Directors: A corporations directors may amend or appeal a corporations bylaws unless: (a) Articles of

incorporation strip the directors of this ability, (b) the shareholders in amendment or repealing or adopting bylaws expressly strip the directors of the power to do so.

DELAWARE; 109:(1) The content of the bylaws: The bylaws may contain provisions that are consistent with the law and the certificate

of incorporation, relating to the business of the corporation, the conduct of the corporation, the conduct of its affairs, and its rights or power or the rights or power of its stockholders, directors.

(2) Amendment: The power to adopt, amend, or repeal bylaws shall be in the stockholders entitled to vote; in the certificate of incorporation, however, may extend the power to adopt or repeal bylaws to the directors.

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Voting: MCBA:

(1) Default Straight voting; 7.28: Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.

(2) Doe not have the right to cumulative vote unless articles provide: Directors do not have the right to cumulative vote unless the articles provide

DELAWRE:(1) Default Straight voting: The default unless cumulative voting is adopted is straight voting.

Straight Voting:(1) Cast one vote for each open seat per each share that is owned: (a) can vote for every seat, (b) to win you do not

need a majority, just need to have more then the competition.(2) If have over 51% of outstanding shares, then can mostly control the corporation: if you have 51% control over the

shares of the corporation then can fill every seat on the board by voting 51% of the shares for every seat(3) Do not have to get the majority of stockholders vote to win seat: Just need more affirmative votes then everyone

else, even if the other stock holders hate you if you still win if you get more votes. Cumulative Voting:

(1) Can cast all votes on a single director: Can spread votes among as many or as few candidates as you wish. Vote totaled is calculated as number of shares times number of directors

(2) Formula: (a) To be sure of electing X directors, (b) the shareholder must have more than N shares.(c) S is the total of shares voting and(d) D is the number of shares to be elected.o (Number of Shares Needed) N= SX/(D+1)o (to find out how may Directors can elect) X=N(D+1)/S

(3) Benefits: Gives a person the approx. seats on the board comparative to interest in company. Class Voting:

(1) General: Instead of having all shares elect directors, shares may be divided up into classes with each class having a right to elect a certain number of directors.

(2) The Purpose of a dual Class Voting System: This dual class common law would allow the founders to protect their control of the corporation while giving public shareholders both significant coting power and the vast majority of shareholders equity.

Staggered Board:(1) Only a certain percentage of directors up for each term: Board can be structured so that each year only a % of

directors are up for re-election. It means that multiple director meetings may be required in order to change the majority of the directors.

(2) Justifications: Provides continuity and stability, ensuring that a corporation will always have an experienced director in office.

(3) Classified Board with staggered terms: This device helps limit the power of the majority shareholder and to implement must not only make a rule providing for it but also have defense preventing the use of majority power to change the rule.

Shareholder Meetings: MCBA:

(1) Annual Meetings; 7.01 o Directors meeting should be held annually: A corporation shall hold meetings annually unless directors are

elected by written consent(2) Special Meetings; 7.02

o Special meetings: A special meeting may be called by (a) the board of directors or a person authorized to do so in the articles of incorporation, or (b) if the holders of at least 10% of all the votes entitled to be cast on any issue proposed to be considered at a meeting propose.

o Board still can augment: The board has some discretion to limit the timing and location of special meeting but may not avoid holding them if validity called as specified in the statutes and the bylaws.

DELAWARE:(1) Annual Meetings; 211:

o Designated in bylaws: An annual meeting of the stockholders shall be held for the election of directors o a date and at a time designated by or provided in the bylaws.

(2) Special Meetings; 211: o Directors or whoever is designated in articles: Special meetings of the stockholders may be called by the

board of directors or by such person or persons as may be authorized by the certificate of incorporation or by 9

the bylaws.(3) Mandatory Feature of Delaware Law: holding shareholder meetings at least once a year is one of the mandatory

features of Delaware law. Failure to hold a shareholder meeting: Corporation codes provide summery judicial procedures to ensure that a

failure to hold a required annual meeting is quickly remedied and the shareholders are usually guaranteed a chance to meet at least once a year.

Actions by Written Consent: MBCA;7.04:

(1) Allows for written consents, however, requires unanimity: An action may be taken by written consent if the action is taken by all of the shareholders that are required to vote on that action.

(2) Effectively limits applicability to small corporations: Effectively limits it use to small corporations.(3) Note default rule: may be augment by articles of incorporation

DELAWARE; 211:(1) Written consent for electing shareholders if majority: Unless the articles of incorporation say otherwise,

directors can be elected by written consent, however a majority vote is necessary. Even if acted through written consent, still have to have annual meetings: Even if acted through written consent

action, have to still hold annual meetings.Record Date: Shareholders entitled to vote at meeting are not always the owners of the shares: The shareholders who are

entitled to vote at the meeting are not necessarily the shareholders who own share on the date of the meeting. Due to shares constantly changing hands hard to tell who owns shares: Since shares are constantly changing

hands at the meeting it is hard to determine who is actually the owner of the shares at the time of the meeting. Companies will set a record date: State corporation codes provide that shareholders entitled to vote are those

owning shares on the record date specified by the directors. Record date can be set 60 days to days before the meeting: The record date can be set anywhere from 60 days to

days before the meeting in question.Removing Directors:May director be removed by action of majority of shares entitled to vote?

Del. MCBA

ORDINARY BOARDWith cause Yes, immutable yes, immutableWith out cause Yes, immutable Yes, unless COI says otherwise says otherwise

Classified (staggered) boardWith Cause Yes, immutable Same as ordinary board; immutableWith out Cause No unless COI says otherwise Same as ordinary board (i.e., unless COI says

otherwise)Cumulative Voting

With cause Yes; immutable Same as ordinary board immutableWith out cause Yes, but must use rules of cumulative voting (unless

entire board is being removed, in which case revert to regular voting); immutable

Yes, unless COI says otherwise, but must use of cumulative voting.

Sub-ClassWith cause Yes; immutable Yes, subject to above rules applied only with in

subclass; immutable.With/out cause Yes subject to above rules applied only within sub-

class; immutableYes subject to above rules applied only within sub-class; immutable

Removing directors before expiration of Term MBCA; 8.08: Removal of Directors by Shareholders:

(1) May remove w/ or w/o cause unless AOI says otherwise: The shareholders may remove one or more directors w/ or w/o cause unless articles of incorporation state otherwise.

(2) If elected by voting group only voting group can vote for removal: if a director is elected by a voting group of shareholders, only the shareholders of that group can vote to remove him.

(3) If cumulative voting is authorized: May not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal.

(4) If cumulative voting is NOT authorized: A director may be removed only if the number of votes cast to remove him exceeds the number of votes case not to remove him.

(5) Only can be removed if notice is provided that a meeting is called for purpose of removal: A director may be removed by shareholders only at a meeting called for the purpose of removing him and the meeting notice must state that the purpose, or one of the purpose of the meeting is removal of the directors.

MBCA; 8.09 Removal of a director by judicial proceedings:10

(1) A court may remove a director in a proceeding commenced by the corporation if: (a) bad conduct such as fraud, gross abuse of position, or bad faith, (b) other remedies are inadequate.

DELAWARE; 141(k):(1) Director may be removed with or with out cause: by the holders of the majority of shares entitled to vote except:

o COI states otherwise: If the certificate states that can only remove for cause.o If corporation has cumulative voting: If less then the entire board is to be removed w/o cause if the votes

cast against such director’s removal would be sufficient to elect such director if cumulatively voted at an election of the entire board or if classes of directors at an election of the class of director of which such director is part.

o If a subclass of shares: If a subclass of shares who are entitled to vote for 1 or more directors then that subclass can only vote for removal of that director without cause and not the vote of all outstanding shares.

Removing Directors for Cause: Not considered to be removing directors for cause:

(1) Desire to take over not for cause: desire to take over a corporation will not be considered to be a reason for ouster(2) In order to oust a director there is a formal process: There must be service of specific charges, adequate notice and

a full opportunity of meeting the accusations, they must have an opportunity to defend themselves. Campell. If removing for cause owe a fiduciary duty under Del. Law to provide director with notice: Advanced notice of

meeting agenda, which is a scheme against a director/ controlling shareholder, cannot be withheld form that director/ controlling shareholder in order to prevent the director/shareholder from exercising his contractual right to put a halt to the other directors scheme.

Altering Statutory Default Rules: If altering bylaw provisions must do so with clarity: A charter or bylaw provisions which alters the principle that a

majority of votes cast at a stockholder meeting is sufficient to elect directors must be clear, positive, and readibly understandable. Centuar Partners.(1) If not: majority voting rule applies(2) Can Amend if not contrary to AOI: Anything can be amended by bylaws as long as it is not contrary to the

articles of incorporation.(3) There are policy arguments against super majority vote: There is a concern that supermajority voting provision

gives minority the ability to veto the will of the majority, effectively disenfranchising the majority.The value of stock and investment in public corporations: Efficient Capital Markets:

(1) Weak form: Current prices incorporate all information in past prices, i.e. the market has no memory.(2) Semi-strong form(generally accepted in the law): Current prices incorporate all public information. Markets are

semi-strong efficient if securities reflects all public information at all times.(3) Strong form: Current prices incorporate all information that can be acquired by painstaking research, including

inside information. No investor is able to make consistently superior forecasts about stock prices. Future Value:

(1) Definition of future value: Money received or paid in the future is not worth as much as money paid or received today.

(2) Interest rates on investments determine value: there is an inverse relationship between interest rates and current values of future payments. The riskier the investment the lower the current value.

(3) Formals for determining values over multiple periods: o Present Value: Pv=Fv(1+interest rate)^number of yearso Future Value: Fv=Pv (1+interest rate)^ number of years

Proxy Solicitations: Proxy voting system: Shareholders are not at the meetings, so institutional traders will solicit proxies on behalf of

smaller traders. Federal Regulation: Mostly promotes disclosure triggered on certain events such as (1) issuing of securities, (2)

proxy solicitation, (3) tender offers, (4) the offering of annual reports. Requirements to be able to submit a proposal; Rule 14a-8(b): Must have continuously have held at least $2,000 in

securities or 1% of company’s securities entitled to vote on the proposal for at least one year by the date that the proposal is submitted.

The proxy card:(1) Formal requirements of proposal (14a-8):

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o Each shareholder may only submit: no more than 1 proposal to a particular shareholder meetingo Word limit: Limited to 500 Words

(2) Shareholder proposals are excluded(14a-8): Shareholder proposals typically cannot require management to do anything; so at most these function as recommendations.

State limitations on shareholder proposals; 14a-8(i):(1) Improper under state law: If the proposal is not a proper subject of shareholder action under state law of the

jurisdiction then it may be excluded The economic Irrelevance Test; 14a-8(i)(5): If the proposal relates to operations which account for less than 5% of

the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year and is not otherwise significantly related to the company’s business it may be omitted.(1) Related has been interpreted to pertain to policy significance and not solely economic: The issue in the proxy

statement could raise a policy issue that is significantly related to the companies business. Lovenheim. The ordinary business exclusion; 14a-8(i): If the proposal deals with matters relating to the companies ordinary

course of business it may be excluded. Reimbursement of Shareholder expenses for Proxy Solicitation:

(1) DELAWRE; 113(a): The bylaws may(not mandatory) provide for the reimbursement by the corporation of expenses incurred by a stockholder in soliciting proxies in connection with an election of directors subject to procedures in the bylaws.o Reimbursement by directors of directors elected proposed by shareholders: A proposal seeking to

require a company to reimburse shareholders for expenses incurred in the election of directors is proper in a proxy statement. AFSCME(note in case it would cause breach of fiduciary duty but 113(a) now condones).

THE BUSINESS JUDGEMENT RULE AND FIDUCIARY DUTIESBusiness Judgment Rule: If the business judgment rule applies: If the business judgment rule applies the court will not substitute its own

judgment for that of the directors, but if it does not apply the court will scrutinize the board’s decision as o its intrinsic fairness to the corporation and its minority shareholders.

Burdens of the business judgment rule:(1) Provides the board with a presumption: There is a judicial presumption that the directors have acted according to

their fiduciary duty of care and good faith.(2) Plaintiff has to rebut this rule when pleading: Any law suite seeking to hold directors liable for business decision

that have gone awry will be dismissed on the pleadings unless the complaining plaintiff facts if proven would rebut the presumption underlying the business judgment rule.o Can overcome this presumption with fraud illegality or conflict of interest: To overcome the

presumption of business judgment a stock holder derivative suite must rely on fraud, illegality, or conflict of interest. Shlensky.

o Can also be rebutted if the director pays to much attention to non shareholder groups: A corporation may be compelled to declare a dividend if its directors fail to do so as a result of fraud, lack of good faith, or abuse of discretion. Ford. ( cannot consider non-shareholders)

o However, in Pennsylvania: Directors may consider anyone and there is NO accountability.Exculpation Clauses: MCBA; 2.02(b)(4): Eliminates or limits the liability of a director to the corporation or its shareholders for money

damages for any action taken, or any failure to take any action except liability for:(1) Benefit received by the director which the director was not entitled to(2) Intentional infliction of harm on the corporation or its shareholders(3) Unlawful distribution(4) Illegal act

DELAWARE; 102(b)(7): Shareholders may eliminate violation of breaches of fiduciary duty except:(1) Bad faith i.e. something that you know will hurt the company, but just turn a blind eye(2) Intentional misconduct(3) Knowing violation of the law(4) Improper distribution(5) Improper personal benefit

Exculpation can act as a summery device at the pleading stage: Breach of duty of care claim must be dismissed

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where a corporation has an exculpatory provision in its charter that precludes money damages for directors breach of duty of care.

Due to exculpation repackage duty of care claims as bad faith claims: To get around an exculpation clause it is useful to repackage duty of care cases as bad faith claims.

Fiduciary Duties: Duty of Care: The duty of care requires that directors perform their duties with the diligence of a reasonable person

in similar circumstance which depends on the context i.e. process failures.(1) Breach: Gross negligence, or bad faith.

Duty of Loyalty: The duty of loyalty stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict. The duty of loyalty can be breached either by making a self-interested transaction or taking a corporate opportunity.(1) Breach: Self-dealing, or corporate opportunity, conflict of interest

Duty of good faith: The duty of good faith stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act with a conscious regard for their responsibilities as fiduciaries.(1) Breach: intentional derelict in the usual duties of an director or officer, intentionally acting for a purpose other

than the benefit of the corporation, or intentionally violating the law.The Corporate Opportunity Doctrine: (Duty of loyalty): Implicated when fiduciary seizure of opportunity belonging to corp.: The corporate opportunity doctrine is

implicated in cases where the fiduciary seizes an opportunity that results in a conflict of interest between the fiduciary duties of the corporation and the self interest of the directs as a result of a exploitation of the opportunity. Broz.

DELAWARE: Guth a.k.a “line of business test:”o Directors may not take opportunities where:

(1) The corporation is financially able to take the opportunity(2) The opportunity is in the corporations line of business(3) The corporation has a reasonable expectancy to take the opportunity, AND(4) If the director/ officer does take the opportunity it will result in a conflict of interest.

o Directors may take the opportunity if: (1) Opportunity is presented to the officer as an individual and not an officer,(2) Opportunity is not essential to the corporation(3) Coportaion has not interest or expectance(4) Officer has not wrongfully employed the resources of the corporation.

ALI Test:o First, determine if it is a corporate opportunity:

(1) Source of information test: (a) Any business opportunity for which a senior executive or director becomes aware of in connection with performance of duties or (b)where offer should be understood as having been made to the corporation OR (c) Through use of corporate property, if resulting opportunity is reasonably of interest to the corporation OR

(2) Type of information test: A business opportunity closely related to corporations actual or expected line of business of which senior executives becomes aware (does not apply to directors).

o Second, if it is a corporate opportunity the director or senior executive may not take advantage of it unless: (1) First offers to corporation: If the he offers it first to the corporation he may take it if other

conditions are met, however, if he does not offer to corporation he may not take it.(2) If offers it have to determine if he made proper disclosure: If did not make proper disclosure may

not take the opportunity, but if he does make proper disclosure move onto (3).(3) The corporation reject the offer: If the corporation is directed by a majority of disinterested

directors then he may take it, but if it is not rejected go to (4).(4) If ratification authorized by interested shareholders and waste: If it is waste then he can take it

but if it is not waste then he has the burden of demonstrating that taking the opportunity was faire to the corporation.

Conflict of Interest: MCBA;8.60-8.63: No transaction with a conflict of interest will be set aside solely on the basis of a conflict of

interest if:(1) Disclosure+ majority vote disinterested directors: The conflict of interest is disclosed and then there is an

affirmative vote of the disinterested directors, OR(2) Disclosure+ stockholder vote: There is a disclosure to the stockholders and it is voted on by the majority of

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qualified shares, OR(3) Transaction is fair to corporation: The conflicted director, not in hindsight, can meet his burden of proving that

the transaction was fair to the corporation at the time of its approval.o Qualified as interested under 8.60 if:

Material financial interest: Means a financial interest in a transaction that would reasonably be expected to influence the director’s judgment in any vote by the directors taken on the authorization of the transaction.

Related person: (a) spouse, (b) family members, (c) individual living in the same home, (c) and entity controlled by the director.

DELAWARE; 144: No transaction with a conflict of interest will be void solely due to the conflict if:(1) Disclosure+ majority vote disinterested directors: The conflict of interest is disclosed and then there is an

affirmative vote of the disinterested directors, OR(2) Disclosure+ stockholder vote: There is a disclosure to the stockholders and it is voted on by the majority of

qualified shares, OR(3) Transaction is fair to corporation: The conflicted director, not in hindsight, can meet his burden of proving that

the transaction was fair to the corporation at the time of its approval.Self-dealing: Controlling shareholder or director has the burden to demonstrate fairness: When controlling

shareholders/director have dealings with the corporation with the corporation that amounts to self dealing the burden is on them to show inherent fairness to the corporation(not BJR).

If the majority of the minority of the shareholders approve the transaction: Burden is on the controlling shareholder to show fairness unless the majority of the minority approve in which case the burden is on the challenger to show unfairness.

Self-dealing in parent subsidiary context: The intrinsic fairness test applies and the burden falls on the parent company to prove that the transaction was based on reasonable business objectives

o If minority was given dividend also court will usually not intervene: In order for the court to intervene the parent must be getting something that the minority shareholder was not. Sinclair Oil.

Refusal to vote does not cleanse the transaction; director must also warn others of hazards: Refusal to vote at a meeting does not nullify any influence that the conflicted director may have had; the director has a duty to warn.

Stock ownership alone is not enough to show a conflict: Stock ownership alone is not enough to show that the director was conflicted. Aronson.

Duty of care: The board will not intervene if: there is fraud, illegality, or conflict of interest. Risk taken by director/ corporate officer: A corporate officer who makes a mistake in judgment as to the economic

conditions, consumer tastes or production line efficiency will rarely if ever be found liable for damages suffered by the corporation.

Decision by the board, however, must be informed ones: A decisions made by a board of directors must be an informed one for the business judgment rule to apply.

Duty of Good Faith: Breach of duty of good faith:

(1) Intentional dereliction of duty: Intentional dereliction of duty, a conscious disregard for one’s responsibilities is an appropriate standard for determining wealth fiduciaries have acted in good faith.

(2) Indifference can be viewed as disloyal: Can also be viewed as actions which are disloyal to the corporation.Duty to Monitor: Employees violating the law: No duty to assume that all corporate employees are potential law violators. Allis-

Chalmers. DELAWARE Duty to monitor(Caremark Doctrine): Directors may assume integrity and honesty of employees but

have a duty to insure the existence of an information gathering and reporting system that is a good faith effort to keep management informed about corporate matters including compliance with the law.

Conditions that predicate oversight liability:(1) No reporting system implemented: The directors utterly failed to implement any reporting or information system

control. OR(2) Consciously failed to monitor: Having implemented such a system or controls consciously failed to monitor or

oversee its operations thus disabling themselves from being informed of risk or problems requiring their attention. Absent of things that should tick off directors; directors can assume honesty: Absent grounds to suspect

deception neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the

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integrity and honesty of employee and the honesty of their dealings on the companies behalf. Duty to monitor cannot be exculpated: It is part of the duty to act in good faith. The duty of good faith is part of the

duty of loyalty and it follows that it cannot be exculpated. Subcategories of bad faith:

(1) Subjective bad faith: Fiduciary conduct that is motivated by the actual intent to do harm.(2) Lack of due care: Fiduciary’s actions are taken solely by reason of gross negligence and without any malevolent

intent. Gross negligence w/o more cannot constitute bad faith Substantive due care and waste:

(1) Waste: An exchange that is so one sided that no business person of ordinary sound judgment could concluded that the corporation has received adequate consideration.

Excessive Compensation, however, is usually considered to be a business judgment: It is the essence of the business judgment for a board to determine if a particular individual warrants large amounts of money whether in the form of currency or severance provisions.

DERIVATIVE SUITES: DEMAND REQUIREMENTGeneral: Parties are hurt when a wrong is committed against the corporation: Everyone who has a stake in the

corporation, but they are in different priority classes: those with fixed claims(creditors, employees, suppliers and other contractors) get paid first while the residual claimant i.e. the shareholder gets hurt first

Directors may not want to bring suite on their own behalf: Directors may not want to sue another member of the board for personal reasons or costs. As a result a director might in some cases decide not to pursue fiduciary duty claims when objectively viewed would be in the corporations best interest to litigate

Demand Requirement: Policy behind the demand requirement: Gives corporation a chance to solve its won problems before handing

control of the litigation to the shareholders. Demand may be futile: If you are suing those upon whom you are making the demand or if they are in some other

way incapable of independently evaluating need for suite. MCBA; 742: No shareholder may commence a derivative proceeding until:

(1) A written demand has been made upon the corporation AND(2) 90 days has past

In Delaware have to litigate the demand futility issue and making a demand can result in a waiver: Delaware makes it hard to make a demand and then litigate if the demand is refused:(1) Spiegel: Held that making a demand concedes the independence of the board and precluded the plaintiff from

litigating the issue later;(2) Grimes: Stated all you waive is the right to claim demand is excused, but you do not waive right to claim that

demand was wrongfully refused and you could claim that the board in fact acted with out required independence and disinterest in refusing your demand.

Demand Futility: Demand futility: Demonstrate that it is futile to provide the board with a demand to initiate a derivative suit The Aronson rule:

(1) The initial burden is on the plaintiff to prove: Demand excused when a plaintiff can allege facts with partiality creating a reasonable doubt that the directors challenged actions were entitled to the protections of the business judgment rule.

(2) To show that they are not worth of protection must show: (a) disinterestedness, and (b) lack of independenceo (a)Disinterestedness (In Re Limited): Interestedness (1) relative to transaction, (2) At the time of the

transaction. Exists wherever: Directorial interest exists whenever divided loyalties are present or a director either

has received or is entitled to receive a personal financial benefit from the challenged transaction that is not shared by the stock holders.

o (b) Lack of independence: (a) Relative to the controlling shareholder and (b) at the time of the transaction: Independence is defined as: A director’s decision is based upon the corporate merits of the subject

matter before the board rather than extraneous influences. To establish lack of independence a plaintiff meets his burden by showing the directors are either beholden to the controlling shareholder, so under his influence that their decision is sterilized.

Rales Case: (a)If more then ½ of the board is different then the Rales case applies,(b) but if more then ½ same 15

Aronson Ryan.:(1) Rales Case: Look at the current boards ability to accept the demand and do not examine the original transaction

and apply the Aronson to the boards decisions to refuse the demand:o Plaintiffs have to show: Plaintiff have to show that there was an utter lack of good faitho Bad faith may be required:

Demand futility in Caremark claims: Cannot apply Aaronson b/c no decisions was made and so apply Rales(1) Rales test applies: Look at the board now and apply the Rales test to determine if the board is properly capable of

evaluating the demand to sue.(2) Conduct the Aaronson test on the pleadings: Determine whether the board has met the standard of good faith in

putting in place a system of controls. Even if disinterested and independent if violate stock plan will not be protected by BJR: Allegations of

violations of a stock holders plan automatically disables the BJR defense.Dismissal of Claims by Committee: Board appoints committee to deal with the demand requirement: A corporation appoints a committee of directors

who are not involved to respond to the derivative complaint to try to get the business judgment rule to apply. By appointing a committee that was not involved in the challenged transaction the board tries to control the derivative suite.

New York Rule; Auerbach: Apply the BJR to the decision; look into disinterestedness, reasonableness of procedures and good faith.

Iowa Rule; Miller: Concern about structural bias, no special deference and would be treated like the normal board. Delaware(Zapata): Burden is on the corporation of proving independence, good faith and reasonable investigation

(1) Step 1: Look at independence, reasonableness of investigation, good faith ( burden on the corporation, limited discovery allowed) if satisfied grant motion to dismiss and proceed to step 2 in courts discretion.o Look at committee now

(2) Step 2: Apply courts independent business judgment as to desirability of litigation, giving special consideration when appropriate matters of law and public policy in addition to the corporation’s best interest

MCBA: Defer to committee decision provided independence(defined to include disinterested and not necessarily to exclude officers) if reasonable procedures and good faith are present but:(1) Committee must consist of independent directors appointed by independent directors(2) Corporation has burden of proving good faith and reasonableness of procedures where majority of board is not

independent(3) To put the burden on the corporation, plaintiff must allege with particular facts showing that the majority of the

board was not independent.(4) Look at the board and committee now.

CLOSED CORPROATIONSPolicy of closed corporations: Dooley: Should be viewed the same as a partnership Easterbrook: Should not be viewed as a partnership. Corporations are specifically non-partnership relationship that

the parties deliberately got into.Contract Around Law: Small number of shareholders; no public exchanges: Small number of stockholders, no market for shares,

substantial majority control in management MCBA 7.32: Shareholder agreements valid for any non-public corporation even if they restrict powers of the board

and give management rights to the shareholders. Existence of agreement should be noted on stock agreement, if not on stock agreement it is invalidated

DELAWARE; 350-354: Special provisions are applicable to statutory defined “closed corporations:”(1) Written shareholder agreements interfering with discretion of directors are valid(2) COI provide for management by shareholders (existence of this provision must be noted in stock certificates).(3) Shareholder agreements and COI provisions not invalid for attempting to mimic partnership.

Altering power structure with shareholder approval(Delaware Common Law):(1) Can alter as long as third parties are not harmed: Allows to augment the power structure and take power away

from directors by majority vote of stock as long as third parties are not harmed(2) By law amendments: By laws passed by unanimous vote are shareholder agreements (i.e. contracts) but bylaw

provisions regarding amendments are also part of contracts.(3) Organizing as a partnership: The parties can attempt to treat the corporation s if it were a partnership or arrange

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their relationship in a matter that would be appropriate to the parties.Voting Agreements as to Shareholder Decisions: MCBA:

(1) Proxies are revocable unless coupled with interest; 7.22(2) Voting Trusts share are transferred to trustee who votes pursuant to irrevocable instructions; 7.30(3) Voting Agreements voting agreements are specifically enforceable; 7.31(4) Shareholder Agreements can augment the form of the corporation greatly;7.32

o Permissible: (a) eliminate or restrict power of board of directors, (b) establish who directors are and how to be removed.

DELAWARE:(1) Proxies irrevocable and may be couple interest; 212(2) Voting trusts: Permits that shares can be held in a fiduciary capacity; 218(a)(3) Voting Agreements: Can bind yourself to vote by agreement; 218(c)

Shareholder agreements can dictate how parties vote as long as do not effect third parties: Voting agreements are valid when they dictate that shareholders who are unable to reach a consensus must sell shares or vote accordingly to the will of the corporation.

Enhanced duty: Legal remedy for minority shareholders: (a) petition for dissolution, (b) derivative suites, (c) direct suites to

compel the payment of dividends. Direct shareholder suites against directors:

(1) Good faith and fair dealing towards minority shareholder: Those in control of corporate affairs have a fiduciary duty of good faith and fair dealing toward the minority shareholders

(2) Duty is discharged by: The duty is discharged if the decisions are made in good faith and reflect legitimate business purpose rather than the private interest of those in control.

(3) Bad faith: o Bad faith test: The essential test for bad faith is to determine whether a policy of the director is dictated by

their personal interest rather than the corporate welfareo Have to be motivated by bad faith: Unless these factors are motivating causes they do not constitute bad

faith as a matter of law.o Bad faith and dividend policies:

(1) If plaintiff can meet burden of showing bad faith, fraud or abuse of discretion court will intervene: The plaintiff has the burden to show that the decision not to declare a dividend amounted to fraud, bad faith or an abuse of discretion and not something that the director was authorized to do.

(2) If burden not met BJR apples: If the burden is not met then the business judgment rule applies Majority shareholder duty to minority shareholder:

(1) Duty of good faith and loyalty: Majority stockholder in a close corporation have a strict obligation to deal with the minority with the utmost good faith and loyalty. Wilkes.

(2) Burdens: o Burden is initially on controlling group to show legitimate business purpose: When a minority brings

suit alleging beach of the strict duty of good faith owed to them by the majority we must carefully analyze the action taken by the controlling stockholders in the individual case and determine whether the controlling group can demonstrate a legitimate business purpose for his action.

o If controlling group meets burden it shifts to the plaintiff: Minority stockholders must demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority interest.

o The court will then weigh: The court must then weigh the legitimate business purpose if any against the predictability of a less harmful alternative ( this is more intensive then the business judgment review, but court acknowledge the right of the majority to selfish ownership)

Involuntary Dissolution/Buyouts(legal remedies for minority): Suite for breach of fiduciary duty: Other law suites such as a contract rules before entering into an agreement. Petitions for involuntary dissolutions:

(1) MCBA; 14.30: Petition to Dissolve: Shareholder may petition for dissolution in the case of:o (a) Deadlock: The directors are deadlocked in management of the corporate affairs, the shareholders are

unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business can no longer be conducted to the advantage of the shareholders because of the deadlock.

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o (b) Oppressive, illegal, or fraudulent conduct: Reasonable expectations doctrine runs between the minority and the majority of the corporation that the majority should not be able to freeze out the majority.

o (c) Waste: Corporation misapplies corporate assets(2) N.Y. Business Law 1104(a): 20% shareholder may petition for dissolution in the case of illegal, oppressive or

fraudulent conduct.o Oppression: Defeat of reasonable expectations, but not simply subjective hope.o Burdens:

(1) Shareholder: Shareholder must first make a prima facie case of oppressive conduct and could also be defined as burdensome and wrongful to the minority.

(2) Defendant: Parties trying to avoid dissolution must then present adequate alternative remedy.o Dissolution can be prevented: No dissolution where any shareholder (or company) is willing to purchase

complaining stockholders share at fair value. Buyout remedy:

(1) MCBA 14.34: (a) Corporations or failing corporations shareholder may elect to purchase shares of petitioning shareholder at fair value; if negotiations fail this will be decided by the court, and (b) the court has to approve

Problem with buyout remedy: There is no efficient market in which shares can be valued, so experts must be relied on.

Share Repurchase Agreements: Call and put options: (a) Put: Allows shareholder on a certain trigger to pout the shares to the company for price,

(b) Call: allows the company to force the shareholder to sell the share back to the company. Absent ambiguities in shareholder agreements will be enforced as written: Courts will generally enforce

shareholder repurchase agreements, even if events subsequent to execution make the price price substantially less than the fair value. “The courts may not rewrite shareholder agreements under the guise of relieved the parties on the hardship of the improvident bargain” Concord Auto Auction.

Agreements between employee who is a minority stockholder and the majority:(1) Bound by the terms of the agreement regardless of employment status: An at-will employee of a closed

corporation who becomes a minority stockholder in that corporation and who contractually agrees to the repurchase of his shares upon termination of his employment for any reason is bond by that agreement.

(2) Acquires no protection from at-will discharge due to agreement: A minority shareholder in a close corporation by that status alone who contractually agrees to the repurchase of his shares upon termination of his employment for any reason acquires no rights from the corporation or majority shareholders against at will discharge and is bound by that agreement. Gallagher.

(3) Conduct that causes repurchase agreement to by triggered by employee’s termination may be a breach of duty: The terms of a repurchase agreement may not breach a fiduciary duty, however, conduct that causes a plaintiff to be terminated and his shares to be repurchases may constitute a breach of fiduciary duty. King.

Fiduciary Duty: May recover for breach of duty for wrongful termination: A shareholder in a closed corporation may recover

damages for breach of fiduciary duty and for wrongful termination if force to resign. Duty the same as in a partnership: The relationship among shareholders in closely held corporations is analogous to

that of partners. In such a fiduciary relationship the law imposes upon the highest standards of integrity and good faith in their dealings with one another. Pedro.

Transfer Restrictions: Effective when:

(1) Provide constructive notice: Must have a legend on each share certificate that notifies third parties that the underlying shares are subject to share transfer agreements.

(2) If no notice, not effective: If the restriction is not on the share it is ineffective unless a person has actual knowledge of the restriction.

Restrictions allowed for a reasonable purpose:(1) Making effective a share repurchase agreement,(2) Preventing transfers that would destroy tax or security law exemptions(3) Preventing transfers that would destroy a corporation’s ability to continue as a closed corporation.

LIMITED LIABILITY COMPANYStructure and Management:

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Creation: Created by filing chartering documents Functions to allocate risk and liabilities: Mergers the joint management and ownership functions so that they are

untied behind a single person these functions include (1) serving as the firms residual claimant and ultimate risk bearer, (2) overseeing business affairs and determining business policies, (3) managing day to day affairs.

Members: Functions as the residual claimants, and share in the profits after all other claimants and the need of the firm have been satisfied.

Management:(1) Member Managed is the default: Default is usually member management if the operating agreement does not

provide otherwise.(2) Member-managed LLC: Resembles a partnership:

o Members function similar to general partnerso Residual claimants the members are the residual claimants and also collectively have the authority to

manage the LLC.o Fiduciary duty and contractual duty on each member: Each member has a fiduciary and contractual duty

to the managing of the business and affairs.(3) Manager-Managed LLC: Resembles a corporation:

o Managers: May not be members but have the ownership functions allocated to them.o Fiduciary duties: The members do not have management authority or fiduciary responsibilities; instead the

person designated as mangers are responsible for managing the business and affairs of the LLC. Limited Liability: No one person is personally liable for the obligations of the LLC, and no one inside the LLC

functions as the ultimate risk bearer.Default Rules of an LLC: ULLCA: Partnership model

(1) Management: Managers have equal voice(2) Distributions/Partnership share: Equal share(3) Liquidation : Return contribution first then the remainder.

DELAWARE: Corporate Like(1) Management: Voice according to investment(2) Profit Distributions Share: According to investment(3) Liquidation: Distribute assets, return contributions first, and then split up the remainder of the interest.

Deviation form the default rules: High degree of flexibility: High degree of flexibility in defining nature of interest and deviating firm standard

conception of fiduciary duty. If not specified in agreement: If not specified in an agreement the default rules will apply If not specified in agreement a leaving member gets fair share: A resigning member is entitled to the fair value of

his membership if not otherwise specified in the agreement. ULLCA: Operating agreements generally govern except for specified exceptions. DELAWRE Common Law:

(1) There is strong policy towards a freedom to contract: The Delaware LLC act gives the maximum effect to the freedom of contract and to the enforceability of the LLC agreements and so the defaults are not prohibited from being altered by internal agreement. Elf Atochem.

(2) Even though vast freedom of contract some default rules remain: Allows for planners to write agreements changing statutory default rules, however, some rules like the duty of loyalty cannot be altered

(3) Agreements only invalid if inconsistent with statutory provisions: Only where the agreement is inconsistent with the statutory provisions will the agreement be invalidated. These are likely to be provisions that are intended to protect third parties and not contracting members.

(4) Oral agreements before formation of business may effect defaults: Oral agreements can apply if it is discussed before the formation of the business and may trump default rules.

Fiduciary Duty and Contracting Around Fiduciary Duty: ULLCA:

(1) Good faith and fair dealing in contract: Cannot be eliminated(2) Fiduciary duty: Cannot limit duty of loyalty, care, or good faith and fair dealing.

DELAWARE:(1) Good Faith and Fair Dealing in Contract: Duty may be expanded or restricted but not eliminated.(2) Fiduciary duty: Cannot eliminate anything that is bad faith act or is in violation of good faith and fair dealing

Contractual Duties in Delaware:19

(1) Eliminate all duties except good faith: Permits the elimination of all other duties except for the contractual duty of good faith and fair dealing

(2) Duties run from managers to members: A duty of good faith and fair dealing may be implied from an LLC operating agreement and imposed on the LLC’s management members and its owners for the benefit of the LLC’s members where the operating agreement provides the management members with broad authority to manage the LLC.

(3) Good faith and fair dealing will not add terms to an agreement: Delaware courts are reluctant to use good faith and fair dealing to impose duties on parties not spelled out in contract. The case for judicial restraint is strongest when sophisticated parties put together a detailed agreement.

(4) This may impose a duty for action to promote the purpose of the agreement: Good faith and fair dealings in the LLC agreement includes the duty to cause things to happen, when you have the power to do so that will promote the purpose of the contract i.e. have to properly perform obligations under the contract.

Fiduciary Duties in Delaware:(1) Duty same as in Corporation: The fiduciary duties are the same as the duties that are spelled out in Del

Corporation codes.(2) Augmenting this relationship: The Delaware LLC act gives members a wide latitude to order their relationship

including the flexibility to limit or eliminate fiduciary duties. But absent any contrary provisions in the LLC agreement, the managers of an LLC owes the traditional fiduciary duties of loyalty and care to the members of the LLC

(3) Waiving Fiduciary Duties: LLC agreements are contracts that are enforced according to their terms all fiduciary duties except those from the implied contractual covenant of good faith and fair dealing can be waived in the LLC.

(4) If ambiguous; however, the court will adopt reasonable interpretation: Where an LLC agreement purports to modify common law fiduciary duties, but creates ambiguity in doing so, an action will not be dismissed for failure to state a acclaim where the courts would be forced to choose between reasonable interpretations of ambiguous provisions in the LLC agreement. Kahn.

(5) Contracting out of conflicting interest transactions: Delaware LLC law may offer substantial advantages for business associations that anticipate frequent related party transactions.

(6) Managers have duty to other mangers/members not to take advantage of the LLC rules: LLC managers owe fiduciary duties to each other and cannot secretly; take advantage of the rules even if they believe that it is in the best interest of the LLC. The minority interest ahs to have the ability to protect itself against the actions of the majority. VGS.

Dissolution: Standing to seek dissolution: Only members or managers have standing to seek dissolution under Delaware law. Standards for dissolution:

(1) Minority states: Can dissolve if find a pattern of oppression or unfairly prejudicial conduct.(2) DELAWARE: Is it reasonably practicable to carry on business in conformity of the operating agreement. Not

reasonably practical when:o Deadlock at board level: There is deadlock at the board level that prevents the company from doing

businesso Operating agreement provides no way to navigate out of deadlock: The operating agreement gives no

means of navigating out of the deadlocko Bad financial condition: Due to the financial condition of the company there is effectively no business

no operate.o Common law example of granting: Where the LLC has no office, no employees, no operating revenue

or debt infusion and when the company’s board has a long history of deadlock as a result of its governance structure it is not reasonably practicable for it to continue to operate and should be dissolved.

Some jurisdictions will not grand dissolution if business successful: However some will regardless if there is prejudicial or oppressive conduct. R&R Capital.

Waiver of the right of dissolution:(1) ULLCA: Does not allow for the right to dissolve to waived(2) DELAWARE: Can waive the right to dissolution:

DIVIDEND DISTRIBUTIONSAssets LiabilitiesCash= $1,000,00.00 Current liability (things due in a year) 540,00.

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Fixed Assets=40,000.00 Long term debt (things due longer than a year) 400,00.Total Assets=1,040,00.00 Equity( what is left over to shareholders when all debts are paid)

Capital: 80,000(if lower capital add to surplus).Surplus: 20,000. (Delaware can only distribute dividends from here).

Total: 1, 040,00.00

Rules of Balance Sheet:(1) Total Assets= Liabilities(2) Equity= Assets(-) Liabilities

Minimum Capitalization Requirement Delaware: $0.00. Initial Capitalization: (a) Delaware-consideration for stock must be at least par value of stock, but par value can be

anything including zero, (b) MCBA; 6.21- no concept of par value. Permissible consideration for shares:

(1) Board: (a) evaluates the consideration to determine if the consideration is acceptable, (b) is liable if accept consideration at a unfairly low price or insufficient value only if a breach of fiduciary duty.

(2) Shareholders: o No liability if no fraud: Not liable for purchasing shares at bargain price if there is no fraud, however if pay

less than the agreed price then they will be liable for the remainder.o If cleansed by the directors then no liability: If shareholders tender property that the directors evaluate and

agree to accept in full payment of the issue price then the shareholders will not be liable to make up any short fall if it is later discovered that property was not worth the agreement purchase price.

(3) Statutes: o MBCA; 6.21: Anything deemed to be “fair and adequate” by the board ( it does not matter b/c they are not

trying to protect creditors through equity cushion).o DELAWARE;152: May authorize capital stock to be issued for consideration consisting of cash, any

tangible or intangible property or any benefit to the corporation and any combination aforementioned.Distributions to shareholders & Buybacks: DELAWARE:

(1) Dividend cannot impair capital: May distribute dividend if it does not impair stated capital.o May always change par value: Can always amend the articles of incorporation in order to change the par

value of the stock.(2) Can only disperse dividend from surplus: Cannot touch capital when distributing the dividend.(3) Share buybacks; 160:

o May not repurchase if would impair capital: A corporation may not repurchase shares if doing so it would cause an impairment of capital unless expressly authorized by 160. A repurchase impairs capital if the funds used in the repurchase exceed the amount of the corporations surplus to mean the excess of net assets over par value.

o The balance sheet is not conclusive on whether the capital requirements have been violated: A corporations balance sheet is not conclusive of whether the Delaware statute prohibiting the impairment of capital has been violated.

o Burdens:(1) Plaintiff: The plaintiff must show that the directors failed to fulfill their duty to evaluate the assets on the

basis of acceptable data and by standards which they are entitled to believe reasonable reflect the present value.

(2) The court: In absence of bad faith, or fraud on the part of the board, the courts will apply the business judgment rule.

MCBA; 6.40: Do not make distributions that would afterwards not allow for debt to be paid. There is a two part test for determining the practical solvency of the balance sheet:

(1) Equity test: Will company be able to pay its debts off in the ordinary course of business i.e. will it be solvent in the equity sense.

(2) Bankruptcy test: Will still have assets equal to or in excess of its liability that will be solvent in the balance sheet or bankruptcy sense.

PIERCING THE CORPORATE VEILOverview Corporations veil will be pierced whenever the corporate form is: (a) employed to evade an existing obligation,

(b) circumvent a statute, (b) perpetuate a fraud, (c) commit a crime, OR (d) work an injustice.

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Not always necessary to pierce: May be able to go directly after the person who is behind the veil, i.e. if controlling shareholder orders directors to order CEO to dump toxic chemicals, controlling shareholder is liable without having to pierce the corporate veil.

Public companies are never pierced: companies that have public shareholders are never pierced. Insurance: If a company takes a risky action and does not have adequate insurance courts will pierce; however, some

legislatures set minimum insurance requirements so if undercapitalized may decided not to pierce.Contract Cases: Principle not agent is liable: Agent is not liable for breach of contract only the principle through the laws of agency. Main test for piercing the corporate veil in contract cases:

(1) Defendant dominated and controlled so that the corporation had no mind of its own: o Complete dominance: Control not mere dominion over finances, policy, and business in respect to the

transaction attacked so that the corporate entity had no separate will of it sown.o More likely to pierce when few director than many: It is easy to have one or two people in corporation

and hard to say fully dominated when there are 100 or a lot of shareholders.(2) The control was to perpetuate a crime, fraud, wrong, or injustice: The control has been sued by the defendant to

commit fraud, or wrong to perpetuate the violation of a statutory or other positive legal duty or dishonest or unjust cat in contravention of plaintiffs legal rights.o Undercapitalization: A corporation is undercapitalized when there is an obvious inadequacy of capital

measured by the nature and magnitude of the corporate under taking.o Estoppel/ waiver and undercapitalization: if continue to deal with an undercapitalized company and do to

check the firms financial statement can relinquish right to challenge it as being undercapitalized and will be unable to pierce corporate value. Olson.

Alter ego or instrumentality test: The company completely dominated and controlled by shareholder in respect to the transaction so that the transaction attacked had no separate will to its own.

Corporate formalities test: Formalities were observed during the lifetime of the corporation, i.e. mixing of funds, all forms and documentation are signed, etc.

Undercapitalization test: (1) corporation is undercapitalized when there is an obvious inadequacy of capital measured by the nature and magnitude of the corporate undertaking. (b) have to be undercapitalized when the corporation begins, (c) if at a later time it would be considered to be an injustice.

Injustice test: Where a corporation is sued for an improper purpose and to perpetuate injustice by which it avoids its legal obligations “equity will step in, pierce the veil, and grant the appropriate relief.”

Equitable subordination: If everything goes south in the corporation creditors can take over company and run the company for themselves for the benefit of the creditors.

Tort Creditors: Liability for piercing: It is to make people liable who would not otherwise be liable under ordinary tort principles. Liability of employer through respondent superior: The employer is liable for the torts of his employees through

respondent superior. All people who actually commit the tort: All persons (including agents and employees) are liable for own torts;

status as agents, employees or shareholders and the corporation will never relieve an actor for liability for a tort they actually committed.

If just acting as corporate shell then it will be pierced:(1) Tortfeasor not protected: Existence of corporation does not shield does not shield you from wrongs that are

directly responsible for(2) Asset less shell will be pierced: If directors own an asset less corporate shell which is experiencing financial

difficulty and is serving as a device through which the directors or officers could carry on tortious activities at the expense of the plaintiffs and at the same time be personally insulated form liability against wrongs in which they knowingly permitted then they will be pierced.

Factors in support of veil piercing for torts:(1) Fraudulent representation by directors,(2) Undercapitalization(3) Failure to observe corporate formalities (misuse of name not enough)(4) Absence of corporate records(5) Payment by the corporation for individual obligations, but note that a personal guarantee for a loan cannot be

enlarged to all for tort liability(6) Use of corporation to promote fraud, illegality, injustice, etc.

Incorporated Shareholders:22

May not have to pierce: The veil may not have to be pierced if parent actively participated in and exercised control over the operations of the facility committing the tort and it could be liable for bing the operator

o Operator facility vs. operating the subsidiary: (a) facility-directly liable, (b) subsidiary-must pierce corporate veil.

The veil may be pierced to get to a subsidiary where:(1) Complete dominance of subsidiary by parent (AND):

o Complete dominance: The parent is so dominated that it had no separate existence, but was merely a conduit for the parent. Depends on finding complete dominance, not only of finances but at the time the corporation had no separate mind or existence.

o 100% ownership is not enough; have to exercise control: 100% ownership is not enough to pierce. Have to find wholly owned subsidiary dominated by parent in order to be liable and have to exercise control

(2) Used corporation to perpetuate fraud or injustice: o Fraud or injustice: The parent has abused the privilege of incorporation by using the subsidiary to

perpetuate a fraud or injustice or otherwise circumvent the law. Craig Lake.

DE FACTO CORPORATIONS AND CORPORATIONS THAT DO NOT EXIST Contracting with a corporation that does not formally exist: If a corporation does not exist it cannot have any

agents, and therefore actions taken for a nonexistent principle will not be protected by the general laws of agency. A corporation does not exist when: (a) before the incorporation occurs, OR (b) during periods of dissolution Creditors may get burned: (a) if corporation did not exist cannot take on contractual obligations of the persons

who did act for the corporation, but (b) creditors may be able to recover once the corporation is formed. If act as a corporation, but did not incorporate then you are liable: All people who assume to act as a corporation

with out authority of a certificate of incorporation that is registered with the state shall be jointly and severally liable for all debts

Corporation de facto (believed that incorporated properly): A corporation arising form the good-faith attempt to comply with the good faith attempts to comply with the statutory requirements of establishing a corporation. The elements:(1) Intention to incorporation,(2) Tried to incorporation- made a good faith attempt to be a corporation and believed succeeded but did not and then

acted as corporation.o If elements met: If the elements are met then will be treated like a corporation.

Corporation by Estoppel: Arises when parties are estopped from denying the existence of corporation as a result of their agreements or conduct.

MCBA; 2.04: Liability for Pre-incorporation Transactions:(1) Knows no corporation then labile: All persons purporting to act as or on behalf of a corporation, knowing there

was no incorporation under the MCBA are jointly and severally liable for all liabilities created while so acting.

FRIENDLY MERGERSTypes of mergers: Stock acquisitions: (1) private deal, (2) tender offer- buy the shares of the target, (3) compulsory share

exchange(MCBA 11.03)- if target corporation agrees to merge then can force the minority shareholders to sell. Sale of assets; followed by liquidation: Acquire will buy all of the targets assets and leave it a shill and then

dissolve it and distribute the assets to its shareholders.(1) Shareholder approval: If a corporation wishes to sell substantially all of the corporations assets other than in the

ordinary course of business they must submit the proposal to their shareholders for approval normally by majority vote.

(2) Less than all assets sold: May seek to have shareholder approval if do not then the deal is subject to judicial second guessing to determine if it was a significant proportion to require a shareholder vote. To calculate substantially all assets:o Qualitative effect on corporation: the need for shareholder approval is to be measured not by the size of the

sale alone but also by its qualitative effect on the corporation. It is relevant to ask whether a transaction I out of the ordinary and substantially effects the existence the purpose of the corporation. Olberly.

o 51% has been held to be substantially all: Sale of 51% of corporations total assets was held to be substantially all of the corporations assets. The court emphasized that the assets sold constituted the corporation long term principle business and that the corporation planned to undertake a radically different business post sale.

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Triangular mergers: These are mergers of the target into a wholly owned subsidiary and then merging it with the parent:

(1) Forward: Target mergers into acquirer’s subsidiary. Then the acquire and the subsidiary merge.(2) Reverse: Acquirer mergers into target. The acquire ends up with a controlling share of the target(3) The reason to pursue this type of merger:

o Eliminates parent shareholder appraisal rights: Eliminates the voting and appraisal rights that the shareholders of the acquirer would ordinarily have

o Parent’s shareholders do not have the right to refuse the merger: Do not have to have there shareholders vote for the merger

Approval for Mergers: Boards of both companies must approve: With the exception of the directors of a parent sub merger the boards of

both companies have to approve the merger Shareholders: Approval of the majority of both the target and the acquirer

(1) MCBA: Majority at meeting were there has to be a quorum, not all outstanding shares(2) DELAWRE: Absolute majority of all outstanding shares not just the shares that can vote.

Exception to requiring shareholder vote:(1) Parent Sub-Merger: At least 90 % ownership just need the approval of the board of the parent(2) Whale-minow merger: Up to 20% i.e. a short form merger the acquirer’s shareholders would not need to vote,

however the targets will.Dissenters Rights(Appraisal): DELAWARE; 262: The shareholder will receive judicially determined fair value plus interest even if that amounts is

less than what the corporation would have offered to the shareholders as part of the terms of the merger. MCBA;13.25: Requires the corporation to make payment to dissenters as soon as the action is consummated. Must be

in good faith and a fair value of the shares. Court will give the dissenters the difference if they think it is undervalued ALI; 7.21: (1) Shareholders in a parent that uses a sub to effect a merger gets appraisal rights as if the partner had

engaged in the merger directly, (2) Shareholder gets appraisal rights if end result is that they have less than 60% of the stock after acquisition.

Appraisal rights: Appraisal rights follows if you are a shareholder in a party to a merger i.e. target or acquirer of which you disapprove if you follow the procedures you will get appraisal rights.

(1) Exception: No appraisal rights if not allowed to vote in the first place b/c you are a whale shareholder, but appraisal subsist if you were not allowed to vote b/c the minority in sub parent merger.

(2) Market out exception: No appraisal rights if active market exists for stock that you have unless you are getting back something other than marketable share or shares of the surviving corporation( MCBA cash). In Delaware this gives you appraisal rights even if you get cash back and deprive you of appraisal rights when you have to exchange stock in a surviving company.o Exception to the exception; MCBA: If there is a suspicion of conflict of interest on the party of the

dominant shareholder or senior executiveVote buying and voter coercion: Vote buying: The plaintiff has the burden of proving that management knowingly misrepresentation material facts

about integration in the effect to purse the shareholders approval for the merger. Voted Coercion: The plaintiff has the burden of presenting significant evidence that the shareholder was coerced by

management during their communication into voting in favor of the proposed merger and that the switch of votes was not made for independent business purpose.

De facto Merger: De Facto Merger: Occurs when the majority takes an approach for a transaction which denies shareholders voting

and appraisal rights what would have been available had the parties chosen to structure the transaction as if it was a normal merger.

The De Facto Merger Doctrine:(1) The plaintiff will argue that: shareholder denied voting or appraisal rights may ask courts to intervene and re-

characterize the merger under the de facto merger doctrine(2) The defendants will argue: the courts should respect the legislatures action in creating overlapping statutory

provisions and should not interfere with the defendants choice of statutory authorized tools to use in structuring the challenged corporate combination.

(3) The test: Does the combination fundamentally change the corporate character of the acquiring corporation and the interest of the plaintiff as a shareholder that refuses him the rights and remedies of a dissenting shareholder and in reality would force him to give up his stock in one corporation and against his will accept shares of

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another. If so it would be considered to be a merger de facto. Essence of a merger:

(1) Transfer all of shares and assets of the target to the acquirer,(2) Assumption by the survivor of all liabilities of the target,(3) Pooling of interest of two corporations(4) Dissolution shortly after(5) Joinder of officers and directors of both corporations on survivors board.

If considered to be a merger de facto: Appraisal rights will be given to those in both target and acquiring corporation. Applestein.

Rejection of the de facto merger doctrine (DELAWRE):(1) Independent legal significance: Actions taken pursuant to the authority of the various section of that law

constitute acts of independent legal significance and their validity is no dependent on the other sections of the act. “If it is legal to accomplish each step, then it is legal to accomplish the end result of the steps.”

(2) Sale of assets legal even if can be accomplished through merger statutes: The reorganization accomplished through the sale of assets statue and a man dory plan for dissolution and distribution is legal. This is so because the sale of assets statue and the merger statue are independent of each other. The framers of a reorganization plan may resort to either type of corporate mechanics to achieve the desire end. Hariton.

Cash Out Mergers: Cash out merger: The majority who vote for the merger get shares in the new company and dissenters get cash. Most

of the time appraisal is the exclusive remedy absence fraud, illegality, or the business purpose test.o Reason to get rid of minority : (a) get rid of fiduciary duties by getting rid of the beneficiaries, (b) do not have to

worry about self dealing (c) can barrow money with sub’s property w/o having to worry about public shareholders.

Legitimate expectations in a cash out merger: (1) fair price, (2) not being frozen out even at a fair price except for a legitimate business purpose.

The business purpose test:(1) What are the legitimate expectations of minority shareholders that disserve to be protected in cash-out merger?:

o Not a legitimate business purpose: A majority owner of a corporation cannot effect a freeze-out merger purely for his own benefit. Coggins.

o Debt financing has been held to be a legitimate reason for a cash out merger: The court has upheld a cash out merger as a legitimate business purpose in order to facilitate long term debt financing.

(2) The burden on the defendant: The defendant bears the burden of proving firs that the merger was for a legitimate business purpose and second that considering the totality of the circumstances it was fair to the minority.

DELAWARE The Weinberger Approach( no business purpose): Appraisal is the sol remedy for freeze outs(1) If seeking to secure minority shareholder approval must comply with two part fairness test:

o Fair dealing, i.e. duty of candor: A duty to corporations to complete disclose to the shareholders all information germane to the merger

o Fair price: All relative and speculative: Requires taking into account all relevant factors but no including any elements of value arising form the accomplishment or expectation of the merger. Use any technique or methods which are generally considered acceptable in the financial community.

(2) Burdens: o Initial burden: The initial burden is on the plaintiff to show fairnesso Burden is ultimately on the defendant to: show by a preponderance of the evidence that the transaction is

fair.(3) Damages: The court shall appraise the shares determined their fair value excluding the benefits arising form the

expectation of the accomplishment of the merger, together with a fair rate of interest if any to be paid upon the amount determined to be fair value.

After Wienberger:(1) If a conflict of interest transaction i.e. parent majority on both sides of transaction: If independent negotiating

committee then the burden is on the plaintiff to show fairness(2) Transaction by majority of the minority: The burden is on the plaintiff to show unfairness, otherwise the burden

is on the defendant to show fairness.(3) Tender offers in bad faith:

o MCBA: To get something other than appraisal remedy have to show (1) self dealing, (2) bad faith, (3) fraud or unlawfulness.

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o DELAWARE: Entire fairness is applied if same party is on both sides of transaction. Valuation and Exclusivity: Valuation under statutory appraisals: Value added to the going concern by the majority acquirer during the

transaction period of a two-step merger accrues to the benefit of all shareholders and must be included in the appraisal process on the date of the merger.

Going concern in a two step merger: In a two step merger value is attributed to the nature and the purpose of the enterprise. Value is: the value of the corporation “but for” the merger. Cede and Co.

In short form merger appraisal is the exclusive remedy(with exceptions): In a short form merger appraisal is not exclusive remedy if you allege a breach of the duty of entire fairness

MBCA: Appraisal is the exclusive remedy.

HOSTILE TAKEOVERSDefensive Measures: Share buybacks (responding to greenmail) (Mathes):

(1) The Rule: Directors may cause company to buy out dissident shareholders if they sincerely believe this is necessary to maintain proper business practices but may not if their true motive is solely and primarily to perpetuate themselves in office.

(2) Burdens: o On directors: The burden should be on the directors to justify that the purchase is one primarily in the

corporate interesto Directors who are uninterested: Will not be held to the same standard of proof required for those having

personal and pecuniary interest in the company.o How the burden is met: The burden is met by showing good faith and reasonable investigation, total

fairness is not necessary.(3) Can pay to make a disruptive presence go away: Directors must show that they had reasonable grounds for

believing that there was a danger to corporate policy and effectiveness. Enhanced Fairness(Unocal Self Tender Case):

(1) Initial Burden is on the directors: Directors must show that they had reasonable grounds for believing that there was a danger to corporate policy and effectiveness.o Satisfy this burden by : Showing good faith and reasonable investigation, by proof that the board consisted

of a majority of outside independent directors.(2) Directors must also prove: The defensive measure was reasonable to the threat posed:

o Demonstrate it is reasonable by:(1) Not coercive: Cramming down on its shareholders a management sponsored alternative OR(2) Not preclusive: A defensive measure is preclusive if it makes a bidder’s ability to wage a successful

proxy contest and gain control either mathematically impossibly or realistically unattainable. Unitrin.(3) Threats: An all cash, all share offer can constitute a threat to which a board may respond( institutional

shareholders are dumb and need to be protected from themselves(4) If the directors meet burdens BJR applies: unless it can be show that the board’s primary motivation was

entrenchment or some other breach of fiduciary duty such as fraud, overreaching, lack of good faith or being uninformed.

Poison Pills: An option of various rights given to shareholders entitling them to buy additional securities of the company upon the happening of certain events; usually the options are below a market premium and this is what makes it expensive for a company trying to take over the company.(1) Moran: May adopt a poison pill as a general antitakeover device as opposed to a response to particular threat.

Can also issue securities for any purpose(2) Redeeming poison pill : Cannot have “dead hand” poison pill where it is not possible to redeem, i.e. cannot be

redeemed unless the board that put it in place approves removal.(3) Can implement a poison pill to block an underpriced tender: If a board has food faith and reasonable basis for

believing a bid is inadequate it may block that bid by using a poison pill. Irrespective of the stockholders desire to accept the offer. AirProducts.

Sale and Auction: Revlon Duties: When a company is for sale the court imposes the duty on the board to maximize immediate

shareholder value and an obligation to auction the company fairly.(1) Triggers:

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o Active Bidding: Corporation activates bidding process to sell itself or reorganization that involves a break up of the company

o In response to bid abandons long term strategy: In responding to a bidders offer a target abandons its long term strategy and seeks an alternative transaction involving the breach up of the company.

(2) Does not trigger: o If boards reaction is only a defensive response: It the board’s reaction to the tender offer constitutes

only a defensive response and not an abandonment of the corporations continued existence; however, Unocal may be triggered.

o Preventing a take over bid will not trigger even at fair market price: A board of directors effort to prevent a takeover via tender offer will not be invalid merely b/c the take over offer constituted a fair market value. Time Case.

Unreasonable deal protections:(1) Deal lock ups could violate Revlon: A change in corporate control or a break up of the corporation subject

directors to enhanced scrutiny and requires them to pursue a transaction(2) Could also invoke Unocal: A board of directors breaches its fiduciary duty if it contractually restricts its rights

to consider competing merger bids. QVC Case.

FEDERAL LAW:Proxy Statements: Federal Securities Law: (1) Primary concern-disclosure, and (2) Application- applies to companies with large

numbers of public shareholders, i.e. companies that are listed on a stock exchange. Securities Act of 1933: Main concern is with disclosure in connection with IPOs

(1) Disclosure: o Registration: Have to register with the SEC and give them information

National Market Improvements Act of 1996: Removed form the states their plenary power to regulated issuances of covered securities.

o No fraud: Cannot lie in the disclosure, i.e. commit fraud. Securities Act of 1934: About continuing discloser.

(1) Requires: Continuing disclosure and regulation of security market with shareholders sell to each other. Contents of disclosure: IPO, quarterly reports, annual reports, tender offers, proxy solicitation, and other material

rights. Enforcement of private rights of action:

(1) Available where the statute does not provide: To protect shareholders it is consistent to provide private rights of action.

(2) Congress wants to promote disclosure: Disclosure is allowed to promote congressional policy of disclosure to investors; SEC does not have the resources to do the entire job itself (this has been limited)

1. Materiality; for 14a-9: TSC Proxy Statements: A fact is material if there is a likelihood that a reasonable investor would think that it is

important when deciding how to vote.o Policy: Make sure that shareholders get enough information to allow them to make informed decisions, but do

not give management an incentive to bury them in a flood of useless information2.Causation for 14a-9: Miller test: Do not have to show reliance only have to show misrepresentation:

(1) Just need to show materiality: A plaintiff alleging proxy violations must demonstrate materiality of the omission need not demonstrate reliance

(2) Has to show that the misleading solicitation was essential link: Need to show that the misleading solicitation was a “essential link” in accomplishing the result in which the plaintiff complains.

(3) Plaintiff’s burden: The burden is on the plaintiff to show materiality of the misrepresented matter. No need to show causation b/c materiality substitutes reliance.

If minority approval is not needed then there is no causal link: If minority approval is not needed the essential link test is not met; the merger could have been carried out with out minority shareholder approval, so misrepresentation is not casually related to accomplishment of the transaction. Give private right of action to those for whom congress intended to protect the shareholders whose votes matter. VA Bank Corp.

Rule 10b-5 and State Law: 10b-5: (1) Fraud, (2) must be in connection with the purchase and sale of securities.

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Enforcement is possible by: (1) the SEC, (2) courts by private rights of action Must be related to purchase and sale of securities and not mismanagement of corporate affairs:

(1) Only to purchase and sale and not breach of fiduciary duty: 10b-5 only applies to fraud perpetrated upon the purchaser or seller of securities and has no relation to breaches of fiduciary duty by corporate insiders resulting in fraud upon those who were not purchasers or sellers. Birbaum Rule.

(2) Standing: Only defrauded purchaser or seller has standing to bring suiteo Can still sue under state law: Just b/c you cannot sue under federal law it does not mean that cannot sue

under state laws. 10b-5 applies even if no harm occurs resulting from fraud:

(1) Even if no harm still standing: Rule 10b-5 is implicated in any fraudulent scheme if as part of that scheme a purchase or sale of securities occurs even if the transaction is not fraudulent and their is no harm done to buyer, seller, or integrity of the market.

(2) Also applies to ace to face transactions: Applies to face-to-face transactions as well as those that are market transactions as long as the sale of securities is involved. Banker’s Life.

10b-5 does not apply if abstain from buying b/c board made the securities seem like bad deal: People who cannot bring suite under 10b-5:(1) If believe that the new offering or post distribution practice made them decide not to purchase because the

gloomy representations or the omission of favorable material was made by the issuer to make the deal appear less favorable than it actually was.

A breach of fiduciary duty(absent fraud, deception, illegality or nondisclosure does not raise a 10b-5 claim:(1) To bring suite under 10b-5 must show manipulation or deception: A breach of fiduciary duty is a state claim and

therefore the shareholder will not have standing under 10b-5. Fraud on the market theory: Proving that the plaintiff relied on misrepresentation when buying or selling if

misrepresentation was material then the efficient market hypothesis tells us that it must have affected prevailing market price “fraud on the market.”

o Provides a presumption to the plaintiffs that: The plaintiffs presumed to have relied on the assumption that the market price was no based on false information.

o Rebutting the Presumption: (1) perhaps price makers knew about the misrepresentation, (2) perhaps plaintiff did not believe the misrepresentation and thought the market mispriced the stock.

INSIDER TRADINGStatutory Provisions: Rule 10b-4 in context of a device to regulate insider trading:

(1) Rule 14e-3 under 14(e) of 1934 Act: Prohibits fraud which is defined as the used of inside information which defined by the source in the context of a tender offer

Damages: 16b 34 Act: Requires insiders to disgorge to corporation all profits made or losses avoided form short wing ( w/ in 6 months) of trades.

Disclose or abstain rule: If have insider information: Anyone in possession of material inside information must either disclose it to the

investment public or abstain from trading in or recommending the securities concerned while such inside information remains undisclosed

Covers anyone: who is trading securities in own account of shares of a corporation in which he has access to information directory or indirectly that is tended to be information only for a corporate purposes and not for personal benefit for anyone. (Texas Gulf/Caddy Roberts)

The classical Rule(Chiarella): There must be a duty and a breach of duty for there to be a cause of action: For there to be insider trading there

must be(1) Duty owed to party who are dealing: Duty owed to the party that you are dealing i.e. relationship of trust and

confidence between persons who trades on inside information and the person for whom the person deals with.(2) Duty is not to disclose or trade: The duty is not to disclose or trade(3) Breach of duty: If do mislead it is considered to be insider trading under 10b-5

If no duty then no liability: Only fraudulent if there is an actual duty; a purchaser of stock who has no duty to a prospective seller b/c he is neither an insider nor a fiduciary has been held to have no obligation to reveal material facts.

Tippee Liabilty( Dirks): Tippee:

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(1) Breach of fiduciary duty: Did the tipper breach fiduciary duty to shareholders.(2) Tippee’s state of mind: knows or should have known that the insider breached fiduciary duty.

Tipper:(1) Tipper has to receive from person benefit from tipping: Tipper must receive some personal benefit for tipping

Insider Information/Knowledge of tender offer: 14(e)(3): Tender offer is under way cannot trade on (1) material (2) nonpublic information regardless if target or

acquirer and if a (3) officer, director, or employeeMisappropriation Theory ( O’Hagen ): The theory:

(1) Duty owed to: the duty is owed to the source of information (principle-agent) duty to a relationship of trust and confidence

(2) The content of the duty is to Not use companies information for own purposes(3) Breach: Breach occurs by using information for own purpose and not telling principle. It does not matter if the

principle consents if told it is sufficient The fraud: The fraud in this theory lies in fooling the source of information b/c you have not told them about your

breach. Not a breach if: Tell the principle that you are going to use their information. The people with the obligations(state law obligations): (1) priest pennant, (2) psychiatrist patient, (3) parent child-

created by 10b5-2 but can be rebutted(3) close friend-Rule 10b-5(2) talks about-history pattern or practice of sharing confidences.

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