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

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

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

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

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

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

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

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

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

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

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

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. 55 Perry FACTS: Two families entered into partnership. Presumptions: Purchased in partnership name it is partnership property. UPA S 25 states that an estate is created and property becomes part of estate. consent of defendants was required in order to admit additional partners into the partnership. NOTES: Plaintiff did wish to have new partners included as that would shift majority shareholding to the defendant. ISSUE: Whether a party can assign their partnership interests without unanimous consent of the other partners. if partnership funds are used. G. UPA S 8. RUPA S 501 does not need this fiction and specifically repeals UPA S 25(1). There are exceptions though such as when equity and justice would demand a 16 .Since real estate was purchased with partnership funds. RUPA S 502 states that a partners only interest is partners interest in the partnership. Charging order procedure allows partnership to pay for individual partnership. unless UPA S 8. so it would likely be immaterial whose money is used provided it is in the name. despite the wishes of the deceased that they go to his brother/partner. or (4) whenever other circumstances render it just and reasonable. What is the courts jurisdiction in restricting who is allowed to come into the partnership? UPA S 28 states you can't cut out creditors from garnishing partnership proceeds. (3) for appropriation of an unauthorized benefit in violation of § 21. Courts ruling is a narrowing of the provision under the UPA. Rappaport v. each family having a 50% stake.2 states property purchased in the name of the partnership is partnership property. so the UPA allows for the other partners to buy out the debt and salvage the partnership business. Duty of Loyalty Text Outline UPA § 22 provides a right to an accounting: (1) when a partner is wrongfully excluded from the business. 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. 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. 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.2 which states if the contrary intention appears. RULE: Court held that pursuant to the agreement and partnership law. As this course breeds mistrust dissolution of the partnership is often the better course. Is the property acquired by the partnership and its proceeds then estate property to go one-half to the deceased wife. If partnership sued as a whole. The other family refused the request taking the position that the partnership agreement did not permit new partners without unanimous consent. Members of one family then assigned 10% of their share to their adult children. UPA § 13 seems to restrict partners from suing the partnership for recourse. Plaintiff brought action seeking declaration of their right to assign their interest in the partnership. it became partnership property. Very little case law on the issuance of charging orders. joint liability not joint and several. Class Notes Intent of parties will be key in determining whether assets were meant to be included in partnership. Don't want to allow an individual partners creditors to undermine the business by attaching individual partners assets.1 states property purchased or brought into the partnership will be presumed to be part of the partnership.

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

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

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

Article 8 will apply when leading to bankruptcy. 43. pg. includes a default rule. agency power to bind after disassociation and liability between RUPA and UPA. Will find it easier to cut off liability under RUPA then UPA. at will. S41. 9 as viewed from third party's standpoint. (b) Say he acted like a partner as bill was sent to him and he got paid. 3(a). Aggregate view of partnership. If 801 fork is not applicable you go to 701 fork. First question is the agreement rightful or wrongful. but likely read as contract issue so joint liability not joint and several. Ars is to receive $5K. Is there an estoppel issue with Mayer? Likely no. Do not have to 20 . If not wrongfully terminating partner can decide to just close and seek judicial sale of business. RUPA provides for very structured bankruptcy. But. seems that he is getting paid prior to other partners. Upon liquidation. Material differences in language used. selling sports equipment wholesale while this is a retail operation she seems to be including. Partnership by estoppel section 16? Does it matter that he is being represented by the partnership? How is consent defined? What is specific language that Gratia uses with the bank? She says she has an "interest" in the business but does not specifically say she is a partner. 9 problem as you view from third parties perspective who would believe he has apparent authority. 4. Gratia and Artis. 2. Is Low a partner? He has veto power and can decide whether he is in or out of the agreement says yes. The fact that he is not providing services. but he passed the bill on? He's not the principle so he's not transferring the liability. Subsection (1) can force termination and liquidation. each partner is viewed as an agent of the partnership. and the more fundamental a waiver provision the more the court will scrutinize the issue backing it up. We know Gratia is does not have actual authority under any principals. consistent with UPA.9 & Sec. Specific RUPA non-waivaible provisions are in 103 and 405. Ars. 36. Partnership Hypothetical's 1. Sec. S32 Dissolution by decree of court if one of the partners becomes a lunatic. the partnership may still be liable for his actions due to apparent authority under Sec. i.e. RUPA deals with liability issues differently if winding down then dissolution. how share is calculated. deems third parties to have had notice 90 days after filing date of dissolution. Can Gratia authorize the construction contract? Sec. Good will problem in dissolution. just apparently a loan to the partners says no. pg 171. (b) Artis is liable for contract. Eisengerg's forks in the road. Sec. Duty of inquiry greater under RUPA then UPA. Problem Set Handouts. (a) Ars is liable in Tort action. not much information for analysis and no knowledge of partners that he shares in the profits so 18g issue as no consent. Likely to be found at will and will likely ask for his share in cash? If will not request liquidation? Sec. Arguments against authority are not seemingly in the course of business. If wrongful dissolution buyout will be reduced by the level of damages. no duty to do anything but wind up. 5. joint and several liability in UPA. but do have a duty to wind up. Has buyout formula in subsection (b) which is a default rule that can be contracted out of. 3 interpretation of knowledge. S38 rights of partnership to property. When drafting under RUPA can not totally draft out partner liability. 179. S801 Winding up termination. 18 principles. Low loans 50K for 10 years. drug addict or serious problem in conduct of life that is not specifically affecting the conduct of the business. especially i. In buyout RUPA imposes reliance requirement on third parties. Do not confuse Sec. would not be any liabilities if he sells to a third party so there are differences between sale and cashing out. 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.7. Read comments to S 801. 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trial court characterized payments by the Pritchard’s as fraudulent conveyances ad entered judgment of $10. Van Gorkom autocratic CEO nearing retirement and with a large shareholding. Van Gorkom approaches Pritzker to buy his shareholdings at $55 a share. United Jersey Bank FACTS: Plaintiffs are trustees is the bankruptcy of Pritchard & Baird Intermediaries. arbitrary action or a breach of trust. whether their actions subsequent to the meeting were adequate to cure any infirmity in their action. NOTES: Unusual case as has duty to creditors as executrix. 20. The court never reaches the second question as directors post Sept. RULE: Directors did not reach an informed business judgment in voting to sell the company because. explored a leveraged buyout after a "first and rough cut" analysis from the CFO Romans using $50-60 per share as a baseline for seeing if a buyout was feasible and to determine necessary cash flows. and duty to shareholders as director. then sought to distribute the shares out to stockholders as a special dividend. RULE: Courts find director liable i negligence for the losses caused by the wrongdoing of corporate officers. and offered a buyout package at $55 per share without the boards knowledge. directors will not be held liable for business decisions. then forgo an $8M tax credit in order to hide the bad investment. Board does not get to see merger documents. Holding is that business judgment rule protects the dumb. American Express Co. CEO of Trans Union. 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. and (2) if not. Should have resigned if unable to perform duties. 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. AMEX purchased $30M of DLJ stock as an investment which dropped to $4M. Considered by many a bad decision.3M against estate. Company is a sitting duck for a takeover. 20 meeting actions did not cure the problems. Pritzker can buy a huge minority share at $38. Smith v. Court says she has affirmative duty to bring the matter to the authorities if she is unable to resolve the situation. NOTES: In response to case Del. without opt. (2) were uninformed as to the intrinsic value of the company. (1) they did not adequately inform themselves as to the CEO's role in forcing the sale and establishing the share purchase price. Can read Freancis as either a duty to report to the authorities or duty to investigate and report if something is amiss. 51 . NOTES: Lists 5 exceptions to business judgment rule. Kamin v. and (3) were grossly negligent in approving the sale of the company upon two hours notice without exigency of crisis or emergency. legislature includes opt in provision so that a corporation can include in their articles of provisions that corp. and company can not go out and solicit other offers. is executrix of her estate. in Van Gorkom still good law. take Van Gorkom at their word. In Del. but also fraud. Van Gorkom FACTS: Class action brought by shareholders of Trans Union seeking rescission of a cash out merger with defendant New T Co. One view is that it is a self-dealing case as Van Gorkom ran the whole deal and did not fully inform others. 198 meeting. Van Gorkom had been an officer for 24 years and was approaching mandatory retirement. Some states have opt out provisions. a subsidiary of Marmon Group whose owner is Jay Pritzker.. Jay Pritzker. FACTS: Complaint is brought derivatively by two shareholders asking for a declaration that a certain dividend is a waste of corporate assets. American Express bought DLJ stock which tanked. daughter of Lillian Pritchard. Van Gorkom met with his friend. RULE: Business judgment rule requires that more then just the showing of another course of action is necessary for an actionable claim. Defendant. Van Gorkom. ISSUE: Whether actions of the directors of AMEX to pay dividend rather then sell shares was a violation of duty of good care. Deal allows in event Van Gorkom sells shares to anyone else at above $55. Van Gorkom puts the number out there.Does business judgment rule eliminate the sting of the duty of care? Freancis v. 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.

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

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

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

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

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

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

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

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