Professor Harvey J. Goldschmid CORPORATIONS (L6231) Assignment Sheet No.

Spring 2014

Excep as specifically indica ed! all assignmen s are o he "na#ridged edi ion of $elvin %. Eisen#erg and James &. 'ox! 'ases and $a erials on 'orpora ions and ( her )"siness (rgani*a ions +10 h ed. 2011). 1,. -he Special Pro#lems of 'lose 'orpora ions +a) +#) .n rod"c ion! pp. 4,2/,0. Special 1o ing %rrangemen s a he Shareholder 2evel +1) 1o ing %greemen s! pp. 4,3/045 +6.7.) ).'.2. 88 009! 0205 &el. 88 212! 214 +&ela:are;s <'lose 'orpora ions5 Special Provisions!< 88 =41/,0! :ill #e considered #elo:). 1o ing -r"s s! pp. 404/305 &el. 8 214. 'lassified S oc>! pp. 431/32.

+2) +=) 10/19. +c)

%greemen s 'on rolling &ecisions ?i hin he )oard;s &iscre ion! pp. 432/4,5 ).'.2. 88 020! 3095 &el. 88 141/42! =,0/,1. +d) +e) +f) +g) S"perma@ori y 1o ing and A"or"m BeC"iremen s! pp..44,/44. Did"ciary (#liga ions pp. 449/,1=. Bevie: ma erials on he 1al"a ion of a )"siness! pp. ,1=/23. Bes ric ions on he -ransfera#ili y of Shares! pp. ,=9/,45 &el. 8 2025 Pro#lems 4 and ,. +h) ,,4/43. %pproaches o Besol" ion of .n racorpora e &isp" es! pp.

20/21.

-he &" y of 'are and he &" y o %c in Good Dai h! pp. 022/=4! 042/44! 090/3035 %2. 88 4.01/.0= /1 /

22/24.

-he &" y of 2oyal y +a) +#) Self/.n eres ed -ransac ions and 'ompensa ion! pp.304/44! 3,=/,4! 303/ 405 %2. 88 ,.02/0=! ,.03. Ese of 'orpora e %sse s! 'ompe i ion ?i h he 'orpora ion! and he 'orpora e (ppor "ni y &oc rine! pp. 344/40=. %2. 88 ,.04/005 Pro#lems 0 and 3. +c) &" ies of 'on rolling Shareholders! pp. 404/441. +d) Sale of 'on rol! pp. 442/02.

2,/20.

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PB()2E$S BE2%-.6G -( '%SES %6& $%-EB.%2S (6 '(BP(B%-.(6S +Pro#lem Se 6o. 2) Pro#lem 4 Feeping 'on rol in he 'lose 'orpora ion %ss"me ha in addi ion o he fac s s a ed in he .n rod"c ion! yo" are old ha Bo#er a Harman :an s a <free hand< o manage he #"siness! and ha her fa her! 2indsay! and Smi h are all :illing ha she sho"ld have i ! provided hey may >eep some con rols o preven ma@or change in he #"siness :i ho" heir approval5 f"r her! ha 2indsay and Smi h do no :an he decision of he Harmans o prevail if #o h of hem feel o her:ise5 and finally! ha hey :an o >eep o" ne:comers in he even of dea h! or decision o sell! of any one of hem. 1. 2. Ho: :o"ld yo" accomplish hese o#@ec ives in 6e: 7or>G .n &ela:areG Smi h #elieves he #lan>e excl"sion of <ne:comers< goes oo far. He s"gges s! as a varia ion! ha sale of shares #e permi ed on a <con rolled #asis!< i.e.! #y agreemen among shareholders o sell only o persons approved #y he o her hree shareholders. &oes s"ch con rol presen any pro#lemG 'an yo" achieve Smi h;s o#@ec iveG Ho:G

/= /

Pro#lem , Bes ric ions on -ransfer

% recen la: school grad"a e :as as>ed o prepare a res ric ion on he shares of Harman 'orpora ion! and she draf ed he follo:ingH <Prior o he sale or disposi ion of hisIher s oc>! any s oc>holder of Harman 'orpora ion con empla ing s"ch a ransac ion shall offer he shares o hisIher fello:

s oc>holders a a reasona#le price.< ?ha cri icisms! if any! :o"ld yo" offer of his draf G

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Pro#lem 0 &" y of 2oyal y

-he follo:ing ransac ion :as p"#lici*ed in he press. . involved he presiden of an ins"rance company and :as inves iga ed #y he S a e .ns"rance 'ommissioner :ho fo"nd <no viola ion of he ins"rance or any o her la:s.< .n fac ! he presiden :as fo"nd o have done <an o" s anding @o#.< Sho"ld his ransac ion have #een C"es ionedG Ho: m"ch :ere he ax la:s prior o 1943 responsi#le for ransac ions of his ypeG ?ha advice :o"ld yo" have given o he ins"rance company presiden G

////// -he Gordon 'ompany has gro:n spec ac"larly as a l"m#er company since 1903! he year i sec"red a foo hold in he :es ern ply:ood ind"s ry. Sales have s>yroc>e ed from J24 million o J192 million. %nd profi s have >ep pace. %mong hose responsi#le is 'harles Smi h! a Gordon direc or and he presiden of Gi#ral ar .ns"rance 'ompany! a >ey so"rce of loans o finance Gordon;s rapid expansion. .n he early 1940s! Gordon had i s eye on 1=!000 acres of im#erland in so" hern (regon. -he land :as o:ned #y 'onserva ion 'o. )" ins ead of #"ying he land direc ly from 'onserva ion! Gordon chose o #"y i hro"gh $r. Smi h. (n he firs day of Jan"ary! 1942! $r. Smi h! Gordon exec" ives! and

'onserva ion 'o. represen a ives C"ie ly ga hered in San Drancisco a he )an>! an ins i " ion :i h :hich Gordon has had close ies. Here;s :ha hey accomplished in @"s a fe: ho"rsH /, /

$r. Smi h #o"gh 'onserva ion 'o. He liC"ida ed he company a once. $in" es la er he sold he proper y o a :holly o:ned s"#sidiary of Gordon // for he same price he paid for i ! pl"s his cos s in financing he p"rchase. <Dor some hing li>e =0 min" es! ho"gh! . o:ned 1=!000 acres of (regon im#erland!< $r. Smi h recalls. -o #"y 'onserva ion! $r. Smi h p" "p J100!000 of his personal f"nds and #orro:ed J=.9 million from he )an> for five years. Gordon! in addi ion! p" "p J4.4 million in cash o ma>e "p he o al J4.4 million price. Ho: :as $r. Smi h reim#"rsedG Gordon agreed o pay $r. Smi h as i harves ed he im#er on he proper y // J40 per 1!000 #oard fee of im#er felled // :i h he proviso ha if Gordon failed o c" he im#er hen $r. Smi h :o"ld have he righ o c" eno"gh im#er himself o ge his money #ac>. $r. Smi h "rned aro"nd and gave his money o he )an> o pay off principal and in eres on his J=.9 million loan. )efore he five years :ere "p! $r. Smi h go #ac> his o:n J100!000! :i h in eres ! and hen Gordon s opped ma>ing paymen s. <. :as @"s a :ash sale!< s"mmari*es $r. Smi h. ?hy didn; Gordon simply #"y 'onserva ion 'o. direc lyG -:o reasons!

according o $r. Smi h. Gordon :as s>i ish! he says! a#o" possi#le an i r"s ac ion :henever i acC"ired ano her company <#" i co"ld #"y land< :i ho" fear of federal disapproval. -he second reason! according o $r. Smi h! :as ha Gordon officials <didn; :an o sho: any more de# on heir #alance shee .< Gordon;s long/ erm de# had spiraled "p:ard d"ring he early 1940s! as i acC"ired ne: im#erlands! rising from J10 million o J1=4 million! a o:ering fig"re in an ind"s ry :here de# radi ionally has #een vie:ed :i h "neasiness. -he so"rce of more han one/ hird of hese loansH Gi#ral ar. .ns ead of Gordon going f"r her in o de# ! $r. Smi h :en in o de# in his /0 /

ins ance. <Gordon didn; have o go in o de# !< $r. Smi h says. <Gordon @"s made a con rac o c" he im#er. . ;s no an inde# edness on Gordon;s par .< <Gordon;s managers didn; agree o pay me if hey didn; c" he im#er. .f hey didn; c" i ! . :o"ld have had o c" he ree myself!< he adds. $r. Smi h regards he ransac ion as a personal favor he has done for Gordon. <.;ve done Gordon a favor. . sho"ld hin> i :o"ld p" hem in my de# ! no me in heirs. -hey as>ed me o do hem a favor. .;ve p" "p money and a>en a ris>.< (#vio"sly! Gordon has #enefi ed from he ransac ion. )" $r. Smi h also has #enefi ed personally from his services. He say fran>ly ha he go meaningf"l ax savings. He says ha he 'hairman of Gordon! in as>ing him o par icipa e in he acC"isi ion! <>ne: . :as in a high/ ax #rac>e < and h"s in a posi ion o derive a ax advan age from he service. $r. Smi h :as in a ,0K #rac>e ! and :o"ld red"ce his ann"al ax #ill #y a#o" J=3!,00. Here;s he :ay i :or>edH $r. Smi h paid he )an> a#o" J3,0!000 of in eres over he five years of his loan! or an average of J1,0!000 a year. ?hen he made o" his income ax! he ded"c ed his J1,0!000 of in eres from his income. .f he :as in a ,0K #rac>e ! his red"ced his axes #y J3,!000. )" agains his saving! he also had o repor a profi on his sale of he proper y o Gordon. -his is #eca"se Gordon :as paying $r. Smi h no only :ha he proper y cos him #" eno"gh ex ra o cover he in eres he paid on his loan. -his <ex ra< amo"n s o J1,0!000 profi a year. )" in he five years prior o 1943! he ax on his J1,0!000 capi al gain :as limi ed o a#o" 2,K and ran only J=3!,00 ann"ally. -h"s! his effec ive ann"al ax savings J3,!000 less J=3!,00 // or J=,!,00 a year. <$y ax a orneys ass"red me i :as perfec ly valid and :as done all he ime!< /3 /

says $r. Smi h of his ransac ion. ?as $r. Smi h compe ing :i h his o:n company #y ma>ing a loan himself :hich Gi#ral ar migh have madeG <. considered his!< he says! <#" Gi#ral ar :on; ma>e shor / erm loans< of five years. -he rela ions #e :een he :o companies are of a con in"ing na "re. .n he years $r. Smi h has #een on he Gordon #oard! Gi#ral ar has loaned Gordon over J,0 million in a series of ransac ions. .n a recen proxy s a emen ! Gordon no ed ha las year Gi#ral ar made nine mor gage loans o a Gordon s"#sidiary and <expec s o ma>e similar loans aggrega ing J9 million his year.< %lso! las year Gi#ral ar paid a Gordon s"#sidiary J20 million for im#erlands in (regon! a >ey par of he financing :hich ena#led Gordon o s:ing he J9= million acC"isi ion of Felly 2"m#er 'o. Since hen Gi#ral ar has given Gordon a con rac o log he im#er. (n a leas one o her occasion d"ring he 1940s Gordon "sed a <friend< o acC"ire proper y :i ho" he need o increase i s inde# edness o #an>s or ins"rance companies. .n his ins ance! i :as he 'E( herself :ho s epped for:ard o render he service! along :i h a Gordon a orney.

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Pro#lem 3 L%ss"me ha from he da e of i s organi*a ion in 2004! he s oc> of Harman 'orpora ion :as o:ned eC"ally #y ?illiam Harman! Bo#er a Harman! 2indsay! and Smi h. -he firs hree :ere direc ors.M .n 200=! ?illiam Harman had p"rchased all he common s oc> of he S"nshine )o le 'ompany! hen in despera e financial condi ion! for J2,!000. He hen #ecame presiden and con rolled he )oard of &irec ors of S"nshine. 6o #eing in s rong heal h! ho:ever! he did no improve i s earnings posi ion percep i#ly! #" simply le i <ride along.< .n 200,! ho:ever! Harman! on #ehalf of S"nshine! hired a:ay Harman 'orpora ion;s prod"c ion manager and en ered in o a con rac :i h Harman 'orpora ion #y :hich S"nshine #o les :ere o #e sold hro"gh he sales depar men of Harman 'orpora ion +"pon a commission #asis in accordance :i h ind"s ry s andards). . proved o #e a happy arrangemen for #o h sides. Harman

'orpora ion #roadened i s line! and h"s made f"ller and more profi a#le "se of i s sales force. Harman! in his "rn! s"cceeded in revi ali*ing he S"nshine 'ompany. % a direc ors; mee ing of Harman 'orpora ion in early 2000! he direc ors vo ed o p"rchase Harman;s S"nshine s oc> a c"rren #oo> val"e! J100!000. Harman a#s ained from vo ing. % his poin ! Smi h o#@ec ed o he :hole ransac ion <from #eginning o end.< -here"pon a s oc>holders; mee ing :as called and he p"rchase ra ified #y 3,K of he shares. ?ha are he o#@ec ions ha Smi h migh raiseG %re hey validG