Business Associations

I. AGENCY
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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II. PARTNERSHIP
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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Business Associations
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

I. Agency
A. Introduction
Text Outline

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.
Class Notes

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
Text Outline

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

Liability is usually based on the implied warranty of authority theory. the general rule is that the agent is bound. either (1) affirms the agent's conduct by manifesting an intention to treat the agent's conduct as authorized. or (2) knowing of such belief and that others might change their position because of it. 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. Termination of agents authority: The general rule is that the principle has the power to terminate an agent's authority at any time. or (2) engages in conduct that is justifiable only if he has such an intention. the general rule is that the agent as well as the principal is bound to the third person. if (1) he intentionally or carelessly caused such belief. the principal is under duty to indemnify the agent for payments authorized or made necessary in executing the principal's affairs. or reliance damages. but some authorities apply the theory that the agent can be held liable on the contract itself. apparent. Inherent Authority: Under this doctrine agent may bind a principal even when the agent had neither actual or apparent authority. Liability of Principal to Agent: If an agent has acted within their actual authority. the general rule is that the agent is liable to the third person. so that the principal is bound to the third person. the agent's liability to the third person depends on whether the principle was disclosed. partially disclosed. 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. If the principal is not bound by the agent's act. 6 . Ratification: A principal will be bound to a third person if the agent purported to act on the principal's behalf. the agent is liable to the principal for any resulting damages. because the agent did not have actual. or undisclosed. Good drafters can read the other side and work around or avoid these issues. 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.transaction was entered into by or for him. and (2) the third person reasonably believes the agent is authorized to do the act. then with knowledge of the facts. even if agent is forbidden. then the third person is liable to the principal. Liability of Agent to Third Person: Where the agent has actual. even though the principal is bound too. Acquiescence: If the agent performs a series of acts of a similar nature. apparent. if (1) the act usually accompanies or is incidental to transactions that the agent is authorize to conduct. Difference being that under the 'liability' theory. 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. although is must be objectively manifested. the general rule is that the agent is not bound to the third person. even if doing so violates a contract between the principle and the agent and it was agreed that authority was irrevocable. Similar to apparent authority. but if the principal is nevertheless bound because that agent had apparent authority. he did not take reasonable steps to notify them of the facts. expectation damages could be collected while under 'implied warranty' theory only losses suffered by entering the contract could be recovered. If disclosed. or inherent authority. Applicability is murky but under §161 Restatement the principal may be liable. If partially disclosed. if the principal is bound by the agent's act. This rests on the ground that personal services will not be subject to specific enforcement. Liability of Agent to Principal: If an agent takes an action that they have no authority to perform. or inherent authority. Ratification need not be communicated to the third person to be effective. If undisclosed.

for collections due to unpaid fuel bills incurred by Dawn partner. very close to apparent authority. but their actions implied ratification. Inherent Agency Power: When have undisclosed principal by definition there is no apparent authority. Damages can also work differently in estoppel vs. Can not give agent complete authority. Restatement says that it will be looked at what a reasonable agent would have thought they had authority to perform. Courts will look at your document to decide what parties intended. not necessarily third parties. even if unauthorized. go to case law. Must be a disclosed principal in order to have apparent authority. Estoppel Authority: Estoppel is tort doctrine. Reasonableness test would also apply when circumstances change and the agent is aware. where they are told by Dawn that they will be taken care of. Furthermore. Actual Authority: If a P appoints an agent. Estoppel can help when you can't establish agency so contract theory does not work. can also be social restraints. 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. Here you are saying that the principal is denied from estopping the authority of the agent. There can be both express and implied actual authority. Can have apparent authority without actual authority and visa versa. The limiting factor on what a principal is liable for when undisclosed agent acts outside of trade norms they will not be held liable. was an agent with implied authority to Morris. Implied/incidental authority is tasks that need to be completed to conduct the assigned task. Morris Oil v Rainbow Oilfield FACTS: Morris Co. would be considered to have been implied authority. but conversations at best ratified Dawns acceptance that Morris would get paid out of Rainbows liabilities. but also can have ratification if the principal accepts the benefits of the agreement. Courts have said though that P can not put to A all the authority vested in P. Can also be express or implied. incurred during the regular course of business. P will be bound to A's actions. Morris tracks down Rainbow for payment and learns of Dawn escrow account. Can have IAP when principal is undisclosed as third party would have no need to go through an agent. P agrees to be bound as P would have been bound if they had entered into directly. It is clear that Dawn ratified the open account after learning of it's existence when Morris contacted Dawn regarding payment. Dawn collected the receipts and was thus aware and retained benefits from its agency relationship when dealing with Morris. sues Dawn Co. Court makes leap that all of Rainbows liability is now Dawns liability. Need to act in a way to maintain the interests and relationship between the parties. but deal with principal themselves and should not be held liable for agreements for which they may not be aware. trucking operator Rainbow. RULE: Under the principle of Undisclosed Agency Morris could not have been aware of the terms of the agreement between Dawn and Rainbow. There should be at minimum an implicit acceptance. 7 . but be open about issues of conflict. Apparent Authority: Important is that view is based on what would be a reasonable interpretation of the agent of what their expectations are. even if not fully authorized. in supposed violation of the contract not allowing it to incur debts. Nothing in restatement defines what a reasonable expectation is. Always about manifestations from P to A. but your drafting can help shape intentions as parties intentions are not necessarily fully realized or understood at the beginning of the relationship. ISSUE: If Dawn is liable for bills incurred by its partner Rainbow. NOTES: Agreement specifically states there is no agency between Dawn and Rainbow. thus their dealings with Rainbow were as one could expect and in the normal course of business. Ratification: If the principal has accepted the benefit with knowledge of relevant facts of the contract. Shirley.Also need to let clients know of the possible pitfalls of an agreement.

Protective language in the transaction confirmation did not overcome the fiduciary relationship. even if no harm was done to the master. Needs to be a consensual relationship. was informing his customers that he was not accepting any commissions. page 6 Manifestation by P. Eisenberg's foreseeability argument vs.Court also makes the assumption that installing a bulk dispenser is in the ordinary course of business. ISSUE: Whether the relationship of the respondent and his customers was one of agent/principal requiring a duty of disclosure. Can't indemnify for apparent or unauthorized practices. Consent by A. the representations of Binder. Dawn is also an undisclosed principal in this case Matter of Allender Company FACTS: Securities broker. trade practices view. and that he had a duty to disclose all material facts. possibly hire other agents to oversee agents. was this an arms length sales relationship or a fiduciary agency relationship? SEC looks at conflicting express words of sales agreement vs. 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. Agency Cost Problem: Problem with agents making mistakes or errors. as gains were solely by the position he occupied. Trade practice restrictions should be sufficient to hold principal liable for actions of his agent without allow them an "out" clause on contract terms. 8 . leading to spiraling costs. Proposed restatement 3rd eliminates these distinctions. Duty of Loyalty Text Outline In a case where a servant enriches himself by taking advantage of the position he occupies. he could not deal with his customers as an adverse party without their consent. He then proceeded to sell securities at a cost well above the quoted market values. Liability Restatement Sec. need to be nominally under control and working on behalf of another. any profits are due to the master. Binder. or loss due to divergent interests/decisions Class Notes Agency is about represental relationships of all kinds. and be under control of P. Problems with the distinctions as it is hard to predict whether this increases or reduces liability of principals. C. There are costs involved in the monitoring of agents. RULE: The SEC found that certain obligations arising out of this relationship were due on the part of Binder. while at the same time limiting liability so that the use of agents does not become excessively risky. that there was an agent/principal relationship. Respondent claims he owes no duties to disclose profits and is free to conduct these transactions. but this is an arguable point. defined as: •The monitoring expenses by the principal •The bonding expenditures by the agent •The residual loss. 1. Question to SEC. and failing to do so was fraud. do not have to be written or exchange of consideration. unequal bargaining relationship and decides that there all factors favor the widows and is an implied relationship.

and tell them that D would pay their expenses. if unpaid there is no special agency based duty of care. but fidelity of the agent is what is aimed at. Absolute ban on self dealing when the subject is trusts. act as booking agent. Ch 5 of Restatement of Agency. contract "in" no self dealing. that commission is due to the principal. Also. D instructed Fuller to learn what fees the artists expected. no self dealing at all. when in fact he had investigated only 5 of the 75 locations. The restatement falls in favor of the K Out theory. The dealers would pay costs. If agent is paid need to exercise duty of care and skill. S390 Disclosure. the principal is entitled to recover from him even if he has been made whole again. agent may not be relieved of duty to disclose even if principal expresses a desire not to know. court review. Absolute prohibition on kickbacks and profits. P. Illustrations pg. jury agreed. RULE: Actual injury is not what the law proceeds on. Resop FACTS: P engaged D as his agent to investigate and negotiate for the purchase of a route of coin operated music machines. What if agent advises the principal of his actions? See Restatement S23. P alleges that D represented to him that he had done a thorough investigation of the route. he also adopted false representations from the sellers and adopted them as his own. Estoppel was created by the trade setting in which singing recitals are 9 . Kidd v. but also by the setting in which they occur including trade custom. Thomas Edison FACTS: The issue is whether an agent. P filed suit against D alleging D received a secret commission from sellers. 31. Upon suit P received a $10K judgment. (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. ISSUE: Whether principal can recover damages from agent due to self dealing misdeeds on his part.Fiduciary Duties Choices are you can contract "out" of specific violations (fairness). it is generally held that where the wrongful act of the defendant involved the plaintiff in litigation. he is entitled to recover the costs as damages. RULE: That the scope of authority should be measured not by words alone. agent is to act solely for the benefit of principal. and damages for losses. P purchased such business from sellers. which would have been profits due the principal. Loechler and L. Termination of Agency powers. Thus a principle can recover from his agent any benefit resulting from a violation of his duty of loyalty. and D would guarantee performance. had authority to contract with Thomas A Edison Inc. P claims contract was for an unconditional singing tour. and Restatement S387 Unless otherwise agreed to by principal. If principle is not business savvy. Tarnowski v. any hidden dealings by agent that result in commission. D contends Fuller's only authority was to engage P for only the recitals which he could book with record dealers. Agent has a duty of fair dealing with the principal. 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. Fuller. Sellers refused to return his down payment. Mayer. ISSUE: What was the degree of Fullers 'apparent authority' as contrasted to the express authority given to him by D. and see that the money was paid. P discovered the falsities and rescinded the sale after having paid an $11K down payment. Principal is also indemnified by the agent for any loss which has been caused to his interest by the improper transaction. Maxwell. you need to reveal the existence and extent of adverse interest. even if economic results are ridiculous.

normally hired. (3) a mutual right of control or management of the business. Watteau v. while partnerships can be organized with no formalities or filing. and (4) a community of interest in the venture. NOTES: Learned Hand is promoting his social policy here. intent to form a partnership is not necessary. Florida adopted RUPA as FRUPA. (1) an agreement to share profits. LH uses trade custom both to limit liability in a new industry and to hold them liable if they take advantage of agents. D argues that purchases were by manager on his own credit and it needs to be shown that he is an agent in fact. Erkmann: A partnership is 'an association of two or more persons to carry on as co-owners a business for profit. Not every state has adopted RUPA. General 10 . Uniform Partnership Act and RUPA. without these conditions imposed. (2) an agreement to share losses. but he died and was completed under an aggregate concept. II. Original theory was that partnerships should have separate legal standing. Lower court held D liable even though manager was never expressly made an agent and exceeded his authority. 2. Class Notes Partnerships regulated by UPA. he then uses analogy. and upon discovery by this Brewery (P) they sued for the value of the goods. principal will be held liable for actions of the agent even if unauthorized as long as within standards of trade practice. which were only to be supplied by D. need to know only the few differences between the two. or their agents take advantage. Corporations. Partnership Formation Text Outline Hilco Properties v. or Revised Uniform Partnership Act. a limited liability companies can only be formed when certain formalities are complied with an filed with the state. especially where the rights of third parties are concerned. United States: It is immaterial that the parties do not call their relationship. 1990's movement to make UPA more in line with business processes. Manager purchased other goods. LH says he is interpreting trade custom. and the third party dealing with the agent is unaware of relationship and conditions between agent and principal. How do courts decide if a particular entity is a partnership? RUPA S 201 & 202. Arnold v. or believe it to be. A relationship will be considered a partnership only if four elements are present. UPA is more complex. this way he gets to choose which custom to apply to a new business model. Trying not to unduly protect reckless business' but not to reward improper behavior. Notes On Formation of Partnerships 1. In their agreement the manager was forbidden to purchase certain goods. Partnership A. a partnership. This four element test departs from the statutory test of UPA and RUPA. Partnership by estoppel is possible S 16 UPA. RUPA has explicit statement that partnership is an entity. limited partnerships. Problem with UPA is that when Ames began drafting. LH relies on trade customs but the P is arguing that the deal is different so it is hard to reconcile. he was a proponent of partnerships being separate. Fenwick FACTS: A Brewery (D) who owned a beerhouse appointed a manager in whose name the business was licensed. ISSUE: Whether the doctrine of principal and agent applies given agent is undisclosed. P argues that manager was an undisclosed principal clothed with the authority to do business on behalf of D. RULE: That when a principal is undisclosed.

An agreement was reached though whereby they would loan KN&K $2. constituted a partnership having been formed even if not contractual. Peyton to use as collateral. 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. PPF obtained resignations of partners. Hall is manager. for construction of a custom auto putting down $500 and further payments of $4K. a fenced off loan as in Martin. Hall. all refused. Hall offered a partnership to Mrs. Peyton FACTS: John Hall. Nothing in UPA or RUPA points to tax filings as determinative in any way in deciding if a partnership entity has been formed. PPF consulted on important matters. they were to receive 40% of the profits until the return was made. a partner in KN&K. Lupien v. Plaintiff never received his vehicle. as part of York Motor Mart. collateral. freeman and Mrs. 11 . obtained a loan of $500K of liberty bonds from his friend Mr. Peyton along with Mr. NOTES: $85K here used as working capital vs. When things start heading south with the business the incentive becomes strong to try and structure a party as a lender vs. express or implied. even if agreement states no partnership was intended to be created. Mr. PPF has only veto power. with exceptions listed. Share in profits considered one of the foundations necessary in partnership creation. floor/ceiling on profit sharing. need to look at underlying statutes in jurisdiction for legal guidance. How to Create Partnerships Partnership must be by two or more persons as co-owners in the business for profit. If nothing else appears the receipt by the defendant of a share of the profits of the business is enough. Sharing of returns does not necessarily establish a partnership. 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. Malsbenden claimed his relationship to York was only that of a banker. Perkins. Malsbenden FACTS: Plaintiff entered into a contract with Cragin. and dealings with third parties. no filing requirements. Pro Partnership Prov.partnerships are very elastic forms of business ventures. To ensure against loss. 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.5M in securities that the firm could use as collateral. Intention will be scrutinized by courts. specific intent to do those things that constitute a partnership. NOTES: Partnership results from contract. sharing of net-profits is prima facie evidence of partnership. Cragin left town but Malsbenden continued to operate the business. Malsbenden retained complete control here of the operation which further leans towards partnership structure. Regardless of what is stated in partnership agreement. Market created creditor protections with negative controls. an insurance policy on Mr. Courts will look at whether actions created an intent to create partnership. Martin v. Pro Loan Prov. here a life saving loan. Additionally. a partner. No loans to partners. KN&K was to turn over securities to the lenders that was to speculative to use as collateral for the bank. both as it relates to the transaction at issue and effects business conditions as a whole. with the interest free loan to be repaid from sales of the autos.: Option to be partnership. Language of agreement. Inspect books. courts may construe partnership based on actions of parties. 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.: 40% profit share.

Sanchez v Saylor Sanchez and Saylor were partners. but party is apparently getting none of the benefits of partnership. Freeman ordered bread just prior to dissolution of approx $171. made clearer in the RUPA. RULE: Yes. UPA then defaults to dissolution of business as remedy in deadlocked decisions. ISSUE: Whether Freeman's purchase bound Stroud. so it deals with many issues as if a partnership is an entity. Can try such things as arbitration and formal separation of functions to relieve deadlock. How to protect yourself from partner? Just dissolving not enough according to UPA as you need to notify creditors. Defendant advised Plaintiff that he would not be liable for future bread sales to partnership. Aggregate: The common law view is that a partnership is not an entity. Legal Nature of Partnership Text Outline Entity v.B. so that a partnership was no more a legal person then a friendship. even if his assent is not required. Hypo pg. RUPA confers entity status on partnerships. 43: B & C prevail. but merely an aggregate of its members. 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. was completed using the aggregate theory. Even though defined as an association (aggregate) under the UPA. and is questionable whether the notification to Nabisco was accurate. actual authority of an agent will not be eliminated. partnership agreements consist of the fragmentary explicit and implicit agreements made from time to time. Smith v Kelley has partner by estoppel. Unanimity is required do depart not only from formal agreements but fragmentary ones also. Class Notes UPA S16 Partner by Estoppel. Can not put that high a level on inquiry duty on a third party. though they have the least stake in the business due to the presumption of equality. National Biscuit v Stroud FACTS: Stroud and Freeman were partners to sell groceries. Plaintiff regularly sold bread to partnership. NOTES: Why is Stroud left liable? The assumption is one partner can not veto decisions of a partner. legislatures may choose to treat as an entity for purposes of statutes. The drafting of the UPA began with an entity theory. while RUPA is able to drastically simplify many partnership rules. as equals in the partnership both men had a right to manage the normal course of business. One partner can not take another partners authority away unilaterally. and both are liable for the purchases. 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. In some areas RUPA reaches an aggregate like result. UPA: Any extra-ordinary action requires unanimity. Operation of Partnerships Text Outline Though the general rule is that partners have an equal say in partnership operations. When not formally in writing. a third party was going to lend money but Sanchez refused to provide his 12 . The UPA withheld entity status from partnerships then created complex rules to arrive at entity results. this can be altered by agreement or by conduct.

or strictly read 18(h)? First thing you look at is written agreement. each partner is liable only for his share of partnership obligations. In two person or deadlock position Summers/Nabisco/Sanchez approaches to resolving the dispute will govern. 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. but can differentiate the cases. thus the obligation to indemnify a partners a partnership liability. Covalt rule might be correct in situation with no self dealing. Summers v. This if a partner pays an obligation. Saylor sued for breach of fiduciary duty. not up to statute requirements. second would be a course of dealing between parties. but is seeking reimbursement from the partnership or other partner. UPA S18(e) provides for all partners to be included in all decisions and information. Some strict proponents of following statute point to lost opportunity cost of investing the funds on the part of the equity investor. No equality assumption in UPA with profits and losses. Dispute between two partners about one hiring an additional employee without the consent of the other. In Covalt one party has 75% of the stock as a differentiator. Is it possible to end run UPA S18(h) by arguing fiduciary duty? Probably not. 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.e. right to be consulted. as between the partners however. and appropriate remedy for disagreements is dissolution. Covalt rule is that each partner has an equal say in decisions. Creates incentives for low equity investor in bad position to cheat. In a proper case. and the obligation to make a contribution is a liability of a partner. but here we have a self dealing relationship. the partnership has a right to require contribution from one or more partners. Remaining partner is entitled to compensation though in UPA for the act of winding up the closure of the partnership. UPA S18(h): No partner is entitled to compensation by the partnership. Dooley FACTS: Partnership agreement to operate trash collection business. so you can have a violation of 18(e) which is not necessarily a violation of 18(h) dealing with decisions. Partner refuses to provide personal financial statements so loan is not given and partnership goes bust. Indemnification and Contribution Partners are individually liable to partnership creditors for partnership obligations. Literal application of statute services only partner would share equally in cash losses of partnership. RUPA is the same as UPA on these subsections. Courts will also imply an agreement of equality of evaluation. Taylor sues for breach of fiduciary duty. but when services partner is compensated he will always have to share in the profits. court will find losses shared the same way and not go to UPA default. Should courts look at informal actions of the partners.personal financial statements. same in RUPA. ISSUE: Whether an equal partner in a two man partnership has the authority to hire a new employee in 13 . If agreement states profits will be shared a certain way. i. court found in favor of Sanchez. He argues that the other partner is sharing in the profits and consented by action. and 18(h) remains the final default to be looked at by the courts. Class Notes Unless partnership says otherwise majority rule will win. he is entitled to indemnification from the partnership for the difference between what he paid and his share of the liability.

To remedy. Unlike UPA. that a partnership is bound by an act of the partner for apparently carrying on in the usual way. NOTES: Lower court says that you can not have a majority with a two person partnership so no liability for compensating hired employee. there was no duty for the Bank to have to inspect the partnership documents. S 301: Lewis theory wins out. D. (1) allowing for notification to 3rd party. Issue is did the Bank have notice as the general partner was acting in his normal course of business? No. and (2) allows partnership to file a statement of partnership authority restricting partners authority. E. the UPA goes to the extreme and under § 15(a) makes partners jointly and severally liable for wrongful acts. RUPA § 307(a) specifically provides that a partnership may sue. or (2) business of the kind carried on by the partnership. RUPA much more third party protective then UPA. Thus joint and several has a slightly different definition under 14 . 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. The major difference between UPA and RUPA concerning partnership authority is that RUPA § 301(1) makes clear. unlike UPA. Liability for Partnership Obligations Text Outline The provisions of UPA governing liability for partnership is an amalgam of the entity and aggregate theories. and be sued in its own name and § 306 provides that partners are jointly and severally liable for all obligations of the partnership. Could have used a ratification argument to possibly sway the court. Partnership obtained notes for project in breach of agreement. Assumption that in real estate transactions title is on file so assumption is easily discoverable. Under RUPA court rules third party would need to have been given information. RNR Investments LP v Peoples First Bank Agreement required general partner to prepare a budget covering costs of acquisitions and constructions. Class Notes Knowledge Exception Obligation to do some investigating under UPA to see if partner has authority. 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. after some time partnership defaulting claiming that Bank should not have issued the notes. UPA §§ 9. 14 make "the partnership" liable for defined acts of the partners. 13. RUPA provides greater protection then UPA to 3rd persons dealing with partners. RUPA can protect partnership from rogue partner by. § 15(b) makes partners only jointly liable for all other debts and obligations of the partnership. 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. however the UPA does not authorize suit against the partnership to enforce these liabilities as the partnership is not an entity. torts and breaches of trust. The partnership should have protected itself by giving the bank notice or filing a statement. however.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. more third party protective. Some states have remedied this by adopting "common name statutes" allowing partnerships to be sued in their own name. (1) the partnership business.

To resolve this UPA treats the matter of partnership property as if it were an entity. Note on Partnership Interests Partners Interest: Although under the UPA a partner does not own property in the partnership. but can not assign his partner function without consent of all the partners. Partners were both income partners and equity partners. 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. property would be held in joint tenancy by each partner. The creditor can foreclose that partnership interest under § 28. Partnership Interests and Partnership Property Text Outline Note on Partnership Property Property used by the partnership may be either partnership property. he does own an interest in the partnership. RUPA does not separate tort/contract and allows joint and several liability. In practice. a partnership can not own property. and creditors cannot levy in such a way as to substitute a partner.RUPA then in the common law sense. Priorities: A major problem in partnership law concerns the relative priorities of creditors of the partnership and creditors of the partners as individuals. or profits. Davis v Loftus Davis complained two lawyers committed malpractice in connection with a real estate transaction they engaged in. Through assorted legal mechanisms. causing its sale. F. 15. Gonzalez: Should not allow one partner to make lawsuit settlement decisions for entire partnership. and (2) separate creditors have priority over partnership creditors as to the individual assets of the partners. 14. The issue may be important in determining. and RUPA dropped it to keep in line with the bankruptcy code. (1) who has the power to transfer the property. there is a two level ownership structure where the partnership owns that assets. RUPA § 203 already treating partnerships as entities. Burns v. The rule was criticized as it kept partnership creditors from getting the full benefit of personal liability of the individual partners. or individual property loaned to the partnership. If the aggregate theory is strictly applied. UPA S 13. UPA § 40(h) provides that. In addition § 501 explicitly abolishes the UPA concept of tenancy in partnership. provides that property acquired by a partnership is property of the partnership and not the partners individually. Court held that income partners could not be held liable as not partners under the UPA. Class Notes Under UPA partnership is aggregate so need to sue each partner jointly for contract disputes. and (3) if the partnership is dissolved determining which are partnership assets. put the individual partner into bankruptcy. A partner can not then sell his partnership. resulting in dissolution of the partnership under § 31(5). § 25(1) & (2a-e) strip all incidents of individual ownership and vest them with the partnership. Assignment: A partner can assign his interests. (1) partnership creditors have priority over separate creditors as to partnership assets. 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. The bankruptcy code eliminated this priority rule. and the partners own the partnership.

Is the property acquired by the partnership and its proceeds then estate property to go one-half to the deceased wife. RUPA S 501 does not need this fiction and specifically repeals UPA S 25(1). Courts ruling is a narrowing of the provision under the UPA. If partnership sued as a whole. UPA S 8. UPA S 25 states that an estate is created and property becomes part of estate. despite the wishes of the deceased that they go to his brother/partner.1 states property purchased or brought into the partnership will be presumed to be part of the partnership. As this course breeds mistrust dissolution of the partnership is often the better course. UPA S 8. if partnership funds are used. 55 Perry FACTS: Two families entered into partnership. RUPA S 502 states that a partners only interest is partners interest in the partnership. 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. or (4) whenever other circumstances render it just and reasonable. Duty of Loyalty Text Outline UPA § 22 provides a right to an accounting: (1) when a partner is wrongfully excluded from the business. Presumptions: Purchased in partnership name it is partnership property. Plaintiff brought action seeking declaration of their right to assign their interest in the partnership. The other family refused the request taking the position that the partnership agreement did not permit new partners without unanimous consent. joint liability not joint and several. Class Notes Intent of parties will be key in determining whether assets were meant to be included in partnership. Charging order procedure allows partnership to pay for individual partnership. Real issue here is whether the children can be brought in and be given decision responsibility. ISSUE: Whether a party can assign their partnership interests without unanimous consent of the other partners. G.Since real estate was purchased with partnership funds. There are exceptions though such as when equity and justice would demand a 16 . so the UPA allows for the other partners to buy out the debt and salvage the partnership business.2 which states if the contrary intention appears. it became partnership property. unless UPA S 8. UPA § 13 seems to restrict partners from suing the partnership for recourse. Rappaport v. (2) if the right is granted under the partnership agreement. each family having a 50% stake. Members of one family then assigned 10% of their share to their adult children. 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. (3) for appropriation of an unauthorized benefit in violation of § 21. Very little case law on the issuance of charging orders. RULE: Court held that pursuant to the agreement and partnership law. 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. so it would likely be immaterial whose money is used provided it is in the name. consent of defendants was required in order to admit additional partners into the partnership.2 states property purchased in the name of the partnership is partnership property. 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. NOTES: Plaintiff did wish to have new partners included as that would shift majority shareholding to the defendant.

Section 404 RUPA. H. Cardozo finds that the venture came to Salmon strictly due to his position as a fiduciary. NOTES: The key case on partnership fiduciary duty. duty of loyalty along with S 18-20 laying out informational duties to partnership. fourth is to pay in respect to profits. Upon expiration of the lease on the Bristol. reckless conduct equate to a breach of duties. but not terribly material as at the time there were not major differences. and the freedom of contract side that does not feel it is needed to give freedom of contract in code. Meinhard v. which he planned to alter to shops and offices for $200K. and if so. including the Bristol. third is to pay off partners in respect to capital. likely due to loss sharing provision. First priority is to pay off creditors other then partners. Meinhard awarded a share of that business but that way ends up with share in other assets of greater value. was taking it effectively theft of the partnership and a breach of duty if the nexus of the two opportunities is close enough. 404 was supposed to be a more realistic interpretation of what parties viewed their fiduciary duties to be in practice. he was simultaneously negotiating with Meinhard for funding. pg 154: Fiduciary duties of partner to partnership. Partnership can be construed broadly as being a real estate JV. Joint venture. to be redeveloped under a company separate from the JV. 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. What exactly did Salmon do that was a breach of duty. Non capital partners may be fund by the courts to need to contribute to losses if equity so require. Could have been a loan and not a partnership interest. Salmon FACTS: Louisa Gerry leased to defendant Salmon the Hotel Bristol. resulting in a written joint venture. without notice. and that by all appearance Gerry believed he was dealing with a sole entity. Page v Page 17 . and having used his position as manager to obtain the deal Salmon breached his duty to Meinhard. the second is to pay partners for obligations other then capital or profits. Gross misconduct. Salmon sets up shell business. RUPA § 305 drops the language and allows a partner to sue the partnership. but made sure he kept management control. Class Notes UPA S 21 is core provision. Question becomes was the deal offered a partnership opportunity. or narrowly as being a JV for the Bristol property. RULE: Re-leasing the same property. pr 125 you can contract out of specific items that are duties of loyalty provided they are not manifestly unreasonable. In S103. not partnership. Dissolution By Rightful Election Text Outline Distributions in Dissolution: UPA § 40(b) sets out the rules for asset distribution after dissolution. 404 has been under attack by both those that feel it gives to much leeway. but wholly owned by Salmon. similarly salary only partners may share in the distribution of a capital partner if equity requires. While negotiating with Gerry. Salmon renegotiated with the assignee of Gerry for a larger tract. 404(e) self-dealing does not necessarily mean a breach of fiduciary duties. Not possible for RUPA to eliminate judicial discretion. ISSUE: Whether Salmon breached his fiduciary duty to Meinhard when he entered into the new lease without notice or opportunity to Meinhard. Some courts hold that services partners in "joint ventures" need not contribute towards a capital loss. Cardozo seems to take the line of business determination.settlement rather then accounting or dissolution. 404 does not overrule Meinhard as the main rule from that case is the duty to disclose. Salmon needed the extra $100K for additions/improvements to the hotel. but not addressed by the court.

Have dissolution be decree of court. while "winding-up" is used to describe the economic event of liquidation. More of a disassociation of the partnership that can either lead to liquidation. continuation are all used. but as partnership is considered an aggregate. The court warns though that should it be proved there was bad faith in the termination plaintiff can be held liable. (1) among the partners themselves. son a partnerships relationship with third parties is not affected. 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. Crutcher v Smith: Partners activities prior to the exclusion of a debtor partner were sufficient to show a wrongful expulsion by those partners. the partnership is at will and can be dissolved at any time. and that unless otherwise agreed the assets are sold and cash distributed. but that is the final goal of the provisions. Levy v Nassau. Consequences Among the Partners: Under the UPA dissolution simply means that a partner ceases to continue being a partner. pg 108.e. and different sections whether wound up or ongoing. The general answer is no. 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. Stands for the proposition that policy disagreements do not constitute bad faith. dissolution. UPA S32. or wind it up. Continuation agreements are common allowing remaining partners to continue the business. or venture of the partnership continues to be carried on by any of the partners in a partnership. the law attaches consequences to dissolution. (1) no part of any business. when there is no breach of faith. 18 . i. termination. winding up. Many judges will not find dissolution of a partnership based of actions of the partners if the partnership is an ongoing profitable entity. Prentis v Sheffel: Stands for the prospect that in the dissolution of a partnership. (2) between the partners as a group and third persons. or to a continuation of the partnership under different circumstances. Tax Consequences: Internal Revenue code § 708 provides that a partnership's existence does not terminate for tax purposes until. Broadly speaking. partners bidding in a judicial sale is completely acceptable and not contrary to the interests of a third partner being excluded. Court found that despite contractual language stating "partnership profits will be retained until all obligations are paid". there still need to be actions to end the business operation. Plaintiff appeals from a judgment declaring the partnership to be for a term rather then at will. financial operation. In dissolution provisions is the assumption that piece meal liquidation is a bad thing. 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. Change in relationship between the partnership may dissolve the partnership. a so-of-a-bitch will not be forced to be dissolved by courts. Definition UPA S29. but also that withdrawal of a partner will not cause dissolution. Class Notes Words in UPA are counterintuitive in this section.Plaintiff and defendant are partners in a linen supply business. and (3) for tax purposes.

some say payment in kind acceptable. Plaintiffs served the defendant with notice of dissolution of the partnership. Case strings in section define parameters for dissolution by lack of fiduciary duty. Dissolution By Judicial Decree and Wrongful Dissolution Text Outline Drastic consequences can result from a wrongful dissolution. Reid sent a letter of termination to her other partners in the partnership. Courts may also order dissolution of a partnership under UPA § 32(1)(f) when dissolution would be equitable. 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. Class Notes Partnership Breakup Under RUPA 19 . Letter sent terminating did not need to address reasons. in the absence of a written agreement to the contrary. Rights of partners to application of partnership property. and (3) a continuation of the business without him. Lower court agreed to a sale by which existing partners could then buy the assets. The parties were unable to agree to a winding up of the partnership. Dreifuerst FACTS: Partnership operated two feed mills and there were no written articles of partnership. Girard Bank v Haley FACTS: Mrs. and there are no provision requiring an asset split of an at will partnership. A partner can just walk away from a partnership. Is there an obligation that a lender who is a partner not call in a note as that will drive dissolution of the business. so that judicial sale is the appropriate means of dissolution. Narrow reading seems to say that you can walk away at any time provided you don't steal value from your other partner. (1) § 32(1)(c) refers to misconduct so serious that it prejudicially affects the business. Contrast with Page v. NOTES: Court says there does no need to be justification for dissolution by a partner as an at will termination. sisters claim Art 42 UPA the partnership had continued. Some cases say cash ok. RULE: Court ruled that dissolution envisions some form of sale. (1) damages. due to the particular circumstances. There are two types of misconduct that may justify dissolution. can read either narrowly or broadly. ISSUE: The issue is whether the letter caused the dissolution of the partnership. McGee v Russell's Executors To prevent $15K to the brother from payment out of partnership proceeds.UPA S31 outlines rightful dissolution. even though it was lengthy. UPA S32 identifies wrongful dissolution. NOTES: UPA S38. will differ depending on whether dissolution is rightful or wrongful. ISSUE: Whether. Dreifuerst v. can force the sale of the partnership assets. but considered wrongful dissolution and will have consequences. a partner upon dissolution and wind-up of the partnership. S38(1) does say that distribution should be in cash. UPA § 31(1)(d) allows involuntary expulsion of partners for "bona fide" reasons. Court found that surviving partner did his fiduciary duty in winding up the business. (2) a valuation of interest that does not reflect the real value of the interest because goodwill is not taken into account. Page where there was an implied promise for continuation 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. I.

The fact that he is not providing services. Will find it easier to cut off liability under RUPA then UPA. Good will problem in dissolution. how share is calculated. If wrongful dissolution buyout will be reduced by the level of damages. 36. Likely to be found at will and will likely ask for his share in cash? If will not request liquidation? Sec. When drafting under RUPA can not totally draft out partner liability. Low loans 50K for 10 years. Specific RUPA non-waivaible provisions are in 103 and 405. Is Low a partner? He has veto power and can decide whether he is in or out of the agreement says yes.e. Aggregate view of partnership. 5. Read comments to S 801. Do not have to 20 . 3(a). consistent with UPA. RUPA deals with liability issues differently if winding down then dissolution. Material differences in language used. S38 rights of partnership to property. 9 problem as you view from third parties perspective who would believe he has apparent authority. especially i. would not be any liabilities if he sells to a third party so there are differences between sale and cashing out.7. each partner is viewed as an agent of the partnership. the partnership may still be liable for his actions due to apparent authority under Sec. S32 Dissolution by decree of court if one of the partners becomes a lunatic. In buyout RUPA imposes reliance requirement on third parties. Gratia and Artis. (a) Ars is liable in Tort action. S801 Winding up termination. drug addict or serious problem in conduct of life that is not specifically affecting the conduct of the business. Arguments against authority are not seemingly in the course of business. 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. Partnership Hypothetical's 1. but he passed the bill on? He's not the principle so he's not transferring the liability. Sec. Is there an estoppel issue with Mayer? Likely no. agency power to bind after disassociation and liability between RUPA and UPA. and the more fundamental a waiver provision the more the court will scrutinize the issue backing it up. at will. 3 interpretation of knowledge. Do not confuse Sec.Article 8 will apply when leading to bankruptcy. 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. First question is the agreement rightful or wrongful. 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. just apparently a loan to the partners says no. 179. pg. S41. but do have a duty to wind up. seems that he is getting paid prior to other partners. Sec. joint and several liability in UPA. pg 171. 43. 4. Duty of inquiry greater under RUPA then UPA. (b) Say he acted like a partner as bill was sent to him and he got paid. i. 2. Can Gratia authorize the construction contract? Sec. Upon liquidation. But. RUPA provides for very structured bankruptcy. includes a default rule. selling sports equipment wholesale while this is a retail operation she seems to be including. but likely read as contract issue so joint liability not joint and several. (b) Artis is liable for contract. Eisengerg's forks in the road. Subsection (1) can force termination and liquidation.9 & Sec. Problem Set Handouts. no duty to do anything but wind up. Has buyout formula in subsection (b) which is a default rule that can be contracted out of. 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. If not wrongfully terminating partner can decide to just close and seek judicial sale of business. Ars is to receive $5K. We know Gratia is does not have actual authority under any principals. 18 principles. Ars. deems third parties to have had notice 90 days after filing date of dissolution. If 801 fork is not applicable you go to 701 fork.

One of the major differences between 1916 & 1985 is what goes in the agreement. when the general partner takes control of the business. the South Dakota UPA statute does not require the calculation of goodwill in the dissolution. by 1970's though you have large numbers of large entities becoming LLP's due to tax advantages. 1976 redraft to RULPA. (2) Limited Liability Companies. Some states still under 1976 statues. Three new forms evolved providing limited liabilities and taxes. LLP are closer to corporations the general partnerships. while the Revised Uniform Limited Partnership Act (RULPA) has been adopted in many and was further revised in 1985. general partner assumes liability and retains control. Today. do not need any information about capitalization or names of limited partners to allow flexibility. Alternative Forms of Business Organizations A. most statutes do not require that you have a limited partnership agreement. III. got arrested. ISSUE: Whether the goodwill of the business should have been considered when calculating the value of the partnership assets. Unlike general partnerships. and demanded partnership funds for his own use after which both parties moved to dissolve the partnership. Plaintiff ignored his duties. but not controlling. Court found that plaintiffs actions caused a wrongful dissolution. earlier 1916 has largely been replaced. Governed by 1916 Uniform Limited Partnership Act. Ranks above the creditors after the old one and before the new. Partnerships not taxed as they are not considered an entity. Limited Partnerships specifically limit liability. Control was never well defined. but this is not practical. There are times a general partner can become liable for the partnership. Limited Partnerships Text Outline Traditionally the predominant considerations in selecting a form of business organization has been taxation and liability. Turn of 20th century starting corporations needed special chartering which led to corruption and favoritism in obtaining charters. Gratia is insolvent as well here. others under 1985. limited partnerships are creatures of statute. 6. LLP grew to allow partners not to have to incur debts of partnership. Traditionally corporations provided limited liability and general partnerships limited taxes. Sorenson FACTS: Plaintiff and defendant associated themselves as co-owners in an insurance and real-estate partnership. upon dissolution you can choose to take proceeds or continue in the shoes of her husband who she inherited from. Key difference is in 1985 RULPA much harder to get into deep 21 . and (3) Limited Liability Partnerships. need to file a certificate. Limited partnerships are not new but have changed recently with changes in the law. To form LLP. and general partner can protect themselves. redrafted again in 1985 as RULPA again. The Uniform Limited Partnership Act (ULPA) was adopted in all states but Louisiana. (1) Limited Partnerships. Class Notes With general partnership each of the partners has liability of the other. Drashner v.give him goodwill under S32 as a wrongful dissolution. 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. They are times when limited partner can incur liability. RULE: Court found that given the circumstances of the dissolution. If forced to keep your share in the business.

Investment Co. RULE: That a limited partnership agreement may provide for contractually created fiduciary duties substantially mirroring traditional fiduciary duties that apply in corporate law. Limited partners can basically replace and pick general partners. Corporate General Partners Text Outline RULPA § 303(b)(1) explicitly recognizes that a corporation can be a general partner in a limited partnership. Gotham Partners v Hallwood Realty . RULE: Court finds that the extent of involvement in the business by GB was sufficient to preclude granting of summary judgment in their favor. Actual knowledge requires direct contact by the court. Gateway Potato Sales v. upon whose reliance Gateway sold large quantities of seed potatoes. act as an agent. unit option. Elements for aiding and abetting a breach of fiduciary duty are: (1) existence of fiduciary relationship. Prevents unjustly enriching creditors from going after deep pockets on which they had no reliance.8% did not complain about the purchases but was denied request to view HGI's books. Two basic types of taxation exist under the revenue code: (1) firm taxation where a business firm is taxable on 22 . 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.pockets of limited partner. and tender offer. wind up etc. a real estate hedge fund. B. a creditor of Sunworth. discretionary and equitable remedies. Less then substantially like = reliance. Gumbiner and Guzzetti are jointly and severally liable for aiding and abetting the breach. proposed a reverse stock split. Sunworth advised Gateway that it had a large financial backer. RULPA S303(b) is safe harbor material. and (4) damages resulted from the concerted action. and still not be considered a general partner. bringing their ownership up to 29. is that reasonable? ROPA S303 1985 takes away the substantially like test. have to have reasonable reliance based on conduct of the limited partner. a board member of the general partner. and (2) courts will not construe a contract as taking away other forms of appropriate relief. Defendants are wholly and severally liable because the challenged transaction breached the entire fairness provision of the partnership agreement. Statute does not address if you would be considered general partner if you perform some or all the provisions. 2002 FACTS: Guzzetti. Gotham filed suit in court complaining that HGI obtained control over the partnership at an unreasonably low price. Gotham. In fact the limited partner gets to be much more involved in the daily operations then a small shareholder. GB. (2) defendants HGI. and (3) court has discretion not to grant rescission when plaintiff unjustifiably delayed seeking remedy. ISSUE: Whether (1) contractual fiduciary duties of fairness in the partnership agreement applied to the disputed transaction. Articles stated GB would not control or assume liabilities of Sunworth. actively advise. Court finds GB to have had extensive involvement in Sunworth's operations. Need to know differences between 1976 and 1985 Acts due to different jurisdictions still following different acts and big difference in the control issue. (2) fiduciary duty is breached. (3) defendant who is not a fiduciary knowingly participated in the breach. claiming breach of fiduciary duties by board. FACTS: Gateway. owned 14.B. G. Del. Substantially like =/ reliance. NOTES: Sunworth was general partner. ISSUE: Whether the limited partner was exercising control of the business. HGI board approved the transactions based on Guzzettis recommendations. In awarding damages a breach permits: (1) broad. Sup Ct. NOTES: general principle of corporate law is that only a party to a contract may be sued for breach of that contract. According to statute liability is incurred by limited partner only to the extent that third parties rely on their participation and control.7%. 1985 standard much harder for 3rd party to meet..

not to the plaintiff limited partners. Ruling failed to take into account that GP now has the controlling interest. Law says it is a fiduciary relationship. Whole thing hand on issue of whether this is an issuance of new units or old units. i. and (2) flow-through taxation where a firm is not subject to taxation and all of the firms income. Directors defense is that duty of care and loyalty were only owed to general partner. general partner is a entity and not a legal concept. fairness of price and fairness of dealings. Likely family limited partnerships for estate planning reasons and as limited partners in larger more sophisticated entities. small limited shareholder corporations. 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. Supreme Court. in re USA Cafes. 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. so corporation owes a duty to 23 . but can reduce or change. being taxed as corporations. Subchapter S corporations. gains and losses are taxed directly to the firms owners eliminating double taxation. 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. are taxed as partnerships with each shareholder receiving their pro-rata share. Is this in the spirit of RULPA? Courts said yes. Master Limited Partnerships are publicly traded and cannot elect partnership taxation. Wyly Brothers owned 47%.its income. 2001 pending proposed Uniform Limited Partnership Act.e. Charge is that general partner is enriching parent company at expense of limited partnership. Defendants are the Wyly brothers who hold all the stock of the general partner of USACafes. Defendants argue they owe fiduciary duties up to the USA Cafe partnership only. that general Partner was not sufficiently informed to make a valid business judgment on the sale. Direct liability. cannot hide behind corporate structure. when a corporation is the general partner. and Metsa. what was he general partner trying to accomplish. and the board of directors. Class Notes Corporate Limited General Partners. Limited Partners Plaintiffs and Limited Partner Defendants also. They bring the action as a class action on behalf of all unit holders. the creditors can gain additional security from then general partner if they so choose. Court says you can not completely waive fiduciary duties by contract according to the Del. Group of partners using corporate shell to do what they please. Standard is entire fairness. Dictum in the case is that not all fiduciary duties have been eliminated by structure. LP FACTS: Plaintiffs are holders of limited partnership units in the purchase of USACafes by Metsa Acquisition. 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. Charge is a breach of duty of loyalty. Judge Allan makes an analogy to trust law and finds that general partner's have liability. Statute entire fairness seems to allow self dealing which is not allowed by common law. Aider and Abeter liability vs. Issue was basically a kickback scheme. not limited partners. ISSUE: Whether directors of a corporate trustee may personally owe duties of loyalty to trusts of the corporation. pg 254. or "double taxation". Under IRS regulations any "eligible entity" can elect either flow through or firm taxation. but the statute allows and does not prevent the limiting of fiduciary duties. What does this form due to the fiduciary relationship of the partnership? Gotham Partners Do not pay attention to the specifics of the transaction. aider and abeter has general fiduciary duty to other partners.. NOTES: General Partners is Inc. Once you start waiving fiduciary duties in documents you must be very careful and draft the documents exceedingly well.

some were very flexible. but limit the liability of the partners. are noncorporate entities that are created under special statutes that combine elements of corporation and partnership law. tax exempt. and other liabilities. Members of a manager-managed LLC have no apparent authority to bind the LLC. FL second. Creditor can get charging order against a members interest. to participate in management (member-managed). capital . LLC advantage over "subchapter S" is fewer foreign investment restrictions. limited liability. but does not address and rule that other fiduciary duties are to be extended. Downside of LLC & LLP is state taxes. 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. obligations. Liability: All statutes provide that members are not liable for the LLC's debts. LLC & LLP allow partners to take greater control with limited risk. Fiduciary Duties: Largely unspecified in the statutes so it is expected to largely come from corporate and partnership case-law. LLC's originally were partly shaped by tax rules allowing each LLC to choose it own characteristics. Formation Articles: LLC's are formed by filing at the State office and state (1) purpose of LLC. Some jurisdictions were strict in which characteristics you can adopt. (2) if membermanaged or manager-managed and the names of individuals. Limited Liability Companies Text Outline Limited liability Company's. and are either member-managed or manager-managed. In 1990's IRA adopted the procedure that you can choose the characteristics in "check box" and take the tax advantage. still may be treated as corporation and liable for state tax even if Fed. (3) duration of LLC. the other half by pro-rata. free transferability etc. general 24 . some say must be for proper purpose. LLC's. Agency-Powers: In most member-managed LLC's the authority of a member-managed LLC is comparable to the apparent authority of a partner. and be supplied with information. but did not convince IRS until 1998 to adopt tax structure. distributions. Owners and members of LLC's have limited liability as in corporations. 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. Must look at jurisdictional differentiation between states when analyzing LLC & LLP vs. perpetual life. Inspection of Books and Records: Generally members are allowed access to books and records. Disassociation: Statutes vary on the termination of a members interests. C. In manager-managed LLC's authority is comparable to a manager of the corporation. Member's Interests: A members financial rights include their right to receive distributions. Allen comes down that duty against self dealing must be extended. Operating Agreements: This is an agreement among the members concerning the LLC's affairs and provides for governance. bankruptcy and lawful expulsion are often grounds. Distributions: Most statutes default rule is that distributions are on a pro-rata basis according to member contributions. Voting Members: About half the statutes provide the default rule that members vote per capita. Developed in Wyoming. and admission/withdrawal of members.other partners. LLC & LLP keep the pass through taxation structure. Concern about corporate characteristics. LLC's are entities that can own property. Death. unlimited amount of owners. Class Notes Taxes is the main driver in deciding which form of corporate structure to adopt.

COLHOC. Hunt Sports Enterprises FACTS: NHL contacted Columbus OH officials about starting a new franchise there. keeping minutes or holding meetings these formalities need to be excluded as grounds for piercing. can have membership managed or outside manager run the firm. Court pierces the veil. i. 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. documents say no authorized distributions.partnership. VGS Inc. Orleans Regional Hospital FACTS: Plaintiffs allege they were laid off by defendants. Governance and management issues will be set out in the documents. whether documents need to be oral or written. Plaintiff attempted to satisfy judgment from any payments becoming due to the individual defendants as owners of the LLC. CHL LLC was formed to explore the franchise. 37 Suffolk 927. commingling. hanging their hat on formalities.e. ISSUE: Whether LLC's are subject to veil piercing doctrine. fraudulent activity. A personal creditor is going after a partners interest in the LLC. partnerships and individuals making a $25K outlay. Big difference in LLC and Corp. Read LLC statutes. RULE: Contract provisions may effect the scope of fiduciary duties. Piercing the corporate veil in Corp. another party formed to obtain the franchise but including two members of CHL. who contacted local businessman Lamar Hunt. as opposed to Corp. is that you do not have a live market for LLC shares like you would in Corp. PB Real Estate Inc v. 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. NOTES: Members never voted to have distribution in a member managed LLC. ORH LLC. 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. NOTES: Should courts pierce the LLC veil in the same manner that they pierce the Corp. 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. with members being local corporations. shareholders who can sell shares. both partnerships. Negotiations went sour with Hunt filing suit on behalf of CHL against. without proper notice in violation of the provision of the Workers Adjustment and Restraining Notification act. Hollowell v. McConnell v. States that the legislature surely would have passed legislation preventing if that was their intent. DEM II Properties FACTS: Plaintiff obtained a deficiency judgment resulting from a mortgage foreclosure against defendant. veil? As LLC do not require formalities such as annual elections. RULE: That LLC limited liability status raises no barrier to the satisfaction of such a judgment from the member's interest in the company. form. total $100K. solely for tax losses. ORH shut down without providing legally required notice to employees. law is when for equitable purposes a court will hold an individual shareholder liable. etc. Arena was to be financed by a sales tax issue that failed in balloting. the main issue here being to what extent does the LLC serve as a shield. Rough rule is when shareholder is not keeping with the integrity of the corporate form. 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. using Corp. 25 . Moreover. Bastan Case: Defense is that LLC structure allows partner to manage the business. ORH is an LLC whose members are NORS and NLRHP. the veil provided by the corporate status of ORH's members may also be pierced in like fashion.

specially chartered by the states to do specific 26 . Megadyne information Systems: Megadyne charged its law firm of breaching its fiduciary duty by not informing claim statute of limitations had run. but you can still be liable for your own liability. Characteristics of the Corporation Text Outline The corporate form has generally been the choice for public companies and results from five central attributes. Provides protection against the negligence of other partners. that the liability of a general partners is less so in the LLP then in a general partnership. and liability extended to contract breach. Largely designed for professional organizations such as lawyers and accountants. Depends on if you read fiduciary duty as a concept that can be contracted away (contractarian). Limited Liability Partnerships Text Outline LLP's are essentially general partnerships with one core difference. FL Statute. general partnerships. D. stockholders do not participate (5) Entity Status: Corporation is a legal Entity so can have rights in it's own name Close Corporations. Historically in order to LLP you needed to have an insurance requirement and annual registration. 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. Now a lot more uniformity among states in LLP law. (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.e. Both requirements have largely been dropped. Class Notes Corporation important driver in economic development. 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. § 620. thus legal representation paid for was worthless. limited liability companies are the different forms of privately held corporations. Protects you from a partners liability. one the LLC rejects an opportunity can a partner in the LLC accept it individually. A partner of an LLP is generally not liable for all partnership obligations.NOTES: Language of the court looks at language a unambiguous contract interpretation. The Corporate Form A. or has certain fundamental bases that can not be contracted away (Eisenberg). IV. Court rules all three partners might be liable. only those arising from their own activities. 2nd generation of LLP's statutes also include protection from contract liability. with the possible exception of those closely related to the partner. According to opinion possible back door interpretation of fiduciary duties. i. Everybody in the LLP can participate in the business to some degree.

Kerry. challenged the special chartering and monopolies being granted to corporations. including preferred stock. The charter will specify the classes of stock and number of shares issued in each class. Two types of equity financing. Generally bonds are secured obligations and debentures are unsecured. internal affairs are governed by the law where they choose to incorporate. sought it was better to have a Federal law of corporations. the next step is filing a charter or articles of incorporation with the state official. Eisenberg goes into his race to the bottom shtick. 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. stock. Eisenberg feels that Delaware has since responded and it is no longer a race to the bottom. and debt financing. C. Delaware remains preeminent in the filing of corporate incorporations. trade debt (accounts payable). States have economic incentives to attract corporations. common stock. NY has the incorporator’s appoint directors. Pres. Delaware became the location of choice for 5060% of corporations seeking to incorporate. Eisenberg's argument overlooks the influence of large shareholders. Act. Continuity of life also opposite. Close corporations are privately held. Organizing a Corporation Text Outline Once a decision has been made to incorporate. 103(c)(2) need to file articled in Del. the other way is to name the directors in the articles of incorporation.functions. Statutes developed to allow private citizens to form corporations so as to avoid special chartering by governments. B.Characteristics Assumption of professional centralized management. Most statutes now provide that pre-incorporation subscription agreements are irrevocable for a specified period of time unless all subscribers consent to a revocation. one is that the incorporators choose the board directors until the shares are issued. RMBCA governs in FL. States often adopt friendly incorporation laws in order to attract the franchise fees that come with incorporating there. and governed by the indenture. Page 100 . Do these different characteristics make a great difference? Answer is clearly there are benefits to being a corporation. With debt financing you 27 . later general articles of incorporation developed. Tax treatment is different. the differences in the legal regime of Delaware. Delaware approach is that shareholders have the power to appoint directors. Also. Substantive law of corporations is State law not Federal law. Selecting a State of Incorporation Text Outline A corporation can incorporate wherever it chooses. bonds and debentures. bank debt. Once under way a board of directors is elected by shareholders. Original author of book. Class Notes Delaware Corporate Law Ch 607 and Revised Model Business Corp. Types of corporate financing are.e. additional formal requirements governing creation and management. Greater level of transferability. and pay fee. (RMBCA) some of the more influential legislation dealing with corporations. There are two basic mechanisms. Jackson implemented anti-corporate policies. not traded on an exchange. Articles of incorporation needed to be specific regarding their purpose and capital requirements. in fact federalism has largely occurred due to the influence on securities laws. Class Notes Del. exact opposite of partnerships. i.

RMBCA has eliminated limitations on convertibility and relies on fiduciary duty.need to get paid. Preferred stock has been used as strategic tool in poison pills. Conversion right is option granted a corporation to convert one type of security to another. not so with stock. Estoppel differs with de facto corporate theory in that estoppel is effective mainly for the facts of a specific transaction. Three requirements are typically cited for application of the de facto corporate doctrine. the promoter is personally liable on the contract and remains so even after the corporation is formed. 28 . D. The two theories differ in two important ways in their application. Main difference between preferred stock and debt is that debt always has a right to be paid. early in Corp. Dividend of preferred is usually cumulative. Common law preemptive rights were assumed. Because of watered stocks Par Value was set as a limit to which the stock would not be sold below. (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. adoption itself does not. A corporation that is formed after a promoter has entered into a contract on its behalf is not bound by the contract. Redemption right is option granted corporation or shareholder. De facto will normally have a greater precedential effect. E. Can fail if found to be corporation de jure. or one where noncompliance is unsubstantial. Still relevant for accounting purposes. adoption or novation. 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. so preferred dividends get paid in full prior to paying common stockholders.e. (1) a statute in existence by which incorporation was legally possible. Declarations of dividends are the sole obligation of the board of directors. Stock is the most volatile type of security. If you have ratification or novation can relieve promoter of liability. Series are subclasses of stock. and if a group of individuals has not done the things necessary to secure or retain de jure corporate status. and (3) some actual use or exercise of corporate privileges. i. Consequences of Defective Incorporation Text Outline McLean Bank v Nelson: The corporate form provides limited liability. Now statutes allow par and no par stock. The general rule for liability is that when the promoter makes a contract for the benefit of a contemplated corporation. not the case anymore. they will have no corporate protection. Preincorporation Transactions by Promoters Text Outline Promoters help a newly forming corporation make contracts. (2) a colorable attempt to comply with the statute. history to prevent fraud. can call shares at any time. estoppel means. bring together assets and superintend the steps necessary to bring the corporation into existence. set out as rights and obligations of stock/debt. After formation the corporation may be bound by ratification. so more risk more reward and control. novation. Quo Warranto: Proceedings brought by the state to test corporate validity. Dividends are payments based upon some apportionment of corporate earnings. common A and common B. without more. Class Notes Corporation can take on a promoter contract by express. ratification.

F. De facto approach differs from the RMBC in being less protective of third parties. In FL as long as both parties are aware that corporation is in formation there is no liability.Class Notes Doctrine of de facto incorporation. purpose being shareholder wealth maximization. Harris sued incorporators jointly and severally. Can view Corp. 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. so the judgment against Brunetti is set aside. entered into contract with Harris. ISSUE: Whether appellees had acted for or on behalf of J&R Construction when entering contract. transaction outside that sphere of what was allowed were ultra vires. entity as shareholders being true legal owner. 29 . These actions were unenforceable by. 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. FACTS: Plaintiffs sought to enjoin defendant from enforcing a guaranty agreement by a corporation in favor of Ladd Estate. Harris v Looney FACTS: Robert Harris sold his business to J&R Construction. Ladd Estate Co. New approach need to show that there was an attempt to defraud. Inc. J&R defaulted on note. RULE: Plaintiffs were found not entitled to equitable relief. General incorporation has made doctrine largely obsolete. Classical Ultra Vires Doctrine Text Outline Early on corporations needed to narrowly describe the activities in which a corporation could permissibly engage.. articles of incorporation were signed but not filed until two days later. FACTS: Plaintiffs brought suit for breach of lease against Sunshine Greenery and Brunetti. RULE: Court affirms the lower court ruling that Joe Alexander only is strictly liable. NOTES: Model for the revised act. 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. 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. Goodman v. Broader doctrine then estoppel. representing the Corp. Would be used to ensure that corporations were complying with their incorporation doctrines outlined in their charters. ISSUE: Whether there was a de facto corporation in existence at the time of the lease. Cantor v. Harris v Looney is model for the revised act. 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. Sunshine Greenery. and against the corporation.

Milton Friedman states that corporations need to conform to basic rules of society embodied in law. declared hi intent to stop paying special dividends in order to reinvest these funds and only pay regular dividends. Delaware does not have "other constituent" statute to protect interest of employees.500 to Princeton which was challenged by shareholders. Del. These statutes allow directors in a hostile environment to take actions not purely in shareholder interest in these instances. AP argued that this was a sound investment and that the public expected corporations to give philanthropically. court states that it is ok for the directors of a company to diverge from the interests of the shareholder. Virtually all states have now adopted statutory provisions relating to corporate contributions that are comparable to Delaware's. 674 addresses and allows charitable contributions. A. Class Notes Dodge Case: Not reasonable for Corporation to make payments with profits other then dividends. § 3. Court cited that the corporation is in the business of benefiting shareholders. but Barlow and Del. The Dodge brothers as shareholders brought suit. as majority shareholder. 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. 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. which was limited in Revlon where they stated that they can benefit other constituencies provided they are rationally related to benefits accruing to shareholders. NOTES: Can read narrowly as a cold war response. 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. v. Can corporations make charitable contributions? Have been addressed statutorily. Co. Arguments against donations are that it is shareholders money.G. 1919 Henry Ford. The Objective and Conduct of the Corporation Text Outline Hu: Discussion on shareholder wealth maximization and market risk. Dodge v Ford.3M in dividends. court ordered payment of $19. Some reasonable relation to the corporate interest remains a necessary component. or broadly as a representation of the desired business 30 . donated $1. arguments for is that it can still benefit the organization indirectly and through taxes. ISSUE: Whether the statute allowing for corporate donation is effective. Barlow FACTS: AP Smith Co.P.02 pg. Smith Mfg. debt holders vs. Second passage focuses on other constituencies. can consider nonshareholder interests. Other Constituencies under Del. looking at general corporate interest. Credit Lyonnais: Del. shareholders. statute state that it need not be directly in the corporate interest but must be reasonable and in its interest. Can go as far as justifying defense based on simply differences between corporate cultures of organizations.

Institutional shareholders fall into six basic categories. allowing for ownership but not control. statutes. Proxy vote issue. (4) consultation with management. This is contrasted with Coase's theorem of a hierarchical model of corporations. Institutional investors now hold about 50% of equities. (6) Foundations. (1) voting on management and shareholder proposals. Shareholdership in Publicly Held Corporations Text Outline In early corporate history the dispersion of corporate shareholdings prevented severe collective action problems. (2) Public Pension Funds. and allowing for easier and cheaper coordination between shareholders. Corporate Structure A. Class Notes If you look at corporations as a nexus of contracts view vs. or general shareholders. professional institutional shareholders. (1) Private pension Funds. collective action problems in coordinating actions so selling stock main recourse. V.philosophy in the US. The Nature for Corporate Law Text Outline Jensen & Meckling formulated the theory that the corporation is a nexus of contracts. Theory of promoting developing corporate norms has been waning. 31 . (4) Investment Companies. H. Class Notes Big structure question is what is the reality vs. The forms that institutional involvement in governance may take are. (3) election of directors to represent institutional investors. ERISA placed fiduciary duties on institutional shareholders. Indexing strategies also make it harder to walk away. Separation of powers notion in corporate structure. The concentration increases sophistication has increased giving a greater and more sophisticated "voice" in the companies. Consultation with big shareholders prior to decisions becoming more common. 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. Do institutional shareholders change this calculus. Coase series of hierarchical relationships. Walking away from stocks is much harder for the institutional shareholders. In actuality a combination of the two theories so not all governance laws can be replaced by contract. is ownership and control in hands of shareholders. management votes proxy of unvoted shares. (2) making 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. (3) Banks. but there always remains a baseline. If nexus of contracts view law is more subject to contractual negotiation so many issues can be contracted away. 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. (5) Insurance Companies. There is "agency costs" involved in monitoring management. Berle & Mean's Thesis: Bottom line is that corporation is not controlled by the shareholder.

a structure that can be used in anti-takeover defenses. How does annual director vote mesh with state shareholder statutes when directors are wished to be removed prior to vote? Note pg. Differs from Del. but about 30 states do. not the substantive outcome. but they can be conferred on preferred stock or even bonds. Blasius analysis looks at whether there was intent and opportunity to vote. the most lenient is the business judgment rule. § 141: Statute in 141 allows limitations otherwise provided for in this chapter. The use of the power is subject to equitable limitations when the power has been exercised to the detriment of their interests. Removal right for cause. 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. Weighted Voting in Publicly Traded Corporations In majority of companies only common stock has voting rights. Some technical problems with shareholder removal in that you do not have a right to call a special shareholder meeting without approval of director. however technically correct the exercise has been. (3) If cumulative voting is authorized. need to show cause and provide due process. if certain conditions are satisfied an officer will not be held liable for consequences of a decision unless the decision was irrational. does this include 109? Can't determine and is a huge policy issue. 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. Blasius did not fundamentally decide this issue. FL Director Removal Statute: Abstract: 607. Under this rule. with or without cause. If charter gives removal rights to other directors rather then shareholders does not infringe on right of shareholder. the board cannot remove a director. In Del. removal rights. (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. Cases are split on whether a court can remove directors for cause. Art § 109 vs. Del. There can also be two classes of stock. whether by statute or charter are necessary and at all times exercisable only for the benefit of the shareholders as their interests appear. close corporations. Shareholders can remove a director for cause. In Blasius the court with regard to interfering with shareholder voting applied the more stringent rule of compelling justification. one with super-voting rights. B. Allocation of Legal Power Between Management and Shareholders Text Outline Thesis is that powers granted to management. leads to 32 . gross negligence is the standard.Delaware has no nonshareholder constituency statute. 169. In the absence of statute.0808 Removal of directors by shareholders. The Business Judgment Rule: Corporate law employs a number of different standards of judicial review. Allen argues Del would vote that management would be allowed to include pill provisions in its by-laws unless they totally disenfranchise shareholders. Most courts do not consider bad business judgment adequate for removal for cause. so FL has the easier removal statute. seems to imply management wins. statutes are designed to help out smaller corporations that are most like partnerships. can charter remove right to remove directors for cause? Cases say that charters cannot take away the right for removal for cause. even in the absence of a statute that so provides. Delaware only allows removal with cause. Class Notes FL & Del.

Not regulated what needs to be completed at the meeting. Shareholder meetings. Statutory. Lipton & Flohm preeminent lawyers in this field. tender offers proxy contests-happen without consent of directors. those given right in the charter. hostile tender offers. Bad argument is that management is just protecting their jobs and trying to retain control.Boards that only elect 1/3 of the board every year. Mergers and Sales of Assets. In tender offers. avoids SEC disclosure requirements and possible leaks involved with private deals or buying on the market. RMBCA jurisdiction significant asset sales only require majority of those shareholders voting. Needs to be provided for by state law.procedural and substantive problems with removal especially without cause. Can have a proxy contest. Primer: Two innovations made takeovers viable. Some takeovers require approval of board of directors. Underlying question is whether you view these tactics as good or bad. who do not release for vote and negotiate the deal giving to shareholders for up or down vote. and new forms of financing such as junk bonds LBO. must give shareholders equal opportunity. Guise is that you can't have a new board every year that does not know the business. A will want absolute control and freeze out balance of shareholders in B on the back-end giving them a lower price. allows less then unanimous consent but majority vote. In asset sales management has complete discretion unless the assets are the substantial majority of the business. the combination of two entities. board of Corp. (3) 33 . most statutes allow for meeting for which shareholders can sue for if not held. Good argument is that if you leave your company unprotected the "sharks" will take over as cheaply as possible. arguable on both sides.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. Conflict between models of shareholder primacy and director primacy. then consummate the merger. If corporation "B" rejects friendly offer. Special meetings need to give notice and agenda. Management often controls the proxy process. share purchases. (2) Super-majority requirements. If to many shares are tendered. Del. Just the threat affected management's operations. how to make expensive share oriented methods. Change of Control Situation Ch 12 Corporate Combinations pg 1061 starts. Del § 102(b)(4). Ways to fend off takeover. protects by delaying takeover. Delaware does not give that right. Corp. Tactics for takeover fend off: (1) Staggered Boards. corporation "A" has the option of going to non-statutory measures. Institutional investors always prefer tender offers as guarantees a premium in share price. Jury still out whether mergers are bad or good. Shareholders cannot initiate merger discussions. Non-statutory. vote in directors friendly to the merger. Fed proxy rules only require compliance with 12G corporations. "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. not all corporations. Mergers § 11 RMBCA. only directors. 3 types of shareholders have right to call special meeting in addition to directors: Those with greater then 10%. Virtually all jurisdictions allow unanimous written consent to conduct business in place of meeting. M&A takeovers not assigned read on side. effectively threatening shareholders into accepting tender. both how to use the by-laws. Acquirer needs a minimum of 51% in order to gain control or deal is not attractive. should just let the shareholders decide if it is a good deal or bad. 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. can structure to come into effect after acquiring company has purchased a certain % of shares. in some jurisdictions super-majority is required to consummate a merger.

ISSUE: Whether the directors were negligent in their fiduciary duties. Is board power to repeal shareholder approved by-laws a large threat? Not likely as shareholders will be pissed and vote out board. or be statutorily provided as in FL. designed to make takeover difficult upon triggering event. Two prongs. Courts have used standard of ordinary business judgment and given management much leeway. As agents of the corporation.Crown Jewel Defenses. FACTS: A petition for injunctive relief was filed to prevent management from advancing the date of the annual stockholder meeting. Schnell v. NOTES: Election is void. Antitakeover measures can be both self-dealing to protect management and in the best interest of shareholders. 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. but when given a self-dealing transaction courts have viewed with a much tougher standard. 34 . 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. (1) is there a realistic threat to the company. Quickturn Design v Shapiro. v.Options for sale of key parts of the organization to other entities. RULE: Court finds the vote choosing Osgood a committee to act to be void. Have to expressly say in by-law that can not be repealed. then no problem.By back stock in company tender offer. Del. (4) Self Tender. Defendants refused to act with him and contracted additional debts leading to a accrued loss of $3. Delaware case string seems to comes down that courts will not tolerate interference with shareholder voting. Can you solve the § 109 v § 141 problem? Resolved in MM v liquid Audio expanding Blasius. but the standard by which to measure that duty is deferential to the court. 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. 1998 WL 954752 (1998). Chris-Craft Industries. Pull case. law.40. statute allowing management to change the annual meeting date is permissible. Directors have a duty of care to the shareholder. One position is that these poison pills just entrench management and go against boards fiduciary duty. (6) White Knight. (7) Poison PillNumerous in number and sophistication. and that they had no legal duty to pay the insurance. (5) Debt Increase. directors have the fiduciary duty to the corporation. Inc.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. RULE: Court finds that even though technically within the Del.Higher leverage makes for a less desirable target. Dunsmore FACTS: Osgood was chosen by the corporation to wind up the company. ISSUE: Whether legally complying with the Del. Some of the tactics have influenced shareholder votes directly. flip side is that they can be good for current shareholders by protecting company from offensive tactics of sharks. defendant was charged with paying the insurance which he did not and the shop was consumed by fire. and (2) is the response proportional and reasonable. thus Delaware applies the Unocal higher scrutiny standard. Charlestown Boot & Shoe Co. Often existing shareholders will get opportunity to purchase large block of shares at a discount to make purchase highly expensive. and there is some empirical evidence that it increases bids in buy-outs. Since corporations are viewed as entity theory directors are viewed as agents of corporation rather then agents specifically of shareholders. Dead-hand. Shareholders need to leave stewardship in hands of directors. Also. court has taken a somewhat middle ground. Comes down to who decides how the process of acquisition will be taken.300.

Court also finds that the presence of a controlling majority stockholder did not undermine the validity of the vote. Court finds the move was not ordinary management of the firm. Stroud v Grace FACTS: Strouds allege that board breached its fiduciary duty by recommending certain charter amendments to shareholders. ISSUE: Whether under the circumstances the board. Court does not go behind case viewing as best option for corp. NOTES: Existing shareholders got 10 shares. Atlas had just completed a restructuring and sought to prevent the takeover. Blasius. Was a hobson's choice as there was a fear of delisting from the NY exchange if passed by less then 66%. The boards action is thus protected by the business judgment rule. 35 . Plaintiffs argued that the recapitalization unfairly benefited the majority block and its intention was to entrench management. Holds that the decision of board make-up should be left to the shareholders and not the board itself. as long as you were provided a fair opportunity to vote. new shareholders received only 1 in recapitalization plan. Measures changed the procedure for nominating board members. Court says don't look at us to change the substantive outcome of the vote. ISSUE: Whether to apply the Blasius compelling justification standard when shareholders are not given a full and fair opportunity to vote. 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. Inc. Atlas Corp. Court basically comes down that economic interests can win over minority shareholder disenfranchisement. 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. but isn't it a courts job to sift through circumstantial evidence. FACTS: Dispute between Atlas Corp. Blasius Industries. but puts a very high standard for the board to meet at their burden. but an attempt to block the shareholders from voting on Blasius' proposal. Blasius acquired 9% of the stock of Atlas with the intent to restructure. shifting the burden to the board. RULE: Court found no breach of fiduciary duty to minority shareholders. Court is not going to micromanage. Essentially saying that if you being a "as applied" challenge we will consider it. Williams v Geier FACTS: Cincinnati Milacron adopted a recapitalization plan. RULE: Only demonstrating that the board breached its fiduciary duties may the presumption of the business judgment rule be rebutted.Single purpose has to be so shareholders do not get to vote. NOTES: Court does not adopt a per sea rule. Atlas called an emergency meeting where that elected two now board members in staggered terms. majority shareholder vote is sufficient. Blasius is a hard case for whose holding to apply. Can't do dual class recapitalization under the rules of the exchanges today. v. Courts took view not to expand shareholder rights and not expand Blasius. may validly act for the principal purpose preventing the shareholders from electing a majority of new directors. and largest shareholder. ISSUE: Whether amendments in a non-takeover situation granting additional power and effectively freezing the board is legal. along with contesting the accuracy of those disclosures. NOTES: Procedures to ding the nominee at the nomination meeting. Defendants dispute this claim stating that the move was allowable under the plan and not a conflict of fiduciary duties. over who will sit on the board. even acting in good faith. has not expanded at all. an issue not of intentional wrong but of authority. basically said this is a high hurdle. Delaware Ct. examining the amendments under an "intrinsic fairness" test. In the plan holders of common stock on the record date would have ten votes per share.

Inc. it must bring that plan to the shareholders. uses Blasius here in finding that board is interfering with shareholder voting. RULE: Court holds that there is no exclusive authority granted to the board. Court may have found that in cases where board thinks there is a threat. Hilton Hotels Corp v ITT Corp FACTS: Hilton announced tender offer for ITT which they rejected. and may shareholders propose resolutions requiring that shareholder rights plans be submitted to shareholders for vote at the annual meeting. Board wanted to approve by-law changes that adopted this poison pill. so is it a shareholder right? Quickturn says repeal by board is ok. ISSUE: Whether a targeted company in the face of a hostile takeover can adopt protective measures to stifle the takeover. and implement requirement for shareholder vote on such plan. RMBCA jurisdictions allow board to adopt by-laws. centaur and American Rent a Car. NOTES: Started in Fed Ct. Ct. Court looks at Unocal. (1) Power over the assets of the corporation (Unocal). but can be contracted away. and (2) power relationship between the board and shareholders (Blasius). Court is also influenced by previous vote by majority of shareholders to redeem pill which was not fully implemented. Shareholders have review authority. Pill is essentially a stock option plan and court says shareholders have right to vote on stock plans.e. supp. NOTES: ITT #1. 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.Teamsters v Fleming Companies FACTS: Teamsters proposed to remove a shareholder rights (poison pill) plan through resolution. These cases have a distinction in two types of corporate power. through circumstantial evidence. When it became clear ITT was not going to hold their annual meeting Hilton filed for injunction to force them. NOTES: Footnote 1 & 2 are keys to this case. What is day-to-day operations of the company which are excluded from Fed proxy law will be determined by the sate. Court focusing on the "what" that was done not the "who" that did it. § 109 Del. or to hoard shares at a low price in order to fend off takeover. it invokes both Unocal & Blasius tests. and implements a plan. governs. Shareholders may restrict the board of directors authority to implement shareholder rights plans. In ITT #2. which go opposite directions while GD court ducks the question. used as a poison pill.. Device can be used either to make money. Quickturn says that you can't. but can the shareholder provision in GD really be repealed? Two cases in Del.. ITT adopted a staggered board and poison pill. Provision is in certificate of incorporation. finding primary purpose is to entrench. not in supp. In Del. General Datacomm Industries. but says there was no threat here. NV Ct. RULE: When an acquirer launches both a proxy fight and tender offer. Classic conflict of § 109 vs. as Teamsters took advantage of SEC rule allowing shareholders to include amendments for vote. 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. looking to see if there was a threat and a reasonable response. Stock option analogy used by courts does not back up this argument well. Ct. Can look at Unocal analysis that if response is relative poison pill can be ok. v. ISSUE: Does OK Law restrict the authority and implement shareholder rights plans exclusively to the board. but it can be repealed at any time. Presumption that shareholders can vote through by-laws. i. Doing it to screw Hilton and court says ok. but shareholders can propose non-repealable by-laws. each side can adopt/repeal allowing for circular battles. annual meeting means 18 months in NV. and no law precluding shareholders from proposing resolutions or by-law amendments.: Board adopts a series of anti-takeover measures in order to prevent hostile takeover by Hilton. 36 . and binding proposal can be adopted through proxy. runs opposite of Schnell. By-law sought to prevent repricing of any stock option issued. says that according to state law you can sue after 18 months. § 141.

Modern Corporate Practice Management function is ordinarily located not in the board. MM complies. Page 33 analysis key to the case. Constraints of Composition The typical board includes a number of directors who are economically or psychologically tied the corporation's executives. Constraints of Information Officers typically not only have much more information then the board. Liquid also lowers stock ownership trigger for pill. finding this case the perfect opportunity to use Blasius within Unocal. 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. not an agent of the shareholders. fix the compensation of. Legal Structure of Management Text Outline The Traditional Legal Model Under the traditional corporate legal model. leaves us not knowing how far ruling goes. Because of Alliance merger (white knight) liquid postponed meeting. but in the executives. NOTES: Poison pill in place. These executives are unlikely to dissent at a board meeting. MM introduces a board-packing provision. you got your vote. If effects shareholder vote. we're just guaranteeing shareholder franchise not a win. By reason of time constraints alone the typical board could not possibly manage the business of a large publicly held corporation. Liquid finds a white knight. Advance notice provision in by-laws requires 60 day notice to include important provisions in annual meeting. Indeed. Under this structure.MM Companies v Liquid Audio FACTS: MM sought injunction against Liquid Audio from expanding their board from 5 to 7 members. By controlling the information officers heavily shape the decisions that the board makes. and the central figure is the CEO. and increases the number of board seats so they can pack it. i. the primary function of the board is not to manage the business but to select. and where appropriate replace the senior executives and monitor the corporation's business to evaluate whether it is being properly managed. Blasius as the second prong. supreme court reverses. MM waits until annual meeting. but packing scheme allowed Liquid to still retain control. the board of directors manages the corporations business. particularly the CEO. Constraints of Time Boards of publicly held corporations meet an average of 8 times a year. court did allow it to delay some. No special meeting provided for in by-laws. MM needs to get board control to get power.e. Del. Can they put deal protection devices into white knight arrangement. Shareholders voted in new MM directors. regularly evaluate. Shareholders have no legal power to give binding instructions to the board on matters within the board's exclusive power. Also no-shop and lock-up provisions have been found ok by courts (not here). C. but control much of the flow of information to the board. How exactly is this step taken to thwart effective implementation of shareholder franchise? Seems to expand Blasius when it had previously been limited. the corporations executives. 37 . a number of seats are usually held by inside directors. need to apply Blasius. Court basically says no problem. and the board is conceived as an independent institution. such as we will pay you $XX Million if the deal does not go through. and directors are normally removable by shareholders only for good cause.

and others used to split tasks between two equals. IRRC shareholder monitoring organization. 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. abstentions become negative votes. Compensation committee requirements and independent audit committees are also addressed. (2)explicit majority approval coupled with acquiescence by remaining directors. (1) meetings. Chairman of the Board: There is little case law on the apparent authority of the chairman because the actual authority can vary greatly. extraordinary. legislatively Sarbanes-Oxley. S-O requires disclosures. Proposed and implemented SEC and NYSE rules have also had a constraining effect. It is fair to say modern courts would hold that at least in the context of a closely held corporation. E. (1) unanimous explicit.Class Notes Attempts to regulate boards. but informal. Consequences of noncompliance include. The definition of chairman and CEO is very gray. 38 . and (3) majority approval or acquiescence. Formalities Required for Action by the Board Text Outline Formalities required for action by the board. are required by statute to be decided by the board. but not to contracts of an "extraordinary" nature. Staggered boards and classified boards need to be approved in charter. (4) voting. Majority of those present not just voting are required. risk and time-span of the action. Nominating committees for directors rather then appointments are recommended but not required. The Presidents actual authority may be greater then his apparent authority. no quorum then activity taken is invalid. protects whistle blowers and stiffens penalties. approval. (2) notice. Statutes also enumerate what matters the board cannot delegate to a committee. Still have problem with defining what are director responsibilities and duties. 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. but some boundaries can be identified. so often little detail and used strategically. Additional elements to determine what is extraordinary is the economic magnitude of the action. Class Notes Minutes of board meeting are discoverable. Independent board rating agencies and executive search firms are also having a monitoring effect. but in many companies the chairman retains the title while handing over day-to-day operations to a successor. other times held by a retired CEO still valued. Complaints on one side are that its hard to get qualified board members given the legal liabilities. D. The difficulty lies in defining what is ordinary vs. S-O on page 1964 in statute book. on the other are complaints that SEC and other disclosure requirements are not enough. Quorum is majority of the full board. the governing rules include. certifications of accuracy and truth. such as declaration of dividends. Some matters. otherwise annual voting. (3) Quorum.

merger. Election o directors requires only a plurality. split among the candidates any way they wish. H. Idea is that you do not vote one-by-one but vote for all seats at the same time. having a fewer number of directors. G. then force minority voters to expend their shares voting out this person. Secretary: Secretary has apparent authority to certify records of the corporation including resolutions. Cumulative voting became mandatory in some states. and their executives. Deployment can be tricky and minority shareholders have actually gained more seats then the majority using cumulative voting wisely. Under most statutes a majority of the shares entitled to vote is necessary for a quorum unless overridden by certificate of incorporation. Current proponents of cumulative voting still feel they should be permissive as it stands now.Vice-Presidents: Vice presidents are usually given little or no apparent authority at the corporate level. Fundamental changes such as sale. dissolution and amendments to the amendments usually requires two-thirds votes. Under straight voting a minority can never elect a director over the objection of the majority. Deposit trust company will hold shares and have record of the holders. Can pool your votes so that a minority shareholder can be guaranteed at least some board representation. 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. argument against is that can be used as "spies". Argument for cumulative voting is that additional points of view and perspectives can be heard on the board. while cumulative voting can. Only persons who are record holders on the record date are entitled to vote at the meetings. Formalities Required for Shareholder Action Text Outline Notice of place. Ways to thwart cumulative voting are staggered boards. Cumulative Voting Text Outline If someone owns 100 shares and 7 directors are running. F. Limited Liability 39 . Permitting vacancies to be filled by the board. Under cumulative voting a shareholder can cast up to the 700 votes. Class Notes Authority issue comes up when one of the parties wishes to get out of a deal. under straight voting they can cast 700 votes total but a max of 100 per candidate. Notice of special meeting must include the reason for being called. Courts will often view closely held corporations. Default you need to look at the certificate of incorporation. as having the same powers as possessed by partners. but since rolled back to a permissive theory. time and date is required for the annual meeting of shareholders and for any special meeting. lead to partisanship etc. Class Notes Really just an issue if were going to make it easy or hard to allow minority representation.

Class Notes Basic assumption of being a shareholder is that you have limited liability. shareholders by statute and managers by agency principal. Piercing the Veil Review: Need to start by thinking about the issues. Should piercing be harder if the investors are sophisticated? Is there a better alternative to piercing? Organize in this manner of answering these questions. i. Courts moving away from Minton undercapitalization test.Financial Risk already a factor. Courts generally do find it easier to pierce the veil in parent/sub relationship. 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. Arguments in support of limited liability. Commingling of funds an issue such as in Sea Land where CEO is using corporate bank accounts as his own. Parent sub corp. mainly the fundamental corporate fact of limited liability and is there a rationale for piercing. money grab solution to no problem Market Efficiency . Also hard to pierce in FL. It is generally known that shareholders of a corporation have limited liability. This protection applies to corporate managers as well as shareholders." Limited liability has nothing to do with being a separate entity. reduced trading. Although tests for piercing the corporate veil are similar from state to state. Is there something different about parent/subsidiary structures that should allow for easier piercing? Is there something about torts that allows for easier piercing. even though commonly called "limited liability.e.Text Outline Shareholders have no liability for corporate obligations. law not enough to just show "alter ego" to pierce the veil. can have covenants required to meet certain financial thresholds. Organizing by issue makes more sense then by doctrine. need improper purpose. the application can vary greatly. Undermine incentive to incorporate Innocent players get punished. Proposal has been that shareholders be liable on a pro-rata basis rather then a joint and several basis. Other theories are piercing only corporate parents. Argument: Basis. a combination with undercapitalization. improves efficiency of markets and is a more transparent legal structure then partnerships. retirement funds and unknowing Under Del. encourages investment. In FL every case of piercing has either been a sham or corp. but why? Protection of closed corporations. Del. is same issue as brother sister corp. One argument (stupid one) is that shareholders should have personal liability as corporations are encouraged to take to much risk. if just alter ego you cannot pierce without fraud. encourages management to be less risk averse. Cons are taxes and can be used to avoid liabilities. but also need to show fraud. DC concludes that not keeping up formalities can be prima facie evidence to pierce. Wash. while VA requires common law fraud. used for fraudulent purposes. One counter is that limited tort liability improves the efficiency of the market. Finding the balance between fairness to creditors and corporate doctrine. or can charge a price that reflects the extra risk. 40 . as RUPA confers liability on partnerships even though a separate entity. but is statutorily granted. Should fraudulent conveyance law be the basis for piercing the corporate veil vs. Inadequate capitalization is merely a factor considering whether or not to pierce the corporate veil.Global Markets. Tort risk not an issue. but this can be contracted around by requiring personal guarantees. Doctrine.

possibly prorata. Sea-Land Services. ISSUE: Whether defendant's corporations should be considered one single entity for liability purposes. Atex. could only get into the pockets of the individual corporations. Walkovszky v. Kodak was granted summary judgment. RULE: As Chaney was not party to the original suit he cannot be held personally liable as he did not defend himself. Pepper Source FACTS: Sea-land shipped peppers on behalf of Pepper Source.. ISSUE: Whether Atex in fact operates as an entity with Kodak rather then a subsidiary thus allowing for vicarious liability. industry practice is for a corporation to own one or two cabs only. but of multiple corps. Seminole corporation had no assets and never functioned like a corporation. Eisenberg feels piecing should be a given for torts. direct liability. 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. FACTS: Plaintiffs filed suit against Atex and Kodak to recover for repetitive stress injuries they claim were caused by Atex's keyboards. 41 . Similar when director commits a tort in their duties as director. as director and officer. It is undisputed Kodak followed corporate formalities here. which did not pay the freight bill. Owner of defendant cab company is stockholder in 10 others. does not necessarily need to be intentional fraud. Director signs person guarantee. they pay not because of any doctrine but because of the guarantee given. Inc. context. ISSUE: Whether Cavaney. in actuality courts and the law is going the other way. RULE: To prevail on an alter ego claim under Del. Del. law decides when the corporate veil can be pierced. and (2) that an overall element of injustice or unfairness is present. RULE: Plaintiff gave no rational to support agency theory of corporation. ISSUE: Whether Marchese's corporations are an alter ego and fraud or injustice occurred. Very little piercing in public corp. Sea-Land obtained judgment but Pepper Source had dissolved. i. US v Best Foods: Basically they were completely running the company so held liable.e. Delaware court not eager to pierce the corporate veil. Sea-land seeks to hold Marchese personally liable. 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. Another issue is should you make a rule that reflects sophisticated parties or that protects the little guy like in Kinney. can be held personally liable for the judgment against Seminole. Two contrasting views. Minton v. As Atex is a Del corp. but has administerability and proof problems. to get into the pocket of the shareholders need to show "alter ego" or fraud. law a plaintiff must show (1) that the parent and subsidiary operated as a single economic entity. Cavaney FACTS: Plaintiffs daughter drown in a public swimming pool recovering a $10K wrongful death judgment from Seminole Pool. Fletcher v. then pierce his corporations veils. not liability of a holding corp.but this is still what often bothers the court. commingling etc. NOTES: Not a case of holding corp. Argument in dissent is that regardless of what the legislature says the under-capitalization is sufficient to pierce the veil. Inc. owned by the same shareholder. Carlton FACTS: Plaintiff was injured by a cab. Fraudulent conveyance (now UFTA) is old doctrine saying that creditors should not be able to use sham corporations to defraud. Plaintiffs brought second action trying to hold defendant Cavaney personally liable for this judgment. plaintiff's appealed alleging Kodak acted tortuously in manufacturing and marketing the allegedly defective keyboards. plaintiff claims all are operated as a single entity. If making an agency claim. based on the shareholders actions. Would need to show fraud or some event leading to personal liability. usually of closed corporation. v.

(1) the claimant must have engaged in some type of inequitable conduct. Equitable Subordination of Shareholder Claims Text Outline Under the doctrine of Equitable Subordination.RULE: Courts finds that the corporations are alter ego's. I. but the prong of injustice is not well defined and needs to be shown by Sea-Land. DHL ownership and control scenario. Equitable subordination simply takes an investment already made. usually happens when partners are in bad shape. including the claim of preferred shareholders. NOTES: Why do you not have a piercing here when he has commingled funds so much? Commingling not enough. transfer funds into corporate loans to themselves from the corporation then declare bankruptcy. Strange that company goes belly up only two moths after lease is signed. not just harm against creditor. the court sometimes consolidates the assets and liabilities of the several corporations into a common pool. (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant. (2) the commingling of funds or assets. J. Even uses completely different third party as basis for unjust enrichment. (3) undercapitalization. they incorporate. on various equitable grounds. NOTES: Given how sophisticated the creditors were should the veil have been pierced? Sophisticated contracting parties should know enough to get guarantees etc. Benjamin v Diamond: Three conditions must be satisfied before exercise of the power of equitable subordination is appropriate. and (4) one corporation treating the assets of another as its own. Class Notes Equitable Subordination happens in the bankruptcy context. Undercapitalization plays an important role as it does in piercing doctrine. 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. RULE: Polan found liable as he did not even try to keep up corporate formalities in order to take advantage of limited liability. Shareholder Informational Rights and Proxy Voting 42 . VI. 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. Courts will not buy the scheme. Court applies Van Dorn test: (1)failure to maintain adequate corporate records or to comply with corporate formalities. Is it possible that Polan lied to make it impossible for Kinney to contract fairly. will individual shareholders be prohibited from the activity as well. 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. The Corporate Entity and the Interpretation of Statutes and Contracts Text Outline This is the question where when corporations are prohibited from an activity. when a corporation is in bankruptcy the claim of a controlling shareholder may be subordinated to the claim of others.

says if shareholder has proper primary purpose to request the document. FL statute is § 607. Class Notes You can get by right corp. Court says no as the purpose needs to be economic. Need to show proper purpose to get access to substantive information. 43 . RULE: That a stockholder may demonstrate a proper demand for the production of corporate books and records upon showing. 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. Stockholder Lists: Courts stand readier to grant access to stockholder lists then to grant access to otherwise confidential financial and business information. shareholder has the burden of showing need. Pillsbury case. Upon failure of merger and payment of termination fee. Two arguments here. Del. ISSUE: Whether plaintiff showed by preponderance of the evidence a credible basis for wrongdoing. Del.20 requires that every corp. Under § 220 Del. Court though limits the documents to be produced to those related specifically to the merger only and available from the bank. Shareholder Informational Rights Under State Law Text Outline Most legislatures have enacted statutes governing the right of inspection. Court takes a liberal view on what is a proper purpose. In FL used to be limitations on number of shares needed to request documents. hard to get access to books. now changed to which documents you wish to request. and must justify each category of the requested production. Shareholder Inspection Rights Pillsbury v Honeywell key case. Need to show a proper purpose in acting in your shareholder duties. 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. by the preponderance of the evidence. but improper secondary purpose. but also a secondary purpose. was denied. § 220 and won in lower court. Plaintiff demanded access to bank's books. Delaware Court vs. Bank entered into merger agreement with Mid Am. makes big distinction to access to books vs. must furnish shareholders annual financial statements including balance sheets and income statements. 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. minutes and by-laws. Honeywell court. Stat. court says it does not matter. To capture the smaller corporations the RMBCA § 16. defines what reasons and what documents may be provided.1602. that there exists a credible basis to find probable corporate wrongdoing. access to shareholder lists. but narrow view on what documents can be obtained. Ct. sued under Del.A. a larger regional bank holding company. not Mid Am." 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. any ulterior purpose is irrelevant. Owners of record may be different from beneficial owners. Appeal by bank ensued. but if challenging management you would also wish to get a list of shareholders and certain internal management documents to show your case. Pillsbury attempted to purchase shares in order to solicit Honeywell shareholders about anti-war views. Anti-war environment against Honeywell's munitions manufacturing.

FACTS: McKesson entered into a stock for stock merger agreement with HBOC. Schedule 14A lists in detail the information that must be furnished when specified types of transactions are to be acted upon by shareholders. plus director notes on merger.Saito v McKesson HBOC. Forms 10K. Inc. 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. i. such as the NYSE. Wants documents from time when he bought stock that are merger related. Catch 22 in this language as they need to show likelihood of wrongdoing to obtain the documents which will show the wrongdoing. 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. basically saying you can't engage in fishing expedition. ISSUE: To what scope to allow access to documents for proper purpose investigation under Del. court uses piercing language. § 220. The merged company had to restate earnings down by $327. If executives put NYSE filing at risk they will sue for breach of fiduciary duties. § 200 for access to books and records to obtain information to sue derivatively. B. one as to the truth of the financials and second as to the effectiveness of the audit and control procedures. restatement meets this criteria. testimony. Likelihood is a lower standard which can be obtained through documentary. a shareholder.4M after audit. and for 8K required for special circumstances. FDR creates the securities act of 1933 with rules for issuance and disclosure. attributable to HBOC accounting irregularities. Pursuant to Sarbanes-Oxly need to have annual disclosures and CEO & CFO have to sign certifying that the documents are true. 40. and no HBOC documents as he was not a shareholder. The language has been given a expansive interpretation. Pg. Court says you only have standing to documents since you bought the stock. Proxy Contests: Rule 14a-11 regulates proxy contests requiring the filing of certain information by insurgents. companies merged. Saito. amendments and elections of directors. Mechanics of Proxy Voting: Another purpose of the proxy rules is to regulate the mechanics of the proxy voting 44 . but authorizes the SEC to promulgate rules that govern private conduct including proxy voting. C. Access to the body of shareholders: Rules 14a-7 & 8 provide mechanisms through which shareholders can communicate with each other. logic. Gets access to HBOC documents that McKesson got. or otherwise. unredacted. § 14(a) of the Securities Exchange Act does not regulate private conduct itself. Del. sued under Del. Also disclosure requirements by SRO's (self regulating organizations). form 10Q. not before. Proxy Rules: Overview Text Outline Proxy voting is the dominant mode of shareholder decision making in publicly held corporations. Periodic Disclosure: The proxy rules also require certain forms of annual disclosure. Have to sign at two levels. both from HBOC and McKesson. but as he was not a stockholder of pre-merger HBOC those documents remain undiscoverable. 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. supreme court says that documents prior are within the shareholder rights. 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.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.

Intended restriction of material in §14(a)(9). Proxy Rules: Private Actions Under the Proxy Rules Text Outline In Borak the Supreme Ct. focus is on § 14(a)(9) anti-fraud provisions. What is material? In Lyman case court says change of accountant to one that had been indicted not material as location was in OK. Pg 1843-82 in Statutes book outlines rule § 14(a) (1) regulating proxies and what needs to be in the statements. Question is now that private action is allowed. Might want to know Would want to know Would change Vote +--------------------------------------------------+-----------------------------------------------------+ Mills Std. in Johnson Ct. will not be so generous to the private litigant. An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. leaving smaller companies not subject to § 14(a) rules. adjusts standard from a material fact that might have been important to the shareholder but would have been considered important. Borak says let us put as many weapons into the hands of shareholders. let them go to state court for smaller issues. Need to go to common law fraud for misrepresentation and material omission. Scalia in Virginia Bankshares narrows Borak but expressly chooses not to overturn it. TSC looks at whether it was appropriate to allow for private right of action. 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. Class Notes Notes on Borak: Question is whether the court is going to say there is a private right of action. Also difference between transactional proxies and nominating proxies. TSC is the law.itself. Current law on materiality of proxy disclosures. D. Does not go here Ct. § 14 SEC act of 1934 says no-one can solicit proxies in contravention of SEC rules on the subject. and non-traded companies of over $5M in assets. Under § 12(g) companies covered are any traded on the exchanges. Class Notes Notion that there was a need to have generally applicable federal law relating to content. 45 . In contrast. It does not require proof of substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. Mills not the law now. Shift to federalism. 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. misrepresentations etc. Says private action is a necessary supplement to SEC enforcement. later narrowed to weapons limited by what congress say's as they could have provided if they wished. what are going to be the elements of fraud? § 14(a)(9) need to have a material omission or a statement that is misleading. tip the Ct. Notes on TSC Industries v Northway: Sup Ct. finds immaterial that one of the directors had been campaigning while being indicted for the foreign corrupt practices act. Northway. Delegates a large grant of power to the SEC to regulate securities matters. court answers yes. says change vote to high a standard. TSC Standard Ct. Mills to low a standard.

Sandberg FACTS: First American Bankshares conducted a freeze-out merger eventually merging into Virginia Bankshares. If board says worth $60 and actually worth $42. minority shareholder. If fact incorrect. Bankshares: Souter is basically looking for if there is a statement that was a material fact. as caps in VA judgments. but did not reveal that board was already under control of the acquiring company. Seventh Cir. Attorney argues that opinion is not a "material fact" as required by 14a-9. Plaintiff looses. so if the merger deal was fair would be unlikely that it would be overturned. not discussing what misstatement would be if proxy not material. 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. i. Problem in proving damages also. everything went to hell but how can you prove that it was due to the director elected. 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.e. Mills. a material misstatement can be a violation. says that they will look at materiality or omission as prima facie evidence of materiality. Filed an amended complaint to set aside the merger based on misleading statements in the proxy. RULE: Court holds that although misleading. torts. Will look to see if it was the kind of statement that shareholders would consider important. applies the standard that the misleading statement caused the merger to go through. Proxy stated board recommendation for the merger. First issue is what happens when directors in a proxy puff-up the deal with conclusory statements under rule 14a-9.e. Can show causation. but not reliance on that causation given so many shareholders. 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. Here in Mills. but rule has not been picked up. without additional evidence that shows board new it was worth $42 and lied are needed. How to determine facts is on pg 303 middle. was it a fair deal. Not necessary to go to shareholder vote. Material defect did not need to be decisive. Ct. Inc. gets case into Fed. NOTES: Courts here are imposing new Fed. this offer was for $42. only material. but did so to avoid claim of breach of 46 . so remanded to lower court for a review on possible monetary damages if found that terms were unfair. In a situation where proxy itself is an essential link in accomplishment of transaction. i. or might have changed the vote of the shareholder. 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. proxy was necessary to transaction. Sandberg has an issue with the stock price as there had been a $60 sale previous. Hard to prove. Ct. it is not possible to undo the merger. policy of constraining private rights of action. burden is more stringent in allowing private right of action. Effectively makes the SEC the enforcer of proxy and securities violations rather then private lawsuits. FN7. RULE: Court holds that misstatements misled petitioners into believing that state remedies to upset the merger had been lost. Souter seems to say that there has to be both belief of the directors and the truth arising from the actual situation. Neither TSC. Sup. 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. 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. but-for cause i. Virginia Bankshares. NOTES: Case is defining what is a material omission? Need to prove causation. v. rules on state regulators. but directors opinion including the fact is believed correct.e. so they look at if a rational shareholder would have voted for the deal. Squeeze out merger of Sandberg. corporate records subject to documentation.

Roosevelt v. Misleading statement was not material. 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. so will prefer to send themselves then release list. board election. § 14(a)(8)(i)(5) Relevance is most important exclusion. exclusions under (i) etc. go to state court. to state law saying that shareholders must not raise provisions that are the normal operations of the business. or make unilateral voting announcements in the newspaper. Class Notes SEC § 14(a)(9) is key proxy provision. that limit who can submit a proposal and for what. Scalia's position. it may be possible to go to Fed. Plaintiff does not win because of causation problem. Can argue that Fed. Palatable to right as opinion basically says you look at state law to determine remedy. § 14(a)(7) differs from state law. Other two big litigated proxy rules are § 14(a)(7) & (8). FACTS: Lower court rules that shareholder proposal is relating to the conduct of ordinary business purposes. violation is what caused you to loose state law remedies. IRRC Investor research firm web site. loss of appraisal rights. Stock option debate. As here. would often be put into management's proxy materials under § 14(a)(8) shareholder proposal rule. disparity of pay. Summary. affirmed. Ct. i. ISSUE: Whether shareholders proposal is subject to exclusion under § 14(a)-8 of the SEC Act relating to "ordinary business practices. Ct. Proposal for phase-out date and alternative CFC sources properly excluded under § 14a-8 as ordinary course of 47 .fiduciary duty. you need to go to state court but if the door was closed because of that lie then you can come to Fed. if widespread program would be considered ordinary course of business. says that in contrast to Mills. Du Pont de Nemours & Co. § 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. it must obtain a no-action letter from the SEC.. Pending rule § 14(a)(11) would say that given shareholders the right to propose their own board of directors for nomination. These rationale can be used by the SEC to give itself leeway. Ct. Proxy solicitations can be oral.000K. as Souter determines that the merger could have been legally accomplished without the proxy despite management's pursuing that course. Kennedy's position is minority shareholders are exactly the group intended to be protected as was in Mills. Proxy Rules: Shareholder Proposals Text Outline Rule 14a-8 provides that if management seeks to exclude a shareholder proposal from a proxy statement." RULE: Court holds that a private right of action is properly implied from section 14(a) of the SEC Act. if narrowly drafted to top management could be argued as social policy issue such a incentive to manipulate stock.I. (a)(7) shareholder can ask management for shareholder list if wishing to offer a different board member. proxy was not necessary to accomplishment of the transaction. E. 1998 Rule numbers changed. Basically a tip of the hat by Feds. E.e. will not trample state laws that may allow for merger without proxy. proxy was not a causal link. If making a shareholder proposal vs. When management sends out the proxy they can send theirs last which is binding. when proxy is not essential to transaction. basically saying if there is widespread public debate on the issue it can't be excluded. but as shareholder can always go to state law to get list. Souter leaves an opening saying that if actions would cause a loss of state law remedy. Rule is limited though as there are thresholds in ownership such as $2. but § 14(a)(1) important. this way management pay's for solicitation for a social or other proposal that is likely to be unsuccessful. and there is a big lie out there.

Court says not appropriate to use corp. What happened in the late 80's & 90's is management is working with major shareholders. The solicitor's database often allows for discovery of who the beneficial owner of the stock is that will be voting. Heineman: Not sure what rule is if directors pay themselves when they do not have shareholder approval. but can use when a dispute as to policy. if they had lost they would have been left out in the cold as pointed out by defense. Proxy Contests Text Outline Very few contested elections are run without the aid of professional proxy solicitors. 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. 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. 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. 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. Solicitors also provide advance guidance as to likelihood of a proxy passing. NOTES: Shareholders still get attorney's fees. The Duty of Care and the Duty to Act Lawfully 48 . Rosenfeld v. When new shareholders take power they pay bills of both their and incumbents proxy contests. Fairchild Engine and Airplane Corp. Disagreement is when are the funds being used to persuade and when to inform. funds when purely a personal power struggle dispute. 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. ISSUE: Whether directors can reimburse proxy contest sponsors from the corporate treasury. F. thus allow management to avoid failing proxies. expense and small likelihood of winning. The solicitor handles all the physical requirements of the proxy campaign. Court says that shareholder approval was necessary to pay insurgents proxy. and further persuade crucial voters. VII. not open to paying all insurgent proxies as that would encourage to many wasteful battles. subject to the scrutiny of the courts when duly challenged. Dissent believes you need to look at the reasonableness of the amount spent as to the purpose. RULE: In a contest over policy. Changed when corp. raiders came into the picture conducting hostile takeovers. helping to entrench themselves. Class Notes Traditionally not many proxy contests due to free-rider problem. corporate directors have the right to make reasonable and proper expenditures. 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. as compared to a purely personal power contest. not proposed new venture. Are these expenses justified and when do they become entertainment. NOTES: Judge uses Unocal hostile takeover standard and imports into proxy contest context. monitor voting results. Easier to just sell shares.business due to being existing production.

The business judgment rule consists of four conditions. (2) large amount of liquid assets create temptations. which if satisfied. 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. The four conditions are: (1) Director must have made a decision. 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. but under a more limited standard such as if it was rational or in good faith. If a director commits a tortuous act. and (4) Director must not have a financial interest in the subject matter of the decision. 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. 49 . The standard of review applied to these duties is less stringent then the standard of conduct.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. Barnes v Andrews. in which case they will have the burden of showing that the transaction is fair. (1) duty to monitor. (3) duty to make prudent or reasonable decisions on matters to which they act upon. he looses his corporate cloak and can be held civilly liable so is really protected only for contract matters. standard of review being the business judgment rule. The business judgment rule will not apply when a board fails to reach an informed decision. Learned Hand. The Del. the decision will be reviewed not to determine whether it was reasonable. (1) interested depositors in addition to shareholders. but that the situation would not have occurred if he had performed his duties. is applicable to claims based on the quality of a decision. 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. If the four conditions are met. and (3) statutes can impose special obligations which become a duty of care as a matter of corporate law. J. The application of this standard of conduct to the functions of directors results in several distinct duties. (3) Decision must have been made in good faith. It is much easier to satisfy a rationality standard then a reasonable standard.A. each director will be liable for any loss of which the boards failure is the cause-in-fact and proximate cause. ALI § 7. Supreme court has since rejected the reasoning in Barnes v Andrews. his colleagues would have followed his lead. and (4) duty to employ a reasonable process to make decisions. Bank/Financial Institution Directors can often be held to have a higher duty of care due to. (b) Or more narrowly. (2) Director must have informed himself with respect to the business judgment to the extent he reasonably believes appropriate under the circumstances. simply because in that case the inattentiveness will not have been a cause-in-fact of the loss. 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. The ALI's principle of Corporate Governance states that a director has a duty to perform their functions in good faith. 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. 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. The ALI comes down where if the Board as a whole has violated it's duty of care either by omission or commission. (2) duty of inquiry.

Joy v North Builder is getting deeper and deeper in debt. Most duty of care cases are non-feseance cases. Ex. 1964: Does the existence of Sarbanes application effect the application of State law? Most important now is audit committee. Essentially by-passes Directors and puts certification duties directly on the officers themselves. reporting requirements. or people making judgments on your performance based on hindsight. standards and rules in place. Now Sarbanes seems to override Caremark doctrine. Supreme Ct. regardless of state law corp. 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. 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. Duty of care is that a manager should act in the manner that a reasonable person in similar position would act. Must put in whistle-blower protections and rules about disclosure by in-house counsel when they discover financial irregularities. Appropriate funding must be given to audit committee. direct limits of liability. Note on pg 544 is good summary of what duties are. Likely that Sarbanes will now start creeping into state law. i. Sarbanes-Oxley pg. As long as there is a process duty of care is met. risks that may be acceptable in other industries. FL adds a good faith requirement. Good loan after bad then business finally fails. gives audit committee power and then establishes rules to disallow manipulation.Directors and Officers Liability Insurance Three elements may serve to reduce or eliminate civil liability for breach of duties. must be financially independent. If clearly illegal against social policy and duty of care. Precursor seems to be Caremark. Issue is now need to comply with Sarbanes. Business hindsight bias is a worry. Rational is do not want bank directors to be taking unnecessary risk with depositors money.: Suppose one director talks others into buying his house at an inflated price? The one director violated his duty of loyalty. Requires CEO to certify that to the best of his knowledge numbers are accurate and he has done investigation within 90 days. Courts will use business judgment rule when confronted by dissident shareholders. duty of loyalty is basically incentives to keep managers from being thieves. If you're not making business judgments but just accommodating you are not protected by the business judgment rule. Additional problem in strong enforcement is that all the benefits of a good decision accrue to the corp. while others are in violation of duty of care. No-win situation's can be different from a "bet the farm" situation. even if intention was to assist the business. overriding previous law in Graham. directors are not giving an adequate effort of attention. Must put in procedures. 50 . no win situation. while all the bad decisions will be accountable for by the director personally. As long as there is a reasonable process with reasonable care should be ok.e. dictum by Allen but then picked up by Del. Parnes v Bally Entertainment Seems to be a slight back-track from Van Gorkom. Illegal behavior would be a violation of the duty of care. insurance and indemnification.

In Del. Can read Freancis as either a duty to report to the authorities or duty to investigate and report if something is amiss. 20 meeting actions did not cure the problems. without opt. 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. Van Gorkom had been an officer for 24 years and was approaching mandatory retirement. but also fraud. Considered by many a bad decision. then forgo an $8M tax credit in order to hide the bad investment. 51 . and (3) were grossly negligent in approving the sale of the company upon two hours notice without exigency of crisis or emergency.. Board does not get to see merger documents. 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. RULE: Courts find director liable i negligence for the losses caused by the wrongdoing of corporate officers. American Express Co. and duty to shareholders as director. FACTS: Complaint is brought derivatively by two shareholders asking for a declaration that a certain dividend is a waste of corporate assets. Company is a sitting duck for a takeover. NOTES: Unusual case as has duty to creditors as executrix. and offered a buyout package at $55 per share without the boards knowledge. Should have resigned if unable to perform duties. Pritzker can buy a huge minority share at $38. is executrix of her estate. Van Gorkom autocratic CEO nearing retirement and with a large shareholding. 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. Van Gorkom puts the number out there. a subsidiary of Marmon Group whose owner is Jay Pritzker. take Van Gorkom at their word. 20. Court says she has affirmative duty to bring the matter to the authorities if she is unable to resolve the situation. Van Gorkom.3M against estate. legislature includes opt in provision so that a corporation can include in their articles of provisions that corp. Defendant. United Jersey Bank FACTS: Plaintiffs are trustees is the bankruptcy of Pritchard & Baird Intermediaries. RULE: Business judgment rule requires that more then just the showing of another course of action is necessary for an actionable claim. Smith v. daughter of Lillian Pritchard. NOTES: Lists 5 exceptions to business judgment rule. and company can not go out and solicit other offers. American Express bought DLJ stock which tanked. 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. and (2) if not. Deal allows in event Van Gorkom sells shares to anyone else at above $55. Jay Pritzker. Trial court characterized payments by the Pritchard’s as fraudulent conveyances ad entered judgment of $10. (2) were uninformed as to the intrinsic value of the company. Holding is that business judgment rule protects the dumb. whether their actions subsequent to the meeting were adequate to cure any infirmity in their action. AMEX purchased $30M of DLJ stock as an investment which dropped to $4M. Kamin v. Van Gorkom FACTS: Class action brought by shareholders of Trans Union seeking rescission of a cash out merger with defendant New T Co. directors will not be held liable for business decisions. RULE: Directors did not reach an informed business judgment in voting to sell the company because. ISSUE: Whether actions of the directors of AMEX to pay dividend rather then sell shares was a violation of duty of good care. Some states have opt out provisions. in Van Gorkom still good law. The court never reaches the second question as directors post Sept. (1) they did not adequately inform themselves as to the CEO's role in forcing the sale and establishing the share purchase price. 198 meeting.Does business judgment rule eliminate the sting of the duty of care? Freancis v. Van Gorkom met with his friend. Van Gorkom approaches Pritzker to buy his shareholdings at $55 a share. arbitrary action or a breach of trust. One view is that it is a self-dealing case as Van Gorkom ran the whole deal and did not fully inform others. NOTES: In response to case Del. CEO of Trans Union. then sought to distribute the shares out to stockholders as a special dividend.

Questions raised about what kind of reports are required and questions should be asked? Supposedly this case only requires good faith and informed process. or when it arises from unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. 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. and (2) a statute that makes managers criminally liable for unlawful acts of employees over whom they have the power of control. NOTES: Not clear that this truly was an illegal act. majority retorts that you should at least engage in some process to evaluate not just blind trust. plaintiffs would have to show either. 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. affording a preference to the DNC on collection procedures in violation of the Communications Act of 1934 and effectively making an illegal campaign contribution. Blind reliance considered here as all directors relied on Van Gorkom. Response to Caremark was establishment of compliance officers and departments. A second class of liability can arise due to failure to monitor. ISSUE: Whether shareholders had a basis for action for breach of duty. 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. NOTES: One case that differs from reasonableness standards of Duty of Care. (1) statutes that make corporate managers criminally liable for unlawful corporate acts if the managers themselves performed or caused the performance of the act. Court states liability may follow from board decisions that result in loss when.5M owed by the Democratic National Committee for communications services. (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. In re Caremark International Inc. Duty to Act Lawfully Text Outline Two types of statutes are relevant to the potential criminal liability of officers and directors. the decision was ill advised or "negligent". even if that power is not exercised. Miller v. RULE: In order to show Caremark directors breached there duty of care by failing to adequately control employees. ISSUE: Whether Caremark's directors breached their duty of care by failing adequately to supervise the conduct of Caremark employees or institute corrective measures. Regarding the "negligence" claim. this one is a complete cash buy out. but hard concept to nail down. Court takes position that this type of behavior as a general rule should be considered illegal. 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. B. Suit seeks recovery of those losses from the board of directors as individuals. later rules that private action will not be considered for campaign finance violations. Issue is also magnitude of the deal. Caremark was charged with multiple Federal violations after a four year investigation. 52 . Derivative Litigation FACTS: Suit charging breach of fiduciary duty of care by Caremark directors as applicable to healthcare providers. RULE: Court points to statutory laws that give shareholders rights to challenge illegal corporate donations thus providing them standing to seek damages. Supreme Ct. 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.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.

Example is when a director provides a loan to a corporation. By the 1960's the law had evolved to where the suit of a shareholder. will those members with special expertise be held to a higher duty? Del Ct. compliance departments can allow you to avoid gross negligence charge and mitigate sentences handed out by Feds. Courts have sometimes awarded punitive damages against directors or officers who have breached their duty of loyalty. self dealing transactions may be a better deal. 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. Levi theory that Fed. response to Smith v Van Gorkom. 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. can get exculpatory clause which protects directors. corporate charter does. Explains how many cases were decided in 80's & 90's as judges were looking at the economics of the transaction. law to make it more shareholder friendly. Traditional remedies for violation of duty of loyalty are restitutionary in nature. Sometimes. law is shaping state law. Chandler does not dismiss the suit. or conflicting board memberships. recently came down with a case in which the Directors did 53 . statute just allows a corporation to include in charter if voted on. normally rescission. Meinhard v Salmon. Class Notes Two types of hard cases.e. Del. § 102(b)(7) does not exculpate itself. especially with close corporations. would be reviewed by the courts subject to rigid and careful scrutiny. WD II is a case if demand should be excused or not. Standard of liability in Del. Must demand action of the board prior to ensuing litigation. Pressure of Fed Law on state law also manifests when board members have a special expertise. Derivative action is an action where shareholder sues on behalf of the corporation against the Directors. is gross negligence. Duty of Loyalty A. Marsh pg 599: Shift as previously there was a prohibition on self dealing transactions. i. self-dealing transactions by a director and corporate opportunities that are taken by a director. effectively standing in the shoes of the corporation. How is Sarbanes-Oxley affecting? Maybe affecting Del. but can argue that Directors will not act so demand should be excused. friendly to corporations but an opt in provision.VIII. Federal sentencing guidelines have been established in part to response to corporate wrongdoing. whether there was a disinterested majority of the board or not. and that loan may not have been available otherwise or at a worse rate. The tougher cases are the indirect self dealing transactions such as purchase from a company in which a director has minor stake holding. 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. § 102(b)(7) Del. family transactions. and invalidate it if found to be unfair. § 144 is a major source of law here.

Walt Disney I.. president of the Chicora Apartments. he awarded construction contract to James Construction wholly owned by himself. James FACTS: Suit brought by the Talbot's against James. NOTES: Eisner hires his friend Ovitz as CEO. In re Walt Disney Derivative Litigation . LGT intervened and filed a complaint seeking specific performance of an agreement for Donald to sell his SLE stock to LGT. Inc. Talbot v. Directors lack of care in an important business decision will not be protected by the business judgment rule. 2003 FACTS: Suit to disgorge Ovits of his severance payment claiming directors breached their fiduciary duties. James appeals after judgment against him for $25K stating he was not entitled to overhead and profits resulting from a construction contract. and stockholder of the company to authorize a contract to a company owned by him from which he received profits and salary.. 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.. Not fair here because contemporaneous market test is not shown here. but WD II now Chandler gives alternative end around § 102(b)(7). In Van Gorkom issue was cash-out merger. court treats Eisner as a Van Gorkom because he has complete control of the board and only informed them after the fact. 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. avoiding calling a duty of care covered by he statute/clause. so it is their burden to prove the transactions were fair and reasonable. RULE: Burden should have been assigned to defendant directors as they were officers and directors of both corporations. chancellor Chandler throws out. NOTES: Court seems to say that a self dealing transaction is ok as long as it is fair. Del.. who then Eisner claims is a compulsive liar and huge spender.broadening areas of ordinary business practices that will be viewed. ISSUE: Whether it is a breach of duty of loyalty for James as president. but would be measured under reasonableness standard. and as defense failed to prove the transactions in question were fair and reasonable he was entitled to judgment. Business judgment rule does not protect them due to their conflict of interest. In WD II here. Breach of duty of good faith gets the gross negligence standard. Donald argued on appeal that the court improperly assigned the burden to him to prove waste. one of the interlocking brothers. 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. and whether the transaction was fair.. adopting a freer standard of good faith. Lewis v. Court addresses by reviving the duty of care. After agreement in which Talbot's contributed land and James labor and expertise to build apartments each for 50% share of stock. Donald. and transaction is voidable if not shown to be fair and reasonable to the corporation. 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. officer. & E. Has been very difficult for medium sized company's to comply with SOX. Shareholders bring a derivative suite. alleging that he diverted specific funds to himself while an officer and director. RULE: Directors are prevented from secretly using their fiduciary positions to their own advantage and to the detriment of the corporation and stockholders. especially § 404 internal controls. 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. ISSUE: Whether the trial court erred in assigning the burden to Donald given a self dealing transaction. Issue is Disney has a § 102(b)(7) exculpatory clause in their charter. No prohibition on self dealing transactions.L.not give information about an investment banking evaluation. none found in this case. Eisner fires Ovitz within a year. S. FACTS: Case arises out of an intra-family dispute over management of two closely held corporations. WD II transaction is about hiring and salary of board manager. Unsure how broadly or narrowly to read at this point. James was compensated for his construction supervisory duties 54 .

the court rejected this argument. Chandler says need fully informed vote.200 looses. Court found that there was not disclosure that James was building due to failure to inspect books.when he received his 50% share so he is not entitled to any other compensation. Court states that where there has been authorization by disinterested directors. Good faith majority director approval. and will consider business judgment as opposed to Huizenga that looks at process only. 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. Oracle is closer to the duty of care obligation then Beam case. some disclosure. B. but almost all can also be interpreted not to preclude such an inquiry. and there was adequate disclosure that he was going to be the general contractor. Chandler saying folks to worry about are the controlling shareholders. Looking at nature and adequacy of disclosure is same as looking at disclosure. Van Gorkam. problem of friends on the board who are 55 . This test is intended to be easier for the director or senior executive to satisfy then a full-fairness test. looks at business judgment rule and fairness. if it is a good deal for the corporation. just that there was not detailed disclosure. NOTES: Talbot the incompetent wins and James who makes a total of $2. and to any conflict of interest. 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. did not disclose that he was going to get up front fees. In Cooke v. plus did not have to pay up front. (2) disclosure was made to directors of the conflict and disinterested directors approved.e. the complainant must show that disinterested directors "could not have reasonably believed" the transaction to be fair to the corporation. § 144(a)(1) requires looking at this particular transaction at this particular time to make sure it is a good deal. A self dealing transaction can still get by. 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. 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. but fair process must occur and vote needs to be fair. will be fairness review. under exacting scrutiny. or (3) disclosure was made to the shareholders and the shareholders approved. To build apartments from another company other then James' would have cost $25-35K. or § 144(a)(2): Disclosure and Good Faith majority shareholder approval. though harder to satisfy then the business-judgment standard. Disinterested directors goes back to issue on one overriding board member being an overriding influence i. Page 84 Supp. Many of the recent statutes on this subject are susceptible to the interpretation that approval by disinterested directors precludes a judicial inquiry into fairness. Bottom line is deal seemed to be substantively fair. Question comes down to what is the necessary level of disclosure balanced against a fair deal. Cook v Oolie. or? § 144(a)(3): Fairness Disinterested Directors are those that do not stand to have financial interest. then James made project work. Class Notes Del Corp Statute § 144: Interested Directors § 144(a)(1): Disclose must be of material facts to the contract or transaction. some fairness. Court is not going to just override the vote.

Cookies knows of self dealing and disclosure. Fliegler v Lawrence: Can read Fliegler more narrowly then what is stated. He is majority shareholder. and that these contracts were a contributor to the success of the organization precludes finding a breach of fair dealing. Eisenberg wants to say that courts need to get in and perform fairness review as a backstop to § 144. courts pick different rules as in SC Talbot court picking disclosure as the key issue. Lewis looks at self dealing deal. interested party. ISSUE: Whether self-dealing transactions by Herrig were a breach duty of fair dealing. by acquiring control of Cookies and executing self-dealing contracts breached his fiduciary duty to the company and fraudulently misappropriated corporate funds. If Self Dealing transaction. while all other shareholders were holding shares they could not sell. Ct. 2001 FACTS: Emerald Partners LP filed action to enjoin consummation of a merger between May petroleum and thirteen corporations owned by Craig Hall. i. Economic interests. otherwise business judgment rule. business judgment rule etc. that compensation for those contracts was fair. Model act provides very bright line rules.expected to vote with the CEO. the fact that adequate knowledge of information was provided to the board. the CEO needs to kick back the compensation they received during that time. Friend & Golf Buddy on board. Cookies Food Products v. Though Oracle is Chancellery Ct and Beam v Stewart is Supreme Ct. but chooses not to look at those factors in as high a level of detail. burden on D to show fairness. Kahn or If: b) § 144(a)(2)----Interested (controlling) shareholder. May's directors were also enjoined. Cooke.482 approval by shareholders needs to be by majority of disinterested shareholders. Sup. Herrig later purchased adequate stock to become the majority shareholder and replaced four of five board members. RULE: Though self-dealing transactions were numerous. Del. alone not enough to be an interested party but a factor that can be weighed if other factors are present.. Oolie first said will need to look at fairness of transaction. Courts have been reviewing the fairness of self dealing transactions to varying degrees. Emerald Partners v Berlin . president and getting a consulting fee. Hall's stance on both sides as a corporate fiduciary alone is sufficient to require the demonstration of entire fairness. Court says there was no need to disclose profits. judge changes mind in later case that if not majority shareholder burden is on plaintiff to show unfairness of process. Director defendant can avoid personal liability only if they have 56 . if director vote there will be one. Emerald. Misreading of Talbot? Court is interpreting statute as saying that board has some level of inquiry and scrutiny. Eisenberg does not like self dealing transactions and feels shareholders do not know if a deal is fair or not.. Key point is subtlety of differences in self dealing reviews by different court jurisdictions. SOX comes right out and says that if a company has to come out and restate earnings. especially under SOX. RULE: Though no longer controlling shareholder. but does not completely give up looking at fairness of the deal. same with Nakash. CEO. if statute applies: If: a) § 144(a)(1)-----Business Judgment Rule (?). 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. Options for review are smell test. 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. interested party. Lake Warehouse FACTS: Plaintiff alleges that Herrig.e. burden shift to plaintiff to show unfairness. Court says to look at the great job he did for the company. NOTES: Cookies BBQ sauce not making any money until Speed Herrig came into the business picture. Other jurisdiction approaches: CA statute if shareholder vote no just and reasonableness review. FL § 607(6). § 102(b)(7) does not permit shareholders to exculpate directors for violation of loyalty or good faith. even after saying profitability is not the litmus test. Interlocking Directory. Takes a hard look to see if § 141(a)(1) applies.

Del Chancery. (3) either (a) the rejection is fair (b) the opportunity is rejected in advance by disinterested directors. 1999 FACTS: A Republic Industries shareholder brings suit on the grounds that acquisition of AutoNation was unfair. but compensation is necessary. E-Bay: Shareholders file derivative suit for usurping corporate opportunities. (2) the opportunity is within the corporations line of business. (3) the corporation holds no interest or expectancy in the opportunity. (c) the rejection is authorized in advance or ratified. 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. Directors vote on their own compensation so scurrilous area. also looked at more closely in close corporations due to opportunity for manipulation. and the Effect of Shareholder Ratification Class Notes Numbers with stock options are huge. 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. D. an opportunity that should have gone to the company. Directors of E-Bay were charged with accepting "flipping" stock from Goldman. Class Notes Three categories of corporate opportunity. Compensation. The Corporate Opportunity Doctrine now as outlined by the Del. and (4) by taking the opportunity the corporate fiduciary will thereby be placed in a position hostile to his duties to the corporation. the Waste Doctrine. Supposed to be dealt with in public corporations as not self dealing so given great deference by courts. he may take the opportunity if: (1) the opportunity is presented to the director in his individual and not his corporate capacity. Miller v. but has not been going far. Brudney and Clark proposal is attempting to map out a safe zone.established that their failure to withstand an entire fairness analysis is exclusively attributable to a violation of the duty of care. (3) the corporation has an interest or expectancy in the opportunity. challenge could only be made under the doctrine of "waste. Guth v. (2) the opportunity is not essential to the corporation. 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. Lines of tests for corporate opportunity standards: 57 . Waste is dead in Del. and (4) the director has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. Miller holds a combination of these two tests. As a corollary. (2) the opportunity is rejected. As acquisition was ratified in a proxy. IRS baseline of $1M for CEO salaries. 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. C. SOX requires kickback of compensation. 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. Harbor Finance v Huizenga . SEC disclosures of salaries are required. Another is the Durfee "fairness" test.

Corporate opportunity is subset of duty of loyalty. view. (3) Fairness: Ballentine analysis. Also includes a "how did the opportunity get to the director" test. special or unique value. opportunity presented to board. but can make argument for an opportunity that was rejected. Adopts view if corporation already has an interest. Broz important case due to interlocking directorships. all factors must be taken into account given to context. (6) ALI/N. and refusal to deal (third party will not deal with Corp. No other tests require disclosure as a precondition. Pablo entered into an agreement to purchase two parcels of land on behalf of the appellant. Interest and expectancy broadly defined as well as how opportunity came to insider and nature of opportunity. What are your obligations when you own the company vs.. legal incapacity. easy case as corporate assets were used in secrecy requiring handing over all shares of new corporation. They went to CA at their own expense and on return advised appellant about attractive real estate deals there. Test is does the opportunity present an especially favorable business opportunity for the company given necessary assets and talents. Harbor: Adopt a test of full disclosure and rejection. Often contradictory lines of argument. Financial incapacity of corporation is often the key defense accepted by courts. Currently law in Del. especially with conglomerate type business'. Ct. Traditional three factors in corporate opportunity defenses: Financial incapacity (Pablo case). HW. 4 factors in Broz test.(1) Interest/expectancy: Starts in Alabama case.e. Court views financial ability to take on opportunity as a defense putting burden on insider to prove if they go after the opportunity. 1971 FACTS: Pastor Pablo and Rufina Pablo were directors in Pablo Realty. so ok for insider to take an interest. Will never be fair for insider to take opportunity that could have been corporations. Pablo explained that as a real estate agent he was entitled to commission after close. 58 . i. Sup. (5) Broz: Del. (4) Mixed Miller: Courts focus on is the taking of the opportunity harming the corporation. E-bay has a very broadly interpreted line of business. answer no. Difference between ALI/NE test and other is the disclosure factor. (2) Line of business: Guth v Loft Pepsi case discussed in NE Harbor is key Del. is opportunity interest in an area of business where corporation would be expected to participate. case on line of business. but states that disclosure would create a safe harbor. Can business afford and adapt to the corporations point of view. Hawaiian International Finance v Pablo . Interest band expectancy broadly interpreted.). Intermediate step to Broz. Very property ownership view. Delaware Court does not adopt disclosure requirement. Business judgment rule if opportunity was rejected by directors. When would it be fair to make a judgment that it is a corporate opportunity or not. Ballentine takes all other tests and lumps them together as one. and need to look carefully if assets are being utilized. what are your obligations when you sell your stock. Would not fly today and even Alabama has narrowed. ALI disclosure standard pg 679. No one factor is dispositive.E. same line of business test as Meinhardt v Salmon. E-bay had a particularly unusual situation as the four directors had 40% control of the corporation and were paid only in stock options. Problem with what specificity of the business areas should be. same line of business. in which he had an agreement for a kickback of 1/2 the commission from the selling agent. Basically saying look at the overall fairness to the corporation. Test up until Broz.

NOTES: Unclear use of corporate asset for benefit. 59 . he could possibly have used asset after if venture unsuccessful. absent disclosure and an agreement with the corporation. v. RULE: In the past the view was that directors cannot serve both themselves and the corporation at the same time. Courts now feel that is some circumstances. 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. Northeast Harbor Golf Club. strict rules are no longer applicable.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. court focuses' on secrecy. Inc. especially closed corporation context. Pablo is liable to appellant for the commissions he received. and here Harris did not disclose the opportunity to the court so the prior judgment in her favor is reversed. NOTES: Maine court chooses to use different doctrine then normal corporate opportunity doctrine. ISSUE: Whether real estate transactions that were not in the interest of the club were a breach of fiduciary duty. 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. 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. Outside directors are basically charged with checking the power of the inside directors. Disclosure is a key element though.