IssueChecklist

1. 2. AGENCY gent? [1] manifestationofconsentP>,Gorton [2] actonbehalfofP,Gorton [3] subjecttoP'scontrol,Cargill [4] consentstosoact PLiableonKDueto'sActions? ActualAuthority(P>) Express Implied,MillStreetChurch (hire2ndperson) Apparent Authority(P>3rd) Express, Dweckv.Nasser (lawyers) Implied,370Leasing (salesmaninherently) Inherent Authority:solelyagency[1] position/industry custom [2] onbehalfofP Undisclosedprinciples,Watteauv.Fenwick (nomanifestationsfromP) Ratification:[1] Paffirmingwithintent+P'sfullknowledge[2] legaleffectnecessary Botticello (accepting$=impliedratification) Estoppel:appearance[1] 3rd partychanged [2] detriment[3] reliance Hoddeson (impostersalesman) LiableonK? DisclosedP =noliability canbeliable: Intenttobind NoauthoritytoK Non/partiallydisclosedP,AtlanticSalmon (disclose+ID;actualknowledge) PVicariouslyLiablefor'sTort? [1] OnlyifP's,and: [2] Servantorindep.contractor? Masterservant=control,GasStationCases,Murphyv.HolidayInn (instrumentality) Indep.contractor=risk,GasStationCases Servant [3] liableifscopeof'semploy [A] typeofwork,Cloverv.SnowbirdSkiResort (frolic/detour);Bushey (foreseeability) [B] timespace,Manning (baseballgame) [C] purposeserveP,Manning (intentionaltorts) [D] exceptionsoutsidescope:Pintended/reckless/nondelegable/relianceon apparentauthority Indep.Contractor [4] notliableunless [A] Pretainscontrol [B] employsincompetent,MajesticRealty (bad@$=/=incompetent) [C] inherentdanger/nondelegable,MajesticRealty ViolatedFiduciaryDuties? DutyofCare:paid=ind.stds. DutyofLoyalty ConflictsofInterest(bribes) SecretProfits,Reading (profitsusingarmy) BusinessOpps.,Singer (referralfeew/odisclosing) Grabbing&Leaving,Town&Country

3.

4.

5.

1. 2. 3.

4.

5. 6.

PARTNERSHIP Partnership? Sharedcontrol+sharedprofits,Fenwick PartnershipbyEstoppel =[1] representation+[2]reliance, Young PartnershipRights+Liabilities? Interests(profits+surplus),Putnam (onlyassignallornone) Specificproperty Management Liability(rank=nonpartnercreditors>partnercreditors>capital>profits) PartnerViolatedFiduciaryDuties? DutyofCare:grosslynegligent/intentional DutyofLoyalty Conflictsofinterest Accountpartnershipopp.,Meinhard (min.dutydisclose) Grabbing&leaving,Meehan (firmpartnerslying) PartnerHasRighttoManage/AuthoritytoBind? Management:equal Ordinarybusinessdecision:majority Deadlock=nochange,NationalBiscuit Extraordinary:unanimous AuthoritytoBind: [1] byallagents+[2] apparentbusinessusualway,unless[3] noauthority+3rd knowsthis,compare NationalBiscuitCo.v.Stroud (P had actualauthorityb/cdeadlockonordinary business),with Summersv.Dooley (opposite) TortLiability:partnershipliableordinarybusiness,see Moren PartnershipEnding? Dissolution:by[A] act/[B] operationoflaw/[C] courtorder(frustrated/badconduct/notpracticable) Buysellagreement:"Isplit,youchoose"bagofweed WrongfulDissolution: Owenv.Cohen (wrongfulb/cnotterm) FiduciaryDuties: Pagev.Page (dissolveonlytoprofit) UPAWindingUp =sellingassets,payingcreditors,dividing,Prentiss (paperdollars OK) DividingLosses: defaultsharelossesproportionaltoprofits,RUPA(rejectingKovacik) Kovacik only:[1] 1service&1capital+[2] servicenosalary PartnerLiableinLP,LLP,LLLP? LP: >1GP+>1LP GPpersonallyliable LP'sliability::LP'scontributions,unlesscontrol,Holzmanv.DeEscamilla (pretendingGPliableb/c controlledplantsgrown/firing/bank$) LLP:~GP,butpartnersnotliable LLLP:~LP,but GPliabilitylimited

CORPORATIONS 1. PreIncorporationLiability? Promoter()FiduciaryDuties ArmslengthOK, mustdiscloseP, AtlanticSalmon 'sLiabilityonK 3rddoesn'tknow= boundbyK 3rdknowsyettobeformedcorp. Corp.boundwhenadoptsK liableunless3rdintent/released liableifneverformed DeFactoCorp.:[1] goodfaithtry+[2] legalrighttoincorp.+[3] acted~corp. Corp.byEstoppel: 3rd[1] thoughtcorp.+[2] denycorp.=windfallto3rd,SouthernGulfMarineCo. 2. SHLimitedLiability? SHLimitedLiability:unlesscorp.usedonlyaspersonal [MBCA] PiercingCorporateVeil: [1] unityinterest+ownership [A] corporateformalities[B] commingling$[C] undercapitalization[D] sharedassets [2] notPCVsanctionsfraud/promotesinjustice,SeaLandServices (mustbewrong>notaable tocollectdebt) AlterEgoTheory: SHliablemergedb/c[A] control[B] dummycorp.[C] purelypersonalgoals, Walkovszky (noPVCb/cNYCcabpurposeundercapitalizedbutcorps.=/=onlySH'spersonalbenefit); Sheffield (alterego=parentliableforcontrolledsubsidiariesbut=/=eachsubsidiaryliableforothers) EnterpriseLiability: recoverAorB [1] Corp.A<lackhoriz.formalities>Corp.B [2] sameowner ReverseVeilPiercing: AliableforB,SeaLandServices (noformalities,allcorps.1bank,sameoffice) [1] Owner< lackvert.formalities>Corp.A [2] Owner< lackvert.formalities>Corp.B ParentSubsidiaryLiability: ifcontrol~alterego,SiliconeGel (fraud/injusticenotreq.intort) LPw/corp.GP: OKifcareful,Frigidaire (taxshelterLP'sdisclosedcreditorassumedrisk) 3. SHDerivativeActionAllowed? Direct:OK,Grimes (whoinjured+relief) Derivative: =SH@timeofwrong+suit Bond,Cohen (forumstatelaw) [A] UniversalDemand =required/90days[MBCA] Dismissedifnotcorp.'sinterest Unlessnogoodfaith/investigation/indep. review: [a] full w/indep.quorum=SH's [b] ind.subsetappointedbyindep.=corp.'s [c] courtappointedindep.=SH's [B] DE/NYDemand=requiredunlessfutile(excused) DEfutile[Grimes]: 's reasonabledoubt[a] maj. $/familyinterest[b] maj. noindep./controlled[c] underlyingtransactionnoBJR NYfutile[Marx]: 's allegewithparticularity[a] maj. interested[b] notinformed[c] underlyingtransactionnoBJR SLCDismissal =OKafterdemandexcusalif: DESLC[Zapata]: 's [1] independent&goodfaith+[2] court'sBJR NYSLC[Auerbach]: 's [a] SLCinterested[b] notinformed [C] WrongfulRefusal =BJRunless 's [1] notindep.[2] noduecare Demandmade&refused=can'targueexcused,Grimes

FIDUCIARYDUTIES 1. QuestioningCorporateDecision? BJR: SHwealthmax=deference, unless breachDoL/DoC,compare Shlenskyv.Wrigley (anyreasonBJR),with Dodgev.Ford (Fordfuckedhimself) EntireFairness: breachfiduciaryduty,butnoliabilityifentiretransaction[procedurallyand substantively]fair, compare Cinerama ($,timing,negotiation,structure,disclosure,approvalby /SHs), with VanGorkom (doublefail=/=entirefairness) 2. BeachedDutyofCare? DutyofCare:[1] goodfaith+[2] reasonablebeliefcorp.'sbestinterestscorporation[MBCA] EgregiousDecisions: Kaminv.Amex (misjudgmentOK,onlyliablemal/nonfeasance) InsufficientProcess: VanGorkom (grosslynegligentnotOKb/ctalkmerger20minsw/o inquiry/expertadvice) 'sObligations: Cinerama (CEO'sgoodjob=/= relieveddutydeliberate+markettest) InattentiveDirector: Francisv.UnitedJerseyBank (100%nonfeasance) Oversight/Compliancew/Law [A] utterfailimplementcontrolsystem [B] consciouslyfailtomonitor,compare Caremark ( consciousdecisionno complianceprog.=BJR),with Stonev.Ritter (opposite) SarbanesOxley: sr.managers+ proactiveoversight 3. BreachedDutyofLoyalty? InterestedTransaction (selfdealing):conflictofinterest=noBJR,butOKifentirelyfair Bayer (hirewifesingcommercialentirelyfair) Benihana (directoronbothsidesoftablenomatterb/c actuallyknew) UsurpingCorporateOpportunity=/=normalDoLtest DETest[Broz]: [1] crop.has$ [2] lineofbusiness, compare MarthaStewart (sellstock=/=lineofbusiness),with eBay (IPOstocklineofbusinessancillarybutpartofassetstrategy) [3] corp.interest/expects [4] conflictofinterest,Broz (disclosurenotneeded) [ALI]: [1] corporateopportunity=[A] allinsiders,fromcorp.[B] sr.execs,"closelyrelated" [2] insidertakeopp.OKif:[A] disclosed[B] corp.rejected ControllingSHActions:BJRunlessselfdealing(detrimentminority),thenentirefairness,SinclairOil Corp. ( showedselfdealinginbreachofK,'s entirefairness);Zahnv.Transamerica (redemptionOK,notdisclosingwindfalltoClassA=usurpingopp.toconvert) 4. Ratification? CountingVotes Quorum=dis+interested Votes=onlyinterested Ratification[Del.144]:disclosurematerialfacts [A] maj.disinterested [B] maj.interested/dis.SHs SHratificationeffects[Wheelabrator]: DoC>extinguished DoLv. >shifts to showwaste DoLv.controllingSH>shifts to notentirelyfair 5. BreachedGoodFaith? Subjectivebadfaith(::breachDoL)=breach Intentionderelictionduty(::breachDoC)=breach Grossnegligence=/=breach, InreWaltDisney (relyingconsultantnotbadfaith)

SECURITIESREGULATION 1. Security? Stock: [1] "stock"+[2] usualcharacteristicsofstock InvestmentContract: [1] invest$[2] commonenterprise[3] profitssolely<effortsofothers, Robinsonv.Glenn (control~partnership,not"solelyfromothers") 2. LiabilityforSale/Registration11+12? Registration Publicsale[1] register[2] 20dayapproval[3] deliveryprospectus<sale Privateexempt[Reg.D] <$1M=unlimited <$5M=<35offerees >$5M=<35sophisticatedofferees Resales Noads Filenotice UntrueStatements[Sec.Act11]: untruefact/omittedreq.materialinreg.statement Reliance/causation/scienter>notreq. cannothaveknowntruth N/Atoexempt Possibles=signedreg.statement(req.signors)/director/experts/underwriters Issuer=strictliability Others=liable offault+s didnotcausedamages DueDiligenceDefense: Fornonexpertsrelyingonexperts:noreasontobelieve Forothers: [1] reasonableinvestigation [2] reasonablegroundstobelieve[3] didbelieve statementstrue/noomissionsmaterialfact,Escottv.BarChris (higherstds.experts) Reg.ProcessViolation[Sec.Act12]:strictliability[A] offer/sellunregisteredsecurity,unless exempt/[B]misrepresentationsinprospectus/oralcomm. Liability+duediligencesameas11 DuediligencedefenseOK 3. AccountingIssue? EfficientCapitalMarkets Weakmarketreflectpastprices Semistrongreflectpublicinfo Strongreflectsallinfo Accounting Balancesheet=assets,liabilitiesSH'sequityonspecificdate Assets=liabilities+SH'sEquity Incomestatement:profit(revenues,expenses,netincome[revenue expenses])/time Statementcashflows:cashreceived+paid/time StatementSH'sequity: inSH'sequity

4. LiabilityforMisstatements10b5? Rule10b5UntrueStatementsofMaterialFact: [1] Jurisdictionalnexus [2] Transactionalnexus [3] Materiality Slidingscaleuncertainevents:[A] probability+[B] magnitude,Basic [4] Reliance:fraudonthemarket Rebuteveryoneknew/corrected [5] Causation Transactioncausation~reliance Losscausation:evidencemarketbelievedmisrepresentation [6] Scienter:intentdeceive/defraud,somects.recklessdisregardtruth 5. LiabilityforInsiderTrading? Insider'sDuty: onlytoSHs;sellnonSHsOK,Goodwin (nodutypublicexchange) CommonLaw:split Specialcircumstancesrule(onlyOKin) Minorityrule(notOK) Traditionalrule(OK) TraditionalTheory[Rule10b5]: [1] buy/sellsecurity [2] basismaterial [3] nonpublicinfo,[Reg.FD](disclosemat.infotoallinvestorsatonce) [4] breachduty[insider],Chiarella (notinsider) Statutoryinsiders=,sr.execs,10%SHs Temp.insiders=[i] givennonpublicmaterialinfo+[ii] expectationconfidence+[iii] relationshipimpliesduty Misappropriation[Rule10b5]: [1] undiscloseduseof[breachingdutyconfidentiality],USv.O'Hagan (OKifdisclosed) DutyTrust/Confidence: [A] agrees[B] history/practicesharingsorecipientknows[C] fromspouse/parent/child/sibling,unlessnoexpectation,[Rule10b52] [2] materialnonpublicinfo [3] belongingtoprinciple [4] personalgain DerivativeLiability [1]tipperbreachedDoLbytippingforpersonalbenefit,Dirks (Secrist=/=tipper,nobreach) [2] tippeeshould/knowstipperbreached,Dirks (DirksknewSecrist'spurposeexposefraud, notpersonalbenefit) TenderOffers[Rule14e3]: [1] tradeon/communicate(ifforeseeable)[2] materialnonpublicinfo [3] exceptions

PROXYSOLICITATION 1. SolicitingProxy? ProxySolicitations[Rule14a]:[1] mustbew/statement[2] filew/SEC[3] old annualreport ReimbursingProxyFights IncumbentOKif[1] expensesreasonable+[2] bonafidecontest(policy,NOTpersonal), Rosenfeld (winingdining) InsurgentsOKif[1] win+[2] SHratifyreimburse 2. LiabilityforMisleadingProxy? MisleadingProxyViolation[Rule14a9] [1] misleadingstatement/omission [2] material,Millsv.ElectricAutoLiteCo. (notdisclosingconflictofinterestmaterial);Seinfeld (valuationsofoptionsnotmaterialduh) [3] causation,Millsv.ElectricAutoLiteCo. ("proxystatementitself,not[defect]essential link");butsee VirginiaBankshares (materialdefect=/=causationifmaj.SHenoughvotes) [4] damages=bestinterestofallSHs Mergersetasideifequitable $ifcanquantifyproxydefect 3. ExcludingSHProposalonProxy? SH'sProposalonCorp.ProxyStatement[Rule14a8]: foreligibleSH($2KFMV/1%interest>year) ExcludingOKon13grounds: PersonalgrievanceofSH Unrelatedbusiness,Lovenheim (forcefeedinggeese%$notmet,butstillsignificant) Electionsorprocedurefor Alreadyrejectedpast5years Specificdividends 4. SHInspectionRight? RighttoSHList[Rule14a7]: SH proper[corporate]purpose,compare CraneCo. (informSHs whyhishostiletakeovergoodOK),with Pillsburyv.Honeywell (social/politicalissuesunrelatedto economicnotOK) CLOSEDCORPORATIONS SplitOwnership&Control? DE: economicandvotingsplitOK,Providence (28%shares,3%voteOK) IL: votingrightreq.,Stroh (loopholeb/cnoeconomicOK) SHAgreements&VotingTrusts? SHAgreements: OK butnospecificperformance,Ringling (remedyignoreinconsistentvotes) DirectorAgreements: voidb/ctakesaway'sindep.judgment,compare McQuade (constrain =violatefiduciaryduty), with Clark (oppositenomin.SH,only2partyK) HomemadeMcQuade (Ktoprevent) LLC? PassThroughTax ManagerManaged =corp. Managers>fiduciaryduties MemberManaged partnership(1vote/share,maj.wins) Allmembers>fiduciaryduties PiercingLLCVeil Members/managers/SHs notliable PCVOK,butlackformalitiesnotenough,NewHorizons (properlyformedLLC>noPCV) EndLLC=partnership,NewHorizons ( liableb/cfuckeddissolution$> notcreditors)

1. 2.

3.

1.

CORPORATECONTROL HowtoGetCorporateControl? ProxyContest: $$$<benefits TenderOffer: premiumoffer,conditional#sharesOK,oversubscribed>prorata,2tier=coercive StockPurchase:openmarket SaleofAssets: buyTarget'sassets(effect merger) Merger/Consolidation:control+combine Merger>acquirerlives Consolidation>newcorp. Merger SHApproval Yes Appraisal Liabilities Other All Tax SaleofAssets(DE) Onlyifselling"sub.all" Nounknown

Yes(nonpublic) No

2. 3. 4.

5.

StepstoaMerger(DE)? [1] approval [2] maj.SHapproval [3] filingnotice [4] appraisal (n/apublic) DeFactoMerger/NonMerger? PA>legislatureabolisheddefactomergerspostFarris DE>rejectsdefactomerger,Hariton (followeitherindep.statuteOK)&defactononmerger,Rauch Acquirer[Maj.SH]BreachedFiduciaryDutyw/FreezeOutMerger? EntireFairness =testmaj.SHbreachedfiduciarydutyinfreezeout,Weinberger (maj.SHbreachedby withholdingexpertreport+notdisclosingconflictsofinterest);Rabkin (maj.SHnotviolateKperse, butbreachedbyintentionallyavoidingcommitment tomin.SHs) Maj.SH's if:[A] noratification/[B] evidenceoffraud/misrepresentation/misconduct o 's showunfairnessif:[1] validratification(maj.ofmin.)+[2] noevidence fraud/misrepresentation/misconduct BusinessPurpose o DE: notreq.,Weinberger o MA: [1] after meets selfdealingby, [2] controllingSH:legitbusinesspurpose+[3] overallfairness,Cogginsv.NewEnglandPatriots (nolegitbusinesspurposetoforceoutminority SHs) Damages o [A] Appraisal: if onlyalleged$toolow Valuebeforefreezeout Openendedvaluation(nomarket,min.discount),Weinberger o [B] EquitableRelief[Recession]:ifappraisalnotadequate+fraud/misrepresentation/self dealing/deliberatewaste [Weinberger]/simplemisconduct[Rabkin] o [C] RescissoryDamages:presentvalueifrecessionnotpractical, Coggins LiabilityinLLCMerger? Min.interestdutyofloyalty[disclosure]>maj.,evenifmaj.willoutvote,VGS,Inc. (LLCmerger invalidb/cmin.managerssecretvotedtofreezeoutmaj.member)

6.

WilliamsActTenderOfferViolation? Acquirer>5%>disclosure10days Tenderopen20days Revocable $increase>alltenders

7. StateRegulatingTakeovers? StatescangiveSHsmoreprotectionb/ctheycreated corps.,aslongascancomplyw/state+fed.law,CTS (IndianaActnotpreemptedbyWilliamsAct/violateCC)

8. WhatTypeofTakeoverDefense? 1. Did BreachFiducaryDutyWithTakeoverDefense? ModifiedDutyofCareTestforTakeoverDefenses GoldenParachute [Unocal]: 's: [1] reasonablebeliefdangertocorp. Greenmail[Cheff] Part[1] Unocal DoCtest+ policy/effectiveness([A] goodfaith[B] reasonable investigation)+ [2] proportionateresponsestothreat, businesspurpose Unocal (legitthreat=$54offerinadequate,junkbonds, Nodeterrence wellknowncorp.raider) IRStax LevelofThreat[Unitrin]:[a] opportunityloss[b] CounterTenderOffer[Unocal, Time]: structuralcoercion(SH'sdecisiondistorted)[c] $$$if1sttiertenders(butnotAcquirer) substantivecoercion(SHsmisledon$) Reversecoercive NonSHConsiderations: NowcounterofferstoallSHs[SEC] [a]employeeunrest,Cheff PoisonPills[Revlon]:"SHRightsPlan"via [b]creditors,customers,employees, vehicle>takeoverlessprofitable Unocal Triggeringevent [c] othersOKifultimatebenefitmustbe canredeem+"disarm" for SHs,Revlon,accord ALI (forcingnegotiation) Revlonauction>onlySHs FlipInPlan: righttobuyanother [d] corporateculture,Time share,dilutingTarget'sstockso ProportionateAction[Unitrin]: nocourtinterference maj.controldifficult/expensive if[1] indep. +[2] defensenot"draconian" FlipOverPlan: dividendstock (coercive+preclusive)+[3] rangeofreasonableness w/righttoconvert1Targetstock> Coercive,TollBrothers (forcedSHstoreelect 2Acquirerstock,dilutingAcquirer incumbent ornothavefunctioning) stock$,maybecontrol Preclusive, TollBrothers (madeanytakeover BackEndPlan: Unocal,offer$$$ impossible) debtsecuritiesif1sttiertenders, forcingofferabovebackendprice Revlon Auction: ifcorp.insalesmode,'s fiduciaryduty =highestauction$, Revlon (lockup VotingPlan: dilutevotingrights notOKb/cdiscouragebidding) (50%stock=only5%votes) LongstandingPlanException[Time]: Revlon doesnot PoisonDebt:debtissuedwithK apply tolongtermsaleplan(onlyactivebidding), preventingcorp.issuingmoredebt, Time (TimenotinRevlonmodeb/cdealwaslong defeatingLBOs standingplan,notabandoningcontrol/strategy) DeadHand/NoHandPills: forstoppinga UnlessLongstandingPlanisChangetoPrivate new fromredeemingpoisonpills Control[QVC]: Revlon alsoapplieswhencorp. DeadHandPills: new cannot control shiftspublicSHs>private,QVC (breakupnot redeem,TollBrothers (notOKcan't req.goingprivate) restrict'spower) NoHandPills:noonecanredeem forXtime, QuickturnDesign 10. Corp.Debt? Systems (disproportionatedefense SuccessorObligorClause: boilerplateclause= can'tprevent exercisinglegal uniforminterpretation+literal,SharonSteel ("all duties) assets"@timeplantoliquidatecreated) NoShop+LockUps[VanGorkom, IndentureAgreements: noextrabenefitsnot Revlon,QVC]: lockup"/terminationfees bargainedforinindentureK, MetLifev.RJR (adding forAcquirer'scostofbidding moredebt=/=breachimplieddutygoodfaith+fair Incentivizesbidding dealingb/criskofexistingdebtlosingvalue Problemw/highfees:lowersoverall considered+assumed) sellingprice+Target'svalue

CORPORATIONSOUTLINE

AGENCY
1. ISTHEREANAGENT? Rest.1(1): "Agency"istherelationshipwhichresultsfromthe [1] manifestationofconsent byone person(theprinciple)toanother(theagent)thattheothershallact[2] onbehalf oftheprincipleand [3] subjecttoprinciple'scontrol,and [4] theagentconsentstosoact. See Gortonv.Doty coachwasagentofteachersoteacherliableforkidsinjuredwhilecoachdriving [1] handingoverkeys=manifestationofconsent todrivekids [2] coachdrovekidstofootballgameonteacher'sbehalf (teacherwantsfootballteamtowinthus SOMESHAREDINTEREST,evenifmoreforthebenefitofthecoach) [3] tellingcoachonlyhecoulddriveindicatesaCONDITION,thusunderteacher'scontrol Asays: evenminimalbackseatdriverlimitationssignalcontrol [4] coach implicitlyconsented toactasAb/cheagreedbytakingkeysafterCONDITIONALOFFER See JensonFarmsv.Cargill WarrenwasCargill'sagentsoCargillas Pwasliableonallcontractsmadeby anAontheP'sbehalf(unlikevicariousliabilityturningonscopeofemployment) [1]Cargill directed Warrentoenterintograinpurchasingcontractswithfarmersand[4]Warren consented [manytimes] [2]WarrenputtCargill'snameoncontractsandusedCargillbagsforthegrain [3] inadditiontofinancing,Cargillhadcontrol ("strongpaternalguidance")inalmosteveryaspect ofWarren'sdaytodaybusinessoperations,inspectrecords,andevenenterWarren'spremises 2. PRINCIPLELIABLEFORAGENT'SACTIONSONCONTRACTS? Rest.144: aprincipal"issubjecttoliabilityuponcontractsmadebyanagent actingwithinhis authority ifmadeinproperformandwiththeunderstandingthattheprincipalisaparty" ActualAuthority(P>A): Express statementthatthereisorisnotauthoritysee Dweckv.Nasser clienttoldlawyer"you cantalkinmyname" Impliedactualauthority whichtheprincipalactuallyintendedtheagenttopossess,typicallysuch powersasarepracticallynecessarytocarryoutthedutiesactuallydelegated LookatreasonablebeliefoftheAfor"manifestationofconsent"fromPtoA Impliedauthorityishighlycontextual,oftendependingonpriorpracticesorindustry customs (e.g.,"incidentalauthority"todothingsthatareusuallynecessarytodotheactions expresslyauthorized) See Dweckv.Nasser clienthadbeenallowinglawyertosettlesuitsfor20years ApparentAuthority(P>3rdParty): arisingfromthemanifestationofauthority fromPto3rdparty See MillStreetChurch everyoneknewthiswasa2personjobsotherewasapparentauthorityto hireanotherworker See 370LeasingCorp.v.AmpexCorp. salesmanhadapparentauthoritytosigncontractb/c that'swhatsalesmendo sellshitandinherentpart ofsellingissigningsalescontracts Notallcourtsholdsalesmantitleautograntsauthority,butthis3rdpartybelievedit See Hoddesonv.KoosBros. someimpostersalesmansoldladyfurniture silence canbe manifestationofauthority,butithastobe observedby3rdparty InherentAuthority: derivedsolelyfrom theagencyrelations,foundif[1] transactionisusualinthe business(customintheindustry);and [2] doneonbehalfofP Comesupalotwith undisclosedprinciples b/ctherecanbeNOMANIFESTATION, see Watteauv. Fenwick Aheldhimselftobeownerofbarandbuyerdidn'tknowactualownerofbarsono apparentauthority(nomanifestationspossible),butinherentauthorityb/cPallowedAtomake somanymanifestationsthathewasactualowner(title,custom,etc) Asays: reasonablebeliefof3rdpartyisNOTrequired i.e.,theagenthasaposition/titlethat indicatescertainauthorityintheindustry irrelevantthat3rdpartydoesn'tknowtheindustryor

importanceoftitleinindustry Ratification: ifAactswithoutauthority(ofanykind)andthereisnogroundsforestoppel,Pwillonlybe boundifPratifiesthecontract,whichrequires: [1] validaffirmationbyP (intenttoratifyandwithfullknowledgeofallthematerial circumstances) Affirmationcanbeexpressorimplied Pmustknoworhavereasontoknowallmaterialfacts AND [2] towhichthelawwillgiveeffect Deniedlegaleffect when necessarytoprotecttherightsofinnocent3rdparty I.e.,principlecan'tratifyacontractjusttohelphimself,mustbeNECESSARYtoprotect innocent3rdparty See Botticellov.Stefanovicz BotticelloboughtpropertynotrealizingthatMaryandWalterwere bothpartowners;butMaryratifiedcontractby acceptingpayments Estoppel: PcannotdenygrantingauthoritytoAif[1] a3rd partychangedhisposition [2] totheir detriment [3] inreliance ontherepresentationsmade,see Hoddesonv.KoosBros. [1] ladyreasonably andingoodfaithchangedposition(handingover$)[3] inreliance(animpostersalesmaninagraysuit seemedprettylegitinafurniturestore),[2] tolady'sdetriment(ladynevergotherfurniture) Actsoromissionsrelevantbutonlyifthepartyispresent P'sintentionalornegligentacts Estoppelonlybindstheprincipal,notthe3rdparty 3. ISAGENTLIABLEONACONTRACT? RULE: Disclosedprincipal =noliability,butAcanbeliablein3situations: Disclosedprincipalbutclear intentofallpartiestobindA Disclosedprincipalbutagentmadethecontractwithoutauthority Anondisclosed orpartiallydisclosedP See AtlanticSalmonv.Curran anAmustdisclose notonlythatheisrepresentingaP,butalsothe identify ofthePtoavoidpersonalliabilityonacontract Actualknowledge isthetest ..."Thedutyrestsupontheagent,ifhewouldavoidpersonal liability,todisclosehisagency,andnotuponotherstodiscoverit." 4. PRINCIPLEVICARIOUSLYLIABLEFORAGENTONTORT? ANALYSIS: IsAanagentofP? Yes [1] IsAaservant ofP,oran independentcontractor? Servant [2] WasthetortcommittedwithinthescopeofA'semployment? Yes PisliableforA'stort No Doessituationfallintoanexception? Yes PisliableforA'stort No PisnotliableinagencylawforA'stort IndependentContractor [3] Doessituationfallintoanexception? Yes PisliableforA'stort. No PisnotliableinagencylawforA'stort. No PisnotliableinagencylawforA'stort [1] MasterServant(EmployerEmployee)OR IndependentContractor? Morecontrol = masterservant Morecontrolthanagency,thisiscontrolorrighttocontrolPHYSICALCONDUCTofservant Principals directresultsorultimateobjectivesofA ("makethishappen,butIdon't careHOWithappens") Masters directorhastherighttocontroleveryaspect ("thisisHOWyou[the employee]physicallyhastogetshitdone") See HumbleOilv.Martin/Hooverv.SunOil indicatorsofcontrolevaluatedgenerally (lookedatwhosethoursofoperation,whohiredstaff,whoboughtshit)

 Butsee Murphyv.HolidayInns,Inc. controlevaluatednarrowly;courtholdsNOmaster servantrelationship b/cthePdidnotcontrolthe"instrumentality"thatcausedtheinjury Morebusinessrisk=IndependentContractor See HumbleOilv.Martin/Hooverv.SunOil independentcontractorb/cgasstationhad theoverallriskofprofitorloss [2]TortWithintheScopeofServant'sEmployment? Rest.228(1): A'sconductiswithinthe scopeofemployment if: [A]kindofworkAisemployedtoperformandconductinsamegeneralnatureorincident totheconducttheservantwasemployedtoperform See Cloverv.SnowbirdSkiResort normallydrivingtoworkisnotinscopeofwork, butskibumskiingtoworkwas"foreseeable"sointhescopeofemployment Accord Busheyv.U.S. adoptsForeseeabilityTest: whoischeapestcostavoider (sailorshootingdudeisnotforeseeable,butdockcouldforeseesomebodyaccidently turningvalves&buttherewerenosafetyprecautions) Asays: notthatgreatoftestb/cifworkisinthemiddleofnowhere,doesthat meanpeopledriving100milesisaforeseeableharm? [B] substantiallywithintheauthorizedtimeandspacelimits See Manningv.Grimsley Oriolespitcherwaswarmingupintime/spaceofwork [C] Itisactuated,atleastinpart,byapurposetoserveP See IraS.Busheyv.U.S. sailorhadnopurposetoservePbyturningvalvesat2AM Butsee Manningv.Grimsley courtheldpitchercouldhavebeenservingOriolesby gettingridofthehecklerwhowasinterferingwithhisjob Asays: notcorrectb/cthe properQ isifAthinksheishelpingtoservePand pitchermustknowthrowingballathecklerisnotgoingtohelp;maybecourt arrivesatdecisionbyconstruingitasasubconscious purpose [3]PLiableforIndependentContractor? RULE: Pnotliablefortortsofindependentcontractor,except: [A] Pretainscontrol overactionleadingtotort(Pisamaster); [B] Pemploys incompetentindependentcontractor; [C] contractor'staskis inherentlydangerous; [D] dutyisnondelegable See MajesticRealtyv.Toti argue[B] citywasnegligentforhiringanincompetentcontractorand [C][D] demolishingbuildingsisinherentlydangerousprinciple'sdutynondelegable 5. AGENTVIOLATINGFIDUCIARYDUTIES? Rest.13: "Anagentisafiduciary withrespecttomatterswithinthescopeofhisagency." FiduciaryDuties: DutyofCare Paidtodojob,thendoittonormalstandardsinindustry DutyofLoyaltyis violatedinfollowingsituations: Inherent ConflictsofInterest (kickbacks,bribes,tipsfrom3rdparties) SecretProfits Fromuseofposition,involving3rdparty,Reading (profitsfromusingarmyuniformto benefithimself) FromdealingwithPwithoutP'sknowledge(realestateagentsecretlybuyinghouse withoutinformingseller) UsurpingBusinessOpportunities fromprincipal,Singer (sentawaybusinesstoanothershop forareferralfeewithoutdisclosing,keyislackofdisclosuretoP) Grabbing&Leaving,Town&Country (OKifyoujustrememberedstuffbutcannotjackthe entirecustomerlistorothersecret/confidentialinfo&dutyappliesevenAFTER youleave)

PARTNERSHIPS
1. ISTHEREAPARTNERSHIP? Definition: "anassociationoftwoormorepersonstocarryonascoownersabusinessforprofit." Coowners=sharedcontrol+sharedprofits Noformalrequirements UPA7(1): Personswhoarenotpartnerstoeachother arenotpartnersastothirdparties,except forpartnershipbyestoppel See Fenwickv.UnemploymentCompensationCommission wasreceptionistapartnerinhairsalon, whentherewasa"partnershipagreement"butitlookedlikereceptionistwasjustanemployee [1] sharingofprofits isprimafacieevidenceofpartnership unlessprofitswerepaidaswages chick'spartnershipagreementclearlysaidthis [2] intentionofparties inconductingbusiness chick'spositioninthecompanydidn'tchange [3] obligationtosharelosses none,Fenwickstilltakingallrisk [4] propertyownership stillownedwhollybyFenwick [5] runningthebusinessandcontrol agreementexcludeschickfromanycontrol [6] didotherssee thebusinessasapartnership howtheyactedinpublicismorerelevant thanthetermsthewrittenagreement [7] assetsafterdissolution none,thechickwouldjustendlikequittinganormaljob HYPO: TigerWoods'scaddy,SteveWilliamsclaimshecan'tbefiredb/cheisTiger'spartnerwho[1] sharedprofitsanddoes[5] alittlejointdecisionmaking Asays: courtsoftenlookatthenormsinthecommunity(everyoneknowsthecaddyisnota partnerinthesensehehaspowertocontrolpartofTiger'sshot) 2. PARTNERSHIPBYESTOPPEL? UPA16(1): "Apersonwhorepresentshimself,orpermitsanothertorepresenthim,toanyoneasa partnerinanexistingpartnershiporwithothersnoactualpartners,isliabletoanysuchperson whomsucharepresentationismadewhohas,onthefaithoftherepresentation,givencredittothe actualorapparentpartnership." [1] needrepresentation aspartnershipAND [2]somesortofrelianceontherepresentation See Youngv.Jones [2] NOpartnershipbyestoppelb/c didn'tgivecreditto(relyon)the assertions 3. WHOISLIABLEINAGENERALPARTNERSHIP? UPA15: Allpartnersareliable (a) Jointlyandseverally foreverythingchargeabletothepartnership (e.g.,tortsandbreaches offiduciaryduties) (b) Jointly forallotherdebts andobligationsofthepartnership...[e.g.,contracts] UPA40(b): liabilitiesofthepartnershiprankinorderforpayment: 1. Debtsowedtocreditors otherthanpartners; 2. Debtsowedto partnersotherthanforcapitalandprofits ... 4. PARTNERVIOLATINGFIDUCIARYOBLIGATIONS? GENERALRULE: "Partnersoweeachotherafiduciarydutyoftheutmostgoodfaithandloyalty ... Asafiduciary,apartnermustconsiderhisorherpartners'welfare,andrefrainfromactingforpurely privategain...",Meehanv.Shaughnessy RUPA404: (a) ONLYfiduciarydutiesapartnerowes topartnershipandotherpartners=thedutyof loyalty andthedutyofcare setforthinsubsections(b)and(c). (b) Dutyofloyalty islimitedto: (1) Toaccount tothepartnershipandholdastrustee foritanyproperty,profitor

benefit derived[frompartnership] includingtheappropriationofapartnership opportunity. Partnersmustdostuffforthepartnershipasawhole,includingnewpartnership opportunities,see Meinhardv.Salmon (minimumdutywastodisclose new opportunitytopartner) (2) Torefrainfromdealingwith... apartyhavinganinterestadversetothepartnership Nodealswherethereareconflictsofinterest (3) Torefrainfromcompeting ... "Grabbing&leaving" lawfirmpartnerscannotstealclients,see Meehanv. Shaughnessy (leavingwasn'ttheissue,LYING=breachofduty) (c) Dutyofcare ...islimitedtorefrainingfromengagingingrosslynegligentorreckless conduct, intentionalmisconduct,oraknowingviolationofthelaw. Highstandard;accidentsareexcusable (d) Apartnershalldischargethedutiestothepartnershipandtheotherpartners... consistentlywiththeobligationofgoodfaithandfairdealing. (e) ApartnerDOESNOTviolateadutyorobligationunderthis[Act]orunderthepartnership agreementmerelybecausethepartner'sconductfurthersthepartner'sowninterest. Perfectlyacceptabletolookoutfor#1(butjustdiscloseanddon'tviolateduties) (f) A partnermaylendmoneytoandtransactotherbusinesswiththepartnership... OptingOut: Partnerscanstructureagreementstooptoutordifferfromgeneralrulesofpartnership, buttherearelimitsonevenwhatpartnerscanoptoutof/contractaway See Perrettav.PrometheusDevelopmentCo. couldnotoptoutb/cmanifestlyunreasonable A'sKeyPoint: lookattheagreementasawholetodecideifitis"manifestlyunreasonable" andNOT"manifestlyunreasonable"whentherearegoodreasonsfortheagreement 5. PARTNERSHIPPROPERTYRIGHTS UPA24: Thepropertyrightsofapartnerare 1. hisrightsinspecificpartnershipproperty, 2. hisinterestinthepartnership(shareofprofits+surplus),and 3. hisrighttoparticipateinthemanagement. UPA25(1),(2): "Apartnerisacoownerwithhispartnersofspecificpartnershipproperty holding asatenantinpartnership." Equalrighttopossesspartnershipproperty forpartnershippurposes Rightsinspecificpartnershippropertyarenotassignable exceptinconnectionwiththe assignmentofrightsofallthepartnersinthesameproperty 6. DOESPARTNERHAVEARIGHTTOMANAGEAND/ORAUTHORITYTOBINDPARTNERSHIP? Management RUPA401: Eachpartnerhasequalrights inmanagement andconduct ofthepartnershipbusiness Becomeapartneronlywiththeconsentofall ofthepartners Adifferencearisinginthe ordinarycourseofbusiness maybedecidedby amajority ofthe partners Ifdeadlocked (i.e.,only2partnersinNationalBiscuit),nothingchanges Anactoutsidetheordinarycourse ofbusinessoranamendmenttothepartnership agreement undertakenonlywithconsentofALLpartners (unanimous) AuthoritytoBind UPA(1914)9(1),(2): [1] Everypartner isanagent ofthepartnership forthepurposeofitsbusiness,AND [2]theactofeverypartner for apparently carryingonpartnershipbusinessINTHEUSUAL WAY bindsthepartnership,UNLESS: [A]thepartnerhas infactnoauthority toactforthepartnershipintheparticular matter,AND [B] thepersonwithwhomheisdealinghasknowledge thatthepartnerhasnosuch authority [3] AnactofapartnerwhichisNOT apparentlyforthecarryingonofpartnershipbusinessin

theusualway doesnotbindthepartnership, unlessauthorizedbytheotherpartners." Compare NationalBiscuitCo.v.Stroud StroudFreemanpartnership,Stroudsaysheisnot payingNationalBiscuitforabreadorderonlyFreemanagreedtob/cStroudtoldNational Biscuithewasn'torderinganymore Notice toNationalBiscuitofnomorebreadordersdidn'tmatterb/c [2] Freemanstill had actualauthority toorderbreadperRUPA401(equalmanagementunlessmajority decidesotherwise) With Summersv.Dooley SummersDooleypartnershipfortrashcollection,Summershired anotheremployeeoverDooley'sobjections,suedtogetpaidforthisexpense UnlikeNationalBiscuit,SummershiringanotherpersonwasNOTintheordinarycourse ofbusiness andrequiredconsentofALLpartnersperRUPA401 TORTLIABILITY: partnershipisliable fortortscommittedbyonepartnerintheordinarycourseof partnershipbusiness Butsee Moren partnerbroughtherkidtoworkandpartnershipliableforkid'sinjuries ordinarilyyoudon'tbringkidstoworkbutcourtsaysdoingyourjobatworkis"ordinary course,"evenwhenyourkidisthere 7. ENDINGTHEPARTNERSHIP? 3TypesofDissolution: [1] byactofoneormorepartners [2] byoperationof law (death,bankruptcy,etc.) [3] bycourtorder that: (i) theeconomicpurposeofthepartnershipislikelytobefrustrated (ii) anotherpartnerhasengagedinconductthatmakesitnotreasonablypracticableto carryonthepartnership (iii) notreasonablypracticabletocarryonthepartnershipinconformitywiththe partnershipagreement See Owenv.Cohen goodpartner worriedhecouldloseinvestmentof$7Kifheterminatesby himself,sohegetscourttosay[3iii]thattherewasnowaythepartnerscouldkeeponworking togetherb/cotherpartnerrealbigasshole Aftercourtordereddissolution,eithersellthebusinessanddividetheproceeds orhavean auction whereonepartnercanbuyouttheother See Pagev.Page partnerwantsacourtdeclarationthatitwasa[1] partnershipatwill (notterm "untilprofitsaremade")sohecanendthatshitandPROFIT Courtholdsnoimpliedtermbutwarnspartneritwouldbe breachoffiduciaryduty todissolve thepartnershipsolelytoprofithimself 8. WHATARECONSEQUENCESOFDISSOLUTION? DissolutionandWindingUpUnderUPA: Dissolutiondoesnotterminatethepartnershipbutlimitspartners'authoritytoactfor partnership,andstarts"windingup"ofthepartnership "Windingup" =sellingpartnership'sassets/business,payingcreditors,anddividing remainingassetsorliabilityforremaininglosses

 [1] Acquirebusinessfromotherpartners andcontinuethepartnership CASE: Prentissv.Sheffel 2outof3partners,whoowned85%combinedinterestdecide todissolvepartnershipthenbuybusinessbackatauctionusingtheirinterestinthe dissolvedpartnership,effectivelyjustkickingoutthelastpartner Courtsays2partnersbiddingwith "paperdollars"isOK b/ctheremovedpartner getsmorevalueforhis15%(notunfair) [2] Continuationperagreement Createsanewpartnership Debtscarryover Departingpartner entitledtoanaccountingandfairvalueofthepartnership Remainsliable onallfirmobligationsunlessreleasedbycreditors Newpartner liableforoldfirmdebts,butdebtsonlycanbesatisfiedoutofthe partnershipassets(i.e.,hehasnopersonalliability) [3] Continuationafterwrongfuldissolution(e.g.,earlyterminationofatermpartnership) Wrongfuldissolversubjecttodamagesforbreach ofthepartnershipagreement Remainingpartnershaverighttocontinuebusiness evenabsentanagreementtodoso Wrongfuldissolverentitledtothefairvalueofhisinterest (NOTincludingthevalueof thepartnership'sgoodwill),minusanydamageshecaused DisassociationandDissolutionUnderRUPA: Triggeringevent ="disassociation",then2options:

9. HOWAREREMAININGPROFITS/LOSSESDIVIDED? UPA(1917)40(b): orderofdistributingassets: (1) owedtocreditors otherthanpartners (2) owedtopartners otherthanforcapitalandprofits (3) owedtopartnersinrespectofcapital (4) owedtopartnersinrespectofprofits DividingLosses,GeneralRULE: ifagreementissilent,defaultispartnersintendedtoshareprofits andlossesequally,regardlessofhowmuchcapitaleachcontributed RUPA401(b): "eachpartnerisentitledtoanequalshareofthepartnershipprofits andis chargeablewith ashare oflossesinproportion tothepartners'shareoftheprofits." Explicitlyrejects Kovacik Butsee Kovacikv.Reed ReedprovidesalllaborandKovacikprovidesallcapital($10K);theyagree toshareprofit5050butdidn'ttalkaboutlosses;KovaciksaysReedmustpay1/2thelosseswhen businessfails ThiscourtsaysReedisNOTliableforlossesb/cheputinlaborequalinvalueto$10K andlost allofthatalready holdingNOTconsistent withgeneralrule Courttailorspartnershiplawtoahypotheticcontractnegotiation ifthepartieshad thoughtabouttheissueoflosses,whatwouldtheyhaveagreedto? Kovacik limitedONLYtocases wherethereis1servicepartnerand1capitalpartnerANDthe servicepartnerhas[1] NOSALARY,and[2] NOCAPITALCONTRIBUTION

10. BUYOUT(BUYSELL)AGREEMENT? Triggerevents =death,disability,voluntaryoptout? Determiningprice isbiggestissue: Haveperiodicagreements Hireanappraiser Useaformula Mostcommonapproachis"Isplit,youchoose"likesplittingabagofweed 11. LIMITEDPARTNERSHIP? DefinitionofLP: Alimitedpartnership iscomposedofatleastonegeneralpartner,andatleastone limitedpartner Deathofalimitedpartner doesNOTcausedissolution Limitedpartnershipshares areoften transferable Limitedpartnersmayhave restrictedvoting rights. Thegeneralpartnerispersonallyliabletocreditors RUPA303(a): limitedpartners areliableonlytotheextentoftheircontributions, UNLESS: Theyarealsogeneralpartners Theyexercisedcontrol(pretendingtobeageneralpartner)orhadarighttoexercisecontrol ButthentheyareONLY liable topersonswho reasonablybelieved,basedonthelimited partner'sconduct,thatthe limitedpartnerisageneralpartner See Holzmanv.DeEscamilla cannotgetoutliabilitybyclaimingthattheyonlylimited partnerswhenthey controlledthebusiness by:(1)makingbigdecisions suchaswhatcrops aregrown;(2)changingmanagement;(3)hadabsolutecontrolofthebusinessbankaccount LimitedLiabilityLimitedPartnership(LLLP): Similartoalimitedpartnership,butalsograntsgeneralpartnerlimitedliability (somewhat similartomakingacorporationthegeneralpartner). LimitedLiabilityPartnership(LLP): Actslikeageneralpartnership,butwithlimitedliability. LiabilityofLLP RUPA306(c): "Anobligationof[alimitedliabilitypartnership]...issolely anobligationofthepartnership ...Apartner isNOTpersonallyliable ...solelybyreasonof being...apartner."

CORPORATIONS
1. CORPORATEENTITY? GeneralPartnership Limited Liability No,butpartnerscanbargainit from3rd party,buyinsurance Corporation Yes,butcreditorsmayseekpersonalguarantees Default:Yes,butmayberestricted Default:Indefinite,butcanbelimited Yes,butmaywanttomodifytopreventfreeze out. Formalitiesrequired,including:Articlesof Incorporation,Bylaws,BoardofDirectors, Officers,Minutes,Elections,Filings;morecosts Doubleondistributedearnings:Corporation taxed,andsoaredividends

Free Default:No,butmaybeallowed Transferability Longevity Centralized Management Formation/ Formalities Tax Dissolutionatwill,unlessagreed uponotherwise No;eachpartneranagent.But canusecommittee&limit authoritybyagreement/notice. Informal(nofiling)

Singletaxation Partnershipis nottaxed;partnersare.

2. PROMOTERLIABLEFORPREINCORPORATIONACTIVITY? "Promoters"purportstoactasanagent ofthebusinesspriortoitsincorporation FiduciaryDutiesPreIncorporation: promoterisanagentofthecorporationsohasfiduciaryduties, see AtlanticSalmon GenerallyOKtoenterintoarmslengthtransactions,butifAhasaP,AmustdiscloseP'sidentity LiabilityofPromoter: if3rdpartydoesn'tknowcorp.isyettobeformed,anpurportedAactingfor thenonexistentPbecomespartytothecontractunlessagreedotherwise If3rdpartyknowsthecorp.isyettobeformed: Oncethearticlesarefiled,implicitlyorexplicitly,corporationadoptsthecontract PromoternotliableONLYifreleasedbyotherparty IfthearticlesareNOTfiled,promoterliableonthecontract (liketheundisclosedprincipal situation) 3. DEFECTIVECORPORATION? RULE: IfthearticlesareNOTfiled oraredefectivelyfiled,thedefectivelyformedentity(or individuals)canenforcethecontract oravoidpersonalliability onlyifthereisadefacto or corporationbyestoppel DefactoCorporation: acourtmaytreatanimproperlyincorporatedfirmasacorporationif organizers: [1] actedingoodfaithtoincorporate; [2] hadthelegalrighttoincorporate;and [3] acted asiftheywereincorporated. CorporationbyEstoppel: acourtmaytreatanimproperlyincorporatedfirmasacorporationif thirdparties: [1] thought businesswasacorporation;and [2] wouldearnawindfallifallowedtodeny thatthebusinesswasacorporation See SouthernGulfMarineCo.No.9v.Camcraft,Inc. Camcraftclaimedcontractwasvoidb/cSGM didnotexistasacorporationwhentheyenteredintothecontract CourtfindsSGMwasa"corporationbyestoppel"b/c[1] bothparties treatedtheSGMasa corporation;and [2] Camcraftwouldearna windfall iftheywereallowedtodenytheexistence ofSGMcorporation 4. ISPERSONALLIABILITYLIMITEDDUETOCORPORATEENTITY? LimitedLiability MBCA6.22(b): "Unlessotherwiseprovidedinthearticlesofincorporation,a shareholder ofacorporationisNOTpersonallyliable fortheactsordebtsofthecorporationexcept thathemaybecomepersonallyliable byreasonofhisownactsorconduct" Agency rulesholdifaPusescorp.ashisagent (furtheringonlyhispersonalgoals),thePisheld liableforcorp.'sactsasanAofP PiercingtheCorporateVeilRequires: [1] aunityofinterestandownership,determinedbylookingatfourfactors: [A] thelackofcorporateformalities(betweenownerandcorporation), [B] thecomminglingoffundsandassets, [C] undercapitalization,and [D] theusebyonecorporationofassetsofanother. AND [2] asituationwhere failingtoPCVwouldeither [A] sanctionfraud OR [B] promoteinjustice. The"AlterEgo"Theory: iswhena"dummy"corp.iscontrolledandusedbyanindividualstockholder forpurelypersonalratherthancorporateends,mergingthepersonandcorp.sothatitwould sanctionfraudorinjusticetonotholdthestockholderliableforactionsofdummycorps.itcontrols See Walkovszkyv.Carlton NYCcabcaseisnotaboutescapingliabilityb/cthatistheexact purposeofacorporation,butaboutwhenPCVisneededtopreventfraud/injustice [1C] askedcourtto PCV b/cthestockownerspurposefullyleftnomoney

(undercapitalized)toavoidpersonalliability NoPCVwith alteregotheory b/c didn'tallegetaxicorp.ownerwasusingallthecorps. forhispersonalbenefit ratherthancorp. Seealso RomanCatholicArchbishopofSFv.Sheffield alteregomeansa"parent"isliablefor theactionsof"subsidiaries"itcontrols,buteach"subsidiary"isNOTliable foractionsofthe othersubsidiaries. [2B]merefactSheffieldwillhavedifficultycollectingfromchurchinSwitzerlandisnot enoughofaninjustice "ReverseVeilPiercing": duetolackofverticalformalities [betweentheCorp.AandCommonOwner, AND Corp.BandCommonOwner],a canholdCorp.B liableforactions ofCorp.A BigPROofreverseveilpiercingisjudgmentcreditor>levyownerofequityshares See SeaLandServices suedownerofPS,Marchese,and5ofhisothercompanies claiming thatallofMarchese'scorps.werealteregos ofeachotherthatMarcheseusedforhisown personalbenefit [1] courtfoundunityofinterestandownership b/cnocorporateformalities,onlyone bankaccountallbusinesses,andMarchesemoved$freelyfromonecorp.toanother [2] problemwas didn'tallege outrightfraud andnotenoughevidence PCVwas necessaryas toavoidpromotinginjustice Hadtobea"wrong"BEYONDacreditor'sinabilitytocollectadebt Onremand wonafterprovidingevidenceMarchesecommittedblatanttaxfraud EnterpriseLiability: iswhenthereisalackofformalitieshorizontally (betweentwoCorps.AandB), bothwithacommonowner,a canrecoverfromAorB ParentSubsidiaryLiability: "Parentcorp.isexpectedtoexertsomecontroloverits subsidiary...however,whenacorp.issocontrolled astothealterego ormereinstrumentalityofits stockholder,thecorporateformmybedisregardedintheinterestsofjustice." See InreSiliconeGelBreastImplantsProductLiabilityLitigation Bristolliableforsubsidiary MEC'sfuckedupboobsb/ctheyhadcorporatecontrolofMEC Evidenceoffraud, inequity,orinjustice NOTrequired inthistortliabilitycase Bristolalsodirectlyliable b/citputitsnameonbreastimplantpackages, endorsingthe productnegligently withoutresearchingit TaxShelters: Alimitedpartnership withacorporation asgeneralpartner sothatthelimitedpartners canclaimpartnershiplossesontheirtaxes,whilecorp.GPincursalltheliabilityforthedebts See Frigidaire nopersonalliability forMannonandBaxteras limitedpartners Asays: onlyb/cMannonandBaxterwereveryclearwhendoingbusiness,i.e.,stating whentheywereactingaslimitedpartnersoractingasofficersinUnionCorp. so Frigidaireknewandassumedthefullrisks

5. PROPERSHAREHOLDERDERIVATIVEACTION? DerivativeActionFlowchart: DirectAction SHsuitallowed. Derivative Isdemanduniversal? Yes UniversalDemandRule(MBCA) Didappropriatedemandreviewinstitutionfindsuitnotincorp'sinterest? Yes Dismissunlessinstitution'sdecisionnotingoodfaithornotbasedon reasonableinvestigation. Typesofreviewofdemandrefusal FullBoard(quorum=independent):SHbearsburdenofproof SubsetofBoard:Corp.bearsburdenofproof Courtappointed:SHbearsburdenofproof No SHsuitallowed. No Nonuniversaldemandrule(Del./NY) Isdemandfutileandthusexcused? Demandexcused SHsuitallowed;Corp.mayuseSLCstogetcourtto dismiss.

 Demandnotexcused wasdemandmade? No Suitdismissed/stayeduntildemandmade. Yes Demandrefused? No BoardofDirectorstakescontrolofsuit Yes Refusalwrongful?(decisiontorefusedemand[notthe underlyingconduct]reviewedunderbusinessjudgmentrule) Yes Shareholdersuitallowed No Suitdismissed. DirectActions: vindicateindividualSHs'structural,financial,liquidity,andvotingrights Grimes focusesonWHOwasinjuredandthusreceivetherelief DirectsuitdamagesarepaiddirectlytoSHs DerivativeSuit: suinginequitytoenforcethe corporation'srights I.e.,enforcefiduciarydutiesofdirectors,officers,orcontrollingSHs alldutiesowedtothe corporation,see Cohenv.BeneficialIndustrialLoanCorp. Allrecoverygoestocorporation,butattorney'sfeesarereimbursedbycorp. mustbeaSH atthetimeoftheallegedwrongdoingandwhensuitcommences UniversalDemand MBCA7.42: SHsmustmake "demand"beforefilingderivativesuit Andcannotstartuntil"90dayshaveexpiredfromthedatethedemandwasmade... unlessirreparableinjury tothecorporationwouldresultbywaitingfortheexpirationof the90dayperiod" DemandMayBeReviewedBy: Board,ifindependentdirectors =quorum(majority) Notindependentif: Materialinterestintransaction Dominatedorcontrolledbyinterestedparty(i.e.,VPisnotindependentifthe Presidentisinterestedparty) Committeeoftwoormoreindependentdirectors appointedbyindependents Courtappointed independentpanel DemandFutility Del/NY: ifthedirectorscannotbeexpectedtomakeafairdecision,demandwould befutileandisexcused DELAWAREDemandFutilityStandard(Aronson;Grimes): Toexcuse the demand requirement, a mustshow reasonabledoubt (easierstd.thanNY)that EITHER: [1] majorityofBoDhasamaterialfinancialorfamilialinterest;OR [2]majorityofBoDisincapableofactingindependentlyforsomeotherreasonsuchas dominationorcontrol;OR [3]theunderlyingtransactiondoesnotpassBJR NEWYORKDemandFutilityStandard(Marx): Toshowthatdemand wouldbefutile (thus excused),the'scomplaintmustallegewithparticularity (tougherstd.)thatEITHER: [1] majorityofBoDinterested;OR [2] directorsfailedtoinformthemselves;OR [3] challengedtransactioncouldnothavepassedBJR DemandExcused SpecialLitigationCommittees(SLCs)RULES: ifdemandisexcused,suitisallowed unlesscorp.usesindependentSLCtogetdismissal NEWYORKSLCTest: Unlessthe canshowthat[1] theSLC'smemberswerethemselves interested OR [2] didnotactonaninformedbasis,theSLC'srecommendationsareentitledto judicialdeference undertheBJR BJRallowsSLCtodismisssuitforvarietyofreasons(i.e.,undermineemployeemorale, underlyingclaimlacksmerit,recoverynotworthcostoflitigation,badpublicity,etc) DELAWARETwoStepSLCTest(Zapata): [1] Independence andgoodfaith ofSLCandthebasessupportingrecommendations( hasburden) [2] Courtmay applyitsownbusinessjudgment (lessdeferencetoSLC,friendliertoSHs) astowhetherthecaseistobedismissed

 DemandRefusedRULE: BoDtakescontrolofsuitunlesstherefusaliswrongful IfSHmakesdemand,can'tgobackandargueitshouldhavebeenexcused onlyclaimleftis wrongfulrefusal WrongfulRefusal: ifademandisrefused,BoDisentitled topresumptionofBJR unlesstheSH can allegefacts thatgivesreasontodoubt: [1] theboardactedindependently OR[2] withdue care inrejectingthedemand InDEnevermakedemand b/c demandexcusaldoctrine (Aronson rule)ismucheasierfor than demandrefusaldoctrine (BJR)

FIDUCIARYDUTIES
1. QUESTIONINGCORPORATIONS'MANAGEMENT/DECISIONS?

ANALYSIS:Wearelookingforredflags [1] IfNOredflags BJR applies;defertothebusinessdecisionoftheboard [2] IfthereAREredflags EntireFairnessTest applies [A] Ifentirelyfair(procedureandsubstantively) noviolationoftherelevantduty [B] IfNOTentirelyfair violationofdutyofloyalty ORdutyofcare BusinessJudgmentRULE(BJR): Absentfraud,illegalityorconflictofinterest,theboard'sbusiness judgmentisnotsecondguessedbythecourt;the courtdeferstotheBoD'sdecisions, unless: [1] Directorsbreach theirdutyofloyalty bytaintingtheirdecisionwith fraud, illegality, oraconflictofinterest [2] Directorsbreach theirdutyofcare bynotconducting sufficientinvestigation OR insufficiently deliberating beforemakingabusinessjudgment See Shlenskyv.Wrigley derivativeactiontryingtoget ChicagoCubsdirectortoinstalllights fornightbaseball(toearnmore$)wasnotsuccessfulb/cdirectorsaidlightswouldfuckup ambianceofneighborhood courtgivesANYreasonBJRdeference Butsee Dodgev.FordMotorCo. courtwould notinterfere with Ford'sbusinessjudgments (i.e.priceofproducts,decisiontoexpandthebusiness,etc.)exceptFord'sdecisionnottopay dividendonlyb/cHenryFordsaidhedidn'tcareaboutmaking$ directlyagainstthe corporatecharter "EntireFairness"Test: Evenwhenthereisabreachoffiduciaryduty,iftheentiretransactionwas entirelyfairunderabalancingtest(procedurallyandsubstantivelyfair),theBoDisrelievedof liability ArgueBoDdidn'tbreach,buteveniftheydid,thetransactionisentirelyfairsoBoDisnotliable See Cineramav.Technicolor TechnicolorBoD()breached itsdutyofcare (eventhoughCEO didthoroughresearchandhardbargaining,thatdidn'trelieveBoDoftheirdutydeliberateand conductamarketcheck) BUTtheBoDmetitsburdenofproving the"entirefairness"ofthe dealsoBoDNOTliable "EntireFairness"Considerations: timing,negotiation,andstructureofthetransaction, thedisclosuretoandapprovalbydirectors,andthedisclosuretoandapprovalbySHs DifferentfromVanGorkom b/cVanGorkom BoDviolateddutyofcare(byfailingto adequatelyinformthemselves)AND violateddutyofdisclosuretoSHs thedoublefail couldn'tpass"entirefairness"test

2. BREACHOFTHEDUTYOFCARE? TheDutyofCare MBCA8.30(a): "Eachmemberoftheboardofdirectors,whendischargingthe dutiesofadirector,shallact:(1) ingoodfaith,and(2) inamannerthedirectorreasonablybelieves tobeinthebestinterestsofthecorporation" See Kaminv.AmEx. Directorscanbreachdutyofcareiftheyneglectto,orfailtoperform,or violatedutiesofmanagementbutcan't beordinarynegligence,mustbe "neglectofduties (i.e.,malfeasanceornonfeasance),notmisjudgment" Notabreachofdutyofcareb/cAmEx.BoDaddressedtheissue,disagreedwithit,and hadreasonablejustificationbasedonthefinancialstatements MaybebreachifBoDdidn'tlookatthefinancialstatements,justmadedecisionona whim"ohb/cwefeellikeit" See Smithv.VanGorkom BoDbreachdutyofcareowedtoSHsb/ctheywere grossly negligentinapprovingthemergerin20mins withoutsubstantialinquiry orexpertadvice PartyattackingaBoD'sdecisioncan rebutthepresumption ofBJR byshowingdutyof carebreachedbynotmakinginformeddecision BoDshouldhavegottenexpertopinions,markettests,moredocumentation See Francisv.UnitedJerseyBank directorturnedblindeyetohersonsrobbingthecompany blindsoshebreachedherdutyofcare bynonfeasance (didn'tdoANYTHINGtowards dischargingherjobduties) NoBJRprotectionb/cminimumadirectorneedstolookatbasicinfothatisreasonably available SarbanesOxleyFederalDutyofCare: Requires seniormanagementanddirectors totakeproactiveroleinoverseeingand monitoringthefinancialreportingprocess,includingdisclosure, reportingsystems and internalcontrols BoDOversight/CompliancewithLaw: BJR presumptionrebutted andbreachofthedutyofcare ifa BoD: [1] utterfailstoimplement acontrolsystem;or [2] consciouslyfailstomonitor thesystem See Caremark BoDmakingaconsciousdecisionnottodothecomplianceprogramisOKunder theBJR ("wethoughtaboutitanditstooexpensiveforoursmalllittlecompany")butifyouset itup,youhavetofollowthrough Butsee Stonev.Ritter changefromCaremark, BoDdoesn'tget BJR iftheymakean affirmativedecisionnottodoacomplianceprogram 3. BREACHOFDUTYOFLOYALTYINANINTERESTEDDIRECTOR/OFFICERTRANSACTION? See Bayerv.Beran BoDdidnotbreachdutyofloyalty byhiringadirector'swifetosingintheir commercialsb/cthoughtherewasaconflictofinterest (selfdealingtransaction),thetransaction wasentirelyfair (servedlegitimatecorporatepurposeandthewifeonlygotnormalcompensation) BJR doesnotapplywhenthereisconflictofinterest Butsee BenihanaofToykov.Benihana,Inc. BenihanaBoDdidnotviolate dutyofloyaltyby allowingselfdealing (directorAbdoonbothsidesofnegotiation)b/cBoDknewAbdowasBFC's representative,thuswereinformedwhenmakingdecision thatwas entirelyfair (negotiationsfair, finalpricefair) Didn'tmatterBoDweren'texpresslytoldAbdowasBFC'srep.b/ctheyactuallyknewhewas 4. BREACHOFDUTYOFLOYALTYBYUSURPINGCORPORATEOPPORTUNITIES? Corporateopportunitydoctrine isasubsetoftheDutyofLoyaltywith specialrule differentfrom regularDoLanalysis DelawareTest(Guthv.Loft,Brozv.CIS,Inc.): Anofficer/directorviolatesDutyofLoyalty by embracingabusinessopportunity if(Asays: lookattheseasfactors insteadofelements): [1] Thecorporationisfinanciallyable totaketheopportunity; [2] Theopportunityisinthecorporation'slineofbusiness; [3] Thecorporationhasan interest orexpectancyintheopportunity;and [4] Byembracingtheopportunitytheofficer/directorcreatesaconflictofinterest withthe corp.

 See Brozv.CIS,Inc. BrozdidNOTbreachofdutyofloyaltyunderDETestb/c: [1] CISnotfinanciallycapableofexploitingtheopportunity [2] opportunitymayhavebeeninthelineofbusiness [3] butCIShadnointerestorexpectancyb/ctheBoDdecidedtogetoutthemarket [4] Broz'sinterestinopportunitycreatednoconflictswithhisobligationstoCIS Brozdidn'tneedto disclose toCIS(butdisclosurewouldhaveprovideda"safeharbor") oppositeto ALIRule[2],wherethefiduciaryMUST disclose andwaitforcorporationto reject theopportunity Compare Beamexrel.MarthaStewartLivingv.Stewart [2] BoDMarthanotusurpingbusiness opportunitybysellingstockb/c sellingstockwasancillaryandNOT incorp.'slineofbusiness With InreeBay,Inc.ShareholdersLitigation [2] BoDsusurpingopportunitiestobuyIPOswas ineBay's lineofbusiness b/ceBaydoesalotofinvestinginsecuritiesb/ctheyhavealotof cashanditispartoftheirassetmanagementstrategy Asays: sometimes even ancillaryactivities maybeconsideredinthe corporation'sline ofbusiness (buteBaydoesALOTofinvestments) AmericanLawInstitute(ALI)Rule: [1] a "corporateopportunity"isdefined: [A] Forallinsiders (directors&seniorexecutives),opportunities: inconnectionwiththeperformanceoffunctions asadirector/sr.executive;or undercircumstanceswherethepersonofferingopportunityexpectsittobe offeredtothecorporation;or acquiredthroughthe useofcorporationinformationorproperty,ifreasonably expectedthatthisopportunitywouldbeofinteresttothecorporation. [B] Forseniorexecutivesonly,anyopportunity thatis closelyrelated toabusinessin whichthecorporationisengagedorexpectstoengage [2] Aninsider maytakeadvantageofacorp.opportunityif: [A] Theinsiderfirstoffered theopportunitytothecorporation,anddisclosed the conflictofinterest; [B] Thecorporation rejectedtheopportunity;andeither Therejectionoftheopportunityisfairtothecorporation;or Theopportunityisrejectedinadvance,bydisinteresteddirectorsinamanner satisfyingtheBJR;or TherejectionisauthorizedorratifiedbydisinterestedSHsandrejectionisnota wasteofcorporateresources See Brozv.CIS,Inc. notindefinitionof"corporationopportunity"underALIRule[1A] notconnectedtoapositionatPriCelluar(entityclaimingbreachofduty) personofferingtheopportunitydidnotexpectittobeofferedtothecorporation seller didn'twanttoselltoPriCelluarb/ctheirfinancialsweretoopoor Opportunitynotacquiredthroughuseofthecompanyinfo/property 5. BREACHOFDUTYOFLOYALTYBYACONTROLLINGSHAREHOLDER? SimplemajoritySH iscontrolling (butnotasobviousas97%SHinSinclair),UNLESSvotingrequiresa supermajority FiduciaryDutyofDominantSHs: "Entirefairness" isappliedintransactions byadominantSHwho hasafiduciaryduty BUTONLYWHEN the transactionis selfdealing (transactionistodetrimentof minoritySHs),otherwisethe BJR isapplied Theburden isonthe directorordominantSH notonlyto provethe goodfaith ofthe transactionbutalsotoshowits inherentfairness,Pepperv.Litton See SinclairOilCorp.v.Levien wantscourttoapplytheBJR ( hasburdenofshowingthe controllingSHwasguiltyofgrossoverreaching); wantedthe"entirefairness"testtoapply(once shows selfdealing,burdenison toshowtheentirefairnessofdeal) Excessivedividends NOTselfdealingb/cpayingdividendsbenefitedallSHs Preventingexpansionofoperations NOTselfdealingb/c didn'tshowanyopportunities wereactuallyavailable

 Breachofcontract selfdealing b/cbenefitedonly whilebeingdetrimentaltominoritySHs See Zahnv.Transamerica dutyofloyaltybreachedbycontrollingSHb/ctheyshouldhavedisclosed thepossiblewindfallprofits(givingClassASHsopportunity toconverttoClassB) 6. NOBREACHOFDUTYOFLOYALTYDUETORATIFICATION? VotingStatutes: Interesteddirectors count towardthe quorumattendance,buttheirvotes donotcount Disinteresteddirectors canpassavote evenwithoutquorum,aslongasotherinterested directorsaretheretomakeitaquorum Ratification144(a): RatificationOKif: (a)(1):withdisclosureofmaterialfacts,itisapprovedbyamajority of[all]thedisinterested directors[notjustonespresentatquorum] (a)(2):withdisclosureofmaterialfacts,itisapprovedbyamajorityoftheshareholders [interestedordisinterested] See InreWheelabratorTech.ShareholdersLitigation Dutyofcare claimsareextinguishedbyfullyinformedshareholderratification DutyofloyaltyclaimsagainstBoD:ratificationshiftsburdento toshowwaste(verydifficult) DutyofloyaltyclaimsagainstcontrollingSH:SHratification onlyshiftsburdento toshow lackofentirefairness (thatthedealwassomewhatunfair) 7. BREACHOFDUTYOFGOODFAITH? See InreWaltDisneyCo.DerivativeLitigation notmanycasesdealwith"goodfaith"separately fromdutyofcareanddutyofloyalty,thiscourtsaystheBoDhiredandreliedonacompensation consultantsoitseemstopass BJR asnotin badfaith 1sttypeofbadfaith=subjectivebadfaith ("IhateDisney,IhateMickeyMouse,I'mgoingto ruinthiscompany")forsurebreachof dutyofloyalty,butveryhardtoshow 2ndtypeofbadfaith=intentionderelictionofduty ("OhIjustreallydon'tfeellikecomingto workthisyear")isbreachofdutyofcare,butalsoverydifficulttoprove 3rdtypeofbadfaith=grossnegligence creatingabreachofthe dutyofgoodfaith,but ultimatelyjustreaffirmationofthe BJR

PUBLICCORPORATIONS&SECURITIESREGULATION
1. ISITA"SECURITY"? SecuritiesAct,2(a)(1): "Theterm'security'meansanynote,stock,treasurystock,bond, debenture,evidenceofindebtedness,certificateofinterestorparticipationinanyprofitsharing agreement,...investmentcontract ...or,ingeneral,anyinterestorinstrumentcommonlyknown asa'security'..." Definitionof"Stock": calledstockandhasusualcharacteristicsofstock Definitionof"InvestmentContract": aninvestmentofmoney(anythingofvalue,i.e.,gold)ina commonenterprise (moneypooltodosomething)withprofitstocomesolelytocomefromthe effortsofothers (Robinsonv.Glenn) CASE: Robinsonv.Glenn profitsdidnotcome"solelyfromtheeffortsofother"sonotan "investmentcontract"dudecouldsueon 2. LIABLEFORFUCKINGUPSECURITIESSALE&REGISTRATIONUNDER11OR12? Registration: Notallowedtosellsecuritiesuntilyouregister Offerspermittedandpriceisusuallynamedatendofthe20days Then20daysfortheSECtosaynoordonothing(thenyou'reallowedtosellyoursecurities) Mustdeliverytheprospectusbeforethesale ExemptionsfromRegistration:

 Transactionsbyanissuernotinvolvinganypublicoffering Reg.Dprovidesa safeharborforprivateofferings: Under$1M,unlimitednumberofpeople Under$5M,upto35offerees Above$5M,upto35offereesoffinancialsophistication Resalescountagainstthesalesneedtoputrestrictionsonthestocktopreventresale Issuercan'tadvertisepublicly Issuerstillmustfile anoticeofthesale withtheSEC(butdon'thavetoregistersecurity) SecuritiesAct11: liableforaregistrationstatementthatcontainsan untruestatementofa materialfact ORomittedtostateamaterialfact requiredtobestatedthereinornecessarytomake thestatementsthereinnotmisleading ..." Donotneedtoshowreliance,causationorscienter Nocauseofactionif knewofuntruthoromission; Doesnotapplytoexemptedregistrations Issuer isstrictlyliable Others liablefordegreeoffault andshaveburdenofshowingthedegreetheirconductdid notcauseplaintiff'sdamages Possibles: Anyone whosigned theregistrationstatement(issuer,executiveofficers, directorsMUSTsign) Everypersonnamedasdirector inreg.statement+directorsattimestatement becomeseffective Every expert namedashavingpreparedorcertifiedanypartofthestatement,or ashavingpreparedanyreportorvaluationused Everyunderwriter ofthesecurity DueDiligenceDefense: [1] afterreasonableinvestigation, [2] had reasonablegrounds to believeand[3] didbelieve thatthestatementsweretrue andnoomissionsofmaterialfact See Escottv.BarChris SHssuestheBarChriscorporationandeveryonewhosignsthe registrationstatementunderSecuritiesAct11,claimingfalsestatementsonthe registrationmadethembuystockandlosemoney Issuer (BarChris)isstrictlyliable butallothersraise duediligencedefense(none succeed) RULESfor Due LiabilityofNonExperts DiligenceDefense: Preparedby Non Experts Notliable ifreasonableinvestigation+ affirmativebeliefthestatementsare true(haveshowyouwentoutanddid actualduediligencesoyoureallyhad reasontobelievemisstatementwas true) LiabilityofExperts Noliability fortheshitthatthe experthadnothingtodowith/ materialstheydidn'tprepared /materialsthecompanydidn't use/alteredmaterials

Preparedby Experts

Sameastopleftbox Notliable ifyouhadnoreasonto believeanddidnotbelievestatements weremisleading(allyouhavetoshow isthattherewerenoredflags)

SecuritiesAct12: Strictliabilityfor: [1] offeringorsellingasecurityinviolationoftheregistrationprocessmandatedbythe SecuritiesAct(shouldhavebeenregisteredbutwasn't),unlesssecurityisexemptfrom registration [2] misrepresentationsintheprospectus/oralcommunications(notjustregistration) Noneedtoprovereliance Appliesonlytopublicofferings

 Duediligencedefense alsoavailable Liabilityofs sameas11 Mainremedyisrescission (orcomparableremediesif nolongerownssecurities) 3. ACCOUNTINGISSUE? EfficientCapitalMarketsHypothesis: 1. Weakmarket reflectpastprices 2. Semistrong reflectpublicinformation 3. Strong reflectsallinformationincludingprivateinformation BasicElementsofFinancialPosition BalanceSheet: companyassets (whatcompanyowns),liabilities (whatcompanyowes),and shareholder'sequity onaspecificdate Assets=Liabilities+Shareholder'sEquity Shareholder'sEquity=Assets Liabilities IncomeStatement: profitoveraperiodoftime,includesrevenues,expenses,andnet income (revenue expenses) StatementofCashFlows:cashreceived (i.e.,income,proceeds,etc)andpaid (i.e.,payments tosuppliers,incometax,capitalexpenditures,etc)bybusinessduringaperiodoftime StatementofSH'sEquity: howmuchSH'sequityaccounthaschangedinaperiodoftime(i.e., changeinstockprice/share) Commonstock:classofstockthatpaysadividend Preferredstock:classofstockthatpaysfixedandregularinterestincome Retainedearnings:profitthatisnotdistributedtoSHsbutreinvestedintothecompany (countsaspartofSH'sstatementofequity) 4. LIABLEFORSECURITIESFRAUDUNDERRULE10B5? Rule10b5: "itshallbeunlawfulforanyperson,directlyorindirectly,bytheuseofanymeansor instrumentalityofinterstatecommerce,orofthemailsorofanyfacilityofanynationalsecurities exchange,(a) Toemployanydevice,scheme,orartificeto defraud,(b)To makeanyuntrue statementofa materialfact ortoomit tostateamaterialfactnecessaryinordertomakethe statementsmade,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading,or (c) To engageinanyact,practice,orcourseofbusinesswhichoperatesorwouldoperateasa fraud ordeceit uponanyperson,inconnectionwiththe purchaseorsaleofanysecurity." ElementsofRule10b5Violation: [1] JurisdictionalNexus: mustinvolveinterstatecommerce [2] TransactionalNexus: Pmusthaveactuallyboughtorsold securities I.e.,GEissuesamisstatement,youcan'tsueGEfordecidingNOTtobuyorsellbasedon themisstatement [3] Materiality: "factismaterialifthereisasubstantiallikelihoodthatareasonableSHwould consideritimportantindecidinghowtovote" SlidingScaleTest foruncertainevents:(1)probability thattheeventwilloccur(i.e.,the mergerwouldhappen);and(2) themagnitude ofthepossibleevent,see Basic,Inc.v. Levinson [4] Reliance:fraudonthemarkettheory essentially eliminatesthereliancerequirement Rebutwith:norelianceb/ceveryoneknewCEOwaslying,Pwouldhavesoldregardless duetohimbeingbroke,misstatementwascorrected [5] Causation: Transactioncausation: basicallythesamethingasreliance(presumedbycourts) Losscausation:howmuchdidyouloseduetoyourreliance(provideevidencemarket believedmisrepresentation) [6] Scienter: stateofmindofthepersonmakingmaterialmisrepresentation Intenttodeceive/defraudisenough Somecourtsalsoacceptrecklessdisregardforthetruthofastatement

5. LIABLEFORINSIDERTRADING? CommonLaw: Split morestatesfollow thespecialcircumstancesrule ORminorityrule, NOT the majorityrule; insider ONLYowesdutytoSHs (nodutywhensellingto nonSHs attimeof transaction) Traditionalor"Majority"Rule: officers&directorsmaytradewithSHswithout disclosingmaterialinfo "SpecialCircumstances"Rule: dutytodisclosetoSHsmightbeimposedwhenthereare specialcircumstances MinorityRule: insidershaveadutytofullydisclosematerialinformationwheneverthey purchasesharesfrom SHs Seealso Goodwinv.Agassiz insidersdo nothavea duty todisclose whentradingonpublic exchange Rule10b5TraditionalTheory: Rule10b5isviolatedwhenthereisapurchaseorsaleofa security...onthebasisofmaterialnonpublicinformation aboutthatsecurity,inbreachofaduty todisclose [ortoabstainfromtrading]becauseofthenecessityofpreventingacorporateinsider from...tak[ing]unfairadvantageof...uninformed...stockholders StatutoryInsiders: directors,officers,10%SHs TemporaryInsiders: forfiduciarydutytobeimposed,outsidermust[1] begivennonpublic materialinfofromissuer;[2] withexpectationofconfidentiality;and[3] relationshipimplies dutyofconfidentiality DerivativeLiabilityofTippee: tippeeisliablefortradingorpassingonatip[1] if thetipper breachedhis dutyofloyalty bydisclosing thetip[forapersonalbenefit];and[2] the tippee knowsorhasreasontoknowofthebreachoffiduciaryduty Tippee cannotinherit derivativeliability UNLESSthetipper breachedhisduty,see Dirks v.SEC (SECcomesafterDirksbutDirksisNOTaninsidersonoderivativeliability) [1] Secristwasnotatipperb/chedidn'tbreachhisdutyforhispersonalbenefit, andnotipper=notippee [2] DirksknewSecrist'smotivationwastoexposefraud,notpersonalbenefit InsiderTrading"Traditional"TheoryFlowchart: IsDefendantinpossessionofmaterialnonpublicinformation? No Noliability. Yes IsDastatutoryinsideroratemporaryinsider? Yes DidDtrade(recklesslyorintentionally)withoutdisclosingtothetrading partnerorthemarketgenerally[TGS]? Yes Subjectliableforpersonaltradesunder10b5. No DidDtipothers? No Noliabilityunder"traditional"theory (butcheckothertheories). Yes See"tippee"sectionbelow. No IsDatippee(derivativeliability)? No Noliabilityunder"traditionaltheory" (butcheckothertheories). Yes Didinsidertipothersrecklessly,forpersonalbenefit? No Noliabilityforeithertipperortippee(butcheckothertheories). Yes DidTippeeknoworshouldreasonablyknowoftippersbreach? No Tipperliableunder10b5,tippeeisnot (butcheckother theories). Yes Bothtipper&tippeeareliableunder10b5.

 Rule10b5MisappropriationTheory: Rule10b5isviolatedwhenapersonmisappropriates confidentialinfo forsecuritiestradingpurposes,inbreachofadutyofconfidentialityowedtothe sourceoftheinfo Requirements: [1] Materialnonpublicinformation [2] Undiscloseduseofinformation [3] Belongingtoprinciple [4] Forpersonalgain See USv.O'Hagan O'Hagandefraudedhislawfirmandfirm'sclientbyusingmaterial nonpublicinfoaboutthetenderoffertopersonallyprofit ButAsays: NOliability if[2] O'Haganjustdisclosed thathisplannedtradestohislaw firmandfirm'sclientbeforetradingb/cthen no"deceptivedevice"under10b5 Rule10b52: nonexclusivelist of3situations whereapersonhasa dutyoftrustor confidence forthepurposeofthemisappropriationtheory: [1] whenapersonagreestomaintain infoinconfidence;or [2] whenthetwopeoplehaveahistoryorpracticeofsharingconfidences,suchthatthe recipientoftheinfoknowsorreasonablyshouldknow thecommunicatorexpectsthe recipienttomaintainconfidentiality;or [3] info obtainedfrom aspouse,parent,childorsibling,UNLESSrecipientshowsthat historyorpracticeindicatesnoexpectationofconfidentiality InsiderTrading"Misappropriation"TheoryFlowchart: IsDefendantinpossessionofmaterialnonpublicinformation? No Noliability. Yes DoesDoweafiduciarydutyofconfidentialitytopossessorofinformation,andis theinformationwithinthescopeofthisfiduciaryduty? No Noliabilityunderthe"misappropriation"theory,unlessDreceivedtipfrom someonewhohadsuchafiduciaryduty(inwhichcase,seebelow). Yes DidDtrade(recklessly)withoutdisclosingtothesourceoftheinformation? Yes Subjectliableforpersonaltradesunder10b5. No DidDtipothers? No Noliabilityunder"misappropriation"theory (checkother theories). Yes Didinsidertipothersrecklessly,forpersonalbenefit,without disclosing? No Noliabilityforeithertipperortippee(checkother theories). Yes DidTippeeknoworshouldreasonablyknowoftipper's breach? No Tipperliableunder10b5,tippeeisnot (checkother theories). Yes Bothtipper&tippeeareliableunder10b5. Rule14e3TenderOffers: whenatenderoffer hascommencedorisabouttobecommenced,itisa violationof14(e)forapersonotherthantheofferingperson totrade intherelevantsecurities, if thatpersonhas materialnonpublicinformation relatingtothetenderoffer,whichtheperson knowsorhasreasontoknowwasacquired(directlyorindirectly)from: theofferor,targetcompany, oranyofficer,director,employeeofofferorortargetcompany Rule14e3(d): Itisaviolationof14(e)forthefollowingpersonstocommunicate material privateinformation toothersifitisreasonablyforeseeablethatthiscommunicationwill resultinaviolationof14(e)... Exceptions forcommunicatingtothetarget andnecessarypeople withintheoffering organization

 HYPO: InsiderTradingLiability Who Traditional Misappropriation No Bowesthedutyof confidentialitytoher[Buyer] company,butnoliabilityb/cnot forpersonalbenefit(discussing deal) 14e3 No Thisis tenderoffer, butthe exception allows disclosureto TargetCo.b/c it'snecessary tothedeal B,CEOofBuyer No Bisnotaninsiderof Co.(discloses) TargetCo. infotoT,the CEOofTarget Co.

B(trades)on infousingher personal account

No Bisnotaninsiderof TargetCo.

Yes nowforpersonalgain,unless Yes tender shemakesdisclosuretoBuyerCo. offerandshe beforedoingso[USv.O'Hagan] istradingfor herpersonal gain No TargetCo.wasarguablynot sourceofinformation,anddidn't owedutyofconfidentialityto source(B) Yes tender offerandshe istradingfor herpersonal gain

Yes Tisaninsidersoliable T,CEOof fortrading target company (trades)oninfo usingher personal account T(discloses) infotoL,her personal lawyer,asking foradvice;J, herhusband, and inadvertently sonS overhears

No Havetoshowitwasfor No TargetCo.wasarguablynot personalbenefit;unless sourceofinfo,anddidn'toweduty she'shopingsomeoneshe ofconfidentialitytosource(B) disclosedtowilltradeonthis info

No unlessshe anticipates tradingonthis information

L,T'spersonal No (1)Lisnotatemp Yes Lbreacheddutyof lawyer(trades) insiderb/cheispersonal confidentiality toclientTbyusing oninfo lawyerofT,notcorporate infototrade lawyerofTargetCo.;(2)T wasnottippingLfor personalbenefit,only seekingadvice;(3)evenifit wasforpersonalbenefit,still havetoproveLknewitwas forpersonalbenefit[Dirks] John,T's No Tdidnotdisclosefor Yes thereisapresumptionof husband personalbenefit,soJohn dutywithaspouseperRule10b5; (trades)oninfo cannotinheritliability[Dirks] unlessJohncanshowtherewasno patternofkeepingconfidences John,T's No disclosurefromTto husband Johnwasnotforpersonal (discloses)info benefit,andthedisclosure

Yes tender offerandheis tradingfor personalgain

Yes tender offerandheis tradingfor personalgain

No thoughJohnmightbe No unlesshe breachinghisdutytohiswifeby anticipates trading,noliabilityfordisclosingto tradingonthis

togolfbuddyH fromJohntoHalsonotfor personalbenefit S(trades)on info No Tdidnotdisclosefor personalbenefit

Hb/cnotforhispersonalbenefit No thoughnotperfectlyclearthis infowasinthescopeofthedutyof confidentialitytoT,normaldutyof confidentialitybetweenmomand sonper10b5doesnotapplyb/cit wasanincidentaloverhearing No unless(1)Hliableasatippee ifheknewJohnwasdisclosingfor personalbenefitOR(2)ifthere wasadutyofconfidentialityto John

information Yes tender offerandheis tradingfor personalgain

H,John'sgolf No disclosurefromTto buddy(trades) Johnwasnotforpersonal oninfo benefit,andthedisclosure fromJohntoHalsonotfor personalbenefit

Yes tender offerandheis tradingfor personalgain

Keytotraditionalliability =everylinkmustbebreached ANDinitialviolationmustbefrominsider Misappropriation issameastraditionalinthateverylinkmustbebreached,but initialviolation doesNOThavetobeinsider 1. PROXYSOLICITATION/CONTEST? Rule14a3(a): Anyonesolicitingaproxymustfirstprovideawrittenproxystatement Rule14a6: ProxystatementmustbefiledwithSEC Rule14a3(b): Incumbentdirectorsmustprovideanannualreport beforesolicitingproxies forthe annualmeeting ProxyFights: ReimbursingIncumbent: OKtoreimburseevenforwininganddiningb/c[1] expenseswere reasonable and[2] abonafideproxycontest basedonpolicy,NOTpersonalreasons ReimbursingInsurgents: cangetreimbursedifthey[1] winand[2] shareholdersratify reimbursement

2. LIABLEFORPROXYVIOLATION? Rule14a9ProxyViolation: [1] misleadingstatementoromission [2] infoismaterial ifthereisasubstantiallikelihoodthatareasonableshareholderwould considertheinfoimportantwhenvotingorgivingproxyvotes See Millsv.ElectricAutoLiteCo. notdisclosing conflictofinterest inproxystatement wasverymaterial Butsee VirginiaBankshares (whenmajoritySHhasenoughvotestopass,evenmaterial defect=/=casualnecessity) Seealso Seinfeldv.Bartz omissionofBlackScholesvaluationsofoptiongrantsonthe proxystatementisnotmaterial asamatteroflawb/cnotrequiredbySECregulations [3] burdenofcausation metifcanshowdefectwasmaterialandthe"proxystatementitself, ratherthantheparticular[defect],wasanessentiallinkintheaccomplishmentofthe transaction" [4] damages isdeterminedbybestinterestsofSHasawhole Mergersetaside onlyifequitable Monetaryreliefifpossibletoquantifyofproxydefect 3. CANBOARDEXCLUDEASHAREHOLDERPROPOSAL? Rule14a8: allowseligibleSH toputaproposalbeforetheirotherSHs,andhaveproxiessolicitedon thecompany'sproxystatement SHeligibleonlyifholdsatleast$2,000inmarketvalueor1%interestforoveryear Companycanexcludetheproposal on13grounds,forexample: PersonalgrievanceofSH Somethingnotsignificantlyrelatedtocorporatebusiness

 Relatedtospecificdividends Relatedtosubstantiallysameproposalthathadbeenrejectedinpast5years Relatedtoelectionsorprocedureforelections CASE: Lovenheimv.IroquoisBrands corp.cannotexcludetheSH'sproposalas"notrelatedto corporatebusiness"b/cthiswasareallyimportantethicalissuethatcouldhaveimpactsoncorp. 4. SHAREHOLDERSUINGFORINSPECTIONRIGHTS? Rule14a7 gives SHstherighttoeithergettheSHlistortomakethecorp.mailoutproxy statementstoSHswithoutturningovertheSHlistofSH Default: SHlistaccessibleifthereisaproper[corporate]purpose NOBOlist(nonobjectingbeneficialowners):longerlistthatcontainstheactualnamesofthe beneficialowners,unlesstheyobjectedtobeinglisted CEDElist: shorterlistwithonlythestreetnamesoftheowners Compare CraneCo.v.AnacondaCo. wasaproperpurpose togetSHlistwhen neededtoinform theSHswhyhishostiletakeoverofferwasactuallygoodforSHs evenwhenahostiletakeover opposedbyBoD With Pillsburyv.Honeywell,Inc. ethicalconcerns [aboutproducingweaponsforVietnamWar]are NOTa "properpurpose" forinspectionb/cmustbe relatedtoan economicpurpose /investment return andnotpurelytopersuadeadoptionofsocialorpoliticalconcerns

CLOSEDCORPORATIONS
Definingcharacteristic:nosecondarymarket SplittingBundleofRights: importantrightsrelatedtoeconomic(i.e.,therighttodividends,voting,etc) DE: OKtohavedifferenteconomicandvotingrights,see Providencev.W (OKforSHtoown28% ofthesharesbutonly3%votesduetobylawlimitingnumberofvotesas#ofsharesincreases) IL: musthavevotingrightsbuteconomicnotnecessary,see Strohv.BlackhawkHolding VotingTrusts&Agreements: Shareholderagreements andtrusts(tovotesharespera3rdpartyifdisagreement)areOK,but nospecificperformance,see Ringling (remedyistojustignorethevotesofbreachingparty) Directoragreements arevoid b/cittakesawayindependentjudgmentofdirectors, see McQuadev.Stoneham (directors violatefiduciarydutiesbyconstraining themselvesb/cthey can'tconsiderotheroptions) Butsee Clarkv.Dodge (agreementbetweenSHsisvalidEVENWHENtheagreement is aboutcontrolling managementdecisions b/conly2SHsaffected,unlikeMcQuade where therewereotherSHs) "HomemadeMcQuade"=sellstocktocreateanotherSHsoaSHagreementcannotbe enforcedperClark PreventbymakinganypurchaserofstockconsenttotheSHagreement ISTHISALIMITEDLIABILITYCOMPANY(LLC)? Characteristics: Mainbenefit="passthroughtaxation"avoidthedoubletaxincorps. Managermanaged islikecorporations:exactlysameasBoD Managersowefiduciaryduties Membermanaged islikepartnership:onevotepermembershipshare,simplemajoritywins Allmembersowefiduciaryduties EndofLLC:sameaspartnership(disassociationordissolution) PiercingCorporateVeilforLLC: Members,managersandSHsnormallynotliable andnothingexplicitapplyingPCVtoLLCs Asays: canPCV,butmoredifficultb/cLLClacksformalitiesinthefirstplace,soonlyshowing lack offormalities isNOTenough, cf. ULLCA303(b):"Thefailureofa[LLC]toobservetheusual companyformalities...isnotagroundforimposingpersonalliabilityonthemembersor managersforliabilitiesofthecompany."

 Seealso NewHorizonsSupplyCoop.v.Haack sproperlyformedaLLC sonotsubjecttoPCV, butLLCnotproperlydissolved b/c tooktheassetsofthedissolvingLLCinsteadofturningover tocreditorsfirst,thus personallyliable forthedebts

CORPORATECONTROL
Manywaystogetcorporatecontrol: Proxycontest:expensiveandnotaslargeofprofits(onlythe%youown) Tenderoffer: acquiringcompanyofferspremiumtotargetSHsforstocks,canbeconditionalon #shares,ifoversubscribed,tendersacceptedprorata Stockpurchases: buyingstockonopenmarket(toughtogetmorethan10%thisway) Saleofassets:don'tbuytargetcorp.,insteadalloftarget'sassets butsameeffectasamerger Doesnotcomewithunknownliabilities Merger/consolidation: onlywaytogaincontrolANDtrulycombine the2companies Merger=onlytheacquirersurvives Moreappealingthansaleofassetsb/coftaxreasons Assetsandliabilitiesaretransferredinamerger Consolidation=newcompanyisformedfromacquirerandtarget StepstoamergerinDE: o [1] Boardapproval fromeachcompany(boundbyitsownlaw) Usuallyalsochangethearticlesofincorporation o [2] MajoritySHapproval o [3] Filingnotice withstate o [4] Appraisalrights (righttogetpaidcashforfairvalueofshares) NOTavailable forpubliccorps. (justsellonopenmarket) 1. ISTHETRANSACTIONADEFACTOMERGERORDEFACTONONMERGER? DeFactoMergerDoctrine: acourtwillholdatransaction asamerger evenifcalleda"saleofassets" inordertopreventcircumventionofSHprotection(cannotallowpeopletotakeawayappraisalrights justbycallingita"saleofassets") o See Farrisv.GlenAldenCorp. courtconcludedsaleofassetswasreallyamergerafterlooking at:(1)allprovisionsofagreement,(2)overallconsequencesoftransaction,and(3)purposeof applicablecorporatelaw Aftermath:PAlegislature abolished the doctrineofdefactomergers o Seealso Haritonv.ArcoElectronics DECourtsaystheDE salesofassetsstatute andmerger statute areindependent sofollowingeitherisOKanddefactomerger doesNOTapply DeFactoNonMergerDoctrine: tofindthatsomethingcalleda"merger"isreallysubstantively somethingelse(i.e.,saleofassetsfollowedbyredemptioninRauchv.RCACorp) o See Rauchv.RCACorp.rejecting defactononmergerdoctrineb/cmergercompliedwithDE's mergerstatute,andshadtherighttochoosemergerorredemption 2. DIDMAJORITYSHAREHOLDERBREACHFIDUCIARYDUTYINFREEZEOUT(CASHOUT)MERGER? TriangularMergers: o Parties: Acquirer,Subsidiary,Target 1. Acquirer(oftenamajoritySH)formswhollyownedSubsidiary 2. Subsidiaryiscapitalizedwith$orstocktobepaidtoTarget'sSHs 3. SubsidiarymergeswithTarget 4. OnceincontrolofTarget,forcetheremainingminoritySHsofTargettotakecash payment,freezingthemout o 2advantages: AcquirergetstotalcontrolofTargetandwithoutassumingTarget'sliabilities o Forwardtriangularmerger: Subsidiarysurvives o Reversetriangularmerger: Targetsurvives RULE: whetheramajoritySH breachedhisfiduciaryduty inafreezeoutmerger isjudgedbythe EntireFairnessTest (remembertheprimarytestforinterestedtransactions),and:

o [1] Burdentoshowunfairness isonthe,if: [A] Validratification(majorityoftheminority); AND [B] NOevidenceoffraud,misrepresentation,ormisconduct o [2] Burdentoshowfairness isonthemajoritySH ifeitheroneoftwothingsistrue: [A] ifa canshowratificationwasinvalidb/c'sfailuretomeetadisclosureobligation; OR [B] ifa showsSOMEevidenceoffraud,misrepresentation,ormisconduct o See Weinbergerv.UOP,Inc. majoritySHforbreachedhisfiduciarydutytominoritySHsby withholdingrelevantinfoandnotdisclosingconflictsofinterest o EntireFairnessTest:evidencepointedtoalackof fairdealing (withholding1stexpert report,notrevealing2ndreportwaspreparedbyaninterestedparty); nofindingon fair price b/cthelowercourtdidn'tconsiderallrelevantfactors o See Rabkinv.PhilipHuntChem.Corp. majoritySHdidnotviolatemergeragreementperse,but courtdoesn'tlikebadbehaviorandfinds breached fiduciaryduty byintentionallyavoidinga commitment madetominoritySHs o Asays: majoritySHsbehaviornotsobad contractwasayear,andtheywaitedaftera yeartodotheotherfreezeoutmerger BusinessPurposeofMerger: o DE: NOTrequiredtoshowabusinesspurpose,Weinberger o MA:Coggins requirescontrollingSH toprove(after methisburdenofshowingselfdealing by):[1] thetransactionservedalegitimatebusinesspurpose forthecorporation;and [2] overallfairness totheminorityshareholders o See Cogginsv.NewEnglandPatriots majoritySHbreachedfiduciarydutytominoritySHs b/cNOlegitbusinesspurpose (SullivanonlywantedtoforceoutminoritySHssohecould paybackhisloans) o Asays: nowthereisastandardsetofbusinesspurposes(decreasetransactioncosts, minimizedisclosureobligations,etc) Damages: o Appraisal onlyremedyifthe onlyallegescashoutmergerdidn'tpayenough $ Lookatstockvaluerightbeforefreezeoutmerger,evenifpriceincreasedsolelydueto majoritySHsmergerattempts Openendedvaluation toaccountforotherfactors(i.e.,lackofmarket,"minority discount"),Weinberger o MonetaryorEquitableRelief(i.e.Recession):OKifappraisalnotadequate,"particularlyin casesoffraud,misrepresentation,selfdealing,deliberatewaste,"Weinberger;maybesimple misconduct perRabkin o RecessionofMergeror"RescissoryDamages":OKifmajoritySHbreach fiduciaryduty,Coggins Normallyrecessionofthemerger,butifpracticalanymore,minoritySHscanrecover "rescissorydamages"(presentvalueofminoritySHsstock) 3. LIABLEFORLLCMERGER? See VGS,Inc.v.Castiel LLCmergerwasinvalidb/cthetwominoritymanagersviolatedtheirfiduciary dutyto3rdmajoritymanagerbyvotinginsecrettomerge(andoust3rdmajority)b/c: o Minorityinterest hasadutyofloyaltytothe majorityinterest,evenifitmeansthatthe majoritywilloutvotetheminority o Nodisclosureofvote=breachoffiduciaryduty

4. DIDBOARDOFDIRECTORSBREACHFIDUCIARYDUTYWITHATAKEOVERDEFENSE? WilliamsAct(1968)FederalRegulationofTenderOffers&StockPurchases: Anyoneacquiring,includingcoordinatedbuys)morethan5%ofsharesmustfileadisclosure within10daysofpurchase Targetcompanyhastofilearesponseontenderoffer TheFrontLoadedTenderOffer: 2tieredtenderofferwherefrontendofferisreallygoodbutback endofferisjunk,havinga"coerciveeffect"onSHstotender DefensesAgainstHostileTakeovers: GoldenParachute Greenmail,[Cheff]: OKforBoDofTargetCo.topayoffcorporateraiderbutahorribledefense b/citdoesn'tdeter,butencouragesmoreraids ThoughIRShasbigtaxongreenmailtodiscouragethis CounterTenderOffers[Unocal, Time]: Targetco.offerstobuybacksharesforhigh$$IFthe firsttiertenders,butexcludesAcquirerfromoffer,thusincentivizingSHstoholdout andNOT selluntilsecondtier(whichwillneverhappen) Butnotveryeffectivenowb/cSECRule13e4(f)(8)prohibitsanissuerfrommaking countertenderoffersthatarenotmadetoALLSHs PoisonPills[Revlon]: moderndefensivetacticwhichareSHexercisablerights("SHRightsPlan") thatmakethetakeoverlessprofitabletotheacquirer,typicallybyloweringthevalueofthe target'sortheacquirer'sshares Rightscannotbeexerciseduntilatriggeringevent(i.e.announcementofahostile tenderoffer,acquisitionofmorethan20%oftarget'sstock,etc) BoDcanredeemand"disarm"poisonpills,forcingacquirernegotiatewiththeBoD FlipInPlan: SH'sgrantedthe righttobuyanothershareoftarget at1/2priceafter triggeringevent,dilutingthetarget'sstockpool andmakingitveryexpensiveforacquirer togetmajoritycontrol FlipOverPlan: specialdividendstockissuedtoSHsthatprovidestherighttoconvert existingstocktodoublethestockintheacquirer soifacquirersucceeds,theSHsofthe targetgettonsofsharesintheacquirer,dilutingthestockvalueofacquirer,possiblyeven gettingcontrol BackEndPlan: sameideaasUnocal,iffirsttiergoesthrough,remainingSHsgetarightto convertshareintodebtsecuritiesathigherprice forcesacquirertoofferabovetheset backendprice VotingPlan: ifeventtriggers,thosethatacquirestockintargethavetheirvotingrights diluted i.e.acquiring50%ofthetargetcorporationonlygivestheacquirermaybe5%of thevotes PoisonDebt:targetcorp.issuesdebttoSHs,anddebtor'srightscontainsprovision preventingthecorp.fromissuingmoredebt defeatingLBOsthatrequireusingthetarget corp.asasecurityforit'sloans DeadHandandNoHandPills: preventstheredemptionloopholeinpoisonpills(whereacquirer installsanewBoDtoredeempoisonpills) DeadHandPills: provisioninpillthatsaysnewlyelecteddirectorscannotredeem poison pill;reservesredemptionrightonlytoapprovedsuccessors,see TollBrothers (deadhand pillNOTOKb/c:can'tcreateunequaldirectorsandrestrictBoDpower) NoHandPills:createsatimeperiodwherenoonecanredeempill, see QuickturnDesign Systems (nohandpillusedwasdisproportionateb/citpreventedthenewBoDsfrom exercisingoneoftheirfundamentaldutiestothecorp. negotiatingpossiblesaleofcorp.) LockUps[VanGorkom,Revlon,QVC]: toincentivizebids,Targetmightgive"lockup"or terminationfeestocoveranacquirer'scostofbidding Problemisreallyhighterminationfees:(1) mightgetmorepeopletoparticipatebut lowersoverallsellingprice AND(2) lowersthetotalvalueofTarget bytheamountit hastopayinterminationfees Noshopobligation: preventstargetfromdealingwithalternativebuyerstobidupthe priceifonebuyerisalreadyputtinginthe$andwork

 ModifiedDutyofCareTestforTakeoverDefenses[Unocal]: BJRnormallyappliestoBoDdecisions butpotentialforconflictintakeoverdefensesplacestheburdenontheBoD toprovethat: [1] BoDhad reasonablegroundstobelievetherewasadangertocorporatepolicyandeffectiveness,whichis demonstratedbyshowing[A] goodfaith and [B] reasonableinvestigation;AND [2] thedefensewere proportionate responsestothelevelofthreat posed,see Unocal countertenderoffer OKb/c BoD wereconfrontedwithalegitthreattocorp.policyevidencedby:junkbondsinoffer,the$54offerwas inadequate,anddudewasawellknowncorp.raider LevelofThreat: determinedbyprice,offer,riskofnonconsummation,timingofoffer, qualityofsecurities 3commoncategoriesofthreatstocorp.policy[Unitrin]: Opportunityloss (offerdeprivesSHsopportunitytochooseabetteroffer) Structuralcoercion (coerciveofferdistortingSHs'decisionstotender) Substantivecoercion (SHsledtobelieveanunderpricedofferisfairdespite intrinsicvalue) ConsiderationofothersotherthanSHs: Cheff listed"employeeunrest"asvalidconsiderationforBoD Unocal OK'dconsideringotherssuchas"creditors,customers,employees, andperhapseventhegeneralcommunity" Revlon canconsiderothersbesidesSHsaslongashadsomeultimatebenefit forSHs neverina Revlonauction Time maintaining"corporateculture"wasrelevantbutdidnotexplainhowit wouldbenefitSHs ProportionateAction[Unitrin]: acourtwillnotinterferewithdefensivemeasuresby independentBoDif: [1] theactionisNOT"draconian" (coerciveorpreclusive),AND [2] as longasactiontakenisintherangeofreasonableness "Coercive"=abadincentivethatforcesSHstodosomething "Preclusive" =adeterrentthatmakestendereffectivelyimpossible See TollBrothers (deadhandpillNOTOKb/ccoercive forcedSHstoreelectthe incumbentdirectorsiftheywantedafunctioningBoDandpreclusive b/cmadeany takeoverimpossible) Relationshipbetween Revlon,Time,andQVC: Revlon Ifthecompanyisforsale musthaveanauction Time butnotifthesaleispartofalongstandingplan QVC unlessthelongstandingplanrepresents achangetoprivatecontrol Revlon Auction: butoncecompanyinsalesmode,BoD'sfiduciaryduty changestoauctioning forhighestprice,see Revlon (lockupagreementsarenotperseillegalinDEbutthislockup agreementdoesNOT pass modifiedUnocal test b/cBoD'sdutychangedtoauctioneerthelock updiscouragesbidding) LongstandingPlanExceptionToRevlonAuction[Time]: butRevlon onlyappliesto[1] active biddingand[2] abandonedlongtermstrategy,see Time (Timewas NOTin "RevlonSalesMode" b/cthedealtheylockeduphadbeeninplaceforalongtime andwasnotadealtoabandon control/strategy thusregularUnocal standardsapplied) Revlon'sWhiteKnightwasanewstrategy;Timejustfollowedtheirplanfromday1 ChangeinControlExceptiontoLongstandingPlanException[QVC]: aBoDhasanobligationto seekthebestvalueavailableforSHswhenthereisabreakup ofthecorporateentity(Revlon), OR whenthereisachangeincorporatecontrol,see QVC (breakupnotnecessarywhenshifting control frompublicSHs >singleprivateSH)

 ALIApproachtoUnsolicitedTenderOffers: BoDcantakedefensiveactionagainsthostiletenderoffer iftheactionisareasonableresponse ReasonableresponseconsidersallfactorsastobestinterestsofthecorporationandSHs, includingiftakeoverwouldthreaten corp.'seconomicinterests Canconsiderotherinterests besidesSHsaslongasnotdetrimental toSHs'interests hasburdentoshowactionwasunreasonable BoD'sactioncanbeenjoinedorsetaside,butnodamages StateRegulationofTakeovers: States,asthecreatorsofcorporateentities,havetheabilitytodefine theprotectionsaffordedtoSHsaslongasit'spossibletocomplywiththestatelawandfederallaw, see CTSCorporationv.DynamicsCorporationofAmerica IndianaActNOTpreemptedbytheWilliamsActb/c purposeofIndianaAct = protectSH,SAME exactpurposeasWilliamsAct IndianaActdoesNOTviolateCommerceClauseb/c:(1)amerelyburdeningSOMEinterstate companies=/=discriminationagainstinterstatecommercewhenthelawitselfdoesn't distinguishbetweeninandoutofstatecorps;and(2)statescreatedcorporations,soonlylogical theyalsohavethepowertodefinetherightsandcharacteristicsofcorporations DelawareAntitakeoverLaw: ifbuyeracquires15%oftarget'sstock,nobusinesscombinationcanbe madewithtargetforthreeyears(i.e.,cannotmerge)unless: Bidderacquires85%+ofstock TargetBoDapprovestenderofferbeforebidderacquires15% TargetBoD+2/3ofdisinterestedSHsapproveafterbidderacquires15% PennsylvaniaAntitakeoverLaw: DirectorscantakeaccountofnonSHinterests Provisionslimitingvotingrightsinshareacquisitions(likeIndianaActinCTS) Can'tmakemoneybygreenmail "Tinparachute" 6. GETTINGRIDOF&INCURRINGADDITIONALCORPORATEDEBT? SuccessorObligorClause: Boilerplatesuccessorobligorclausesshouldbeinterpretedtobalancethe rightsofallinterestedparties,see SharonSteelCorp.v.ChaseManhattanBank (successorobligor clausethatrequiressubstantiallyalloftheassetsofthecompanytobetransferredwiththedebt obligationmeans"allassets"atthetimetheplantoliquidatecompanywasmade) IndentureAgreements: Acourtwillnotaddanyadditionalbenefitsforthepartiesinanindenture agreementwhenthebenefitswerenotbargainedfor,see MetropolitanLifeInsurancev.RJRNabisco (RJRdidNOTbreachimplieddutyofgoodfaithandfairdealingbytakingonalotmoredebt,thus loweringvalueofexistingdebenturesb/ctheyhadnodutytogivemorebenefitthanwhatthe contractexpresslystatedandcourtwon'taddtermstogiveapartysomethingtheydidn'tbargainfor)