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

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

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

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

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

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

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

Defendant advised Plaintiff that he would not be liable for future bread sales to partnership. made clearer in the RUPA. The drafting of the UPA began with an entity theory. Legal Nature of Partnership Text Outline Entity v. 43: B & C prevail. UPA then defaults to dissolution of business as remedy in deadlocked decisions. Plaintiff regularly sold bread to partnership. a third party was going to lend money but Sanchez refused to provide his 12 . How to protect yourself from partner? Just dissolving not enough according to UPA as you need to notify creditors. but party is apparently getting none of the benefits of partnership. Operation of Partnerships Text Outline Though the general rule is that partners have an equal say in partnership operations. NOTES: Why is Stroud left liable? The assumption is one partner can not veto decisions of a partner.B. UPA 18(e) grants even minority partners a right to be consulted in management decisions. and is questionable whether the notification to Nabisco was accurate. RUPA confers entity status on partnerships. even if his assent is not required. partnership agreements consist of the fragmentary explicit and implicit agreements made from time to time. though they have the least stake in the business due to the presumption of equality. was completed using the aggregate theory. Class Notes UPA S16 Partner by Estoppel. but merely an aggregate of its members. so that a partnership was no more a legal person then a friendship. In some areas RUPA reaches an aggregate like result. Can not put that high a level on inquiry duty on a third party. Freeman ordered bread just prior to dissolution of approx $171. actual authority of an agent will not be eliminated. Sanchez v Saylor Sanchez and Saylor were partners. The UPA withheld entity status from partnerships then created complex rules to arrive at entity results. Can try such things as arbitration and formal separation of functions to relieve deadlock. ISSUE: Whether Freeman's purchase bound Stroud. Why is there an assumption that all share equally in the decisions even though assets contributed might be unequal? C. 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. as equals in the partnership both men had a right to manage the normal course of business. National Biscuit v Stroud FACTS: Stroud and Freeman were partners to sell groceries. Hypo pg. legislatures may choose to treat as an entity for purposes of statutes. so it deals with many issues as if a partnership is an entity. Even though defined as an association (aggregate) under the UPA. Smith v Kelley has partner by estoppel. Unanimity is required do depart not only from formal agreements but fragmentary ones also. this can be altered by agreement or by conduct. UPA: Any extra-ordinary action requires unanimity. When not formally in writing. while RUPA is able to drastically simplify many partnership rules. and both are liable for the purchases. One partner can not take another partners authority away unilaterally. RULE: Yes. Aggregate: The common law view is that a partnership is not an entity.

If agreement states profits will be shared a certain way.e. This if a partner pays an obligation.personal financial statements. Dooley FACTS: Partnership agreement to operate trash collection business. Covalt rule is that each partner has an equal say in decisions. but is seeking reimbursement from the partnership or other partner. so you can have a violation of 18(e) which is not necessarily a violation of 18(h) dealing with decisions. as between the partners however. not up to statute requirements. each partner is liable only for his share of partnership obligations. RUPA is the same as UPA on these subsections. Covalt rule might be correct in situation with no self dealing. or strictly read 18(h)? First thing you look at is written agreement. and appropriate remedy for disagreements is dissolution. Summers v. the partnership has a right to require contribution from one or more partners. court will find losses shared the same way and not go to UPA default. Creates incentives for low equity investor in bad position to cheat. Is it possible to end run UPA S18(h) by arguing fiduciary duty? Probably not. He argues that the other partner is sharing in the profits and consented by action. Indemnification and Contribution Partners are individually liable to partnership creditors for partnership obligations. Saylor sued for breach of fiduciary duty. In Covalt one party has 75% of the stock as a differentiator. court found in favor of Sanchez. Dispute between two partners about one hiring an additional employee without the consent of the other. thus the obligation to indemnify a partners a partnership liability. same in RUPA. In a proper case. but can differentiate the cases. ISSUE: Whether an equal partner in a two man partnership has the authority to hire a new employee in 13 . and 18(h) remains the final default to be looked at by the courts. 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. i. Partner refuses to provide personal financial statements so loan is not given and partnership goes bust. 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. but here we have a self dealing relationship. UPA S18(h): No partner is entitled to compensation by the partnership. It is not economically rational to have a 90% investment in a partnership but have decision making rules of 50/50 for two person partnerships and majority rule for three or more. Literal application of statute services only partner would share equally in cash losses of partnership. and the obligation to make a contribution is a liability of a partner. Taylor sues for breach of fiduciary duty. second would be a course of dealing between parties. Remaining partner is entitled to compensation though in UPA for the act of winding up the closure of the partnership. UPA S18(e) provides for all partners to be included in all decisions and information. Should courts look at informal actions of the partners. Some strict proponents of following statute point to lost opportunity cost of investing the funds on the part of the equity investor. Courts will also imply an agreement of equality of evaluation. No equality assumption in UPA with profits and losses. but when services partner is compensated he will always have to share in the profits. In two person or deadlock position Summers/Nabisco/Sanchez approaches to resolving the dispute will govern. right to be consulted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

need to delay in order to allow for a stronger negotiation position. board of Corp. "A" makes public offer to buy shares of company at X price upon certain terms. Underlying question is whether you view these tactics as good or bad. If to many shares are tendered. tender offers proxy contests-happen without consent of directors. Primer: Two innovations made takeovers viable. effectively threatening shareholders into accepting tender. (2) Super-majority requirements. must give shareholders equal opportunity. only directors. protects by delaying takeover. arguable on both sides. Corp. Acquirer needs a minimum of 51% in order to gain control or deal is not attractive. M&A takeovers not assigned read on side. Some takeovers require approval of board of directors. Guise is that you can't have a new board every year that does not know the business. Need to look at fortunes of target and acquiring shareholders and societal impact to determine if hostile takeovers are a good or bad thing. Del § 102(b)(4). Non-statutory. Just the threat affected management's operations. Good argument is that if you leave your company unprotected the "sharks" will take over as cheaply as possible. Shareholders cannot initiate merger discussions. Virtually all jurisdictions allow unanimous written consent to conduct business in place of meeting. who do not release for vote and negotiate the deal giving to shareholders for up or down vote. 3 types of shareholders have right to call special meeting in addition to directors: Those with greater then 10%. Not regulated what needs to be completed at the meeting. Conflict between models of shareholder primacy and director primacy. In tender offers. Bad argument is that management is just protecting their jobs and trying to retain control. directors. Ways to fend off takeover. can structure to come into effect after acquiring company has purchased a certain % of shares. corporation "A" has the option of going to non-statutory measures. Lipton & Flohm preeminent lawyers in this field. most statutes allow for meeting for which shareholders can sue for if not held. Delaware does not give that right. both how to use the by-laws. and new forms of financing such as junk bonds LBO. then consummate the merger. Management often controls the proxy process. Shareholder meetings.Boards that only elect 1/3 of the board every year. Special meetings need to give notice and agenda. Del. how to make expensive share oriented methods.Requires something like 80% shareholder approval to implement merger. avoids SEC disclosure requirements and possible leaks involved with private deals or buying on the market. Jury still out whether mergers are bad or good. vote in directors friendly to the merger. Can have a proxy contest. hostile tender offers. (3) 33 . the combination of two entities. should just let the shareholders decide if it is a good deal or bad. not all corporations. Needs to be provided for by state law. Institutional investors always prefer tender offers as guarantees a premium in share price. Change of Control Situation Ch 12 Corporate Combinations pg 1061 starts. RMBCA jurisdiction significant asset sales only require majority of those shareholders voting. allows less then unanimous consent but majority vote. in some jurisdictions super-majority is required to consummate a merger. If corporation "B" rejects friendly offer. Fed proxy rules only require compliance with 12G corporations. Tactics for takeover fend off: (1) Staggered Boards.procedural and substantive problems with removal especially without cause. Mergers § 11 RMBCA. those given right in the charter. Mergers and Sales of Assets. Statutory. they will be accepted in a pro rata share then kick back to shareholders unneeded balance. share purchases. A will want absolute control and freeze out balance of shareholders in B on the back-end giving them a lower price. In asset sales management has complete discretion unless the assets are the substantial majority of the business.

NOTES: Judge agrees that maneuver was in bad faith by using voting mechanism to entrench themselves. FACTS: A petition for injunctive relief was filed to prevent management from advancing the date of the annual stockholder meeting. then no problem. (4) Self Tender. Shareholders need to leave stewardship in hands of directors.Higher leverage makes for a less desirable target. (1) is there a realistic threat to the company. Defendants refused to act with him and contracted additional debts leading to a accrued loss of $3. RULE: Court finds the vote choosing Osgood a committee to act to be void. Since corporations are viewed as entity theory directors are viewed as agents of corporation rather then agents specifically of shareholders. law. Also. Can you solve the § 109 v § 141 problem? Resolved in MM v liquid Audio expanding Blasius. (5) Debt Increase. 1998 WL 954752 (1998). Is board power to repeal shareholder approved by-laws a large threat? Not likely as shareholders will be pissed and vote out board. Dunsmore FACTS: Osgood was chosen by the corporation to wind up the company. but the standard by which to measure that duty is deferential to the court. 34 . court has taken a somewhat middle ground. (7) Poison PillNumerous in number and sophistication.Options for sale of key parts of the organization to other entities. Quickturn Design v Shapiro.Seek out a friendly company for friendly merger or stock block purchase. v. Directors have a duty of care to the shareholder. Comes down to who decides how the process of acquisition will be taken. and there is some empirical evidence that it increases bids in buy-outs. 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.Crown Jewel Defenses. One position is that these poison pills just entrench management and go against boards fiduciary duty. (6) White Knight. Schnell v. RULE: Court finds that even though technically within the Del. thus Delaware applies the Unocal higher scrutiny standard. Courts have used standard of ordinary business judgment and given management much leeway. Some of the tactics have influenced shareholder votes directly. 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. NOTES: Election is void. ISSUE: Whether the directors were negligent in their fiduciary duties. Pull case. Del. statute allowing management to change the annual meeting date is permissible. Antitakeover measures can be both self-dealing to protect management and in the best interest of shareholders. but when given a self-dealing transaction courts have viewed with a much tougher standard. or be statutorily provided as in FL. and that they had no legal duty to pay the insurance. designed to make takeover difficult upon triggering event. Delaware case string seems to comes down that courts will not tolerate interference with shareholder voting. directors have the fiduciary duty to the corporation. Dead-hand. and (2) is the response proportional and reasonable. As agents of the corporation. Charlestown Boot & Shoe Co. Chris-Craft Industries. ISSUE: Whether legally complying with the Del. Inc. flip side is that they can be good for current shareholders by protecting company from offensive tactics of sharks. 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.40.300. Often existing shareholders will get opportunity to purchase large block of shares at a discount to make purchase highly expensive. Two prongs. Have to expressly say in by-law that can not be repealed. defendant was charged with paying the insurance which he did not and the shop was consumed by fire.By back stock in company tender offer.

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

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

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

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

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

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

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

NOTES: Why do you not have a piercing here when he has commingled funds so much? Commingling not enough. J. NOTES: Given how sophisticated the creditors were should the veil have been pierced? Sophisticated contracting parties should know enough to get guarantees etc. (3) undercapitalization. Is it possible that Polan lied to make it impossible for Kinney to contract fairly. but the prong of injustice is not well defined and needs to be shown by Sea-Land. on various equitable grounds. On appeal from remand court finds Marchese liable for $118K in damages and that second prong was satisfied and Marchese unjustly enriched. Equitable Subordination of Shareholder Claims Text Outline Under the doctrine of Equitable Subordination. (1) the claimant must have engaged in some type of inequitable conduct.RULE: Courts finds that the corporations are alter ego's. Benjamin v Diamond: Three conditions must be satisfied before exercise of the power of equitable subordination is appropriate. RULE: Polan found liable as he did not even try to keep up corporate formalities in order to take advantage of limited liability. including the claim of preferred shareholders. Even uses completely different third party as basis for unjust enrichment. and denies it the status of a creditors claim on parity with outside creditors for controlling behavior by the parent corp. when a corporation is in bankruptcy the claim of a controlling shareholder may be subordinated to the claim of others. in the end he is found liable for not paying taxes on these proceeds. Court applies Van Dorn test: (1)failure to maintain adequate corporate records or to comply with corporate formalities. Courts will not buy the scheme. Strange that company goes belly up only two moths after lease is signed. 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. they incorporate. DHL ownership and control scenario. transfer funds into corporate loans to themselves from the corporation then declare bankruptcy. Shareholder Informational Rights and Proxy Voting 42 . not just harm against creditor. (2) the commingling of funds or assets. I. (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant. will individual shareholders be prohibited from the activity as well. and (4) one corporation treating the assets of another as its own. Undercapitalization plays an important role as it does in piercing doctrine. If a parent and a subsidiary are both bankrupt. and (3) equitable subordination of the claim must not be inconsistent with provisions of the bankruptcy act. Equitable subordination simply takes an investment already made. Class Notes Equitable Subordination happens in the bankruptcy context. the court sometimes consolidates the assets and liabilities of the several corporations into a common pool. The Corporate Entity and the Interpretation of Statutes and Contracts Text Outline This is the question where when corporations are prohibited from an activity. usually happens when partners are in bad shape. VI.

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

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

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

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

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

Easier to just sell shares. ISSUE: Whether directors can reimburse proxy contest sponsors from the corporate treasury. Are these expenses justified and when do they become entertainment. 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. helping to entrench themselves. Rosenfeld v. The solicitor's database often allows for discovery of who the beneficial owner of the stock is that will be voting. Dissent believes you need to look at the reasonableness of the amount spent as to the purpose. Heineman: Not sure what rule is if directors pay themselves when they do not have shareholder approval. raiders came into the picture conducting hostile takeovers. monitor voting results. 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. RULE: In a contest over policy. 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. Fairchild Engine and Airplane Corp. Disagreement is when are the funds being used to persuade and when to inform. Class Notes Traditionally not many proxy contests due to free-rider problem. but can use when a dispute as to policy.business due to being existing production. The solicitor handles all the physical requirements of the proxy campaign. When new shareholders take power they pay bills of both their and incumbents proxy contests. Amalgamated Clothing and Textile v Wal-Mart Stores FACTS: Awarding of attorneys fees to shareholders in conjunction with a SEC 14a-8 ruling omitting shareholder proposal. thus allow management to avoid failing proxies. NOTES: Judge uses Unocal hostile takeover standard and imports into proxy contest context. Proxy Contests Text Outline Very few contested elections are run without the aid of professional proxy solicitors. subject to the scrutiny of the courts when duly challenged. What happened in the late 80's & 90's is management is working with major shareholders. funds when purely a personal power struggle dispute. The Duty of Care and the Duty to Act Lawfully 48 . expense and small likelihood of winning. as compared to a purely personal power contest. not open to paying all insurgent proxies as that would encourage to many wasteful battles. F. Solicitors also provide advance guidance as to likelihood of a proxy passing. and further persuade crucial voters. Court says that shareholder approval was necessary to pay insurgents proxy. 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. if they had lost they would have been left out in the cold as pointed out by defense. not proposed new venture. VII. Court says not appropriate to use corp. corporate directors have the right to make reasonable and proper expenditures. 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. Changed when corp. NOTES: Shareholders still get attorney's fees.

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

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

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

Derivative Litigation FACTS: Suit charging breach of fiduciary duty of care by Caremark directors as applicable to healthcare providers.5M owed by the Democratic National Committee for communications services. Supreme Ct. Regarding the "negligence" claim. 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. Duty to Act Lawfully Text Outline Two types of statutes are relevant to the potential criminal liability of officers and directors. 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. Miller v. Court states liability may follow from board decisions that result in loss when. this one is a complete cash buy out. Questions raised about what kind of reports are required and questions should be asked? Supposedly this case only requires good faith and informed process. dissent says if the deal is good enough they should be able to go through with it and give directors benefit of business judgment. plaintiffs would have to show either. Court takes position that this type of behavior as a general rule should be considered illegal. Blind reliance considered here as all directors relied on Van Gorkom. 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. and (2) a statute that makes managers criminally liable for unlawful acts of employees over whom they have the power of control. Response to Caremark was establishment of compliance officers and departments. A second class of liability can arise due to failure to monitor. affording a preference to the DNC on collection procedures in violation of the Communications Act of 1934 and effectively making an illegal campaign contribution.what constitutes duty of care and gross negligence is that board is not supposed to make rash and uninformed decisions. Issue is also magnitude of the deal. or when it arises from unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. NOTES: One case that differs from reasonableness standards of Duty of Care. B. (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. but hard concept to nail down. Alleged was a breach of directors duty to exercise diligence in handling affairs of the corporation. majority retorts that you should at least engage in some process to evaluate not just blind trust. RULE: In order to show Caremark directors breached there duty of care by failing to adequately control employees. RULE: Court points to statutory laws that give shareholders rights to challenge illegal corporate donations thus providing them standing to seek damages. ISSUE: Whether shareholders had a basis for action for breach of duty. NOTES: Not clear that this truly was an illegal act. 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. In re Caremark International Inc. 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 (4) that such failure proximately resulted in the losses complained of. Caremark was charged with multiple Federal violations after a four year investigation. ISSUE: Whether Caremark's directors breached their duty of care by failing adequately to supervise the conduct of Caremark employees or institute corrective measures. (1) statutes that make corporate managers criminally liable for unlawful corporate acts if the managers themselves performed or caused the performance of the act. the decision was ill advised or "negligent". 52 . even if that power is not exercised.

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

Has been very difficult for medium sized company's to comply with SOX. officer. alleging that he diverted specific funds to himself while an officer and director. NOTES: Eisner hires his friend Ovitz as CEO. Shareholders bring a derivative suite. ISSUE: Whether it is a breach of duty of loyalty for James as president. ISSUE: Whether the trial court erred in assigning the burden to Donald given a self dealing transaction. adopting a freer standard of good faith. especially § 404 internal controls. who then Eisner claims is a compulsive liar and huge spender. NOTES: Court seems to say that a self dealing transaction is ok as long as it is fair. and transaction is voidable if not shown to be fair and reasonable to the corporation..L. RULE: Burden should have been assigned to defendant directors as they were officers and directors of both corporations. In WD II here. Unsure how broadly or narrowly to read at this point. In Van Gorkom issue was cash-out merger.. none found in this case. one of the interlocking brothers. James FACTS: Suit brought by the Talbot's against James.broadening areas of ordinary business practices that will be viewed. After agreement in which Talbot's contributed land and James labor and expertise to build apartments each for 50% share of stock. Donald argued on appeal that the court improperly assigned the burden to him to prove waste. court treats Eisner as a Van Gorkom because he has complete control of the board and only informed them after the fact. Donald. Lewis v. but WD II now Chandler gives alternative end around § 102(b)(7). chancellor Chandler throws out. Eisner fires Ovitz within a year. 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. RULE: Directors are prevented from secretly using their fiduciary positions to their own advantage and to the detriment of the corporation and stockholders. 2003 FACTS: Suit to disgorge Ovits of his severance payment claiming directors breached their fiduciary duties. president of the Chicora Apartments. James was compensated for his construction supervisory duties 54 . avoiding calling a duty of care covered by he statute/clause. Talbot v. 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. Court addresses by reviving the duty of care.not give information about an investment banking evaluation. Del. LGT intervened and filed a complaint seeking specific performance of an agreement for Donald to sell his SLE stock to LGT. FACTS: Case arises out of an intra-family dispute over management of two closely held corporations. charged that his brothers had wasted the assets of SLE by causing SLE to lease business premises to LGT from 1966 to 1972 at an unreasonably low rental. and stockholder of the company to authorize a contract to a company owned by him from which he received profits and salary. S. so it is their burden to prove the transactions were fair and reasonable. Not fair here because contemporaneous market test is not shown here. & E. Directors lack of care in an important business decision will not be protected by the business judgment rule.. 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.. but would be measured under reasonableness standard. Issue is Disney has a § 102(b)(7) exculpatory clause in their charter. James appeals after judgment against him for $25K stating he was not entitled to overhead and profits resulting from a construction contract. Business judgment rule does not protect them due to their conflict of interest.. he awarded construction contract to James Construction wholly owned by himself. Walt Disney I. In re Walt Disney Derivative Litigation . and as defense failed to prove the transactions in question were fair and reasonable he was entitled to judgment. 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. No prohibition on self dealing transactions. and whether the transaction was fair. Breach of duty of good faith gets the gross negligence standard. WD II transaction is about hiring and salary of board manager. Inc.

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

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

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

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

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. Pablo is liable to appellant for the commissions he received. absent disclosure and an agreement with the corporation. Inc. Now the court feels that it is important to preserve some ability for corporate fiduciaries to pursue personal business interests that present no real threat to their duty of loyalty. RULE: Had Pablo disclosed the fact that he had been anticipated commissions the case would be different as appellant would have had an opportunity to either attempt to obtain the property at a price less the commission or it could have agreed with Pablo to acquiesce in letting him retain the commission. especially closed corporation context. NOTES: Maine court chooses to use different doctrine then normal corporate opportunity doctrine. Disclosure is a key element though. ISSUE: Whether real estate transactions that were not in the interest of the club were a breach of fiduciary duty. court focuses' on secrecy. Northeast Harbor Golf Club. 59 . strict rules are no longer applicable. he could possibly have used asset after if venture unsuccessful. v. and here Harris did not disclose the opportunity to the court so the prior judgment in her favor is reversed. RULE: In the past the view was that directors cannot serve both themselves and the corporation at the same time. NOTES: Unclear use of corporate asset for benefit. Courts now feel that is some circumstances. Outside directors are basically charged with checking the power of the inside directors. 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.

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