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I. Introduction and Background A.
The Development of the American Business Corp: A Historical Overview 1. Corp are creatures of state law and are formed under laws of that specific state; this indicates the internal working of the corp. 2. Board of Directors (BOD) runs a corp. not the shareholders; this is a control issue 3. Close Corp→ small family operations where shareholders are also people who run the day to day business 4. In the west the first things that looked like corps were churches. They went beyond a family and lasted longer. 5. Canon law recognized that they would have indefinite life. It was a separate entity and perpetuated among itself. 6. In England, began to charter entities for certain purposes, used a lot for civic purposes. There were limitations→ get charter from Parliament; had set term of years, had to be renewed; govt had the right to change the terms of the charter at any time. Huge advantage→ if one died the whole enterprise was not wiped out and didn’t have to start all over; liability for debts was limited to the amount of $ you put in; limited liability issue allowed more people to get involved than normal. 7. The US is considered the home for corps b/c found a way to take advantages of the strengths and got rid of a lot of the limitations. The scope has grown tremendously and the capital accumulation is outrageously huge. B. Agency 1. § 1. Agency; Principal; Agent • Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act • The one for whom action is to be taken is the principal. • The one who is to act is the agent. 2. Agency→ when one person acts w/the and thru the authority of another 3. Agency relationship can exist w/out any intent to have created it. 4. Need: • Mutual consent • To act on someone’s behalf • W/in someone’s control 5. An agent can bind a principal in K when agent is acting w/in his authority • Actual authority→ P tells the A to act upon his behalf; agent has to believe from the communication that he has the authority to act and it must be reasonable; § 26 Creation of Authority; general rule→ can be created by written or spoken words or other conduct of the P which, reasonably, interpreted, causes the A to believe that the P desires him to so act on the P’s account • Apparent authority→ 3rd party reasonably believes that the A has authority to act on behalf of the P; usually done thru actions § 27. Creation of Apparent Authority; general rule→ created as to a third person by written or spoken words or any other conduct of the P which, reasonably interpreted, causes the third person to believe that the P consents to have the act done on his behalf by the person purporting to act for him. • Authority by estoppel→ apparent authority w/out P taking any action at all; somehow it would be unfair for the 3rd party not to recover from the P
Partnership interest is not transferable but can assign economic interest. can’t compete. 8. Majority vote wins but must be unanimous if want to admit a new partner 5. whereby the act. servants are subsets of agents. When two or more people are in a business as co-owners for a profit • In business→ implies continuous basis • Co-owner→ implies share profits and losses 3. there is a “frolic and detour” exception to being liable b/c not w/in the scope of their employment P owes duties to A • Compensation • Reimbursement • Indemnification for cost incurred w/in scope of employment • Fiduciary duty A owes duties to P • Duty of loyalty→ can’t take unapproved benefits. Managed by each partner equally unless agreed otherwise 4. exists to catch cases that didn’t fit in anywhere else and not right for 3rd party to be harmed by the A • Ratification §82→ affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. may opt out of default rules by making K. Every partner is an A for the partnership 7. need notice and consent not to breach this duty • Duty of care • Duty of disclosure How they end • Dissociation allows partner to leave w/out dissolving the partnership • If partnership buys him out they don’t have to dissolve and can continue the business . is given effect as if originally authorized by him Can also be liable in tort for you’re a • If authorize conduct • Respondeat superior doctrine→ have control and he is performing work for you.6. can’t act on behalf of another if in conflict w/P. but if disclosed then it is ok but if no consent from P then liable for breach • Duty of care→ act w/due care and liable for negligence • Fiduciary duty How to end agency relationship • Voluntarily and completely at will • Expire at end of certain period • End when condition or purpose has been fulfilled or accomplished • Authority also ends but apparent auth may still exist→ must do something to let 3rd parties know the agency is over • C. Profits and losses are shared equally. not liable for ind K b/c have no control. Inherit authority→ exists for the protection of persons harmed by or dealing w/a servant or other agent. as to some or all persons. Partnership 1. If a statute provides. Default rule→ don’t have to create one knowingly 2. held to a high standard. unless otherwise provided 8. Duties to partners • Fiduciaries to each other • Duty of loyalty→ main duty. 7. 9. partnership 10. that new person is not a partner and doesn’t have any of the regular rights 9. must be agreed by all partners and signed by all partners 6.
The BOD runs the corp. will be held and the ct will determine the partnerships worth If partnership does end you must wind up/liquidate→ sell off all assets and split accordingly. residual holder after all other claims are paid off. shows total assets and liabilities. Wrigley • Wrigley owed the Cubs. the profit here was in education. appraisal. claimed he though baseball was a day time game and was just stubborn • Ct held for Wrigley. that is what the board is for. Dodge vs. riskier than being a creditor but he potential pay off is better 6. 2. had other owners • One of the other owners sued b/c wanted to install lights in order to have night games (one of the few that didn’t have it at the time) • Wrigley claimed beneficial to neighborhood not to have lights • П claims Wrigley was rich and selfish and didn’t care if the Cubs made $. vs. usually a small group of people and usually have other jobs and meet 6 to 8 times a year.• • If partners can’t agree then a judicial proceeding. equity holders (shareholders) split up the corp profits. if anything II. come up w/more indirect benefits. Shlensky vs. Pres of the co wanted to donate $1500 to Princeton • Shareholders felt that donation wasn’t going to do anything to build the business or make more $ for the shareholders • Co defended itself by saying donating to higher education. You form a corp by selling shares of stock. possibly be educating future workers • Ct notes that this is not a pet charity and not for personal reasons 4. as long as the board acts w/good faith and on a reasonable basis and . Nature of the Corporation A. Co. Financial Statements • Balance Sheet→ shows assets and liabilities and how much equity your shareholder has. Ford Motor Co. ct basically lost its nerve b/c easy to pay out $ but hard to stop someone from building plant. however they do not run the company. Ct justifies by saying there was no proof that if install lights that more people will attend night games. shows shareholder equity and whether they lost or made $. 3. AP Smith Mfg. Equity→ proportional share of the profits. gives you the right to dollars in earnings. claimed what Ford was doing was against the best interest of the corp. 7. The Role and Purpose of Corporations 1. creditors get paid first and then whoever loaned $ and then who paid capital contributions and then split what is left. Ct says that п didn’t prove his arguments • Ct began applying business judgment rule→ ct is not there to run a corp. they are elected and manage the affairs of the corp. stockholders invest $ into the equity and get an interest in the profits of the co. • Ford owned 58% of the co and Dodge Bros owned 10% • Ford stopped special dividends and wanted to put that $ back into the co in order to build plants so that he could quit outsourcing and be able to do everything himself • Dodge Bros sued and argued that Ford wasn’t’ wanting to benefit them anymore and that the plant was to satisfy his own personal dreams. much bigger consequences w/this issue 5. • Ct sided w/Ford and let him build the plant but still has to pay out special dividends. Barlow • Provision in co charter not to allow donations to universities. always done at end of fiscal period. the ct could have really harmed his business if didn’t allow him to build the plant.
show legit reasons consistent w/not acting in best interst of the corp through community. Inc. of State’s Office. In La. Bylaws→ are subtext. no bad faith and no conflict of interest 8. Southern-Gulf Marine Co. Must file Articles of Incorp. have to file initial report which lists agent for service of process. Walkovszky vs. Barrett signed the K on behalf of Southern Gulf • Δ then tries to pull out of K b/c Southern Gulf incorporates in Cayman and not in TX as previously said • Ct doesn’t let Δ out of the K b/c they were given notice b/c Pres of Camcraft signed acceptance and acknowledged Southern gulf formed in Cayman instead of TX. must also file affidavit from agent of service of process that says they are the agent and they will accept things on behalf of the corp. Must follow formalities as set in state statute.they make an informed decision the cts will not second guess what they do. need extra wrongdoing to pierce B. C. 4. they are a fiduciary to the corp. . so if the notices are due there is a way to find them 3. must be able to prove not acting in the best interest of the corp. work out details of how meetings are conducted. In La. you must look to the best interest of the corp. Best way to rebut the business judgment rule is to bring up a conflict or s how that there is a contrary believe. How to form a Corp 1. When on the board you have duties and have to make disclosures or the corp will be able to recover for neglect 9. they can do it on their own 6. days notice to give shareholders. D. it is not just substance. If technically follow your duties and board approves it then not going to be held liable. Camcraft. • Δ made vessels • П corp was in process of being formed into a corp when signed K w/ Δ. he consented in a way for the substitution The Corporate Entity and Limited Liability 1. that is what happened here b/c no fraud.. A corp can act just like people and they are distinct from the officers and directors and have a separate roll in the process 8. put here b/c a board can amend bylaws and don’t have to go thru shareholders. w/the Sec. they want the board to get elected as quickly as possible in order to take the liability away from them 5. you can derogate from them by providing provisions in the Art of Incorp 2. Carlton • П hit by one of Δ’s taxi cabs • Δ owns 10 corps. the state stature sets out exactly what has to be included in the document • Names • Officers • Number of shares of stock • Name and address of directors or person who incorporated the co • You can add additional info but above MUST be included • If don’t want default rules as provided in state law. The incorporator has liablities and obligations under state obligation law until the board is elected. Form matters. more technically detailed info. no assets in the corps • Ct doesn’t see misbehavior by Δ so an agency argument won’t work • П then argues corp veil option→ ct says good policy argument but not sufficient to pierce the veil. 7. vs. Promoters and the Corporate Entity 1. all of which have two cabs and all w/minimum insurance.
can’t remember if he filed articles and they didn’t have bylaws • Ct says denied recovery is important but not the injustice the ct is looking for. depending upon state rules. 5. he didn’t even have a personal bank acct. In re Silicone Gel Breast Implants Products Liability Litigation • Bristol Meyers is the parent co of MEC (owns 100%). bills and vacations. • First rental came from Polan personally to Industrial and then no other payments were made • Income from the sublease was the only source of income for Industrial • Polan didn’t put in any $ when formed Industrial. all entities operate as one and it is run like one business. didn’t issue stock certificates and there were no other assets to satisfy the lease obligation • П tries to pierce the veil in order to get their $ • Ct looked at undercapitalization and failure to carry out corp formalities and ruled the test was satisfied and allowed pierce of the veil • If Kinney would have run a credit check could argue they were assuming the risk of nonpayment. Polan • Polan in 100% shareholder of Ind. but don’t get at any personal assets of any of the shareholders. Ct remands • On remand the ct finds other injustices→ he was evading other creditors and avoiding taxes and that was enough for ct to establish injustice • Ct allowed piercing of veil 4. Realty and Polan Ind. Bristol shareholders are not the shareholders of MEC but Bristol itself is the lone shareholder • The totality of circumstances must be elevated in determining whether a subsidiary may be found to be the alter ego or mere instrumentality of a parent corp: (1) the parent and the sub have common directors or officers (2) the parent and the sub have common business departments . Pepper Source • П is suing b/c Δ stiffed them on a shipping bill (when shipped peppers) • Δ entity no longer exists so п goes after Marchese and the other 5 companies that he owns. MEC manufactured breast implants. Industrial signs lease w/п. • Unity of interest→ (1) the failure to maintain adequate corp records or to comply w/the corp formalities. Marchese never held annual meeting. and (2) Circumstances must be such that adherence to the fiction of separate corp existence would sanction a fraud or promote injustice. not enterprise liability) • Piercing Corp Veil Theory→ A corp entity will be disregarded and the veil of limited liability pierced when two requirements are met: (1) there must be such unity of interest and ownership that the separate personalities of the corp and the individual no longer exists. must show unity of interest and injustice.2. didn’t elect officers. (2) the commingling of funds or assets (3) undercapitalization. they argue no formalities and want to get to him personally (corp veil theory. Kenney Shoe Corp. elected director and issued stock certificates • Prof thinks injustice here is very thin and ct was wrong in its application 6. Sea-Land Services. vs. they then sublet to Poland Ind. If you pierce the veil then shareholders are at risk for liability. and (4) one corp treating the assets of another corp as its own • Ct finds a unity of interest here b/c Marchese used funds to pay his alimony. Enterprise Liability→ if can’t pierce the corp veil then try to prove this instead. 3. Inc. Kinney might also could have asked for collateral or asked Polan to sign the K as a guarantee • To avoid this result Polan could have protected himself by putting in a minimal amount of capital. vs..
whether K or tort 9. Frigidaire Sales Corp vs. proof can be easy (Bristol) or it can be more difficult (Pepper Source). there was no misrepresentation who were officers. he approaches Pritzker about buying the co. (2) approved their budget (3) set up employment policies (4) put logo and name on packaging (5) purchased ins for them (6) suspended sales of certain products (7) officers of MEC were hired by Bristol and paid on their scale • Here have common directors and officers. Inc. Duties of Officers and Directors A. some common business depts. Duty of Care 1. Union Prop. but if you do sacrifice the formalities then you are at risk (Kinney). and (c) in best interest? 2. set the salaries • Ct doesn’t let Bristol out on the MSJ 7. board approves it only b/c he tells them that if they don’t they will get sued on fiduciary duty • Shareholders sue trans union • Ct uses BJR test: . Pritzker agrees to buy but lock in price to avoid ebay problem • Van Gorkom gets atty to prepare paperwork and then tells the board about it. Principles to apply when trying to pierce the veil • keeping up w/formalties and adequately capitalization of the corp shouldn’t be at any risk for pierce. Van Gorkom • Van Gorkom is CEO of Trans union.. Even if you can’t pierce the veil thre are other theories of liability to get shareholders or sister corporations • direct liability (breast implant case) • enterprise liability • could be liable for fraud (but extremely hard to prove) III. usually even having total disregard for formalities is not enough to pierce • must be some showing of injustice. had consolidated financials. most states require that result would not be equitable • try to tie some sort of shortfall to injustice • key to success in these cases is to show that it is just unfair that you can’t recover for whatever the entity did to you. (b) informed basis. • П wanted limited partners to be held personally liable • Ct refuses to pierce the veil here. Ct doesn’t find injustice here either 8. Ct says proper formalities here were met. Smith vs. such as keeping separate books and records and holding shareholder and board meetings • Bristol had control over MEC: (1) made sure manuf process was going as should. there was no evid of unity of interest and that is necessary to pierce the veil.(3) the parent and the sub file consolidated financial statements and tax returns (4) the parent finances the sub (5) the parent caused the incorp of the sub (6) the sub operates w/grossly inadequate capital (tricky) (7) the sub receives no business except that given to it by the parent (8) the parent uses the sub’s prop as its own (9) the daily operations of the two corps are not kept separate (10) the sub does not observe the basic corp formalities. board knows nothing about this. Business Judgment Rule Test: (1) Is there a conflict? (2) Decision by the board: (a) was it in good faith.
board is still given power to run the corp. Ct said if don’t pay attention and abdicate your duty then no protection of the BJR • B/c of the complete failure of a director to monitor the business of the co the ct doesn’t give protection of the BJR and eventually holds them liable 6. Derivative Action • When the corp is the only proper п • Shareholders step in and attempt to sue on behalf of the co to recover from them personally the damage that they have caused • Make demand upon the board. Caremark Intl • Ct says the board can’t be expected to know every little thing going on and a company needs to get the most important type of info up to them • Ct says the board needs to set up a system so that most important things will get to them. The BJR protects people who are making the immediate decisions regarding the co. no written materials. board can step in and decide whether to proceed 7. ct uses standard of gross negligence (c) best interest→ nor did the board not act in the best interest of the business. United Jersey Bank • Pritchard doesn’t get the benefits of the BJR analysis b/c it protects people that are active and she didn’t make any decisions or display any basic understanding of the business. • Entire fairness test: (1) fair price. Ovitz begins looking for another job but doesn’t want to get fired so that he can get the big severance package • Disney eventually fires him and the shareholders are upset at what he gets • Shareholders claim duty of care breach for negligent hiring and duty of care breach for not firing him for cause and allowing him to receive the 140 million $ package • Ct uses the BJR test • This ct sets the market on other side of Van Gorkom of how bad thins can be and not trigger liability 5. no expert opinions. everyone complains about him. We want boards to take economic risks. ct said you had no idea what Van Gorkom knew when he was presenting the stuff to you. Ct determines there was not an informed decision. Eisner • Eisner was CEO of Disney and he picked his successor. sort of a monitoring device and if don’t’ do this can be subject to liability • Ct said here there was enough monitoring by the board: training programs. manual and enough safeguards for the ct to say they were acting to monitor the situation 8. no deliberation when this was just sprung on you. it is easier to think of something in hindsight rather than in the heat of the moment. there was no research to see what the control premium should be and how high someone should pay 3. Francis vs. Duty of Loyalty Directors and Managers . Ovitz. B. there was no merger agreement to read. Brehm vs. he gets a HUGE K • Ovitz does a terrible job. The BJR protects rationale risk taking by directors.• • (1) Is there a conflict? No b/c no conflict b/w trans union board and Pritzker (2) Decision by the Board: (a) was it in good faith→ it doesn’t seem the board acted w/bad faith (b) informed basis→ this is a problem here by the board. Technicolor→ Ct will decide on fact basis whether the whole transaction was fair. they did not upon their fiduciary duty • Market Test→ ??? • Board can still be held negligent if shareholders getting more than the premium market value as is here. (2) fair dealing 4.
The ruling in Doran caused problems so the SEC implemented new rules: . SL &E. a license comes up for sale but don’t think that CIS is good candidate so approach Broz to purchase license on behalf of RFBC • Is this corp opportunity? Ct said the opportunity didn’t come to Broz as he was in his scope as a director of CIS. (3) size of the offer and (4) manner of the offering (this is the one the ct really concentrates on) • Ct says the more sophisticated the investor the less info you need to provide but the less sophisticated the investor the more info that the co needs to provide. must prove that the decision was fair to the shareholders • Ct said the decision to hire wife was fair. 3. Inc • Broz owns 100% of RFBC. to show they made a fair and reasonable decision (inherent fairness). it is a starting point for more accurate evaluations of a company • (2) Market Value→ what a willing buyer would pay a willing seller. positives are they are objective and easy to verify. • Ct doesn’t apply the BJR here b/c both boards for the separate companies are the same. the board. he knew CIS wouldn’t and couldn’t purchase yyyyybout oil and gas production) • Duran claims that failure to register this security is a violate of the Securities act of 1933. pay scale was like what they were paying the other singers • Ct said program was to benefit the co and not the wife • Notice the Pres was the only one w/a conflict. it is a professional value of a business. Broz v. in this case they didn’t show a fair and reasonable decision. she worked at the Metro Opera House and was a professional singer. Cellular Info Systems. defense was that it was a non public offer and was exempt b/c it was a private offer • Ct must look to: (1) number of offerees and their relationship to each other. negatives are that there is no correlation b/w what true worth and what costs are. this is critical in other methods of determining worth. you have the whole board here who is being questioned b/c of the Pres only. Ct assumes it as a conflict b/c who wants to cross their boss on a decision Lewis vs. (2) number of units. Beran • Pres of the co’s wife was hired to sign in the musical advertisement hour. accuracy depends entirely upon the market • (3) Inherent value→ what the company is really worth. whole board of one of the companies is benefiting • Ct says burden must switch and Δ must show fair and reasonable decision. how much $ this company can make regularly. CIS is a competitor and Broz is on the board and a shareholder. Inc. there is some guess work involved here b/c really trying to figure out how much it will make in the future and will it exceed the cost and if so by how much (discounting cash flow method) • (4) Asset Value→ how much $ you can get by selling off all the pieces of the company. ad campaign was legit and wasn’t intended to foster or boost the wife’s career. Ct goes further and says if really sophisticated don’t have to show you gave them the info but only that the investor had access to it 8.1. she also made recommendations of other musicians to hire for the musical hour • Ct says that when you raise an argument and the ct agrees that there is a conflict then the burden switches over to the Δ. there was no effort to tie value of prop to the stock Types of valuation methods • (1) Book Value→ shows on financial sheets equity of the shareholders. Bayer vs. 2. usually not used to value a current on going business Corporate Opportunities 4.
• § 11 case→ material misstatement or omission • Once п proves a §11 violation then ct moves to who is liable • The company itself cannot use a defense. practice. they are not provided a defense. or (c) To engage in any act. he told 11 of his clients there was going to be a certain acquisition that would result in a large premium. (2) Material misstatement or omission must be in connection w/purchase or sale of the security. (b) To make any untrue misstatement of a material fact or to omit to state a material fact necessary in order to make the statements made. directly or indirectly. which is different from other rule which can only be enforced by the SEC • It shall be unlawful for any person. 11. Ct said can anticipate times when duties as a lawyer and as a director must go to one or the other • Ct found expert liable 10. and Director liable • Ct found outside director liable b/c investigation not specific enough • Ct found director liable who’s law firm counseled Δ. and (4) Causation • Ct rejects the agreement in principle test and says that if a reasonable investor would consider it important then they would have to disclose it and it is therefore material • Ct uses Judge Friendly probability rule→ • Basic could have probably just stated no comment when asked about possible but merger and probably would have been ok • Fraud on the market theory→ ??? 12. Prudential Securities. in the light of the circumstances under which they were made. • Hoffman is a stockbroker for Prudential. (a) To employ any device. Rule 10(b)-5 of the 1934 Act • Individuals can sue to enforce this rule. in connection w/the purchase or sale of any security. scheme or artifice to defraud. vs.Regulation D→ series of safe harbors that issuers can use to come w/in the private placement exemption and avoid or reduce their required disclosure. claim that b/c Basic lied and they relied on their lies and sold their stock at an artificially low price • П need to prove: (1) A material misstatement or omission. by the use of any means or instrumentality of interstate commerce. not misleading. or of the mails or of any facility of any nation securities exchange. 9. Escott vs. West vs. BarChris Const. Corp. they didn’t deny but flat out lied and did so three times • Shareholders of Basic are suing b/c they sold stock b/w time of negotiations and before acquisition. Levinson ** (impt 10b case) • Basic mad three public statements denying merger w/Combustion. Basic Inc. Inc. or course of business which operates or would operate as a fraud or deceit upon any person. others who signed the registration is allowed to use a due diligence defense but must prove they reasonably investigated and didn’t find errors • Experts are only responsible for that portion of the registration statement that they have “expertized” • Ct found directors liable • Ct found Treasurer and CEO liable • Ct found in-house-counsel and Sec. but he was lying and acquisition never happened • Ct said no evid that the info leaked from clients to the public and therefore this was a private offer (Basic was a public newspaper) . (3) Scienter→ has to be intentional or reckless.
It is usually used in circumstances transaction is in question. Stroh vs. vs. only applies if own more than 90% of a company. Shareholder Voting Control 1. B. all that was in Medtest was this intellectual propery • One of the two shareholders sold security to a couple but told them there was a patent on the medical process • Ct said it is possible that the statement was material and there is a different in knowing have a patent and the possibility of getting one→ But the Ct remanded for decision 14. п’s claim they lied in order to keep the stock from doing down even more and if they hadn’t lied then stock would have continued to drop • П had call and put option and when price dropped he had to buy at artificial price • Ct ruled п had standing as purchaser to seek damages under §10b. If there is a duty of loyalty question. Medtest Corp. Beneficial Corp. State of Wisconsin Investment Board vs. Control in Closely Held Corporations . but still must prove at trial IV. Pommer vs. they were trying to obtain a patent. • Δ’s were in development of a medical process. • Ct says that the ownership of stock means that the propriety rights are given to participate in (1) the control of the corp and (2) in its surplus or profits or (3) in the distribution of assets • Ct says corp can place any restrictions on the corp as long as they don’t deny voting power→ can prefer one class over another • However if there is fraud that is different 2. Santa Fe Industries.• Ct said that private statements cannot move the market 13. Problems of Control A. generally you apply the intrinsic fairness test to determine if the directors actions were intrinsically fair (by sum total of all of their actions). Blackhawk Holding Corp. Green **(impt 10b case) • Short form merger→ provided by state statute. Deutschman vs. board adopts a plan of merger and once it is approved it can be implemented. • Ct uses the Blasius test instead of intrinsic fairness b/c there is no transaction at issue here • Blasius Test→ ??? the where a certain 3. don’t have to inform the other shareholders by law but only to notify them w/in 10 days after its adoption There is remedy if the minority shareholders are unhappy→ statute provides they may demand an appraisal of their shares and be paid a fair appraisal value of their shares • Santa Fe owns 95% of Kirby lumber and wants to acquire the remaining 5% by short form merger • The minority shareholders claim they were paid inadequately for their shares • SC says state law breach of fiduciary duty alone is not going to satisfy a 10b claim b/c it is federal and federal provides for specific types of harm • П’s here could due for their appraisal • Ct says claims relating to mergers that don’t have misstatements or omissions and when are not satisfied the decisions are left to the state cts 15. Inc. • Beneficial’s insurance division has a bad quarter and stock started going down. Peerless Systems Corp.
one of the shareholders. Ringling • Directors have agreement that will vote together on the same director. 6. McQuade vs. State statutes provide for close corps. (3) more adequate planning in advance could resolve the disaster on back end of pooling agreement. 2. put in agreement in advance that would give arbitrator authority to enforce the agreement and give remedies if breach and explain damages if breach 3. Ct says cannot abdicate that role by agreeing in advance that could harm minority shareholders and possibly make you breach your fiduciary duty as a board member and not allowed to react to certain consequences 4. Ramos s. (2) Dodge agrees to put Clark on the board and (3) keep Clark as the general manager • Different from prev case b/c have full 100% here and didn’t have that in McQuade. Estrada • Two different groups combined together but each member of each group had agreement they would stick together when it came to voting. Stoneham • Shareholders agree to elect themselves directors and as directors they agree to appoint themselves as officers • McQuade. don’t owe obligations to anyone except for themselves. there was NY state statute that provided that a magistrate couldn’t hold another office at the same time • Ct says shareholders can agree to do whatever they want. Clark vs. owns 25% and Δ owns 75%. shareholders have a more direct role than normal. one of the members didn’t vote how she was supposed to and then ousted and shares were sold to the rest of the group (as was provided in the agreement) • Δ argues that mad at her for using judgment as a director and really punishing her for conduct as a director. the board can do what it needs to do but there is a built in remedy for the employee. if can’t agree then arbitrator is to come in and tell them who to vote for. also different b/c general manager clause allows Dodge to get rid of Clark if he had to. was also a magistrate judge. • Vote pooling agreements are legal • Come from this case: (1) pooling agreement is ok. they agree (1) Clark agrees to give up formula. Dodge • Opposite outcome from McQuade • П. so allows him to live up to fiduciary duties • Ct found this K agreement was valid and ok 5. some thing may come up in the future that would require you to breach fid duty just to still be in accordance with the K.1. they are supposed to act in own self interest and it is perfectly legit. shareholders can in advance work together to elect directors. but there is that 1% of the time when duties will apply?? . one of the directors doesn’t vote how agreed • Ct says the concept of this agreement is ok and acceptable. (2) only as good as the terms themselves in the K. Ringling Bros. not weighed upon by fiduciary duties b/c shareholders don’t have fiduciary duties. they can get together in advance and agree to elect directors • But about the directors electing officers ct says that is unenforceable. instead of the board picking them (2) employment Ks→ if protect the job by K then don’t have to worry about board acting consistent w/fiduciary duties and also employee has K rights separate. Black Letter Rules of Close Corps • Shareholder agreements are ok. ct doesn’t buy that argument 7. McQuade and Clark give uncertainty so state legislatures have given some suggestions as how to satisfy but not completely resolve this issue: (1) bylaws of a corp can provide for other mods of electing officers. Barnum & Bailey vs.
Gray area • When own less than 100% of stock get together in advance and agree→ ct will look to see if there is a public detriment that would conflict w/any fiduciary duty in that case. could also sue for rights he had as an employee • What could have been done in advance to avoid going to ct? could have had a buy sell agreement to buy out fellow shareholders. • Wilkes buys prop thinking it would be profitable. if don’t have a reasonable explanation then the ct will not uphold b/c no way for directors to use their judgment in consistent w/fiduciary duties. he wasn’t complaining enough about mistreatment as a shareholder • . Ingle v. Springside Nursing Home. he spent his whole career w/this company. ct says probably an expectation here • Ingle is let go and Glamore’s son wants to buy his stock • Ct notices that Ingle has two relationships: (1) employee and (2) shareholder • П claims. Inc. but nobody knows exactly how far have to go to be reasonable (Galler) Abuse of Control 1. as Wilkes did.C. no board seat and no prospect of getting $ from dividends • Ct said others did it for the sole purpose of getting him out. and there was no business reason for his firing • Ct says there is a different w/duty to minority shareholder and duty owed to an employee. freezing him out • Board has to show (1) legit business reasons for firing Wilkes and if can’t show business purpose then they lose. could have refused to pay anything for his shares • What types of claims could have had if ct applied only typical standard? Could have filed a derivative action that payments were not legit for business (but very hard to prove). Glamore Motor Sales • П hired as sales manager. and (3) Ingle got $ for his shares • Ct says Ingle’s complaint is really an employment complaint and is not really a shareholder complaint. later allowed to by in to 40% of the company as provided in shareholders agreement. (2) Minority to prove that there was a less harmful alternative • Ct doesn’t get to second step b/c found that there was no business purpose for dismissing Wilkes. Ct says the status as a minority shareholder isn’t enough for Wilkes principle to apply • Difference b/w this case and Wilkes: (1) there was written and signed agreement in Wilkes. everyone agrees in advance and that is fair (Clark) 8. he now has no salary. (2) Ingle was employee before he was a shareholder. could have followed formalities a lot better. Wilkes started and founded the nursing home. they will all be active in the management and each will take equally • Disagreements began among them and they kicked Wilkes off the board. Ct requires other three men to pay Wilkes personally • What did the ct think the guys did wrong? Took away return on investment. terms also provided that if Ingle ever fired or wasn’t employee any longer then Glamore could purchase his stock • For 16 years Ingle is employed by Δ and is a shareholder. If 100% of the shareholders agree to take actions then that is also ok b/c no minority shareholder is there getting damaged. offered him what ct considered an inadequate price • What could they have done differently to make it legit and wouldn’t have breached their duties? Could have tied $ pay out to shareholders to performance of duties. he finds three other investors and they build the nursing home • They have an informal agreement that they will each get a seat on the board. Wilkes vs. maybe if had employment K for the services that he provided 2.
Wolfson wanted this provision b/c he didn’t want the other three ganging upon him The business becomes profitable and they get into a dispute over dividends. Inc. 5. all the evid put together showed an intent to freeze out minority shareholders by the majority shareholder. even though each piece of evid by itself would not be sufficient. problem w/that is that if win the $ comes back into the company • What could have been done in advance to avoid going to ct? could have had a buy sell agreement Smith vs. means individual gets a veto. also mad inadequate price offer to minority shareholders for the price of their shares • What could they have done differently to make it legit and wouldn’t have breached their duties? Paid himself a reasonable amount. if you put all of them together that is sufficient evid • What did the ct think the guys did wrong? Paid himself and his father too much $. and (3) reimbursement of penalty taxes by Wolfson Ct said the provision regarding the veto power reversed the general rule of the majority having control Ct says Wolfson was avoiding paying taxes on dividends.3. Duff and Phelps. Wolfson finds prop and puts up $50. Atlantic Prop. or give family jobs. probably should have just not made an offer instead of an inadequate one • What types of claims could have had if ct applied only typical standard? They actually did sue as a derivative action and that is the only action. pension wasn’t justified and his salary was beyond what he should have gotten paid. finds three others and they each put up $12. Inc. really only recourse was as an employee • What could have been done in advance to avoid going to ct? had a buy sell agreement here. needed a plan that he wanted improvement What types of claims could have had if ct applied only typical standard? Could have petitioned ct to dissolve the co (if deadlocked) What could have been done in advance to avoid going to ct? could have had buy sell agreement. could have had an employment K for services that he provided Sugarman vs. 4. the put the prop into a Corp They entered into an agreement which stated needed 80% vote to be able to do whatever. minority acting selfishly What did the ct think the guys did wrong? Blocking dividends w/out legit reason. Wolfson claimed he wanted to put the $ back into the co. the others wanted to get paid dividends They fight over this for years and are assessed a tax penalty by the IRS for 7 years Other three shareholders ask: (1) dividends. • . he had no alternative and was avoiding taxes and acting out of spite What could they have done differently to make it legit and wouldn’t have breached their duties? Needed a viable alternative. didn’t pay out dividends. Sugarman • Involves a (1) derivative action and (2) freeze out claim • Ct finds on derivative claim→ Leo has wasted corp money • Ct finds on freeze out claim→ Need to show bad faith.000. could have had a separate shareholders agreement Jordan v.500. What did the ct think the guys did wrong? As shareholder didn’t treat wrong but problem was how was treated as an employee • What could they have done differently to make it legit and wouldn’t have breached their duties? Look more closely to the terms of the agreement • What types of claims could have had if ct applied only typical standard? No shareholder remedies. (2) removal of Wolfson as director. didn’t buy his argument of putting back into the corp Case show extension of Wilkes principle→ can be done in reverse.
Inc. ct also found he had a lifetime K w/the co so gave him lost wages and future earnings. ct also gave him atty fees and expenses • Ct felt the other brothers were stealing from the co and didn’t want them to profit that way 3. second accountant comes in and doesn’t find it all but finds some • Other brothers go to odd brother and tell him to forget about the missing $ or he will be fired. and then told everybody at work that he had a nervous breakdown • Ct gives him damages for the 1/3 of the co that he owned. Pedro vs. must also prove causation→ more likely than not wouldn’t have left Ct doesn’t allow him to recover b/c say that w/the problems w/his family and his wife and mother he was going to move regardless D. Perlman vs. a week afterwards they announce buy out and he could have gotten ½ million for his stocks 10b5 claim→ must prove material misstatement or omission in relation to purchase or sell of a security. also wins b/c brothers breached fiduciary duty.• • • Jordan quit job and had to sell back his shares. Zetlin vs. Pedro • Three brothers own co together. . the bank • Ct said the merger didn’t trigger the shareholder agreement. Feldmann • Perlman is minority shareholder here. Fransden would have right of first refusal to buy those shares • Bank of Wisconsin wants to the bank and not the insurance co. Harbor Furniture • Harbor consisted of a furniture store and a trailer park. can’t sue if minority shareholder just b/c a control shareholder or group gets paid a premium price for their shares 3. Alaska Plastics vs. Duration and Statutory Dissolution 1. accountant comes in and finds nothing. in the meantime the co was in negotiations for a buy out. they all work their and have their own responsibilities • Some $ winds up missing and one of the brothers investigates into it. Coppock • 2. sisters wanted to separate the trailer park b/c it was making a lot of $ but the furniture store was consistently losing $ • ???? Transfer of Control 1. well they fired him. Wilport wants to buy this block b/c they want to control the steel company b/c at E. Inc. so there is to be a merger w/Δ and the shareholders are going to get cash for consideration • The deal is reorganized and instead of merger the corp is to sell its stock in the bank to First Wis and they get the bank and don’t have to do anything at the shareholder level and therefore Fransden isn’t involved b/c they sold an asset that the company itself owned. in it as an entity. Fransden vs. Stuparich vs. must also show reliance and that wouldn’t have quit working there if had known. he waits until the end of the year to leave b/c get more $ for his shares. • Control premiums by themselves are legit. п owned 8% of the bank • Agreement that if the 52% wanted to sell their shares. Hansen Holdings. Control. Feldman controls the majority block of stock here. Jensen-Sundquist Agency. the agreement didn’t discuss a merger 2. • Jensen-Sun controls majority of bank and has an ins co. it has to be knowingly and has to have caused damages.
this time there was a shortage and they knew if they acquired this block they would get first access to the steel • Wilport paid $20 a share and market price was $12. directly or indirectly. not supposed to get anything “extra”. TX Gulf Sulphur • Mining co found mineral rich spot in Canada. (1) to employ any device. scheme or artifice to defraud. vs. Benefit is it returns greater value. Yates • Yates was Pres of Republic Pictures (control block being sold here. so you pay a low fee to freeze that price. Agassiz • Directors in a commercial corp stand in relation of trust to the corp and are bound to exercise the strictest good faith to its prop and business • However. not elected every year • Also in the K to get immediate control of the board • Ct says selling office is not ok but selling control premium is ok. Only knowledge was existence of a theory in thesis of geologist. or to omit to state a . In fact. disclosure would have been detrimental to other mining companies in which they were directors. can’t say if you elect me CEO I will pay you each $2 million. But it is riskier b/c you could lose all the $ you invested in the option • Rumors of major oil strike were circulating • Confirmed in a newspaper release. Inside information 1. even if it shoots up and becomes worth much more. Yates controls 28% • Essex has unusual board set up. Goodwin vs. (2) to make any untrue statement of material fact.4. other shareholders were upset so they sued • This cases raises the issues: (1) is it ok to give a control premium? And (2) is it ok to sell off corp assets or offices? • Ct doesn’t really answer these questions but raises the issues Essex Universal Corp. SEC vs. by the use of any means or instrumentality of interstate commerce or of the mails or any facility of any national securities exchange. if getting something extra. • If had disclosed the info and it would not have come true that could have resulted in liability 2. not exercising judgment on behalf of shareholder but getting personal gain for carrying out fiduciary duties V. had a classified or staggered board which split directors in groups and only elected every year when director needs to be elected.3000 calls has been purchased by employees • Call option→ options to purchase shares of stock at a fixed price. • Was there fraud here? Ct said no. belongs to co as a whole. started buying up large pieces of land around that area • They ordered it to be kept a secret but during Nov and March 7000 to 12. In response the VP drafted press release asserting the nature of the article was incorrect • Rule10b-5→ it shall be unlawful for any person. you can’t pay somebody and get that separately • It is illegal to sell the office or corp asset. He was at no obligation to expose the theory. Insider Trading and Liability Issues A. they are not trustees toward indiv stockholders • Test→ when buyer seeks out stockholder to buy his shares w/out disclosing material facts w/in his knowledge and not in knowledge of the seller the transaction will be strictly scrutinized • Fraud cannot be presumed!!! It must be proved.
be of a sort that would cause reasonable investors to rely upon False misleading. Ct needed to come up w/some limiting principle. SEC . Encompass any fact in reasonable and objective contemplation MIGHT affect the value of the corp stock or securities. “in connection w/”→ the point of the rule was to protect the investing public and secure fair dealing. Whether a fact is material will depend at any give time upon a balancing of the probability that the event will occur and the anticipated magnitude of the event. whatever it may be. Chiarella vs. deceptive→ ct remands b/c record not clear 3. SEC was very upset about the decision in Chiarella so they passed Rule 14e3→ if a company is about to commence offer and someone learns about it then they cannot trade based upon that information. specifically look at insiders.• • • • • • • • material fact necessary in order to make the statements made. Another factor is that materiality is based on how insiders act (they though it was material. in the light of the circumstances under which they are made. US • Ct used the fiduciary duty template they had created: either have to be an insider or get info from insider who breached their fiduciary duty • He got the information from the acquiring company bringing in the info into his printing office • No one w/fiduciary duty to target shareholders was even aware of what was going on • So he bought stock of that co that was going to be acquired. Congressional intent. lead to Chiarella (2) other tension is have seen breaches of fiduciary duty that are not alone enough to find violation of 10b-5. 4. Whoever is doing the trading has to be breaching a fiduciary duty. Trick w/insider trading is that not all omissions are bad. used tender offer rule to stock in new limitation to apply. 6. You must disclose publicly what you know or refrain from acting in yours or others best interest So no excuse that the corp forbid disclosure of the info Test for materiality: Basic test→ would a reasonably prudent investor attach importance in determining his choice of action in the transaction in question. Ct said not a real predicted danger here that the corp board members will decrease (that was their argument) YES IT WAS MATERIAL and the stockholders who purchase violated the rules Corp defense→ Press release was not issued in connection w/the purchase of a sale or security and alternatively SEC failed to prove it was false or misleading or deceptive. However. The info must be of the corp and if trading on it then you can be breaching duty and hurting people by making personal gain. Santa Fe→ if all you’ve done is violate duty of care then have state law remedies for that and don’t have fed securities law remedy. but he wasn’t connected to anyone who owed a fiduciary duty • SC let him off. Tagging the violation of breach of fiduciary duty tensions (1) tension b/w general idea that is pushed hard by the SEC that want a level playing field and only finding violations where there is a breach of fiduciary duty. (3) to engage in any act. only that device employed. 5. not misleading. Insider trading violations are a subspecies of 10b-5 violations. 8. or. the ct left out what duties he owed to who • SC was limited to the fiduciary analysis they had created so they couldn’t hold him liable b/c didn’t squarely fall w/in it • This case is eventually overturned b/c of Rule 14e by SEC and the O’Hagan case 7. You also owe duties to your shareholders. practice or course of business which operates or would operate as a fraud or deceit upon any person in connection w/the sale or purchase of any security. Dirks vs. separated state law duty breach claims from 10b-5 claims.
So no fiduciary duty breach and no personal benefit • This case creates question: how do you tell if breach of fid duty and how do you tell if there is a personal benefit? 9. O’Hagan • O’Hagan is an atty who works at law firm that was hired by GrandMet. US vs. Dorsey. Ct still dying the violation to the breach of a duty. but doesn’t owe any duty to Pillsbury • O’Hagan buys stock in Pillsbury at market price. • Ct said no personal benefit there he was only trying to expose fraud. tip from insider that has lead to discovery of material nonpublic info and people are using that info to sell stock at a profit • SEC charged Dirks w/violation. Chestman • Husband learned of acquisition of the family grocery store thru the wife. He took their valuable info and used it form his own personal benefit. • So O’Hagan owes duties to GrandMet and his law firm. Dirks also told some of his own clients and a number of investors about what he knew • Now have. GrandMet is preparing a tender offer of acquiring Pillsbury. parent. then tender offer is announced and he sells his stock and makes over 4. abstain or wait for disclosure. ex-manager from Equity comes to Dirks and tells him of illegal things that have been going on (fraud and stuff) • Dirks has no connection to Equity. he can’t use it either • SC adopts the misappropriation theory. mother learned from husband. SEC rule for when relationship of confidence exists and when duty is imposed upon tippee: (1) if make agreement to keep something confidential then inherit insider duties (2) if they have a pattern of sharing confidences (3) if have direct family relationship that imposes a relationship of confidence (spouse. Just like the CEO of Pillsbury couldn’t use the info to make a profit. wife learned from mother. or child) 11. SEC says there is a clear chain of info • Ct says when someone is in (1) violation of their fiduciary duty AND (2) they gain a personal benefit we can extend liability. Ct ruled that if you woe a duty to someone else and you misappropriate that info and use it form your own personal benefit then the ct will hold you liable • Misappropriate theory: rooted in the fiduciary duty analysis. 14(e) 3 – special rule that imposes duty of disclosure on anyone who trades in securities when in possession of material information that know is nonpublic. sibling. But every time the insider discloses that doesn’t automatically pass the duty but only when improperly disclosed.A Sr. • Ct didn’t find husband liable of insider trading b/c had no fiduciary duty • SEC also got very upset about this decision so they made another rule 10. SEC says that insider has obligation to either disclose info or abstain from trading. This theory broadens the scope of possible group of people who violate could owe duty to. SEC’s position is that someone who gets tipped by insider then their obligation transfers to the tippee (TX Gulf Surphur) • SEC says his clients that sold on his tip info violated 10b-5 b/c traded nonpublic info they received two steps back from insider. So not bound by obligation to abstain or disclose. He works for a broker dealer • Dirks tells a Wall Street Journal report of what was told to him about Equity. he actually does investigating himself and finds out from some employees that something is going on.3 million • SEC prosecutes a 14e3 case and a 10b-5 action • O’Hagan uses Chiarella argument and thinks he is ok • SEC gets around that by saying he owed duty to GrandMet and his law firm and he breached those duties. tender offer 12. It overturns the Chiarella case. Now anybody w/ a similar relationship of trust • .
The transaction that made them a 10% shareholder and elevated them to that status can’t be used to show a profit. If you improperly take that info and trade on it then can be held liable for 10b5 violation. Foremost-McKessen vs. Provident Securities • Ct rules that have to be a 10% shareholder before the purchase or sale of the stock for §16b to apply. and confidence and you owe that duty to them and it is their info then this theory applies. (2) Requires that any insider who makes a profit off purchase of sale w/in 6 months of each other must reimburse the corp. Not every single person that has ever filed a business corp.000 shares . 2. 4. It is a strict rule and if you don’t meet form of the rule then not going to apply 8. really only big companies.• • B. • OPC is trying to acquire Kern thru merger but the merger fails • Kern decides to tender offer for shares of stock. For 10b-5 action there has to be deception and in this case there is deception b/w O’Hagan and the people he owes duty to Ct says SEC has not exceeded their authority w/14e3 and O’Hagan is clearly liable here Short-Swing Profits 1. The cts match stock sales and purchases in whatever way maximizes the amount the company can recover. director or 10% shareholder and if you were then you will be liable for that profit. Shareholder is laibel for the short swing profits that he or she makes on any class of stock. have to file report w/the SEC and that puts the world on notice that the insiders are trading. directors and 10% shareholders must pay to the corp any profits they make w/in 6 month period from buying and selling the firms stock. Cts consider classes of stock separately. v. 5. Officers and directors are subject to 16b if they occupy that position either at the time of the purchase or at the time of the sale. Emerson Electric • Emerson is buying stock in Dodge. 3. Any stockholder of the company can sue to recover the profit. 9. §16(a)→ only applies to those companies that hit threshold. §16 of the SEA of 1934: (1) Requires insiders to disclose all of their trades. 7. But the profit must go back into the company. willing to buy 500. Were you an officer. Occidental Petro Corp. 6. Anytime you buy or sell stock. To calculate a companies recovery a ct must match a defendant’s purchases w/his sales. §16(b)→ Officers. The rule only applies to someone who is already a 10% shareholder. Kern County Land Co. Dodge and Reliance eventually merge • When Emerson realizes merger they need to get rid of stock so they sell and go from 13. • This case shows that cts look to form over substance. There is no obligation to pay back. Since below 10% in the second sale then not liable under 16b.000 shares. Reliance Electric v. **This is the key element. they extend to the offer for another month • At the end of the term they end up w/over 800. argued that they were deliberately trying to get around the 16b rule and that they planned to sell stock in two separate sales • Emerson claims that for the second sale they were not a 10% shareholder • Do you take into account the transaction that makes you a 10% shareholder? Ct says NO.96% shareholder • Emerson sold remaining stock in a second sale • Reliance brings a §16b action claiming two sales w/in 6 months.2% shareholder to a 9. W/OUT ELEMENT OF DECEPTION THERE IS NO MISSAPPROPRIATION THEORY.
Ct says look to the purpose of the act when looking to expand “sale. . The exchanges were not sales for the 16b purpose Ct says look to see if there was any speculative abuse or any opportunity to improperly use insider info. and there are two points w/in 6 months where gave up rights and securities and want those to be consider as sale Ct says that neither of them are sales. No liability b/c purchase sale was 6 months and 3 days apart. There is an option that Tenneco agrees to buy back shares that OPC is going to get and to make sure don’t have 16b liability they must wait 6 months and a day Kern points to the merger as a sale. Ct looks at formalities. Ct will use this to determine if something is a sale. Ct found no evid that management was helping OPC here.• • • • • • Kern’s officers sent letters to shareholder telling them not to sell b/c of a possible merger w/Tenneco Board approves merger w/Tenneco.
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