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A. Introduction B. Authority Morris Oil v Rainbow Oilfield Matter of Allender Company C. Duty of Loyalty Tarnowski v. Resop Kidd v. Thomas Edison Watteau v. Fenwick
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A. Partnership Formation Martin v. Peyton Lupien v. Malsbenden B. Legal Nature of Partnership C. Operation of Partnerships National Biscuit v Stroud Sanchez v Saylor Summers v. Dooley D. Authority of a Partner E. Liability for Partnership Obligations Davis v Loftus F. Partnership Interests and Partnership Property in re Gerlach's Estate Balafas v Balafas Rappaport v. 55 Perry G. Duty of Loyalty Meinhard v. Salmon H. Dissolution By Rightful Election Page v Page Girard Bank v Haley Dreifuerst v. Dreifuerst I. Dissolution By Judicial Decree and Wrongful Dissolution Drashner v. Sorenson
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III. ALTERNATIVE FORMS OF BUSINESS ORGANIZATIONS
A. Limited Partnerships Gateway Potato Sales v. G.B. Investment Co. Gotham Partners v Hallwood Realty , Del. Sup Ct., 2002 B. Corporate General Partners in re USA Cafes, LP
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C. Limited Liability Companies PB Real Estate Inc v. DEM II Properties Hollowell v. Orleans Regional Hospital McConnell v. Hunt Sports Enterprises D. Limited Liability Partnerships
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IV. THE CORPORATE FORM
A. Characteristics of the Corporation B. Selecting a State of Incorporation C. Organizing a Corporation D. Preincorporation Transactions by Promoters E. Consequences of Defective Incorporation Cantor v. Sunshine Greenery, Inc. Harris v Looney F. Classical Ultra Vires Doctrine Goodman v. Ladd Estate Co. G. The Objective and Conduct of the Corporation A.P. Smith Mfg. Co. v. Barlow H. The Nature for Corporate Law
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V. CORPORATE STRUCTURE
A. Shareholdership in Publicly Held Corporations B. Allocation of Legal Power Between Management and Shareholders Charlestown Boot & Shoe Co. v. Dunsmore Schnell v. Chris-Craft Industries, Inc. Blasius Industries, Inc. v. Atlas Corp. Stroud v Grace Williams v Geier Teamsters v Fleming Companies General Datacomm Industries, Inc. v. Wisconsin Investment Board Hilton Hotels Corp v ITT Corp MM Companies v Liquid Audio C. Legal Structure of Management D. Formalities Required for Action by the Board E. Authority of Corporate Officers F. Formalities Required for Shareholder Action G. Cumulative Voting H. Limited Liability Fletcher v. Atex, Inc. Walkovszky v. Carlton Minton v. Cavaney
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Sea-Land Services, Inc. v. Pepper Source Kinney Shoe v Polan I. Equitable Subordination of Shareholder Claims J. The Corporate Entity and the Interpretation of Statutes and Contracts
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VI. SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING
A. Shareholder Informational Rights Under State Law Security First v US Die Casting and Development Saito v McKesson HBOC, Inc. B. Shareholder Informational Rights Under Federal Law and Stock Exchange Rules C. Proxy Rules: Overview D. Proxy Rules: Private Actions Under the Proxy Rules Mills v Electric Auto-Lite Virginia Bankshares, Inc. v. Sandberg E. Proxy Rules: Shareholder Proposals Roosevelt v. E.I. Du Pont de Nemours & Co. Amalgamated Clothing and Textile v Wal-Mart Stores F. Proxy Contests Rosenfeld v. Fairchild Engine and Airplane Corp.
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VII. THE DUTY OF CARE AND THE DUTY TO ACT LAWFULLY
A. Duty of Care Joy v North Parnes v Bally Entertainment Freancis v. United Jersey Bank Kamin v. American Express Co. Smith v. Van Gorkom In re Caremark International Inc. Derivative Litigation B. Duty to Act Lawfully Miller v. American Telephone & Telegraph
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VIII. DUTY OF LOYALTY
A. Self-Interested Transactions Lewis v. S.L. & E., Inc. In re Walt Disney Derivative Litigation , Del., 2003 Talbot v. James B. Statutory Approaches Cookies Food Products v. Lake Warehouse Emerald Partners v Berlin , Sup. Ct. Del., 2001 C. Compensation, the Waste Doctrine, and the Efect of Shareholder Ratification Harbor Finance v Huizenga , Del Chancery, 1999 D. The Corporate Opportunity Doctrine Hawaiian International Finance v Pablo , HW, Sup. Ct., 1971 Northeast Harbor Golf Club, Inc. v. Harris
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Exam: Designed to require you to study everything Expect a Curve Ball Question Complex and Thick answers, two lines writing in ambiguity Exam on file in library many mini-essays covering everything in class Essay will be a traditional fact pattern on one of the more contestable areas Multiple Choice: Trying to teach how to read closely, pick the best answer as all may be correct Exam question, will have many conflicting issues and facts. Many facts that you will need to put in your legal "templates" and apply No conclusion necessary, IRAAAAA Interest is in thoughtful & deep answers Outlining: Using analytical table of contents from book, use as skeleton. Know when different statutes apply in different jurisdictions. Know the important statutes. Look up Sarbanes-Oxley Don't be conclusory
A sole proprietorship, as a matter of law, will have no separate identity from its owner although it may have a separate financial and physical identity. The employment by one person, P, of another, A, to act on P's behalf, and subject to her control, is known as the Law of Agency. An agent is a person who by mutual assent acts on behalf of another and is subject to their control, while the person for whom the agent acts is a principal. Agency law governs: •The relationship between agents and principles •The relationship between agents and third persons with whom the agent deals on a principles behalf •The relationship between principles and third persons when an agent deals with a third person on the principal's behalf Agency is a legal concept which depends upon the existence of required factual elements: the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking. Whether an agency relationship has been created does not turn on whether the parties think of themselves as or intend to be agent and principal.
Associations currently in existence, sole proprietorship, partnership, Public Corporation, LLP, LLC, Closed Corporations and Limited Partnerships. LLP & LLC are recent statutorily created developments, do not have a lot of case law on these two. Theory that corporate law needs to function to regulate markets and externalities, not just a series of contracts between parties became dominant. Post ENRON regulatory doctrine has gained ground in corporate law. 4
Areas Influencing Corp. Law Theory Three sources of doctrine in BA: •Federal Law - Securities laws, but influential in Corp law in general •Statute Law - Corp legal models •Restatements - Professors ideal views on Corp law. Three Corp legal models: •Delaware Model •New York Model •Model Business Corp. Act Choice of business form. Extremely determinative in choosing which form is the Tax impact. B. Authority
Dawn v. Morris Hypo: Undisclosed agency principal. It is well established that an agent for an undisclosed principal subjects the principal to liability for acts done on its account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent; i.e. contract documents need not bind third parties who deal with one of them in ignorance of those instructions. Agent: Person who acts on behalf and is subject to control of another. General Agent: Agent authorized to conduct a series of transactions involving continuity of service. Special Agent: Agent only authorized to conduct a single or limited series of transactions. Principal: Person on whose behalf and subject to whose control the agent acts. Disclosed: Agent whom a third party knows the agent is acting on behalf of principal. Partially Disclosed: When third party knows agent is acting on behalf of a principal, but does not know principals identity. Undisclosed: Principal is undisclosed if the agent, dealing with a third party, purports to be acting on its own behalf. Principal will be liable for agents authorized activities as (1) principle sets the transaction in motion and stands to gain from it, and (2) third party can sue the agent who can indemnify the principal so allowing liability does not materially enlarge the principals liability. Liability of Principal to Third Person: Under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, on the principals behalf, given actual, apparent, or inherent authority, or was an agent by estoppel, or if the principal ratified the act or transaction. Actual Authority: An agent has actual authority to act on the principals behalf if the principals words or conduct would lead a reasonable person the believe he had been authorized by the principal. Can be express or implied. Apparent Authority: An agent has apparent authority to act in a given way in relation to a third person if the words or conduct of the principal would lead a reasonable person to believe that the principal had authorized the agent to so act. Agency by Estoppel: A person who is not otherwise liable as a party to a transaction, is nevertheless subject to liability to persons who have changed their positions because of their belief that the 5
Ratification: A principal will be bound to a third person if the agent purported to act on the principal's behalf. 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. If disclosed. or reliance damages. or undisclosed. 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. 6 . Acquiescence: If the agent performs a series of acts of a similar nature. Applicability is murky but under §161 Restatement the principal may be liable. either (1) affirms the agent's conduct by manifesting an intention to treat the agent's conduct as authorized. although is must be objectively manifested. the agent is liable to the principal for any resulting damages. if (1) he intentionally or carelessly caused such belief. partially disclosed. Liability is usually based on the implied warranty of authority theory. Difference being that under the 'liability' theory. then the third person is liable to the principal. if (1) the act usually accompanies or is incidental to transactions that the agent is authorize to conduct. 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. If the principal is not bound by the agent's act. or inherent authority. apparent. 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. he did not take reasonable steps to notify them of the facts. even though the principal is bound too. Liability of Principal to Agent: If an agent has acted within their actual authority. Ratification need not be communicated to the third person to be effective. or (2) knowing of such belief and that others might change their position because of it. apparent. or (2) engages in conduct that is justifiable only if he has such an intention. because the agent did not have actual. or inherent authority. but some authorities apply the theory that the agent can be held liable on the contract itself. Good drafters can read the other side and work around or avoid these issues.transaction was entered into by or for him. Liability of Agent to Principal: If an agent takes an action that they have no authority to perform. Inherent Authority: Under this doctrine agent may bind a principal even when the agent had neither actual or apparent authority. Termination of agents authority: The general rule is that the principle has the power to terminate an agent's authority at any time. If undisclosed. the general rule is that the agent is bound. even if doing so violates a contract between the principle and the agent and it was agreed that authority was irrevocable. If partially disclosed. but if the principal is nevertheless bound because that agent had apparent authority. then with knowledge of the facts. the general rule is that the agent is not bound to the third person. the general rule is that the agent is liable to the third person. expectation damages could be collected while under 'implied warranty' theory only losses suffered by entering the contract could be recovered. Similar to apparent authority. the agent's liability to the third person depends on whether the principle was disclosed. even if agent is forbidden. Liability of Agent to Third Person: Where the agent has actual. so that the principal is bound to the third person. if the principal is bound by the agent's act. the general rule is that the agent as well as the principal is bound to the third person. This rests on the ground that personal services will not be subject to specific enforcement. the principal is under duty to indemnify the agent for payments authorized or made necessary in executing the principal's affairs. and (2) the third person reasonably believes the agent is authorized to do the act.
Actual Authority: If a P appoints an agent. 7 . Here you are saying that the principal is denied from estopping the authority of the agent. but your drafting can help shape intentions as parties intentions are not necessarily fully realized or understood at the beginning of the relationship. Nothing in restatement defines what a reasonable expectation is. Ratification: If the principal has accepted the benefit with knowledge of relevant facts of the contract. trucking operator Rainbow. contract. There should be at minimum an implicit acceptance. incurred during the regular course of business. Restatement says that it will be looked at what a reasonable agent would have thought they had authority to perform. Estoppel Authority: Estoppel is tort doctrine. even if not fully authorized. even if unauthorized. Morris tracks down Rainbow for payment and learns of Dawn escrow account. very close to apparent authority. 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. Dawn collected the receipts and was thus aware and retained benefits from its agency relationship when dealing with Morris. P agrees to be bound as P would have been bound if they had entered into directly. Can have apparent authority without actual authority and visa versa. in supposed violation of the contract not allowing it to incur debts. but also can have ratification if the principal accepts the benefits of the agreement. not necessarily third parties. Inherent Agency Power: When have undisclosed principal by definition there is no apparent authority. RULE: Under the principle of Undisclosed Agency Morris could not have been aware of the terms of the agreement between Dawn and Rainbow. Furthermore. would be considered to have been implied authority. Courts will look at your document to decide what parties intended. but deal with principal themselves and should not be held liable for agreements for which they may not be aware. was an agent with implied authority to Morris.Also need to let clients know of the possible pitfalls of an agreement. for collections due to unpaid fuel bills incurred by Dawn partner. where they are told by Dawn that they will be taken care of. can also be social restraints. The limiting factor on what a principal is liable for when undisclosed agent acts outside of trade norms they will not be held liable. but their actions implied ratification. P will be bound to A's actions. Need to act in a way to maintain the interests and relationship between the parties. NOTES: Agreement specifically states there is no agency between Dawn and Rainbow. Can not give agent complete authority. There can be both express and implied actual authority. Estoppel can help when you can't establish agency so contract theory does not work. It is clear that Dawn ratified the open account after learning of it's existence when Morris contacted Dawn regarding payment. go to case law. Always about manifestations from P to A. but conversations at best ratified Dawns acceptance that Morris would get paid out of Rainbows liabilities. Apparent Authority: Important is that view is based on what would be a reasonable interpretation of the agent of what their expectations are. Reasonableness test would also apply when circumstances change and the agent is aware. but be open about issues of conflict. Court makes leap that all of Rainbows liability is now Dawns liability. Morris Oil v Rainbow Oilfield FACTS: Morris Co. Shirley. Can have IAP when principal is undisclosed as third party would have no need to go through an agent. sues Dawn Co. Can also be express or implied. Damages can also work differently in estoppel vs. Must be a disclosed principal in order to have apparent authority. Courts have said though that P can not put to A all the authority vested in P. Implied/incidental authority is tasks that need to be completed to conduct the assigned task. ISSUE: If Dawn is liable for bills incurred by its partner Rainbow. thus their dealings with Rainbow were as one could expect and in the normal course of business.
Liability Restatement Sec. unequal bargaining relationship and decides that there all factors favor the widows and is an implied relationship. leading to spiraling costs. Consent by A. Binder. 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. Eisenberg's foreseeability argument vs. Can't indemnify for apparent or unauthorized practices. Problems with the distinctions as it is hard to predict whether this increases or reduces liability of principals.Court also makes the assumption that installing a bulk dispenser is in the ordinary course of business. trade practices view. Needs to be a consensual relationship. RULE: The SEC found that certain obligations arising out of this relationship were due on the part of Binder. and failing to do so was fraud. There are costs involved in the monitoring of agents. he could not deal with his customers as an adverse party without their consent. defined as: •The monitoring expenses by the principal •The bonding expenditures by the agent •The residual loss. ISSUE: Whether the relationship of the respondent and his customers was one of agent/principal requiring a duty of disclosure. and be under control of P. page 6 Manifestation by P. the representations of Binder. possibly hire other agents to oversee agents. Respondent claims he owes no duties to disclose profits and is free to conduct these transactions. Question to SEC. but this is an arguable point. Duty of Loyalty Text Outline In a case where a servant enriches himself by taking advantage of the position he occupies. that there was an agent/principal relationship. C. or loss due to divergent interests/decisions Class Notes Agency is about represental relationships of all kinds. 1. Proposed restatement 3rd eliminates these distinctions. Dawn is also an undisclosed principal in this case Matter of Allender Company FACTS: Securities broker. Trade practice restrictions should be sufficient to hold principal liable for actions of his agent without allow them an "out" clause on contract terms. 8 . do not have to be written or exchange of consideration. while at the same time limiting liability so that the use of agents does not become excessively risky. even if no harm was done to the master. need to be nominally under control and working on behalf of another. Agency Cost Problem: Problem with agents making mistakes or errors. was this an arms length sales relationship or a fiduciary agency relationship? SEC looks at conflicting express words of sales agreement vs. as gains were solely by the position he occupied. any profits are due to the master. was informing his customers that he was not accepting any commissions. Protective language in the transaction confirmation did not overcome the fiduciary relationship. and that he had a duty to disclose all material facts. He then proceeded to sell securities at a cost well above the quoted market values.
S390 Disclosure.Fiduciary Duties Choices are you can contract "out" of specific violations (fairness). What if agent advises the principal of his actions? See Restatement S23. any hidden dealings by agent that result in commission. Termination of Agency powers. P filed suit against D alleging D received a secret commission from sellers. he also adopted false representations from the sellers and adopted them as his own. D contends Fuller's only authority was to engage P for only the recitals which he could book with record dealers. (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. and see that the money was paid. P. and tell them that D would pay their expenses. P purchased such business from sellers. D instructed Fuller to learn what fees the artists expected. and D would guarantee performance. which would have been profits due the principal. the principal is entitled to recover from him even if he has been made whole again. jury agreed. even if economic results are ridiculous. Absolute ban on self dealing when the subject is trusts. Absolute prohibition on kickbacks and profits. 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. Loechler and L. Also. you need to reveal the existence and extent of adverse interest. Thus a principle can recover from his agent any benefit resulting from a violation of his duty of loyalty. Estoppel was created by the trade setting in which singing recitals are 9 . contract "in" no self dealing. If agent is paid need to exercise duty of care and skill. if unpaid there is no special agency based duty of care. when in fact he had investigated only 5 of the 75 locations. The dealers would pay costs. Kidd v. P alleges that D represented to him that he had done a thorough investigation of the route. and damages for losses. Maxwell. Agent has a duty of fair dealing with the principal. act as booking agent. he is entitled to recover the costs as damages. had authority to contract with Thomas A Edison Inc. The restatement falls in favor of the K Out theory. Fuller. but fidelity of the agent is what is aimed at. RULE: That the scope of authority should be measured not by words alone. Principal is also indemnified by the agent for any loss which has been caused to his interest by the improper transaction. ISSUE: What was the degree of Fullers 'apparent authority' as contrasted to the express authority given to him by D. Ch 5 of Restatement of Agency. no self dealing at all. agent is to act solely for the benefit of principal. P discovered the falsities and rescinded the sale after having paid an $11K down payment. it is generally held that where the wrongful act of the defendant involved the plaintiff in litigation. Illustrations pg. P claims contract was for an unconditional singing tour. Upon suit P received a $10K judgment. RULE: Actual injury is not what the law proceeds on. 31. that commission is due to the principal. agent may not be relieved of duty to disclose even if principal expresses a desire not to know. court review. Resop FACTS: P engaged D as his agent to investigate and negotiate for the purchase of a route of coin operated music machines. Mayer. ISSUE: Whether principal can recover damages from agent due to self dealing misdeeds on his part. and Restatement S387 Unless otherwise agreed to by principal. but also by the setting in which they occur including trade custom. Sellers refused to return his down payment. Thomas Edison FACTS: The issue is whether an agent. If principle is not business savvy. Tarnowski v.
Notes On Formation of Partnerships 1. he then uses analogy. Lower court held D liable even though manager was never expressly made an agent and exceeded his authority. NOTES: Learned Hand is promoting his social policy here. RUPA has explicit statement that partnership is an entity. especially where the rights of third parties are concerned. Original theory was that partnerships should have separate legal standing. Erkmann: A partnership is 'an association of two or more persons to carry on as co-owners a business for profit. Problem with UPA is that when Ames began drafting. P argues that manager was an undisclosed principal clothed with the authority to do business on behalf of D. or believe it to be. II. (3) a mutual right of control or management of the business. LH relies on trade customs but the P is arguing that the deal is different so it is hard to reconcile. a limited liability companies can only be formed when certain formalities are complied with an filed with the state. (2) an agreement to share losses. which were only to be supplied by D. Uniform Partnership Act and RUPA. Partnership by estoppel is possible S 16 UPA. Not every state has adopted RUPA. intent to form a partnership is not necessary. or Revised Uniform Partnership Act. Arnold v. and the third party dealing with the agent is unaware of relationship and conditions between agent and principal. RULE: That when a principal is undisclosed. and (4) a community of interest in the venture. ISSUE: Whether the doctrine of principal and agent applies given agent is undisclosed. but he died and was completed under an aggregate concept. or their agents take advantage. need to know only the few differences between the two. United States: It is immaterial that the parties do not call their relationship. A relationship will be considered a partnership only if four elements are present. Fenwick FACTS: A Brewery (D) who owned a beerhouse appointed a manager in whose name the business was licensed. General 10 . D argues that purchases were by manager on his own credit and it needs to be shown that he is an agent in fact. while partnerships can be organized with no formalities or filing. this way he gets to choose which custom to apply to a new business model. Class Notes Partnerships regulated by UPA. and upon discovery by this Brewery (P) they sued for the value of the goods. Trying not to unduly protect reckless business' but not to reward improper behavior. LH says he is interpreting trade custom. In their agreement the manager was forbidden to purchase certain goods. Manager purchased other goods. Florida adopted RUPA as FRUPA. UPA is more complex. he was a proponent of partnerships being separate. LH uses trade custom both to limit liability in a new industry and to hold them liable if they take advantage of agents. (1) an agreement to share profits. Partnership Formation Text Outline Hilco Properties v. 2. Watteau v.normally hired. 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. 1990's movement to make UPA more in line with business processes. without these conditions imposed. This four element test departs from the statutory test of UPA and RUPA. limited partnerships. a partnership. Partnership A. Corporations.
: 40% profit share. freeman and Mrs. floor/ceiling on profit sharing. 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. PPF has only veto power. PPF consulted on important matters. Malsbenden FACTS: Plaintiff entered into a contract with Cragin.partnerships are very elastic forms of business ventures. Pro Loan Prov. Language of agreement. Malsbenden claimed his relationship to York was only that of a banker. Sharing of returns does not necessarily establish a partnership. Plaintiff never received his vehicle. no filing requirements. for construction of a custom auto putting down $500 and further payments of $4K. here a life saving loan. need to look at underlying statutes in jurisdiction for legal guidance. and certain control provisions including right to have a say in the termination of a partner were taken together not sufficient to have formed a partnership. and dealings with third parties. Martin v. an insurance policy on Mr. as part of York Motor Mart. collateral.: Option to be partnership. Mr. Peyton to use as collateral. obtained a loan of $500K of liberty bonds from his friend Mr. Additionally. Peyton along with Mr. a fenced off loan as in Martin. NOTES: Partnership results from contract. KN&K was to turn over securities to the lenders that was to speculative to use as collateral for the bank. If nothing else appears the receipt by the defendant of a share of the profits of the business is enough. PPF obtained resignations of partners. all refused. sharing of net-profits is prima facie evidence of partnership. Hall offered a partnership to Mrs. with exceptions listed.5M in securities that the firm could use as collateral. Perkins. specific intent to do those things that constitute a partnership. Hall is manager. 11 . Pro Partnership Prov. Market created creditor protections with negative controls. Courts will look at whether actions created an intent to create partnership. Lupien v. When things start heading south with the business the incentive becomes strong to try and structure a party as a lender vs. To ensure against loss. Regardless of what is stated in partnership agreement. 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. NOTES: $85K here used as working capital vs. a partner. a partner in KN&K. Cragin left town but Malsbenden continued to operate the business. An agreement was reached though whereby they would loan KN&K $2. with the interest free loan to be repaid from sales of the autos. Malsbenden retained complete control here of the operation which further leans towards partnership structure. even if agreement states no partnership was intended to be created. Share in profits considered one of the foundations necessary in partnership creation. express or implied. No loans to partners. they were to receive 40% of the profits until the return was made. How to Create Partnerships Partnership must be by two or more persons as co-owners in the business for profit. Nothing in UPA or RUPA points to tax filings as determinative in any way in deciding if a partnership entity has been formed. both as it relates to the transaction at issue and effects business conditions as a whole. Inspect books. 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. Peyton FACTS: John Hall. Hall. constituted a partnership having been formed even if not contractual. courts may construe partnership based on actions of parties. Intention will be scrutinized by courts.
ISSUE: Whether Freeman's purchase bound Stroud. was completed using the aggregate theory. and is questionable whether the notification to Nabisco was accurate. In some areas RUPA reaches an aggregate like result. partnership agreements consist of the fragmentary explicit and implicit agreements made from time to time. RUPA confers entity status on partnerships. The UPA withheld entity status from partnerships then created complex rules to arrive at entity results. so it deals with many issues as if a partnership is an entity. Plaintiff regularly sold bread to partnership. so that a partnership was no more a legal person then a friendship. though they have the least stake in the business due to the presumption of equality.B. Smith v Kelley has partner by estoppel. Even though defined as an association (aggregate) under the UPA. Freeman ordered bread just prior to dissolution of approx $171. Aggregate: The common law view is that a partnership is not an entity. Unanimity is required do depart not only from formal agreements but fragmentary ones also. even if his assent is not required. while RUPA is able to drastically simplify many partnership rules. as equals in the partnership both men had a right to manage the normal course of business. UPA then defaults to dissolution of business as remedy in deadlocked decisions. Defendant advised Plaintiff that he would not be liable for future bread sales to partnership. When not formally in writing. but merely an aggregate of its members. Sanchez v Saylor Sanchez and Saylor were partners. Hypo pg. National Biscuit v Stroud FACTS: Stroud and Freeman were partners to sell groceries. a third party was going to lend money but Sanchez refused to provide his 12 . legislatures may choose to treat as an entity for purposes of statutes. made clearer in the RUPA. 43: B & C prevail. UPA: Any extra-ordinary action requires unanimity. Legal Nature of Partnership Text Outline Entity v. NOTES: Why is Stroud left liable? The assumption is one partner can not veto decisions of a partner. Operation of Partnerships Text Outline Though the general rule is that partners have an equal say in partnership operations. 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. Why is there an assumption that all share equally in the decisions even though assets contributed might be unequal? C. The drafting of the UPA began with an entity theory. UPA 18(e) grants even minority partners a right to be consulted in management decisions. and both are liable for the purchases. Class Notes UPA S16 Partner by Estoppel. Can try such things as arbitration and formal separation of functions to relieve deadlock. this can be altered by agreement or by conduct. actual authority of an agent will not be eliminated. RULE: Yes. Can not put that high a level on inquiry duty on a third party. How to protect yourself from partner? Just dissolving not enough according to UPA as you need to notify creditors. but party is apparently getting none of the benefits of partnership. One partner can not take another partners authority away unilaterally.
Indemnification and Contribution Partners are individually liable to partnership creditors for partnership obligations. Summers v. Partner refuses to provide personal financial statements so loan is not given and partnership goes bust. but when services partner is compensated he will always have to share in the profits. Dooley FACTS: Partnership agreement to operate trash collection business. each partner is liable only for his share of partnership obligations. UPA S18(h): No partner is entitled to compensation by the partnership. so you can have a violation of 18(e) which is not necessarily a violation of 18(h) dealing with decisions. but is seeking reimbursement from the partnership or other partner. court found in favor of Sanchez. ISSUE: Whether an equal partner in a two man partnership has the authority to hire a new employee in 13 . UPA S18(e) provides for all partners to be included in all decisions and information. No equality assumption in UPA with profits and losses. same in RUPA. Courts will also imply an agreement of equality of evaluation. Class Notes Unless partnership says otherwise majority rule will win. This if a partner pays an obligation. Saylor sued for breach of fiduciary duty. Covalt rule is that each partner has an equal say in decisions. Taylor sues for breach of fiduciary duty. Dispute between two partners about one hiring an additional employee without the consent of the other. If agreement states profits will be shared a certain way. Remaining partner is entitled to compensation though in UPA for the act of winding up the closure of the partnership. 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. Covalt rule might be correct in situation with no self dealing. the partnership has a right to require contribution from one or more partners.personal financial statements. In a proper case. and the obligation to make a contribution is a liability of a partner. 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. and 18(h) remains the final default to be looked at by the courts. but can differentiate the cases. Is it possible to end run UPA S18(h) by arguing fiduciary duty? Probably not.e. or strictly read 18(h)? First thing you look at is written agreement. and appropriate remedy for disagreements is dissolution. In Covalt one party has 75% of the stock as a differentiator. He argues that the other partner is sharing in the profits and consented by action. Creates incentives for low equity investor in bad position to cheat. but here we have a self dealing relationship. right to be consulted. RUPA is the same as UPA on these subsections. Some strict proponents of following statute point to lost opportunity cost of investing the funds on the part of the equity investor. 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. i. second would be a course of dealing between parties. thus the obligation to indemnify a partners a partnership liability. not up to statute requirements. court will find losses shared the same way and not go to UPA default. 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. Should courts look at informal actions of the partners.
Some states have remedied this by adopting "common name statutes" allowing partnerships to be sued in their own name. and be sued in its own name and § 306 provides that partners are jointly and severally liable for all obligations of the partnership. unlike UPA. the UPA goes to the extreme and under § 15(a) makes partners jointly and severally liable for wrongful acts. 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. (1) allowing for notification to 3rd party. 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. 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. Class Notes Knowledge Exception Obligation to do some investigating under UPA to see if partner has authority. D. S 301: Lewis theory wins out. To remedy. NOTES: Lower court says that you can not have a majority with a two person partnership so no liability for compensating hired employee. more third party protective. RNR Investments LP v Peoples First Bank Agreement required general partner to prepare a budget covering costs of acquisitions and constructions. RUPA § 307(a) specifically provides that a partnership may sue. however the UPA does not authorize suit against the partnership to enforce these liabilities as the partnership is not an entity. RUPA much more third party protective then UPA. The partnership should have protected itself by giving the bank notice or filing a statement.disregard of the objection of the other partner and then attempt to charge the dissenting partner with the costs incurred as a result of his unilateral decision. torts and breaches of trust. or (2) business of the kind carried on by the partnership. RUPA provides greater protection then UPA to 3rd persons dealing with partners. RUPA can protect partnership from rogue partner by. there was no duty for the Bank to have to inspect the partnership documents. 14 make "the partnership" liable for defined acts of the partners. Under RUPA court rules third party would need to have been given information. E. § 15(b) makes partners only jointly liable for all other debts and obligations of the partnership. that a partnership is bound by an act of the partner for apparently carrying on in the usual way. (1) the partnership business. UPA §§ 9. Liability for Partnership Obligations Text Outline The provisions of UPA governing liability for partnership is an amalgam of the entity and aggregate theories. after some time partnership defaulting claiming that Bank should not have issued the notes. Unlike UPA. Issue is did the Bank have notice as the general partner was acting in his normal course of business? No. Assumption that in real estate transactions title is on file so assumption is easily discoverable. however. Could have used a ratification argument to possibly sway the court. and (2) allows partnership to file a statement of partnership authority restricting partners authority. 13. Thus joint and several has a slightly different definition under 14 . Partnership obtained notes for project in breach of agreement. The major difference between UPA and RUPA concerning partnership authority is that RUPA § 301(1) makes clear.
Partnership Interests and Partnership Property Text Outline Note on Partnership Property Property used by the partnership may be either partnership property. The rule was criticized as it kept partnership creditors from getting the full benefit of personal liability of the individual partners. Through assorted legal mechanisms. resulting in dissolution of the partnership under § 31(5). In addition § 501 explicitly abolishes the UPA concept of tenancy in partnership. and RUPA dropped it to keep in line with the bankruptcy code. (1) who has the power to transfer the property. property would be held in joint tenancy by each partner. UPA S 13. there is a two level ownership structure where the partnership owns that assets. Court held that income partners could not be held liable as not partners under the UPA. RUPA does not separate tort/contract and allows joint and several liability. 15. In practice. The creditor can foreclose that partnership interest under § 28. he does own an interest in the partnership. and creditors cannot levy in such a way as to substitute a partner. and (3) if the partnership is dissolved determining which are partnership assets. UPA § 40(h) provides that. § 25(1) & (2a-e) strip all incidents of individual ownership and vest them with the partnership. Burns v. or individual property loaned to the partnership. a partnership can not own property. Note on Partnership Interests Partners Interest: Although under the UPA a partner does not own property in the partnership. F. To resolve this UPA treats the matter of partnership property as if it were an entity. If the aggregate theory is strictly applied. A partner can not then sell his partnership. Davis v Loftus Davis complained two lawyers committed malpractice in connection with a real estate transaction they engaged in.RUPA then in the common law sense. or profits. and (2) separate creditors have priority over partnership creditors as to the individual assets of the partners. but can not assign his partner function without consent of all the partners. provides that property acquired by a partnership is property of the partnership and not the partners individually. put the individual partner into bankruptcy. causing its sale. (2) in deciding between creditors when creditors of the partnership are competing with creditors of an individual partner and ownership is at issue. 14. Gonzalez: Should not allow one partner to make lawsuit settlement decisions for entire 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. Partners were both income partners and equity partners. The issue may be important in determining. (1) partnership creditors have priority over separate creditors as to partnership assets. RUPA § 203 already treating partnerships as entities. Priorities: A major problem in partnership law concerns the relative priorities of creditors of the partnership and creditors of the partners as individuals. Class Notes Under UPA partnership is aggregate so need to sue each partner jointly for contract disputes. The bankruptcy code eliminated this priority rule. and the partners own the partnership. in re Gerlach's Estate 15 . Assignment: A partner can assign his interests.
NOTES: Plaintiff did wish to have new partners included as that would shift majority shareholding to the defendant. Real issue here is whether the children can be brought in and be given decision responsibility. RUPA S 501 does not need this fiction and specifically repeals UPA S 25(1). so the UPA allows for the other partners to buy out the debt and salvage the partnership business. unless UPA S 8. (3) for appropriation of an unauthorized benefit in violation of § 21. As this course breeds mistrust dissolution of the partnership is often the better course. There are exceptions though such as when equity and justice would demand a 16 . Plaintiff brought action seeking declaration of their right to assign their interest in the partnership. Presumptions: Purchased in partnership name it is partnership property. Class Notes Intent of parties will be key in determining whether assets were meant to be included in partnership. 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.2 states property purchased in the name of the partnership is partnership property.Since real estate was purchased with partnership funds. each family having a 50% stake. Courts ruling is a narrowing of the provision under the UPA. Charging order procedure allows partnership to pay for individual partnership. if partnership funds are used. despite the wishes of the deceased that they go to his brother/partner. consent of defendants was required in order to admit additional partners into the partnership. 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. Rappaport v. 55 Perry FACTS: Two families entered into partnership. Members of one family then assigned 10% of their share to their adult children. (2) if the right is granted under the partnership agreement. G. 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. 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. RULE: Court held that pursuant to the agreement and partnership law. Is the property acquired by the partnership and its proceeds then estate property to go one-half to the deceased wife. ISSUE: Whether a party can assign their partnership interests without unanimous consent of the other partners.1 states property purchased or brought into the partnership will be presumed to be part of the partnership. UPA S 8. Don't want to allow an individual partners creditors to undermine the business by attaching individual partners assets. UPA S 8. UPA § 13 seems to restrict partners from suing the partnership for recourse. RUPA S 502 states that a partners only interest is partners interest in the partnership. If partnership sued as a whole.2 which states if the contrary intention appears. The other family refused the request taking the position that the partnership agreement did not permit new partners without unanimous consent. it became partnership property. or (4) whenever other circumstances render it just and reasonable. Duty of Loyalty Text Outline UPA § 22 provides a right to an accounting: (1) when a partner is wrongfully excluded from the business. joint liability not joint and several. so it would likely be immaterial whose money is used provided it is in the name. Very little case law on the issuance of charging orders. UPA S 25 states that an estate is created and property becomes part of estate.
pr 125 you can contract out of specific items that are duties of loyalty provided they are not manifestly unreasonable. ISSUE: Whether Salmon breached his fiduciary duty to Meinhard when he entered into the new lease without notice or opportunity to Meinhard. 404(e) self-dealing does not necessarily mean a breach of fiduciary duties. Question becomes was the deal offered a partnership opportunity. which he planned to alter to shops and offices for $200K. including the Bristol. similarly salary only partners may share in the distribution of a capital partner if equity requires. What exactly did Salmon do that was a breach of duty. Salmon sets up shell business.settlement rather then accounting or dissolution. Salmon renegotiated with the assignee of Gerry for a larger tract. likely due to loss sharing provision. Cardozo seems to take the line of business determination. 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. third is to pay off partners in respect to capital. H. 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. was taking it effectively theft of the partnership and a breach of duty if the nexus of the two opportunities is close enough. but wholly owned by Salmon. Partnership can be construed broadly as being a real estate JV. 404 does not overrule Meinhard as the main rule from that case is the duty to disclose. Salmon needed the extra $100K for additions/improvements to the hotel. NOTES: The key case on partnership fiduciary duty. Joint venture. Section 404 RUPA. Dissolution By Rightful Election Text Outline Distributions in Dissolution: UPA § 40(b) sets out the rules for asset distribution after dissolution. Meinhard awarded a share of that business but that way ends up with share in other assets of greater value. pg 154: Fiduciary duties of partner to partnership. Some courts hold that services partners in "joint ventures" need not contribute towards a capital loss. but not addressed by the court. Page v Page 17 . RUPA § 305 drops the language and allows a partner to sue the partnership. reckless conduct equate to a breach of duties. Upon expiration of the lease on the Bristol. resulting in a written joint venture. In S103. but not terribly material as at the time there were not major differences. and that by all appearance Gerry believed he was dealing with a sole entity. Not possible for RUPA to eliminate judicial discretion. While negotiating with Gerry. and the freedom of contract side that does not feel it is needed to give freedom of contract in code. Meinhard v. duty of loyalty along with S 18-20 laying out informational duties to partnership. and having used his position as manager to obtain the deal Salmon breached his duty to Meinhard. Salmon FACTS: Louisa Gerry leased to defendant Salmon the Hotel Bristol. 404 was supposed to be a more realistic interpretation of what parties viewed their fiduciary duties to be in practice. without notice. not partnership. Gross misconduct. fourth is to pay in respect to profits. the second is to pay partners for obligations other then capital or profits. and if so. but made sure he kept management control. or narrowly as being a JV for the Bristol property. RULE: Re-leasing the same property. Class Notes UPA S 21 is core provision. Could have been a loan and not a partnership interest. Non capital partners may be fund by the courts to need to contribute to losses if equity so require. First priority is to pay off creditors other then partners. 404 has been under attack by both those that feel it gives to much leeway. he was simultaneously negotiating with Meinhard for funding.
or to a continuation of the partnership under different circumstances. and that unless otherwise agreed the assets are sold and cash distributed. Continuation agreements are common allowing remaining partners to continue the business. Class Notes Words in UPA are counterintuitive in this section. winding up. Broadly speaking. i. Prentis v Sheffel: Stands for the prospect that in the dissolution of a partnership. Crutcher v Smith: Partners activities prior to the exclusion of a debtor partner were sufficient to show a wrongful expulsion by those partners. (1) no part of any business. In dissolution provisions is the assumption that piece meal liquidation is a bad thing. while "winding-up" is used to describe the economic event of liquidation. Court found that despite contractual language stating "partnership profits will be retained until all obligations are paid". Stands for the proposition that policy disagreements do not constitute bad faith. partners bidding in a judicial sale is completely acceptable and not contrary to the interests of a third partner being excluded.Plaintiff and defendant are partners in a linen supply business. (2) between the partners as a group and third persons. the law attaches consequences to dissolution. (1) among the partners themselves. termination. or (2) within a twelve month period there is a sale or exchange of fifty percent or more of the total interest in partnership capital and profits. and (3) for tax purposes. Tax Consequences: Internal Revenue code § 708 provides that a partnership's existence does not terminate for tax purposes until. Levy v Nassau. dissolution. or venture of the partnership continues to be carried on by any of the partners in a partnership. The general answer is no. Definition UPA S29. but as partnership is considered an aggregate. The court warns though that should it be proved there was bad faith in the termination plaintiff can be held liable. 18 . 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. Consequences Among the Partners: Under the UPA dissolution simply means that a partner ceases to continue being a partner. pg 108. a so-of-a-bitch will not be forced to be dissolved by courts. 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. Change in relationship between the partnership may dissolve the partnership.e. when there is no breach of faith. there still need to be actions to end the business operation. or wind it up. and different sections whether wound up or ongoing. son a partnerships relationship with third parties is not affected. Many judges will not find dissolution of a partnership based of actions of the partners if the partnership is an ongoing profitable entity. but also that withdrawal of a partner will not cause dissolution. the partnership is at will and can be dissolved at any time. Have dissolution be decree of court. financial operation. UPA S32. Breakup Under the UPA The term "dissolution" is used in the UPA to describe a change in the legal status of the partners and partnership. but that is the final goal of the provisions.
Girard Bank v Haley FACTS: Mrs. 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. Dreifuerst FACTS: Partnership operated two feed mills and there were no written articles of partnership. Contrast with Page v. Reid sent a letter of termination to her other partners in the partnership. sisters claim Art 42 UPA the partnership had continued. Page where there was an implied promise for continuation of the partnership. due to the particular circumstances. Rights of partners to application of partnership property. Dreifuerst v. Class Notes Partnership Breakup Under RUPA 19 . NOTES: UPA S38. will differ depending on whether dissolution is rightful or wrongful. Plaintiffs served the defendant with notice of dissolution of the partnership. even though it was lengthy. RULE: Court ruled that dissolution envisions some form of sale. A partner can just walk away from a partnership. Case strings in section define parameters for dissolution by lack of fiduciary duty. McGee v Russell's Executors To prevent $15K to the brother from payment out of partnership proceeds. (2) a valuation of interest that does not reflect the real value of the interest because goodwill is not taken into account. a partner upon dissolution and wind-up of the partnership. Court found that surviving partner did his fiduciary duty in winding up the business. S38(1) does say that distribution should be in cash. Letter sent terminating did not need to address reasons. (1) § 32(1)(c) refers to misconduct so serious that it prejudicially affects the business. can force the sale of the partnership assets. UPA S32 identifies wrongful dissolution. Is there an obligation that a lender who is a partner not call in a note as that will drive dissolution of the business. and (3) a continuation of the business without him. ISSUE: The issue is whether the letter caused the dissolution of the partnership.UPA S31 outlines rightful dissolution. I. NOTES: Court says there does no need to be justification for dissolution by a partner as an at will termination. Lower court agreed to a sale by which existing partners could then buy the assets. and there are no provision requiring an asset split of an at will partnership. ISSUE: Whether. Dissolution By Judicial Decree and Wrongful Dissolution Text Outline Drastic consequences can result from a wrongful dissolution. in the absence of a written agreement to the contrary. UPA § 31(1)(d) allows involuntary expulsion of partners for "bona fide" reasons. There are two types of misconduct that may justify dissolution. some say payment in kind acceptable. can read either narrowly or broadly. (1) damages. Narrow reading seems to say that you can walk away at any time provided you don't steal value from your other partner. Courts may also order dissolution of a partnership under UPA § 32(1)(f) when dissolution would be equitable. but considered wrongful dissolution and will have consequences. Some cases say cash ok. and (2) § 32(1)(d) misconduct relating to the partnership business that makes it impractical to carry on the business with the wrongdoing partner. so that judicial sale is the appropriate means of dissolution. The parties were unable to agree to a winding up of the partnership.
179. at will. Eisengerg's forks in the road. Ars is to receive $5K. (b) Artis is liable for contract. Duty of inquiry greater under RUPA then UPA. the partnership may still be liable for his actions due to apparent authority under Sec. S32 Dissolution by decree of court if one of the partners becomes a lunatic. pg. Likely to be found at will and will likely ask for his share in cash? If will not request liquidation? Sec. S38 rights of partnership to property. Good will problem in dissolution. Sec. joint and several liability in UPA. Arguments against authority are not seemingly in the course of business. Is Low a partner? He has veto power and can decide whether he is in or out of the agreement says yes. but do have a duty to wind up. 9 as viewed from third party's standpoint. i. Gratia and Artis. each partner is viewed as an agent of the partnership. 4. Has buyout formula in subsection (b) which is a default rule that can be contracted out of. If 801 fork is not applicable you go to 701 fork. but he passed the bill on? He's not the principle so he's not transferring the liability. But. seems that he is getting paid prior to other partners. In buyout RUPA imposes reliance requirement on third parties. Partnership Hypothetical's 1. 9 problem as you view from third parties perspective who would believe he has apparent authority. just apparently a loan to the partners says no.e. (b) Say he acted like a partner as bill was sent to him and he got paid. RUPA deals with liability issues differently if winding down then dissolution. Low loans 50K for 10 years. 3(a). Will find it easier to cut off liability under RUPA then UPA. 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.Article 8 will apply when leading to bankruptcy. Specific RUPA non-waivaible provisions are in 103 and 405. Do not have to 20 . Do not confuse Sec. (a) Ars is liable in Tort action. Is there an estoppel issue with Mayer? Likely no. RUPA provides for very structured bankruptcy. Can Gratia authorize the construction contract? Sec. Subsection (1) can force termination and liquidation. 36. Problem Set Handouts. When drafting under RUPA can not totally draft out partner liability. S801 Winding up termination. includes a default rule. Read comments to S 801. how share is calculated. 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. drug addict or serious problem in conduct of life that is not specifically affecting the conduct of the business. Upon liquidation. consistent with UPA. Material differences in language used.9 & Sec. 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. and the more fundamental a waiver provision the more the court will scrutinize the issue backing it up. 3 interpretation of knowledge. Aggregate view of partnership. Sec. 43. First question is the agreement rightful or wrongful. Ars. We know Gratia is does not have actual authority under any principals. agency power to bind after disassociation and liability between RUPA and UPA. no duty to do anything but wind up. The fact that he is not providing services. not much information for analysis and no knowledge of partners that he shares in the profits so 18g issue as no consent. 18 principles. If not wrongfully terminating partner can decide to just close and seek judicial sale of business. but likely read as contract issue so joint liability not joint and several.7. selling sports equipment wholesale while this is a retail operation she seems to be including. would not be any liabilities if he sells to a third party so there are differences between sale and cashing out. 5. especially i. S41. 2. If wrongful dissolution buyout will be reduced by the level of damages. pg 171. deems third parties to have had notice 90 days after filing date of dissolution.
earlier 1916 has largely been replaced. general partner assumes liability and retains control. (2) Limited Liability Companies. Alternative Forms of Business Organizations A. Governed by 1916 Uniform Limited Partnership Act. Plaintiff ignored his duties. Partnerships not taxed as they are not considered an entity. most statutes do not require that you have a limited partnership agreement. Drashner v. redrafted again in 1985 as RULPA again. Limited Partnerships specifically limit liability. The Uniform Limited Partnership Act (ULPA) was adopted in all states but Louisiana. III. ISSUE: Whether the goodwill of the business should have been considered when calculating the value of the partnership assets. got arrested. LLP grew to allow partners not to have to incur debts of partnership.give him goodwill under S32 as a wrongful dissolution. others under 1985. Turn of 20th century starting corporations needed special chartering which led to corruption and favoritism in obtaining charters. (1) Limited Partnerships. but this is not practical. the South Dakota UPA statute does not require the calculation of goodwill in the dissolution. by 1970's though you have large numbers of large entities becoming LLP's due to tax advantages. Unlike general partnerships. LLP are closer to corporations the general partnerships. when the general partner takes control of the business. Today. There are times a general partner can become liable for the partnership. Some states still under 1976 statues. 1976 redraft to RULPA. Control was never well defined. Key difference is in 1985 RULPA much harder to get into deep 21 . and demanded partnership funds for his own use after which both parties moved to dissolve the partnership. and (3) Limited Liability Partnerships. do not need any information about capitalization or names of limited partners to allow flexibility. Court found that plaintiffs actions caused a wrongful dissolution. One of the major differences between 1916 & 1985 is what goes in the agreement. while the Revised Uniform Limited Partnership Act (RULPA) has been adopted in many and was further revised in 1985. need to file a certificate. To form LLP. Three new forms evolved providing limited liabilities and taxes. and general partner can protect themselves. Limited Partnerships Text Outline Traditionally the predominant considerations in selecting a form of business organization has been taxation and liability. upon dissolution you can choose to take proceeds or continue in the shoes of her husband who she inherited from. Ranks above the creditors after the old one and before the new. Limited partnerships are not new but have changed recently with changes in the law. Traditionally corporations provided limited liability and general partnerships limited taxes. Class Notes With general partnership each of the partners has liability of the other. RULE: Court found that given the circumstances of the dissolution. They are times when limited partner can incur liability. 6. but not controlling. If forced to keep your share in the business. Sorenson FACTS: Plaintiff and defendant associated themselves as co-owners in an insurance and real-estate partnership. limited partnerships are creatures of statute. 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. Gratia is insolvent as well here.
Sup Ct. ISSUE: Whether the limited partner was exercising control of the business. Articles stated GB would not control or assume liabilities of Sunworth. GB. proposed a reverse stock split.. Gumbiner and Guzzetti are jointly and severally liable for aiding and abetting the breach. Defendants are wholly and severally liable because the challenged transaction breached the entire fairness provision of the partnership agreement. In awarding damages a breach permits: (1) broad. Sunworth advised Gateway that it had a large financial backer. Prevents unjustly enriching creditors from going after deep pockets on which they had no reliance. RULPA S303(b) is safe harbor material.8% did not complain about the purchases but was denied request to view HGI's books. Gotham Partners v Hallwood Realty . NOTES: Sunworth was general partner. Two basic types of taxation exist under the revenue code: (1) firm taxation where a business firm is taxable on 22 . is that reasonable? ROPA S303 1985 takes away the substantially like test. 2002 FACTS: Guzzetti. have to have reasonable reliance based on conduct of the limited partner. According to statute liability is incurred by limited partner only to the extent that third parties rely on their participation and control. actively advise. Actual knowledge requires direct contact by the court. (2) defendants HGI. Gateway Potato Sales v. a board member of the general partner. 1985 standard much harder for 3rd party to meet. NOTES: general principle of corporate law is that only a party to a contract may be sued for breach of that contract. Limited partners can basically replace and pick general partners. and (3) court has discretion not to grant rescission when plaintiff unjustifiably delayed seeking remedy. Court finds GB to have had extensive involvement in Sunworth's operations. 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 tender offer. Statute does not address if you would be considered general partner if you perform some or all the provisions. RULE: That a limited partnership agreement may provide for contractually created fiduciary duties substantially mirroring traditional fiduciary duties that apply in corporate law. (2) fiduciary duty is breached.pockets of limited partner. a real estate hedge fund.7%. Elements for aiding and abetting a breach of fiduciary duty are: (1) existence of fiduciary relationship. G. discretionary and equitable remedies. and (2) courts will not construe a contract as taking away other forms of appropriate relief. Gotham. and (4) damages resulted from the concerted action. Investment Co. act as an agent. Gotham filed suit in court complaining that HGI obtained control over the partnership at an unreasonably low price. Substantially like =/ reliance.B. unit option. B. ISSUE: Whether (1) contractual fiduciary duties of fairness in the partnership agreement applied to the disputed transaction. and still not be considered a general partner. Corporate General Partners Text Outline RULPA § 303(b)(1) explicitly recognizes that a corporation can be a general partner in a limited partnership. wind up etc. a creditor of Sunworth. Need to know differences between 1976 and 1985 Acts due to different jurisdictions still following different acts and big difference in the control issue. (3) defendant who is not a fiduciary knowingly participated in the breach. Less then substantially like = reliance. owned 14. bringing their ownership up to 29. FACTS: Gateway. HGI board approved the transactions based on Guzzettis recommendations. upon whose reliance Gateway sold large quantities of seed potatoes. claiming breach of fiduciary duties by board. In fact the limited partner gets to be much more involved in the daily operations then a small shareholder. 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.
Charge is a breach of duty of loyalty. being taxed as corporations. Defendants are the Wyly brothers who hold all the stock of the general partner of USACafes. 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. that general Partner was not sufficiently informed to make a valid business judgment on the sale. Charge is that general partner is enriching parent company at expense of limited partnership. Is this in the spirit of RULPA? Courts said yes. Aider and Abeter liability vs. are taxed as partnerships with each shareholder receiving their pro-rata share. Class Notes Corporate Limited General Partners. Standard is entire fairness. fairness of price and fairness of dealings. aider and abeter has general fiduciary duty to other partners. general partner is a entity and not a legal concept. Under IRS regulations any "eligible entity" can elect either flow through or firm taxation. What does this form due to the fiduciary relationship of the partnership? Gotham Partners Do not pay attention to the specifics of the transaction. and (2) flow-through taxation where a firm is not subject to taxation and all of the firms income. Law says it is a fiduciary relationship.. Once you start waiving fiduciary duties in documents you must be very careful and draft the documents exceedingly well. Issue was basically a kickback scheme. They bring the action as a class action on behalf of all unit holders. but the statute allows and does not prevent the limiting of fiduciary duties. small limited shareholder corporations. but can reduce or change. ISSUE: Whether directors of a corporate trustee may personally owe duties of loyalty to trusts of the corporation. Whole thing hand on issue of whether this is an issuance of new units or old units.its income. Wyly Brothers owned 47%. Ruling failed to take into account that GP now has the controlling interest. Dictum in the case is that not all fiduciary duties have been eliminated by structure. and Metsa. LP FACTS: Plaintiffs are holders of limited partnership units in the purchase of USACafes by Metsa Acquisition. not to the plaintiff limited partners. Court says you can not completely waive fiduciary duties by contract according to the Del. 2001 pending proposed Uniform Limited Partnership Act. Judge Allan makes an analogy to trust law and finds that general partner's have liability. and the board of directors. NOTES: General Partners is Inc. when a corporation is the general partner. Direct liability. or "double taxation". Likely family limited partnerships for estate planning reasons and as limited partners in larger more sophisticated entities. 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. Major difference in 2001 is that there is never liability in limited partner no matter what level of control as they should be treated more like corporate shareholders. Supreme Court. so corporation owes a duty to 23 . Subchapter S corporations. pg 254. cannot hide behind corporate structure.e. what was he general partner trying to accomplish. Master Limited Partnerships are publicly traded and cannot elect partnership taxation. the creditors can gain additional security from then general partner if they so choose. in re USA Cafes. i. gains and losses are taxed directly to the firms owners eliminating double taxation. Defendants argue they owe fiduciary duties up to the USA Cafe partnership only. Limited Partners Plaintiffs and Limited Partner Defendants also. Group of partners using corporate shell to do what they please. Statute entire fairness seems to allow self dealing which is not allowed by common law. not limited partners. Directors defense is that duty of care and loyalty were only owed to general partner. 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.
Owners and members of LLC's have limited liability as in corporations. limited liability. general 24 . obligations. Must look at jurisdictional differentiation between states when analyzing LLC & LLP vs. LLC's are entities that can own property. Creditor can get charging order against a members interest. (2) if membermanaged or manager-managed and the names of individuals. Concern about corporate characteristics. the other half by pro-rata. FL second. 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. Voting Members: About half the statutes provide the default rule that members vote per capita. Developed in Wyoming. to participate in management (member-managed). bankruptcy and lawful expulsion are often grounds. but does not address and rule that other fiduciary duties are to be extended. still may be treated as corporation and liable for state tax even if Fed. Members of a manager-managed LLC have no apparent authority to bind the LLC. and admission/withdrawal of members. and are either member-managed or manager-managed. perpetual life. Allen comes down that duty against self dealing must be extended. LLC's. Disassociation: Statutes vary on the termination of a members interests. Fiduciary Duties: Largely unspecified in the statutes so it is expected to largely come from corporate and partnership case-law. some were very flexible. Class Notes Taxes is the main driver in deciding which form of corporate structure to adopt. In 1990's IRA adopted the procedure that you can choose the characteristics in "check box" and take the tax advantage. LLC's originally were partly shaped by tax rules allowing each LLC to choose it own characteristics. but limit the liability of the partners. capital . Death. In manager-managed LLC's authority is comparable to a manager of the corporation. and be supplied with information. and other liabilities. Downside of LLC & LLP is state taxes. (3) duration of LLC. LLC & LLP allow partners to take greater control with limited risk. free transferability etc. 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. unlimited amount of owners. LLC advantage over "subchapter S" is fewer foreign investment restrictions.other partners. C. Formation Articles: LLC's are formed by filing at the State office and state (1) purpose of LLC. but did not convince IRS until 1998 to adopt tax structure. Operating Agreements: This is an agreement among the members concerning the LLC's affairs and provides for governance. some say must be for proper purpose. Member's Interests: A members financial rights include their right to receive distributions. LLC & LLP keep the pass through taxation structure. Distributions: Most statutes default rule is that distributions are on a pro-rata basis according to member contributions. Some jurisdictions were strict in which characteristics you can adopt. Limited Liability Companies Text Outline Limited liability Company's. Inspection of Books and Records: Generally members are allowed access to books and records. Agency-Powers: In most member-managed LLC's the authority of a member-managed LLC is comparable to the apparent authority of a partner. tax exempt. distributions. are noncorporate entities that are created under special statutes that combine elements of corporation and partnership law. Liability: All statutes provide that members are not liable for the LLC's debts.
Court pierces the veil. is that you do not have a live market for LLC shares like you would in Corp. States that the legislature surely would have passed legislation preventing if that was their intent. the veil provided by the corporate status of ORH's members may also be pierced in like fashion. NOTES: Members never voted to have distribution in a member managed LLC. partnerships and individuals making a $25K outlay. Hollowell v. Look at duration of LLC. Hunt Sports Enterprises FACTS: NHL contacted Columbus OH officials about starting a new franchise there. PB Real Estate Inc v. etc. fraudulent activity. Big difference in LLC and Corp. documents say no authorized distributions. CHL LLC was formed to explore the franchise. 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. Read LLC statutes. VGS Inc. veil? As LLC do not require formalities such as annual elections. Moreover. ISSUE: The extent to which an LLC liability shield protects the interest of a member of a LLC against a judgment creditor when the basis for the judgment is an obligation unrelated to the activities of the company. ISSUE: Whether LLC's are subject to veil piercing doctrine. form. RULE: That the "veil" of protection afforded ORH by its LLC form may be pierced if in fact ORH was operating a the "alter ego" of ORH's members or the members were committing fraud or deceit on third parties through ORH. with members being local corporations. RULE: Contract provisions may effect the scope of fiduciary duties. NOTES: Should courts pierce the LLC veil in the same manner that they pierce the Corp. ORH shut down without providing legally required notice to employees. McConnell v. both partnerships. DEM II Properties FACTS: Plaintiff obtained a deficiency judgment resulting from a mortgage foreclosure against defendant. total $100K. solely for tax losses. whether documents need to be oral or written. 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. A personal creditor is going after a partners interest in the LLC. Rough rule is when shareholder is not keeping with the integrity of the corporate form. ORH is an LLC whose members are NORS and NLRHP. i. another party formed to obtain the franchise but including two members of CHL. the main issue here being to what extent does the LLC serve as a shield. as opposed to Corp. using Corp. hanging their hat on formalities. Plaintiff attempted to satisfy judgment from any payments becoming due to the individual defendants as owners of the LLC. without proper notice in violation of the provision of the Workers Adjustment and Restraining Notification act. 25 . 37 Suffolk 927. can have membership managed or outside manager run the firm.e. Arena was to be financed by a sales tax issue that failed in balloting. Piercing the corporate veil in Corp. Governance and management issues will be set out in the documents. who contacted local businessman Lamar Hunt. commingling. ORH LLC. Bastan Case: Defense is that LLC structure allows partner to manage the business. law is when for equitable purposes a court will hold an individual shareholder liable. keeping minutes or holding meetings these formalities need to be excluded as grounds for piercing. 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. Orleans Regional Hospital FACTS: Plaintiffs allege they were laid off by defendants. COLHOC. shareholders who can sell shares. Negotiations went sour with Hunt filing suit on behalf of CHL against. RULE: That LLC limited liability status raises no barrier to the satisfaction of such a judgment from the member's interest in the company.partnership.
stockholders do not participate (5) Entity Status: Corporation is a legal Entity so can have rights in it's own name Close Corporations. limited liability companies are the different forms of privately held corporations. but you can still be liable for your own liability. Depends on if you read fiduciary duty as a concept that can be contracted away (contractarian). Court rules all three partners might be liable. and liability extended to contract breach. that the liability of a general partners is less so in the LLP then in a general partnership. Everybody in the LLP can participate in the business to some degree. specially chartered by the states to do specific 26 . The Corporate Form A. Limited Liability Partnerships Text Outline LLP's are essentially general partnerships with one core difference. general partnerships. Megadyne information Systems: Megadyne charged its law firm of breaching its fiduciary duty by not informing claim statute of limitations had run. with the possible exception of those closely related to the partner. IV. 2nd generation of LLP's statutes also include protection from contract liability. Characteristics of the Corporation Text Outline The corporate form has generally been the choice for public companies and results from five central attributes. 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. Issue is whether all partners will be liable under the LLP structure or only attorney working the case. or has certain fundamental bases that can not be contracted away (Eisenberg). thus legal representation paid for was worthless. Both requirements have largely been dropped. only those arising from their own activities. Provides protection against the negligence of other partners. Now a lot more uniformity among states in LLP law. According to opinion possible back door interpretation of fiduciary duties. FL Statute. Class Notes Limited partnership which is itself general manager of an LLP is an LLLP (Limited liability Limited Partnerships). Protects you from a partners liability. Class Notes Corporation important driver in economic development. (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. D.NOTES: Language of the court looks at language a unambiguous contract interpretation. A partner of an LLP is generally not liable for all partnership obligations. § 620. Historically in order to LLP you needed to have an insurance requirement and annual registration. one the LLC rejects an opportunity can a partner in the LLC accept it individually. i.e. Largely designed for professional organizations such as lawyers and accountants.
Do these different characteristics make a great difference? Answer is clearly there are benefits to being a corporation. Types of corporate financing are. Generally bonds are secured obligations and debentures are unsecured. Also. Organizing a Corporation Text Outline Once a decision has been made to incorporate. one is that the incorporators choose the board directors until the shares are issued.Characteristics Assumption of professional centralized management. later general articles of incorporation developed. Delaware approach is that shareholders have the power to appoint directors. Act. Continuity of life also opposite. the next step is filing a charter or articles of incorporation with the state official. Eisenberg's argument overlooks the influence of large shareholders. Most statutes now provide that pre-incorporation subscription agreements are irrevocable for a specified period of time unless all subscribers consent to a revocation. 103(c)(2) need to file articled in Del. Page 100 . Kerry. Once under way a board of directors is elected by shareholders. Articles of incorporation needed to be specific regarding their purpose and capital requirements. Tax treatment is different. Jackson implemented anti-corporate policies.functions. Delaware became the location of choice for 5060% of corporations seeking to incorporate. sought it was better to have a Federal law of corporations. stock. in fact federalism has largely occurred due to the influence on securities laws. With debt financing you 27 . bank debt. Close corporations are privately held. i. C. Original author of book. Pres. Two types of equity financing. There are two basic mechanisms. trade debt (accounts payable). and governed by the indenture. NY has the incorporator’s appoint directors. Substantive law of corporations is State law not Federal law. including preferred stock. Eisenberg feels that Delaware has since responded and it is no longer a race to the bottom. challenged the special chartering and monopolies being granted to corporations. and pay fee. 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. and debt financing. exact opposite of partnerships. Delaware remains preeminent in the filing of corporate incorporations. additional formal requirements governing creation and management. not traded on an exchange. Class Notes Del. Class Notes Delaware Corporate Law Ch 607 and Revised Model Business Corp. common stock. Eisenberg goes into his race to the bottom shtick. bonds and debentures. States have economic incentives to attract corporations. internal affairs are governed by the law where they choose to incorporate. (RMBCA) some of the more influential legislation dealing with corporations.e. Greater level of transferability. 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. RMBCA governs in FL. the differences in the legal regime of Delaware. the other way is to name the directors in the articles of incorporation. Selecting a State of Incorporation Text Outline A corporation can incorporate wherever it chooses. B. States often adopt friendly incorporation laws in order to attract the franchise fees that come with incorporating there.
Estoppel differs with de facto corporate theory in that estoppel is effective mainly for the facts of a specific transaction.need to get paid. and if a group of individuals has not done the things necessary to secure or retain de jure corporate status. and (3) some actual use or exercise of corporate privileges. Main difference between preferred stock and debt is that debt always has a right to be paid. (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.e. Redemption right is option granted corporation or shareholder. Still relevant for accounting purposes. ratification. D. not so with stock. Preferred stock has been used as strategic tool in poison pills. Quo Warranto: Proceedings brought by the state to test corporate validity. De facto will normally have a greater precedential effect. adoption itself does not. Stock is the most volatile type of security. 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. novation. Because of watered stocks Par Value was set as a limit to which the stock would not be sold below. history to prevent fraud. without more. adoption or novation. Class Notes Corporation can take on a promoter contract by express. If you have ratification or novation can relieve promoter of liability. not the case anymore. (2) a colorable attempt to comply with the statute. Common law preemptive rights were assumed. Dividend of preferred is usually cumulative. 28 . estoppel means. Dividends are payments based upon some apportionment of corporate earnings. After formation the corporation may be bound by ratification. i. Preincorporation Transactions by Promoters Text Outline Promoters help a newly forming corporation make contracts. Conversion right is option granted a corporation to convert one type of security to another. RMBCA has eliminated limitations on convertibility and relies on fiduciary duty. so more risk more reward and control. Consequences of Defective Incorporation Text Outline McLean Bank v Nelson: The corporate form provides limited liability. early in Corp. A corporation that is formed after a promoter has entered into a contract on its behalf is not bound by the contract. Can fail if found to be corporation de jure. they will have no corporate protection. the promoter is personally liable on the contract and remains so even after the corporation is formed. or one where noncompliance is unsubstantial. Now statutes allow par and no par stock. bring together assets and superintend the steps necessary to bring the corporation into existence. Declarations of dividends are the sole obligation of the board of directors. The two theories differ in two important ways in their application. so preferred dividends get paid in full prior to paying common stockholders. Three requirements are typically cited for application of the de facto corporate doctrine. common A and common B. (1) a statute in existence by which incorporation was legally possible. can call shares at any time. E. Series are subclasses of stock. set out as rights and obligations of stock/debt. The general rule for liability is that when the promoter makes a contract for the benefit of a contemplated corporation.
FACTS: Plaintiffs brought suit for breach of lease against Sunshine Greenery and Brunetti. 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.. 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. ISSUE: Whether there was a de facto corporation in existence at the time of the lease. RULE: Plaintiffs were found not entitled to equitable relief. Harris v Looney is model for the revised act. entity as shareholders being true legal owner. Goodman v. so the judgment against Brunetti is set aside. ISSUE: Whether appellees had acted for or on behalf of J&R Construction when entering contract. F. transaction outside that sphere of what was allowed were ultra vires. FACTS: Plaintiffs sought to enjoin defendant from enforcing a guaranty agreement by a corporation in favor of Ladd Estate. 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.Class Notes Doctrine of de facto incorporation. purpose being shareholder wealth maximization. New approach need to show that there was an attempt to defraud. RULE: Court affirms the lower court ruling that Joe Alexander only is strictly liable. Sunshine Greenery. 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. In FL as long as both parties are aware that corporation is in formation there is no liability. J&R defaulted on note. articles of incorporation were signed but not filed until two days later. Classical Ultra Vires Doctrine Text Outline Early on corporations needed to narrowly describe the activities in which a corporation could permissibly engage. Can view Corp. These actions were unenforceable by. Harris sued incorporators jointly and severally. Cantor v. Would be used to ensure that corporations were complying with their incorporation doctrines outlined in their charters. Ladd Estate Co. Broader doctrine then estoppel. De facto approach differs from the RMBC in being less protective of third parties. representing the Corp. 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. NOTES: Model for the revised act. Harris v Looney FACTS: Robert Harris sold his business to J&R Construction. entered into contract with Harris. 29 . General incorporation has made doctrine largely obsolete. Inc. and against the corporation.
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. but Barlow and Del. Milton Friedman states that corporations need to conform to basic rules of society embodied in law. Can corporations make charitable contributions? Have been addressed statutorily. Barlow FACTS: AP Smith Co. Can go as far as justifying defense based on simply differences between corporate cultures of organizations.02 pg. 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.G.3M in dividends. v. AP argued that this was a sound investment and that the public expected corporations to give philanthropically. arguments for is that it can still benefit the organization indirectly and through taxes. Other Constituencies under Del. Delaware does not have "other constituent" statute to protect interest of employees. Some reasonable relation to the corporate interest remains a necessary component. Class Notes Dodge Case: Not reasonable for Corporation to make payments with profits other then dividends. A. NOTES: Can read narrowly as a cold war response. 674 addresses and allows charitable contributions. § 3. which was limited in Revlon where they stated that they can benefit other constituencies provided they are rationally related to benefits accruing to shareholders. Co. 1919 Henry Ford. Court cited that the corporation is in the business of benefiting shareholders. The Dodge brothers as shareholders brought suit. shareholders. These statutes allow directors in a hostile environment to take actions not purely in shareholder interest in these instances.P.500 to Princeton which was challenged by shareholders. court states that it is ok for the directors of a company to diverge from the interests of the shareholder. ISSUE: Whether the statute allowing for corporate donation is effective. as majority shareholder. 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. looking at general corporate interest. Credit Lyonnais: Del. can consider nonshareholder interests. debt holders vs. donated $1. declared hi intent to stop paying special dividends in order to reinvest these funds and only pay regular dividends. Dodge v Ford. Second passage focuses on other constituencies. Del. Arguments against donations are that it is shareholders money. or broadly as a representation of the desired business 30 . The Objective and Conduct of the Corporation Text Outline Hu: Discussion on shareholder wealth maximization and market risk. court ordered payment of $19. statute state that it need not be directly in the corporate interest but must be reasonable and in its interest. Virtually all states have now adopted statutory provisions relating to corporate contributions that are comparable to Delaware's. Smith Mfg.
or general shareholders. Walking away from stocks is much harder for the institutional shareholders. Berle & Mean's Thesis: Bottom line is that corporation is not controlled by the shareholder. V. 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. Do institutional shareholders change this calculus. ERISA placed fiduciary duties on institutional shareholders. and allowing for easier and cheaper coordination between shareholders.philosophy in the US. The forms that institutional involvement in governance may take are. H. If nexus of contracts view law is more subject to contractual negotiation so many issues can be contracted away. Shareholdership in Publicly Held Corporations Text Outline In early corporate history the dispersion of corporate shareholdings prevented severe collective action problems. In actuality a combination of the two theories so not all governance laws can be replaced by contract. 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. Theory of promoting developing corporate norms has been waning. (1) voting on management and shareholder proposals. (3) Banks. Proxy vote issue. collective action problems in coordinating actions so selling stock main recourse. (5) Insurance Companies. statutes. Indexing strategies also make it harder to walk away. management votes proxy of unvoted shares. 31 . Separation of powers notion in corporate structure. Coase series of hierarchical relationships. is ownership and control in hands of shareholders. (2) making shareholder proposals. Class Notes Big structure question is what is the reality vs. The Nature for Corporate Law Text Outline Jensen & Meckling formulated the theory that the corporation is a nexus of contracts. (4) Investment Companies. (4) consultation with management. Consultation with big shareholders prior to decisions becoming more common. Corporate Structure A. (2) Public Pension Funds. Institutional investors now hold about 50% of equities. (3) election of directors to represent institutional investors. This is contrasted with Coase's theorem of a hierarchical model of corporations. 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. (1) Private pension Funds. Institutional shareholders fall into six basic categories. but there always remains a baseline. professional institutional shareholders. Class Notes If you look at corporations as a nexus of contracts view vs. allowing for ownership but not control. (6) Foundations. The concentration increases sophistication has increased giving a greater and more sophisticated "voice" in the companies. There is "agency costs" involved in monitoring management.
the most lenient is the business judgment rule. Delaware only allows removal with cause. seems to imply management wins. In the absence of statute. (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. Shareholders can remove a director for cause. Most courts do not consider bad business judgment adequate for removal for cause. with or without cause. FL Director Removal Statute: Abstract: 607. whether by statute or charter are necessary and at all times exercisable only for the benefit of the shareholders as their interests appear. Allen argues Del would vote that management would be allowed to include pill provisions in its by-laws unless they totally disenfranchise shareholders. As a general rule stockholders can not act in relation to the ordinary business of the corporation nor control the directors in the exercise of the judgment vested in them by virtue of their offices. can charter remove right to remove directors for cause? Cases say that charters cannot take away the right for removal 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. In Blasius the court with regard to interfering with shareholder voting applied the more stringent rule of compelling justification. There can also be two classes of stock. Blasius analysis looks at whether there was intent and opportunity to vote. 169. but they can be conferred on preferred stock or even bonds. Blasius did not fundamentally decide this issue. a structure that can be used in anti-takeover defenses. leads to 32 . (3) If cumulative voting is authorized. but about 30 states do. Weighted Voting in Publicly Traded Corporations In majority of companies only common stock has voting rights. The use of the power is subject to equitable limitations when the power has been exercised to the detriment of their interests. close corporations. Removal right for cause. Allocation of Legal Power Between Management and Shareholders Text Outline Thesis is that powers granted to management. How does annual director vote mesh with state shareholder statutes when directors are wished to be removed prior to vote? Note pg. does this include 109? Can't determine and is a huge policy issue. Art § 109 vs. The Business Judgment Rule: Corporate law employs a number of different standards of judicial review. removal rights. Under this rule. however technically correct the exercise has been. Differs from Del. the board cannot remove a director. even in the absence of a statute that so provides. so FL has the easier removal statute. § 141: Statute in 141 allows limitations otherwise provided for in this chapter. Class Notes FL & Del. In Del.Delaware has no nonshareholder constituency 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. If charter gives removal rights to other directors rather then shareholders does not infringe on right of shareholder. statutes are designed to help out smaller corporations that are most like partnerships. Cases are split on whether a court can remove directors for cause.0808 Removal of directors by shareholders. need to show cause and provide due process. gross negligence is the standard. not the substantive outcome. Del. B. one with super-voting rights. if certain conditions are satisfied an officer will not be held liable for consequences of a decision unless the decision was irrational.
Jury still out whether mergers are bad or good. should just let the shareholders decide if it is a good deal or bad. protects by delaying takeover. and new forms of financing such as junk bonds LBO. Underlying question is whether you view these tactics as good or bad. Acquirer needs a minimum of 51% in order to gain control or deal is not attractive. how to make expensive share oriented methods. need to delay in order to allow for a stronger negotiation position. Virtually all jurisdictions allow unanimous written consent to conduct business in place of meeting. Primer: Two innovations made takeovers viable. Mergers § 11 RMBCA. A will want absolute control and freeze out balance of shareholders in B on the back-end giving them a lower price. Need to look at fortunes of target and acquiring shareholders and societal impact to determine if hostile takeovers are a good or bad thing. (2) Super-majority requirements. M&A takeovers not assigned read on side. Ways to fend off takeover. "A" makes public offer to buy shares of company at X price upon certain terms. Shareholders cannot initiate merger discussions. Needs to be provided for by state law. Shareholder meetings. effectively threatening shareholders into accepting tender. corporation "A" has the option of going to non-statutory measures. Fed proxy rules only require compliance with 12G corporations. share purchases. both how to use the by-laws. Institutional investors always prefer tender offers as guarantees a premium in share price. Guise is that you can't have a new board every year that does not know the business.procedural and substantive problems with removal especially without cause. vote in directors friendly to the merger. Conflict between models of shareholder primacy and director primacy. allows less then unanimous consent but majority vote. must give shareholders equal opportunity. RMBCA jurisdiction significant asset sales only require majority of those shareholders voting. If corporation "B" rejects friendly offer. Not regulated what needs to be completed at the meeting. avoids SEC disclosure requirements and possible leaks involved with private deals or buying on the market. In tender offers. Mergers and Sales of Assets. Good argument is that if you leave your company unprotected the "sharks" will take over as cheaply as possible. Tactics for takeover fend off: (1) Staggered Boards. Statutory. Some takeovers require approval of board of directors. directors. Change of Control Situation Ch 12 Corporate Combinations pg 1061 starts. most statutes allow for meeting for which shareholders can sue for if not held. Del § 102(b)(4). the combination of two entities. Can have a proxy contest. (3) 33 . Lipton & Flohm preeminent lawyers in this field.Boards that only elect 1/3 of the board every year. Just the threat affected management's operations. Corp. can structure to come into effect after acquiring company has purchased a certain % of shares. board of Corp. If to many shares are tendered. tender offers proxy contests-happen without consent of directors. 3 types of shareholders have right to call special meeting in addition to directors: Those with greater then 10%.Requires something like 80% shareholder approval to implement merger. In asset sales management has complete discretion unless the assets are the substantial majority of the business. not all corporations. Management often controls the proxy process. then consummate the merger. hostile tender offers. those given right in the charter. only directors. they will be accepted in a pro rata share then kick back to shareholders unneeded balance. Non-statutory. Bad argument is that management is just protecting their jobs and trying to retain control. in some jurisdictions super-majority is required to consummate a merger. Delaware does not give that right. who do not release for vote and negotiate the deal giving to shareholders for up or down vote. Del. arguable on both sides. Special meetings need to give notice and agenda.
directors have the fiduciary duty to the corporation. and there is some empirical evidence that it increases bids in buy-outs. flip side is that they can be good for current shareholders by protecting company from offensive tactics of sharks. Also.Crown Jewel Defenses.40. Schnell v. v. Directors have a duty of care to the shareholder.Higher leverage makes for a less desirable target. Since corporations are viewed as entity theory directors are viewed as agents of corporation rather then agents specifically of shareholders. Charlestown Boot & Shoe Co. but the standard by which to measure that duty is deferential to the court. Courts have used standard of ordinary business judgment and given management much leeway. Antitakeover measures can be both self-dealing to protect management and in the best interest of shareholders. Can you solve the § 109 v § 141 problem? Resolved in MM v liquid Audio expanding Blasius. law. thus Delaware applies the Unocal higher scrutiny standard. Pull case. Dead-hand. Del. FACTS: A petition for injunctive relief was filed to prevent management from advancing the date of the annual stockholder meeting. then no problem. Two prongs. and (2) is the response proportional and reasonable. RULE: Court finds the vote choosing Osgood a committee to act to be void. (6) White Knight. NOTES: Judge agrees that maneuver was in bad faith by using voting mechanism to entrench themselves. 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. Defendants refused to act with him and contracted additional debts leading to a accrued loss of $3. defendant was charged with paying the insurance which he did not and the shop was consumed by fire. Chris-Craft Industries. 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. As agents of the corporation. and that they had no legal duty to pay the insurance. 34 . ISSUE: Whether legally complying with the Del. Is board power to repeal shareholder approved by-laws a large threat? Not likely as shareholders will be pissed and vote out board. (1) is there a realistic threat to the company. Comes down to who decides how the process of acquisition will be taken. or be statutorily provided as in FL. 1998 WL 954752 (1998). but when given a self-dealing transaction courts have viewed with a much tougher standard. Dunsmore FACTS: Osgood was chosen by the corporation to wind up the company.Options for sale of key parts of the organization to other entities. Shareholders need to leave stewardship in hands of directors. (5) Debt Increase. Quickturn Design v Shapiro.By back stock in company tender offer. ISSUE: Whether the directors were negligent in their fiduciary duties.Seek out a friendly company for friendly merger or stock block purchase. Delaware case string seems to comes down that courts will not tolerate interference with shareholder voting. Have to expressly say in by-law that can not be repealed. 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. court has taken a somewhat middle ground. (4) Self Tender. designed to make takeover difficult upon triggering event. statute allowing management to change the annual meeting date is permissible. Inc.300. NOTES: Election is void. RULE: Court finds that even though technically within the Del. (7) Poison PillNumerous in number and sophistication. Some of the tactics have influenced shareholder votes directly. Often existing shareholders will get opportunity to purchase large block of shares at a discount to make purchase highly expensive. One position is that these poison pills just entrench management and go against boards fiduciary duty.
Blasius. Court finds the move was not ordinary management of the firm. Court does not go behind case viewing as best option for corp. Court is not going to micromanage. Can't do dual class recapitalization under the rules of the exchanges today. but an attempt to block the shareholders from voting on Blasius' proposal. majority shareholder vote is sufficient. Defendants dispute this claim stating that the move was allowable under the plan and not a conflict of fiduciary duties. an issue not of intentional wrong but of authority. Holds that the decision of board make-up should be left to the shareholders and not the board itself. may validly act for the principal purpose preventing the shareholders from electing a majority of new directors. Delaware Ct. Court says don't look at us to change the substantive outcome of the vote. Atlas Corp. Stroud v Grace FACTS: Strouds allege that board breached its fiduciary duty by recommending certain charter amendments to shareholders. has not expanded at all. Essentially saying that if you being a "as applied" challenge we will consider it. and largest shareholder. ISSUE: Whether under the circumstances the board. NOTES: Procedures to ding the nominee at the nomination meeting. RULE: Only demonstrating that the board breached its fiduciary duties may the presumption of the business judgment rule be rebutted. RULE: Court found no breach of fiduciary duty to minority shareholders. 35 . v. even acting in good faith. Atlas had just completed a restructuring and sought to prevent the takeover. Blasius Industries. Blasius is a hard case for whose holding to apply. NOTES: Court does not adopt a per sea rule. Courts took view not to expand shareholder rights and not expand Blasius. new shareholders received only 1 in recapitalization plan. but puts a very high standard for the board to meet at their burden. FACTS: Dispute between Atlas Corp. Plaintiffs argued that the recapitalization unfairly benefited the majority block and its intention was to entrench management. Court also finds that the presence of a controlling majority stockholder did not undermine the validity of the vote. Court basically comes down that economic interests can win over minority shareholder disenfranchisement. as long as you were provided a fair opportunity to vote. Measures changed the procedure for nominating board members. Was a hobson's choice as there was a fear of delisting from the NY exchange if passed by less then 66%. Inc. examining the amendments under an "intrinsic fairness" test.Single purpose has to be so shareholders do not get to vote. Atlas called an emergency meeting where that elected two now board members in staggered terms. ISSUE: Whether amendments in a non-takeover situation granting additional power and effectively freezing the board is legal. basically said this is a high hurdle. Blasius acquired 9% of the stock of Atlas with the intent to restructure. but isn't it a courts job to sift through circumstantial evidence. along with contesting the accuracy of those disclosures. 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. over who will sit on the board. NOTES: Existing shareholders got 10 shares. The boards action is thus protected by the business judgment rule. Judge Allen alludes that a coercive attempt by a shark in short time to respond could be found acceptable. preventing Blasius from obtaining a majority of board seats. Williams v Geier FACTS: Cincinnati Milacron adopted a recapitalization plan. shifting the burden to the board. ISSUE: Whether to apply the Blasius compelling justification standard when shareholders are not given a full and fair opportunity to vote. In the plan holders of common stock on the record date would have ten votes per share.
and no law precluding shareholders from proposing resolutions or by-law amendments. Pill is essentially a stock option plan and court says shareholders have right to vote on stock plans.Teamsters v Fleming Companies FACTS: Teamsters proposed to remove a shareholder rights (poison pill) plan through resolution. used as a poison pill. RMBCA jurisdictions allow board to adopt by-laws. Doing it to screw Hilton and court says ok. ISSUE: Does OK Law restrict the authority and implement shareholder rights plans exclusively to the board.e. 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. i. Inc. and (2) power relationship between the board and shareholders (Blasius). Ct. (1) Power over the assets of the corporation (Unocal). but it can be repealed at any time. runs opposite of Schnell. Classic conflict of § 109 vs. and may shareholders propose resolutions requiring that shareholder rights plans be submitted to shareholders for vote at the annual meeting. supp. each side can adopt/repeal allowing for circular battles. ITT adopted a staggered board and poison pill. Provision is in certificate of incorporation. Ct. not in supp.. Court focusing on the "what" that was done not the "who" that did it. NV Ct. RULE: Court holds that there is no exclusive authority granted to the board. RULE: When an acquirer launches both a proxy fight and tender offer. Court may have found that in cases where board thinks there is a threat. Can look at Unocal analysis that if response is relative poison pill can be ok. These cases have a distinction in two types of corporate power. governs. and binding proposal can be adopted through proxy. NOTES: Footnote 1 & 2 are keys to this case. When it became clear ITT was not going to hold their annual meeting Hilton filed for injunction to force them. 36 . it must bring that plan to the shareholders. so is it a shareholder right? Quickturn says repeal by board is ok. § 141. 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. which go opposite directions while GD court ducks the question. but shareholders can propose non-repealable by-laws. Hilton Hotels Corp v ITT Corp FACTS: Hilton announced tender offer for ITT which they rejected. What is day-to-day operations of the company which are excluded from Fed proxy law will be determined by the sate.: Board adopts a series of anti-takeover measures in order to prevent hostile takeover by Hilton. Shareholders have review authority. but says there was no threat here. annual meeting means 18 months in NV. or to hoard shares at a low price in order to fend off takeover. ISSUE: Whether a targeted company in the face of a hostile takeover can adopt protective measures to stifle the takeover. Quickturn says that you can't. By-law sought to prevent repricing of any stock option issued. looking to see if there was a threat and a reasonable response. Court looks at Unocal. Presumption that shareholders can vote through by-laws. Court is also influenced by previous vote by majority of shareholders to redeem pill which was not fully implemented. NOTES: Started in Fed Ct. centaur and American Rent a Car. uses Blasius here in finding that board is interfering with shareholder voting. but can be contracted away. through circumstantial evidence. Board wanted to approve by-law changes that adopted this poison pill. Shareholders may restrict the board of directors authority to implement shareholder rights plans. § 109 Del. v. Device can be used either to make money. In Del. it invokes both Unocal & Blasius tests.. In ITT #2. but can the shareholder provision in GD really be repealed? Two cases in Del. and implements a plan. as Teamsters took advantage of SEC rule allowing shareholders to include amendments for vote. says that according to state law you can sue after 18 months. and implement requirement for shareholder vote on such plan. General Datacomm Industries. NOTES: ITT #1. Stock option analogy used by courts does not back up this argument well. finding primary purpose is to entrench.
and directors are normally removable by shareholders only for good cause. Advance notice provision in by-laws requires 60 day notice to include important provisions in annual meeting. and where appropriate replace the senior executives and monitor the corporation's business to evaluate whether it is being properly managed. Under this structure. How exactly is this step taken to thwart effective implementation of shareholder franchise? Seems to expand Blasius when it had previously been limited. court did allow it to delay some. Indeed.e. regularly evaluate. the board of directors manages the corporations business. Page 33 analysis key to the case. need to apply Blasius. Shareholders voted in new MM directors. 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. These executives are unlikely to dissent at a board meeting. 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. Shareholders have no legal power to give binding instructions to the board on matters within the board's exclusive power. we're just guaranteeing shareholder franchise not a win. MM waits until annual meeting. supreme court reverses. not an agent of the shareholders. 37 .MM Companies v Liquid Audio FACTS: MM sought injunction against Liquid Audio from expanding their board from 5 to 7 members. By controlling the information officers heavily shape the decisions that the board makes. leaves us not knowing how far ruling goes. and the central figure is the CEO. NOTES: Poison pill in place. Liquid also lowers stock ownership trigger for pill. Court basically says no problem. Liquid finds a white knight. and increases the number of board seats so they can pack it. you got your vote. MM introduces a board-packing provision. a number of seats are usually held by inside directors. Constraints of Composition The typical board includes a number of directors who are economically or psychologically tied the corporation's executives. and the board is conceived as an independent institution. such as we will pay you $XX Million if the deal does not go through. but control much of the flow of information to the board. the corporations executives. i. 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. but in the executives. but packing scheme allowed Liquid to still retain control. Del. MM needs to get board control to get power. Modern Corporate Practice Management function is ordinarily located not in the board. C. Because of Alliance merger (white knight) liquid postponed meeting. Can they put deal protection devices into white knight arrangement. Constraints of Time Boards of publicly held corporations meet an average of 8 times a year. MM complies. Blasius as the second prong. If effects shareholder vote. particularly the CEO. No special meeting provided for in by-laws. By reason of time constraints alone the typical board could not possibly manage the business of a large publicly held corporation. Also no-shop and lock-up provisions have been found ok by courts (not here). fix the compensation of.
other times held by a retired CEO still valued. but in many companies the chairman retains the title while handing over day-to-day operations to a successor. but some boundaries can be identified. otherwise annual voting. the governing rules include. Complaints on one side are that its hard to get qualified board members given the legal liabilities. (1) unanimous explicit. and (3) majority approval or acquiescence. and others used to split tasks between two equals. Chairman of the Board: There is little case law on the apparent authority of the chairman because the actual authority can vary greatly. risk and time-span of the action. The difficulty lies in defining what is ordinary vs. 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. (3) Quorum. Proposed and implemented SEC and NYSE rules have also had a constraining effect. The definition of chairman and CEO is very gray. legislatively Sarbanes-Oxley. are required by statute to be decided by the board. Majority of those present not just voting are required. (2) notice. Nominating committees for directors rather then appointments are recommended but not required. IRRC shareholder monitoring organization. on the other are complaints that SEC and other disclosure requirements are not enough. 38 . 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. Quorum is majority of the full board. Compensation committee requirements and independent audit committees are also addressed. The Presidents actual authority may be greater then his apparent authority. but not to contracts of an "extraordinary" nature. (1) meetings. Still have problem with defining what are director responsibilities and duties. D. Staggered boards and classified boards need to be approved in charter.Class Notes Attempts to regulate boards. but informal. extraordinary. such as declaration of dividends. approval. protects whistle blowers and stiffens penalties. Independent board rating agencies and executive search firms are also having a monitoring effect. Additional elements to determine what is extraordinary is the economic magnitude of the action. S-O on page 1964 in statute book. certifications of accuracy and truth. no quorum then activity taken is invalid. abstentions become negative votes. Formalities Required for Action by the Board Text Outline Formalities required for action by the board. (2)explicit majority approval coupled with acquiescence by remaining directors. (4) voting. Statutes also enumerate what matters the board cannot delegate to a committee. Class Notes Minutes of board meeting are discoverable. Some matters. It is fair to say modern courts would hold that at least in the context of a closely held corporation. so often little detail and used strategically. Consequences of noncompliance include. S-O requires disclosures. E.
having a fewer number of directors. Class Notes Authority issue comes up when one of the parties wishes to get out of a deal. Deployment can be tricky and minority shareholders have actually gained more seats then the majority using cumulative voting wisely. time and date is required for the annual meeting of shareholders and for any special meeting. Notice of special meeting must include the reason for being called. Election o directors requires only a plurality. Fundamental changes such as sale. Under straight voting a minority can never elect a director over the objection of the majority. Under most statutes a majority of the shares entitled to vote is necessary for a quorum unless overridden by certificate of incorporation. H. G. while cumulative voting can. lead to partisanship etc. Cumulative voting became mandatory in some states.Vice-Presidents: Vice presidents are usually given little or no apparent authority at the corporate level. Formalities Required for Shareholder Action Text Outline Notice of place. under straight voting they can cast 700 votes total but a max of 100 per candidate. Default you need to look at the certificate of incorporation. as having the same powers as possessed by partners. argument against is that can be used as "spies". Deposit trust company will hold shares and have record of the holders. Secretary: Secretary has apparent authority to certify records of the corporation including resolutions. F. Can pool your votes so that a minority shareholder can be guaranteed at least some board representation. Cumulative Voting Text Outline If someone owns 100 shares and 7 directors are running. but since rolled back to a permissive theory. dissolution and amendments to the amendments usually requires two-thirds votes. Argument for cumulative voting is that additional points of view and perspectives can be heard on the board. merger. Idea is that you do not vote one-by-one but vote for all seats at the same time. Class Notes Really just an issue if were going to make it easy or hard to allow minority representation. Only persons who are record holders on the record date are entitled to vote at the meetings. Courts will often view closely held corporations. Current proponents of cumulative voting still feel they should be permissive as it stands now. 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. Ways to thwart cumulative voting are staggered boards. Limited Liability 39 . Permitting vacancies to be filled by the board. and their executives. then force minority voters to expend their shares voting out this person. Under cumulative voting a shareholder can cast up to the 700 votes.
It is generally known that shareholders of a corporation have limited liability. DC concludes that not keeping up formalities can be prima facie evidence to pierce. Arguments in support of limited liability. law not enough to just show "alter ego" to pierce the veil. One argument (stupid one) is that shareholders should have personal liability as corporations are encouraged to take to much risk. In FL every case of piercing has either been a sham or corp.Text Outline Shareholders have no liability for corporate obligations. as RUPA confers liability on partnerships even though a separate entity. need improper purpose.e. Doctrine. Piercing the Veil Review: Need to start by thinking about the issues. Del. Class Notes Basic assumption of being a shareholder is that you have limited liability. Other theories are piercing only corporate parents. encourages management to be less risk averse. but also need to show fraud. money grab solution to no problem Market Efficiency . Cons are taxes and can be used to avoid liabilities. mainly the fundamental corporate fact of limited liability and is there a rationale for piercing. is same issue as brother sister corp. but is statutorily granted. Organizing by issue makes more sense then by doctrine. a combination with undercapitalization. retirement funds and unknowing Under Del. reduced trading. 40 . Parent sub corp. Courts moving away from Minton undercapitalization test. i. but this can be contracted around by requiring personal guarantees." Limited liability has nothing to do with being a separate entity. This protection applies to corporate managers as well as shareholders. the application can vary greatly. even though commonly called "limited liability. Also hard to pierce in FL. shareholders by statute and managers by agency principal. Inadequate capitalization is merely a factor considering whether or not to pierce the corporate veil. used for fraudulent purposes. One counter is that limited tort liability improves the efficiency of the market. Should fraudulent conveyance law be the basis for piercing the corporate veil vs. Argument: Basis. Proposal has been that shareholders be liable on a pro-rata basis rather then a joint and several basis. or can charge a price that reflects the extra risk. Should piercing be harder if the investors are sophisticated? Is there a better alternative to piercing? Organize in this manner of answering these questions.Financial Risk already a factor. Undermine incentive to incorporate Innocent players get punished. while VA requires common law fraud. but why? Protection of closed corporations.Global Markets. Although tests for piercing the corporate veil are similar from state to state. improves efficiency of markets and is a more transparent legal structure then partnerships. can have covenants required to meet certain financial thresholds. Courts generally do find it easier to pierce the veil in parent/sub relationship. if just alter ego you cannot pierce without fraud. Wash. 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. Commingling of funds an issue such as in Sea Land where CEO is using corporate bank accounts as his own. Finding the balance between fairness to creditors and corporate doctrine. Is there something different about parent/subsidiary structures that should allow for easier piercing? Is there something about torts that allows for easier piercing. encourages investment. Tort risk not an issue.
ISSUE: Whether defendant's corporations should be considered one single entity for liability purposes. usually of closed corporation. owned by the same shareholder. Inc. Owner of defendant cab company is stockholder in 10 others. they pay not because of any doctrine but because of the guarantee given.but this is still what often bothers the court. as director and officer. not liability of a holding corp. but has administerability and proof problems. Pepper Source FACTS: Sea-land shipped peppers on behalf of Pepper Source. i. Kodak was granted summary judgment. Argument in dissent is that regardless of what the legislature says the under-capitalization is sufficient to pierce the veil. and (2) that an overall element of injustice or unfairness is present. It is undisputed Kodak followed corporate formalities here. Walkovszky v. Inc. Director signs person guarantee. Delaware court not eager to pierce the corporate veil.e. Seminole corporation had no assets and never functioned like a corporation. ISSUE: Whether Atex in fact operates as an entity with Kodak rather then a subsidiary thus allowing for vicarious liability. law decides when the corporate veil can be pierced. 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. RULE: As Chaney was not party to the original suit he cannot be held personally liable as he did not defend himself. If making an agency claim. Plaintiffs brought second action trying to hold defendant Cavaney personally liable for this judgment. Another issue is should you make a rule that reflects sophisticated parties or that protects the little guy like in Kinney. in actuality courts and the law is going the other way.. 41 . Del. can be held personally liable for the judgment against Seminole. plaintiff claims all are operated as a single entity. ISSUE: Whether Marchese's corporations are an alter ego and fraud or injustice occurred. context. but of multiple corps. could only get into the pockets of the individual corporations. industry practice is for a corporation to own one or two cabs only. FACTS: Plaintiffs filed suit against Atex and Kodak to recover for repetitive stress injuries they claim were caused by Atex's keyboards. Would need to show fraud or some event leading to personal liability. plaintiff's appealed alleging Kodak acted tortuously in manufacturing and marketing the allegedly defective keyboards. Fraudulent conveyance (now UFTA) is old doctrine saying that creditors should not be able to use sham corporations to defraud. Atex. Sea-Land Services. As Atex is a Del corp. ISSUE: Whether Cavaney. based on the shareholders actions. possibly prorata. then pierce his corporations veils. Very little piercing in public corp. v. Two contrasting views. Sea-Land obtained judgment but Pepper Source had dissolved. Sea-land seeks to hold Marchese personally liable. does not necessarily need to be intentional fraud. commingling etc. which did not pay the freight bill. RULE: Plaintiff gave no rational to support agency theory of corporation. 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. Carlton FACTS: Plaintiff was injured by a cab. US v Best Foods: Basically they were completely running the company so held liable. Similar when director commits a tort in their duties as director. Fletcher v. to get into the pocket of the shareholders need to show "alter ego" or fraud. Eisenberg feels piecing should be a given for torts. direct liability. NOTES: Not a case of holding corp. Minton v. RULE: To prevail on an alter ego claim under Del. law a plaintiff must show (1) that the parent and subsidiary operated as a single economic entity. Cavaney FACTS: Plaintiffs daughter drown in a public swimming pool recovering a $10K wrongful death judgment from Seminole Pool.
RULE: Courts finds that the corporations are alter ego's. J. Even uses completely different third party as basis for unjust enrichment. Courts will not buy the scheme. not just harm against creditor. NOTES: Why do you not have a piercing here when he has commingled funds so much? Commingling not enough. will individual shareholders be prohibited from the activity as well. Shareholder Informational Rights and Proxy Voting 42 . (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant. The Corporate Entity and the Interpretation of Statutes and Contracts Text Outline This is the question where when corporations are prohibited from an activity. DHL ownership and control scenario. VI. (1) the claimant must have engaged in some type of inequitable conduct. Equitable Subordination of Shareholder Claims Text Outline Under the doctrine of Equitable Subordination. If a parent and a subsidiary are both bankrupt. Benjamin v Diamond: Three conditions must be satisfied before exercise of the power of equitable subordination is appropriate. RULE: Polan found liable as he did not even try to keep up corporate formalities in order to take advantage of limited liability. in the end he is found liable for not paying taxes on these proceeds. on various equitable grounds. NOTES: Given how sophisticated the creditors were should the veil have been pierced? Sophisticated contracting parties should know enough to get guarantees etc. the court sometimes consolidates the assets and liabilities of the several corporations into a common pool. including the claim of preferred shareholders. (2) the commingling of funds or assets. (3) undercapitalization. On appeal from remand court finds Marchese liable for $118K in damages and that second prong was satisfied and Marchese unjustly enriched. Undercapitalization plays an important role as it does in piercing doctrine. but the prong of injustice is not well defined and needs to be shown by Sea-Land. when a corporation is in bankruptcy the claim of a controlling shareholder may be subordinated to the claim of others. and (3) equitable subordination of the claim must not be inconsistent with provisions of the bankruptcy act. Equitable subordination simply takes an investment already made. Is it possible that Polan lied to make it impossible for Kinney to contract fairly. Strange that company goes belly up only two moths after lease is signed. and denies it the status of a creditors claim on parity with outside creditors for controlling behavior by the parent corp. I. and (4) one corporation treating the assets of another as its own. they incorporate. Court applies Van Dorn test: (1)failure to maintain adequate corporate records or to comply with corporate formalities. 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. Class Notes Equitable Subordination happens in the bankruptcy context. usually happens when partners are in bad shape. transfer funds into corporate loans to themselves from the corporation then declare bankruptcy.
Pillsbury attempted to purchase shares in order to solicit Honeywell shareholders about anti-war views.20 requires that every corp. § 220 and won in lower court. 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. 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. a larger regional bank holding company. that there exists a credible basis to find probable corporate wrongdoing. ISSUE: Whether plaintiff showed by preponderance of the evidence a credible basis for wrongdoing. 43 . FL statute is § 607. Anti-war environment against Honeywell's munitions manufacturing. Need to show proper purpose to get access to substantive information. Class Notes You can get by right corp. Court though limits the documents to be produced to those related specifically to the merger only and available from the bank. now changed to which documents you wish to request. access to shareholder lists. not Mid Am. Stockholder Lists: Courts stand readier to grant access to stockholder lists then to grant access to otherwise confidential financial and business information. Plaintiff demanded access to bank's books. Honeywell court. but also a secondary purpose. If the shareholder has a proper purpose. says if shareholder has proper primary purpose to request the document. Bank entered into merger agreement with Mid Am. Court says no as the purpose needs to be economic. NOTES: Plaintiff must show credible basis to find probable wrongdoing. defines what reasons and what documents may be provided. To capture the smaller corporations the RMBCA § 16. court says it does not matter. In FL used to be limitations on number of shares needed to request documents. makes big distinction to access to books vs. Shareholder Inspection Rights Pillsbury v Honeywell key case. Del.A. Ct. and must justify each category of the requested production. The SEC Act which is applicable to corporations of at least 500 record holders requires corporations to report certain information to all shareholders without specific shareholder requests. but if challenging management you would also wish to get a list of shareholders and certain internal management documents to show your case. Owners of record may be different from beneficial owners. Under § 220 Del. Del. must furnish shareholders annual financial statements including balance sheets and income statements. but improper secondary purpose. RULE: That a stockholder may demonstrate a proper demand for the production of corporate books and records upon showing. Stat. was denied. Delaware Court vs. hard to get access to books.1602. Court takes a liberal view on what is a proper purpose. Pillsbury case. Two arguments here. any ulterior purpose is irrelevant. sued under Del. shareholder has the burden of showing need. Appeal by bank ensued. Upon failure of merger and payment of termination fee. but narrow view on what documents can be obtained. by the preponderance of the evidence. minutes and by-laws. 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." 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.
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. one as to the truth of the financials and second as to the effectiveness of the audit and control procedures. Forms 10K. Schedule 14A lists in detail the information that must be furnished when specified types of transactions are to be acted upon by shareholders. but authorizes the SEC to promulgate rules that govern private conduct including proxy voting. such as the NYSE. 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. Access to the body of shareholders: Rules 14a-7 & 8 provide mechanisms through which shareholders can communicate with each other. basically saying you can't engage in fishing expedition. and no HBOC documents as he was not a shareholder. The merged company had to restate earnings down by $327. FDR creates the securities act of 1933 with rules for issuance and disclosure. Catch 22 in this language as they need to show likelihood of wrongdoing to obtain the documents which will show the wrongdoing. § 14(a) of the Securities Exchange Act does not regulate private conduct itself. Proxy Rules: Overview Text Outline Proxy voting is the dominant mode of shareholder decision making in publicly held corporations. 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. or otherwise. and for 8K required for special circumstances. Also disclosure requirements by SRO's (self regulating organizations). not before. 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. Have to sign at two levels. Wants documents from time when he bought stock that are merger related.Saito v McKesson HBOC. Likelihood is a lower standard which can be obtained through documentary. Periodic Disclosure: The proxy rules also require certain forms of annual disclosure. logic. 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. companies merged. Inc. testimony. Pg. FACTS: McKesson entered into a stock for stock merger agreement with HBOC. but as he was not a stockholder of pre-merger HBOC those documents remain undiscoverable. both from HBOC and McKesson. If executives put NYSE filing at risk they will sue for breach of fiduciary duties. court uses piercing language. Court says you only have standing to documents since you bought the stock. 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. Proxy Contests: Rule 14a-11 regulates proxy contests requiring the filing of certain information by insurgents. i. B. ISSUE: To what scope to allow access to documents for proper purpose investigation under Del. sued under Del.e. Saito. restatement meets this criteria. Gets access to HBOC documents that McKesson got. unredacted. Del. attributable to HBOC accounting irregularities. form 10Q. supreme court says that documents prior are within the shareholder rights. amendments and elections of directors. Pursuant to Sarbanes-Oxly need to have annual disclosures and CEO & CFO have to sign certifying that the documents are true. 40. The language has been given a expansive interpretation. C.4M after audit. plus director notes on merger. a shareholder. § 220.
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. Notes on TSC Industries v Northway: Sup Ct. Delegates a large grant of power to the SEC to regulate securities matters. It does not require proof of substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. misrepresentations etc. court answers yes. D. Also difference between transactional proxies and nominating proxies. Might want to know Would want to know Would change Vote +--------------------------------------------------+-----------------------------------------------------+ Mills Std. TSC Standard Ct. Does not go here Ct. says change vote to high a standard. § 14 SEC act of 1934 says no-one can solicit proxies in contravention of SEC rules on the subject. and non-traded companies of over $5M in assets. Pg 1843-82 in Statutes book outlines rule § 14(a) (1) regulating proxies and what needs to be in the statements. Question is now that private action is allowed. focus is on § 14(a)(9) anti-fraud provisions. in Johnson Ct. TSC looks at whether it was appropriate to allow for private right of action. 45 . Intended restriction of material in §14(a)(9). Need to go to common law fraud for misrepresentation and material omission. Northway. Scalia in Virginia Bankshares narrows Borak but expressly chooses not to overturn it. Class Notes Notion that there was a need to have generally applicable federal law relating to content. Says private action is a necessary supplement to SEC enforcement. will not be so generous to the private litigant. let them go to state court for smaller issues. An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. In contrast. Shift to federalism. Borak says let us put as many weapons into the hands of shareholders. adjusts standard from a material fact that might have been important to the shareholder but would have been considered important. What is material? In Lyman case court says change of accountant to one that had been indicted not material as location was in OK. finds immaterial that one of the directors had been campaigning while being indicted for the foreign corrupt practices act. Mills to low a standard.itself. TSC is the law. Class Notes Notes on Borak: Question is whether the court is going to say there is a private right of action. leaving smaller companies not subject to § 14(a) rules. tip the Ct. Proxy Rules: Private Actions Under the Proxy Rules Text Outline In Borak the Supreme Ct. Mills not the law now. Under § 12(g) companies covered are any traded on the exchanges. what are going to be the elements of fraud? § 14(a)(9) need to have a material omission or a statement that is misleading. later narrowed to weapons limited by what congress say's as they could have provided if they wished. allowed that shareholders could bring private action for violation of the proxy rules though neither the 1934 Act nor the proxy rules themselves explicitly provide for such an action. Current law on materiality of proxy disclosures.
Not necessary to go to shareholder vote.e. says that they will look at materiality or omission as prima facie evidence of materiality. was it a fair deal. proxy was necessary to transaction. Sandberg has an issue with the stock price as there had been a $60 sale previous. gets case into Fed. but rule has not been picked up. Souter seems to say that there has to be both belief of the directors and the truth arising from the actual situation. FN7. First issue is what happens when directors in a proxy puff-up the deal with conclusory statements under rule 14a-9. without additional evidence that shows board new it was worth $42 and lied are needed. v. but-for cause i. Inc. Filed an amended complaint to set aside the merger based on misleading statements in the proxy. NOTES: Courts here are imposing new Fed. Ct. If board says worth $60 and actually worth $42. it is not possible to undo the merger. Material defect did not need to be decisive. NOTES: Case is defining what is a material omission? Need to prove causation. so remanded to lower court for a review on possible monetary damages if found that terms were unfair. If fact incorrect. but did not reveal that board was already under control of the acquiring company. Here in Mills. deal approved due to misstatement? Mills v Electric Auto-Lite FACTS: Shareholder brought suit for injunction against voting on a merger but did not request temporary restraining order. Squeeze out merger of Sandberg. Hard to prove. rules on state regulators. policy of constraining private rights of action. Plaintiff's likely did not seek TRO due to need to post a bond. Virginia Bankshares. How to determine facts is on pg 303 middle. Plaintiff looses. a material misstatement can be a violation. RULE: Court holds that misstatements misled petitioners into believing that state remedies to upset the merger had been lost.Shift from Mills to TSC making it a more difficult to apply standard. Seventh Cir. 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. so if the merger deal was fair would be unlikely that it would be overturned. minority shareholder.e. not discussing what misstatement would be if proxy not material. torts. applies the standard that the misleading statement caused the merger to go through. Can show causation. Mills. corporate records subject to documentation. Bankshares: Souter is basically looking for if there is a statement that was a material fact. Effectively makes the SEC the enforcer of proxy and securities violations rather then private lawsuits. Neither TSC. as caps in VA judgments. Proxy stated board recommendation for the merger. 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. everything went to hell but how can you prove that it was due to the director elected. i. i. 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. but directors opinion including the fact is believed correct. so they look at if a rational shareholder would have voted for the deal. In a situation where proxy itself is an essential link in accomplishment of transaction. only material. this offer was for $42. Sup. Sandberg FACTS: First American Bankshares conducted a freeze-out merger eventually merging into Virginia Bankshares. Attorney argues that opinion is not a "material fact" as required by 14a-9. but did so to avoid claim of breach of 46 . Ct. Problem in proving damages also. but not reliance on that causation given so many shareholders. RULE: Court holds that although misleading.e. burden is more stringent in allowing private right of action. 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. Will look to see if it was the kind of statement that shareholders would consider important.
and there is a big lie out there. board election." RULE: Court holds that a private right of action is properly implied from section 14(a) of the SEC Act. § 14(a)(7) differs from state law. E. i. Kennedy's position is minority shareholders are exactly the group intended to be protected as was in Mills. but § 14(a)(1) important. FACTS: Lower court rules that shareholder proposal is relating to the conduct of ordinary business purposes. Ct. says that in contrast to Mills. basically saying if there is widespread public debate on the issue it can't be excluded. would often be put into management's proxy materials under § 14(a)(8) shareholder proposal rule. When management sends out the proxy they can send theirs last which is binding. 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. Summary. Stock option debate. Roosevelt v. Scalia's position. Later changed their minds back as ruling was to broad and reworded in § 14(a) amendment. Ct. Souter leaves an opening saying that if actions would cause a loss of state law remedy. this way management pay's for solicitation for a social or other proposal that is likely to be unsuccessful. if narrowly drafted to top management could be argued as social policy issue such a incentive to manipulate stock. ISSUE: Whether shareholders proposal is subject to exclusion under § 14(a)-8 of the SEC Act relating to "ordinary business practices. Rule is limited though as there are thresholds in ownership such as $2. exclusions under (i) etc. Basically a tip of the hat by Feds. § 14(a)(8) does not apply to board director voting. Ct. 1998 Rule numbers changed. that limit who can submit a proposal and for what. Plaintiff does not win because of causation problem. (a)(7) shareholder can ask management for shareholder list if wishing to offer a different board member. disparity of pay. Can argue that Fed. you need to go to state court but if the door was closed because of that lie then you can come to Fed.000K. These rationale can be used by the SEC to give itself leeway. proxy was not a causal link. Class Notes SEC § 14(a)(9) is key proxy provision. E. Proposal for phase-out date and alternative CFC sources properly excluded under § 14a-8 as ordinary course of 47 .e.I. will not trample state laws that may allow for merger without proxy. go to state court. If making a shareholder proposal vs. to state law saying that shareholders must not raise provisions that are the normal operations of the business. Pending rule § 14(a)(11) would say that given shareholders the right to propose their own board of directors for nomination. it may be possible to go to Fed. when proxy is not essential to transaction. IRRC Investor research firm web site. Proxy Rules: Shareholder Proposals Text Outline Rule 14a-8 provides that if management seeks to exclude a shareholder proposal from a proxy statement.. as Souter determines that the merger could have been legally accomplished without the proxy despite management's pursuing that course. proxy was not necessary to accomplishment of the transaction. § 14(a)(8)(i)(5) Relevance is most important exclusion. but as shareholder can always go to state law to get list. if widespread program would be considered ordinary course of business. Du Pont de Nemours & Co. Palatable to right as opinion basically says you look at state law to determine remedy. Misleading statement was not material. it must obtain a no-action letter from the SEC.fiduciary duty. loss of appraisal rights. As here. Proxy solicitations can be oral. affirmed. Other two big litigated proxy rules are § 14(a)(7) & (8). or make unilateral voting announcements in the newspaper. so will prefer to send themselves then release list. violation is what caused you to loose state law remedies.
if they had lost they would have been left out in the cold as pointed out by defense. expense and small likelihood of winning. Dissent believes you need to look at the reasonableness of the amount spent as to the purpose. What happened in the late 80's & 90's is management is working with major shareholders. 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. Fairchild Engine and Airplane Corp. subject to the scrutiny of the courts when duly challenged. Disagreement is when are the funds being used to persuade and when to inform. NOTES: Shareholders still get attorney's fees. corporate directors have the right to make reasonable and proper expenditures. funds when purely a personal power struggle dispute. Proxy Contests Text Outline Very few contested elections are run without the aid of professional proxy solicitors. 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. ISSUE: Whether directors can reimburse proxy contest sponsors from the corporate treasury. raiders came into the picture conducting hostile takeovers. as compared to a purely personal power contest. The Duty of Care and the Duty to Act Lawfully 48 . Rosenfeld v. The solicitor's database often allows for discovery of who the beneficial owner of the stock is that will be voting. VII. monitor voting results. and further persuade crucial voters. not proposed new venture. 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. Court says not appropriate to use corp. Court says that shareholder approval was necessary to pay insurgents proxy. 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.business due to being existing production. not open to paying all insurgent proxies as that would encourage to many wasteful battles. but can use when a dispute as to policy. Are these expenses justified and when do they become entertainment. Class Notes Traditionally not many proxy contests due to free-rider problem. The solicitor handles all the physical requirements of the proxy campaign. Easier to just sell shares. Changed when corp. Solicitors also provide advance guidance as to likelihood of a proxy passing. RULE: In a contest over policy. NOTES: Judge uses Unocal hostile takeover standard and imports into proxy contest context. 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. thus allow management to avoid failing proxies. F. 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. Heineman: Not sure what rule is if directors pay themselves when they do not have shareholder approval. helping to entrench themselves. When new shareholders take power they pay bills of both their and incumbents proxy contests.
The ALI's principle of Corporate Governance states that a director has a duty to perform their functions in good faith. The standard of review applied to these duties is less stringent then the standard of conduct. (1) duty to monitor. standard of review being the business judgment rule. each director will be liable for any loss of which the boards failure is the cause-in-fact and proximate cause. (3) Decision must have been made in good faith. but that the situation would not have occurred if he had performed his duties. and (3) statutes can impose special obligations which become a duty of care as a matter of corporate law. can be read for two propositions: (a) That an inattentive director will not be liable for a loss that would have been prevented by an attentive board unless it is shown that if the director had been attentive. The application of this standard of conduct to the functions of directors results in several distinct duties. 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 decision will be reviewed not to determine whether it was reasonable. 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. Barnes v Andrews. simply because in that case the inattentiveness will not have been a cause-in-fact of the loss. It is much easier to satisfy a rationality standard then a reasonable standard. (2) large amount of liquid assets create temptations.A. ALI § 7. his colleagues would have followed his lead. Supreme court has since rejected the reasoning in Barnes v Andrews. 49 . The four conditions are: (1) Director must have made a decision. and (4) Director must not have a financial interest in the subject matter of the decision. which if satisfied.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 business judgment rule consists of four conditions. The Del. 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 ALI comes down where if the Board as a whole has violated it's duty of care either by omission or commission. 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. (2) duty of inquiry. The business judgment rule will not apply when a board fails to reach an informed decision. J. he looses his corporate cloak and can be held civilly liable so is really protected only for contract matters. If the four conditions are met. (1) interested depositors in addition to shareholders. Bank/Financial Institution Directors can often be held to have a higher duty of care due to. (b) Or more narrowly. 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. Learned Hand. but under a more limited standard such as if it was rational or in good faith. If a director commits a tortuous act. in which case they will have the burden of showing that the transaction is fair. (3) duty to make prudent or reasonable decisions on matters to which they act upon. (2) Director must have informed himself with respect to the business judgment to the extent he reasonably believes appropriate under the circumstances. is applicable to claims based on the quality of a decision. and (4) duty to employ a reasonable process to make decisions. 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.
while others are in violation of duty of care. If clearly illegal against social policy and duty of care. overriding previous law in Graham. Supreme Ct. regardless of state law corp. No-win situation's can be different from a "bet the farm" situation. 1964: Does the existence of Sarbanes application effect the application of State law? Most important now is audit committee. standards and rules in place. As long as there is a process duty of care is met. 50 . 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. Must put in procedures. gives audit committee power and then establishes rules to disallow manipulation. Rational is do not want bank directors to be taking unnecessary risk with depositors money. Now Sarbanes seems to override Caremark doctrine. directors are not giving an adequate effort of attention.e. Appropriate funding must be given to audit committee. direct limits of liability. no win situation. Business hindsight bias is a worry. Courts will use business judgment rule when confronted by dissident shareholders. Must put in whistle-blower protections and rules about disclosure by in-house counsel when they discover financial irregularities. Issue is now need to comply with Sarbanes. even if intention was to assist the business. Sarbanes-Oxley pg. Illegal behavior would be a violation of the duty of care.Directors and Officers Liability Insurance Three elements may serve to reduce or eliminate civil liability for breach of duties. i. duty of loyalty is basically incentives to keep managers from being thieves. Good loan after bad then business finally fails. Essentially by-passes Directors and puts certification duties directly on the officers themselves. Most duty of care cases are non-feseance cases. must be financially independent. Precursor seems to be Caremark. insurance and indemnification. 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. As long as there is a reasonable process with reasonable care should be ok. or people making judgments on your performance based on hindsight. Joy v North Builder is getting deeper and deeper in debt. Duty of care is that a manager should act in the manner that a reasonable person in similar position would act. Note on pg 544 is good summary of what duties are. Likely that Sarbanes will now start creeping into state law. If you're not making business judgments but just accommodating you are not protected by the business judgment rule.: Suppose one director talks others into buying his house at an inflated price? The one director violated his duty of loyalty. reporting requirements. Ex. dictum by Allen but then picked up by Del. FL adds a good faith requirement. while all the bad decisions will be accountable for by the director personally. risks that may be acceptable in other industries. Additional problem in strong enforcement is that all the benefits of a good decision accrue to the corp. Requires CEO to certify that to the best of his knowledge numbers are accurate and he has done investigation within 90 days.
and duty to shareholders as director.. FACTS: Complaint is brought derivatively by two shareholders asking for a declaration that a certain dividend is a waste of corporate assets. Board does not get to see merger documents. 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. then sought to distribute the shares out to stockholders as a special dividend. Defendant. without opt. (1) they did not adequately inform themselves as to the CEO's role in forcing the sale and establishing the share purchase price. RULE: Directors did not reach an informed business judgment in voting to sell the company because. Kamin v. daughter of Lillian Pritchard. CEO of Trans Union. 20.3M against estate. The court never reaches the second question as directors post Sept. explored a leveraged buyout after a "first and rough cut" analysis from the CFO Romans using $50-60 per share as a baseline for seeing if a buyout was feasible and to determine necessary cash flows. and (2) if not. Smith v. RULE: Business judgment rule requires that more then just the showing of another course of action is necessary for an actionable claim. NOTES: Lists 5 exceptions to business judgment rule. but also fraud. directors will not be held liable for business decisions. 51 . is executrix of her estate. American Express bought DLJ stock which tanked. United Jersey Bank FACTS: Plaintiffs are trustees is the bankruptcy of Pritchard & Baird Intermediaries. 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. 20 meeting actions did not cure the problems. Some states have opt out provisions. Trial court characterized payments by the Pritchard’s as fraudulent conveyances ad entered judgment of $10. In Del. 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. then forgo an $8M tax credit in order to hide the bad investment. Deal allows in event Van Gorkom sells shares to anyone else at above $55. Van Gorkom. and company can not go out and solicit other offers.Does business judgment rule eliminate the sting of the duty of care? Freancis v. Van Gorkom autocratic CEO nearing retirement and with a large shareholding. Can read Freancis as either a duty to report to the authorities or duty to investigate and report if something is amiss. AMEX purchased $30M of DLJ stock as an investment which dropped to $4M. in Van Gorkom still good law. (2) were uninformed as to the intrinsic value of the company. One view is that it is a self-dealing case as Van Gorkom ran the whole deal and did not fully inform others. Court says she has affirmative duty to bring the matter to the authorities if she is unable to resolve the situation. American Express Co. Van Gorkom puts the number out there. Jay Pritzker. take Van Gorkom at their word. Pritzker can buy a huge minority share at $38. Van Gorkom approaches Pritzker to buy his shareholdings at $55 a share. NOTES: In response to case Del. Should have resigned if unable to perform duties. Van Gorkom had been an officer for 24 years and was approaching mandatory retirement. Considered by many a bad decision. arbitrary action or a breach of trust. NOTES: Unusual case as has duty to creditors as executrix. and offered a buyout package at $55 per share without the boards knowledge. ISSUE: Whether actions of the directors of AMEX to pay dividend rather then sell shares was a violation of duty of good care. a subsidiary of Marmon Group whose owner is Jay Pritzker. RULE: Courts find director liable i negligence for the losses caused by the wrongdoing of corporate officers. and (3) were grossly negligent in approving the sale of the company upon two hours notice without exigency of crisis or emergency. Van Gorkom met with his friend. whether their actions subsequent to the meeting were adequate to cure any infirmity in their action. 198 meeting. Company is a sitting duck for a takeover. legislature includes opt in provision so that a corporation can include in their articles of provisions that corp. Van Gorkom FACTS: Class action brought by shareholders of Trans Union seeking rescission of a cash out merger with defendant New T Co. Holding is that business judgment rule protects the dumb.
(1) statutes that make corporate managers criminally liable for unlawful corporate acts if the managers themselves performed or caused the performance of the act. Caremark agreed ton a plea involving one count of felony mail fraud and reimbursements of $250M to public and private parties. 52 .5M owed by the Democratic National Committee for communications services. Issue is also magnitude of the deal. this one is a complete cash buy out. B. or when it arises from unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. (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. majority retorts that you should at least engage in some process to evaluate not just blind trust. RULE: In order to show Caremark directors breached there duty of care by failing to adequately control employees. In re Caremark International Inc. American Telephone & Telegraph FACTS: Stockholders brought a derivative suit against AT&T and all but one director for failure to collect an outstanding debt of $1. later rules that private action will not be considered for campaign finance violations. Blind reliance considered here as all directors relied on Van Gorkom. Supreme Ct. affording a preference to the DNC on collection procedures in violation of the Communications Act of 1934 and effectively making an illegal campaign contribution. Court states liability may follow from board decisions that result in loss when. Regarding the "negligence" claim. dissent says if the deal is good enough they should be able to go through with it and give directors benefit of business judgment. NOTES: Not clear that this truly was an illegal act.what constitutes duty of care and gross negligence is that board is not supposed to make rash and uninformed decisions. the decision was ill advised or "negligent". Court takes position that this type of behavior as a general rule should be considered illegal. Questions raised about what kind of reports are required and questions should be asked? Supposedly this case only requires good faith and informed process. Caremark was charged with multiple Federal violations after a four year investigation. and (4) that such failure proximately resulted in the losses complained of. NOTES: One case that differs from reasonableness standards of Duty of Care. ISSUE: Whether Caremark's directors breached their duty of care by failing adequately to supervise the conduct of Caremark employees or institute corrective measures. Response to Caremark was establishment of compliance officers and departments. A second class of liability can arise due to failure to monitor. RULE: Court points to statutory laws that give shareholders rights to challenge illegal corporate donations thus providing them standing to seek damages. even if that power is not exercised. plaintiffs would have to show either. Duty to Act Lawfully Text Outline Two types of statutes are relevant to the potential criminal liability of officers and directors. but hard concept to nail down. 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. leaving only state action for duty of care. Alleged was a breach of directors duty to exercise diligence in handling affairs of the corporation. and (2) a statute that makes managers criminally liable for unlawful acts of employees over whom they have the power of control. ISSUE: Whether shareholders had a basis for action for breach of duty. 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. Derivative Litigation FACTS: Suit charging breach of fiduciary duty of care by Caremark directors as applicable to healthcare providers. Miller v. Suit seeks recovery of those losses from the board of directors as individuals.
Example is when a director provides a loan to a corporation. i. self dealing transactions may be a better deal. Derivative action is an action where shareholder sues on behalf of the corporation against the Directors. Explains how many cases were decided in 80's & 90's as judges were looking at the economics of the transaction. law to make it more shareholder friendly. 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. § 144 is a major source of law here. § 102(b)(7) Del. recently came down with a case in which the Directors did 53 . especially with close corporations. WD II is a case if demand should be excused or not. The tougher cases are the indirect self dealing transactions such as purchase from a company in which a director has minor stake holding. friendly to corporations but an opt in provision. can get exculpatory clause which protects directors. Duty of Loyalty A. Chandler does not dismiss the suit. Traditional remedies for violation of duty of loyalty are restitutionary in nature. 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. Must demand action of the board prior to ensuing litigation. Meinhard v Salmon. family transactions. but can argue that Directors will not act so demand should be excused. and invalidate it if found to be unfair. statute just allows a corporation to include in charter if voted on. or conflicting board memberships. Levi theory that Fed. Class Notes Two types of hard cases. Courts have sometimes awarded punitive damages against directors or officers who have breached their duty of loyalty.e. 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. By the 1960's the law had evolved to where the suit of a shareholder. is gross negligence. How is Sarbanes-Oxley affecting? Maybe affecting Del. whether there was a disinterested majority of the board or not. law is shaping state law. Federal sentencing guidelines have been established in part to response to corporate wrongdoing. compliance departments can allow you to avoid gross negligence charge and mitigate sentences handed out by Feds.VIII. self-dealing transactions by a director and corporate opportunities that are taken by a director. will those members with special expertise be held to a higher duty? Del Ct. § 102(b)(7) does not exculpate itself. response to Smith v Van Gorkom. normally rescission. corporate charter does. Del. Standard of liability in Del. and that loan may not have been available otherwise or at a worse rate. Pressure of Fed Law on state law also manifests when board members have a special expertise. Marsh pg 599: Shift as previously there was a prohibition on self dealing transactions. Sometimes. effectively standing in the shoes of the corporation. would be reviewed by the courts subject to rigid and careful scrutiny.
. After agreement in which Talbot's contributed land and James labor and expertise to build apartments each for 50% share of stock. Del. Business judgment rule does not protect them due to their conflict of interest. adopting a freer standard of good faith. 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. NOTES: Court seems to say that a self dealing transaction is ok as long as it is fair.broadening areas of ordinary business practices that will be viewed. NOTES: Eisner hires his friend Ovitz as CEO. president of the Chicora Apartments. Donald argued on appeal that the court improperly assigned the burden to him to prove waste. he awarded construction contract to James Construction wholly owned by himself. 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. & E. Issue is Disney has a § 102(b)(7) exculpatory clause in their charter. LGT intervened and filed a complaint seeking specific performance of an agreement for Donald to sell his SLE stock to LGT. James FACTS: Suit brought by the Talbot's against James. Directors lack of care in an important business decision will not be protected by the business judgment rule. ISSUE: Whether it is a breach of duty of loyalty for James as president. Lewis v. avoiding calling a duty of care covered by he statute/clause. S. and whether the transaction was fair. Donald. who then Eisner claims is a compulsive liar and huge spender.. In Van Gorkom issue was cash-out merger. RULE: Burden should have been assigned to defendant directors as they were officers and directors of both corporations. Talbot v. but would be measured under reasonableness standard. chancellor Chandler throws out. officer. none found in this case. but WD II now Chandler gives alternative end around § 102(b)(7). 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.L. 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.not give information about an investment banking evaluation. one of the interlocking brothers. Inc. In WD II here. and as defense failed to prove the transactions in question were fair and reasonable he was entitled to judgment. Walt Disney I. James was compensated for his construction supervisory duties 54 .. FACTS: Case arises out of an intra-family dispute over management of two closely held corporations. 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. so it is their burden to prove the transactions were fair and reasonable. Court addresses by reviving the duty of care. Unsure how broadly or narrowly to read at this point.. ISSUE: Whether the trial court erred in assigning the burden to Donald given a self dealing transaction. 2003 FACTS: Suit to disgorge Ovits of his severance payment claiming directors breached their fiduciary duties. Not fair here because contemporaneous market test is not shown here. In re Walt Disney Derivative Litigation . WD II transaction is about hiring and salary of board manager. court treats Eisner as a Van Gorkom because he has complete control of the board and only informed them after the fact. and transaction is voidable if not shown to be fair and reasonable to the corporation. especially § 404 internal controls.. Breach of duty of good faith gets the gross negligence standard. James appeals after judgment against him for $25K stating he was not entitled to overhead and profits resulting from a construction contract. 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: Directors are prevented from secretly using their fiduciary positions to their own advantage and to the detriment of the corporation and stockholders. and stockholder of the company to authorize a contract to a company owned by him from which he received profits and salary. No prohibition on self dealing transactions. Eisner fires Ovitz within a year. Shareholders bring a derivative suite.
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. though harder to satisfy then the business-judgment standard. but almost all can also be interpreted not to preclude such an inquiry. Disinterested directors goes back to issue on one overriding board member being an overriding influence i. A self dealing transaction can still get by. some disclosure. Bottom line is deal seemed to be substantively fair. if it is a good deal for the corporation. Many of the recent statutes on this subject are susceptible to the interpretation that approval by disinterested directors precludes a judicial inquiry into fairness. Cook v Oolie. § 144(a)(1) requires looking at this particular transaction at this particular time to make sure it is a good deal. In Cooke v. 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 states that where there has been authorization by disinterested directors. or § 144(a)(2): Disclosure and Good Faith majority shareholder approval. looks at business judgment rule and fairness. 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. some fairness. NOTES: Talbot the incompetent wins and James who makes a total of $2. and to any conflict of interest. Court found that there was not disclosure that James was building due to failure to inspect books. Court is not going to just override the vote. will be fairness review. Van Gorkam. but fair process must occur and vote needs to be fair. Class Notes Del Corp Statute § 144: Interested Directors § 144(a)(1): Disclose must be of material facts to the contract or transaction. Chandler saying folks to worry about are the controlling shareholders. just that there was not detailed disclosure. 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. To build apartments from another company other then James' would have cost $25-35K. B. (2) disclosure was made to directors of the conflict and disinterested directors approved.e. Chandler says need fully informed vote. This test is intended to be easier for the director or senior executive to satisfy then a full-fairness test. problem of friends on the board who are 55 .when he received his 50% share so he is not entitled to any other compensation. Oracle is closer to the duty of care obligation then Beam case. then James made project work. and there was adequate disclosure that he was going to be the general contractor. Looking at nature and adequacy of disclosure is same as looking at disclosure. did not disclose that he was going to get up front fees. or (3) disclosure was made to the shareholders and the shareholders approved.200 looses. Page 84 Supp. plus did not have to pay up front. Good faith majority director approval. Question comes down to what is the necessary level of disclosure balanced against a fair deal. the complainant must show that disinterested directors "could not have reasonably believed" the transaction to be fair to the corporation. or? § 144(a)(3): Fairness Disinterested Directors are those that do not stand to have financial interest. under exacting scrutiny. the court rejected this argument.
same with Nakash. by acquiring control of Cookies and executing self-dealing contracts breached his fiduciary duty to the company and fraudulently misappropriated corporate funds. Courts have been reviewing the fairness of self dealing transactions to varying degrees. courts pick different rules as in SC Talbot court picking disclosure as the key issue. if statute applies: If: a) § 144(a)(1)-----Business Judgment Rule (?). Options for review are smell test. 2001 FACTS: Emerald Partners LP filed action to enjoin consummation of a merger between May petroleum and thirteen corporations owned by Craig Hall. May's directors were also enjoined. burden shift to plaintiff to show unfairness. Emerald Partners v Berlin . the fact that adequate knowledge of information was provided to the board. Economic interests. while all other shareholders were holding shares they could not sell. Herrig later purchased adequate stock to become the majority shareholder and replaced four of five board members. ISSUE: Whether self-dealing transactions by Herrig were a breach duty of fair dealing.. Lake Warehouse FACTS: Plaintiff alleges that Herrig.482 approval by shareholders needs to be by majority of disinterested shareholders. the CEO needs to kick back the compensation they received during that time. Cookies knows of self dealing and disclosure. Director defendant can avoid personal liability only if they have 56 . and that these contracts were a contributor to the success of the organization precludes finding a breach of fair dealing. interested party. He is majority shareholder.expected to vote with the CEO. Friend & Golf Buddy on board. especially under SOX. interested party. Interlocking Directory. that compensation for those contracts was fair.e. SOX comes right out and says that if a company has to come out and restate earnings. business judgment rule etc. 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. NOTES: Cookies BBQ sauce not making any money until Speed Herrig came into the business picture. Though Oracle is Chancellery Ct and Beam v Stewart is Supreme Ct. Misreading of Talbot? Court is interpreting statute as saying that board has some level of inquiry and scrutiny. Key point is subtlety of differences in self dealing reviews by different court jurisdictions. but chooses not to look at those factors in as high a level of detail. RULE: Though self-dealing transactions were numerous. Ct. § 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. Model act provides very bright line rules. if director vote there will be one. Fliegler v Lawrence: Can read Fliegler more narrowly then what is stated. Court says there was no need to disclose profits. otherwise business judgment rule. Eisenberg wants to say that courts need to get in and perform fairness review as a backstop to § 144.. even after saying profitability is not the litmus test. Emerald. Court says to look at the great job he did for the company. Cooke. Oolie first said will need to look at fairness of transaction. Cookies Food Products v. but does not completely give up looking at fairness of the deal. Sup. Other jurisdiction approaches: CA statute if shareholder vote no just and reasonableness review. alone not enough to be an interested party but a factor that can be weighed if other factors are present. 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. Takes a hard look to see if § 141(a)(1) applies. i. CEO. president and getting a consulting fee. judge changes mind in later case that if not majority shareholder burden is on plaintiff to show unfairness of process. Del. burden on D to show fairness. Lewis looks at self dealing deal. If Self Dealing transaction. RULE: Though no longer controlling shareholder. Kahn or If: b) § 144(a)(2)----Interested (controlling) shareholder. FL § 607(6). Hall's stance on both sides as a corporate fiduciary alone is sufficient to require the demonstration of entire fairness.
(2) the opportunity is not essential to the corporation. (2) the opportunity is rejected. (3) either (a) the rejection is fair (b) the opportunity is rejected in advance by disinterested directors. 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. Directors vote on their own compensation so scurrilous area. Miller v. and (4) the director has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. IRS baseline of $1M for CEO salaries. also looked at more closely in close corporations due to opportunity for manipulation. As acquisition was ratified in a proxy. C.established that their failure to withstand an entire fairness analysis is exclusively attributable to a violation of the duty of care. D." RULE: Court rules that the doctrine is an unnecessary vestige and more then adequately covered by the business judgment rule and other doctrines. SOX requires kickback of compensation. and (4) by taking the opportunity the corporate fiduciary will thereby be placed in a position hostile to his duties to the corporation. The Corporate Opportunity Doctrine Text Outline The main test applied to the Corporate Opportunity Doctrine is the "line of business" test first applied in Guth v Loft. As a corollary. the Waste Doctrine. Supposed to be dealt with in public corporations as not self dealing so given great deference by courts. Lines of tests for corporate opportunity standards: 57 . 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. Brudney and Clark proposal is attempting to map out a safe zone. 1999 FACTS: A Republic Industries shareholder brings suit on the grounds that acquisition of AutoNation was unfair. SEC disclosures of salaries are required. Del Chancery. (c) the rejection is authorized in advance or ratified. give shareholders ammo in lawsuit. but has not been going far. E-Bay: Shareholders file derivative suit for usurping corporate opportunities. he may take the opportunity if: (1) the opportunity is presented to the director in his individual and not his corporate capacity. but compensation is necessary. (2) the opportunity is within the corporations line of business. Miller holds a combination of these two tests. 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. Compensation. Waste is dead in Del. challenge could only be made under the doctrine of "waste. Class Notes Three categories of corporate opportunity. Another is the Durfee "fairness" test. (3) the corporation holds no interest or expectancy in the opportunity. Directors of E-Bay were charged with accepting "flipping" stock from Goldman. an opportunity that should have gone to the company. Guth v. and the Effect of Shareholder Ratification Class Notes Numbers with stock options are huge. The Corporate Opportunity Doctrine now as outlined by the Del. Harbor Finance v Huizenga . (3) the corporation has an interest or expectancy in the opportunity.
Ct. Pablo explained that as a real estate agent he was entitled to commission after close.E. (4) Mixed Miller: Courts focus on is the taking of the opportunity harming the corporation. legal incapacity. Currently law in Del. Very property ownership view. Test is does the opportunity present an especially favorable business opportunity for the company given necessary assets and talents. all factors must be taken into account given to context.). (3) Fairness: Ballentine analysis. Interest and expectancy broadly defined as well as how opportunity came to insider and nature of opportunity.(1) Interest/expectancy: Starts in Alabama case. 4 factors in Broz test. Can business afford and adapt to the corporations point of view. Court views financial ability to take on opportunity as a defense putting burden on insider to prove if they go after the opportunity. Pablo entered into an agreement to purchase two parcels of land on behalf of the appellant. what are your obligations when you sell your stock. Sup. is opportunity interest in an area of business where corporation would be expected to participate. HW. Will never be fair for insider to take opportunity that could have been corporations. and need to look carefully if assets are being utilized. so ok for insider to take an interest. 58 . view. Test up until Broz. Delaware Court does not adopt disclosure requirement. i. Financial incapacity of corporation is often the key defense accepted by courts. E-bay had a particularly unusual situation as the four directors had 40% control of the corporation and were paid only in stock options. E-bay has a very broadly interpreted line of business. They went to CA at their own expense and on return advised appellant about attractive real estate deals there. 1971 FACTS: Pastor Pablo and Rufina Pablo were directors in Pablo Realty. especially with conglomerate type business'. easy case as corporate assets were used in secrecy requiring handing over all shares of new corporation. (6) ALI/N. (5) Broz: Del. Would not fly today and even Alabama has narrowed. Ballentine takes all other tests and lumps them together as one. and refusal to deal (third party will not deal with Corp. Also includes a "how did the opportunity get to the director" test. case on line of business. (2) Line of business: Guth v Loft Pepsi case discussed in NE Harbor is key Del. Adopts view if corporation already has an interest. Often contradictory lines of argument. but can make argument for an opportunity that was rejected. opportunity presented to board. Problem with what specificity of the business areas should be. No one factor is dispositive.e. When would it be fair to make a judgment that it is a corporate opportunity or not. Corporate opportunity is subset of duty of loyalty. Hawaiian International Finance v Pablo . same line of business test as Meinhardt v Salmon. What are your obligations when you own the company vs. Business judgment rule if opportunity was rejected by directors. Traditional three factors in corporate opportunity defenses: Financial incapacity (Pablo case). ALI disclosure standard pg 679. but states that disclosure would create a safe harbor. Basically saying look at the overall fairness to the corporation. Broz important case due to interlocking directorships. same line of business.. No other tests require disclosure as a precondition. Interest band expectancy broadly interpreted. Intermediate step to Broz. in which he had an agreement for a kickback of 1/2 the commission from the selling agent. Difference between ALI/NE test and other is the disclosure factor. answer no. special or unique value. Harbor: Adopt a test of full disclosure and rejection.
and here Harris did not disclose the opportunity to the court so the prior judgment in her favor is reversed.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. 59 . NOTES: Unclear use of corporate asset for benefit. strict rules are no longer applicable. 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. Disclosure is a key element though. Outside directors are basically charged with checking the power of the inside directors. especially closed corporation context. 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. Pablo is liable to appellant for the commissions he received. Inc. Northeast Harbor Golf Club. Courts now feel that is some circumstances. v. he could possibly have used asset after if venture unsuccessful. 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. 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. NOTES: Maine court chooses to use different doctrine then normal corporate opportunity doctrine. absent disclosure and an agreement with the corporation. court focuses' on secrecy.
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