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o Rule: According to R(3) 1.01, agency is the fiduciary relationship that results from (i) the manifestation of
consent by one person (the principal) to another (the agent) (ii) that the agent shall act on the principals behalf
(iii) and be subject to the principals control and (iv) consent by the agent to so act.
Binds by principal by words or action.
o Manifestation of consent is objective and required for agent and principal
o Parties may unintentionally fall into agency relationship the key is being subject to the principals control
Gorton v. Doty Doty authorized Garst to drive her car and exercised sufficient control to establish
agency relationship by saying Garst is only one who can drive condition = control
Note: Consent was good enough for ct solely by coach driving and solely by Doty giving keys.
Cargill Cargill exercised sufficient control of its debtors business to be liable as principal by placing
supervisor on sight, aggressively financing, and having veto power over all transactions (totality)
By contrast, veto over specified amounts OK
o Agents liability on the contract (undisclosed principle)
Atlantic Salmon Curran purchased salmon from P, but did not disclose he was acting on behalf of a
corp. Curran liable. P deprived of ability fully evaluate the contract. Must disclose that there is a P.
If principle is undisclosed to 3rd parties, actions taken by agent in furtherance of the Ps business binds
the P (agent is also bound!) Watteau v. Fenwick
UP is liable for acts of A done on UPs account, if usual or necessary in such transactions,
although forbidden by the UP.
1. Types of Authority conferred to Agent:
a. Express/Actual what P expressly told A he can do
b. Implied Incidental to what P expressly told A he can do (emanates from express authority)
a. Mill Street Church v. Hogan Hired brother in past; Church knew job required help; Helper suggested
by church was unavailable. Church was liable when brother got injured.
c. Apparent Look at Ps manifestations to 3rd party and whether 3rd party reasonably relied
a. Hogan had been hired in past salary paid then and now. From Sams perspective, Bill had authority
b. Three-Seventy Leasing v. Ampex Ampex (principal) articulated to Joyce (3rd party) that Kays (agent)
would handle the sale Joyce relied by corresponding w/ Kays (who had the apparent authority)
i. Apparent Authority when principle acts in a manner as would lead a reasonably prudent person
to suppose that the agent had the authority to bind his employer to sell.
d. Inherent Based on job title
a. Watteau he had the authority to buy beer, but not cigars, then he bought cigars
2. Fiduciary Obligations of Agents Duty of Loyalty
o Agents duty to be fair/honest/exercise food faith in dealing w/ P Avoid COI, competing with P, etc.
Common issues: (1) Secret Profits, (2) Usurpation of a business opportunity, (3) Conflict of Interest
o Test Agents behavior resulted in financial gain for agent to the financial detriment of principal. Both parts
are required. If A referred away business for no personal gain, there would be no breach.
A. Secret Profits A accountable to P for profits obtained b/c of As position and w/o Ps knowledge
a. Reading v. Regem Soldier would not have received kickbacks for transporting contraband across
check point but for his position as an army employee/having uniform P (Govt) entitled to profit, even
though no loss. PP: Loyalty
B. Duty to Disclose Disclosure by A is essential when benefitting financially from position in a transaction or
knowledge acquired b/c of employment
a. Rash v. J.V. Intermediate Agent breached fiduciary duty by not disclosing that he was on both sides
of a transaction in which P was purchasing scaffolding subcontractor. A used P to benefit personally.
i. Disclosing allows P to supervise and make fully informed decision
C. Duty Not to Compete (including Grabbing and Leaving) May not solicit former employers customers
(during or after employment) if those customers patronage secured through extraordinary efforts. Non-
competes enforceable if reasonable in terms of: (1) scope of time; and (2) geographical limitations
a. Town & Country Former employers liable for breach of FD duty when started own home cleaning
company and specifically targeted former employers customers who had been secured through
extraordinary advertising and years of business effort
b. Brazilian straightening hypo maybe not unfair competition (they go to him for straightening).
o Relief for breach: Injunction; Damages measured by financial loss to P; % of: As profits or As business
o Other duty owed by agents duty of care duty to act like reasonable business person

Types of Businesses

o Sole Proprietorship: Unincorporated business that is owned and operated by one person.
General Partnership: DIST from Sole Proprietorship. Two or more ppl share profits and control, 202.
Registration. No formal filing with the state is requiredthe agreement between
the parties is effective. 103, Unif. Partnership Act. Nor is the agreement
required, only the definition (i.e., shared profit and control) in 202.
Relationship between and Power of Partners.
o Each partner has the power to bind the partnership/other partners when
they enter into contracts.
o Each partner is personally jointly and severally liable, unless there is an agreement that at least
one will be. Uniform Partnership Act, 306(a).
Duties. Partners have a duty of loyalty and care. 404(a). Also apply to LPs.
Partnership opportunity parallels corporate opportunity. 404(b).
Partners shouldnt compete with the partnership. 404(b)(3).
Partners have a duty to care to not engage in illegal or grossly negligent conduct.
Dissolution. Dissolves under state law when one partner dies/retires/becomes

Limited Partnership1. DIST from General Partnership. One category of partners enjoy limited liability.
1. Registration.
A filing with the Secretary of State called a statement of qualification is required.
2. Relationship between and Power of Partners. There are two types of partners:
o a. Limited partners.
Liability. Enjoy limited liability (so, only their investment in the company is at strake)
Role: Must remain passive or leave liability shield and become GPS
o b. General Partners
Liability: Same as gps in general partnership, assets can be reached.
Note: NEEDS ONE GP. Can be corp who will assume personal liability (Frigidaire)

Hold legal status as person.
o Public: >1mill in assets >500 shareholders.
Law: State law governs incorporation, must also comply with federal law
o Closely held: Not significant assets and few shareholders
Law: State law governs small corps, but if have securities, federal law applies.
o Basic corp document: Must be a public document (charter, cerif. Of incorp., articles inco
Name of corp
Address of corp
Names of Incorporators
Capital Structure
Purpose (any lawful purpose)
o By laws: private doc that sets forth internal rules
o Coprorate kit of standard forms for each state is filed with SOS, who returns certificate
o Organizational meeting: Founders draft bylaws, adopt bylaws, and elect directors
Directors appoint officers
Sell stock (subject to security requirements)
And file corporate name
Role of Shareholders:
o 1) Elect directors, residual owners of the company
o Liability: Shareholders are perfected from PL. All PL is limited to investment amoun
Defining Features: More than 2 features is subject to corp law and taxation, regardless of what
it calls itself
o 1) Limited liability for
shareholders (ease of raising capital) and
o 2) Centralized management:
officers (day to day) and directors (manage for shareholders the officers and
make long term strategic decisions): subject to fiduciary care breach
o 3) Continuity of life: survives the departure of indiviiduals
o 4) Free transferability
Role of Corporations
Primary objective: shareholder wealth maximization (Dodge v. Ford) Directors owe fiduciary duty to
shareholders to maximize profits ( can ignore society, employees, officers, but not sh.holders)
o Board not required to change working strategy to potentially earn more profit
o Can be other important interests, but if conflict, s/holder profit maximization must prevail
o But See ALI principles of corporate governance
Objective should be to enhance corporate profit and shareholder gain.
May devote a reasonable amount of resources to charity (even if corporate profit not
NOTE: Public Benefit Corporation S362 DGC: NY and CAL also has
90% of shareholders must approve. Other 10% get fmv. Name must contain PBC
Balances stockholders pecuniary interests, the best interests of those materially
affected by the corps conduct (employees), and the public benefit Operate in
sustainable manner
A. Social Responsibility (CTS usually refer to corp through BJ Rule)
NEW JERSEY A corporation may make reasonable charitable contributions that benefit shareholders,
provided its not a pet project. Donations limited to 1% of capital and surplus by statute.
A.P. Smith v. Barlow A donation made to Princeton was reasonable and helped strengthen
the companys relationship with the University which would hopefully lead to top grads
joining company
DELAWARE Making contributions is a specific power of the corporation, but is subject to corporate
benefit (ie. some profit maximizing rationale). As long as serving corporate benefit the donation may serve
a laundry list of purposesscientific, educational, emergency relief, etc. (tolerant, can be tenuos).
NEW YORK Contributions are within corporations authority irrespective of corp benefit
a. Factors to consider (from A.P. Smith v. Barlow) Was donation:
1. Discriminately (opposed to indiscriminately) made
2. Made to pet charity of directors
3. Modest in amount and well w/in statutory limitations (if applicable)
4. Voluntarily made in the reasonable belief that it would aid the public welfare and advance the
interest of the corp in the community (ex. of benefits good will; tax benefits)
Pennsylvania: Not just charitable, but can be communitarian because directors not liable under
consumer live (no fiduciary duty). Has to benefit something, not just sholders
B. Social Responsibility v. Irrationality
o Although a corps directors have discretion in the means they choose to make products and earn a
profit, they may not reduce profits in order to benefit the public Dodge v. Ford SUBJ Breach of
good faith
There, Fords decision to lower prices, and not issue dividends, was found to be irrational
and thus, not protected by the BJR. Cannot operate corporation like a non-profit
However, Ford did not do a very good job in articulating his position as a business decision
(lowering prices to increase demand; drive out competition; customer loyalty; etc.)
o A corporations decision that benefits the community may not be challenged unless the conduct is
causing financial loss the s/holders and involved one of the exception to the BJR Shlensky v.
The court gives BJR protection because there is no fraud, illegality, or irrationality.
There, we see much more importance placed on being responsive to community
Wrigley presented decision as economic/business decision P should have presented
evidence that night games would provide economic benefits & increase in revenue would
offset cost of installing lights. Also deference of judges to BJ
ALI Even if corp profit and s/holder gain are not thereby enhanced, the corp may devote a reasonable
amount of resources to: public welfare, humanitarian, educational, and philanthropic purposes
More in line with reasoning of Wrigley than Dodge
Negativ externalities: Corp law requires board to place shareholders first. Externalities are costs created by doin
this: pollution, union busting, consumer risks, layoffs. LLC incentivizes investment but results in these. Positive
externalities exist when benefits go to non-shareholders.

The Nature of the Corporation

After corp filing article of incorporation they go to the Secretary of State for review
There may be a period of time when someone wants to act on behalf of the business, but the business hasnt been
incorporated yet (articles are pending review, etc.) Ex. Sign a lease for an office space; buy inventory from 3 party
PROMOTER Investor, etc. representing and acting on behalf of the unincorporated business (afgent)
o Promoter is personally liable UNLESS the party to the contract knows the corporation is not in existence but
nevertheless agrees to look solely to the corporation and not the promoter
o Once a corporation is chartered by state It needs to ratify the promoters transactions
Can be express (agree verbally to be liable) or implied (pay employee and accept benefits)
Promoter still on the hook unless there is novation (Rare)
THEORIES OF PREINCORP LIABILITY Defective Corporations (we have this to protect shareholder assets)
De jure corporation Filed articles of incorporation and received charter but have not completed all necessary steps
to organize corp (adopt bylaws, issue stock, hold the organizational meeting) Recognized as corp for all purposes
De facto corporation Partially-formed corporation, that when invoked, leads to court treating the business as if it
was a corporation for purposes of adjudicating the rights and duties of private parties, even though the statutory
formalities for formation of a corporation have not been met. You have done everything not your fault.
o Steps: 1) Analyze from promoters perspective 2)GF effort to incorporate 3) Legal right to incorp 4)Act ascorp
o Impact: Ct will consider it a corp with LL
Corporation by estoppel 1) one who contracts with what he think to be and treats as a corporation, incurring
obligations in its favor, is estopped from denying its corporate existence, particularly when the obligations are
sought to be enforced 2) to prevent windfall
o Equitable defense so party asserting the defense must have acted in good faith and not have affirmatively
misled the other party If did rely on account of good faith, no irreparable harm causes
o Southern-Gulf Marine v. Camcraft P relied on the corporation when entering k and tried to avoid k when
learning corp wound up being incorporated in another state. Court invoked corporation by estoppel.
Corp cant be different then the parties contemplated.
Camcraft wanted to avoid because the cost went up. If it went down and SGM didnt perform, they
wouldve sued SGM. Not fair. Rationale=equity
IF party thinks incorporated in 1 place, but somewhere else, OK
Planning for Pre-contractual liability: 1) Parties dealing w/ promoter insist on personal liability until corp is formed 2)
parties should address how corp will be capitalized and how liability will be satisfied 3) parties should agree on what
happens if corp is not formed 4) add clause to discontinue K if they are not satisfied with the incorporation of the newly
formed corp.

Limits of Limited Liability

Piercing the corporate veil (only closely held, not public)
o The corporate veil represents a legal assumption that the acts of a corp are not the actions of it s/holders, so
that the s/holders are exempt from liability for the corps actions. However under certain circumstances
courts may pierce the corporate veil and permit creditors to reach s/holders personal assets. To pierce you
have to show that the shareholders are not treating it as a separate entity (but as their own personal thing).
o Requirements to pierce (From Sea-Land):
1. Unity of interest and ownership; and
There must be such unity of interest and ownership that the separate personalities of the
corporation and the individual s/holder(s) no longer exist (they are one personality).
Factors to determine whether separate identities have been disregarded: (Sea-Land)
1. Failure to comply w/ corporate formalities or to keep sufficient business records
a. No corporate meetings, no bylaws, single location
b. BUT one person can act on behalf of 2 or more entities as long as formalities
followed Frigidaire
2. Commingling of funds or assets
a. Use of corps bank account for personal use
b. Sea-Land Paid personal expenses (alimony, childs education) w/ corp funds
3. One corps treatment of another corps assets as its own (shuffling)
a. Borrowing money from one corps w/o paying interest
b. More relevant w/ respect to enterprise reliability
4. Undercapitalization
a. Insufficient funding, or capital to support the corps operations
b. Not important in New York New York test regarding undercapitalizing:
o Pierce if siphoning funds, trying to be judgment proof/shield itself
o Dont pierce if Not profitable to undercapitalize; expenses are high;
common in industry to do so; poor management
Walkovszky v. Carlton (New York) Court refused to pierce a taxi company in which the
owner created nine corporations to operate cabs. Court did not find sufficient unity of
interest. Only argument was undercapitalization but company did comply NYs insurance
Undercapitalization was not enough in Walkovszky New York, but it was in Sea-Land.
If he did successfully pierce, wouldve become stockholder. When you reverse pierce, first
you pierce D (who has no assets) then go after his other corps but become creditor not a
stockholder. SAME FACTORS
o Stockholders only make money if profitable (pierce), but when RP you get assets or
debt (so youre a creditor and creditors get paid first)
2. By adhering to corp protection & not piercing, court would be sanctioning fraud/promoting
An unrecovered judgment does not satisfy this rule
Something akin to fraud or deceit (REQUIRED IN NY)
Bad faith making it inequitable to hid behind veil
o Purposes of law undermined; legal rules skirted; unjust enrichment; intentional
scheming to defraud creditors; undercapitalizing to avoid paying liabilities
o Intentionally putting all assets into a liability-free corporation while heaping liabilities
upon an asset-free corporation.
Sea-Land Services v. Pepper Sauce Court found unity of interest prong met b/c of
commingling, not following corp formalities. However, says inability to satisfy judgment is
not sufficient to meet second prong. Remanded. On remand, lower court found that refusal
to pierce would unjustly enrich a s/holder who acted in a way to avoid liability to creditors
o Alter ego liability term for piercing w/ respect to subsidiary liability Imposes liability on a parent for the
liability of its subsidiary BUT not another subsidiary (distinction from enterprise liability)
Sheffield Same requirements to impose liability on a parent company under alter ego theory as
for piercing the corporate veil. Court refused to pierce after Sheffield never received a dog he
purchased from a monastery in Switzerland. Should have claimed enterprise liability!
Parent:sub factors: 1) sub grossly inadequate capital 2) parent pays capital and expenses 3) parent
uses property of sub 4) daily operations same 5) Sub does not observe corp formalities (keeping
books separate)
o Shielding companies from liability may shift expense to taxpayers (persons goes on Medicaid/Medicare/food
stamps, etc.) But as a society we have decided there are policy interests to provide corp s/holders w/
limited liability to encourage investment in corps and for corps to take risks
o Tort Claimants: Unlike Sealand where there was a K (thus need to show fraud) because parties assume risk,
torts are different. No K. Rule: totality of circumstances to see if alter ego or mere instrumentality: common
officers, consolidated statements, parent finances subsidiary, parent pays salaries, parent uses subsidiaries
prop as its own, same address notepads etc, consolidated financial statements etc. In re Silicone
Enterprise Liability (horizontal, couldve been argued in Sealand)
o When separate corps (sister corps) are owned by the same s/holders and do not have a separate existence
of their own, integration of resources, creditors may reach the assets of 2 or more of the corps as though
they are one entity
While assets of sisters corps may be reached, there wont be personal liability on part of s/holders
(piercing is a separate issue)
Concern is whether the sister corps are separate from one another; NOT whether individuals are
separate from the corps
To avoid: (1) separate employees (if borrow, pay sister corp not employee); (2) separate bank
accounts/records; (3) Minimize undercapitalization (Important in NEW YORK)
o Requirements virtually the same as piercing:
1. Unity of interest among all sisters corps; and
Not treating as individual corps
1. Lack of respect for the separate existence of the corps
2. Integration of resources to achieve a single business purpose
3. Corps all use the same accounts and services, have the same officers and
employees, or keep collective record
4. Centralized control
5. Shift funds (shuffling)/personnel around
2. Adhering to corps separate corp status would sanction fraud/promote injustice
o Most piercing cases occur w/ respect to closely held corporations in large corps, s/holders are too disperse
to have unity of interest with corp; and auditors also ensure requirements are met
o If corporate veil pierce s/holders treated as partners and each is jointly and severally liable
o With parent company and EACH individual sub piercing and enterprising liability is essentially the same
Limited Partnership : May have a Corporation as the general partner (he who enjoys liability). In
Frigidaire, two men who were LPs did not incur liability even though they were also directors,
officers, and shareholders of the parent and GP of their little firm. Why?
Meticulous in separation of their roles, signed K on behalf of the LP as agents of the parent.
LPs enjoy LL unless they participate in control of the LP (but can act as agents for the GP if
CORP) and the person Ked with understands this.

Shareholder Derivative Actions (shareholder to regulate corp. mgmt.. Corps are individuals)
FEES: $ won normally goes to corp (even if D wins) unless closely held out of equity.
Indemnity: Must corps have for directors unless it goes to trial Del145b. If action is settled, corp can pay for
both sides. If it goes to trial, d will have to pay damages and legal fees.
1. Direct or Derivative?
Direct: enforce shareholders rights against corp. Normally class actions
1. Individualized harm to s/holder who gets direct benefits (Eisenberg The reorganization that
deprived P of vote in company affairs actually benefitted corp by allowing it avoid regulations )
2. Seeking non-monetary relief declarative/injunctive ( Grimes Sought declarative relief concerning
with respect to allegation that board was abdicating its duties)
If direct s/holder may avoid following steps and bring suit (no need to post bond or make demand)
Derivative: Usually monetary damages for breach of fiduciary duty . Loss to shareholders upon harm to corp
Generally, if something involves a breach of one of the fiduciary duties, that almost inherently is a
derivative suit (the corporation is being harmed).
2. Many jurisdictions require s/holder to post bond that will cover cops legal costs if s/holder loses to discourage
strike suits based on ownership: < 5% (of outstanding shares) or $50,000 (worth of shares) (required in NY &
NJ, but not DE) Cohen NEW YORK . PP to prevent nuisance, revenge suits. IF P loses, pays A Fees.
3. Requirement of demand on directors
Normally demand is made to initiate suit or to take corrective action
NOTE: When demand is made, she is not entitled to discovery (tough to plead with particularilty)
Universal demand Demand required in all cases unless corp would suffer irreperable harm as a result
NOTE: If demand is req/not excused company will file Motion TD and ct wlll grant if it agress
NEW YORK Demand requires unless excused as futile
Demand excused if: (Marx v. Akers)
1. A majority of the board is interested in the challenged transaction;
2. The board did not fully inform itself about the challenged transaction; OR
3. The challenged transaction was egregious on its face that it could not have been a product
of the directors sound business judgment
Marx Demand was not excused regarding excessive compensation claim b/c a majority of the
board (15 of 18) were disinterested. Also no particularity
DELEWARE Demand required unless excused as futile Remember: DGCL 141(A) BJ RULE
Demand futile if a reasonable doubt exists that the board is capable of making an independent
decision to assert the claim in demand: (Grimes v. Donald)
1. A majority of the board has a material financial or familial interest;
2. A majority of the board is incapable of acting independently for some other reason such as
domination or control; OR
a. Perhaps a minority number of shareholders, but they are executives
3. Underlying transaction is not the product of a valid exercise of business judgment
Reasonable doubt = flexible standard that weighs in favor of the stockholder
Cannot be mere suspicions or stated solely in conclusory terms.
Must be plead with particularity must use tools at hand such as public records
This can be done with DGCL Sec 220 (right to inspect books)
NOTE: Once you make a demand, you waive your right to say that demand should be excused. You
would still have the right to say that the boards refusal to act on the demand was wrongful.
If demand excused s/holder represents corp and controls suit; If demand required corp controls
Does Board accept demand? After ENRON/Worldcomm much more common
4. Wrongful Refusal
If demand is refused, s/holder still has wrongful refusal claim subject to BJR protection
Presumption of BJR, unless the stockholder can allege facts with particularity creating a reasonable
doubt that the board is entitled to the benefit of the presumption. Then you go back to the 3
reasonable doubt factors.
To overcome BJR, s/holder must establish one of the exceptions the BJR using tools at hand
Exceptions: (1) Conflict of interest; (2) Illegality; (3) Lack of informed decision making; (4)
Irrationality; (5) Gross Negligence
Tools at hand: relevant records reflecting corp action (ex. minutes of meeting)
If s/holder overcomes BJR, s/holder takes control of the lawsuit
5. If s/holder has power of the suit (b/c of demand being excused or wrongful refusal) Corp can still appoint an SLC
Special Litigation Committee Often delegated decision making w/ respect to whether suit should proceed
SLC has authority and makes determination of what to do with suit Almost always decides suit should be
NEW YORK BJR protection of SLCs decision (Auerbach v. Bennett) as long as procedures were followed
Prong 1, Factors:
1. Good faith
2. Disinterested/independent committee members
3. Investigative procedures were adequate and appropriate
Prong 2, if factors met, court will not look to substance of the SLCs decision and will dismiss (defer
to the SLCs substantive decision).
o Very hard for claims to go forward in NY!
Auerbach Demand excused. SLC determines not in best interest of corp to go forward w/ suit.
Court finds SLC was disinterested and followed adequate procedures in good faith. Court dismissed.
DELAWARE BJR protection of SLCs decision (Zapata v. Maldonado)
Prong 1, Factors (burden is on the corporation to establish):
1. Good faith
2. Disinterested/independent committee members
a. Cant be ties between committee members and board (college, tight knit
community, social ties). In Re Oracle
3. Investigative procedures were adequate and appropriate
Prong 2 court applies its own independent business judgment! (gives them a lot of discretion)
o Balances law and public policy with the corps best interests (looking at substance)
a. Court was worried about SLC indepdent judgment. SLC has empathy for the
b. Reason why DE chancery ct thinks it can make a better decision
c. Tainted board, before problems demand was excused, which is what lead to
conclusion, so company does SLC, but those people are very likely through
structural bias to root against P
If all factors met, and court satisfied after applying its independent BJ, will dismiss
o Despite fourth factor, dew claims go forward in DE!

Limited liability companies

Fastest growing business entity. Started in Wyoming. Advantages include flexible structuring (vs. corporation),
limited liability to members, and pass through taxation. Disadvantages include uncertainty in case law due to being
relatively new, no public offerings, and liability varies state to state creating confusion.
Members are owners (receive limited liability) and mangers run the firm (could be the same)
o Partnership like decision making authority.
TO receive same tax treatment as corp: need Limited liability and another feature of corp (i.e manager managgd)
Members owe fiduciary duties to each other (but see McConnell)
Operating Agreement: Partnership agreement or corporate bylaws
Formation: Articles of Organization filed with secretary of state to create an LLC
Derivative: Members can sue derivatively if manager or members refuse to bring an action or an effort to cause the
manager or those members to commence is not likely to succeed.
1. If an individual does not provide notice that he is entering a contract on behalf of an LLC, the individual is liable on
the contract Water, Waste & Land v. Lanham
o Statutory language providing that the filing of articles of organization w/ the secretary of state provides
notice that the LLC is an LLC should NOT be interpreted broadly Notice is provided when company puts
LLC at the end of the company name.
Water, Waste & Land While D was an agent of LLC, he failed to disclose his principal to the 3rd party with
whom the agent dealt and under agency law, this failure rendered him liable on the k to the 3rd party
2. Delaware LLC act gives members broad flexibility in drafting the operating agreement and it gives maximum effect
to freedom of contract Elf Atochem v. Jaffari and Malek LLC
o Flexibility in how business will be operated, who is in control and who can do what can be customized in
operating agreement
Elf Atochem LLC contracted away the right to go to court in DE, which is a preferred method given DEs
great experience with LLCs; however, the contract still prevailed despite shortcoming of arbitration.
Only when the agreement is inconsistent w/ mandatory statutory provision will it be invalidated
Ex. Waive liability for tort of contract w/out attention to intent
3) In dispute amongst shareholders, where each have equal control and cant act without the other, one is not
mandated to give up a right or add more $ merely to save the company. One party doesnt have to acquiesce to the
other. Fisk. Moreover, in the same scenario, no breach of impled covenant of good faith and fair dealing merely by
blocking financing. When one class of shareholders has an equal veto power, they are allowed to use it. Fisk
o Fisk Factors for Dissolution (reasonally practical)
1) members vote is deadlocked at the board level
2) operating agreement gives no way to break deadlock
3) due to the financial situation of the comp, there is effectively no business to operate.
3. LLC veil may be pierced in a manner similar to a corporate veil Kaycee Land & Livestock v. Flahive LLC
o Even if piercing is not in LLC statute, no reason to treat an LLC different than corp to remedy an unjust
result. It would be illogical to allow persons to abuse LLCs in a manner that is prohibited for corps.
o Factors (similar to the corporate context):
Look to see what the agreement provides (LLC operating agreements are allowed to be flexible)
Commingling of funds
Undercapitalization (maybe not in NY though)
See if parties are not treating the LLC like a separate entity
o NOTE: Enterprise liability and reverse piercing may work as well according to wade.
4. The operating agreement governs and can define the scope of LLC members fiduciary duties McConnell v. Hunt
Sport Enterprises
o If terms are clear and unambiguous, the operating agreement can limit or define the scope of the fiduciary
McConnell Original LLC seeks to acquire NHL team and McConnell formed separate group to acquire that
same team. This was permissible b/c freedom of contract prevails. The operating agreement said members
may compete.

General Partnerships
A partnership is an association of two or more persons to carry on as co-owners of a business for profit
There are some mandatory rules in partnership statutes that cannot be trumped by the partnership agreement (ex.
cannot waive duty of loyalty) BUT, otherwise statutes provide default rules Partnership agreements govern
A. Formation of a Partnership FACTORS considered under an objective totality of the circumstances approach:
1. Intention of the parties
Important to look to when agreement isnt clear (evidential although not conclusive)
Whether parties operating the same as before the agreement Fenwick v. UCC
Whether relationship is for a fixed or indefinite duration Southex
UPA (1997) stresses partnership may form despite the absence of intent
2. Right to share profits
UPP (1914) Sharing in profits is prima facie evidence of partnership
UPP (1997) Sharing in profits leads presumption of partnership
Both provide exceptions payment to others; wages to employees; paying off debts, etc.
3. Obligation to share in losses (strongest indication Implied in UPA required in some states)
Is one party indemnifying all the losses? Southex
Does agreement state explicitly to the contrary? Fenwick (she was not sharing in losses).
Jointly and severally liable
4. Ownership and control of the partnership property and business
Whose hands is capital in? Fenwick (Fenwick contributed all the capital and retained ownership).
Who owns intangible assets such as IP Southex
5. Community of power in administration
Is one party responsible for lions share of management decisions Fenwick & Southex
6. Language of the agreement
Not always dispositive
Partner may not be enough Fenwick (though it said partnership, it excluded Chesire from
most of the ordinary rights of the partner)
Contract said Agreement not Partnership agreement Southex (Partner used colloquially)
Is it more consistent with a loan than a partnership agreement Martin v. Peyton
o Creditor/Debtor relationship does not create partnership (P wanted creditor liable).
o Examination of books; not so onerous veto provision; suggestion regarding mgmt
7. Conduct towards third persons
Do the individuals hold themselves out as partners? Fenwick (filed taxes as partnership (because it
was in their interest to do so) but made no other indication to others never registered as such)
Is party conducting business w/ others in its own name, rather than in name of partnership? Southex
8. Rights of the parties upon dissolution
Art the rights the same as for an employee who quits? Fenwick (same impact as if employee)
0. Owning Property
Joint tenancy, tenancy in common, joint property, etc. does not by itself establish a partnership, even
if the co-owners share profits made by the use of the property. 1914 and 1997 UPA
B. Fiduciary Obligations of Partners
Partners & joint adventurers owe each other a heightened dutynot honesty alone, but the punctilio of an honor
o Necessary elements of a joint venture (from Sandvick):
(1) express or implied agreement that joint venture is formed
(2) contributions, of different kinds and not necessarily all equal, in the undertaking;
(3) shared profits, but not necessarily losses
(4 )equal voice in controlling the project
Similar to partnership but only for fixed term/purpose and principles of PL apply.
The duty of loyalty owed by partners to each other involves: (1) accountin g for any profits; (2) refraining from
acquiring a partnership asset and misappropriating for his own use a partnership opportunity; and (3) refraining
from competing w/ the partnership w/in the scope of the business prior to dissolution
o Meinhard v. Salmon Salmon breached his duty to his jv, Meinhard, by agreeing to purchase property
leased together by the two without informing Meinhard. The opportunity was an incident of the enterprise.
Salmon had a higher duty as a result of being on-site manager (supreme duty of undivided loyalty).
What would have satisfied the duty? Tell Meinhard about the opportunity, give Meinhard an option
to become a partner in the new deal (the thought of self was to be renounced). This involves
business duty but can be compared to discussions of fiduciary duty.
DISCLOSURE: Punctilio of honor (Cardozo)
o Sandvick v. LaCross L&H purchased top lease prior to the expiration of the original lease without notifying
S&L (did not matter that there was no express agreement that they were going to continue the relationship)
When a partner is involuntarily expelled for a business, the general rule is that his expulsion must be in good faith
o Partnership expulsion is virtually always guided by terms of the partnership agreement
o Guillotine method: allows immediate expulsion as long as in good faithquick/efficient/ free market motives
Lawlis v. Kightlinger & Gray Partnership agreement provided for guillotine method that was
decided on by all partners. Expulsion of Lawlis for incompetence and poor behavior was in good
faith and no notice was required per the partnership agreement
o Partner v. Employee: Biggest factor is whether individual controls direction of the firm. If an employee, rules
for termination are subject to employment law under EEOC, whereas termination rules for partners are
determined in partnership agreement.
Generally, all breaches of fiduciary duty involve some sort of financial impact

Fiduciary Duties of Directors

BJR Rule: Judicial deference to the boards substantive decisions:

Rationale: Shareholders take risk with investing, ct. is not composed of experts, decision paralysis (cautiousness).

Scope: Applies as long as there is no fraud, illegalility, COI, gross negligence

Duty of Care (directors, officers, and controlling shareholders owe fiduciary duty)
NOTE: Shareholder ratification excuses directors from this breach
A. Duty to deliberate An allegation that some course of action other than that taken by the board would have been
more advantageous does not give rise to a cause of action if board exercised reasonable BJ.
BJR applies and court determines whether any of the exceptions apply. There cannot be arbitrary action.
Kamin v. American Express Boards decision to declare a dividend in kind of shares of another company,
rather than sell shares and take capital loss, was protected by the BJR b/c it was a rational decision in which
the board deliberated btw two options and there was no allegations of fraud, irrationality, etc.
o Even seemingly unwise decisions make it without recklessness, gross neg, fraud, illegality, breach of
loyalty. Mistakes are to be expected. If make too strict, would chill business decisions
B. Duty to be fully informed The board is protected when relying in good faith on repots by experts of officers
Under Del 141(e) Board protected when:
1. Reasonable reliance;
2. In good faith;
3. Expert was selected with reasonable care; and
4. Board reasonably believed the expert was competent
Van Gorkom BJR did not apply to a merger on grounds of lack of informed decision making. Board relied
on CEO without any assurance that CEO was fully informed and without taking time to confirm anything
they were told or review any documents. Boards decision to approve took 2 hours. DIDNT investigate
o Direct class action: Shareholders did not get enough $. Board should have sought other offers, get
ind. Value of company, seek outside counsel and financial adice. Time constraints no excuse.

Disney: No breach due to experts.

C1) Duty to Monitor/Supervise (similar to duty to be fully informed

Francis v. United Jersey Bank board must read financial statements. Ms. Pritchard did not act in the way a
reasonable business person would have. She fell below the standards that board members must adhere to.
o Gross negligence = breach of duty of care
o Sometimes as a board member you must resign or object. Sometimes you have to threaten to sue
your co-directors.
o BJ Rule only protects INFORMED decision not to act, not just not acting. Normally, people can rely
on subordinate UNLESS on notice of possible illegal acts (should look at financial statements)
o To Prove: 1) directors knew or should have known violations were occurring, directors took no good
faith preventivie measures 3) failure proximately caused loss
Optimal corp governance: lectures, ethics programs, indep. Audit, handbooks, etc.
C. Response to Van Gorkom Del 102(b)(7) & other similar corporate statutes allow companies to include in its
corporate charter a provision that:
Eliminates/limits the personal liability of directors (not officers) to corp/shareholders for monetary damages
for breach of fiduciary duty of care Protection above and beyond the BJR
o Does not include:
1. Breach of duty of loyalty
2. Acts or omissions not in good faith, illegality, or intentional misconduct
3. Transaction which the director derived an improper personal benefit.
D. With 102(b)(7) and similar protection afforded to directors Duty of care essentially irrelevant
Note: Ps can still seek injunctive relief against corp for breach of duty of care
EXCEPTIONS to 102(b)(7) and BJR:
1. Where plaintiff proves gross negligence in breach of duty of care
2. Where defendant is a financial institution that owes a fiduciary duty to creditors (those whose
money you are holding)
102(b)(7) type provision limit liability to s/holders NOT to creditors (No BJR for duty of care
to creditors, who want to decrease risk rather than increase profits).
Francis v. United Jersey Bank Ms. Prichard held liable for her dereliction of her duties
which was a substantial factor in the liability to creditors b/c her sons spawned their fraud
in the backwater of her neglect.

Obligation of Good Faith (If it breaches, really breaching duty of loyalty)

Courts had struggled with whether there are 2 (care, loyalty) or 3 (care, loyalty, good faith) fiduciary duties. This
became an issue after 102(b)(7) eliminated monetary liability for breach of duty of care. Walt Disney carves out
good faith from duty of care, and Ritter then places it under duty of loyalty Directors can be financially liable
Violating duty of good faith involves (see Walt Disney)
1. Subjective bad faith;
Intent to do harm to the corporations interests
2. Conscious disregard of duties OR dereliction of duties
Abandonment of duties
Francis may have been more than gross negligence. She completely abandoned her duties. BUT
A. With respect to compensation not informed of market rate, etc.
Walt Disney Board was informed and did not violate any fiduciary duty when it provided for a $130 million
severance package to new company president after consulting compensation experts, market rates. They
even brought in an outside consultant to help the board review the deal. The consultants looked at what he
made at CAA, what other executives made at Disney, and elsewhere, and they believed it was appropriate.
B. With respect to oversight/duty to monitor sustained or systematic failure of oversight
a. Directors must exercise oversight if (Graham): (i.e., duty to monitor arises when)
1. Have suspicion (notice); OR
2. Operate in highly regulated industry
b. If no red flag of wrongdoing:
1. Keep informed; OR
2. Delegate responsibility; OR
3. Resigns
c. If required to exercise oversight (if duty to monitor has arisen):
1. Must implement reporting system; and
2. Implement internal controls to monitor if any violations occurring
d. Directors liable if they (Stone v. Ritter):
Utterly failed to implement any reporting system; or
Having implemented a system, the directors consciously failed to monitor it
e. When a director learns of wrong doing by other directors (applies in all situations):
1. Object; or (Make sure objections are noted in corporate minutes/in writing)
2. Resign
Stone v. Ritter Court found, following bank being assessed significant fines for employee misconduct, that
the company had established adequate systems and properly monitored. No claim by shareholders
If it is in bad faith to exercise oversight, this is breach of DUTY OF LOYALTY!
REMEMBER: Rather have breach of care because much higher standard to show failure to monitor/
good faith.

Duty of Loyalty (NY Rule : Full disclosure of all material facts to COI to bd and get disinterested director vote or if no
disclosure and COI look at fairness w/ bop on D directors to prove fairness)
General rule: no BJR protection BJR protection yields to requirement of undivided loyalty. Directors owe a duty of
loyalty to the corporation to place interests of the corporation ahead of their personal interests.
o Step 1 Identify issue Was there:
1. Self-dealing/Conflict of Interest P has initial burden
Board member on both sides of transaction. PRESUMED IN DEL N
Benihana Director Abdo arranged to deal to sell preferred stock (to raise money for
renovations) to another company which he was the vice chair of.
Dual directorships : sine owe duty to two companies, recuse from both and appoint SLC
Director has material financial incentive or related to someone who does.
Bayer v. Beran Company hires directors wife to appear in new commercial.
NY now requires maj of directors to be independent or outsiders.
Compensation: Especially if inside director gets comp based on profits.
Dominant shareholder
If there is self-dealing, did the dominant shareholder receive something at expense of minority
shareholders to their detriment (BJ Rule Wont Apply, Go to Intrinsic Fairness)
BJ will apply if shareholders treated equally (same dividends proportionally) Sinclair
But, wont apply when Parent breaches K with subsidiary by paying late, not adhering
Liquidation: Preferred stock (paid first even in liq, but no voting), common stock(voting), upon
liquidating if common has right to redeem preferred stock, that is fine but must disclose. See step 3
2. Usurpation of corporate opportunity
a. Board members or officers
Broz Broz, a director of CIS, gets offer to purchase license on behalf of his company, RFBC (where
he was sole shareholder). CIS had held similar cellular licenses but was selling them due to financial
Dominant shareholder
Did DS usurp corporate opportunity to detriment of minority. (If they did, NO BJ go to intrinsic
Look to facts: subsidiary in Venezuela but no gas companies (everyone is leaving) BJ rule will
apply. Sinclair
o Step 2 Was there approval by the board/shareholder ratification:
If no board approval or shareholder approval Fairness test w/ burden on D
Bayer Board did not approve transaction at the outset and only later ratified
Broz Received informal board approval Did not seek formal board approval
If approval by majority of disinterested board members (no quorum required) Traditional BJR protection
under safe harbor provision of Del 144(a)(1) w/ burden on P
If material facts as to the interested directors relationship/interest in the transaction are disclosed
to the board and a majority of disinterested directors authorize the transaction in good faith
In interested directors best interest to recuse himself
Benihana Abdo received formal approval from a majority of disinterested directors who were
informed of Abdos relationship to the transaction.
If approval by majority of interested s/holders and no controlling s/holder Fairness test w/ burden on D
Fliegler Only 1/3 of disinterested s/holders approved option to buy mineral rights.
In Fliegler it was a minority of disinterested shareholders that approved. The burden will
stay with defendant. The burden will shift to the plaintiff where there is a controlling
shareholder, but a majority of the disinterested shareholders approved.
If approval by majority of disinterested s/holders and disinterested s/holders are majority of all s/holders
Heightened BJR protection with only exceptions being gift or waste under Del 144(a)(2)
Waste (Disney) squandering corporate assets
Gift giving away corporate assets
Wheelabrator Majority of s/holders were disinterested and majority of the disinterested s/holders
approved WTIs merger with Waste as did board.
If approval by majority of disinterested s/holders when disinterested s/holders are minority of all s/holders
and there is a controlling s/holder who owns 51%+ Fairness test with burden shifting to P
No BJR protection b/c majority of minority s/holders may have been controlled by majority s/holder
(the invisible hand)
Wheelabrator dicta
o Step 3 What test to apply:
If transaction freshened/sterilized apply test noted above (traditional BJR or heightened BJR w/ only exceptions
being gift or waste)
Rationale: Goal is to protect owners. If disinterested parties approve why should court get involved?
Allow for some limited exceptions b/c possible that interest parties may unduly influence disinterested
parties/ transaction could just simply be egregious.
Fairness test with burden on D D must show entire (inherent) fairness under rigorous scrutiny
1. Self-dealing/COI Was transaction conducted at arms length?
Factors: (Bayer
Substantive fairness
1. Salary (was amount paid for the services reasonable?) - look to comparable salaries
2. Was there an independent third party involved?
3. Cost (was spending that amount reasonable considering revenue, etc.?) see market
4. Competence/ Qualifications (of person hired were they adequate?)
Procedural fairness
1. Was/how was contract negotiated
2. Who took part in negotiations
3. Who made decision to hire
2. Corporate opportunity Did taking opportunity constitute usurpation?
Factors: (Broz)
1. Capacity (corp must be financially able to take the opportunity for itself)
In Broz, CIS was insolvent and was liquidating similar licenses
The counter argument will always be that just because the company is incapable now,
does not meet that they wouldnt have been able to become capable had the
opportunity been disclosed. They could have discussed the matter with the company.
2. Line of business (opportunity must involve the type of business the corp is typically engaged
in Consider whether the opportunity provides a practical advantage)
In Broz, CIS was diveFsting itself of licenses getting out of that line of business
3. Interest/Expectancy (Does the corp have an interest (kual or otherwise) or a reasonable
expectancy in receiving such an opportunity in the ordinary course of business or, perhaps
is the opportunity too risky?)
EBay Directors accepting high-profit IPO investments from GS as incentive to continue
business relationship. Gift was expected by corp since it was given as incentive for the
crop, not directors individually, to do business w/ GS again
In Broz, CIS divesting the line of business and thus had no idnterest in purchasing such a
license. CIS was giving up other cellular rights that it had.
4. Conflict of interest (by embracing the opportunity, will the self-interest of the director be
brought into conflict w/ that of the corp
In Broz, Broz owed duty to CIS, not PC (which had not yet closed on purchase of CIS)
Note: When director or officer takes corporate opportunity, they can decide for
themselves whether or not to seek formal board approval. Only in Delaware
1. Seek and obtain (Benihana) Safe harbor under 144(a)(1) case dismissed
2. Dont seek (Broz) 4 factor analysis
In DE, wouldnt matter if entity presenting opportunity doesnt want to work w/ corp
Generally, doesnt matter if opportunity presents itself to director/officer in individual
or representative capacity same analysis applies
3) For Dominant Shareholders Where BJ Rule Doesnt Apply (self dealing, usurpation)
Intrinsic fairness Test: BURDEN ON D.
Factors: Didnt breach, everyone equal, sharing of info, disclosure.
Liquidation: Must disclose. Not fair for dominant common stockholders who have right to
redeem preferred stock before liquidating t not disclose material info about the new price
of the shares upon liquidation Zahn. Commons need to make informed decision so they can
convert b4 liquidation.
HYPO: Inventory is 240 upon liq. (A gets 2-1) but B can recall back for 60 (as per
charter). SO instead of getting 160, A would only get 60 and get fucked. This is why
B (board) must disclose to minority about material prices and inventory.
Fairness test with burden shifted to P P must show entire (inherent) unfairness under rigorous scrutiny
Same factors as above are applies (based on the issue)

Disclosure and Fairness (Securities)

Securities Act of 1933: IPOS: Mandates disclosure through registration statement.
Prospectus is the first part of statement and ordered by SEC. Reasonable disclosure is everything a
reasonable prudent investor would want to know. There can be unlimited risk, just no misrep. Or fraud
Must be delivered to potential investors before sale
Exemptions from registration statement: Private placement (priv. offerings), Regulation D (private
placement but put caps and safe harbors to avoid or reduce required disclosure.
Identifying when something is a stock or security to fit within confines of the federal statutes
Security: Catch all phrase for stocks, notes, bonds. Must be registered with the SEC
LLCS: Because LLCS are not incorporated, 1) look at operation agreement to see who is managing
(board of investors or managers) 2) Did investor have meaningful control, or was he passive. 3) If he
has control, he has access to info to make informed decision and shouldnt be protected 4 ) If
meaningful control, no a security. Rule: Courts look at economic reality of the facts,not the label
Robinson v. Glynn (Robinson had meaningful control of board, could appoint, make decisions)
If Robinson had purchased an investment K, it wouldve been a security.
o With these, investor pays $ with expectation of profits from others. Howey test but
flexible. Not just solely anymore, but can he exercise meaningful control. EX: HE
has control but cant exercise, Security.
Partnerships: Very similar to Llc. Is partner, member managing? GPS generally not. LP or member
managed, probably is.
CORPS: Note, public will have to register. Closely held: If they have securities, same thing.
Section 5a of Securities Act: If its a security, MUST have registration statement. Remember, prior to
issuance, must file statement with prospectus to warn potential investors.
o When security not registered : Strict liability under Securities Act Section 12(a)(1)
when does not register, fails to deliver adequate prospectus.
LIMITED PARTNERSHIP: This is what happened in Doran (Limited partners,
no control). Stock in oil was a security, didnt file. Strict liability when had
to stop drilling and lost $
o Section 12(a)(2) Securities Act : Private civil. Liab. Who sells a security in insterstate
commerce who makes material representation or mission on statementand
cannot prove he did not know of misrepresentation (intentional or negligent
violations) D has BOP
Elements for P : 1) sale o security 2) interstate commerce 3) by means of
prospectus or communication 4) untrue statement or omission of material
fact 5) By D which knew or should have known of untrue statement
D will first argue Due Dillegence 11b defense (never company or issuer)
RULE: What kind of investigation a prudent person in Ds position
with his position, responsibilities, background, skills, training, access
to info would have made. Escott MUST BE MATERIAL OMISSION OR
Whos Liable: Signors of statement, underwriters, directors,
engineers, appraisers, experts who worked (but only their portion)
What is reasonable investitation: Look at major terms, look at
inventory, look at Ks, operations, corp minutes,
Non-experts on non-experted portions: After reas. Invest., had
reasonable grounds to believe truth and did. (person cant say
lawyer/can be accountant) Escott (bowling ally)
Experts for expertised portions (only liable for their portion): same
as above but in eyes of reasonable expert
Non-expert on expertised portion: No reasonable grounds to
believe false, and subjectively did not believe to be untrue. EX:
relying on accountant. NO INVEST NEEDED
Damages: Change in price. But can show it didnt hurt P.
Exemptions from registration statement:
Private placement (priv. offerings), Regulation D (private placement
but put caps and safe harbors to avoid or reduce required
disclosure. Factors: 1) Number of units, normally small 2) size
usually small 3) manner of offering (PRIVATE ONLY, no ads) 4)
number of offerees and their relationship (if they are tight, dont
need much sophistication because prob have info) If not close, see
sophistication (if a lot prob have access to info and its private
placement) . BUT can be sophisticated no info not PP.
Safe Harbors. To safely ensure private placement statusand thus
exemption from disclosure requirementsissuers can look to the
SECs Regulation D.
(1) If an issuer raises no more than $1 million, it does not need to
register (Rule 504).
(2) If an issuer raises no more than $5 million and sells to less than
35 people, it does not need to register (Rule 505).
(3) If an issuer raises more than $5 million and sells to less people,
it does not need to register so long as each buyer passes various
tests of financial sophistication (Rule 506).
(4) Registration D only exempts the initial sale.
Sarbanes Oxley: Internal controls, PCs must issue report that they understand importance of establishing internal
financial reporting controls, gather info about companies compliance, managers are resp. for managing, mandates
that managers make disclosure about companys code of ethics. Use

Securities Act of 1934: Mostly secondary market (wall st). created SEC.
Companies must file annual statements and quarterly statements
10b insider trading. 12. Registration : public companies must 14: proxy (no action letter)
Mandatory continuous disclosure for corps who: list securities on national exchange, own 5 million in assets
and have at least 500 holders, file a statement that becomes effective.
10B5 Under ACT
Company cant make omissions or false representations or use fraud or deceive to MATERIAL FACTS
Standing: Generally, investors who dont buy hav standing. SEC can also bring. Investors have implied right
to bring private action.
Step 1) Scienter: Intent to deceive or defraud. (state of mind)
Recklesness could satisfy, intent, willful can, but not negligence
Step 2) Causation: P shows Ds misstatements caused damage
No causation where private lies cant affect market price of a company a broker privately
tells a few holders to buy West v. Prudential
In Jordan , court had a tough time because he wouldve sold anyway?
Step 3) Materiality P shows misstatements were material according to a reasonable investor Basic
Corps dont have to disclose discussion of merger, but if they DO they cant mislead or be
dishonest. Ct held that info about prelim. Merger negotiations was material Basic vLevinson
Jordan Need to tell about negotiation of merger to employee thinking of quitting. Note:
Cant fire him and then take profit (see Wilkes). Note: Cant trade on info if not public: see
insider trading
Silence: Note, this cant trigger this violation.
Step 4) Reliance is Presumed unless closely held Fraud on the market theory. Rebuttable
presumption that Ps relied. Indirect reliance OK. Ps relying on efficiency and integrity of the
market, and if corp makes false statement, and stock goes up, they are relying even if they did not
read it or did not have time. P has to prove, but rebuttable presumption in favor of P. Comes from
Basic v. Levenson
Basic v. Levenson (relied on statements that merger was not coming so they sold)
Private lies dont go to fraud on market because info not disseminated. West v. Prudential
With omissions, need to show P would have acted DIFFERENTLy
How to rebut: Evidence that P was going to sell anyway Jordan.
Limit : Can show it didnt affect market price threby eliminating damages or
show other factors affected, limiting damages
Is D arguing that it is merely an option: Put opt. (right to sell security) Call opt. (right to buy)
10b5 makes it so that an option is a security so s/holders have standing.
Steps: Do 1-4. For reliance and causation, keep in mind market price for options is directly
responsive to changes in market price for underlying stock info affecting that price.
o In Deutschman v. Beneficial Corp: Officdrs of beneficial misrepresented financial
health (they were going under). Deutschman would have paid a lot less. Satisfied.
If youve merely been treated unfairly without misrep, omission, fraud, deceit, other options
1) Seek Appraisal (Dissenter) rights: Min. shareholders go to ct and ask for ct appraiser.
2) When merger between parent and subsidiary (253 DGCL: Short form-merger) and minority think
price unfair, do appraisal or sue for duty of loyalty. Cant sue under 10b5. Santa Fe

Rule 10b-5 and Insider Trading: 1934 Securities ACT

Policy: Trading on inside information (nonpublic information) is such a concern b/c people make decision to invest
based on information Insider at advantage when he can consider certain information before the public can.

Common Law/State Law

Blue Sky Laws state laws concerning wrongdoing of insiders; these laws still on the books, however, w/ Federal
Securities law, investors often go to federal law first
Elements of Typical Blue Sky Law: (Goodwin)
1. Nonpublic info can be described as material
o Materiality something that a reasonable investor would rely on
2. Deceit (misrepresentation of some kind)
3. Transaction was direct, not an anonymous trade on the stock market
Goodwin v. Agassiz Insiders purchased stock on stock exchange after learning about theory of copper
deposits in mine. Analysis Info was only the theory of a geologist, and thus, not material. Transaction was
amorphous, nebulous transaction where seller had no idea who he was selling to. No liability.
NOTE: This case says no fiduciary duty was owed to s/holders. WADE says today it is otherwise

Classic Theory of Insider Trading

For insider trading liability under 10b-5, the insider must have a duty to corp whose shares he traded and its
s/holders w/ respect to the nonpublic info (info is material), and must breach that duty (fail to disclose or abstain)
NOTE: Insider with material info remains an insider even when leaving.
1. Materiality 2 factors from 10b-5 (TGS) Corp IS liable
a. Whether reasonable investor would find the fact important in deciding whether or not to buy or sell
a security.
b. Balance test: Anticipated magnitude of the event in light of the totality of the company activity; and
probability that the event will occur
Texas Gulf Sulfur Knowledge of possible existence of rich iron ore mine was very important and
would have affected stock price. Probability was very high not just an idea; theory; plan and
insiders were actually trading on it. Court determines the info was material.
2. If material Insiders must: (Cady, Roberts & adopted by TGS)
a. Disclose; or
o Often insider owes fiduciary duty to company to not disclose
b. Abstain
Texas Gulf Sulfur 2 guys who traded day before second press release (confirming findings) were in
breach b/c info was not yet released to public. Guy who traded on day of disclosure also breached
because info hadnt been fully disseminated needed to wait for analysts to look at impact and for
investors to digest info.
Should have waited for press release.
3) Scienter: Must show intent to influence investors or recklessness.
4) Reliance: Must show reliance. Similar as above.
5) Causation: Harm to other investors or shareholders who missed out.
3. People owing this duty include those who owe a fiduciary duty to the other party to the transaction
(Chiarella (SC) limits TGS which said ANYONE with inside info has this duty)
Must find a fiduciary nexus (a duty of confidentiality) between the person with the inside
information (the insider and tipper) and the other party to the transaction
Chiarella Worked for a printing co representing the acquirer Thus, owed no fiduciary duty to
s/holders of the target corps he was transacting w/ and consequently was not liable.
NOTE: Chiarella didnt get to missapropriation
NOTE: Temporary Insiders Accountant, lawyer, or investment banker becomes temporary insider
for information they are exposed to while working for corporate client. Thus, the temporary insider
may be liable under the classic theory just as an ordinary insider may be.

Tippee Liability under Classic Theory (Can be Breach of Loyalty when Benefit Gained (Dirks)
Test for determining tipper/tippee liability: (Dirks)
1. Tipper breaches fiduciary duty to the corp by disclosing nonpublic info and the tippee knows or should know
that there has been a breach; and
2. Tipper tips for the purpose of obtaining some sort of personal benefit
Direct or indirect benefit Examples:
o Selling the info;
o Giving the info to enhance ones reputation or standing;
o Giving the info to someone w/ the expectation of receiving a reciprocal benefit (quid pro
quo) or w/ whom the tipper has a personal (or even business) relationship
If both factors satisfied Both parties liable. Tippee for breaching a fiduciary duty assumed from the tipper;
and the tipper for inheriting the tippees breach (derivative liability)
Dirks Court found no liability under 10b-5 b/c Secrist (tipper) did not derive any direct or indirect
benefit from the disclosure to Dirks (tippee), he merely sought to blow the whistle. (NOTE: Secrist
may have had some sort of fiduciary duty as a former employee)
NOTE: If you are in a restaurant and hear info totally unrelated to you, you can go and invest like
crazy and they will only be liable as breach of duty of care. When they inadvertently tip you, they
gain no personal benefit and thus no tippee liability. Arms length
Common insiders: Lawyers, accountants, professionals inside firms etc all becomes insiders.
Fair Disclosure: SEC adopted disclosure rules. If someone discloses material nonpublic info to market pros,
they must make it public If they let something slip, must issue press release. Disclosure must be
Misappropriation Theory (Outsider Trading) B/w trader and source (not corp
The classical theory is based on fraud on the other party to the transaction. The misappropriation theory is based
upon fraud by the recipient of the info on the source of the information.
The misappropriation doctrine supplements the protective sweet of the insider trading protections for securities. It
was designed to protect the securities market from abuse by outsiders who have access to confidential info, but
who owe no obligation or fiduciary duty to the corps s/holders
Test for determining liability under the misappropriation theory: (OHagan)
o The party exposed to the inside info has:
1. A duty of trust to the source of the inside information; and
Could involve a fiduciary duty or an agreement to hold something in confidence
Could involve someone writing article for NYT sharing info and they trade on it.Carpenter
OHagan Had a fiduciary duty to his partners/his firm which had obligation to its client to
not misappropriate (misuse) confidential info. The rule of the misappropriation theory is:
there are some individuals who are not fiduciaries to the company in which stocks they are
trading, but they might be breaching their fiduciary duty to someone else, and they will be
liable as a result. OHagan has a duty to his law firms client to keep information
confidential. If you have a fiduciary duty to the acquiring company, and sell in stocks of the
target company, you are liable.
o Under Chiarella he would have no obligation because he has no fiduciary duty to
Pillsbury because he is not their lawyer (he bought and then sold Pillsbury stock).
o If this rule was applied to Chiarellas facts, whether there is liability depends if there
was a fiduciary duty owed to the acquirer. Probably would be liable today because
he owes a fiduciary duty to his employer.
SEC adopts Rule 10b-5(2) which provides examples of relationship or circumstances that
impose a duty of trust/confidence for purposes of applying the misappropriation theory:
a. When the source of the info agreed to keep the info confidential (look for
confidentiality agreement);
b. When the persons involved in the communication had a history or pattern of
sharing confidences; and
c. When the person who provided the info was a spouse, parent, child or sibling of the
person who received the info, unless it is shown that there was no reasonable
expectation of confidence
2. Violates that duty by trading on the info

Fraudulent Trading in Connection w/ a Tender offer

SEC Rule 14e-3(a) Vey broad abstain or disclose rule applies only to tender offers Not limited to those with
fiduciary duties. Essentially a strict liability theory (relating only to tender offers)
Anyone trading on the basis of material nonpublic information
Concerning a pending tender offer (ONLY APPLIES to tender offers)
That he knows or has reason to know has been acquired directly or directly from
An insider of the offeror or issuer or someone working on their behalf on the tender offer
A. Indemnification
1. Sources of indemnification for fiduciaries: (i) Exculpation provisions in charters (but such exculpatory provisions are
limited by DGCL 102(b)(7)), (ii) indemnification statutes such as DGCL 145, (iii) contractual promises to
indemnify in bylaws, charters, etc. (which may or may not be able to exceed statutory authorization), and (iv)
director/officer (D&O) insurance (which nearly every company buys).
2. Exculpation clauses: DGCL 102(b)(7)(ii) denies exculpation for acts or omissions that (i) are not in good faith, (ii)
involve intentional misconduct or knowing violation of law, or (iii) violate the duty of loyalty
3. Indemnification statute: DGCL 145 provides the following.
a. Direct suits: 145(a) gives the corporation power to indemnify expenses and amounts paid if (1) the person
acted in good faith and (ii) with the reasonable belief that he was acting in (or not opposed to) the corporations
best interests.
(i) Expenses and amounts paid: Includes attorneys fees, settlements, judgments, etc.
b. Derivative suits: 145(b) gives the corporation power to indemnify expenses only if (i) the person acted in
good faith and (ii) with the reasonable belief that he was acting in (or not opposed to) the corporations best
interests (iii) and the person is not judged liable to the corporation (unless the court finds the person is fairly and
reasonably entitled to indemnification).
(i) If case settles: likely to get expenses reimbursed because not judged liable. But if case goes to trial
and person loses, harder to show good faith.
c. Who decides if acted in good faith, etc. under (a) and (b): 145(d) Distinterested directors, counsel,
d. Reimbursement of expenses: 145(c) obligates the corporation to reimburse expenses if the defendant is
successful on the merits or otherwise. Applies both to direct and derivative suits.
(i) Success on the merits: Settlement doesnt count; dismissal does (Waltuch, 2d Cir. 1996, suit against
dismissed because s employer paid out large settlement).
e. Advancement of expenses: 145(e) gives the corporation power to advance expenses if . . .
(i) Corporation has power, not obligation to advance expenses, so D / O is going to want company to
contractually precommit or pass bylaws obligating advancement. Precommitment can even cover
cases where the corporation itself is suing the D / O (Roven).
f. Other rights: 145(f) says that 145 is not exclusive of other rights. It is not clear whether this subsection has
any substantive effect at all.
(i) According to the 2d Cir. (not Del.), 145(f) does not mean that a company can indemnify directors for
act not done in good faith a corporation cannot indemnify in ways inconsistent with the rest of
145 (Waltuch).
(A) That is, the good faith requirement of DGCL 145(a)-(b) cannot be circumvented under any
(ii) Note that a charter provision cannot require the corporation to provide any indemnification that is
greater than the permitted scope of 145.
g. Insurance: 145(g) gives the corporation power to buy D&O insurance, which is useful because it can cover
situations the corporation cannot indemnify directly (e.g., derivative suit liability) and will still pay if the
corporation becomes insolvent.
4. How 145 plays out in practice:
a. If wins: entitled to expenses, including attorneys fees, under 145(c).
b. If settles and must contribute to the settlement:
(i) Reimbursement of expenses not required because not success on merits. 145(c).
(ii) If acted in good faith and with reasonable belief that his actions were not opposed to the best
interests of the corporation, then 145(a) (direct) or 145(b) (derivative) apply.
c. If settles, makes no contribution to settlement, and case dismissed
(i) Expenses reimbursed under 145(c). That corporation was a co-defendant and made a settlement
payment in lieu of a settlement payment by the defendant not importnat. (Waltuch v. Conticommodity
Servs., Inc., 2d Cir. 1996) (applying Delaware law).
d. If not successful on the merits:
(i) If direct suit: Corporation has power, but not obligation, to indemnify for both expenses and amounts
paid in settlement, judgment, fine or penalty, provided acted in good faith and with reasonable belief
that actions not opposed to corporations best interests. 145(a).
(ii) If derivative suit: Corporation has power, but not obligation, to indemnify for expenses, provided
acted in good faith and with reasonable belief that actions not opposed to corporations best interests,
and if judged liable, is fairly and reasonably entitled to indemnification. 145(b).
(iii) Under 145(d), the decision about good faith and reasonable belief is made by the directors who are
not parties to the action, or if there are no such directors of if the directors so decide, the decision is
made by independent legal counsel or by a stockholder vote.
5. Insurance
a. Directors and officers insurance can insure some items that are not indemnifiable under 145.

Proxy Fights

Rooted in SA of 1934. Section 14: regulates solicitation and prohibits from soliciting outside rules

NOTE: Only covers corps that file under 34 act even if majority owned by its directors

Most s/holders do not attend annual meetings. Management solicits proxies (votes) from s/holders in order to
reach a quorum (minimum number) so for the meeting can take place and elections held.
Sometimes insurgents seek to take control by electing themselves to the board 14(a)(11). A proxy fight then
ensues in which incumbents and insurgents (challengers) seek to amass the most proxies.
o The law provides a lot of help incumbents to remain on board and in control.
o Pay: According to 14(a)(11), s/holders can vote, but not binding.
Incumbents can authorize the use of corporate funds (subject to requirements below) to fund proxy solicitation in
advance (Levin v. MGM)
o Win or lose incumbents dont have to shoulder costs
o Cant be personal
o Provides advantage for incumbents to retain control
o Rationale: Directors would not be able to freely answer challenges of outside groups and in good faith
defend their actions and may be at the mercy of wealthy groups
Challengers must shoulder all costs in advance and may be reimbursed if: (Rosenfeld v. Fairchild Engine & Airplane)
1. The challengers win;
2. Shareholders vote, after full disclosure, to reimburse; and
3. Requirements below are met
o Rationale: Leads to deterrence but that is better than encouraging frivolous attempts by insurgents who
wind up wasting s/holder and corporate resources
Requirements: In both cases, expenses have to be: (Levin & Rosenfeld)
a. Fair (reasonable in amount and incurred in good faith);
Debate as to whether entertainment expenses are reasonable often depends on circumstances
b. Legal; and
c. Spent in support of policy (not personnel)
Dispute over the best interests policy NOT who is the better man for the jobs
o Levin Expenses incurred by incumbents were fair, legal, and involved policy matters (how many films to
produce each year and what to do w/ those films) Incumbent board able to use corp funds to solicit
proxies in its favor.

Private Actions for Proxy Rule Violations:

This is derivative.

Law: 34 act. Rule 14(a)(9)

Note: Usually in context of mergers because most need 2/3 s/holder approval.
Step 1) false or misleading material ommissions or statements in proxy ratification material.
o Or omission of material fact that makes any portion of the statement false or misleading.
MENS REA: Intent or recklessness for outsiders (prob) and negligece for insiders (prob)
Relief: Rescission, damages, or both.
Policy: SEC Cant bring every claim. Parties have standing. JIC v. Borak
Step 2) Materiality : Lead a reasonable or prudent investor to act or vote a certain way Borak
o Under merger, ommssion to minority s/holders that 2/3 of board was controlled by acquirer is material.
JIC v. Borak
o In proxy statement for director fees, company showed # of options they had but not formula to
calculate worth. In suit, P lost because that information was not material. Investors wouldnt change
vote if options were worth mad according to CT. Seinfeld v. Bart
Step 3) Causation:
o 1) Material misstatement in proxy info
o 2) Must show not only defect but that proxy link was an essential link to accomplishment of transaction
Mills v. Electric Auto-lite Co.
Causation was met in Mills because proxy solicitation was essential link to get merger in.
Step 4) Damages: must cause harm. Recession: rate. Can enjoin merger, uunless proxy is revised, but only
available if action was brought before merger occurred. Even if no monetary value, attorney fees Mills
o To shareholders: Damages after meger, looking at arms length and fairness, but difficult. Monetary
damages may not be available tominority shareholders if their votes are not required to authorize.

6. Overview of proxy rules promulgated under 14(a), which authorizes the SEC to regulate solicitation of proxies. Rules
14a-7, 14a-8, and 14a-9 generate the most litigation
a. Rule 14a-2 describes the solicitations to which the rules apply (if shareholder soliciting proxies for itself)
b. Rule 14a-3 describes the information to be furnished. Shareholders must be given proxy statements that make
certain disclosures and must be filed with the SEC.
(i) Key items that proxy statements must disclose: (i) Conflicts of interest, (ii) details of compensation
plans to be voted on, (iii) compensation of highly-paid officers, and (iv) details of major corporate
changes to be voted on.
c. Mail-or-give-list-rule: Corporations can either send out proxies for the shareholder, or can elect to give the list
of shareholders to the proxy supporters. In either case, the shareholder must pay. Rule 14a-7. This rule applies
in proxy fights.
(i) Corporations usually choose to send the proxies rather than providing the list, meaning that insurgent
group usually must rely on state rules to get mailing lists.
d. Shareholder proposal rule: Describes when a company is required to include a proposal in its proxy materials.
Rule 14a-8.
e. General antifraud rule. Forbids solicitation of proxies containing material misstatements or omissions. Rule

Shareholder Proposals(meetings)
Although s/holder proposal are likely to be voted against, they serve the purposes of bringing about awareness and
forcing companies to confront/defend certain issues. These two factors both serve social justice, and other social
groups will buy shares just to be able to submit a proposal to bring light to an issue.
Most companies go to SEC and ask to exclude. If they can, SEC will send no action (meaning they dont take
Common occurrences : Often to remove takeover defense measures (green mail, poison pull), not to appoint CEO as
chairman of board, proposal to make board more or less indepdent, to link director pay to performance.
SEC Rule 14a-8 Town Meeting rule that allows for any security holder who holds (2k in MV or 1% of companys
security and didnt get rid of it) to submit a proposal for action at a forthcoming meeting of security holder along
with a statement of no more than 500 words in support of the proposal to be included in the proxy statement.
If mgmt opposes: Must file proposal and reasons for opposing with SEC who Reviews.
1. 14a-8(i)(5) Relevance
Proposal must be relevant to operations involving at least 5% of the companys total assets, net
earnings, or gross sales, OR be otherwise economically and significantly related to the corps
Otherwise significantly related serves as an exception to the exception (can exclude
proposals related to matters involving less than 5% of assets, earnings, or sales) with respect
to matters of social and ethical significance (i.e., not limited to issues of economic
significance) Lovenheim v. Iroquois Brands
o Rationale: Although forcing companies to devote time and resources to confronting
something w/ little present financial or other effect, certain behavior (animal cruelty
in Lovenheim), if taking place, could be devastating from ethical and public relations
standpoint down the line
2. 14a-8(i)(8) Relating to An Election
A proposal was non-excludable b/c it involved a proxy access bylaw change proposal relating to
election procedures IN GENERAL rather than a SPECIFIC, upcoming election AFSCME v. AIG
(shareholders wanted to amend AIG bylaws to require AIG to publish the names of shareholder
nominated board candidates).
a. Current state of law 14a-8(i)(8) amended to allow the board to exclude any proposal that
relates to a nomination or an election for membership on the companys board or
analogous governing body or a procedure for such nomination or election
o Now applies to procedures as well as elections
3. 14a-8(i)(7) Management Function (company will tell SEC they are denying proposal)
Bylaws are controlled by s/holders and directors but proposals shall not take away discretion of
the board. Not in the s/holders province to compel the board to do something because board has
fiduciary duty to exercise their reasonable business judgment CA, Inc. v. AFSCME
Proposals cant be ecluded if it involves a strategic decision
CA v. AFSCME S/holder proposal to reimburse reasonable expenses incurred by
challenging directors was proper matter for s/holder action (under Del 109); however, the
language of shall reimburse violates the prohibition (under Del 141(a)) against
contractual arrangements that commit a board to a course of action that would preclude
them from fully discharging their fiduciary duties to the corporation. Allocation of funds is
generally something within the boards discretion and this is not something that the
shareholders can mandate that the board do. Cannot remove board discretion.
o If it is advisory and doesnt require the board to act, it can usually be included.
o The shareholders power is not coextensive with the boards power to manage. The
shareholders power is limited by the boards management power under Del
o 14a-8(i)(1): Not a proper subject for action by shareholders (ex: demanding business to stop purchasing foie
gras violates 141(a) and fiduciary breach) Note if 141(a) violated, 14a-8(i)(2) is violated.
1) Improper under bylaws if inconsistent with law or articles of incorp
2) ORDERS THE BOARD: Cant unless in certificate of incorp.


(1) Improper under state law: If the proposal is not a proper subject for action by shareholders
under the laws of the jurisdiction of the company's organization;
NOTE to paragraph (i)(1): Depending on the subject matter, some proposals are not
considered proper under state law if they would be binding on the company if approved by
shareholders. In our experience, most proposals that are cast as recommendations or
requests that the board of directors take specified action are proper under state law.
Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is
proper unless the company demonstrates otherwise.
Class Notes: 1 of the most common ways to find their proposals excluded. When a proposal
orders directors to do something, instead of recommending the directors from doing
something, then gets excluded. Note that proposal does not have any mandatory effect. Bd
does not have to do; it just gives them an idea of what shareholders want. What is wrong
with a proposal in demanding bd to do something? These are not decisions that
shareholders get to make. Management or affairs is to be only undertaken by bd of
directors NOT shareholders.
(2) Violation of law: If the proposal would, if implemented, cause the company to violate any state,
federal, or foreign law to which it is subject;
NOTE to paragraph (i)(2): We will not apply this basis for exclusion to permit exclusion of a
proposal on grounds that it would violate foreign law if compliance with the foreign law
could result in a violation of any state or federal law.
(3) Violation of proxy rules: If the proposal or supporting statement is contrary to any of the
Commission's proxy rules, including Rule 14a-9, which prohibits materially false or misleading
statements in proxy soliciting materials;
Class Notes: (3) violation of proxy rules. If you have shareholder proposal that had material
misleading statement/omission can be excluded
(4) Personal grievance; special interest: If the proposal relates to the redress of a personal claim or
grievance against the company or any other person, or if it is designed to result in a benefit to you,
or to further a personal interest, which is not shared by the other shareholders at large;
Class Notes: personal interest of shareholder can be excluded under (4).
(5) Relevance: If the proposal relates to operations which account for less than 5 percent of the
company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net
earning sand gross sales for its most recent fiscal year, and is not otherwise significantly related to
the company's business; [This was at issue in Lovenheim case]
(6) Absence of power/authority: If the company would lack the power or authority to implement
the proposal;
(7) Management functions: If the proposal deals with a matter relating to the company's ordinary
business operations;
Class Notes: (7): Deals with management functions if proposal relates to ordinary bus
operations, then it can be excluded b/c not proper subject for shareholders action. It is
officers who make ordinary bus decisions. This is simple corporate governance matter. (can
be excluded under (i)(7) or (i)(1))
(8) Relates to election: If the proposal relates to a nomination or an election for membership on the
company's board of directors or analogous governing body or a procedure for such nomination or
election; [at issue in AIG case]
(9) Conflicts with company's proposal: If the proposal directly conflicts with one of the company's
own proposals to be submitted to shareholders at the same meeting.
NOTE to paragraph (i)(9): A company's submission to the Commission under this section
should specify the points of conflict with the company's proposal.
(10) Substantially implemented: If the company has already substantially implemented the
(11) Duplication: If the proposal substantially duplicates another proposal previously submitted to
the company by another proponent that will be included in the company's proxy materials for the
same meeting;
(12) Resubmissions: If the proposal deals with substantially the same subject matter as another
proposal or proposals that has or have been previously included in the company's proxy materials
within the preceding 5 calendar years, a company may exclude it from its proxy materials for any
meeting held within 3 calendar years of the last time it was included if the proposal received:
(i) Less than 3% of the vote if proposed once within the preceding 5 calendar years;
(ii) Less than 6% of the vote on its last submission to shareholders if proposed twice
previously within the preceding 5 calendar years; or
(iii)Less than 10% of the vote on its last submission to shareholders if proposed three times
or more previously within the preceding 5 calendar years; and
Class Notes: Proposals that have been given in the past but have never had much support.
o (13) Specific amount of dividends: If the proposal relates to specific amounts of cash or stock dividends.

Note on SEC oversight/procedure of s/holder proposals:

If a corp believes a proposal can be excluded, it may file w/ the SEC stating that it intends to exclude the
proposal, the SEC then:
If in agreement files no action letter saying it would not recommend commission bring
enforcement proceeding
If not in agreement notify issuer that SEC may bring enforcement action if proposal is excluded
Intermediate approach tell issuer that would be excluded as currently drafted, but can be revised
as follows
o Either side who loses can ask commissioners to review staff decision
o Proponent of the proposal may still bring suit even if SEC does not take action

Closely Held Corporation (35 or fewer shareholders)

Hobby Lobby: Best interest of the corporation. Want corporation to avoid heavy fines. Q: What advice would you give
to the Sc in relation to Sc in citing this decision? BJ is relevant if one of the shareholders in the family had challenged the
other members (by incurring penalties and bringing litigation). Dissenting family member could have said a breach,
negligence, etc. But this is a different question. If a corp is a person as per citizens united, they should have a first
amendment right as to what speech they have. On the other end, when there are numerous shareholders, how do you
ascertain this? Why if a corp gets special treatment with liability should it be a citizen in regards to rights?

Wade: The essence of a corp is it seperateness from its shareholders. It is a distinct legal entity, with its own rights,
obligations, different from the rights of shareholders. Relates to piercing: if an individual shareholder gets to relyon te
separate existence of corp to shield himself from liability, then that should end the inquiry. Shouldnt get to choose.

Abuse of Control (state law, normally closely held)

Since CHCs are similar to partnerships, s/holders have a fiduciary duty of utmost good faith and loyalty to each
other because they control board of directors. By contrast, s/holders in large public corps owe no duties to one
another unless there is a dominant s/holder
Test for breach of duty of loyalty to minority shareholders: (Wilkes)
1. Whether the action taken further a legitimate purpose; and if so,
Burden on controlling s/holders
NOTE: Controlling shareholder can be someone with 25% stake but total veto power (i.e 4
shareholders all w 25% but they need >80% of the vote to pass anything) (preventing
o See Smith v. Atlantic Properties (similar to fisk ventures with veto provision)
Wolfson in Smith ran wouldnt agree to pay dividends to other 3
shareholders. Eventually, that had negative tax consequences. He breached
duty of loyalty by having no plan and making taxes come.
But, didnt all 4 not agreeing cause tax penalty?
2. Is there an alternative means to accomplish that purpose that would be less harmful to the minority
s/holders interest (i.e., less harmful (least restrictive) alternative)
Burden on minority s/holder
o Wilkes (mass) Termination of Wilkes for objecting to Quinns purchase of corp property because price was
too high did not further a legitimate business purpose (and thus, didnt have to reach second prong). Wilkes
was competent in his salaried position. Other members cannot just fire him.
i. Distinguishing Ingle: 1) Ingle was NY 2) Ingle had specific sholder K with specific buyout, Wilkes had
oral understanding to keep job as long as loyal. 3) Wilkes, original investment in corp, held shares
for a long time, Ingle employee first, just bought shares 4) Wilkes did not get fair price, Ingle did 5)
but werent expectations the same? 6) dissent in Ingle says buyout prov. Was there in case Ingle left
Remedies for breach Reasonable Expectation Test: (Brodie)
1. What were s/holders reasonable expectations?
o What did the shareholder reasonable expect to get out of being a shareholder?
2. Were s/holders reasonable expectations in share of ownership frustrated?
o Brodie By freezing out Ms. Brodie, she was excluded from corp decision making, access to corp
info, and ability to sell her shares. She was receiving no dividends and no salary.
3. Determine what remedy would vindicate Ps interests? (remedy has to comport with the plaintiffs
reasonable expectation of benefits from stock ownership in the corporation)
In freeze out, restore minority s/holder as nearly as possible to the position she would have been in
had there been no wrongdoing
Forcing a buyout of ones shares is not a proper remedy (Creates artificial market UE)
o Brodie Reasonable expectation was role of director and/or officer and salary similar to what her
husband was receiving (and maybe a dividend)
Perhaps injunction to prevent majority from blocking the minoritys position
o Wilkes Salary that Wilkes would have received had he not been terminated
Ways to avoid issues:
1. Employment with shares that has contract that sets grounds for termination
Employee doesnt acquire fiduciary protection against being fired simply because he is a minority
s/holder Ingle
Ingle NEW YORK at will employment doctrine overrides strict good faith when buy-back
provision in s/holder agreement is premised on termination for any reason. No right to
employment, and no fiduciary duty to terminate only for cause. The sequence of starting as
an at-will employee and then becoming a shareholder was material. If his argument was
that he wasnt treated fairly in terms of the money he received for shares, he would have
went to ct and they would have appraised it. (dissenting from transaction).
Appraisal/dissenters rights. **Remember if he hadnt signed agreement, may have been
more like Wilkes
o ******Q: Enron documentary: Did the board members of Enron breach a
fiduciary duty. And if so, what duty?
o Duty of care requires due consideration/ investigation/ and deliberation. They did
not do that here. Failure to investigate, failure to deliberate. Need to finsh by
saying that they were grossly negligent!
o How about duty to monitor? Dont want to show this because it is a much higher
standard to prove good faith.
Q:: Andy fastow when he did business, he chose for many of the special entities limited
partnership business forms. Many of the rest of the partners were limited liability. Was
limited partner form the best choice of business organization. If not, why not, and what
would you have chosen? Entities were limited partnerships, how do you protect Fastow
when he can be responsible for all the debts? Limited partnerships (LLPS), def varies from
state to state. What about a corporation? Not the best answer because corps have
centralized control and he wants control! Takes away flexibility.
Q Why did Ingle lose his case?
2. Some sort of buyout (buy-sell) agreement
If a minority s/holder is termination/frozen out, corp has buy out his shares
When M. Sholder has K that terminates stock when employee quits
Corp must Disclose or abstain from trading on MATERIAL, non-public info. (see above
under insider trading)
In Jordan: if you quit, get book value, but merger was in place. Corp didnt tell him and got
excess because he sold before successful merger. Jordan wouldnt have quit had the
company disclosed or abstained. (these are Wilkes duties) : good faith.
Contrary to INGLE!
Opportunistic fireing triggers Wilkes
Can agree to trigger and price when agreement entered
Exception relating to employment at will contract in NEW YORK An employee doesnt
acquire fiduciary protection against being fired simply because he is a minority shareholder

Mergers and Acquisitions: Friendly transaction negotiated between acquiring company and the acquired.
2 Ways to do this: 1) 2/3 vote of shareholders of both companies vote for merger
2) Sell assets of acquired company and surviving company has assets of acquired

Result: one company ceases to exist and everything is transferred to the survivor.

Once Merger, Dissenting Shareholders Always get Dissenting Rights

Right of shareholders if they dissent from or disagree with particular transaction under
state law
Courts will determine value of their shares
Judicial proceeding to appraise value of shareholders shares
DE shareholders of companies in DE do not get appraisal rights for asset sales; shareholders of
companies in DE do get appraisal rights for mergers
PA shareholders get appraisal rights in both asset sales and mergers
Asset Sale
o one company sells its assets to another company
o If company a sells its assets to company b, then in return for assets can give 1) $, 2) shares in company b,
or 3) combo of both
o Once A sells to B, all it has is its name and $/stock it got for its assets. In these cases, after A sells assets,
it will liquidated. Then A will give $/shares, to the A SHs.

Farris v.Glen Alden Corp: List small but sells to GA in exchange for GA stock. Then, list liquidated and distributed
GA stock . This was done to avoid appraisal rights because PA didnt have appraisal rights for asset selloff. Ct
called this a de facto merger and abolished this asset sell off without appraisal rights. PA NEED APR. RIghts

Harrington v. Arco : Same transaction as Farris: involved asset sale (did it instead of merger) and Delaware ct
said that this is perfectly ok to choose one over the other. NO APPRAISAL RIGHTS IN DE
Both methods of amalgamation are of equal dignity because any other approach, parties are never
certain of the outcome. No defacto merger in most jurisictions including NY.

Freezeout Merger: Normally, remedy for merger or sell out is to have court determine fair price. But another remedy

Majority Rule: It is ok to freeze out minority shareholers, but must do so in accordance w/ Weinberger
w/ 1) fair price : usually independent evaluations, investigation, etc.
2) fair dealing. Need full disclosure of COIs, merger agreement, etc. Need to bargain for price.
o Weinberger rule. Does not require legit. Business purpose to freezeout. Here, there were
conflicted directors. Not fair dealing by not disclosing conflict. Also, not fair price because the
company should have bargained more for minority shareholders.
o Other bases: Not just misrep ofr fraud. Can be broader notions of procedural fairness and fair
Minority Rule: (Coggins was for cash-out merger)
o 1) Legit Business Purpose: (Cant be personal) Coggins MASS Rule
o 2) Fair Price:
o 3) Fair Dealing:
Note: Relief: Normally dont force people back in, give damages as if merger was
undone and corp back together.

Takeaway: Remedies for minority shareholders (and no such thing as de-facto merger)
1) Appraisal rights (In DE and NY, they are extreme right rights because cts. Dont want everyone to do it. So
they give it when there is a merger, but not asset sale. In PA, they give rights for both).

2) Weinberger remedy

3) K Right to get a certain level, see Rabkin. There, minority shareholders had right to get certain price per share
per K.

De Facto Non-merger

Rauch v. RCA: Where parties structured a merger but plaintiffs wanted to call it an asset sale followed by
redemption. Essentially, DGCP251 allows during a merger for a company to reissue stock or to give a
cash out. In this case, if I was a redemption, Ps wouldve gotten 100 a share, not 40. IT IS WHAT THE
PARTIES CALL IT. Corporaitons have equal dignity to choose how they structure. THIS IS THE

LLC Merger: (merger of llc into a corporation)

BACKGROUND: LLCs can have board of managers, have centralized management, etc.
Rule: Managers still have fiduciary duty of loyalty. In VGS Inc. v. Castiel, C owned 75% and S owned
25%. Q served on board as per C. Q and S try to go behind Cs back and form LLC to become majority.
o Majority of LLC can take members off board without notice or meeting etc. If C had notice, he
would have blocked merger by remoing Q from board of managers. DGCL 404(d) allows actions
requiring consent to be taken w/o meeting, but remember they cant be surreptitious.
Must provide notice and give shareholder opportunity to protect his interest.


Dealing w/ hostile form of corporate takeover. Typically, acquirer bypassed the directors and makes offer directly to
s/holders through a tender offer Offers premium over market value if sufficient % of shares are tendered
Can also bypass board and have shareholders through proxy try to mess with corps directors
Can also do a slow creep and buy stock on open market and gain share to influence directors. Cheff
Numerous tools available to Board to thwart takeover attempts power derived from Del 141(a) (power to
manage business gives Board power of defense) & Del 160(a) (broad authority for corp to deal in its own stock)
1 Tier: No limit on shares willing to take, but he wants 51%. Offers for 60 when trading at 50. You can
tender and get 60, or refuse and watch the price (freeride). If deal fails, keep what you have.
2 Tier: Buy 51% of everyone that tenders stock for 65 (front end) and thereafter merge firms and pay 55 to
the remaining back end %49.
What happens: 1) you tender and go through. Get 65 for at least %51 of stock (more if less tender)
and $55 for the rest. 2) Dont tender and deal goes through. You will receive back end $55 for all
stock. 3) Deal does not go through: maybe rival company bids stock up real high.
Reason: Meant to prevent one tier (free ride policy) where no one tenders hoping company
becomes more profitable because eveveryone scared of getting screwed in 2 tier.
Defense Mechanisms:
Greenmail buy corporate raiders shares (IRS now imposes 50% tax penalty on Greenmail)
In Cheff the corporation got Holland bank to buy only the Maremont shares. They offered
$20 for shares worth $14, so the shareholders bring suit.
Alternative: Issue dividends or buy shares from shareholder who want to sell.
Poison Pills anything that kills your corporation. A triggering event that is going to make the
corporation less valuable so that the acquirer will no longer want to acquire it.
Could be certain rights granted to s/holders to acquire equity or debt securities
White Knight A person or corp that rescues the target and makes competing tender offer
No-shop Agreement Stipulation prohibiting a target corp from seeking other offers
Cancellation Fee requires acquirer to pay large fee to White Knight
Lockup Option Gives White Knight option to buy valuable crown jewels at far below market
value if raider gains control Revlon
Self-tender Company purchases its own shares (Now illegal if offered to select s/holders only)
Board can take a number of defense mechanisms to ward off a hostile takeover attempt
BJR protection does not apply right away to boards actions. There is enhanced scrutiny.
o Directors have to satisfy higher burden to get BJR protection b/c of fear of COI/entrenchment Cheff
Test to determine whether board acting reasonably, and thus, higher burden satisfied
o Court analyzes whether board (Unocal Duties Expansion of Cheff):
1. Acted in good faith (actions motivated by genuine concern for the corp);
2. Conducted a reasonable investigation in assessing the takeover bid; and
3. Balancing Whether action taken was reasonable in relation to the threat posed
o If factors met, higher burden satisfied & directors receive BJR protection (subject to trad. BJR exceptions)
Cheff Court determined that board acted in good faith and conducted a reasonable investigation (did own
investigation; contacted outside firm; considered Dunn & Bradstreet report which characterized Maremont
as a corp raider), and thus, decision to pay off Maremont was protected as a valid business decision.
Maremont was going to change their business strategy that was working (i.e., by liquidating the company).
Unocal Selective treatment in making self-tender was reasonably related to the perceived threat of a
coercive two-tiered tender offer (NOTE: SEC outlawed self-tender offers unless offered to single s/h or all)
o The board passed the enhanced scrutiny test and got BJR because it was acting in the shareholders
best interests and not to entrench themselves.
However, when sale or break-up is inevitable, the boards obligation changes from defending the corp (unocal
duties) to getting the best possible offer for shareholders (dont need to seek competing price) Revlon Duties:
1. Triggered when dissolution or break up is inevitable (active bidding process) or when in response to a hostile
bid, company abandons long term strategy and looks for a friendly bidder to break up company Revlon
o Corp initiates sale
o Corp seeks alternative transaction in response to bidders offer (Revlon)
Lock-up provision is an acknowledgement of an imminent break-up. You want to foster
bidding, not eliminate it.
o Corp abandoning strategy and business model through lockup provision (Revlon)
Revlon Only issue was price. Board had fiduciary duty to get best possible price and subsequent
defense measures no shop, lockup, and cancellation fee to white knight were not reasonable
Analysis changes if other issues such as acquirer would change business model, etc.
Merger: If a merger is in place, and negotiations are ongoing, to fend off a rival bid, the COMPANY
may make a tender offer and is not forced to investigate new offer. When sale or breakup is not
inevitable, company can use its best interest and make tender offer (shareholders lose). Time INC

2. Triggered when control of the corp is to be sold QVC

Paramount v. QVC Sale would change control from fluid aggregation of public shareholders
(disperse and fragmented ownership) to dominant s/holder. Different from Time Warner When this
happens, it triggers Revlon
Important if dominant s/holder plans to change business model or if such control in the
hands of one person and thus unfettered discretion to take such actions as sell off assets,
dissolve, merge elsewhere, etc. would be against the public interest
No shop: Paramount board would not discuss any business combo with 3rd party unless the
parties offer was not subject to financial contingencies, and paramount board decided that
its fiduciary duties required it to talk to the 3rd party.
Termination fee: If negotiated deal falls through (Viacom and paramount), Paramount
would pay Viacom 100 million.
NOTE: There can be a conflict of interest because people can lose their jobs. Because of
this, business judgment rule is not implicated. HEIGHTENED LEVEL OF JUDICIAL SCRUTINY.
Lyondell v. Ryan: Board of Lyondell gets offer from Basell. Reject first offer within very short time.
Board was very sloppy. Derivative suit by shareholders. While they were sloppy and disinterested,
they were exculpated from liability for duty of care. Only liable if duty of loyalty but they werent
because of no bad faith (business judgment)
Remember, as long as they bargain for fair price, DONt NEED TO SEEK COMPETING OFFERS