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o Agency/partnership
o Bringing claims
Need to know case names
Can use any abbreviations
Can bring calculator
Dont be startled

Courts spend most of their time trying to figure out if someone has satisfied her fiduciary duties
o Agent satisfied fiduciary to P
o Partners to each other
o Directors/officers to shareholders
Courts like to follow the money
o Businesses are designed to generate cash
Future Value / PV
o Firm foundation theory what is this business doing?
How much cash is there likely to be in the future?
Predicted via discounted cash flows
o Castle in the Air no, we just compare this company to other companies like it, and
assume that it will sell to similar situated companies
E.g. merger value of Time Warner
o Predict out the cash flows of the combined TW for the next 5 years, discounted back to present
value, then that number would be $250
o Time BoD gets to choose lower price today (Warner) over the higher value of the deal today
Then gets to show that Warner would be worth more in the future
141(a) business and affairs managed by BoD
Directors get to pick the horizon
o Did the directors satisfy their fiduciary duties?
Look at via DCF
o What if numbers are big now?
Revlon intermediate space of enhanced business judgment
If inevitable company is going to be sold, then the BoD must get the highest price
for the shareholders
Thus, all the hostile bids that were looking at (e.g. Perlmann in Revlon - $25 starting
pre-merger price)
o No need to discount to present value, because Perlmann is essentially paying
for it today
o Very high bid flips the company from Unocal/Unitrin to Revlon
Unocal/Unitrin identify the threat, threat could be that favored transaction worth more
in the future
Valuation analysis helps determine fiduciary duties in simple cases
Valuation analysis helps determine fiduciary duties in hostile cases
Duty of Care (informed basis, good faith, reasonable belief in best interests of the corp) first director duty
Once protection of BJR, then no more suit for the complaining shareholders, because court will not
substitute its own judgment for that of the directors
o have to demo that directors dont get BJR
Not informed AmEx pay worthless stock as dividends or sell worthless stock and get
the tax benefit
how have they satisfied their duty to inform? Via valuation!
Did not make a decision failure to act
Duty to Monitor cases shareholders pay for all of this
o Allis-Chalmers BoD only have to monitor if theres a red flag (give rise
to suspicion that there is wrongdoing)
o Caremark yes, only address if red flag, but you cant hide from the
information. Must make an information and reporting system, has to review
that information as it becomes available.
Standard for failing in these cases are really really high
Failure to satisfy?
Gross negligence, not merely negligent
Absolute refusal to establish Stone v. Ritter (utterly
Or, consciously disregarding
Pretty much always exculpated
o Francis v. United NJ hapless Mrs. Pritchard
Directors, once aware of problem, must ask the bad conduct to stop,
must resign, report, or sue the other directors
Something evaluated on case-by-case basis
o (under exculpation) excluded are breaches of duty of loyalty, acts not in good
faith, and illegal acts
what constitutes bad faith?
is there something bigger than bad faith?
Walt Disney no separate duty of GF, GF undergirds
loyalty and care
Yes, Walt Disney (quoted in Lyondell) would be a very difficult
claim to make
Could be case that BoD of brokerage house, see that 3 other
brokerage houses for violations for prohibitions against
harassment, considering if you should implement this policy
o If you hired experts to come in, put in place these
policies, then you considered info and made a
buesiness decision that your company doesnt have to
put in those policies
o E.g. if you employed only women, then maybe no
need sexual harassment claim
o E.g. if experts hired said 30% of the people here have
reported formal or informal harassment
o Then fiduciary duty said put in information and
reporting system
Absent some statement that required to do something about
fiduciary duty, and refuse to do it, then yes, duty claim
otherwise likely exculpated or BJR
Knowing violations of law
AT&T v. Miller no matter how good it is, still will not receive protection of the
BJR cannot allow knowing violations of the law
102b-7 exculpation no damages for breaches of duty of care
Lyondell court sets aside the entire duty of care claim
o If transxn already completed, then no injunctive relief
o If duty of care was about setting compensation for CEO without properly
evaluating her work, then injunctive relief could be hiring a compensation
o Did not understand the business (e.g. Theranos)
Almost every company has this absolutely no damages, dont proceed with claim,
because no relief to the shareholders
Emerald Partners even if could share breach of duty of care, then BoD can show entire
fairness (p.313)
Hard to show fair process (because probably acted grossly negligent)
But, BoD could show fair price
o Consistent throughout all of DE law

o What happens in Washington? Absence of disclosure is a per se breach of the duty of loyalty
Hayes v. Oyster didnt tell standing both sides of the transaction
All evidence was that transaction was fair to both sides of the company
In Washington, the absence of disclosure is a per se breach
In Delaware, Hayes wouldnt have been able to condition no full information
o Wouldnt have been able to show ratification of disinterested shareholders
o Would be able to show entire fairness
Not fair process, maybe fair price
o DE courts always want to leave room for entire fairness review
Want transactions ultimately in best interest of the shareholders, relatively high
price goes through even if the process is flawed
How do safe harbor statutes work?
Cooke v. Oolie Can have approval of disinterested directors; 1 on both sides, other 5
approved (disinterested) then the disinterested dirs have the protection of the BJR
Same thing happens if ratification of disinterested shareholders; fully informed shareholder vote,
then gets BJR
o For duty of care kills claim
o For duty of loyalty Wheelabrator
Lewis v. Vogelstein Waste is a very high standard
o If transaction is characterized as wasteful, then shareholders must do a unanimous vote
(not mere majority)
What about controlling shareholder?
o Controlling sher elects BoD fiduciary duties of the directors bleed onto the controlling
o Sinclair Oil Might be able to show no conflict at all?
Sinclair 97% dividends to parent; 3% to shareholders
Pro rata share of the dividends, so there is no conflict
This is a pretty rare thing!
What if controlling sher is director uses their own company (e.g. dean diller using
janitorial services for company where)?
o Benefit to the detriment
o Something on pro rata basis might trigger
o Cant get disinterested directors, you elected all of them
o Could get disinterested shareholders
Weinberger v. UOP must demonstrate fair process and fair price
Special committee comprised of directors he elected, but not of directors who
otherwise worked for him (not also officers, only relationship is as director)
independent directors conducting arms length negotiations over the price
What about M&A?
Wheelabrator burden shifting
Controlled mergers
o Weinberger:
DGCL 251 once merger approved by board and shareholders, stock
evaporates and just get right to receive merger consideration
E.g. $13/share, board approves, minority shareholders approve; then all
that stock in 40% minority shares . . . becomes right to buy
o Squeeze out / cash out / freeze out
Designed to get rid of pesky shareholders
o Lynch Communications :
If approval of maj of min shers, or special committee
BOP shifts to to show a lack of fairness
Then there will be an entire fairness hearing very expensive for
everyone lots of discovery, experts testify, court has to sort through all
of this shit and reach a ruling
But, if bears burden of showing lack of fairness, then less likely to bring a suit
Harder to show a lack of fairness
Diller would line up all the lawyers and investment bankers to make sure
that he can demonstrate fair process and fair price
Significant impact on the number of suits that are brought
o M&F Worldwide changes everything! (controlled merger)
Controller ab initio (has to announce that they are a controlling shareholder in
the company and their intent and their price, but will not consummate unless (1)
committee, (2) maj of min)
Fight is over the effective special committee
Big fight is over the independence of the directors; independent because
not standing both sides of the transaction and also not employees of the
But in M&F, Perlmann owns sooo many companies, so a director that
wants to serve as a director on any of his other companies, then youre
gonna be obedient
o Fight is over independence
DD controls everything price, factors, etc.
M&F says that, if controlling sher conditions that merger on (1) approval of
effective special committee AND (2) maj of min shareholders, then gets BJR
All has to do is show effective special committee
Own investment bankers and lawyers, studied transaction, negotiated for
a higher price, etc.
Then gets BJR protection
o CNX Gas Corporation (tender O-short form merger)
These combinations are just techniques (tender offer, sales of assets liabilities,
merger, etc.)
will buy any and all shares at $13/share and see how many shers
tender to him
same standard is applied to tender offers as would be applied if party did
a squeeze out merger (just a different technique)
committee of board of dirs. (independent and effective) that recommends the
tender offer to the shareholders AND maj of min tender
that transaction gest BJR just like it would if it were a merger
Chancery court decision!!!
NOT a Supreme Court of DE decision; might not be as solid as M&F
Worldwide (Strine wrote CNX, now CJ of DE Supreme Court)
Same burden shifting as M&F? Gentile says yes
DGCL 253 once you own more than 90% of the shares (then you can
do cash out / squeeze out / freeze out mergers) then you can just
notify the shareholders, heres your check yada yada
o Only reason a controlling sher is to get rid of every single one of
the minority shareholder
Either MERGER (becoming right to receive merger
consideration when cash, gets shers all out) OR
o Typically do 51%, then try and do a merger under Lynch; if you
miss your tender by even one share and are at 89%, then you
fucked up
How closely do the courts look at what happens?
o CNX fishy, some shareholder holds roughly equal stakes
Court looks very carefully act actual facts, true economic circumstances in both
Lipsky kept saying no, I dont think this is a good deal
Overlap between Williams Act and DE jurisprudence?
Williams Act BoD should tell shers its view
Under CNX, seems on the facts of the case (where unusually special
committee was very active in challenging controlling shareholder), then
special committee would have to recommend the action
o ON EXAM: whenever there is a tender offer, she will say
having satisfied all obligations under Williams Act
o Want to get out of scrutiny?
M&F Worldwide offer a high enough price to get out
CNX is chancery court, so better to stick with the M&F situation (what you
want to go under)
Also why would you ever do a tender-short form merger if you could do
a merger?
DGCL 262 you can sue for appraisal proceeding entire fairness?
o You have to bring that suit to demo that the price is too low
Derivative actions?
o How are directors sued?
Private attorneys! Plaintiffs bar
AJ Fletcher incentives are the double agency costs; has incentive to bring meritorious
suits and also strike suits; dirs. Want to settle meritorious and also want to settle non-
meritorious (breach of duty of care (idiots) or loyalty (self-dealing, thieves) because they pay
it out of the corporate treasury (shareholder money)
Market Rule?
o Hanson Holdings Market Rule for control premia
Notion of corporate opportunity (NOT ON EXAM)
Opportunities that come to a director but could possible go to the corporation; DE
amended statute to essentially wipe that out (tech companies were litigating a lot
because all these ideas were coming at them, VC firms challenging, etc.)
o Cellular Communications tells you if director can keep the corporate
o MIGHT BE ON AN OLD EXAM if facts dont make sense, then just
move on
o IF YOURE TAKING YOUR OWN EXAM go get a drink of water
Perlmann v. Feldmann (collective opportunity = RARE)
CEO Feldmann had an idea to Newport Steel company that (for some reason) the
buyer wasnt going to use
o Think about Time Warner (evaluated under Unocal/Unitrin threat to
corporate enterprise) threat was that the shareholders would not realize
that there is much more value $250 over next five years v. $200 of
Paramount now protection of Time culture
o Almost anything can be a threat so enhanced BJR mainly like normal BJR
Peculiarity here court found collective opportunity, something in corporation that
the seller wouldnt honor
o Feldmann Plan was a way to modernize the NewPort Steel Company
o Wilport didnt care because just wanted the steel
EXCEPTION TO MARKET RULE BECAUSE: new controlling sher viewed
as very bad for the minority sher
Delphi Financial Services if control position is sold, we get to share in that control
EXCEPTION: controlling sher coercing minority sher - $54 for him and $45 for
shers; Court let it go to the fully informed shers
Courts dont want the money to evaporate, dont want to stand in the way of shers
getting a premium
o $19 $45 is a big deal!
Last exception: selling to looters
Final piece of duty of loyalty?
o Executive compensation
Whats the trick with executive compensation?
Someone has to stand on both sides of the transaction;
CEO pay?
o when CEO negotiates salary, then BoD nego for company, CEO nego for
herself (minor conflict: dirs. held responsible for CEO relationship, but can
also fire)
o Informed basis and GF, dirs. get BJR
BoD paying itself?
o Conflicting transaction
o No disinterested directors, all negotiating their own pay for themselves but
could get the approval of the shareholders
Most shers are going to be directors
Shers must vote on EXACTLY that compensation (NOT omnibus
compensation plan that does not cleanse Citrix case?)
o Fair process compensation consultants, fair price within the same range
Goldman Sachs shers complaining about excessive compensation paid to all the
o Shers cant claim breach of duty of loyalty dirs. negotiating on behalf of
company for pay going to employees
o Directors get BJR unless they are not informed
o AmEx selling the shares and tax benefits v. pay worthless as dividends
o Closely held corporations
Punctilio partnership duties
Must sell within, not sell into the marketplace
Court held in Rodd v. Electrotype (MA case) when selling shares back to the
corporation, all shers should be able to sell at the same price
If cant do all shares, then pro rata basis
Nixon v. Peabody (DE) allows disproportionate repurchases, because typically the one
being bought out is the ineffective CEO thats about to retire

Shareholders most focused on efficiency (because they are paid last), we as a society want them to vote
JetCapital case can easily bribe shers to vote the way you like
o Not per se illegal evaluated on case by case basis
o Like Delphi Financial deferential to fully informed sher vote
Clearly being coerced for accepting the split, but Court was more than happy to let them
take that coercion if they voted on that informed basis
o Same with bribes
As long as aware for who was bribing (Jet Cap clearly being bribed with TX Air merger
shers were fully aware and voted in favor of the bribe)
Made it permissible
Controlling minority structures
o A/B (A- 1 vote per share, B- 10 votes per share) what Rosenkranz had in Delphi Financial
o Pyramiding
One company at top that owns 50% of another company that owns 50% of another
company that owns 50% of another company
Very quickly youre down to 12.5% (economic interest) still able to elect the directors; 50%
allows you to vote for all when youre up top
Dividend payment system taxation in the US would make everyone pay everytime
it flips up and thats not the case in the EU
Veil Piercing
o (1) Disrespect of the corporate form (failure to keep good books/records, commingling of assets)
o (2) standard of review?
Sea-Land 2 prongs (Van Dorn Test)
Laya option 3rd prong (Kinney Shoe)
If your client is person seeking to pierce, then you want Kinney because all you have
to show is undercapitalization
o But, if std of review is Sea-Land, then harder to satisfy
Flip if your client is trying to protect against veil
o Aligned with all the other stakeholders, against the shareholders
Employees, customers, etc. just want the company to survive
E.g. creditors want donuts to shut down the coffee business and to keep doing their
shit, keep everyone else working
o But shareholders, want the company to go invest in some brand new scheme
because if company survives creditors get paid, shareholders get dividends
as profits
o Creditors interests much more aligned with other stakeholders (suppliers, customers, employees) so
we want to protect them
o How do we protect them?
Mandatory disclosures at most once every 3 months not enough
Capital controls distribution constraints re: what dividends can be paid out
Capital surplus goes into that
Problem: distribution constraints are binding when they dont need to be, and dont
bind once the company has a lot of money
When statutes dont work, rely on duties
Director duty corporate enterprise as a whole (zone of insolvency) Credit
o Directors have personal liability for any dividends that are paid improperly
Other creditor duties fraudulent conveyance as sinks into bankruptcy, then
transfer money to less than fair value to someone else (creditor)
o Emerges, and then gets assets back, and then restart
o Court drags assets back into the company so old creditors get paid
Shareholder duties
o Costello v. Fazio took some of the companys equity and converted it into
debt, bankruptcy? Debt gets paid first and then equity gets paid
Leonard only has $2k, Costello and Fazio reduced to $2k
Equitable Subordination: court uses equity powers to subordinate
debt back into the equity layer so same amount of equity as when it
was a partnership
Test: looks at the motive of the controlling shareholder
o Veil Piercing
Agents owe to P
Dirs./officers to shareholders
Partners owe duties to one another
o Pappas v. Tzolis clueless partners, in order to get $1M, need to sign piece of paper waiving their
fiduciary duties
(same for limited partnerships)
fiduciary duties can be waived!
Adams v. Jarvis, Page v. Page winding up, collecting all assets, use assets to pay liabilities, whatever is
left is paid to the partners
o Unless there is this type of winding up, then partners are liable for those partnership debts

ability to bind principals?
o Want to put the burden on the party that eliminates waste
o Cargill Warren grain and seed company co. goes bankrupt and the farmers sue Cargill because
their grain is all up in there
Found that Warren was Agent, because that is what is efficient Cargill should check on
o Hanson v. Kynast lacrosse player
Looking for where the money is no money from the university to the player, so no agency
Ability to bind principal in K?
o Authority
Apparent manifestation from the P to 3P that A is authorized to act on behalf of the P
White v. Thomas wanted to buy that land that was sold, P didnt want to
recognize, A had blank check (authority to buy and not to sell)
o Court (at first blush) takes different approach Thomases should have
Allowed White to cancel the contract
White was pretty clear she didnt have authority to sell on his behalf
Blank check = clear manifestation of authority to buy and not
o Thomases even questioned her about it
o Clear about who agents are and what they have
Gallant Insurance clear that only way insurance K can be altered is if Gallant
approves, in the manifestation and communication directly to the 3P
o Problem is that Gallant allowed A to make modifications without its
o Found inherent agency power to protect 3P
o Fits within rubric of putting the onus on the P
o Telling Ps whatever you manifest, you are bound to it!

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