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A. Introduction B. Authority Morris Oil v Rainbow Oilfield Matter of Allender Company C. Duty of Loyalty Tarnowski v. Resop Kidd v. Thomas Edison Watteau v. Fenwick
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A. Partnership Formation Martin v. Peyton Lupien v. Malsbenden B. Legal Nature of Partnership C. Operation of Partnerships National Biscuit v Stroud Sanchez v Saylor Summers v. Dooley D. Authority of a Partner E. Liability for Partnership Obligations Davis v Loftus F. Partnership Interests and Partnership Property in re Gerlach's Estate Balafas v Balafas Rappaport v. 55 Perry G. Duty of Loyalty Meinhard v. Salmon H. Dissolution By Rightful Election Page v Page Girard Bank v Haley Dreifuerst v. Dreifuerst I. Dissolution By Judicial Decree and Wrongful Dissolution Drashner v. Sorenson
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III. ALTERNATIVE FORMS OF BUSINESS ORGANIZATIONS
A. Limited Partnerships Gateway Potato Sales v. G.B. Investment Co. Gotham Partners v Hallwood Realty , Del. Sup Ct., 2002 B. Corporate General Partners in re USA Cafes, LP
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C. Limited Liability Companies PB Real Estate Inc v. DEM II Properties Hollowell v. Orleans Regional Hospital McConnell v. Hunt Sports Enterprises D. Limited Liability Partnerships
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IV. THE CORPORATE FORM
A. Characteristics of the Corporation B. Selecting a State of Incorporation C. Organizing a Corporation D. Preincorporation Transactions by Promoters E. Consequences of Defective Incorporation Cantor v. Sunshine Greenery, Inc. Harris v Looney F. Classical Ultra Vires Doctrine Goodman v. Ladd Estate Co. G. The Objective and Conduct of the Corporation A.P. Smith Mfg. Co. v. Barlow H. The Nature for Corporate Law
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V. CORPORATE STRUCTURE
A. Shareholdership in Publicly Held Corporations B. Allocation of Legal Power Between Management and Shareholders Charlestown Boot & Shoe Co. v. Dunsmore Schnell v. Chris-Craft Industries, Inc. Blasius Industries, Inc. v. Atlas Corp. Stroud v Grace Williams v Geier Teamsters v Fleming Companies General Datacomm Industries, Inc. v. Wisconsin Investment Board Hilton Hotels Corp v ITT Corp MM Companies v Liquid Audio C. Legal Structure of Management D. Formalities Required for Action by the Board E. Authority of Corporate Officers F. Formalities Required for Shareholder Action G. Cumulative Voting H. Limited Liability Fletcher v. Atex, Inc. Walkovszky v. Carlton Minton v. Cavaney
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Sea-Land Services, Inc. v. Pepper Source Kinney Shoe v Polan I. Equitable Subordination of Shareholder Claims J. The Corporate Entity and the Interpretation of Statutes and Contracts
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VI. SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING
A. Shareholder Informational Rights Under State Law Security First v US Die Casting and Development Saito v McKesson HBOC, Inc. B. Shareholder Informational Rights Under Federal Law and Stock Exchange Rules C. Proxy Rules: Overview D. Proxy Rules: Private Actions Under the Proxy Rules Mills v Electric Auto-Lite Virginia Bankshares, Inc. v. Sandberg E. Proxy Rules: Shareholder Proposals Roosevelt v. E.I. Du Pont de Nemours & Co. Amalgamated Clothing and Textile v Wal-Mart Stores F. Proxy Contests Rosenfeld v. Fairchild Engine and Airplane Corp.
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VII. THE DUTY OF CARE AND THE DUTY TO ACT LAWFULLY
A. Duty of Care Joy v North Parnes v Bally Entertainment Freancis v. United Jersey Bank Kamin v. American Express Co. Smith v. Van Gorkom In re Caremark International Inc. Derivative Litigation B. Duty to Act Lawfully Miller v. American Telephone & Telegraph
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VIII. DUTY OF LOYALTY
A. Self-Interested Transactions Lewis v. S.L. & E., Inc. In re Walt Disney Derivative Litigation , Del., 2003 Talbot v. James B. Statutory Approaches Cookies Food Products v. Lake Warehouse Emerald Partners v Berlin , Sup. Ct. Del., 2001 C. Compensation, the Waste Doctrine, and the Efect of Shareholder Ratification Harbor Finance v Huizenga , Del Chancery, 1999 D. The Corporate Opportunity Doctrine Hawaiian International Finance v Pablo , HW, Sup. Ct., 1971 Northeast Harbor Golf Club, Inc. v. Harris
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Exam: Designed to require you to study everything Expect a Curve Ball Question Complex and Thick answers, two lines writing in ambiguity Exam on file in library many mini-essays covering everything in class Essay will be a traditional fact pattern on one of the more contestable areas Multiple Choice: Trying to teach how to read closely, pick the best answer as all may be correct Exam question, will have many conflicting issues and facts. Many facts that you will need to put in your legal "templates" and apply No conclusion necessary, IRAAAAA Interest is in thoughtful & deep answers Outlining: Using analytical table of contents from book, use as skeleton. Know when different statutes apply in different jurisdictions. Know the important statutes. Look up Sarbanes-Oxley Don't be conclusory
A sole proprietorship, as a matter of law, will have no separate identity from its owner although it may have a separate financial and physical identity. The employment by one person, P, of another, A, to act on P's behalf, and subject to her control, is known as the Law of Agency. An agent is a person who by mutual assent acts on behalf of another and is subject to their control, while the person for whom the agent acts is a principal. Agency law governs: •The relationship between agents and principles •The relationship between agents and third persons with whom the agent deals on a principles behalf •The relationship between principles and third persons when an agent deals with a third person on the principal's behalf Agency is a legal concept which depends upon the existence of required factual elements: the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking. Whether an agency relationship has been created does not turn on whether the parties think of themselves as or intend to be agent and principal.
Associations currently in existence, sole proprietorship, partnership, Public Corporation, LLP, LLC, Closed Corporations and Limited Partnerships. LLP & LLC are recent statutorily created developments, do not have a lot of case law on these two. Theory that corporate law needs to function to regulate markets and externalities, not just a series of contracts between parties became dominant. Post ENRON regulatory doctrine has gained ground in corporate law. 4
Areas Influencing Corp. Law Theory Three sources of doctrine in BA: •Federal Law - Securities laws, but influential in Corp law in general •Statute Law - Corp legal models •Restatements - Professors ideal views on Corp law. Three Corp legal models: •Delaware Model •New York Model •Model Business Corp. Act Choice of business form. Extremely determinative in choosing which form is the Tax impact. B. Authority
Dawn v. Morris Hypo: Undisclosed agency principal. It is well established that an agent for an undisclosed principal subjects the principal to liability for acts done on its account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent; i.e. contract documents need not bind third parties who deal with one of them in ignorance of those instructions. Agent: Person who acts on behalf and is subject to control of another. General Agent: Agent authorized to conduct a series of transactions involving continuity of service. Special Agent: Agent only authorized to conduct a single or limited series of transactions. Principal: Person on whose behalf and subject to whose control the agent acts. Disclosed: Agent whom a third party knows the agent is acting on behalf of principal. Partially Disclosed: When third party knows agent is acting on behalf of a principal, but does not know principals identity. Undisclosed: Principal is undisclosed if the agent, dealing with a third party, purports to be acting on its own behalf. Principal will be liable for agents authorized activities as (1) principle sets the transaction in motion and stands to gain from it, and (2) third party can sue the agent who can indemnify the principal so allowing liability does not materially enlarge the principals liability. Liability of Principal to Third Person: Under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, on the principals behalf, given actual, apparent, or inherent authority, or was an agent by estoppel, or if the principal ratified the act or transaction. Actual Authority: An agent has actual authority to act on the principals behalf if the principals words or conduct would lead a reasonable person the believe he had been authorized by the principal. Can be express or implied. Apparent Authority: An agent has apparent authority to act in a given way in relation to a third person if the words or conduct of the principal would lead a reasonable person to believe that the principal had authorized the agent to so act. Agency by Estoppel: A person who is not otherwise liable as a party to a transaction, is nevertheless subject to liability to persons who have changed their positions because of their belief that the 5
the general rule is that the agent is bound. Liability is usually based on the implied warranty of authority theory. Ratification: A principal will be bound to a third person if the agent purported to act on the principal's behalf. the principal is under duty to indemnify the agent for payments authorized or made necessary in executing the principal's affairs. but if the principal is nevertheless bound because that agent had apparent authority. partially disclosed. even if doing so violates a contract between the principle and the agent and it was agreed that authority was irrevocable. the failure of the principle to object to them is an indication that he consents to the performance of similar acts in the future under similar conditions. and (2) the third person reasonably believes the agent is authorized to do the act. Difference being that under the 'liability' theory. Similar to apparent authority. or inherent authority. If undisclosed. then the third person is liable to the principal.transaction was entered into by or for him. Termination of agents authority: The general rule is that the principle has the power to terminate an agent's authority at any time. if (1) he intentionally or carelessly caused such belief. Ratification need not be communicated to the third person to be effective. If disclosed. the general rule is that the agent is not bound to the third person. either (1) affirms the agent's conduct by manifesting an intention to treat the agent's conduct as authorized. even though the principal is bound too. the agent's liability to the third person depends on whether the principle was disclosed. Class Notes When drafting legal document need to be very wary of what language and drafting will possibly freak out the other side and scuttle the deal. Applicability is murky but under §161 Restatement the principal may be liable. Liability of Agent to Principal: If an agent takes an action that they have no authority to perform. If the principal is not bound by the agent's act. Liability of Principal to Agent: If an agent has acted within their actual authority. If partially disclosed. Acquiescence: If the agent performs a series of acts of a similar nature. or (2) knowing of such belief and that others might change their position because of it. although is must be objectively manifested. if (1) the act usually accompanies or is incidental to transactions that the agent is authorize to conduct. the general rule is that the agent is liable to the third person. The major exception is that the third person is not liable to an undisclosed principal if the agent or the principal knew the third person would not have dealt with the principal had they known their identity. Liability of Agent to Third Person: Where the agent has actual. or undisclosed. apparent. Liability of Third Person to Principal: The general rule is that if an agent and a third person enter into a contract under which the agent's principal is liable to the third person. or reliance damages. or (2) engages in conduct that is justifiable only if he has such an intention. expectation damages could be collected while under 'implied warranty' theory only losses suffered by entering the contract could be recovered. the agent is liable to the principal for any resulting damages. if the principal is bound by the agent's act. but some authorities apply the theory that the agent can be held liable on the contract itself. then with knowledge of the facts. or inherent authority. the general rule is that the agent as well as the principal is bound to the third person. because the agent did not have actual. he did not take reasonable steps to notify them of the facts. even if agent is forbidden. Good drafters can read the other side and work around or avoid these issues. 6 . Inherent Authority: Under this doctrine agent may bind a principal even when the agent had neither actual or apparent authority. apparent. so that the principal is bound to the third person. This rests on the ground that personal services will not be subject to specific enforcement.
Shirley. ISSUE: If Dawn is liable for bills incurred by its partner Rainbow. Reasonableness test would also apply when circumstances change and the agent is aware. for collections due to unpaid fuel bills incurred by Dawn partner. Ratification: If the principal has accepted the benefit with knowledge of relevant facts of the contract. P will be bound to A's actions. Inherent Agency Power: When have undisclosed principal by definition there is no apparent authority. Nothing in restatement defines what a reasonable expectation is. Apparent Authority: Important is that view is based on what would be a reasonable interpretation of the agent of what their expectations are. NOTES: Agreement specifically states there is no agency between Dawn and Rainbow. even if not fully authorized. contract. Court seems to say that in accepting clerical fee they accepted benefit of contract but this is not the case as fee was already in place. but their actions implied ratification. thus their dealings with Rainbow were as one could expect and in the normal course of business. very close to apparent authority. Here you are saying that the principal is denied from estopping the authority of the agent. Can not give agent complete authority. sues Dawn Co. but your drafting can help shape intentions as parties intentions are not necessarily fully realized or understood at the beginning of the relationship. Can have IAP when principal is undisclosed as third party would have no need to go through an agent. Court makes leap that all of Rainbows liability is now Dawns liability. in supposed violation of the contract not allowing it to incur debts. P agrees to be bound as P would have been bound if they had entered into directly. Morris Oil v Rainbow Oilfield FACTS: Morris Co. but be open about issues of conflict. RULE: Under the principle of Undisclosed Agency Morris could not have been aware of the terms of the agreement between Dawn and Rainbow. Actual Authority: If a P appoints an agent. Estoppel Authority: Estoppel is tort doctrine. Courts have said though that P can not put to A all the authority vested in P. There can be both express and implied actual authority. Must be a disclosed principal in order to have apparent authority. It is clear that Dawn ratified the open account after learning of it's existence when Morris contacted Dawn regarding payment. Implied/incidental authority is tasks that need to be completed to conduct the assigned task. Always about manifestations from P to A. but deal with principal themselves and should not be held liable for agreements for which they may not be aware. even if unauthorized. The limiting factor on what a principal is liable for when undisclosed agent acts outside of trade norms they will not be held liable. Damages can also work differently in estoppel vs. Morris tracks down Rainbow for payment and learns of Dawn escrow account. but also can have ratification if the principal accepts the benefits of the agreement. 7 . Need to act in a way to maintain the interests and relationship between the parties. Courts will look at your document to decide what parties intended. Estoppel can help when you can't establish agency so contract theory does not work. Restatement says that it will be looked at what a reasonable agent would have thought they had authority to perform. go to case law. incurred during the regular course of business. was an agent with implied authority to Morris. trucking operator Rainbow. Dawn collected the receipts and was thus aware and retained benefits from its agency relationship when dealing with Morris. where they are told by Dawn that they will be taken care of. There should be at minimum an implicit acceptance.Also need to let clients know of the possible pitfalls of an agreement. Can have apparent authority without actual authority and visa versa. not necessarily third parties. Can also be express or implied. Furthermore. would be considered to have been implied authority. but conversations at best ratified Dawns acceptance that Morris would get paid out of Rainbows liabilities. can also be social restraints.
Question to SEC. Needs to be a consensual relationship. as gains were solely by the position he occupied. defined as: •The monitoring expenses by the principal •The bonding expenditures by the agent •The residual loss. do not have to be written or exchange of consideration. and failing to do so was fraud. What if there were two innocent parties hurt or conflicting agency relationships? Comes down to judicial discretion based on expectations of the parties as nature of relationships. Respondent claims he owes no duties to disclose profits and is free to conduct these transactions. Eisenberg's foreseeability argument vs. any profits are due to the master. trade practices view. 8 . RULE: The SEC found that certain obligations arising out of this relationship were due on the part of Binder. Liability Restatement Sec. unequal bargaining relationship and decides that there all factors favor the widows and is an implied relationship. 1. Protective language in the transaction confirmation did not overcome the fiduciary relationship. He then proceeded to sell securities at a cost well above the quoted market values. C. or loss due to divergent interests/decisions Class Notes Agency is about represental relationships of all kinds. Dawn is also an undisclosed principal in this case Matter of Allender Company FACTS: Securities broker. Consent by A. was informing his customers that he was not accepting any commissions. possibly hire other agents to oversee agents. the representations of Binder. but this is an arguable point. Duty of Loyalty Text Outline In a case where a servant enriches himself by taking advantage of the position he occupies. Proposed restatement 3rd eliminates these distinctions. that there was an agent/principal relationship. There are costs involved in the monitoring of agents. Can't indemnify for apparent or unauthorized practices. while at the same time limiting liability so that the use of agents does not become excessively risky. and that he had a duty to disclose all material facts. and be under control of P. Agency Cost Problem: Problem with agents making mistakes or errors. was this an arms length sales relationship or a fiduciary agency relationship? SEC looks at conflicting express words of sales agreement vs. Trade practice restrictions should be sufficient to hold principal liable for actions of his agent without allow them an "out" clause on contract terms. Binder. ISSUE: Whether the relationship of the respondent and his customers was one of agent/principal requiring a duty of disclosure. Problems with the distinctions as it is hard to predict whether this increases or reduces liability of principals. need to be nominally under control and working on behalf of another. leading to spiraling costs. page 6 Manifestation by P.Court also makes the assumption that installing a bulk dispenser is in the ordinary course of business. he could not deal with his customers as an adverse party without their consent. even if no harm was done to the master.
Thomas Edison FACTS: The issue is whether an agent. had authority to contract with Thomas A Edison Inc. and see that the money was paid. Illustrations pg. Tarnowski v. no self dealing at all. RULE: That the scope of authority should be measured not by words alone. even if economic results are ridiculous. RULE: Actual injury is not what the law proceeds on. P filed suit against D alleging D received a secret commission from sellers. Maxwell. Mayer. when in fact he had investigated only 5 of the 75 locations. it is generally held that where the wrongful act of the defendant involved the plaintiff in litigation. P. that commission is due to the principal. jury agreed. agent may not be relieved of duty to disclose even if principal expresses a desire not to know. and tell them that D would pay their expenses. If principle is not business savvy. the principal is entitled to recover from him even if he has been made whole again. ISSUE: What was the degree of Fullers 'apparent authority' as contrasted to the express authority given to him by D. if unpaid there is no special agency based duty of care. and Restatement S387 Unless otherwise agreed to by principal. The dealers would pay costs. P discovered the falsities and rescinded the sale after having paid an $11K down payment. P alleges that D represented to him that he had done a thorough investigation of the route. What if agent advises the principal of his actions? See Restatement S23. P purchased such business from sellers. Absolute ban on self dealing when the subject is trusts. Principal is also indemnified by the agent for any loss which has been caused to his interest by the improper transaction. Fuller. The restatement falls in favor of the K Out theory. D contends Fuller's only authority was to engage P for only the recitals which he could book with record dealers. he also adopted false representations from the sellers and adopted them as his own. Resop FACTS: P engaged D as his agent to investigate and negotiate for the purchase of a route of coin operated music machines. Agent has a duty of fair dealing with the principal. Thus a principle can recover from his agent any benefit resulting from a violation of his duty of loyalty. Termination of Agency powers. and D would guarantee performance. (D) on behalf of Mary Kidd (P) to engage her without condition to sing for a series of 'tone-test' recitals designed to show the accuracy of D's records. Also.Fiduciary Duties Choices are you can contract "out" of specific violations (fairness). Estoppel was created by the trade setting in which singing recitals are 9 . Kidd v. court review. S390 Disclosure. any hidden dealings by agent that result in commission. contract "in" no self dealing. P claims contract was for an unconditional singing tour. 31. and damages for losses. Sellers refused to return his down payment. Loechler and L. but also by the setting in which they occur including trade custom. act as booking agent. but fidelity of the agent is what is aimed at. Absolute prohibition on kickbacks and profits. which would have been profits due the principal. If agent is paid need to exercise duty of care and skill. ISSUE: Whether principal can recover damages from agent due to self dealing misdeeds on his part. Need to disclose all fact that could or reasonably could effect need to be disclosed unless principal manifests in some way that he is aware. Ch 5 of Restatement of Agency. you need to reveal the existence and extent of adverse interest. agent is to act solely for the benefit of principal. Upon suit P received a $10K judgment. he is entitled to recover the costs as damages. D instructed Fuller to learn what fees the artists expected.
This four element test departs from the statutory test of UPA and RUPA. (3) a mutual right of control or management of the business. Lower court held D liable even though manager was never expressly made an agent and exceeded his authority. Class Notes Partnerships regulated by UPA. Watteau v. (2) an agreement to share losses. this way he gets to choose which custom to apply to a new business model. intent to form a partnership is not necessary. Problem with UPA is that when Ames began drafting. II. a limited liability companies can only be formed when certain formalities are complied with an filed with the state. Partnership A. United States: It is immaterial that the parties do not call their relationship. How do courts decide if a particular entity is a partnership? RUPA S 201 & 202. (1) an agreement to share profits. Not every state has adopted RUPA. but he died and was completed under an aggregate concept. 2. General 10 . especially where the rights of third parties are concerned. and (4) a community of interest in the venture. principal will be held liable for actions of the agent even if unauthorized as long as within standards of trade practice.normally hired. Trying not to unduly protect reckless business' but not to reward improper behavior. RULE: That when a principal is undisclosed. need to know only the few differences between the two. LH says he is interpreting trade custom. D argues that purchases were by manager on his own credit and it needs to be shown that he is an agent in fact. LH uses trade custom both to limit liability in a new industry and to hold them liable if they take advantage of agents. Partnership by estoppel is possible S 16 UPA. and the third party dealing with the agent is unaware of relationship and conditions between agent and principal. or believe it to be. Manager purchased other goods. Partnership Formation Text Outline Hilco Properties v. A relationship will be considered a partnership only if four elements are present. Arnold v. Uniform Partnership Act and RUPA. Notes On Formation of Partnerships 1. and upon discovery by this Brewery (P) they sued for the value of the goods. Original theory was that partnerships should have separate legal standing. he was a proponent of partnerships being separate. Florida adopted RUPA as FRUPA. In their agreement the manager was forbidden to purchase certain goods. P argues that manager was an undisclosed principal clothed with the authority to do business on behalf of D. ISSUE: Whether the doctrine of principal and agent applies given agent is undisclosed. without these conditions imposed. or Revised Uniform Partnership Act. limited partnerships. while partnerships can be organized with no formalities or filing. Erkmann: A partnership is 'an association of two or more persons to carry on as co-owners a business for profit. NOTES: Learned Hand is promoting his social policy here. he then uses analogy. RUPA has explicit statement that partnership is an entity. UPA is more complex. a partnership. Corporations. 1990's movement to make UPA more in line with business processes. which were only to be supplied by D. or their agents take advantage. Fenwick FACTS: A Brewery (D) who owned a beerhouse appointed a manager in whose name the business was licensed. LH relies on trade customs but the P is arguing that the deal is different so it is hard to reconcile.
Peyton along with Mr.: 40% profit share. an insurance policy on Mr. all refused. Share in profits considered one of the foundations necessary in partnership creation. a partner. here a life saving loan. ISSUE: Whether these transactions and contract provisions associate respondents with the firm so that they and together thereafter carried on as co-owners a business for profit? RULE: The court found that the provisions for a share of the profit. Courts will look at whether actions created an intent to create partnership. Sharing of returns does not necessarily establish a partnership. even if agreement states no partnership was intended to be created.: Option to be partnership. as part of York Motor Mart. courts may construe partnership based on actions of parties. with exceptions listed. Additionally. Here no bankruptcy provisions so a social policy of allowing customers to add equity in the form of a loan to try and save their business and previous investment. and certain control provisions including right to have a say in the termination of a partner were taken together not sufficient to have formed a partnership. Hall is manager. Mr. KN&K was to turn over securities to the lenders that was to speculative to use as collateral for the bank. How to Create Partnerships Partnership must be by two or more persons as co-owners in the business for profit. Martin v. sharing of net-profits is prima facie evidence of partnership. they were to receive 40% of the profits until the return was made.partnerships are very elastic forms of business ventures. ISSUE: Whether the superior court erred in its finding that Malsbenden and Cragin were partners in the pertinent part of York Motor Mart's business? RULE: The court found that Malsbenden's day to day involvement in the operations. To ensure against loss. a fenced off loan as in Martin. for construction of a custom auto putting down $500 and further payments of $4K. floor/ceiling on profit sharing. An agreement was reached though whereby they would loan KN&K $2. Plaintiff never received his vehicle. Market created creditor protections with negative controls. Perkins. Peyton FACTS: John Hall. Hall. Malsbenden retained complete control here of the operation which further leans towards partnership structure. freeman and Mrs. If nothing else appears the receipt by the defendant of a share of the profits of the business is enough. When things start heading south with the business the incentive becomes strong to try and structure a party as a lender vs. Pro Partnership Prov. Intention will be scrutinized by courts. Cragin left town but Malsbenden continued to operate the business. with the interest free loan to be repaid from sales of the autos. 11 . no filing requirements. express or implied.5M in securities that the firm could use as collateral. NOTES: Partnership results from contract. Peyton to use as collateral. Inspect books. Lupien v. PPF consulted on important matters. Pro Loan Prov. Hall offered a partnership to Mrs. and dealings with third parties. No loans to partners. PPF has only veto power. obtained a loan of $500K of liberty bonds from his friend Mr. specific intent to do those things that constitute a partnership. Regardless of what is stated in partnership agreement. Malsbenden FACTS: Plaintiff entered into a contract with Cragin. collateral. PPF obtained resignations of partners. both as it relates to the transaction at issue and effects business conditions as a whole. a partner in KN&K. Language of agreement. NOTES: $85K here used as working capital vs. constituted a partnership having been formed even if not contractual. need to look at underlying statutes in jurisdiction for legal guidance. Nothing in UPA or RUPA points to tax filings as determinative in any way in deciding if a partnership entity has been formed. Malsbenden claimed his relationship to York was only that of a banker.
UPA then defaults to dissolution of business as remedy in deadlocked decisions. was completed using the aggregate theory. even if his assent is not required. and is questionable whether the notification to Nabisco was accurate.B. and both are liable for the purchases. actual authority of an agent will not be eliminated. a third party was going to lend money but Sanchez refused to provide his 12 . RUPA confers entity status on partnerships. though they have the least stake in the business due to the presumption of equality. made clearer in the RUPA. Defendant advised Plaintiff that he would not be liable for future bread sales to partnership. UPA: Any extra-ordinary action requires unanimity. Legal Nature of Partnership Text Outline Entity v. partnership agreements consist of the fragmentary explicit and implicit agreements made from time to time. When not formally in writing. One partner can not take another partners authority away unilaterally. most notably as in UPA a partner remains individually liable for partnership debts and a partners duty of good faith and fair dealing extend to both the partnership and other partners. Sanchez v Saylor Sanchez and Saylor were partners. so that a partnership was no more a legal person then a friendship. RULE: Yes. Freeman ordered bread just prior to dissolution of approx $171. legislatures may choose to treat as an entity for purposes of statutes. so it deals with many issues as if a partnership is an entity. Class Notes UPA S16 Partner by Estoppel. ISSUE: Whether Freeman's purchase bound Stroud. Aggregate: The common law view is that a partnership is not an entity. NOTES: Why is Stroud left liable? The assumption is one partner can not veto decisions of a partner. The drafting of the UPA began with an entity theory. while RUPA is able to drastically simplify many partnership rules. this can be altered by agreement or by conduct. How to protect yourself from partner? Just dissolving not enough according to UPA as you need to notify creditors. Plaintiff regularly sold bread to partnership. but party is apparently getting none of the benefits of partnership. Hypo pg. UPA 18(e) grants even minority partners a right to be consulted in management decisions. Why is there an assumption that all share equally in the decisions even though assets contributed might be unequal? C. but merely an aggregate of its members. Can try such things as arbitration and formal separation of functions to relieve deadlock. Even though defined as an association (aggregate) under the UPA. Operation of Partnerships Text Outline Though the general rule is that partners have an equal say in partnership operations. Smith v Kelley has partner by estoppel. Can not put that high a level on inquiry duty on a third party. Unanimity is required do depart not only from formal agreements but fragmentary ones also. National Biscuit v Stroud FACTS: Stroud and Freeman were partners to sell groceries. In some areas RUPA reaches an aggregate like result. The UPA withheld entity status from partnerships then created complex rules to arrive at entity results. as equals in the partnership both men had a right to manage the normal course of business. 43: B & C prevail.
Literal application of statute services only partner would share equally in cash losses of partnership. It is not economically rational to have a 90% investment in a partnership but have decision making rules of 50/50 for two person partnerships and majority rule for three or more. or strictly read 18(h)? First thing you look at is written agreement. Creates incentives for low equity investor in bad position to cheat. and 18(h) remains the final default to be looked at by the courts. Remaining partner is entitled to compensation though in UPA for the act of winding up the closure of the partnership. he is entitled to indemnification from the partnership for the difference between what he paid and his share of the liability. Taylor sues for breach of fiduciary duty. i. so you can have a violation of 18(e) which is not necessarily a violation of 18(h) dealing with decisions. Covalt rule might be correct in situation with no self dealing. as between the partners however. RUPA is the same as UPA on these subsections. He argues that the other partner is sharing in the profits and consented by action. This if a partner pays an obligation. second would be a course of dealing between parties. and appropriate remedy for disagreements is dissolution. each partner is liable only for his share of partnership obligations. Courts will also imply an agreement of equality of evaluation. thus the obligation to indemnify a partners a partnership liability. Some strict proponents of following statute point to lost opportunity cost of investing the funds on the part of the equity investor. Indemnification and Contribution Partners are individually liable to partnership creditors for partnership obligations. but is seeking reimbursement from the partnership or other partner. right to be consulted.personal financial statements. but here we have a self dealing relationship. In two person or deadlock position Summers/Nabisco/Sanchez approaches to resolving the dispute will govern. If agreement states profits will be shared a certain way. In Covalt one party has 75% of the stock as a differentiator. Covalt rule is that each partner has an equal say in decisions. Class Notes Unless partnership says otherwise majority rule will win. UPA S18(e) provides for all partners to be included in all decisions and information.e. Dooley FACTS: Partnership agreement to operate trash collection business. Is it possible to end run UPA S18(h) by arguing fiduciary duty? Probably not. but can differentiate the cases. UPA S18(h): No partner is entitled to compensation by the partnership. No equality assumption in UPA with profits and losses. court will find losses shared the same way and not go to UPA default. Courts have said that there is an implied agreement that when one partner is a services only partner he will only share in losses to the extent of his investment generally. Saylor sued for breach of fiduciary duty. Partner refuses to provide personal financial statements so loan is not given and partnership goes bust. Summers v. but when services partner is compensated he will always have to share in the profits. the partnership has a right to require contribution from one or more partners. court found in favor of Sanchez. same in RUPA. ISSUE: Whether an equal partner in a two man partnership has the authority to hire a new employee in 13 . and the obligation to make a contribution is a liability of a partner. Dispute between two partners about one hiring an additional employee without the consent of the other. not up to statute requirements. In a proper case. Should courts look at informal actions of the partners.
NOTES: Lower court says that you can not have a majority with a two person partnership so no liability for compensating hired employee. Partnership obtained notes for project in breach of agreement. The partnership should have protected itself by giving the bank notice or filing a statement. UPA §§ 9. Could have used a ratification argument to possibly sway the court. RULE: The court cites that equality between partners is with respect to management of business affairs is a central theme in Uniform Partnership Law and that ordinary matters must be decided by a majority of the partners.disregard of the objection of the other partner and then attempt to charge the dissenting partner with the costs incurred as a result of his unilateral decision. (1) the partnership business. there was no duty for the Bank to have to inspect the partnership documents. RNR Investments LP v Peoples First Bank Agreement required general partner to prepare a budget covering costs of acquisitions and constructions. RUPA provides greater protection then UPA to 3rd persons dealing with partners. however the UPA does not authorize suit against the partnership to enforce these liabilities as the partnership is not an entity. Class Notes Knowledge Exception Obligation to do some investigating under UPA to see if partner has authority. however. § 15(b) makes partners only jointly liable for all other debts and obligations of the partnership. Under RUPA court rules third party would need to have been given information. RUPA much more third party protective then UPA. RUPA § 307(a) specifically provides that a partnership may sue. Issue is did the Bank have notice as the general partner was acting in his normal course of business? No. D. 13. unlike UPA. and be sued in its own name and § 306 provides that partners are jointly and severally liable for all obligations of the partnership. that a partnership is bound by an act of the partner for apparently carrying on in the usual way. Unlike UPA. torts and breaches of trust. To remedy. The major difference between UPA and RUPA concerning partnership authority is that RUPA § 301(1) makes clear. Some states have remedied this by adopting "common name statutes" allowing partnerships to be sued in their own name. Authority of a Partner Text Outline The basic rule governing a partner's actual authority under the UPA is that each partner is an agent of the partnership for the purpose of its business. more third party protective. E. Assumption that in real estate transactions title is on file so assumption is easily discoverable. (1) allowing for notification to 3rd party. Thus joint and several has a slightly different definition under 14 . after some time partnership defaulting claiming that Bank should not have issued the notes. or (2) business of the kind carried on by the partnership. RUPA provides protection in § 307 by providing that a judgment against a partner based on a claim against the partnership normally cannot be satisfied against the partners individual assets until partnership assets are exhausted. and (2) allows partnership to file a statement of partnership authority restricting partners authority. RUPA can protect partnership from rogue partner by. 14 make "the partnership" liable for defined acts of the partners. S 301: Lewis theory wins out. the UPA goes to the extreme and under § 15(a) makes partners jointly and severally liable for wrongful acts. Liability for Partnership Obligations Text Outline The provisions of UPA governing liability for partnership is an amalgam of the entity and aggregate theories.
Davis v Loftus Davis complained two lawyers committed malpractice in connection with a real estate transaction they engaged in. In addition § 501 explicitly abolishes the UPA concept of tenancy in partnership. The rule was criticized as it kept partnership creditors from getting the full benefit of personal liability of the individual partners. and RUPA dropped it to keep in line with the bankruptcy code. and (2) separate creditors have priority over partnership creditors as to the individual assets of the partners. property would be held in joint tenancy by each partner. UPA S 13. and (3) if the partnership is dissolved determining which are partnership assets. RUPA § 203 already treating partnerships as entities. put the individual partner into bankruptcy. Partnership Interests and Partnership Property Text Outline Note on Partnership Property Property used by the partnership may be either partnership property. The bankruptcy code eliminated this priority rule. 14. but can not assign his partner function without consent of all the partners. Court held that income partners could not be held liable as not partners under the UPA. a partnership can not own property. Priorities: A major problem in partnership law concerns the relative priorities of creditors of the partnership and creditors of the partners as individuals. To resolve this UPA treats the matter of partnership property as if it were an entity. Through assorted legal mechanisms. Note on Partnership Interests Partners Interest: Although under the UPA a partner does not own property in the partnership. If the aggregate theory is strictly applied. § 25(1) & (2a-e) strip all incidents of individual ownership and vest them with the partnership. A partner can not then sell his partnership. In practice. he does own an interest in the partnership. Assignment: A partner can assign his interests. or individual property loaned to the partnership. Gonzalez: Should not allow one partner to make lawsuit settlement decisions for entire partnership. Partners were both income partners and equity partners. there is a two level ownership structure where the partnership owns that assets. resulting in dissolution of the partnership under § 31(5). Partnership Creditors: A creditor that has extended credit to an individual rather then the partnership is in a position similar to an assignee and can get a charging order on the partnership interest. in re Gerlach's Estate 15 . (2) in deciding between creditors when creditors of the partnership are competing with creditors of an individual partner and ownership is at issue. (1) who has the power to transfer the property. F. 15. RUPA does not separate tort/contract and allows joint and several liability. provides that property acquired by a partnership is property of the partnership and not the partners individually. and the partners own the partnership. Burns v. Class Notes Under UPA partnership is aggregate so need to sue each partner jointly for contract disputes. The issue may be important in determining. or profits. UPA § 40(h) provides that. causing its sale. and creditors cannot levy in such a way as to substitute a partner.RUPA then in the common law sense. (1) partnership creditors have priority over separate creditors as to partnership assets. The creditor can foreclose that partnership interest under § 28.
Class Notes Intent of parties will be key in determining whether assets were meant to be included in partnership. unless UPA S 8. There are exceptions though such as when equity and justice would demand a 16 . If partnership sued as a whole. (2) if the right is granted under the partnership agreement. The other family refused the request taking the position that the partnership agreement did not permit new partners without unanimous consent. Members of one family then assigned 10% of their share to their adult children. RUPA S 502 states that a partners only interest is partners interest in the partnership. RULE: Court held that pursuant to the agreement and partnership law. ISSUE: Whether a party can assign their partnership interests without unanimous consent of the other partners. Plaintiff brought action seeking declaration of their right to assign their interest in the partnership. UPA § 13 seems to restrict partners from suing the partnership for recourse. (3) for appropriation of an unauthorized benefit in violation of § 21. Courts ruling is a narrowing of the provision under the UPA. Real issue here is whether the children can be brought in and be given decision responsibility.2 which states if the contrary intention appears. Is the property acquired by the partnership and its proceeds then estate property to go one-half to the deceased wife. UPA S 8. joint liability not joint and several. Court rules that as it was their intention through their actions that the partnership property be left to the other partner upon death that will shall govern. Balafas v Balafas The action is brought for an accounting seeking to establish that certain property acquired jointly by two brothers constituted partnership property and that one half belonged to the estate of Michael Balafas. RUPA S 501 does not need this fiction and specifically repeals UPA S 25(1). UPA S 8. Duty of Loyalty Text Outline UPA § 22 provides a right to an accounting: (1) when a partner is wrongfully excluded from the business. NOTES: Plaintiff did wish to have new partners included as that would shift majority shareholding to the defendant.1 states property purchased or brought into the partnership will be presumed to be part of the partnership.2 states property purchased in the name of the partnership is partnership property.Since real estate was purchased with partnership funds. Presumptions: Purchased in partnership name it is partnership property. each family having a 50% stake. UPA S 25 states that an estate is created and property becomes part of estate. Rappaport v. so it would likely be immaterial whose money is used provided it is in the name. or (4) whenever other circumstances render it just and reasonable. What is the courts jurisdiction in restricting who is allowed to come into the partnership? UPA S 28 states you can't cut out creditors from garnishing partnership proceeds. so the UPA allows for the other partners to buy out the debt and salvage the partnership business. it became partnership property. As this course breeds mistrust dissolution of the partnership is often the better course. if partnership funds are used. consent of defendants was required in order to admit additional partners into the partnership. 55 Perry FACTS: Two families entered into partnership. Very little case law on the issuance of charging orders. despite the wishes of the deceased that they go to his brother/partner. G. Don't want to allow an individual partners creditors to undermine the business by attaching individual partners assets. It would not be proper for one partner who gets in a tough financial condition to have his creditors attempt to force liquidation of the partnership to get payment. Charging order procedure allows partnership to pay for individual partnership.
Meinhard v. RULE: Re-leasing the same property. Joint venture. third is to pay off partners in respect to capital. and the freedom of contract side that does not feel it is needed to give freedom of contract in code. Gross misconduct. Dissolution By Rightful Election Text Outline Distributions in Dissolution: UPA § 40(b) sets out the rules for asset distribution after dissolution. Meinhard awarded a share of that business but that way ends up with share in other assets of greater value. 404 was supposed to be a more realistic interpretation of what parties viewed their fiduciary duties to be in practice. but not addressed by the court. and that by all appearance Gerry believed he was dealing with a sole entity. including the Bristol. 404 has been under attack by both those that feel it gives to much leeway. likely due to loss sharing provision. Salmon renegotiated with the assignee of Gerry for a larger tract. but not terribly material as at the time there were not major differences. to be redeveloped under a company separate from the JV. Class Notes UPA S 21 is core provision. Some courts hold that services partners in "joint ventures" need not contribute towards a capital loss.settlement rather then accounting or dissolution. Salmon needed the extra $100K for additions/improvements to the hotel. Partnership can be construed broadly as being a real estate JV. fourth is to pay in respect to profits. Non capital partners may be fund by the courts to need to contribute to losses if equity so require. First priority is to pay off creditors other then partners. and if so. not partnership. Could have been a loan and not a partnership interest. Seems to point to a narrower duty of disclosure in that Salmon never disclosed any of his dealings to Meinhard and never gave him an opportunity to compete. Not possible for RUPA to eliminate judicial discretion. which he planned to alter to shops and offices for $200K. but wholly owned by Salmon. or narrowly as being a JV for the Bristol property. pr 125 you can contract out of specific items that are duties of loyalty provided they are not manifestly unreasonable. Salmon sets up shell business. What exactly did Salmon do that was a breach of duty. he was simultaneously negotiating with Meinhard for funding. and having used his position as manager to obtain the deal Salmon breached his duty to Meinhard. duty of loyalty along with S 18-20 laying out informational duties to partnership. similarly salary only partners may share in the distribution of a capital partner if equity requires. RUPA § 305 drops the language and allows a partner to sue the partnership. Salmon FACTS: Louisa Gerry leased to defendant Salmon the Hotel Bristol. reckless conduct equate to a breach of duties. ISSUE: Whether Salmon breached his fiduciary duty to Meinhard when he entered into the new lease without notice or opportunity to Meinhard. but made sure he kept management control. While negotiating with Gerry. without notice. Section 404 RUPA. pg 154: Fiduciary duties of partner to partnership. was taking it effectively theft of the partnership and a breach of duty if the nexus of the two opportunities is close enough. Upon expiration of the lease on the Bristol. H. resulting in a written joint venture. NOTES: The key case on partnership fiduciary duty. Page v Page 17 . Cardozo seems to take the line of business determination. In S103. the second is to pay partners for obligations other then capital or profits. Cardozo finds that the venture came to Salmon strictly due to his position as a fiduciary. Question becomes was the deal offered a partnership opportunity. 404(e) self-dealing does not necessarily mean a breach of fiduciary duties. 404 does not overrule Meinhard as the main rule from that case is the duty to disclose.
e. Broadly speaking. Effect of dissolution on Third Parties: It is debated under the UPA whether a partnership agreement can provide not only that the partnership business may continue after dissolution. Tax Consequences: Internal Revenue code § 708 provides that a partnership's existence does not terminate for tax purposes until. but that is the final goal of the provisions. dissolution. there still need to be actions to end the business operation. (1) no part of any business. (1) among the partners themselves. (2) between the partners as a group and third persons. The court warns though that should it be proved there was bad faith in the termination plaintiff can be held liable. 18 . or venture of the partnership continues to be carried on by any of the partners in a partnership. the law attaches consequences to dissolution. or to a continuation of the partnership under different circumstances. or (2) within a twelve month period there is a sale or exchange of fifty percent or more of the total interest in partnership capital and profits. and (3) for tax purposes. Plaintiff appeals from a judgment declaring the partnership to be for a term rather then at will. the partnership is at will and can be dissolved at any time. son a partnerships relationship with third parties is not affected. when there is no breach of faith. More of a disassociation of the partnership that can either lead to liquidation. UPA S32. Breakup Under the UPA The term "dissolution" is used in the UPA to describe a change in the legal status of the partners and partnership. The general answer is no. while "winding-up" is used to describe the economic event of liquidation. and that unless otherwise agreed the assets are sold and cash distributed. Stands for the proposition that policy disagreements do not constitute bad faith. financial operation. Prentis v Sheffel: Stands for the prospect that in the dissolution of a partnership. Crutcher v Smith: Partners activities prior to the exclusion of a debtor partner were sufficient to show a wrongful expulsion by those partners. winding up. i. Change in relationship between the partnership may dissolve the partnership. a so-of-a-bitch will not be forced to be dissolved by courts. partners bidding in a judicial sale is completely acceptable and not contrary to the interests of a third partner being excluded. Levy v Nassau. Have dissolution be decree of court. Class Notes Words in UPA are counterintuitive in this section. Court found that despite contractual language stating "partnership profits will be retained until all obligations are paid". or wind it up. In dissolution provisions is the assumption that piece meal liquidation is a bad thing. but as partnership is considered an aggregate. termination. pg 108. Many judges will not find dissolution of a partnership based of actions of the partners if the partnership is an ongoing profitable entity. continuation are all used. and different sections whether wound up or ongoing. Definition UPA S29. Continuation agreements are common allowing remaining partners to continue the business.Plaintiff and defendant are partners in a linen supply business. Consequences Among the Partners: Under the UPA dissolution simply means that a partner ceases to continue being a partner. but also that withdrawal of a partner will not cause dissolution.
There are two types of misconduct that may justify dissolution. S38(1) does say that distribution should be in cash. due to the particular circumstances. Letter sent terminating did not need to address reasons. Rights of partners to application of partnership property. and there are no provision requiring an asset split of an at will partnership. Class Notes Partnership Breakup Under RUPA 19 . can force the sale of the partnership assets. Courts may also order dissolution of a partnership under UPA § 32(1)(f) when dissolution would be equitable. Dreifuerst v. Is there an obligation that a lender who is a partner not call in a note as that will drive dissolution of the business. Dreifuerst FACTS: Partnership operated two feed mills and there were no written articles of partnership. ISSUE: Whether. Court found that surviving partner did his fiduciary duty in winding up the business. Lower court agreed to a sale by which existing partners could then buy the assets. a partner upon dissolution and wind-up of the partnership. and (3) a continuation of the business without him.UPA S31 outlines rightful dissolution. (1) § 32(1)(c) refers to misconduct so serious that it prejudicially affects the business. in the absence of a written agreement to the contrary. RULE: Court ruled that dissolution envisions some form of sale. Plaintiffs served the defendant with notice of dissolution of the partnership. I. Contrast with Page v. Page where there was an implied promise for continuation of the partnership. even though it was lengthy. sisters claim Art 42 UPA the partnership had continued. The parties were unable to agree to a winding up of the partnership. and (2) § 32(1)(d) misconduct relating to the partnership business that makes it impractical to carry on the business with the wrongdoing partner. A partner can just walk away from a partnership. will differ depending on whether dissolution is rightful or wrongful. some say payment in kind acceptable. can read either narrowly or broadly. ISSUE: The issue is whether the letter caused the dissolution of the partnership. RULE: Court ruled that there was no need to justify the termination as agreement did not specify any requirements so that dissolution was not a contravention of the agreement. UPA S32 identifies wrongful dissolution. so that judicial sale is the appropriate means of dissolution. UPA § 31(1)(d) allows involuntary expulsion of partners for "bona fide" reasons. NOTES: UPA S38. McGee v Russell's Executors To prevent $15K to the brother from payment out of partnership proceeds. (1) damages. (2) a valuation of interest that does not reflect the real value of the interest because goodwill is not taken into account. NOTES: Court says there does no need to be justification for dissolution by a partner as an at will termination. Case strings in section define parameters for dissolution by lack of fiduciary duty. but considered wrongful dissolution and will have consequences. Dissolution By Judicial Decree and Wrongful Dissolution Text Outline Drastic consequences can result from a wrongful dissolution. Some cases say cash ok. Girard Bank v Haley FACTS: Mrs. Narrow reading seems to say that you can walk away at any time provided you don't steal value from your other partner. Reid sent a letter of termination to her other partners in the partnership.
The fact that he is not providing services. Good will problem in dissolution. If 801 fork is not applicable you go to 701 fork. Low loans 50K for 10 years. 2. 43. First question is the agreement rightful or wrongful. Will find it easier to cut off liability under RUPA then UPA. Problem Set Handouts. the partnership may still be liable for his actions due to apparent authority under Sec.Article 8 will apply when leading to bankruptcy. Gratia and Artis. S38 rights of partnership to property. Sec. will be hard to draft a partnership agreement that cuts one of the partners out of a vote in major partnership decisions or right to withdraw at will would not be able to draft out. Ars is to receive $5K. Subsection (1) can force termination and liquidation. but he passed the bill on? He's not the principle so he's not transferring the liability. S801 Winding up termination. Is Low a partner? He has veto power and can decide whether he is in or out of the agreement says yes. drug addict or serious problem in conduct of life that is not specifically affecting the conduct of the business. but do have a duty to wind up. 5. Aggregate view of partnership. But. especially i. Read comments to S 801. Duty of inquiry greater under RUPA then UPA. (a) Ars is liable in Tort action. Eisengerg's forks in the road. Ars. Not consistent with UPA is that under the RUPA forks partner can change their minds under 802(b) as there is the realization that dissolution can take time and circumstances change. Sec. S41. i. Likely to be found at will and will likely ask for his share in cash? If will not request liquidation? Sec. Can Gratia authorize the construction contract? Sec. no duty to do anything but wind up. 3(a). at will. Is there an estoppel issue with Mayer? Likely no. RUPA provides for very structured bankruptcy. 4. We know Gratia is does not have actual authority under any principals. When drafting under RUPA can not totally draft out partner liability.e. deems third parties to have had notice 90 days after filing date of dissolution. S32 Dissolution by decree of court if one of the partners becomes a lunatic. consistent with UPA. pg. In buyout RUPA imposes reliance requirement on third parties. agency power to bind after disassociation and liability between RUPA and UPA.7.9 & Sec. seems that he is getting paid prior to other partners. 179. joint and several liability in UPA. Upon liquidation. Do not confuse Sec. Has buyout formula in subsection (b) which is a default rule that can be contracted out of. just apparently a loan to the partners says no. includes a default rule. but likely read as contract issue so joint liability not joint and several. If wrongful dissolution buyout will be reduced by the level of damages. 18 principles. Specific RUPA non-waivaible provisions are in 103 and 405. Partnership by estoppel section 16? Does it matter that he is being represented by the partnership? How is consent defined? What is specific language that Gratia uses with the bank? She says she has an "interest" in the business but does not specifically say she is a partner. 9 problem as you view from third parties perspective who would believe he has apparent authority. pg 171. RUPA deals with liability issues differently if winding down then dissolution. 36. Partnership Hypothetical's 1. how share is calculated. (b) Artis is liable for contract. (b) Say he acted like a partner as bill was sent to him and he got paid. each partner is viewed as an agent of the partnership. Material differences in language used. 3 interpretation of knowledge. Do not have to 20 . If not wrongfully terminating partner can decide to just close and seek judicial sale of business. and the more fundamental a waiver provision the more the court will scrutinize the issue backing it up. not much information for analysis and no knowledge of partners that he shares in the profits so 18g issue as no consent. 9 as viewed from third party's standpoint. Arguments against authority are not seemingly in the course of business. would not be any liabilities if he sells to a third party so there are differences between sale and cashing out. selling sports equipment wholesale while this is a retail operation she seems to be including.
Key difference is in 1985 RULPA much harder to get into deep 21 . Plaintiff ignored his duties. ISSUE: Whether the goodwill of the business should have been considered when calculating the value of the partnership assets. general partner assumes liability and retains control. the South Dakota UPA statute does not require the calculation of goodwill in the dissolution. LLP are closer to corporations the general partnerships. do not need any information about capitalization or names of limited partners to allow flexibility. Limited Partnerships Text Outline Traditionally the predominant considerations in selecting a form of business organization has been taxation and liability. but not controlling. Unlike general partnerships. while the Revised Uniform Limited Partnership Act (RULPA) has been adopted in many and was further revised in 1985. and (3) Limited Liability Partnerships. Traditionally corporations provided limited liability and general partnerships limited taxes. Governed by 1916 Uniform Limited Partnership Act. One of the major differences between 1916 & 1985 is what goes in the agreement. Limited Partnerships specifically limit liability. and demanded partnership funds for his own use after which both parties moved to dissolve the partnership. Gratia is insolvent as well here. (2) Limited Liability Companies. by 1970's though you have large numbers of large entities becoming LLP's due to tax advantages. 6. Ranks above the creditors after the old one and before the new. Class Notes With general partnership each of the partners has liability of the other. and general partner can protect themselves. Today. need to file a certificate. redrafted again in 1985 as RULPA again. Sorenson FACTS: Plaintiff and defendant associated themselves as co-owners in an insurance and real-estate partnership. Turn of 20th century starting corporations needed special chartering which led to corruption and favoritism in obtaining charters. If forced to keep your share in the business. To form LLP.give him goodwill under S32 as a wrongful dissolution. earlier 1916 has largely been replaced. most statutes do not require that you have a limited partnership agreement. The Uniform Limited Partnership Act (ULPA) was adopted in all states but Louisiana. but this is not practical. got arrested. Three new forms evolved providing limited liabilities and taxes. do need to buyout but can pay in payments unless party being dissolved can show that immediate payment would not be a drain on the business. LLP grew to allow partners not to have to incur debts of partnership. There are times a general partner can become liable for the partnership. III. Partnerships not taxed as they are not considered an entity. RULE: Court found that given the circumstances of the dissolution. Drashner v. Some states still under 1976 statues. others under 1985. Alternative Forms of Business Organizations A. when the general partner takes control of the business. Limited partnerships are not new but have changed recently with changes in the law. 1976 redraft to RULPA. limited partnerships are creatures of statute. They are times when limited partner can incur liability. Control was never well defined. (1) Limited Partnerships. upon dissolution you can choose to take proceeds or continue in the shoes of her husband who she inherited from. Court found that plaintiffs actions caused a wrongful dissolution.
pockets of limited partner. ISSUE: Whether (1) contractual fiduciary duties of fairness in the partnership agreement applied to the disputed transaction. RULE: Court finds that the extent of involvement in the business by GB was sufficient to preclude granting of summary judgment in their favor. Court finds GB to have had extensive involvement in Sunworth's operations. Del. (2) fiduciary duty is breached. Gotham filed suit in court complaining that HGI obtained control over the partnership at an unreasonably low price. a real estate hedge fund.7%. HGI board approved the transactions based on Guzzettis recommendations. Gumbiner and Guzzetti are jointly and severally liable for aiding and abetting the breach. B. actively advise. Prevents unjustly enriching creditors from going after deep pockets on which they had no reliance. NOTES: general principle of corporate law is that only a party to a contract may be sued for breach of that contract. and (4) damages resulted from the concerted action. Sunworth advised Gateway that it had a large financial backer. Substantially like =/ reliance. unit option. upon whose reliance Gateway sold large quantities of seed potatoes. Investment Co. Need to know differences between 1976 and 1985 Acts due to different jurisdictions still following different acts and big difference in the control issue. owned 14..B. is that reasonable? ROPA S303 1985 takes away the substantially like test. Sup Ct. and still not be considered a general partner. Actual knowledge requires direct contact by the court. act as an agent. a board member of the general partner. RULPA S303(b) is safe harbor material. Statute does not address if you would be considered general partner if you perform some or all the provisions. wind up etc. Elements for aiding and abetting a breach of fiduciary duty are: (1) existence of fiduciary relationship. have to have reasonable reliance based on conduct of the limited partner. ISSUE: Whether the limited partner was exercising control of the business. FACTS: Gateway. proposed a reverse stock split. and (3) court has discretion not to grant rescission when plaintiff unjustifiably delayed seeking remedy. According to statute liability is incurred by limited partner only to the extent that third parties rely on their participation and control. 2002 FACTS: Guzzetti. Limited partners can basically replace and pick general partners. discretionary and equitable remedies. GB. a creditor of Sunworth. Corporate General Partners Text Outline RULPA § 303(b)(1) explicitly recognizes that a corporation can be a general partner in a limited partnership.8% did not complain about the purchases but was denied request to view HGI's books. Gotham Partners v Hallwood Realty . In awarding damages a breach permits: (1) broad. Defendants are wholly and severally liable because the challenged transaction breached the entire fairness provision of the partnership agreement. brought suit to recover payment for goods it had supplied to the limited partnership including GB Investments LP in the suit as part owner of Sunworth. claiming breach of fiduciary duties by board. Gateway Potato Sales v. RULE: That a limited partnership agreement may provide for contractually created fiduciary duties substantially mirroring traditional fiduciary duties that apply in corporate law. bringing their ownership up to 29. and tender offer. and (2) courts will not construe a contract as taking away other forms of appropriate relief. In fact the limited partner gets to be much more involved in the daily operations then a small shareholder. Less then substantially like = reliance. G. (2) defendants HGI. Gotham. 1985 standard much harder for 3rd party to meet. Two basic types of taxation exist under the revenue code: (1) firm taxation where a business firm is taxable on 22 . Articles stated GB would not control or assume liabilities of Sunworth. (3) defendant who is not a fiduciary knowingly participated in the breach. NOTES: Sunworth was general partner.
They bring the action as a class action on behalf of all unit holders. Directors defense is that duty of care and loyalty were only owed to general partner. Group of partners using corporate shell to do what they please. Under IRS regulations any "eligible entity" can elect either flow through or firm taxation. Charge is a breach of duty of loyalty. that general Partner was not sufficiently informed to make a valid business judgment on the sale. ISSUE: Whether directors of a corporate trustee may personally owe duties of loyalty to trusts of the corporation. Major difference in 2001 is that there is never liability in limited partner no matter what level of control as they should be treated more like corporate shareholders. Supreme Court. so corporation owes a duty to 23 . gains and losses are taxed directly to the firms owners eliminating double taxation. or "double taxation". what was he general partner trying to accomplish. that unit holders were misled into believing that the sale would be put to vote of all unit holders and that Metsa knowingly participated in the breach of duty. pg 254. the creditors can gain additional security from then general partner if they so choose. Subchapter S corporations. not to the plaintiff limited partners. Standard is entire fairness. Whole thing hand on issue of whether this is an issuance of new units or old units.its income. not limited partners. and the board of directors. Limited Partners Plaintiffs and Limited Partner Defendants also. Defendants argue they owe fiduciary duties up to the USA Cafe partnership only. What does this form due to the fiduciary relationship of the partnership? Gotham Partners Do not pay attention to the specifics of the transaction. Once you start waiving fiduciary duties in documents you must be very careful and draft the documents exceedingly well. being taxed as corporations. but the statute allows and does not prevent the limiting of fiduciary duties. and Metsa. RULE: Court finds directors have a duty not to use control over a partnerships property to advantage the corporate directors at the expense of the partnership. i. Master Limited Partnerships are publicly traded and cannot elect partnership taxation. in re USA Cafes. small limited shareholder corporations. Dictum in the case is that not all fiduciary duties have been eliminated by structure. when a corporation is the general partner.e. are taxed as partnerships with each shareholder receiving their pro-rata share. Judge Allan makes an analogy to trust law and finds that general partner's have liability. cannot hide behind corporate structure. fairness of price and fairness of dealings. aider and abeter has general fiduciary duty to other partners. Court says you can not completely waive fiduciary duties by contract according to the Del. Likely family limited partnerships for estate planning reasons and as limited partners in larger more sophisticated entities. general partner is a entity and not a legal concept. Aider and Abeter liability vs. Wyly Brothers owned 47%. Issue was basically a kickback scheme. Law says it is a fiduciary relationship. but can reduce or change. Direct liability. Defendants are the Wyly brothers who hold all the stock of the general partner of USACafes. Statute entire fairness seems to allow self dealing which is not allowed by common law. NOTES: General Partners is Inc. Class Notes Corporate Limited General Partners. Is this in the spirit of RULPA? Courts said yes. and (2) flow-through taxation where a firm is not subject to taxation and all of the firms income. 2001 pending proposed Uniform Limited Partnership Act. LP FACTS: Plaintiffs are holders of limited partnership units in the purchase of USACafes by Metsa Acquisition. Charge is that general partner is enriching parent company at expense of limited partnership. Ruling failed to take into account that GP now has the controlling interest.. Reason for 2001 proposal is that due to new forms of organization such as LLP & LLC are taking over so need to look at what is appropriate for limited partners now.
Liability: All statutes provide that members are not liable for the LLC's debts. Downside of LLC & LLP is state taxes. bankruptcy and lawful expulsion are often grounds. Voting Members: About half the statutes provide the default rule that members vote per capita. Class Notes Taxes is the main driver in deciding which form of corporate structure to adopt. capital . general 24 . Members of a manager-managed LLC have no apparent authority to bind the LLC. tax exempt. LLC's. FL second. In 1990's IRA adopted the procedure that you can choose the characteristics in "check box" and take the tax advantage. Limited Liability Companies Text Outline Limited liability Company's. are noncorporate entities that are created under special statutes that combine elements of corporation and partnership law. and be supplied with information. obligations. LLC & LLP allow partners to take greater control with limited risk.other partners. Inspection of Books and Records: Generally members are allowed access to books and records. Death. Allen comes down that duty against self dealing must be extended. Distributions: Most statutes default rule is that distributions are on a pro-rata basis according to member contributions. the other half by pro-rata. (2) if membermanaged or manager-managed and the names of individuals. Creditor can get charging order against a members interest. but did not convince IRS until 1998 to adopt tax structure. Fiduciary Duties: Largely unspecified in the statutes so it is expected to largely come from corporate and partnership case-law. Agency-Powers: In most member-managed LLC's the authority of a member-managed LLC is comparable to the apparent authority of a partner. but limit the liability of the partners. Developed in Wyoming. LLC advantage over "subchapter S" is fewer foreign investment restrictions. Management: Most LLC statutes provide as a default rule that the LLC is to be managed by its members and can be varied only by provision in the LLC agreement. perpetual life. still may be treated as corporation and liable for state tax even if Fed. Member's Interests: A members financial rights include their right to receive distributions. some say must be for proper purpose. In manager-managed LLC's authority is comparable to a manager of the corporation. Derivative Actions: Most statutes explicitly permit members of LLC's to bring derivative actions on the LLC's behalf based on a breach of fiduciary duties. (3) duration of LLC. Formation Articles: LLC's are formed by filing at the State office and state (1) purpose of LLC. Disassociation: Statutes vary on the termination of a members interests. and are either member-managed or manager-managed. Operating Agreements: This is an agreement among the members concerning the LLC's affairs and provides for governance. limited liability. to participate in management (member-managed). but does not address and rule that other fiduciary duties are to be extended. Concern about corporate characteristics. LLC & LLP keep the pass through taxation structure. some were very flexible. and other liabilities. C. distributions. and admission/withdrawal of members. Must look at jurisdictional differentiation between states when analyzing LLC & LLP vs. Some jurisdictions were strict in which characteristics you can adopt. unlimited amount of owners. LLC's originally were partly shaped by tax rules allowing each LLC to choose it own characteristics. LLC's are entities that can own property. Owners and members of LLC's have limited liability as in corporations. free transferability etc.
Read LLC statutes. whether documents need to be oral or written. the main issue here being to what extent does the LLC serve as a shield. without proper notice in violation of the provision of the Workers Adjustment and Restraining Notification act. is that you do not have a live market for LLC shares like you would in Corp. RULE: That LLC limited liability status raises no barrier to the satisfaction of such a judgment from the member's interest in the company. both partnerships. commingling. Look at duration of LLC. RULE: That the "veil" of protection afforded ORH by its LLC form may be pierced if in fact ORH was operating a the "alter ego" of ORH's members or the members were committing fraud or deceit on third parties through ORH. partnerships and individuals making a $25K outlay. Plaintiff attempted to satisfy judgment from any payments becoming due to the individual defendants as owners of the LLC. VGS Inc. keeping minutes or holding meetings these formalities need to be excluded as grounds for piercing. Orleans Regional Hospital FACTS: Plaintiffs allege they were laid off by defendants. Courts will not allow use of LLC form to freeze out and squeeze out partners that have no ability to sell or transfer their partnership interests. McConnell v. form. another party formed to obtain the franchise but including two members of CHL. ISSUE: Whether LLC's are subject to veil piercing doctrine. the veil provided by the corporate status of ORH's members may also be pierced in like fashion.partnership. as opposed to Corp. who contacted local businessman Lamar Hunt. ORH shut down without providing legally required notice to employees. solely for tax losses. veil? As LLC do not require formalities such as annual elections. DEM II Properties FACTS: Plaintiff obtained a deficiency judgment resulting from a mortgage foreclosure against defendant. total $100K. v Castiel: When an LLC manager and member get together without notice to a third and still active member that will be viewed as a breach of good faith. ORH is an LLC whose members are NORS and NLRHP. Rough rule is when shareholder is not keeping with the integrity of the corporate form. Court pierces the veil. Court finds that a person who ignores the intended separation between individual and the company ought to be no better off then the sole shareholder who ignores corporate obligations. CHL LLC was formed to explore the franchise. law is when for equitable purposes a court will hold an individual shareholder liable. can have membership managed or outside manager run the firm. documents say no authorized distributions. fraudulent activity. i. Arena was to be financed by a sales tax issue that failed in balloting. with members being local corporations. Piercing the corporate veil in Corp. Hunt Sports Enterprises FACTS: NHL contacted Columbus OH officials about starting a new franchise there. Negotiations went sour with Hunt filing suit on behalf of CHL against. Hollowell v. Governance and management issues will be set out in the documents. 25 . RULE: Contract provisions may effect the scope of fiduciary duties. ISSUE: The extent to which an LLC liability shield protects the interest of a member of a LLC against a judgment creditor when the basis for the judgment is an obligation unrelated to the activities of the company. COLHOC. 37 Suffolk 927. Big difference in LLC and Corp. PB Real Estate Inc v.e. NOTES: Members never voted to have distribution in a member managed LLC. NOTES: Should courts pierce the LLC veil in the same manner that they pierce the Corp. States that the legislature surely would have passed legislation preventing if that was their intent. Moreover. etc. Bastan Case: Defense is that LLC structure allows partner to manage the business. using Corp. hanging their hat on formalities. shareholders who can sell shares. ORH LLC. A personal creditor is going after a partners interest in the LLC.
one the LLC rejects an opportunity can a partner in the LLC accept it individually. or has certain fundamental bases that can not be contracted away (Eisenberg). Class Notes Corporation important driver in economic development. FL Statute. The Corporate Form A. i. Now a lot more uniformity among states in LLP law. IV. Depends on if you read fiduciary duty as a concept that can be contracted away (contractarian). A partner of an LLP is generally not liable for all partnership obligations. Largely designed for professional organizations such as lawyers and accountants. 2nd generation of LLP's statutes also include protection from contract liability. only those arising from their own activities. Characteristics of the Corporation Text Outline The corporate form has generally been the choice for public companies and results from five central attributes. Limited Liability Partnerships Text Outline LLP's are essentially general partnerships with one core difference. Class Notes Limited partnership which is itself general manager of an LLP is an LLLP (Limited liability Limited Partnerships). Issue is whether all partners will be liable under the LLP structure or only attorney working the case. but you can still be liable for your own liability.NOTES: Language of the court looks at language a unambiguous contract interpretation. general partnerships. and liability extended to contract breach. stockholders do not participate (5) Entity Status: Corporation is a legal Entity so can have rights in it's own name Close Corporations. Provides protection against the negligence of other partners. specially chartered by the states to do specific 26 . with the possible exception of those closely related to the partner. Some statutes require a trade-off for limited liability in the form of insurance requirements or segregated funds and that they be registered with the state. thus legal representation paid for was worthless. that the liability of a general partners is less so in the LLP then in a general partnership. D. Megadyne information Systems: Megadyne charged its law firm of breaching its fiduciary duty by not informing claim statute of limitations had run. (1) Limited Liability: Shareholders and managers are not personally liable for obligations (2) Free transferability of Ownership Interests: Stock is freely transferable (3) Continuity of Existence: The legal existence of a corporation is perpetual (4) Centralized Management: Managed by professionals under direction of a board of directors. Both requirements have largely been dropped. Everybody in the LLP can participate in the business to some degree.e. § 620. Historically in order to LLP you needed to have an insurance requirement and annual registration. Court rules all three partners might be liable. According to opinion possible back door interpretation of fiduciary duties. Protects you from a partners liability. limited liability companies are the different forms of privately held corporations.
and governed by the indenture.functions. Generally bonds are secured obligations and debentures are unsecured. additional formal requirements governing creation and management. Organizing a Corporation Text Outline Once a decision has been made to incorporate. Class Notes Delaware Corporate Law Ch 607 and Revised Model Business Corp. States often adopt friendly incorporation laws in order to attract the franchise fees that come with incorporating there. Class Notes Del. one is that the incorporators choose the board directors until the shares are issued. Selecting a State of Incorporation Text Outline A corporation can incorporate wherever it chooses. the next step is filing a charter or articles of incorporation with the state official. Delaware became the location of choice for 5060% of corporations seeking to incorporate. Most statutes now provide that pre-incorporation subscription agreements are irrevocable for a specified period of time unless all subscribers consent to a revocation. Act. Types of corporate financing are. the differences in the legal regime of Delaware. Do these different characteristics make a great difference? Answer is clearly there are benefits to being a corporation. not traded on an exchange. States have economic incentives to attract corporations. C. bonds and debentures. Substantive law of corporations is State law not Federal law. Close corporations are privately held. There are two basic mechanisms.e. and pay fee. NY has the incorporator’s appoint directors. In a subscription agreement a would-be shareholder agrees to purchase a corporation's stock when it is issued to him at some future date. sought it was better to have a Federal law of corporations. Original author of book. Eisenberg's argument overlooks the influence of large shareholders. Also. Delaware remains preeminent in the filing of corporate incorporations. Jackson implemented anti-corporate policies. the other way is to name the directors in the articles of incorporation. exact opposite of partnerships. Pres. Statutes developed to allow private citizens to form corporations so as to avoid special chartering by governments. Two types of equity financing. Articles of incorporation needed to be specific regarding their purpose and capital requirements. Once under way a board of directors is elected by shareholders. bank debt. Tax treatment is different. Eisenberg feels that Delaware has since responded and it is no longer a race to the bottom. RMBCA governs in FL. 103(c)(2) need to file articled in Del. Greater level of transferability. i. Continuity of life also opposite. The charter will specify the classes of stock and number of shares issued in each class.Characteristics Assumption of professional centralized management. Kerry. With debt financing you 27 . internal affairs are governed by the law where they choose to incorporate. common stock. Eisenberg goes into his race to the bottom shtick. Page 100 . (RMBCA) some of the more influential legislation dealing with corporations. stock. trade debt (accounts payable). in fact federalism has largely occurred due to the influence on securities laws. challenged the special chartering and monopolies being granted to corporations. and debt financing. Delaware approach is that shareholders have the power to appoint directors. B. later general articles of incorporation developed. including preferred stock.
(2) a colorable attempt to comply with the statute. Can fail if found to be corporation de jure. bring together assets and superintend the steps necessary to bring the corporation into existence. RMBCA has eliminated limitations on convertibility and relies on fiduciary duty. adoption or novation. they will have no corporate protection. If you have ratification or novation can relieve promoter of liability. A corporation that is formed after a promoter has entered into a contract on its behalf is not bound by the contract. Quo Warranto: Proceedings brought by the state to test corporate validity. The general rule for liability is that when the promoter makes a contract for the benefit of a contemplated corporation. and if a group of individuals has not done the things necessary to secure or retain de jure corporate status. adoption itself does not. i. Preincorporation Transactions by Promoters Text Outline Promoters help a newly forming corporation make contracts. not so with stock. Declarations of dividends are the sole obligation of the board of directors. Dividend of preferred is usually cumulative. not the case anymore. Three requirements are typically cited for application of the de facto corporate doctrine. or one where noncompliance is unsubstantial. Conversion right is option granted a corporation to convert one type of security to another. Redemption right is option granted corporation or shareholder. (1) a statute in existence by which incorporation was legally possible. Series are subclasses of stock. Still relevant for accounting purposes. so more risk more reward and control. Stock is the most volatile type of security. After formation the corporation may be bound by ratification. history to prevent fraud. so preferred dividends get paid in full prior to paying common stockholders. Because of watered stocks Par Value was set as a limit to which the stock would not be sold below. novation. Preferred stock has been used as strategic tool in poison pills. Class Notes Corporation can take on a promoter contract by express.e. E. Estoppel differs with de facto corporate theory in that estoppel is effective mainly for the facts of a specific transaction.need to get paid. Dividends are payments based upon some apportionment of corporate earnings. ratification. De facto will normally have a greater precedential effect. and (2) the would-be shareholders would not need to resort to the estoppel theory if they could establish that their business had de facto corporate status. The two theories differ in two important ways in their application. and (3) some actual use or exercise of corporate privileges. early in Corp. 28 . Now statutes allow par and no par stock. (1) the nub of estoppel theory in such cases is that the third party has dealt with the business as if it were a corporation. D. common A and common B. Common law preemptive rights were assumed. estoppel means. Main difference between preferred stock and debt is that debt always has a right to be paid. set out as rights and obligations of stock/debt. Consequences of Defective Incorporation Text Outline McLean Bank v Nelson: The corporate form provides limited liability. the promoter is personally liable on the contract and remains so even after the corporation is formed. without more. can call shares at any time.
articles of incorporation were signed but not filed until two days later. Harris argues that incorporators were jointly and severally liable for the debt because its articles of incorporation had not been filed with the secretary of state's office at the time Joe Alexander. These actions were unenforceable by. RULE: Plaintiffs were found not entitled to equitable relief. so the judgment against Brunetti is set aside. transaction outside that sphere of what was allowed were ultra vires. ISSUE: Whether appellees had acted for or on behalf of J&R Construction when entering contract. NOTES: Model for the revised act. why necessary when incorporation is so easy? Cases where there are bona fide attempts to organize and negotiations and activities have been conducted under the corporate name in belief that the corporation is in existence. Goodman v. entered into contract with Harris. Ladd Estate Co. ISSUE: Whether there was a de facto corporation in existence at the time of the lease. 29 . In FL as long as both parties are aware that corporation is in formation there is no liability. FACTS: Plaintiffs brought suit for breach of lease against Sunshine Greenery and Brunetti.Class Notes Doctrine of de facto incorporation. entity as shareholders being true legal owner. The trial judge determined that plaintiffs were entitled to judgment against Brunetti individually on the theory that at creation of the contract he was acting as promoter and at the time of contract Sunshine was not a legal corporation. Class Notes Ultra vires doctrine has fallen into disfavor due to corporations empowerment to do what it chooses and not have to declare it's purpose at time of incorporation. Harris v Looney FACTS: Robert Harris sold his business to J&R Construction. RULE: Court affirms the lower court ruling that Joe Alexander only is strictly liable. RULE: Court finds that the bona fide effort to file and the dealings with the plaintiff in the name of the corporation fully satisfy the requisite proof of the existence of a de facto corporation.. Classical Ultra Vires Doctrine Text Outline Early on corporations needed to narrowly describe the activities in which a corporation could permissibly engage. FACTS: Plaintiffs sought to enjoin defendant from enforcing a guaranty agreement by a corporation in favor of Ladd Estate. representing the Corp. purpose being shareholder wealth maximization. Cantor v. New approach need to show that there was an attempt to defraud. De facto approach differs from the RMBC in being less protective of third parties. J&R defaulted on note. F. Harris v Looney is model for the revised act. Can view Corp. General incorporation has made doctrine largely obsolete. Inc. Broader doctrine then estoppel. and against the corporation. Harris sued incorporators jointly and severally. Would be used to ensure that corporations were complying with their incorporation doctrines outlined in their charters. Sunshine Greenery.
Milton Friedman states that corporations need to conform to basic rules of society embodied in law. Other Constituencies under Del. Court cited that the corporation is in the business of benefiting shareholders. statute state that it need not be directly in the corporate interest but must be reasonable and in its interest. looking at general corporate interest.500 to Princeton which was challenged by shareholders. debt holders vs. which was limited in Revlon where they stated that they can benefit other constituencies provided they are rationally related to benefits accruing to shareholders. These statutes allow directors in a hostile environment to take actions not purely in shareholder interest in these instances.G. donated $1. Can corporations make charitable contributions? Have been addressed statutorily.P. Smith Mfg. A. can consider nonshareholder interests. court ordered payment of $19. v. NOTES: Can read narrowly as a cold war response. Credit Lyonnais: Del. Delaware does not have "other constituent" statute to protect interest of employees. RULE: The court find the donation to be within the lawful exercise of the corporations implied and incidental powers under common law principles and that it came within the express authority of the pertinent state legislation. 674 addresses and allows charitable contributions. shareholders. declared hi intent to stop paying special dividends in order to reinvest these funds and only pay regular dividends.3M in dividends. as majority shareholder. 1919 Henry Ford. or broadly as a representation of the desired business 30 . law Unocal v Mesa: Court begins with the basic principal that corporate directors have a fiduciary duty to act in the best interests of corporation stockholders. Class Notes Dodge Case: Not reasonable for Corporation to make payments with profits other then dividends. Del. Can go as far as justifying defense based on simply differences between corporate cultures of organizations. Co. Dodge v Ford. ISSUE: Whether the statute allowing for corporate donation is effective. arguments for is that it can still benefit the organization indirectly and through taxes. The Objective and Conduct of the Corporation Text Outline Hu: Discussion on shareholder wealth maximization and market risk. Second passage focuses on other constituencies. Arguments against donations are that it is shareholders money. Some reasonable relation to the corporate interest remains a necessary component. court states that it is ok for the directors of a company to diverge from the interests of the shareholder. Barlow FACTS: AP Smith Co. AP argued that this was a sound investment and that the public expected corporations to give philanthropically.02 pg. Is this only applicable when a corporation is near bankruptcy? Unocal: Court tilts towards allowing managers to take defensive actions when faced with a corporate takeover. The Dodge brothers as shareholders brought suit. § 3. Virtually all states have now adopted statutory provisions relating to corporate contributions that are comparable to Delaware's. but Barlow and Del.
(3) election of directors to represent institutional investors. There is "agency costs" involved in monitoring management. There is a free-rider problem in that any expense an institutional investor incurs for beyond the ordinary course shareholder activities will benefit the other shareholders more then itself. Proxy vote issue. Coase series of hierarchical relationships. Theory of promoting developing corporate norms has been waning. is ownership and control in hands of shareholders. Class Notes Big structure question is what is the reality vs. collective action problems in coordinating actions so selling stock main recourse. statutes. Do institutional shareholders change this calculus. Institutional investors now hold about 50% of equities. Indexing strategies also make it harder to walk away. The concentration increases sophistication has increased giving a greater and more sophisticated "voice" in the companies. (6) Foundations. Class Notes If you look at corporations as a nexus of contracts view vs. Institutional shareholders fall into six basic categories. 31 . allowing for ownership but not control. (3) Banks. (1) Private pension Funds. Corporate Structure A. (2) Public Pension Funds. Berle & Mean's Thesis: Bottom line is that corporation is not controlled by the shareholder. or general shareholders. (5) Insurance Companies. In actuality a combination of the two theories so not all governance laws can be replaced by contract. Walking away from stocks is much harder for the institutional shareholders. (1) voting on management and shareholder proposals. Institutional investing has shifted ownership to a more centralized group of shareholders with a greater say and more incentive to voice displeasure rather then walk. Shareholdership in Publicly Held Corporations Text Outline In early corporate history the dispersion of corporate shareholdings prevented severe collective action problems. V. Separation of powers notion in corporate structure. The Nature for Corporate Law Text Outline Jensen & Meckling formulated the theory that the corporation is a nexus of contracts. ERISA placed fiduciary duties on institutional shareholders. (2) making shareholder proposals. This is contrasted with Coase's theorem of a hierarchical model of corporations. The forms that institutional involvement in governance may take are. (4) consultation with management. If nexus of contracts view law is more subject to contractual negotiation so many issues can be contracted away.philosophy in the US. and allowing for easier and cheaper coordination between shareholders. H. management votes proxy of unvoted shares. What is the influence of index strategy and institutional investment on the shareholder/manager relationship? Indexing and institutional ownership make it harder to unload the stock giving managers more incentive to influence companies. professional institutional shareholders. (4) Investment Companies. Consultation with big shareholders prior to decisions becoming more common. but there always remains a baseline.
As a general rule stockholders can not act in relation to the ordinary business of the corporation nor control the directors in the exercise of the judgment vested in them by virtue of their offices. the board cannot remove a director. leads to 32 . so FL has the easier removal statute. not the substantive outcome. but about 30 states do. Under this rule. Most courts do not consider bad business judgment adequate for removal for cause. with or without cause. The Business Judgment Rule: Corporate law employs a number of different standards of judicial review. close corporations. (1) The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be removed only for cause. Removal right for cause. does this include 109? Can't determine and is a huge policy issue. In the absence of statute. How does annual director vote mesh with state shareholder statutes when directors are wished to be removed prior to vote? Note pg. Cases are split on whether a court can remove directors for cause. however technically correct the exercise has been. Art § 109 vs.Delaware has no nonshareholder constituency statute. need to show cause and provide due process. one with super-voting rights. Del. There can also be two classes of stock. if certain conditions are satisfied an officer will not be held liable for consequences of a decision unless the decision was irrational. Delaware only allows removal with cause. even in the absence of a statute that so provides. whether by statute or charter are necessary and at all times exercisable only for the benefit of the shareholders as their interests appear. Shareholders can remove a director for cause. Class Notes FL & Del. Blasius did not fundamentally decide this issue. In Blasius the court with regard to interfering with shareholder voting applied the more stringent rule of compelling justification. If charter gives removal rights to other directors rather then shareholders does not infringe on right of shareholder. 169. Allocation of Legal Power Between Management and Shareholders Text Outline Thesis is that powers granted to management. B. gross negligence is the standard. can charter remove right to remove directors for cause? Cases say that charters cannot take away the right for removal for cause. removal rights. a structure that can be used in anti-takeover defenses. Blasius analysis looks at whether there was intent and opportunity to vote. § 141: Statute in 141 allows limitations otherwise provided for in this chapter. statutes are designed to help out smaller corporations that are most like partnerships. a director may not be removed if the number of votes sufficient to elect the director under cumulative voting is voted against his or her removal. In Del. Weighted Voting in Publicly Traded Corporations In majority of companies only common stock has voting rights. Allen argues Del would vote that management would be allowed to include pill provisions in its by-laws unless they totally disenfranchise shareholders. seems to imply management wins. the most lenient is the business judgment rule. Some technical problems with shareholder removal in that you do not have a right to call a special shareholder meeting without approval of director. (3) If cumulative voting is authorized. The use of the power is subject to equitable limitations when the power has been exercised to the detriment of their interests. Differs from Del. but they can be conferred on preferred stock or even bonds.0808 Removal of directors by shareholders. FL Director Removal Statute: Abstract: 607.
effectively threatening shareholders into accepting tender. Management often controls the proxy process. corporation "A" has the option of going to non-statutory measures. directors. Some takeovers require approval of board of directors. In tender offers. M&A takeovers not assigned read on side. If corporation "B" rejects friendly offer. Lipton & Flohm preeminent lawyers in this field. Delaware does not give that right. "A" makes public offer to buy shares of company at X price upon certain terms. need to delay in order to allow for a stronger negotiation position. Acquirer needs a minimum of 51% in order to gain control or deal is not attractive. Just the threat affected management's operations. Conflict between models of shareholder primacy and director primacy. tender offers proxy contests-happen without consent of directors. who do not release for vote and negotiate the deal giving to shareholders for up or down vote. both how to use the by-laws. Primer: Two innovations made takeovers viable.Boards that only elect 1/3 of the board every year. (3) 33 . how to make expensive share oriented methods. Good argument is that if you leave your company unprotected the "sharks" will take over as cheaply as possible. the combination of two entities. hostile tender offers. avoids SEC disclosure requirements and possible leaks involved with private deals or buying on the market. Needs to be provided for by state law. Special meetings need to give notice and agenda. those given right in the charter. Shareholder meetings. protects by delaying takeover. arguable on both sides. Jury still out whether mergers are bad or good. Guise is that you can't have a new board every year that does not know the business. Mergers and Sales of Assets.procedural and substantive problems with removal especially without cause. Shareholders cannot initiate merger discussions. Institutional investors always prefer tender offers as guarantees a premium in share price. Underlying question is whether you view these tactics as good or bad. Can have a proxy contest. Change of Control Situation Ch 12 Corporate Combinations pg 1061 starts. Not regulated what needs to be completed at the meeting. can structure to come into effect after acquiring company has purchased a certain % of shares. If to many shares are tendered. board of Corp. Del. not all corporations.Requires something like 80% shareholder approval to implement merger. they will be accepted in a pro rata share then kick back to shareholders unneeded balance. should just let the shareholders decide if it is a good deal or bad. then consummate the merger. allows less then unanimous consent but majority vote. and new forms of financing such as junk bonds LBO. (2) Super-majority requirements. In asset sales management has complete discretion unless the assets are the substantial majority of the business. Tactics for takeover fend off: (1) Staggered Boards. in some jurisdictions super-majority is required to consummate a merger. Mergers § 11 RMBCA. Non-statutory. most statutes allow for meeting for which shareholders can sue for if not held. Del § 102(b)(4). Statutory. only directors. Need to look at fortunes of target and acquiring shareholders and societal impact to determine if hostile takeovers are a good or bad thing. A will want absolute control and freeze out balance of shareholders in B on the back-end giving them a lower price. RMBCA jurisdiction significant asset sales only require majority of those shareholders voting. Ways to fend off takeover. must give shareholders equal opportunity. share purchases. vote in directors friendly to the merger. Bad argument is that management is just protecting their jobs and trying to retain control. Corp. 3 types of shareholders have right to call special meeting in addition to directors: Those with greater then 10%. Fed proxy rules only require compliance with 12G corporations. Virtually all jurisdictions allow unanimous written consent to conduct business in place of meeting.
RULE: Court finds that even though technically within the Del. Courts have used standard of ordinary business judgment and given management much leeway. directors have the fiduciary duty to the corporation. Two prongs. Charlestown Boot & Shoe Co. Quickturn Design v Shapiro. statute allowing management to change the annual meeting date is permissible. Some of the tactics have influenced shareholder votes directly. Inc. thus Delaware applies the Unocal higher scrutiny standard. NOTES: Election is void. Defendants refused to act with him and contracted additional debts leading to a accrued loss of $3. Shareholders need to leave stewardship in hands of directors. (5) Debt Increase.300. Dunsmore FACTS: Osgood was chosen by the corporation to wind up the company. and there is some empirical evidence that it increases bids in buy-outs. v. then no problem. Directors have a duty of care to the shareholder. Also. designed to make takeover difficult upon triggering event. ISSUE: Whether legally complying with the Del. FACTS: A petition for injunctive relief was filed to prevent management from advancing the date of the annual stockholder meeting. Pull case.Seek out a friendly company for friendly merger or stock block purchase. NOTES: Judge agrees that maneuver was in bad faith by using voting mechanism to entrench themselves.40. no-hand and slow-hand provisions have been found invalid and unenforceable by the courts as they prevent a current board from exercising its duties.Crown Jewel Defenses. and that they had no legal duty to pay the insurance. (1) is there a realistic threat to the company. (7) Poison PillNumerous in number and sophistication. Delaware case string seems to comes down that courts will not tolerate interference with shareholder voting. RULE: Court finds the vote choosing Osgood a committee to act to be void. Del.By back stock in company tender offer. Is board power to repeal shareholder approved by-laws a large threat? Not likely as shareholders will be pissed and vote out board. Schnell v. Can you solve the § 109 v § 141 problem? Resolved in MM v liquid Audio expanding Blasius. Have to expressly say in by-law that can not be repealed. flip side is that they can be good for current shareholders by protecting company from offensive tactics of sharks. 34 . (4) Self Tender. but the standard by which to measure that duty is deferential to the court. (6) White Knight. Comes down to who decides how the process of acquisition will be taken. ISSUE: Whether the directors were negligent in their fiduciary duties. Chris-Craft Industries. Lower court rejected management's business reasons as being disingenuous and designed to cut down the time available for plaintiff's to wage a proxy battle. One position is that these poison pills just entrench management and go against boards fiduciary duty. Since corporations are viewed as entity theory directors are viewed as agents of corporation rather then agents specifically of shareholders.Options for sale of key parts of the organization to other entities. or be statutorily provided as in FL. court has taken a somewhat middle ground. 1998 WL 954752 (1998). Often existing shareholders will get opportunity to purchase large block of shares at a discount to make purchase highly expensive.Higher leverage makes for a less desirable target. and (2) is the response proportional and reasonable. Antitakeover measures can be both self-dealing to protect management and in the best interest of shareholders. defendant was charged with paying the insurance which he did not and the shop was consumed by fire. Dead-hand. but when given a self-dealing transaction courts have viewed with a much tougher standard. As agents of the corporation. law. there are inequitable reasons to move the meeting based on desire to hamper a take-over bid so original annual meeting date is to be reinstated.
NOTES: Existing shareholders got 10 shares. Blasius Industries. ISSUE: Whether under the circumstances the board. RULE: Only demonstrating that the board breached its fiduciary duties may the presumption of the business judgment rule be rebutted. Blasius acquired 9% of the stock of Atlas with the intent to restructure. an issue not of intentional wrong but of authority. Court says don't look at us to change the substantive outcome of the vote. but puts a very high standard for the board to meet at their burden. NOTES: Procedures to ding the nominee at the nomination meeting. Courts took view not to expand shareholder rights and not expand Blasius. RULE: Court found no breach of fiduciary duty to minority shareholders. Atlas Corp. shifting the burden to the board. Holds that the decision of board make-up should be left to the shareholders and not the board itself. over who will sit on the board. Plaintiffs argued that the recapitalization unfairly benefited the majority block and its intention was to entrench management. Atlas had just completed a restructuring and sought to prevent the takeover. Court also finds that the presence of a controlling majority stockholder did not undermine the validity of the vote. Blasius is a hard case for whose holding to apply. may validly act for the principal purpose preventing the shareholders from electing a majority of new directors. ISSUE: Whether to apply the Blasius compelling justification standard when shareholders are not given a full and fair opportunity to vote. new shareholders received only 1 in recapitalization plan. Inc. Court does not go behind case viewing as best option for corp. In the plan holders of common stock on the record date would have ten votes per share. Court basically comes down that economic interests can win over minority shareholder disenfranchisement. ISSUE: Whether amendments in a non-takeover situation granting additional power and effectively freezing the board is legal. Court finds the move was not ordinary management of the firm. FACTS: Dispute between Atlas Corp. Delaware Ct. v. Stroud v Grace FACTS: Strouds allege that board breached its fiduciary duty by recommending certain charter amendments to shareholders. has not expanded at all. Essentially saying that if you being a "as applied" challenge we will consider it. but isn't it a courts job to sift through circumstantial evidence.Single purpose has to be so shareholders do not get to vote. but an attempt to block the shareholders from voting on Blasius' proposal. basically said this is a high hurdle. examining the amendments under an "intrinsic fairness" test. Court is not going to micromanage. Measures changed the procedure for nominating board members. even acting in good faith. RULE: Court finds an unintended breach of duty of good faith by the board in that they could have taken more appropriate measures to fend off proposal. majority shareholder vote is sufficient. along with contesting the accuracy of those disclosures. Can't do dual class recapitalization under the rules of the exchanges today. Atlas called an emergency meeting where that elected two now board members in staggered terms. Blasius. Was a hobson's choice as there was a fear of delisting from the NY exchange if passed by less then 66%. 35 . NOTES: Court does not adopt a per sea rule. Defendants dispute this claim stating that the move was allowable under the plan and not a conflict of fiduciary duties. Williams v Geier FACTS: Cincinnati Milacron adopted a recapitalization plan. Judge Allen alludes that a coercive attempt by a shark in short time to respond could be found acceptable. preventing Blasius from obtaining a majority of board seats. as long as you were provided a fair opportunity to vote. The boards action is thus protected by the business judgment rule. and largest shareholder.
so is it a shareholder right? Quickturn says repeal by board is ok. but shareholders can propose non-repealable by-laws. annual meeting means 18 months in NV. 36 .. NOTES: Started in Fed Ct. and binding proposal can be adopted through proxy. not in supp. These cases have a distinction in two types of corporate power. finding primary purpose is to entrench. ISSUE: Does OK Law restrict the authority and implement shareholder rights plans exclusively to the board. Device can be used either to make money. Presumption that shareholders can vote through by-laws. says that according to state law you can sue after 18 months. i. Doing it to screw Hilton and court says ok. but can be contracted away. ISSUE: Whether a targeted company in the face of a hostile takeover can adopt protective measures to stifle the takeover.Teamsters v Fleming Companies FACTS: Teamsters proposed to remove a shareholder rights (poison pill) plan through resolution. and no law precluding shareholders from proposing resolutions or by-law amendments. Board wanted to approve by-law changes that adopted this poison pill. Hilton Hotels Corp v ITT Corp FACTS: Hilton announced tender offer for ITT which they rejected. and implement requirement for shareholder vote on such plan. and may shareholders propose resolutions requiring that shareholder rights plans be submitted to shareholders for vote at the annual meeting. Court is also influenced by previous vote by majority of shareholders to redeem pill which was not fully implemented. NOTES: Footnote 1 & 2 are keys to this case. Provision is in certificate of incorporation. Quickturn says that you can't. What is day-to-day operations of the company which are excluded from Fed proxy law will be determined by the sate. RULE: When an acquirer launches both a proxy fight and tender offer. RMBCA jurisdictions allow board to adopt by-laws. as Teamsters took advantage of SEC rule allowing shareholders to include amendments for vote. but it can be repealed at any time. In ITT #2. Inc. or to hoard shares at a low price in order to fend off takeover. ITT adopted a staggered board and poison pill. centaur and American Rent a Car. looking to see if there was a threat and a reasonable response. used as a poison pill. Court looks at Unocal. RULE: Court holds that there is no exclusive authority granted to the board. it invokes both Unocal & Blasius tests. and (2) power relationship between the board and shareholders (Blasius). If it can be repealed at any time is it the same as a slow hand provision? GD Court says they are not going to answer the question whether shareholder rights can be constrained. governs. which go opposite directions while GD court ducks the question. through circumstantial evidence. Wisconsin Investment Board FACTS: General Datacomm (GD) seeks declaratory and injunctive relief regarding the validity of a by-law proposed for consideration at GD's annual meeting by shareholder. In Del. runs opposite of Schnell. Court focusing on the "what" that was done not the "who" that did it.e. Pill is essentially a stock option plan and court says shareholders have right to vote on stock plans. v. § 141. supp. and implements a plan.. When it became clear ITT was not going to hold their annual meeting Hilton filed for injunction to force them. (1) Power over the assets of the corporation (Unocal). it must bring that plan to the shareholders. but can the shareholder provision in GD really be repealed? Two cases in Del. but says there was no threat here. Classic conflict of § 109 vs. Shareholders may restrict the board of directors authority to implement shareholder rights plans. By-law sought to prevent repricing of any stock option issued. NOTES: ITT #1. NV Ct. each side can adopt/repeal allowing for circular battles. Can look at Unocal analysis that if response is relative poison pill can be ok. uses Blasius here in finding that board is interfering with shareholder voting. General Datacomm Industries. § 109 Del. Ct. Ct.: Board adopts a series of anti-takeover measures in order to prevent hostile takeover by Hilton. Court may have found that in cases where board thinks there is a threat. Shareholders have review authority. Stock option analogy used by courts does not back up this argument well.
Liquid finds a white knight. Shareholders have no legal power to give binding instructions to the board on matters within the board's exclusive power. The Monitoring Board The monitoring model of the board recognizes that in a publicly held corporation the management function is exercised not by the board but by the senior executives. Constraints of Time Boards of publicly held corporations meet an average of 8 times a year. Can they put deal protection devices into white knight arrangement. How exactly is this step taken to thwart effective implementation of shareholder franchise? Seems to expand Blasius when it had previously been limited. Court basically says no problem. leaves us not knowing how far ruling goes. Constraints of Information Officers typically not only have much more information then the board. 37 . These executives are unlikely to dissent at a board meeting. No special meeting provided for in by-laws. particularly the CEO. MM complies. Indeed. NOTES: Poison pill in place. supreme court reverses. the corporations executives. Page 33 analysis key to the case. we're just guaranteeing shareholder franchise not a win. Liquid also lowers stock ownership trigger for pill. C. you got your vote. fix the compensation of. Blasius as the second prong. and the board is conceived as an independent institution. Under this structure.e. Del. not an agent of the shareholders. regularly evaluate. and where appropriate replace the senior executives and monitor the corporation's business to evaluate whether it is being properly managed. By controlling the information officers heavily shape the decisions that the board makes. the board of directors manages the corporations business. and directors are normally removable by shareholders only for good cause. MM waits until annual meeting. By reason of time constraints alone the typical board could not possibly manage the business of a large publicly held corporation. but in the executives. Modern Corporate Practice Management function is ordinarily located not in the board. court did allow it to delay some. need to apply Blasius. Because of Alliance merger (white knight) liquid postponed meeting. and the central figure is the CEO. such as we will pay you $XX Million if the deal does not go through. Also no-shop and lock-up provisions have been found ok by courts (not here). but control much of the flow of information to the board. Legal Structure of Management Text Outline The Traditional Legal Model Under the traditional corporate legal model. Constraints of Composition The typical board includes a number of directors who are economically or psychologically tied the corporation's executives. and increases the number of board seats so they can pack it. If effects shareholder vote. finding this case the perfect opportunity to use Blasius within Unocal. Advance notice provision in by-laws requires 60 day notice to include important provisions in annual meeting. a number of seats are usually held by inside directors. but packing scheme allowed Liquid to still retain control. Shareholders voted in new MM directors.MM Companies v Liquid Audio FACTS: MM sought injunction against Liquid Audio from expanding their board from 5 to 7 members. i. MM introduces a board-packing provision. MM needs to get board control to get power. the primary function of the board is not to manage the business but to select.
Staggered boards and classified boards need to be approved in charter. Additional elements to determine what is extraordinary is the economic magnitude of the action. Majority of those present not just voting are required. Complaints on one side are that its hard to get qualified board members given the legal liabilities. no quorum then activity taken is invalid. so often little detail and used strategically. (1) unanimous explicit. such as declaration of dividends. S-O requires disclosures. Authority of Corporate Officers Text Outline President: the prevalent modern rule is that the president has apparent authority to bind his company to contracts in the usual and regular course of business. The Presidents actual authority may be greater then his apparent authority. Proposed and implemented SEC and NYSE rules have also had a constraining effect. The definition of chairman and CEO is very gray. risk and time-span of the action. Consequences of noncompliance include. Chairman of the Board: There is little case law on the apparent authority of the chairman because the actual authority can vary greatly. on the other are complaints that SEC and other disclosure requirements are not enough. Quorum is majority of the full board. Nominating committees for directors rather then appointments are recommended but not required. (1) meetings. but some boundaries can be identified. legislatively Sarbanes-Oxley. other times held by a retired CEO still valued. but in many companies the chairman retains the title while handing over day-to-day operations to a successor. the governing rules include. and others used to split tasks between two equals. Compensation committee requirements and independent audit committees are also addressed. otherwise annual voting. but not to contracts of an "extraordinary" nature. certifications of accuracy and truth. E. D. abstentions become negative votes. Independent board rating agencies and executive search firms are also having a monitoring effect. extraordinary. are required by statute to be decided by the board. (2)explicit majority approval coupled with acquiescence by remaining directors. protects whistle blowers and stiffens penalties. (4) voting. 38 . IRRC shareholder monitoring organization. (2) notice. but informal. Formalities Required for Action by the Board Text Outline Formalities required for action by the board. approval. and (3) majority approval or acquiescence. Still have problem with defining what are director responsibilities and duties. S-O on page 1964 in statute book.Class Notes Attempts to regulate boards. Statutes also enumerate what matters the board cannot delegate to a committee. (3) Quorum. The difficulty lies in defining what is ordinary vs. It is fair to say modern courts would hold that at least in the context of a closely held corporation. explicit but informal approval by all the directors is effective where a person who has contracted with a corporate officer has been led to regard his transaction with the corporation as valid and all the shareholders are either directors or have acquiesced in the transaction. Class Notes Minutes of board meeting are discoverable. Some matters.
argument against is that can be used as "spies". Under straight voting a minority can never elect a director over the objection of the majority. Ways to thwart cumulative voting are staggered boards. Class Notes Authority issue comes up when one of the parties wishes to get out of a deal. but since rolled back to a permissive theory. as having the same powers as possessed by partners. under straight voting they can cast 700 votes total but a max of 100 per candidate. split among the candidates any way they wish. Class Notes How can you tell which shareholders are entitled to vote at the meeting? When millions of shares traded daily not easy to determine whose the owner on the record date. Permitting vacancies to be filled by the board. time and date is required for the annual meeting of shareholders and for any special meeting. having a fewer number of directors. Limited Liability 39 . then force minority voters to expend their shares voting out this person. Cumulative Voting Text Outline If someone owns 100 shares and 7 directors are running. G. and their executives. Under cumulative voting a shareholder can cast up to the 700 votes. H. Deployment can be tricky and minority shareholders have actually gained more seats then the majority using cumulative voting wisely. Election o directors requires only a plurality. dissolution and amendments to the amendments usually requires two-thirds votes.Vice-Presidents: Vice presidents are usually given little or no apparent authority at the corporate level. Can pool your votes so that a minority shareholder can be guaranteed at least some board representation. Cumulative voting became mandatory in some states. lead to partisanship etc. Default you need to look at the certificate of incorporation. Notice of special meeting must include the reason for being called. Idea is that you do not vote one-by-one but vote for all seats at the same time. Fundamental changes such as sale. Formalities Required for Shareholder Action Text Outline Notice of place. Class Notes Really just an issue if were going to make it easy or hard to allow minority representation. F. Under most statutes a majority of the shares entitled to vote is necessary for a quorum unless overridden by certificate of incorporation. while cumulative voting can. Current proponents of cumulative voting still feel they should be permissive as it stands now. Only persons who are record holders on the record date are entitled to vote at the meetings. Deposit trust company will hold shares and have record of the holders. Courts will often view closely held corporations. merger. Argument for cumulative voting is that additional points of view and perspectives can be heard on the board. Secretary: Secretary has apparent authority to certify records of the corporation including resolutions.
encourages investment. Is there something different about parent/subsidiary structures that should allow for easier piercing? Is there something about torts that allows for easier piercing. Del. if just alter ego you cannot pierce without fraud. Proposal has been that shareholders be liable on a pro-rata basis rather then a joint and several basis. One argument (stupid one) is that shareholders should have personal liability as corporations are encouraged to take to much risk. as RUPA confers liability on partnerships even though a separate entity. Class Notes Basic assumption of being a shareholder is that you have limited liability. It is generally known that shareholders of a corporation have limited liability. 40 . Finding the balance between fairness to creditors and corporate doctrine." Limited liability has nothing to do with being a separate entity. even though commonly called "limited liability. Whose pocket do you go into when you pierce the corporate veil and does it matter if it's tort or contract liability? Very little doctrine in this area. the application can vary greatly. This protection applies to corporate managers as well as shareholders. Organizing by issue makes more sense then by doctrine. Cons are taxes and can be used to avoid liabilities. In FL every case of piercing has either been a sham or corp. Should piercing be harder if the investors are sophisticated? Is there a better alternative to piercing? Organize in this manner of answering these questions. Doctrine. Courts generally do find it easier to pierce the veil in parent/sub relationship. Courts moving away from Minton undercapitalization test. encourages management to be less risk averse. Commingling of funds an issue such as in Sea Land where CEO is using corporate bank accounts as his own. but this can be contracted around by requiring personal guarantees.Financial Risk already a factor. reduced trading. while VA requires common law fraud. Arguments in support of limited liability. mainly the fundamental corporate fact of limited liability and is there a rationale for piercing. improves efficiency of markets and is a more transparent legal structure then partnerships. money grab solution to no problem Market Efficiency . but also need to show fraud. Other theories are piercing only corporate parents. Tort risk not an issue. Should fraudulent conveyance law be the basis for piercing the corporate veil vs.Text Outline Shareholders have no liability for corporate obligations. Undermine incentive to incorporate Innocent players get punished. but why? Protection of closed corporations. need improper purpose. Also hard to pierce in FL. or can charge a price that reflects the extra risk. retirement funds and unknowing Under Del. Although tests for piercing the corporate veil are similar from state to state. One counter is that limited tort liability improves the efficiency of the market. used for fraudulent purposes.Global Markets. Parent sub corp. a combination with undercapitalization. Argument: Basis. Wash. Inadequate capitalization is merely a factor considering whether or not to pierce the corporate veil. but is statutorily granted. can have covenants required to meet certain financial thresholds. Piercing the Veil Review: Need to start by thinking about the issues. shareholders by statute and managers by agency principal. law not enough to just show "alter ego" to pierce the veil. is same issue as brother sister corp. DC concludes that not keeping up formalities can be prima facie evidence to pierce.e. i.
but this is still what often bothers the court. Eisenberg feels piecing should be a given for torts. which did not pay the freight bill. Fraudulent conveyance (now UFTA) is old doctrine saying that creditors should not be able to use sham corporations to defraud. but has administerability and proof problems. then pierce his corporations veils. as director and officer. and (2) that an overall element of injustice or unfairness is present. law a plaintiff must show (1) that the parent and subsidiary operated as a single economic entity. direct liability. but of multiple corps. ISSUE: Whether Marchese's corporations are an alter ego and fraud or injustice occurred. usually of closed corporation. to get into the pocket of the shareholders need to show "alter ego" or fraud. RULE: As Chaney was not party to the original suit he cannot be held personally liable as he did not defend himself. does not necessarily need to be intentional fraud. If making an agency claim. US v Best Foods: Basically they were completely running the company so held liable. Would need to show fraud or some event leading to personal liability. they pay not because of any doctrine but because of the guarantee given. NOTES: View is that as long as subsidiary is acting as a separate entity it will be given the benefit of separate corporate liability protection.e. law decides when the corporate veil can be pierced.. Kodak was granted summary judgment. Delaware court not eager to pierce the corporate veil. possibly prorata. commingling etc. RULE: To prevail on an alter ego claim under Del. plaintiff's appealed alleging Kodak acted tortuously in manufacturing and marketing the allegedly defective keyboards. ISSUE: Whether Atex in fact operates as an entity with Kodak rather then a subsidiary thus allowing for vicarious liability. Argument in dissent is that regardless of what the legislature says the under-capitalization is sufficient to pierce the veil. RULE: Plaintiff gave no rational to support agency theory of corporation. could only get into the pockets of the individual corporations. Minton v. 41 . Del. Two contrasting views. NOTES: Not a case of holding corp. ISSUE: Whether Cavaney. owned by the same shareholder. It is undisputed Kodak followed corporate formalities here. i. FACTS: Plaintiffs filed suit against Atex and Kodak to recover for repetitive stress injuries they claim were caused by Atex's keyboards. Atex. not liability of a holding corp. v. Sea-Land obtained judgment but Pepper Source had dissolved. Carlton FACTS: Plaintiff was injured by a cab. industry practice is for a corporation to own one or two cabs only. Walkovszky v. Inc. Director signs person guarantee. in actuality courts and the law is going the other way. As Atex is a Del corp. context. Another view is not to consider bargaining power but look to see if there have been misrepresentations that ensure that one party does not have enough information. Sea-land seeks to hold Marchese personally liable. Inc. Seminole corporation had no assets and never functioned like a corporation. Sea-Land Services. Fletcher v. Owner of defendant cab company is stockholder in 10 others. based on the shareholders actions. Plaintiffs brought second action trying to hold defendant Cavaney personally liable for this judgment. plaintiff claims all are operated as a single entity. Another issue is should you make a rule that reflects sophisticated parties or that protects the little guy like in Kinney. Very little piercing in public corp. can be held personally liable for the judgment against Seminole. ISSUE: Whether defendant's corporations should be considered one single entity for liability purposes. Cavaney FACTS: Plaintiffs daughter drown in a public swimming pool recovering a $10K wrongful death judgment from Seminole Pool. Pepper Source FACTS: Sea-land shipped peppers on behalf of Pepper Source. Similar when director commits a tort in their duties as director.
Class Notes Equitable Subordination happens in the bankruptcy context. Equitable subordination simply takes an investment already made. NOTES: Given how sophisticated the creditors were should the veil have been pierced? Sophisticated contracting parties should know enough to get guarantees etc. Strange that company goes belly up only two moths after lease is signed. RULE: Polan found liable as he did not even try to keep up corporate formalities in order to take advantage of limited liability. not just harm against creditor. Undercapitalization plays an important role as it does in piercing doctrine. (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant. on various equitable grounds. usually happens when partners are in bad shape. (1) the claimant must have engaged in some type of inequitable conduct. Even uses completely different third party as basis for unjust enrichment. Courts will not buy the scheme. they incorporate. will individual shareholders be prohibited from the activity as well.RULE: Courts finds that the corporations are alter ego's. DHL ownership and control scenario. I. (3) undercapitalization. Shareholder Informational Rights and Proxy Voting 42 . (2) the commingling of funds or assets. Court applies Van Dorn test: (1)failure to maintain adequate corporate records or to comply with corporate formalities. the court sometimes consolidates the assets and liabilities of the several corporations into a common pool. NOTES: Why do you not have a piercing here when he has commingled funds so much? Commingling not enough. J. Kinney Shoe v Polan FACTS: Kinney sued Polan the owner of Industrial Realty who they invested in yet had no assets or formalities as a corporation. in the end he is found liable for not paying taxes on these proceeds. including the claim of preferred shareholders. Benjamin v Diamond: Three conditions must be satisfied before exercise of the power of equitable subordination is appropriate. and denies it the status of a creditors claim on parity with outside creditors for controlling behavior by the parent corp. and (3) equitable subordination of the claim must not be inconsistent with provisions of the bankruptcy act. On appeal from remand court finds Marchese liable for $118K in damages and that second prong was satisfied and Marchese unjustly enriched. If a parent and a subsidiary are both bankrupt. Is it possible that Polan lied to make it impossible for Kinney to contract fairly. Equitable Subordination of Shareholder Claims Text Outline Under the doctrine of Equitable Subordination. but the prong of injustice is not well defined and needs to be shown by Sea-Land. The Corporate Entity and the Interpretation of Statutes and Contracts Text Outline This is the question where when corporations are prohibited from an activity. VI. and (4) one corporation treating the assets of another as its own. when a corporation is in bankruptcy the claim of a controlling shareholder may be subordinated to the claim of others. transfer funds into corporate loans to themselves from the corporation then declare bankruptcy.
hard to get access to books. Stockholder Lists: Courts stand readier to grant access to stockholder lists then to grant access to otherwise confidential financial and business information.A. If the shareholder has a proper purpose. Security First v US Die Casting and Development FACTS: Defendant is a publicly traded bank while Plaintiff is a closely held corporation holding 5% of the banks stock. Honeywell court. court says it does not matter. To capture the smaller corporations the RMBCA § 16. Ct. NOTES: Plaintiff must show credible basis to find probable wrongdoing. with many being more limited in coverage then the common law rule of a shareholder "acting in good faith for the purpose of advancing the interests of the corporation and protecting his own interest as a stockholder. Owners of record may be different from beneficial owners. but also a secondary purpose. Del. shareholder has the burden of showing need. Under § 220 Del. Two arguments here. Pillsbury attempted to purchase shares in order to solicit Honeywell shareholders about anti-war views. by the preponderance of the evidence.1602. Need to show proper purpose to get access to substantive information. Court takes a liberal view on what is a proper purpose.20 requires that every corp. Stat. Anti-war environment against Honeywell's munitions manufacturing." Proper Purpose: Courts have found proper inspection to determine the financial condition of a corporation and to ascertain the value of the petitioner's shares. § 220 and won in lower court. but narrow view on what documents can be obtained. was denied. access to shareholder lists. a larger regional bank holding company. not Mid Am. any ulterior purpose is irrelevant. ISSUE: Whether plaintiff showed by preponderance of the evidence a credible basis for wrongdoing. Shareholder Informational Rights Under State Law Text Outline Most legislatures have enacted statutes governing the right of inspection. The SEC Act which is applicable to corporations of at least 500 record holders requires corporations to report certain information to all shareholders without specific shareholder requests. but if challenging management you would also wish to get a list of shareholders and certain internal management documents to show your case. must furnish shareholders annual financial statements including balance sheets and income statements. Delaware Court vs. now changed to which documents you wish to request. Pillsbury case. Need to show a proper purpose in acting in your shareholder duties. Shareholder Inspection Rights Pillsbury v Honeywell key case. FL statute is § 607. Court says no as the purpose needs to be economic. RULE: That a stockholder may demonstrate a proper demand for the production of corporate books and records upon showing. Class Notes You can get by right corp. Appeal by bank ensued. Del. makes big distinction to access to books vs. In FL used to be limitations on number of shares needed to request documents. Court though limits the documents to be produced to those related specifically to the merger only and available from the bank. 43 . Bank entered into merger agreement with Mid Am. defines what reasons and what documents may be provided. Upon failure of merger and payment of termination fee. sued under Del. says if shareholder has proper primary purpose to request the document. and must justify each category of the requested production. but improper secondary purpose. Plaintiff demanded access to bank's books. that there exists a credible basis to find probable corporate wrongdoing. minutes and by-laws.
The merged company had to restate earnings down by $327. logic. amendments and elections of directors. Have to sign at two levels. form 10Q. unredacted. supreme court says that documents prior are within the shareholder rights. and no HBOC documents as he was not a shareholder. FDR creates the securities act of 1933 with rules for issuance and disclosure. restatement meets this criteria. NOTES: Saito starts action in chancellery court to get access to documents as they are not sure of what they will find at this point. FACTS: McKesson entered into a stock for stock merger agreement with HBOC. Wants documents from time when he bought stock that are merger related. Schedule 14A lists in detail the information that must be furnished when specified types of transactions are to be acted upon by shareholders. testimony. Access to the body of shareholders: Rules 14a-7 & 8 provide mechanisms through which shareholders can communicate with each other.e. RULE: Court rules that third party documents and those produced prior to Saito's stock purchase are discoverable given they relate directly to the proper purpose. one as to the truth of the financials and second as to the effectiveness of the audit and control procedures. Pg. 40. Catch 22 in this language as they need to show likelihood of wrongdoing to obtain the documents which will show the wrongdoing. both from HBOC and McKesson. but authorizes the SEC to promulgate rules that govern private conduct including proxy voting. and for 8K required for special circumstances.4M after audit. Proxy Rules: Overview Text Outline Proxy voting is the dominant mode of shareholder decision making in publicly held corporations. ISSUE: To what scope to allow access to documents for proper purpose investigation under Del. Pursuant to Sarbanes-Oxly need to have annual disclosures and CEO & CFO have to sign certifying that the documents are true. Court says you only have standing to documents since you bought the stock. If executives put NYSE filing at risk they will sue for breach of fiduciary duties.Saito v McKesson HBOC. such as the NYSE. attributable to HBOC accounting irregularities. Transactional Disclosure: One purpose of the proxy rules is to require full disclosure in connection with transactions that shareholders are being asked to approve such as mergers. plus director notes on merger. Also disclosure requirements by SRO's (self regulating organizations). companies merged. The language has been given a expansive interpretation. The SEC has promulgated proxy rules that serve a variety of purposes including: Coverage: Rule 14a-2 provides that proxy rules apply to every solicitation of a proxy with respect to securities registered pursuant to section 12 of the act. Likelihood is a lower standard which can be obtained through documentary. Del. but as he was not a stockholder of pre-merger HBOC those documents remain undiscoverable. Inc. Proxy Contests: Rule 14a-11 regulates proxy contests requiring the filing of certain information by insurgents. Mechanics of Proxy Voting: Another purpose of the proxy rules is to regulate the mechanics of the proxy voting 44 . Saito. i. Periodic Disclosure: The proxy rules also require certain forms of annual disclosure. B. Forms 10K. or otherwise. Gets access to HBOC documents that McKesson got. § 220. not before. a shareholder. sued under Del. C. § 200 for access to books and records to obtain information to sue derivatively. § 14(a) of the Securities Exchange Act does not regulate private conduct itself. court uses piercing language. basically saying you can't engage in fishing expedition. Shareholder Informational Rights Under Federal Law and Stock Exchange Rules Class Notes SEC disclosure requirements only apply to 12G corporations which require size and shareholder requirements.
Borak says let us put as many weapons into the hands of shareholders. § 14 SEC act of 1934 says no-one can solicit proxies in contravention of SEC rules on the subject. Mills to low a standard. Considers the might standard to low a threshold that would lead to management fear of liability leading to deluge of frivolous information in proxy's. TSC looks at whether it was appropriate to allow for private right of action. court answers yes. Pg 1843-82 in Statutes book outlines rule § 14(a) (1) regulating proxies and what needs to be in the statements. Says private action is a necessary supplement to SEC enforcement. leaving smaller companies not subject to § 14(a) rules. Northway. let them go to state court for smaller issues. Does not go here Ct. what are going to be the elements of fraud? § 14(a)(9) need to have a material omission or a statement that is misleading. misrepresentations etc. Proxy Rules: Private Actions Under the Proxy Rules Text Outline In Borak the Supreme Ct. It does not require proof of substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. later narrowed to weapons limited by what congress say's as they could have provided if they wished. says change vote to high a standard. 45 . adjusts standard from a material fact that might have been important to the shareholder but would have been considered important. D. TSC is the law. In contrast. Scalia in Virginia Bankshares narrows Borak but expressly chooses not to overturn it. finds immaterial that one of the directors had been campaigning while being indicted for the foreign corrupt practices act. Delegates a large grant of power to the SEC to regulate securities matters. Question is now that private action is allowed. Intended restriction of material in §14(a)(9). Class Notes Notion that there was a need to have generally applicable federal law relating to content. What is material? In Lyman case court says change of accountant to one that had been indicted not material as location was in OK. and non-traded companies of over $5M in assets. Also difference between transactional proxies and nominating proxies. Notes on TSC Industries v Northway: Sup Ct. Mills not the law now. focus is on § 14(a)(9) anti-fraud provisions.itself. allowed that shareholders could bring private action for violation of the proxy rules though neither the 1934 Act nor the proxy rules themselves explicitly provide for such an action. Might want to know Would want to know Would change Vote +--------------------------------------------------+-----------------------------------------------------+ Mills Std. Class Notes Notes on Borak: Question is whether the court is going to say there is a private right of action. will not be so generous to the private litigant. TSC Standard Ct. Current law on materiality of proxy disclosures. Shift to federalism. in Johnson Ct. Need to go to common law fraud for misrepresentation and material omission. An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. tip the Ct. Under § 12(g) companies covered are any traded on the exchanges.
it is not possible to undo the merger. burden is more stringent in allowing private right of action. but not reliance on that causation given so many shareholders. but did not reveal that board was already under control of the acquiring company. How to determine facts is on pg 303 middle. If board says worth $60 and actually worth $42. or Bankshares answers the question if you need to show scienter? Adams states that scienter should be an element of liability in private suits under proxy provisions as they apply to outside accountants. i. Not necessary to go to shareholder vote. so they look at if a rational shareholder would have voted for the deal. Mills. i. RULE: Court holds that misstatements misled petitioners into believing that state remedies to upset the merger had been lost. a material misstatement can be a violation. NOTES: Case is defining what is a material omission? Need to prove causation.e. Plaintiff looses. but directors opinion including the fact is believed correct. Will look to see if it was the kind of statement that shareholders would consider important. ISSUE: What causal relationship must be shown between a misleading proxy statement and the merger to establish a cause of action based on violation of the Act. says that they will look at materiality or omission as prima facie evidence of materiality. Proxy stated board recommendation for the merger. rules on state regulators. only material. ISSUE: Whether a statement couched in conclusory or qualitative terms purporting to explain directors reasons for recommending certain corporate action can be materially misleading within the meaning of 14a-9. Sup. In a situation where proxy itself is an essential link in accomplishment of transaction. Here in Mills. deal approved due to misstatement? Mills v Electric Auto-Lite FACTS: Shareholder brought suit for injunction against voting on a merger but did not request temporary restraining order. Souter seems to say that there has to be both belief of the directors and the truth arising from the actual situation. Sandberg FACTS: First American Bankshares conducted a freeze-out merger eventually merging into Virginia Bankshares. Squeeze out merger of Sandberg. First issue is what happens when directors in a proxy puff-up the deal with conclusory statements under rule 14a-9. FN7. Filed an amended complaint to set aside the merger based on misleading statements in the proxy. Sandberg has an issue with the stock price as there had been a $60 sale previous. so remanded to lower court for a review on possible monetary damages if found that terms were unfair. Attorney argues that opinion is not a "material fact" as required by 14a-9. Problem in proving damages also. torts. Seventh Cir. NOTES: Courts here are imposing new Fed. applies the standard that the misleading statement caused the merger to go through. policy of constraining private rights of action. gets case into Fed. v. Plaintiff's likely did not seek TRO due to need to post a bond.Shift from Mills to TSC making it a more difficult to apply standard. this offer was for $42. proxy was necessary to transaction. RULE: Court holds that although misleading. Hard to prove. corporate records subject to documentation. Virginia Bankshares. minority shareholder. without additional evidence that shows board new it was worth $42 and lied are needed. so if the merger deal was fair would be unlikely that it would be overturned. as caps in VA judgments. not discussing what misstatement would be if proxy not material. Inc. but did so to avoid claim of breach of 46 . Effectively makes the SEC the enforcer of proxy and securities violations rather then private lawsuits. everything went to hell but how can you prove that it was due to the director elected. was it a fair deal. Neither TSC. Ct.e. or might have changed the vote of the shareholder. Can show causation. If fact incorrect. Bankshares: Souter is basically looking for if there is a statement that was a material fact. but rule has not been picked up. or that there was no loss of state remedy as minority shareholders did not have the votes to block the merger as proxy was not required by law or by-laws.e. Material defect did not need to be decisive. but-for cause i. Ct.
If making a shareholder proposal vs. exclusions under (i) etc. this way management pay's for solicitation for a social or other proposal that is likely to be unsuccessful. IRRC Investor research firm web site." RULE: Court holds that a private right of action is properly implied from section 14(a) of the SEC Act. says that in contrast to Mills. Proxy solicitations can be oral.e. Rule is limited though as there are thresholds in ownership such as $2. but as shareholder can always go to state law to get list. FACTS: Lower court rules that shareholder proposal is relating to the conduct of ordinary business purposes. Palatable to right as opinion basically says you look at state law to determine remedy. Scalia's position.000K. proxy was not necessary to accomplishment of the transaction. proxy was not a causal link. Ct. Ct. § 14(a)(8) does not apply to board director voting. Later changed their minds back as ruling was to broad and reworded in § 14(a) amendment. basically saying if there is widespread public debate on the issue it can't be excluded. Ct. i. § 14(a)(7) differs from state law. board election. (a)(7) shareholder can ask management for shareholder list if wishing to offer a different board member. Summary. but § 14(a)(1) important. you need to go to state court but if the door was closed because of that lie then you can come to Fed. go to state court. loss of appraisal rights. Plaintiff does not win because of causation problem. so will prefer to send themselves then release list.fiduciary duty. Souter leaves an opening saying that if actions would cause a loss of state law remedy. § 14(a)(8)(i)(5) Relevance is most important exclusion. when proxy is not essential to transaction. Du Pont de Nemours & Co. that limit who can submit a proposal and for what. As here. or make unilateral voting announcements in the newspaper. Proposal for phase-out date and alternative CFC sources properly excluded under § 14a-8 as ordinary course of 47 . These rationale can be used by the SEC to give itself leeway. would often be put into management's proxy materials under § 14(a)(8) shareholder proposal rule. Stock option debate. Basically a tip of the hat by Feds. and there is a big lie out there. if widespread program would be considered ordinary course of business. ISSUE: Whether shareholders proposal is subject to exclusion under § 14(a)-8 of the SEC Act relating to "ordinary business practices. to state law saying that shareholders must not raise provisions that are the normal operations of the business.I. disparity of pay. Other two big litigated proxy rules are § 14(a)(7) & (8). Roosevelt v. 1998 Rule numbers changed. it may be possible to go to Fed. as Souter determines that the merger could have been legally accomplished without the proxy despite management's pursuing that course. E. Can argue that Fed. Proxy Rules: Shareholder Proposals Text Outline Rule 14a-8 provides that if management seeks to exclude a shareholder proposal from a proxy statement. violation is what caused you to loose state law remedies. When management sends out the proxy they can send theirs last which is binding. E. it must obtain a no-action letter from the SEC. Class Notes SEC § 14(a)(9) is key proxy provision. if narrowly drafted to top management could be argued as social policy issue such a incentive to manipulate stock. will not trample state laws that may allow for merger without proxy. affirmed.. In Cracker Barrel court said that issue can be excluded as being in the context of employment issues which are ordinary course of management's business. Pending rule § 14(a)(11) would say that given shareholders the right to propose their own board of directors for nomination. Misleading statement was not material. Kennedy's position is minority shareholders are exactly the group intended to be protected as was in Mills.
Dissent believes you need to look at the reasonableness of the amount spent as to the purpose.business due to being existing production. expense and small likelihood of winning. The solicitor's database often allows for discovery of who the beneficial owner of the stock is that will be voting. Fairchild Engine and Airplane Corp. NOTES: Judge uses Unocal hostile takeover standard and imports into proxy contest context. but can use when a dispute as to policy. corporate directors have the right to make reasonable and proper expenditures. not proposed new venture. VII. as compared to a purely personal power contest. ISSUE: Whether directors can reimburse proxy contest sponsors from the corporate treasury. When new shareholders take power they pay bills of both their and incumbents proxy contests. RULE: In a contest over policy. from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe are in the best interests of the corporation. Disagreement is when are the funds being used to persuade and when to inform. Heineman: Not sure what rule is if directors pay themselves when they do not have shareholder approval. helping to entrench themselves. FACTS: Minority stockholder seeks to compel return of $261K paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. F. The Duty of Care and the Duty to Act Lawfully 48 . Are these expenses justified and when do they become entertainment. funds when purely a personal power struggle dispute. Court says that shareholder approval was necessary to pay insurgents proxy. NOTES: Shareholders still get attorney's fees. Court says not appropriate to use corp. The solicitor handles all the physical requirements of the proxy campaign. subject to the scrutiny of the courts when duly challenged. Solicitors also keep close contact with proxy clerks at brokerage firms and appropriate bank officers to make sure that client's proxy material is being forwarded. not open to paying all insurgent proxies as that would encourage to many wasteful battles. Proxy Contests Text Outline Very few contested elections are run without the aid of professional proxy solicitors. Easier to just sell shares. raiders came into the picture conducting hostile takeovers. Class Notes Traditionally not many proxy contests due to free-rider problem. monitor voting results. What happened in the late 80's & 90's is management is working with major shareholders. Rosenfeld v. RULE: Communication of a proposal relating to facilitate communications among shareholders and between shareholders and management was found to be able to recover attorneys fees as benefit was to all shareholders. Changed when corp. and further persuade crucial voters. Amalgamated Clothing and Textile v Wal-Mart Stores FACTS: Awarding of attorneys fees to shareholders in conjunction with a SEC 14a-8 ruling omitting shareholder proposal. thus allow management to avoid failing proxies. Solicitors also provide advance guidance as to likelihood of a proxy passing. Is this still the case today? Does voting really provide a serious constraint on management? Difference from agency law in that agent can not use partnership funds to support their positions while in corporations the companies pay for the expense of proxy to elect themselves. if they had lost they would have been left out in the cold as pointed out by defense.
but under a more limited standard such as if it was rational or in good faith. It is much easier to satisfy a rationality standard then a reasonable standard. (3) Decision must have been made in good faith. Barnes v Andrews. and (3) statutes can impose special obligations which become a duty of care as a matter of corporate law.A. Duty of Care Text Outline Note on Causation The court noted in Barnes v Andrews that not only does a plaintiff need to show a violation of duty of the defendant. (3) duty to make prudent or reasonable decisions on matters to which they act upon. (2) Director must have informed himself with respect to the business judgment to the extent he reasonably believes appropriate under the circumstances. standard of review being the business judgment rule. the decision will be reviewed not to determine whether it was reasonable. The Del. he looses his corporate cloak and can be held civilly liable so is really protected only for contract matters.18(b) A violation of a standard of conduct is the legal cause of loss if the plaintiff proves that (i) satisfaction of the applicable standard would have been a substantial factor in averting the loss. his colleagues would have followed his lead. It is not a defense to liability in such cases that damage to the corporation would not have resulted but for the acts or omissions of other individuals. (2) large amount of liquid assets create temptations. The ALI's principle of Corporate Governance states that a director has a duty to perform their functions in good faith. Learned Hand. (1) duty to monitor. ALI § 7. 49 . The business judgment rule will not apply when a board fails to reach an informed decision. (2) duty of inquiry. in which case they will have the burden of showing that the transaction is fair. If the four conditions are met. The standard of review applied to these duties is less stringent then the standard of conduct. The business judgment rule consists of four conditions. The application of this standard of conduct to the functions of directors results in several distinct duties. (b) Or more narrowly. simply because in that case the inattentiveness will not have been a cause-in-fact of the loss. Supreme court has since rejected the reasoning in Barnes v Andrews. in a manner that they believe to be in the best interests of the corporation and with the care an ordinary prudent person would reasonably be expected to exercise. J. Notes on Standards of Review and the Business Judgment Rule Standard of conduct states how someone should conduct a given activity while standard of review states the test the court should apply when reviewing someone's conduct. Bank/Financial Institution Directors can often be held to have a higher duty of care due to. (1) interested depositors in addition to shareholders. which if satisfied. and (ii) the likelihood of injury would have been foreseeable to an ordinarily prudent person in a like position to that of the defendant and under similar circumstances. that an inattentive director will not be liable for a corporate loss if full attentiveness by all the directors would not have saved the situation. each director will be liable for any loss of which the boards failure is the cause-in-fact and proximate cause. If a director commits a tortuous act. is applicable to claims based on the quality of a decision. The ALI comes down where if the Board as a whole has violated it's duty of care either by omission or commission. and (4) duty to employ a reasonable process to make decisions. The four conditions are: (1) Director must have made a decision. can be read for two propositions: (a) That an inattentive director will not be liable for a loss that would have been prevented by an attentive board unless it is shown that if the director had been attentive. but that the situation would not have occurred if he had performed his duties. and (4) Director must not have a financial interest in the subject matter of the decision.
or people making judgments on your performance based on hindsight. Additional problem in strong enforcement is that all the benefits of a good decision accrue to the corp. Joy v North Builder is getting deeper and deeper in debt. Essentially by-passes Directors and puts certification duties directly on the officers themselves. Likely that Sarbanes will now start creeping into state law.Directors and Officers Liability Insurance Three elements may serve to reduce or eliminate civil liability for breach of duties.e. Supreme Ct. As long as there is a process duty of care is met. 1964: Does the existence of Sarbanes application effect the application of State law? Most important now is audit committee. no win situation. No-win situation's can be different from a "bet the farm" situation. Issue is now need to comply with Sarbanes.: Suppose one director talks others into buying his house at an inflated price? The one director violated his duty of loyalty. As long as there is a reasonable process with reasonable care should be ok. direct limits of liability. gives audit committee power and then establishes rules to disallow manipulation. directors are not giving an adequate effort of attention. i. If you're not making business judgments but just accommodating you are not protected by the business judgment rule. Liability and legal expense of directors who are subject to claims based on a lack of duty of care and other wrongful acts will often be covered by Directors' and Officers' insurance. Illegal behavior would be a violation of the duty of care. Precursor seems to be Caremark. reporting requirements. even if intention was to assist the business. Appropriate funding must be given to audit committee. while others are in violation of duty of care. must be financially independent. dictum by Allen but then picked up by Del. Most duty of care cases are non-feseance cases. Requires CEO to certify that to the best of his knowledge numbers are accurate and he has done investigation within 90 days. 50 . duty of loyalty is basically incentives to keep managers from being thieves. FL adds a good faith requirement. If clearly illegal against social policy and duty of care. Note on pg 544 is good summary of what duties are. while all the bad decisions will be accountable for by the director personally. risks that may be acceptable in other industries. Class Notes Duty of Care Doctrine Why do you have both duty of care and duty of loyalty? Duty of care designed to promote profit maximizing goals of company. regardless of state law corp. Sarbanes-Oxley pg. overriding previous law in Graham. Must put in procedures. standards and rules in place. Rational is do not want bank directors to be taking unnecessary risk with depositors money. Courts will use business judgment rule when confronted by dissident shareholders. Business hindsight bias is a worry. Duty of care is that a manager should act in the manner that a reasonable person in similar position would act. Now Sarbanes seems to override Caremark doctrine. Parnes v Bally Entertainment Seems to be a slight back-track from Van Gorkom. Ex. insurance and indemnification. Must put in whistle-blower protections and rules about disclosure by in-house counsel when they discover financial irregularities. Good loan after bad then business finally fails.
daughter of Lillian Pritchard. then sought to distribute the shares out to stockholders as a special dividend. Smith v. NOTES: Lists 5 exceptions to business judgment rule. arbitrary action or a breach of trust. (1) they did not adequately inform themselves as to the CEO's role in forcing the sale and establishing the share purchase price. NOTES: Unusual case as has duty to creditors as executrix. Company is a sitting duck for a takeover. take Van Gorkom at their word. Kamin v. Pritzker can buy a huge minority share at $38. Van Gorkom puts the number out there. and offered a buyout package at $55 per share without the boards knowledge. Should have resigned if unable to perform duties. Defendant. United Jersey Bank FACTS: Plaintiffs are trustees is the bankruptcy of Pritchard & Baird Intermediaries. and duty to shareholders as director. Van Gorkom FACTS: Class action brought by shareholders of Trans Union seeking rescission of a cash out merger with defendant New T Co. Van Gorkom. 51 . is executrix of her estate. Trial court characterized payments by the Pritchard’s as fraudulent conveyances ad entered judgment of $10. No evidence of illegality or that four directors whose compensation was keyed to earnings induced undue influence on the other 16 directors to vote their way. Van Gorkom autocratic CEO nearing retirement and with a large shareholding.. AMEX purchased $30M of DLJ stock as an investment which dropped to $4M. Considered by many a bad decision. ISSUE: Whether the directors reached an informed business judgment in agreeing to sell the company as it regards to two questions: (1) whether the directors an informed business judgment at the Sept.Does business judgment rule eliminate the sting of the duty of care? Freancis v. Van Gorkom met with his friend. Deal allows in event Van Gorkom sells shares to anyone else at above $55. a subsidiary of Marmon Group whose owner is Jay Pritzker. RULE: Courts find director liable i negligence for the losses caused by the wrongdoing of corporate officers. ISSUE: Whether actions of the directors of AMEX to pay dividend rather then sell shares was a violation of duty of good care. explored a leveraged buyout after a "first and rough cut" analysis from the CFO Romans using $50-60 per share as a baseline for seeing if a buyout was feasible and to determine necessary cash flows. In Del. and (2) if not. Holding is that business judgment rule protects the dumb. and (3) were grossly negligent in approving the sale of the company upon two hours notice without exigency of crisis or emergency. Court says she has affirmative duty to bring the matter to the authorities if she is unable to resolve the situation. Some states have opt out provisions. 20 meeting actions did not cure the problems. Van Gorkom approaches Pritzker to buy his shareholdings at $55 a share. CEO of Trans Union. American Express Co. then forgo an $8M tax credit in order to hide the bad investment. and company can not go out and solicit other offers.3M against estate. RULE: Directors did not reach an informed business judgment in voting to sell the company because. but also fraud. whether their actions subsequent to the meeting were adequate to cure any infirmity in their action. legislature includes opt in provision so that a corporation can include in their articles of provisions that corp. FACTS: Complaint is brought derivatively by two shareholders asking for a declaration that a certain dividend is a waste of corporate assets. ISSUE: Whether a corporate director is personally liable in negligence for the failure to prevent the misappropriation of trust funds by other directors who were also officers and shareholders of the corporation. Can read Freancis as either a duty to report to the authorities or duty to investigate and report if something is amiss. The court never reaches the second question as directors post Sept. Board does not get to see merger documents. RULE: Business judgment rule requires that more then just the showing of another course of action is necessary for an actionable claim. 198 meeting. without opt. Jay Pritzker. Van Gorkom had been an officer for 24 years and was approaching mandatory retirement. directors will not be held liable for business decisions. (2) were uninformed as to the intrinsic value of the company. NOTES: In response to case Del. American Express bought DLJ stock which tanked. in Van Gorkom still good law. One view is that it is a self-dealing case as Van Gorkom ran the whole deal and did not fully inform others. 20.
and (2) a statute that makes managers criminally liable for unlawful acts of employees over whom they have the power of control. or when it arises from unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. RULE: In order to show Caremark directors breached there duty of care by failing to adequately control employees. B. Regarding the "negligence" claim.what constitutes duty of care and gross negligence is that board is not supposed to make rash and uninformed decisions. Alleged was a breach of directors duty to exercise diligence in handling affairs of the corporation. ISSUE: Whether shareholders had a basis for action for breach of duty. Caremark was charged with multiple Federal violations after a four year investigation. Miller v. dissent says if the deal is good enough they should be able to go through with it and give directors benefit of business judgment. and (4) that such failure proximately resulted in the losses complained of. majority retorts that you should at least engage in some process to evaluate not just blind trust. Issue is also magnitude of the deal. Supreme Ct. (1) the directors knew or (2) should have known that violations of law were occurring and (3) that the directors took no steps in a good faith effort to prevent or remedy the situation. plaintiffs would have to show either. NOTES: Not clear that this truly was an illegal act. RULE: Court points to statutory laws that give shareholders rights to challenge illegal corporate donations thus providing them standing to seek damages. even if that power is not exercised. In re Caremark International Inc. A second class of liability can arise due to failure to monitor. Caremark agreed ton a plea involving one count of felony mail fraud and reimbursements of $250M to public and private parties. leaving only state action for duty of care. Derivative Litigation FACTS: Suit charging breach of fiduciary duty of care by Caremark directors as applicable to healthcare providers. Duty to Act Lawfully Text Outline Two types of statutes are relevant to the potential criminal liability of officers and directors.5M owed by the Democratic National Committee for communications services. (1) statutes that make corporate managers criminally liable for unlawful corporate acts if the managers themselves performed or caused the performance of the act. Response to Caremark was establishment of compliance officers and departments. Blind reliance considered here as all directors relied on Van Gorkom. Directors here made a good faith effort to be informed and did not know the specifics of the activities that led to indictments so they cannot be faulted. affording a preference to the DNC on collection procedures in violation of the Communications Act of 1934 and effectively making an illegal campaign contribution. where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation only a sustained or systematic failure of the board to exercise oversight will establish the lack of good faith that is a necessary condition to liability. Court takes position that this type of behavior as a general rule should be considered illegal. Questions raised about what kind of reports are required and questions should be asked? Supposedly this case only requires good faith and informed process. ISSUE: Whether Caremark's directors breached their duty of care by failing adequately to supervise the conduct of Caremark employees or institute corrective measures. American Telephone & Telegraph FACTS: Stockholders brought a derivative suit against AT&T and all but one director for failure to collect an outstanding debt of $1. this one is a complete cash buy out. but hard concept to nail down. the decision was ill advised or "negligent". NOTES: One case that differs from reasonableness standards of Duty of Care. later rules that private action will not be considered for campaign finance violations. Suit seeks recovery of those losses from the board of directors as individuals. 52 . Court states liability may follow from board decisions that result in loss when.
Levi theory that Fed. The tougher cases are the indirect self dealing transactions such as purchase from a company in which a director has minor stake holding. statute just allows a corporation to include in charter if voted on. normally rescission. § 102(b)(7) does not exculpate itself. § 144 is a major source of law here. especially with close corporations. will those members with special expertise be held to a higher duty? Del Ct. Federal sentencing guidelines have been established in part to response to corporate wrongdoing. Self-Interested Transactions Text Outline In the past a director with a self-dealing transaction was often required to get approval from a disinterested majority of the board. friendly to corporations but an opt in provision. Example is when a director provides a loan to a corporation. i. Class Notes Two types of hard cases.VIII. law is shaping state law. § 102(b)(7) Del. response to Smith v Van Gorkom. The ALI also states that directors or officers who violate their duty of fair dealing should be required to pay attorneys fees and costs required to establish the violation. How is Sarbanes-Oxley affecting? Maybe affecting Del. corporate charter does. A director or officer who violates the duty of fair dealing may be required to repay the corporation any salary he earned during the relevant period in addition to making restitution for his wrongful gain. or conflicting board memberships. and that loan may not have been available otherwise or at a worse rate. law to make it more shareholder friendly. Meinhard v Salmon. Traditional remedies for violation of duty of loyalty are restitutionary in nature. Duty of Loyalty A. Del. Derivative action is an action where shareholder sues on behalf of the corporation against the Directors. Chandler does not dismiss the suit. self-dealing transactions by a director and corporate opportunities that are taken by a director.e. Marsh pg 599: Shift as previously there was a prohibition on self dealing transactions. Pressure of Fed Law on state law also manifests when board members have a special expertise. Courts have sometimes awarded punitive damages against directors or officers who have breached their duty of loyalty. compliance departments can allow you to avoid gross negligence charge and mitigate sentences handed out by Feds. WD II is a case if demand should be excused or not. would be reviewed by the courts subject to rigid and careful scrutiny. family transactions. Sometimes. can get exculpatory clause which protects directors. Explains how many cases were decided in 80's & 90's as judges were looking at the economics of the transaction. self dealing transactions may be a better deal. whether there was a disinterested majority of the board or not. but can argue that Directors will not act so demand should be excused. Standard of liability in Del. Must demand action of the board prior to ensuing litigation. By the 1960's the law had evolved to where the suit of a shareholder. is gross negligence. effectively standing in the shoes of the corporation. recently came down with a case in which the Directors did 53 . and invalidate it if found to be unfair.
After agreement in which Talbot's contributed land and James labor and expertise to build apartments each for 50% share of stock. Eisner fires Ovitz within a year. and transaction is voidable if not shown to be fair and reasonable to the corporation. and whether the transaction was fair. Unsure how broadly or narrowly to read at this point.broadening areas of ordinary business practices that will be viewed. none found in this case. NOTES: Court seems to say that a self dealing transaction is ok as long as it is fair. Inc. president of the Chicora Apartments. adopting a freer standard of good faith.not give information about an investment banking evaluation. Court addresses by reviving the duty of care. one of the interlocking brothers. NOTES: Eisner hires his friend Ovitz as CEO. Business judgment rule does not protect them due to their conflict of interest. Is Chancellor Chandler laying out a different duty of care standard then Van Gorkom and going around § 102(b)(7)? Some say Chandler would be responding to pressures of Fed law. chancellor Chandler throws out. Has been very difficult for medium sized company's to comply with SOX. Del. Directors lack of care in an important business decision will not be protected by the business judgment rule.. alleging that he diverted specific funds to himself while an officer and director. officer. RULE: Acts of intentional misconduct or of omissions not made in good faith will not be protected by the exculpatory clause in Disney's by-laws. FACTS: Case arises out of an intra-family dispute over management of two closely held corporations. charged that his brothers had wasted the assets of SLE by causing SLE to lease business premises to LGT from 1966 to 1972 at an unreasonably low rental. James appeals after judgment against him for $25K stating he was not entitled to overhead and profits resulting from a construction contract. Lewis v. In re Walt Disney Derivative Litigation . who then Eisner claims is a compulsive liar and huge spender. he awarded construction contract to James Construction wholly owned by himself. but would be measured under reasonableness standard. Donald argued on appeal that the court improperly assigned the burden to him to prove waste. Shareholders bring a derivative suite. 2003 FACTS: Suit to disgorge Ovits of his severance payment claiming directors breached their fiduciary duties. LGT intervened and filed a complaint seeking specific performance of an agreement for Donald to sell his SLE stock to LGT. RULE: Burden should have been assigned to defendant directors as they were officers and directors of both corporations. James FACTS: Suit brought by the Talbot's against James.L.. In WD II here. Issue is Disney has a § 102(b)(7) exculpatory clause in their charter. RULE: Directors are prevented from secretly using their fiduciary positions to their own advantage and to the detriment of the corporation and stockholders. avoiding calling a duty of care covered by he statute/clause. In Van Gorkom issue was cash-out merger. Not fair here because contemporaneous market test is not shown here. so it is their burden to prove the transactions were fair and reasonable. Breach of duty of good faith gets the gross negligence standard. but WD II now Chandler gives alternative end around § 102(b)(7). court treats Eisner as a Van Gorkom because he has complete control of the board and only informed them after the fact. ISSUE: Whether the trial court erred in assigning the burden to Donald given a self dealing transaction.. Walt Disney I. James was compensated for his construction supervisory duties 54 .. and stockholder of the company to authorize a contract to a company owned by him from which he received profits and salary. No prohibition on self dealing transactions. & E.. Talbot v. ISSUE: Whether defendant directors of Disney should be held personally liable for a knowing or intentional lack of due care in the decision-making process of Ovitz hiring and termination. WD II transaction is about hiring and salary of board manager. and as defense failed to prove the transactions in question were fair and reasonable he was entitled to judgment. ISSUE: Whether it is a breach of duty of loyalty for James as president. lying director's get nailed but so did a sophisticated business man on the board as his expertise should have allowed him to know the offer was to low and unreasonable. Donald. S. especially § 404 internal controls.
A self dealing transaction can still get by. though harder to satisfy then the business-judgment standard. Looking at nature and adequacy of disclosure is same as looking at disclosure. Page 84 Supp.200 looses. then James made project work. problem of friends on the board who are 55 . Court is not going to just override the vote. the complainant must show that disinterested directors "could not have reasonably believed" the transaction to be fair to the corporation. will be fairness review. just that there was not detailed disclosure. Good faith majority director approval.when he received his 50% share so he is not entitled to any other compensation. or § 144(a)(2): Disclosure and Good Faith majority shareholder approval. § 144(a)(1) requires looking at this particular transaction at this particular time to make sure it is a good deal. Statutes such as that in NJ have made it clear that a transaction is not voidable solely because of a director conflict if any one of the following conditions are met: (1) the transaction was fair at the time it was authorized. under exacting scrutiny. Oolie defendant directors who had made a loan to the company claimed that only the business judgment rule should apply as the transaction was approved by disinterested directors. Statutory Approaches Text Outline A review of the substantive fairness of a self-interested transaction may be thought of as a surrogate for a review of the fairness of the process by which the transaction was approved. Court states that where there has been authorization by disinterested directors. the court rejected this argument. Chandler says need fully informed vote. plus did not have to pay up front. To build apartments from another company other then James' would have cost $25-35K. (2) disclosure was made to directors of the conflict and disinterested directors approved. Chandler saying folks to worry about are the controlling shareholders. if it is a good deal for the corporation. B. Many of the recent statutes on this subject are susceptible to the interpretation that approval by disinterested directors precludes a judicial inquiry into fairness. Van Gorkam. some disclosure. and to any conflict of interest. or? § 144(a)(3): Fairness Disinterested Directors are those that do not stand to have financial interest. Class Notes Del Corp Statute § 144: Interested Directors § 144(a)(1): Disclose must be of material facts to the contract or transaction. Question comes down to what is the necessary level of disclosure balanced against a fair deal. This test is intended to be easier for the director or senior executive to satisfy then a full-fairness test. some fairness. looks at business judgment rule and fairness. and there was adequate disclosure that he was going to be the general contractor. but almost all can also be interpreted not to preclude such an inquiry.e. Bottom line is deal seemed to be substantively fair. Cook v Oolie. Disinterested directors goes back to issue on one overriding board member being an overriding influence i. Question is fairness alone a factor that can be decided on by the courts or a factor that must be in addition to (1) and (2) allowing for court second guessing? Courts focus on different branches of the above. but fair process must occur and vote needs to be fair. In Cooke v. Oracle is closer to the duty of care obligation then Beam case. NOTES: Talbot the incompetent wins and James who makes a total of $2. and will consider business judgment as opposed to Huizenga that looks at process only. did not disclose that he was going to get up front fees. Court found that there was not disclosure that James was building due to failure to inspect books. or (3) disclosure was made to the shareholders and the shareholders approved.
and that these contracts were a contributor to the success of the organization precludes finding a breach of fair dealing. i. Lewis looks at self dealing deal. Model act provides very bright line rules. Eisenberg does not like self dealing transactions and feels shareholders do not know if a deal is fair or not. Hall's stance on both sides as a corporate fiduciary alone is sufficient to require the demonstration of entire fairness. Other jurisdiction approaches: CA statute if shareholder vote no just and reasonableness review. interested party.expected to vote with the CEO. burden shift to plaintiff to show unfairness. SOX comes right out and says that if a company has to come out and restate earnings. Cooke. if director vote there will be one. Friend & Golf Buddy on board. Court says to look at the great job he did for the company.. alone not enough to be an interested party but a factor that can be weighed if other factors are present. May's directors were also enjoined. § 102(b)(7) does not permit shareholders to exculpate directors for violation of loyalty or good faith. business judgment rule etc. Eisenberg wants to say that courts need to get in and perform fairness review as a backstop to § 144. even after saying profitability is not the litmus test. If Self Dealing transaction. Ct.. the fact that adequate knowledge of information was provided to the board. Takes a hard look to see if § 141(a)(1) applies. but chooses not to look at those factors in as high a level of detail. Court says there was no need to disclose profits. by acquiring control of Cookies and executing self-dealing contracts breached his fiduciary duty to the company and fraudulently misappropriated corporate funds. Director defendant can avoid personal liability only if they have 56 . CEO. courts pick different rules as in SC Talbot court picking disclosure as the key issue. Oolie first said will need to look at fairness of transaction. If disclosure is supposed to be so fact specific how can you say no one was harmed? Argument against Speed is that he set up deal so that he earned cash. especially under SOX. Cookies knows of self dealing and disclosure. Key point is subtlety of differences in self dealing reviews by different court jurisdictions. Interlocking Directory. Del. RULE: Though no longer controlling shareholder. otherwise business judgment rule. NOTES: Cookies BBQ sauce not making any money until Speed Herrig came into the business picture. Options for review are smell test. judge changes mind in later case that if not majority shareholder burden is on plaintiff to show unfairness of process. Herrig agreed to an exclusive distributorship agreement for the barbecue sauce through an existing network of auto-parts stores of which he was sole owner. ISSUE: Whether self-dealing transactions by Herrig were a breach duty of fair dealing. that compensation for those contracts was fair.482 approval by shareholders needs to be by majority of disinterested shareholders. Sup. interested party. Misreading of Talbot? Court is interpreting statute as saying that board has some level of inquiry and scrutiny. Fliegler v Lawrence: Can read Fliegler more narrowly then what is stated. same with Nakash. the CEO needs to kick back the compensation they received during that time. while all other shareholders were holding shares they could not sell. RULE: Though self-dealing transactions were numerous. Cookies Food Products v. FL § 607(6). Emerald Partners v Berlin . Emerald. if statute applies: If: a) § 144(a)(1)-----Business Judgment Rule (?). Though Oracle is Chancellery Ct and Beam v Stewart is Supreme Ct. Lake Warehouse FACTS: Plaintiff alleges that Herrig. Kahn or If: b) § 144(a)(2)----Interested (controlling) shareholder. Courts have been reviewing the fairness of self dealing transactions to varying degrees. but does not completely give up looking at fairness of the deal. president and getting a consulting fee. Herrig later purchased adequate stock to become the majority shareholder and replaced four of five board members. He is majority shareholder. 2001 FACTS: Emerald Partners LP filed action to enjoin consummation of a merger between May petroleum and thirteen corporations owned by Craig Hall. Economic interests. burden on D to show fairness.e.
but compensation is necessary. (3) the corporation has an interest or expectancy in the opportunity. the Waste Doctrine. (2) the opportunity is within the corporations line of business. Miller v. Another is the Durfee "fairness" test.established that their failure to withstand an entire fairness analysis is exclusively attributable to a violation of the duty of care. The ALI states the general rule directors/executives may not take advantage of a corporate opportunity unless (1) directors/officers first make the offer to the corporation and disclose the conflict. Guth v. SEC disclosures of salaries are required. challenge could only be made under the doctrine of "waste. (c) the rejection is authorized in advance or ratified. 1999 FACTS: A Republic Industries shareholder brings suit on the grounds that acquisition of AutoNation was unfair. (2) the opportunity is rejected. but has not been going far. Directors of E-Bay were charged with accepting "flipping" stock from Goldman. Class Notes Three categories of corporate opportunity. give shareholders ammo in lawsuit." RULE: Court rules that the doctrine is an unnecessary vestige and more then adequately covered by the business judgment rule and other doctrines. As acquisition was ratified in a proxy. Brudney and Clark proposal is attempting to map out a safe zone. (3) the corporation holds no interest or expectancy in the opportunity. As a corollary. Lines of tests for corporate opportunity standards: 57 . and (4) by taking the opportunity the corporate fiduciary will thereby be placed in a position hostile to his duties to the corporation. Directors vote on their own compensation so scurrilous area. Waste is dead in Del. E-Bay: Shareholders file derivative suit for usurping corporate opportunities. an opportunity that should have gone to the company. E-bay insiders are held to be potentially liable as this "gratuity" should have rightfully gone to the company and was intended to bring business Goldman's way and thus is a likely breach of fiduciary duty. IRS baseline of $1M for CEO salaries. D. The Corporate Opportunity Doctrine now as outlined by the Del. and (4) the director has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. he may take the opportunity if: (1) the opportunity is presented to the director in his individual and not his corporate capacity. C. (2) the opportunity is not essential to the corporation. Harbor Finance v Huizenga . Compensation. Del Chancery. Loft progeny is that a director may not take a business opportunity as his own if: (1) the corporation is financially able to exploit the opportunity. (3) either (a) the rejection is fair (b) the opportunity is rejected in advance by disinterested directors. The Corporate Opportunity Doctrine Text Outline The main test applied to the Corporate Opportunity Doctrine is the "line of business" test first applied in Guth v Loft. Miller holds a combination of these two tests. and the Effect of Shareholder Ratification Class Notes Numbers with stock options are huge. Supposed to be dealt with in public corporations as not self dealing so given great deference by courts. SOX requires kickback of compensation. also looked at more closely in close corporations due to opportunity for manipulation.
but states that disclosure would create a safe harbor. 58 . They went to CA at their own expense and on return advised appellant about attractive real estate deals there. so ok for insider to take an interest. Corporate opportunity is subset of duty of loyalty. Ballentine takes all other tests and lumps them together as one. Pablo entered into an agreement to purchase two parcels of land on behalf of the appellant. Delaware Court does not adopt disclosure requirement. Traditional three factors in corporate opportunity defenses: Financial incapacity (Pablo case).. opportunity presented to board. same line of business test as Meinhardt v Salmon. Adopts view if corporation already has an interest. ALI disclosure standard pg 679.). (5) Broz: Del. in which he had an agreement for a kickback of 1/2 the commission from the selling agent. (4) Mixed Miller: Courts focus on is the taking of the opportunity harming the corporation. No other tests require disclosure as a precondition. 4 factors in Broz test. Test is does the opportunity present an especially favorable business opportunity for the company given necessary assets and talents. Broz important case due to interlocking directorships. Difference between ALI/NE test and other is the disclosure factor. Harbor: Adopt a test of full disclosure and rejection. Pablo explained that as a real estate agent he was entitled to commission after close. is opportunity interest in an area of business where corporation would be expected to participate. Often contradictory lines of argument. Test up until Broz. Can business afford and adapt to the corporations point of view. Intermediate step to Broz. Very property ownership view. case on line of business. special or unique value. Ct.E. Basically saying look at the overall fairness to the corporation. Business judgment rule if opportunity was rejected by directors. (6) ALI/N. Currently law in Del. i. Problem with what specificity of the business areas should be. Court views financial ability to take on opportunity as a defense putting burden on insider to prove if they go after the opportunity. all factors must be taken into account given to context. Also includes a "how did the opportunity get to the director" test.e. Will never be fair for insider to take opportunity that could have been corporations. HW. and need to look carefully if assets are being utilized. Financial incapacity of corporation is often the key defense accepted by courts. legal incapacity. E-bay had a particularly unusual situation as the four directors had 40% control of the corporation and were paid only in stock options. What are your obligations when you own the company vs. but can make argument for an opportunity that was rejected. easy case as corporate assets were used in secrecy requiring handing over all shares of new corporation.(1) Interest/expectancy: Starts in Alabama case. what are your obligations when you sell your stock. especially with conglomerate type business'. Would not fly today and even Alabama has narrowed. E-bay has a very broadly interpreted line of business. same line of business. No one factor is dispositive. answer no. 1971 FACTS: Pastor Pablo and Rufina Pablo were directors in Pablo Realty. (3) Fairness: Ballentine analysis. Interest and expectancy broadly defined as well as how opportunity came to insider and nature of opportunity. view. Sup. Hawaiian International Finance v Pablo . (2) Line of business: Guth v Loft Pepsi case discussed in NE Harbor is key Del. When would it be fair to make a judgment that it is a corporate opportunity or not. and refusal to deal (third party will not deal with Corp. Interest band expectancy broadly interpreted.
he could possibly have used asset after if venture unsuccessful. court focuses' on secrecy. especially closed corporation context. Northeast Harbor Golf Club. Outside directors are basically charged with checking the power of the inside directors. RULE: In the past the view was that directors cannot serve both themselves and the corporation at the same time. Pablo is liable to appellant for the commissions he received. absent disclosure and an agreement with the corporation. Disclosure is a key element though. 59 . NOTES: Unclear use of corporate asset for benefit. and here Harris did not disclose the opportunity to the court so the prior judgment in her favor is reversed. strict rules are no longer applicable. v. Inc. Now the court feels that it is important to preserve some ability for corporate fiduciaries to pursue personal business interests that present no real threat to their duty of loyalty. RULE: Had Pablo disclosed the fact that he had been anticipated commissions the case would be different as appellant would have had an opportunity to either attempt to obtain the property at a price less the commission or it could have agreed with Pablo to acquiesce in letting him retain the commission.ISSUE: Whether a corporate officer acting for the corporation in the purchase of investment real estate can retain a commission received from the real estate brokers representing the seller. Harris FACTS: Club maintains that Nancy Harris breached her fiduciary duty as president of the club by purchasing and developing property abutting the golf course. Courts now feel that is some circumstances. ISSUE: Whether real estate transactions that were not in the interest of the club were a breach of fiduciary duty. NOTES: Maine court chooses to use different doctrine then normal corporate opportunity doctrine.
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