Business Associations

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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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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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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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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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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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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A. Self-Interested Transactions Lewis v. S.L. & E., Inc. In re Walt Disney Derivative Litigation , Del., 2003 Talbot v. James B. Statutory Approaches Cookies Food Products v. Lake Warehouse Emerald Partners v Berlin , Sup. Ct. Del., 2001 C. Compensation, the Waste Doctrine, and the Efect of Shareholder Ratification Harbor Finance v Huizenga , Del Chancery, 1999 D. The Corporate Opportunity Doctrine Hawaiian International Finance v Pablo , HW, Sup. Ct., 1971 Northeast Harbor Golf Club, Inc. v. Harris

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Business Associations
Exam: Designed to require you to study everything Expect a Curve Ball Question Complex and Thick answers, two lines writing in ambiguity Exam on file in library many mini-essays covering everything in class Essay will be a traditional fact pattern on one of the more contestable areas Multiple Choice: Trying to teach how to read closely, pick the best answer as all may be correct Exam question, will have many conflicting issues and facts. Many facts that you will need to put in your legal "templates" and apply No conclusion necessary, IRAAAAA Interest is in thoughtful & deep answers Outlining: Using analytical table of contents from book, use as skeleton. Know when different statutes apply in different jurisdictions. Know the important statutes. Look up Sarbanes-Oxley Don't be conclusory

I. Agency
A. Introduction
Text Outline

A sole proprietorship, as a matter of law, will have no separate identity from its owner although it may have a separate financial and physical identity. The employment by one person, P, of another, A, to act on P's behalf, and subject to her control, is known as the Law of Agency. An agent is a person who by mutual assent acts on behalf of another and is subject to their control, while the person for whom the agent acts is a principal. Agency law governs: •The relationship between agents and principles •The relationship between agents and third persons with whom the agent deals on a principles behalf •The relationship between principles and third persons when an agent deals with a third person on the principal's behalf Agency is a legal concept which depends upon the existence of required factual elements: the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking. Whether an agency relationship has been created does not turn on whether the parties think of themselves as or intend to be agent and principal.
Class Notes

Associations currently in existence, sole proprietorship, partnership, Public Corporation, LLP, LLC, Closed Corporations and Limited Partnerships. LLP & LLC are recent statutorily created developments, do not have a lot of case law on these two. Theory that corporate law needs to function to regulate markets and externalities, not just a series of contracts between parties became dominant. Post ENRON regulatory doctrine has gained ground in corporate law. 4

Areas Influencing Corp. Law Theory Three sources of doctrine in BA: •Federal Law - Securities laws, but influential in Corp law in general •Statute Law - Corp legal models •Restatements - Professors ideal views on Corp law. Three Corp legal models: •Delaware Model •New York Model •Model Business Corp. Act Choice of business form. Extremely determinative in choosing which form is the Tax impact. B. Authority
Text Outline

Dawn v. Morris Hypo: Undisclosed agency principal. It is well established that an agent for an undisclosed principal subjects the principal to liability for acts done on its account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent; i.e. contract documents need not bind third parties who deal with one of them in ignorance of those instructions. Agent: Person who acts on behalf and is subject to control of another. General Agent: Agent authorized to conduct a series of transactions involving continuity of service. Special Agent: Agent only authorized to conduct a single or limited series of transactions. Principal: Person on whose behalf and subject to whose control the agent acts. Disclosed: Agent whom a third party knows the agent is acting on behalf of principal. Partially Disclosed: When third party knows agent is acting on behalf of a principal, but does not know principals identity. Undisclosed: Principal is undisclosed if the agent, dealing with a third party, purports to be acting on its own behalf. Principal will be liable for agents authorized activities as (1) principle sets the transaction in motion and stands to gain from it, and (2) third party can sue the agent who can indemnify the principal so allowing liability does not materially enlarge the principals liability. Liability of Principal to Third Person: Under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, on the principals behalf, given actual, apparent, or inherent authority, or was an agent by estoppel, or if the principal ratified the act or transaction. Actual Authority: An agent has actual authority to act on the principals behalf if the principals words or conduct would lead a reasonable person the believe he had been authorized by the principal. Can be express or implied. Apparent Authority: An agent has apparent authority to act in a given way in relation to a third person if the words or conduct of the principal would lead a reasonable person to believe that the principal had authorized the agent to so act. Agency by Estoppel: A person who is not otherwise liable as a party to a transaction, is nevertheless subject to liability to persons who have changed their positions because of their belief that the 5

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

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

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

court review. If principle is not business savvy. ISSUE: What was the degree of Fullers 'apparent authority' as contrasted to the express authority given to him by D. Thomas Edison FACTS: The issue is whether an agent. Fuller. Mayer. D contends Fuller's only authority was to engage P for only the recitals which he could book with record dealers. RULE: Actual injury is not what the law proceeds on. had authority to contract with Thomas A Edison Inc. even if economic results are ridiculous. but also by the setting in which they occur including trade custom. Resop FACTS: P engaged D as his agent to investigate and negotiate for the purchase of a route of coin operated music machines. act as booking agent.Fiduciary Duties Choices are you can contract "out" of specific violations (fairness). Agent has a duty of fair dealing with the principal. Illustrations pg. agent may not be relieved of duty to disclose even if principal expresses a desire not to know. RULE: That the scope of authority should be measured not by words alone. if unpaid there is no special agency based duty of care. The dealers would pay costs. The restatement falls in favor of the K Out theory. Loechler and L. P claims contract was for an unconditional singing tour. Need to disclose all fact that could or reasonably could effect need to be disclosed unless principal manifests in some way that he is aware. and see that the money was paid. Kidd v. and damages for losses. Estoppel was created by the trade setting in which singing recitals are 9 . and Restatement S387 Unless otherwise agreed to by principal. no self dealing at all. he also adopted false representations from the sellers and adopted them as his own. Principal is also indemnified by the agent for any loss which has been caused to his interest by the improper transaction. P filed suit against D alleging D received a secret commission from sellers. Ch 5 of Restatement of Agency. agent is to act solely for the benefit of principal. Termination of Agency powers. P alleges that D represented to him that he had done a thorough investigation of the route. jury agreed. If agent is paid need to exercise duty of care and skill. Maxwell. D instructed Fuller to learn what fees the artists expected. when in fact he had investigated only 5 of the 75 locations. and tell them that D would pay their expenses. any hidden dealings by agent that result in commission. Tarnowski v. What if agent advises the principal of his actions? See Restatement S23. contract "in" no self dealing. Absolute prohibition on kickbacks and profits. he is entitled to recover the costs as damages. ISSUE: Whether principal can recover damages from agent due to self dealing misdeeds on his part. Thus a principle can recover from his agent any benefit resulting from a violation of his duty of loyalty. which would have been profits due the principal. P. Upon suit P received a $10K judgment. that commission is due to the principal. (D) on behalf of Mary Kidd (P) to engage her without condition to sing for a series of 'tone-test' recitals designed to show the accuracy of D's records. you need to reveal the existence and extent of adverse interest. and D would guarantee performance. it is generally held that where the wrongful act of the defendant involved the plaintiff in litigation. P purchased such business from sellers. but fidelity of the agent is what is aimed at. 31. Also. S390 Disclosure. the principal is entitled to recover from him even if he has been made whole again. Sellers refused to return his down payment. P discovered the falsities and rescinded the sale after having paid an $11K down payment. Absolute ban on self dealing when the subject is trusts.

especially where the rights of third parties are concerned. ISSUE: Whether the doctrine of principal and agent applies given agent is undisclosed. United States: It is immaterial that the parties do not call their relationship. How do courts decide if a particular entity is a partnership? RUPA S 201 & 202. LH says he is interpreting trade custom. which were only to be supplied by D. a limited liability companies can only be formed when certain formalities are complied with an filed with the state. Original theory was that partnerships should have separate legal standing. Not every state has adopted RUPA. A relationship will be considered a partnership only if four elements are present. General 10 . Partnership Formation Text Outline Hilco Properties v. LH relies on trade customs but the P is arguing that the deal is different so it is hard to reconcile. Lower court held D liable even though manager was never expressly made an agent and exceeded his authority. Uniform Partnership Act and RUPA. but he died and was completed under an aggregate concept. and upon discovery by this Brewery (P) they sued for the value of the goods. P argues that manager was an undisclosed principal clothed with the authority to do business on behalf of D.normally hired. Arnold v. 2. Partnership A. In their agreement the manager was forbidden to purchase certain goods. Partnership by estoppel is possible S 16 UPA. and the third party dealing with the agent is unaware of relationship and conditions between agent and principal. Watteau v. he was a proponent of partnerships being separate. or Revised Uniform Partnership Act. Florida adopted RUPA as FRUPA. this way he gets to choose which custom to apply to a new business model. Notes On Formation of Partnerships 1. he then uses analogy. Problem with UPA is that when Ames began drafting. without these conditions imposed. intent to form a partnership is not necessary. NOTES: Learned Hand is promoting his social policy here. II. and (4) a community of interest in the venture. Class Notes Partnerships regulated by UPA. (3) a mutual right of control or management of the business. LH uses trade custom both to limit liability in a new industry and to hold them liable if they take advantage of agents. a partnership. Corporations. principal will be held liable for actions of the agent even if unauthorized as long as within standards of trade practice. or believe it to be. This four element test departs from the statutory test of UPA and RUPA. RUPA has explicit statement that partnership is an entity. 1990's movement to make UPA more in line with business processes. limited partnerships. Erkmann: A partnership is 'an association of two or more persons to carry on as co-owners a business for profit. Manager purchased other goods. Trying not to unduly protect reckless business' but not to reward improper behavior. Fenwick FACTS: A Brewery (D) who owned a beerhouse appointed a manager in whose name the business was licensed. or their agents take advantage. 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. UPA is more complex. (1) an agreement to share profits. need to know only the few differences between the two. RULE: That when a principal is undisclosed. (2) an agreement to share losses.

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

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

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

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

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

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

fourth is to pay in respect to profits. and the freedom of contract side that does not feel it is needed to give freedom of contract in code. Seems to point to a narrower duty of disclosure in that Salmon never disclosed any of his dealings to Meinhard and never gave him an opportunity to compete. 404 does not overrule Meinhard as the main rule from that case is the duty to disclose. Cardozo finds that the venture came to Salmon strictly due to his position as a fiduciary. Section 404 RUPA. he was simultaneously negotiating with Meinhard for funding. 404 has been under attack by both those that feel it gives to much leeway. but not terribly material as at the time there were not major differences. pg 154: Fiduciary duties of partner to partnership. likely due to loss sharing provision. including the Bristol. Meinhard v. pr 125 you can contract out of specific items that are duties of loyalty provided they are not manifestly unreasonable. 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 sets up shell business. reckless conduct equate to a breach of duties. What exactly did Salmon do that was a breach of duty. Page v Page 17 . and that by all appearance Gerry believed he was dealing with a sole entity. Some courts hold that services partners in "joint ventures" need not contribute towards a capital loss. RUPA § 305 drops the language and allows a partner to sue the partnership. to be redeveloped under a company separate from the JV. Could have been a loan and not a partnership interest. similarly salary only partners may share in the distribution of a capital partner if equity requires. Joint venture. Non capital partners may be fund by the courts to need to contribute to losses if equity so require. Salmon FACTS: Louisa Gerry leased to defendant Salmon the Hotel Bristol. Partnership can be construed broadly as being a real estate JV. Salmon needed the extra $100K for additions/improvements to the hotel. but wholly owned by Salmon. Not possible for RUPA to eliminate judicial discretion. Class Notes UPA S 21 is core provision. or narrowly as being a JV for the Bristol property. 404 was supposed to be a more realistic interpretation of what parties viewed their fiduciary duties to be in practice. Dissolution By Rightful Election Text Outline Distributions in Dissolution: UPA § 40(b) sets out the rules for asset distribution after dissolution. Upon expiration of the lease on the Bristol. resulting in a written joint venture. Cardozo seems to take the line of business determination. RULE: Re-leasing the same property. Meinhard awarded a share of that business but that way ends up with share in other assets of greater value. Gross misconduct. NOTES: The key case on partnership fiduciary duty. ISSUE: Whether Salmon breached his fiduciary duty to Meinhard when he entered into the new lease without notice or opportunity to Meinhard. not partnership. third is to pay off partners in respect to capital. but made sure he kept management control. H. and if so.settlement rather then accounting or dissolution. but not addressed by the court. While negotiating with Gerry. which he planned to alter to shops and offices for $200K. without notice. First priority is to pay off creditors other then partners. 404(e) self-dealing does not necessarily mean a breach of fiduciary duties. the second is to pay partners for obligations other then capital or profits. was taking it effectively theft of the partnership and a breach of duty if the nexus of the two opportunities is close enough. In S103. Salmon renegotiated with the assignee of Gerry for a larger tract. Question becomes was the deal offered a partnership opportunity.

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

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

Arguments against authority are not seemingly in the course of business. but likely read as contract issue so joint liability not joint and several. consistent with UPA. (b) Artis is liable for contract. Is Low a partner? He has veto power and can decide whether he is in or out of the agreement says yes. Duty of inquiry greater under RUPA then UPA. no duty to do anything but wind up. just apparently a loan to the partners says no. 18 principles. RUPA deals with liability issues differently if winding down then dissolution. especially i. 36. 5. Do not confuse Sec. But. RUPA provides for very structured bankruptcy. If not wrongfully terminating partner can decide to just close and seek judicial sale of business. Read comments to S 801. S32 Dissolution by decree of court if one of the partners becomes a lunatic. Upon liquidation. Likely to be found at will and will likely ask for his share in cash? If will not request liquidation? Sec. agency power to bind after disassociation and liability between RUPA and UPA. Do not have to 20 . Will find it easier to cut off liability under RUPA then UPA. 9 problem as you view from third parties perspective who would believe he has apparent authority. includes a default rule. S801 Winding up termination. how share is calculated. the partnership may still be liable for his actions due to apparent authority under Sec. i. at will. 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. 2. 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. 3(a). 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.Article 8 will apply when leading to bankruptcy. The fact that he is not providing services. Ars is to receive $5K. When drafting under RUPA can not totally draft out partner liability. First question is the agreement rightful or wrongful. Specific RUPA non-waivaible provisions are in 103 and 405. Gratia and Artis. 179. Aggregate view of partnership. Can Gratia authorize the construction contract? Sec. 9 as viewed from third party's standpoint. each partner is viewed as an agent of the partnership. Material differences in language used. (b) Say he acted like a partner as bill was sent to him and he got paid. If wrongful dissolution buyout will be reduced by the level of damages. deems third parties to have had notice 90 days after filing date of dissolution. If 801 fork is not applicable you go to 701 fork. (a) Ars is liable in Tort action.7. but do have a duty to wind up. Has buyout formula in subsection (b) which is a default rule that can be contracted out of. Ars. Subsection (1) can force termination and liquidation. drug addict or serious problem in conduct of life that is not specifically affecting the conduct of the business. seems that he is getting paid prior to other partners. Low loans 50K for 10 years. Sec. S38 rights of partnership to property. Sec. 43.9 & Sec. Good will problem in dissolution. 4. Is there an estoppel issue with Mayer? Likely no. S41. Eisengerg's forks in the road. We know Gratia is does not have actual authority under any principals. Problem Set Handouts. 3 interpretation of knowledge. selling sports equipment wholesale while this is a retail operation she seems to be including. In buyout RUPA imposes reliance requirement on third parties. but he passed the bill on? He's not the principle so he's not transferring the liability. pg 171. Partnership Hypothetical's 1. joint and several liability in UPA. not much information for analysis and no knowledge of partners that he shares in the profits so 18g issue as no consent. pg. and the more fundamental a waiver provision the more the court will scrutinize the issue backing it up. would not be any liabilities if he sells to a third party so there are differences between sale and cashing out.e.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

leaving smaller companies not subject to § 14(a) rules. Delegates a large grant of power to the SEC to regulate securities matters. let them go to state court for smaller issues. Mills to low a standard. Class Notes Notes on Borak: Question is whether the court is going to say there is a private right of action. TSC is the law. Says private action is a necessary supplement to SEC enforcement. later narrowed to weapons limited by what congress say's as they could have provided if they wished. tip the Ct. It does not require proof of substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. Pg 1843-82 in Statutes book outlines rule § 14(a) (1) regulating proxies and what needs to be in the statements. § 14 SEC act of 1934 says no-one can solicit proxies in contravention of SEC rules on the subject. In contrast. and non-traded companies of over $5M in assets. misrepresentations etc. Might want to know Would want to know Would change Vote +--------------------------------------------------+-----------------------------------------------------+ Mills Std. Borak says let us put as many weapons into the hands of shareholders. Scalia in Virginia Bankshares narrows Borak but expressly chooses not to overturn it. D. TSC Standard Ct. Northway.itself. Current law on materiality of proxy disclosures. Need to go to common law fraud for misrepresentation and material omission. Intended restriction of material in §14(a)(9). Does not go here Ct. Question is now that private action is allowed. will not be so generous to the private litigant. what are going to be the elements of fraud? § 14(a)(9) need to have a material omission or a statement that is misleading. 45 . An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. Notes on TSC Industries v Northway: Sup Ct. focus is on § 14(a)(9) anti-fraud provisions. Mills not the law now. court answers yes. in Johnson Ct. finds immaterial that one of the directors had been campaigning while being indicted for the foreign corrupt practices act. Also difference between transactional proxies and nominating proxies. Under § 12(g) companies covered are any traded on the exchanges. Shift to federalism. Proxy Rules: Private Actions Under the Proxy Rules Text Outline In Borak the Supreme Ct. What is material? In Lyman case court says change of accountant to one that had been indicted not material as location was in OK. Considers the might standard to low a threshold that would lead to management fear of liability leading to deluge of frivolous information in proxy's. TSC looks at whether it was appropriate to allow for private right of action. Class Notes Notion that there was a need to have generally applicable federal law relating to content. adjusts standard from a material fact that might have been important to the shareholder but would have been considered important. says change vote to high a standard. allowed that shareholders could bring private action for violation of the proxy rules though neither the 1934 Act nor the proxy rules themselves explicitly provide for such an action.

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

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

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

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

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

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

Blind reliance considered here as all directors relied on Van Gorkom. even if that power is not exercised. Supreme Ct. A second class of liability can arise due to failure to monitor. majority retorts that you should at least engage in some process to evaluate not just blind trust. dissent says if the deal is good enough they should be able to go through with it and give directors benefit of business judgment. later rules that private action will not be considered for campaign finance violations. Questions raised about what kind of reports are required and questions should be asked? Supposedly this case only requires good faith and informed process. affording a preference to the DNC on collection procedures in violation of the Communications Act of 1934 and effectively making an illegal campaign contribution. RULE: Court points to statutory laws that give shareholders rights to challenge illegal corporate donations thus providing them standing to seek damages. (1) statutes that make corporate managers criminally liable for unlawful corporate acts if the managers themselves performed or caused the performance of the act. Regarding the "negligence" claim. NOTES: One case that differs from reasonableness standards of Duty of Care. Alleged was a breach of directors duty to exercise diligence in handling affairs of the corporation. or when it arises from unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. and (4) that such failure proximately resulted in the losses complained of. B. Miller v.what constitutes duty of care and gross negligence is that board is not supposed to make rash and uninformed decisions. where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation only a sustained or systematic failure of the board to exercise oversight will establish the lack of good faith that is a necessary condition to liability. Court states liability may follow from board decisions that result in loss when.5M owed by the Democratic National Committee for communications services. but hard concept to nail down. Caremark was charged with multiple Federal violations after a four year investigation. this one is a complete cash buy out. leaving only state action for duty of care. Court takes position that this type of behavior as a general rule should be considered illegal. Suit seeks recovery of those losses from the board of directors as individuals. American Telephone & Telegraph FACTS: Stockholders brought a derivative suit against AT&T and all but one director for failure to collect an outstanding debt of $1. (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. Response to Caremark was establishment of compliance officers and departments. In re Caremark International Inc. plaintiffs would have to show either. NOTES: Not clear that this truly was an illegal act. 52 . and (2) a statute that makes managers criminally liable for unlawful acts of employees over whom they have the power of control. RULE: In order to show Caremark directors breached there duty of care by failing to adequately control employees. Issue is also magnitude of the deal. Derivative Litigation FACTS: Suit charging breach of fiduciary duty of care by Caremark directors as applicable to healthcare providers. 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. the decision was ill advised or "negligent". Duty to Act Lawfully Text Outline Two types of statutes are relevant to the potential criminal liability of officers and directors. Caremark agreed ton a plea involving one count of felony mail fraud and reimbursements of $250M to public and private parties. ISSUE: Whether shareholders had a basis for action for breach of duty. ISSUE: Whether Caremark's directors breached their duty of care by failing adequately to supervise the conduct of Caremark employees or institute corrective measures.

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

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

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

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

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

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

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

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