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§1 Who is an Agent?
Gorton v. Doty (Idaho 1937) Doty expressly stated that Darst could use her car if he drove. Darst didn’t say he wouldn’t let anyone else drive. But, manifested assent to Doty’s condition by following the condition. Issue: Whether an agency relationship existed between Doty and Darst? Why does it matter? Any act of the agent makes the principal liable. Rule: Rest § 1- Agency is a relationship that results from: The manifestation of consent by P to A that A shall act (1) on P’s behalf- her car that she could have driven but instead offered to him with him as driver . She gave to him after the offer. and (2) subject to P’s control- implied that for the trip to Paris and back for a particular game and particular day, and he is to drive A’s consent to so act. He drove the car to and from the game. Business Orgs is based on Contracts, but it is NOT Contracts. A K provision that tries to opt out of an immutable rule, cannot be done! Look for this on the exam. *It is the presumption that the driver is the agent of the owner of a car. Must look at other factors, though. The fact that she made the condition that he drive, etc. Must apply all of the factors. On what grounds did defendant move for a mistrial? Implication by plaintiff that defendant Doty carried insurance. What effect does this decision have on Doty and other drivers? The incentive to insure. If you know you’re going to be hit with a million dollar lawsuit for letting someone borrow your car, you want to shift that risk and liability to another= the insurance company. In order to establish an agency relationship, benefit is not specifically required. Is a benefit the same as acting on a P’s behalf? Remember this for Jenson. Pay attn to the facts the Court uses to determine if there is a relationship. A. Gay Jenson Farms Co. v. Cargill, Inc (Minn. Sup. Ct. 1981) Facts: Warren Seed and Grain Co. operated a seed business, grain elevator, and grain storage. Warren entered a security agreement with Cargill, Inc. in 1964 to receive loan money for working capital. Working capital represents operating liquidity so Warren probably didn’t have enough assets on hand for day-to-day operations. Through the agreement, Warren would receive 1
funds and pay its expenses by issuing drafts drawn on Cargill, but imprinted with both Warren and Cargill’s names. Proceeds from Warren’s sales would be deposited to Cargill’s account. Warren also appointed Cargill as its grain agent for transaction with the Commodity Credit Corporation, and Cargill was given a right of first refusal to purchase grain sold by Warren. 3 yrs later in 1967, Warren and Cargill negotiated a new contract extending Warren’s credit line and it allowed Cargill to keep annual financial statements and access to Warren’s books for inspection and audit. Warren was also not allowed to make any capital improvements or encumber its assets without Cargill’s approval. In 1970, Warren became Cargill’s wheat agent. 1971 Warren “contracted on Cargill’s behalf with various farmers” for seeds. Warren began purchasing business forms from Cargill and used them to create its own business forms. Cargill headquarters informed the regional office that it had right to determine the use of Warren’s funds since it was financing Warren. So a regional manager from Cargill started working with Warren daily and with monthly meetings. Warren’s credit line was continuously extended by Cargill and reached 1.25m in 1976, a bank account was opened for Warren to draw checks, and at that time Cargill was receiving 90% of Warren’s grain. In 1977, Cargill discovered through local farmers that Warren was paying his vendors and after an audit determined that Warren was 4m in debt. Warren ceased operations and was indebted to Cargill 3.6m and to the plaintiffs 2m. Procedural Hist: 86 individual, partnership, or corporate grain farmers sued Cargill and Warren Grain and Seed to recover the 2m in losses sustained by Warren’s breach of Ks with the Ps. The Ps alleged that Cargill was jointly liable for Warren’s indebtedness because it acted as the principal for the grain elevator. Jury trial. Judgment for the Ps. Cargill appeals the verdict. Issue: Whether Cargill, by its course of dealing with Warren, became liable as a principal on Ks made by Warren? Held: Yes. By its control and influence over Warren, Cargill became a principal. Even if the parties didn’t intend this to be an agency, circumstantial evidence showing the course of dealing between the parties proves the existence of an agency. When an agency is proven through circumstantial evidence, the principal must be show to have consented to the agency. Cargill manifested its consent to the agency when it consented that Warren would be its agent. Cargill had control over Warren because it interfered with Warren’s internal affairs and heavily financed Warren. And Warren manifested assent by acting on Cargill’s behalf in procuring grain for Cargill. This was not a buyer-supplier relationship because Warren cannot be an independent business since all of Warren’s operations were financed by Cargill and almost all of its grain was sold to Cargill. Cargill’s reason for financing Warren was not to make money as a lender, but to establish a source of grain for its own business. Under Rest. § 14 O the Court also found that Cargill was a creditor who assumed control of his debtor’s business. Cargill became the principal because it assumed de facto control over Warren’s grain elevator. Rules: Restatement 1.01. “Agency.” And (2nd) 14 O- A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. Immutable rules. Legal formality made Cargill an agent- de facto control makes him, the creditor, also the principal. 2
Cargill is the purported principal and Warren is acting as its agent. No contract saying that Cargill would take over. Don’t need a K. Circumstantial evidence. Agent- A person consents that another shall act on his behalf, subject to his control, and with the other person’s consent. What the Nine Factors listed by the Court show: (1) constant recommendations- Manifestation of consent, (2) right of first refusal- control, (3) Cargill’s approval before Warren can enter into mortgages- control, (4) right of entry onto premises to audit- control, (5) correspondence regarding finances- control, (6) needs paternal guidance= control, (7) drafts (affiliated), (8) financing (debtor) (9) power to discontinue (debtor/creditor). The Court was looking for “control.” You either argue the law or the facts, whichever is better for the case. Emphasize the facts that need to be emphasized. Simply that fact that one finances all of another’s purchases for operations and operating expenses does not alone show an agency. The fact that one has right of first refusal is not enough either. Right of first refusal happens a lot in businesses. Doesn’t mean can’t sell to others just have to sell to one first. Constant recommendation by phone. Not enough if advice. Could be if demanding. Maybe what was going on is that someone from Cargill was making lots off commission off of every deal so that’s why they kept extending credit etc.
§2 Liability of Principal to Third Parties in Contract A. The Agent’s Authority
Mill Street Church of Christ v. Hogan Facts: Mill Street Church hired church member Bill Hogan to paint the building and the church provided all materials. It also decided to hire another church member if assistance was needed. Bill had been hired for painting jobs in the past by the Church and was allowed to hire his brother Sam to assist when he too was a church member. Bill discussed with an Elder of the Church that he would need assistance when he reached a high and difficult area to paint. The Elder mentioned the church member the Church had previously discussed but the Elder did not tell Bill he had to hire him. SO Bill hires his brother Sam again. Thirty minutes into working, Sam fell off of a ladder and broke his arm because a leg of the ladder he was on broke. Hist: Sam filed for Workers Comp and was turned down because the Old Board ruled that he was not an employee of the Church. The New Board, however, reversed. Mill St Church and State Automobile Ins Co petition for review of the New Worker’s Comp Board’s decision. The Church argues that the Board erred in finding that Bill Hogan possessed implied authority as an agent to hire Sam Hogan. 3
Default rule. Because of the facts. If they had said no Sam or must hire someone else, etc. HELD: Affirmed. Hogan had implied authority as an agent to hire another worker because the circumstantial evidence proves that the authority of Bill Hogan to hire another is necessary to carry out his duties. Bill had hired Sam in the past at the Church (custom), never told Bill that he could not hire Sam or had to hire the other guy, the painting could not have been done by just one person. ALSO apparent authority because Sam relied on Bill’s belief that it was ok to hire him as his assistant. If third party has facts showing that there was no authority, then no agency exists. Dweck v. Nasser (Del.Ch.2008) Facts: Nasser, the chairman of the board of directors of Kids International, Inc. fired Dweck, the president, CEO, and member of the board of directors for allegedly operating competing businesses out of the Kids Intl offices. After an unsuccessful attempt to reach a settlement agreement, Dweck sued Nasser in 2005. In 2007, Dweck retained Wachtel to facilitate a settlement. Although Nasser’s attorney on record was Heyman, Nasser’s attorney of 20 years, Shiboleth, executed a settlement agreement on Nasser’s behalf that required Dweck to pay 52.5% of aggregate profits generated by the entities that allegedly competed with Kids and to pay $1.05m to Nasser for litigation expenses. Nasser was to compensate Dweck for her 30% equity interest in Kids. But Nasser says he’s not bound to the agreement since Heyman didn’t execute it. Hist: In 2005, Dweck sued Nasser for unlawful termination. Nasser moved to dismiss several counts of the complaint, granted in part. In 2007, the parties executed a settlement agreement. Dweck moves to enforce the settlement agreement. Held: Motion to enforce the settlement agreement is granted. Issue: Did Shiboleth have authority to bind Nasser into a settlement agreement? Reasoning: Yes. The Court says the attorney had actual authority, implied authority, and apparent authority. Actual authority because of the 20 year relationship, Nasser told Shiboleth to “do what he wants” with the agreement, both Shiboleth and Heyman testified that Nasser granted Shiboleth the authority to settle the litigation, Nasser agreed to the settlement to Shiboleth 7 different times, and Nasser testified that he told Shiboleth that he could “act in [his] name.” Shiboleth AT LEAST has Implied authority because of the course of dealings between the two over a period of 20 years including Shiboleth having settled many cases for Nasser, and Nasser permitting Shiboleth to speak in his name (act on his behalf) and directing him to settle the action (control). LIKELY Apparent because Nasser knew Shiboleth was working with Heyman on the settlement and Shiboleth believed he had the authority to act on Nasser’s behalf. Three-Seventy Leasing Corp v. Ampex Corp. Facts: 370 is a company that purchases and leases computer hardware. Kays, a salesman of Ampex arranged a meeting between himself, Mueller, his superior at Ampex, and Joyce, the owner and only active employee of 370. At the meeting, Joyce was informed that Ampex could 4
The burdens are different for each authority. ISSUE: Did Kays have apparent authority to bind Ampex? For apparent agency. Then about a week later. Joyce informed Ampex that he didn’t think passing the credit requirements would be a problem. Affirmed. The license was always taken out in Humble’s name and his name was painted over the door. Hist: Watteau sued Fenwick for monies owed. Hist: 370 sues for breach of K. the letter from Shiboleth said you’ve been telling all these people that I act on your behalf. and signature blocks for a rep of 370 and for a rep of Ampex. The letter then. had apparent authority to act for Ampex because Ampex led Joyce to believe that Kays could act on its behalf. Ampex appeals because it considers the document to have been a solicitation. Actual authority looks to the communications between the P and the A.only sell to 370 if 370 could pass certain credit requirements. etc for the business on credit with Watteau. Still acted like he was the owner even though he wasn’t. there is enough that there is an indirect communication to the third party by the principal. though. Authorities often overlap. HELD: Yes. Mueller directed Kays to submit to Joyce a document containing the items for purchase. which became an offer when executed by Joyce. payment and delivery method. Mueller agreed and even noted this in the intra-office memo. Before apparent authority. Humble bought cigars. It’s just another lens for looking at how the cases are processed and how you meet your burden. the price. Kays sent Joyce a letter confirming the delivery date of the memory units. but was not accepted by Ampex. (1) Mueller directed Kays to send Joyce the document. but Ampex never executed. Humble and Fenwick agreed that Humble only had the authority to buy bottled ales and mineral waters for the bar. must look at the principal’s manifestations to the third party. 370 returned the document signed. Joyce began negotiating a lease agreement with EDS. a salesman of Ampex. Fenwick appeals. judgment for Watteau. Like in Nasser. Mueller announced in an intra-office memo that Ampex was awarded an agreement with 370 and that Kays would be handling all matters with 370. Did Humble have actual authority to buy cigars and Bovril from plaintiffs? No. (2) Joyce said he wanted all communications to be through Kays. but he remained the manager. While negotiations with Ampex continued. However. 5 . Watteau v. Joyce was never made aware of this limitations and thought that Kays could do so. Fenwick (Queen’s Bench 1892) Facts: Humble transferred his bar to Fenwick. Why do we care what type of authority? The type of authority doesn’t change the liability but will change how you analyze your proof for a case. Kays. and EDS committed to lease six units of Ampex computer core memory from 370. Even though Ampex testified that Kays did not have the authority to accept and enter into Ks on Ampex’s behalf. and any other goods would be acquired by Fenwick. Dist court found that there was an enforceable K because the offer was accepted by Ampex. A few days later. was a promise to deliver the items set out in the document executed by Joyce and submitted to Ampex.
Neither Botticello or the attorneys knew that Mary had any interest in the property. Fenwick is liable to Watteau. Ratification Agency by Ratification is an agency that occurs when : 1. 6 . A person misrepresents himself or herself as another’s agent when in fact he or she is not and purported P ratifies. then Ps left off the hook too much. Botticello offered to buy the farm for $75k. but Mary said no way would she go less than $85k. The parties executed the agreement and Botticello began possessing the property and making substantial improvements. Watteau reasonably believed that Humble had the authority to purchase the cigars and Bovril.An undisclosed principal is subject to liability when (1) 3P is induce to change position to their determinant and (2) knowledge by the principal of the agent’s general conduct.Issue: Is Fenwick liable for Humble’s acts when Humble acted contrary to his authority but represented himself to Watteau that he had authority? Held Yes. In undisclosed principal cases. Botticello v. If you don’t know that there is a P how can you be holding out? No notice of the specific transaction necessary. Stefanovicz (Conn. But if this is always the rule. just P needs to know about A’s conduct generally. B.06 Liability of Undisclosed Principal-. Fenwick was the principal. So there was no holding out by the owner= the P= plaintiff didn’t even know that Ps existed. but Mary and Walter refused to honor the option agreement. Court says holding himself out as the owner. what is the scope of the agent’s authority? Watteau: “The principal is liable for all the acts… which are within the authority usually confided to an agent of that character. Botticello exercised his option to purchase. Although undisclosed to Watteau. Walter and Botticello then entered a lease agreement with an option to purchase with a price of $85k. the 3P must be aware that there is a P. 1979) Facts: Mary and Walter Stefanovicz were tenants in common of a farm. For manifestation of assent between the P and the 3P.” Rest § 195. Even though Humble exceeded his authority.“agent enters into trans usual in such business and on the principal’s account” Restatement § 2. The Court said that this must be the rule or else all of the Watteau’s of the world would be automatically defeated. The agreement was drafted by Walter’s attorney and reviewed and modified by Botticello’s attorney. and Watteau thought that Humble was the business proprietor.
possession of the premises. Mary is not bound to the terms of the agreement. And you look at what happens at the time. having 1/2 undivided interest. In order for the receipt of monies to constitute ratification. Koos Bros allowed Hoddeson to look at all 5 of the salesman of that department. Mary’s receipt of its benefits does not make her a party to the agreement. Because Walter. Estoppel Hoddeson v. and is Koos Bros bound? Rule: Agency by estoppels= recklessness of duty= An agency exists between the company and the imposter because if not for the company’s lack of reasonable surveillance and supervision. by receiving rental payments. Never received her furniture that she was told would arrive the next month. Since that didn’t happen. For agency by estoppel. Trial court found for Botticello. Issue: Was Walter acting as Mary’s agent? Did Mary ratify the terms of the K by her conduct? Did Mary ratify the terms of the K by receiving its benefits? Held: No. insurance. Know that another acted without your manifestation of assent. Issue: Did the imposter have apparent authority to act on Koos Bros’ behalf. land jointly held. You have to know that you are ratifying to be able to do it. No specific performance to 3P. is allowed to lease his share. Ratification. Agent. Just because married. For undisclosed principal. (NJ 1957) Facts: Hoddeson purchases a bedroom suit from Koos Bros. the imposter would not have been able to conduct business on the company’s behalf. These do not create an agency. Koos Bros. however. No. Koos Bros.no delegation of power by Mary to Walter to enter into the agreement on her behalf. Walter handled many of the business aspects of the property ownership including paying taxes. he was on vacation the week she bought the furniture.Hist: Botticello sued seeking specific performance.(1) Mary did not affirm Walter’s execution of the agreement by knowing that Botticello was occupying and improving the land. determines that it must have been an imposter salesman who sold the furniture. Held: No. She did not get a receipt.Cannot prove that Mary ever agreed or authorized Walter to act on her behalf in the selling the farm and the execution of the agreement. A business proprietor has a duty exercise reasonable care and vigilance of protect customers from imposter salesmen. and damages. Walter and Mary appeal claiming that Mary was never a party to the agreement and its terms may not be forced against her. 7 . She paid the salesman with cash. (2) Mary did not ratify the agreement by receiving its benefits. The facts aren’t enough to show that Mary was affirming the K execution. mortgage. C. and having a 1/2 interest in the property. No communication between Koos Bros and the 3P imposter. the principal does not have to know about the 3P. One resembled the salesman. principal must know about the 3P. No. the agreement must have been purported to be entered on Mary’s account.
Marketing Designs. Because he was an agent. Inc.” and he signed his name with the designation “Treas.” Wire transfers of payment were also made in the name of Boston International Seafood Exchange.04. Inc. Designs. and in 1987.) Curran paid Salmoner and Atlantic with checks imprinted with “Boston International Seafood Exchange.02 and 6.” or “Boston Seafood Exchange.” (Note: NOT the new name of Marketing. an unidentified principal. Inc” and “Boston International Seafood Exchange. 8 . and the sole stockholder of a corporation called Marketing. But in 1983. filed a certificate with the city clerk declaring that it was conducting business under the name of “Boston Seafood Exchange.The business cannot avail itself of the impostor’s lack of authority because the business did not prevent the imposter from holding himself out to be an agent of the business when it had a duty to do so.Third) “Unidentified Principal” and “Principal Does not Exist”. And Curran advertised in trade journals for both “Boston Seafood Exchange. Inc. dissolved. Inc. In 1983 Marketing Designs.. Inc” listed the Ps as suppliers. Estoppel only binds P Could the result in Watteau be explained on estoppel grounds? Why did Koos Bros litigate this case so vigorously? Precedent as a public good. Curran represented himself as working for “Boston International Seafood Exchange. Designs. treasurer.] 6. the trial court held that he was not personally liable to the Ps. a director. Points to Consider: Where agent had auth (of any kind) K is binding on both P and T. The Court was concerned with policy. Ps appeal. § 4(2) (2nd) [(6. Curran began purchasing salmon from Salmonor. Curran even gave representatives of the P’s business cards listing himself as the “marketing director” of Boston International Seafood Exchange. clerk. Inc.” One of the advertisements appearing under “Boston Seafood Exchange. Agents Liability on the Contract Atlantic Salmon A/S v. Inc. Inc.” In 1985. Curran (Mass. Issue: Is Curran personally liable to the Ps because he did not disclose the true identity of his principal? Rule: An agent acting for an undisclosed principal is a party to the contract unless otherwise agreed. from Atlantic Salmon. that was organized in 1977. Inc. Inc. Inc. Inc. Hist: Salmoner and Atlantic Salmon both sued Curran for monies owed to them for salmon sold in 1988. 1992) Facts: Curran was the president. D.04--If Curran had actually just hired a lawyer and gotten his corporate filings straight then the principal would exist and he wouldn’t be liable. The trial court determined that Curran was an agent of Marketing Designs.
Humble and Love appeal the judgment and seek full indemnity from each other (protection from the other’s acts. v. The Agreement was also terminable at the will of Humble.Held: Yes. Servant Versus Independent Contractor Humble Oil & Refining Co. Love dropped off her car at Humble for servicing. Immutable. The “Commission Agency Agreement” between Humble and Schneider required Humble to pay most of the operational expenses. then he has a duty to disclose the identity of his principal. Hist: Martin sued both Love and Humble Oil. decided upon substantive facts= Humble’s substantial control A party may be liable for an independent contractor’s tortious conduct if he exercises control over the contractor’s operations. and so accordingly were Schneider’s assistants who were contemplated by the contract. The gas station was owned by Sun but leased by Barone. it rolled across the street and hit Mr. so they don’t want to be jointly and severally liable). Humble furnished the station and equipment. “The business was Humble’s business. This is because of the amount of control that Humble exerted over the contractor. The Court said that. was present when the car rolled away. The relationship between Humble and the independent contractor is more like a master-servant relationship than an independent contractor-type arrangement. Curran’s use of the fake business names does not sufficiently identify the principal to protect him from liability. The trial court found both Ds jointly and severally liable and granted Love judgment over Humble for whatever she was to pay. Martin (Tex 1949) Facts: Mrs. Manis. If an agent wants to avoid personal liability on a contract entered into on behalf of his principal.” Hoover v. Before anyone had touched the car. and controlled the hours of operation. financed advertising. The Court of Civil Appeals affirmed but eliminated the “judgment over” in favor of Love. § 3: LIABILITY OF PRINCIPAL TO THIRD PARTIES IN TORT A. and only one employee. The duty rests upon the agent to disclose the identity of the principal or it may be presumed that he intended to make himself personally responsible. The Humble station was operated by an independent contractor.. Schneider. Held: Yes. Hoover’s car caught on fire. Schneider was Humble’s servant. just as the store clerk’s business would be that of the store owner. Schneider to perform duties directed by Humble. Martin and his three daughters as they were walking. Issue: Is Humble liable for the negligence of the independent contractor? Rule: A master-servant relationship exists where the servant has agreed (a) to work on behalf of the master and (b) to be subject to the master’s control or right to control the “physical conduct” of the servant. Barone and Sun had entered a 9 . Sun Oil Company (Del 1965) Facts: A gas station attendant was filling up the gas tank of Hoover’s car.
Service Station Cases Essentially similar facts: gas station. Somebody gets hurt in an accident at the station and sues the oil company. Held: Motion for summary judgment granted. Sun moved for summary judgment on the basis that Barone was an independent contractor and. A Sun sales rep would visit the station weekly for inspection. Issue: Is a principal liable for the alleged tortious conduct of an independent contractor’s employee when the principal is not involved with the day-to-day operations of the business and has no control over the profit or loss of the business? Rule: An owner is vicariously liable when he exerts substantial control over the independent contractor’s business. Barone. Barone attended a Sun school for service station operators. and in return. then the fact that Master isn’t present doesn’t matter. Sun would loan equipment and advertising materials. Reasoning No liability can shift to Sun for the allegedly negligent acts of Barone’s employee because Sun had no control over the details of Barone’s day-to-day operation. with substantial ties to an oil company. But all Sun products were to bear the Sunoco label. *Who provides supplies. etc? *Location of work. Hoover argues that Barone was acting as Sun’s agent and is therefore liable for his injuries. Hist: Hoover sued the gas station attendant. though. THE SERVICE STATION CASES Principal Agent Sub-agent Oil Company Franchisee Operator Local Employee (actual tortfeasor) Master Servant Sub-servant If can establish a master-servant relationship. Is the nature of the case important? Direct/indirect factors for determining existence of M/S *Tax status of the A *amount of business risk borne by each *term of the relationship *is A paid by job or with unit wage? *Is As work part of Ps reg business? *Ps and As beliefs about the relationship.dealer’s agreement that required Barone to purchase petroleum products from Sun. Barone advertised that Sunoco products were sold at the station and his employee’s wore uniforms with the Sun emblem. which also operates a car repair service. therefore. and Sun Oil Company. and to make suggestions to Barone. the negligence of Barone’s employee could not shift to Sun. to take product orders. Barone was under no obligation to follow the sales rep’s advice. The agreement did not restrict Barone from selling competitive products. 10 . Still liable for sub-servant’s tortious conduct.
Holiday Inns. Inc. Holiday Inns provies a name. Hist: Murphy sued Holiday Inns. Holiday Inns moved for summary judgment because it had no relations with the operator of the motel other than the license agreement. The Betsy-Lyn and Holiday Inns. for the negligence of its employees in maintaining the sidewalk. in return for fees from Betsy-Lyn. then looking for “control” makes sense. Murphy v. *Whether A has a distinct business. and a system of operation.Is this work typically done without supervision or with? *Skill required of A. quality assurance. (Va. Murphy appeals the decision. national advertising. Inc entered into a license agreement that allowed the Betsy-Lyn to use the name “Holiday Inns” subject to terms of the agreement. Inc. Inc exert control over the Betsy-Lyn to the extent that it would constitute an agency relationship? 11 . *Extent of Ps control over work details. The trial court granted summary judgment in favor of Holiday Inns finding that no principal-agent or master-servant relationship existed. Apply Rest §220(2) HUMBLE (a) (b) © (d) (e) (f) (g) (h) (i) (j) May give orders H owns stock Local custom? Moderate H owns prop and stock At will employee Volume-based rent Core part of business ? H in business SUN OIL Recommendations B may sell other products Appearance relevant? Moderate SO owns prop NOT stock 30 day notice Volume-based rent BUT cap “ ? SO in business If you want to put the liability on the person who can minimize the risk. 1975) Facts: Murphy slipped and fell on a sidewalk outside of the Betsy-Lyn Motor Hotel Corporation and sustained permanent injuries.*Whether P in business herself. *Trade practice of supervision in locality. Issue: Did Holiday Inns.
McDonald’s Corp. No principal-agent or master-servant relationship exists even though specific requirements were made in the franchise contract. or discipline employees…” Level necessary to create a master-servant relationship? Looked at franchise agreement to determine whether Betsy-Lyn a servant or independent contractor per the Restatement definitions. fix customer rates. (Ore. but an independent contractor and was responsible for all liabilities of the restaurant. and only for the benefit of both parties. commercial service. employee wages. maintaining adequate supplies and employees during the required hours of operations. This comes up a lot in franchiser/franchisee relationships. and employees had to be clean and courteous. The trial court granted. Tort Liability and Apparent Agency Miller v. B. Holiday Inns had no control over the Betsy-Lyn’s day-to-day operations. Miller appeals. etc. “If a franchise contract so ‘regulates the activities of the franchisee’ as to vest the franchiser with control w/i the def of agency. and the agent manifests assent or otherwise consents so to act. employees.01 Held: No. set std for employee skills or productivity. and it had the right to revoke to franchise license for non-compliance. The McDonald’s location was a franchise owned by 3K Restaurants. 1997) *Apparent agency in tort. or demand a share of profits” (3) “hire or fire. Reasoning: The franchise contract provisions are to standardize the business identity. Facts: Miller sustained injuries when she bit into a heart shaped sapphire stone while eating a Big Mac. room rates. McD would send field consultants to inspect the operations and ensure conformity with the standards of the Agreement. maintenance. all employee’s wear McD uniforms. supervise employee work routine.Rule: An agency is the fiduciary relationship that arises when one person manifests assent to another person that the agent shall act on the principal’s behalf and subject to the Ps control. Hist: Miller sues McDonald’s Corp. §1. *The contract does not control. only designated food and drinks to be sold.. food handling and preparation methods were designated by McD. the agency relationship arises even though the parties expressly deny it. Under the franchise agreement. determine employee wages or working conditions.” Holiday Inns “was given no power to” (1) “control daily maintenance of the premises” (2) “control Betsy-Lyn’s current business expenditures. 12 . BetsyLyn retained all powers that an owner and operator of a business has. Some of the requirements include: following specs and blueprints provided by McD. The Agreement provided that 3K was not an agent. McDonald’s moved for summary judgment because it did not own or operate the restaurant. McDonalds Inc mandated several provisions regarding the business’s operations.
any activities that the A can be reasonably expected to perform when carrying out Ps task out of an agent are within the scope even though P controls only a subset Restatement (3d) View: §7. that which the servant was employed to perform? See §229 Was the conduct substantially removed from the authorized time and space limits of the employment? “frolic and detour” Liable if reasonable to expect the agent to take the detour. Scope of Employment *General Rules regarding Was the conduct of the same general nature as. Reasoning: A jury may find that an agency exists because of the amount of control McD has over 3Ks daily operations and the required uniformed standards and appearance of the franchise. Hist: Bushey sued the Government and was granted compensation for its loss. United States (2d Cir. 1968) Facts: The US Coast Guard vessel Tamaroa was being overhauled in a floating drydock. This would be an actual agency and McD vicariously liable. and damaging the drydock owned by Bushey.07: When Employer is Liable for Torts of an Employee Ira S. Whether McDs held 3K out as an agent and whether Miller relied on that holding out. causing the lock the flood. is the conduct in the scope of employment and is the employer liable for the employee’s acts? 13 . If a franchisor holds out a franchisee as to be its agent and other parties reasonably believe that the franchisee is acting as an agent. v. The US appeals on the ground that it is not liable because the drunken seaman was not acting within the scope of his employment. Inc. In particular. then an apparent agency exists and the franchisor is liable. then an agency relationship exists and the franchisor is vicariously liable for the acts of the franchisee. or incident to. Key Points: Certain activities can be within the scope even though they’re not subject to Ps control. Issue: If the employee’s acts do not serve the employer’s interests. partially sinking Tamaroa. Bushey & Sons. And only if acting in the scope of his employment would the Government be liable. C. A drunken seaman returned to the drydock late at night and turned some wheels on the drydock wall.Issue: Did McDonalds have the right to control the performance of 3K under the Agreement? Did McDonalds create an apparent agency by its standards that create a uniform appearance? Rule: If a franchisor has the right to control the franchisee. A jury needs to determine whether there is an apparent agency. Whether the conduct was motivated at least in part by a purpose to serve the master. Held: Reverse the trial court’s decision to grant summary judgment because issues of fact exist.
Hist: Manning sued both Grimsley and his employer. Statutory Claims 14 . Manning attended the Orioles/Red Sox game. Held: Vacated and remanded on the battery count.Employer liable for actions of employee performed within the scope of employment. Old standard looked at the purpose of the conduct. The US is liable. Reasoning: Determining the motive of the employee is not a practical test. Held: Affirmed. and although the conduct is unforeseeable. Issue: Is an employer liable for injuries to the victim of an employee’s assault? Rule: To relieve himself of liability for injuries from an employee’s assault. The conduct was not so “unforeseeable” as to relieve the Government of responsibility. The conduct of an employee may be in the scope of employment even if the specific act does not serve the employer’s interest. then the P is liable regardless of whether or not that particular type of harm was foreseeable. the Employer must establish that the assault was in response to the plaintiff’s conduct which was presently interfering with the employee’s ability to perform his duties successfully. Manning and other people sitting in the bleachers in the right field were heckling him.) Friendly says if the Harm is foreseeable. The district judge directed a verdict for defendants on the battery count and the jury returned a verdict for Ds on the negligence count. Determination of motive particular to discovering whether “within scope of employment. As Grimsley. Grimsley looked over at the hecklers several times and then threw the ball toward the hecklers. The ball went through the mesh fence and hit Manning. scope of employment. Inc for battery and negligence.Rule: Respondeat superior. the Baltimore Baseball Club. Grimsley (1st Cir. Manning appeals the directed verdict on the battery count.” as that would mean acting with the purpose of serving the master. the pitcher for the Orioles. *Judge Friendly looked at whether the conduct was foreseeable. D. 1981) *Intentional Torts Facts: At Fenway Park in Boston. Direction. there is a risk that an employee will cause damages. An employer should expect risks. *Was conduct the same nature as that authorized? *Was Lane on a frolic and detour? *Did Lane have a purpose to serve the US? Manning v. (Case where servant told to Get up and Fight by master. was warming up. Reasoning: A jury could have found that Manning’s conduct interfered with Grimsley’s ability to perform his duties effectively so the battery issue needs to go to the jury.
(2) Ivory. Conoco. Second. Inc. Inc. and summary judgment should not have been granted. Hist: The group filed suit against Conoco. “You people steal gas. knocking a 6-pack of beer off of the counter toward Arguello. Inc. when they were at a Conoco-branded store where the employee refused to provide toilet paper for the restroom. A master is subject to liability for the torts of his servants while acting in the scope of their employment. Pickett.” And the last two incidents involved employee’s telling him he must pre-pay for his gasoline when Caucasion customers were allowed to pay after pumping gas. (2) In determining whether Smith was acting within the scope 15 . Held: Affirmed in part reversed in part. and Conoco-branded stores. using profanities. and Conoco-branded store and Smith? Rule: To impose liability under the Civil Rights Act for the discriminatory actions of a third party. they were told that Conoco could do nothing since it’s not a Conoco-owned store. Inc. The employee said “we don’t have to serve you people” and “you people are always acting like this. the plaintiff must demonstrate an agency relationship between the D and the 3d party.” The men called the police and the police ordered the store employee to serve the group. and Ross were followed by an employee in a Conoco-branded store. Inc. The district court granted summary judgment to Conoco. (3) The Escobedos experienced four incidents. Arguello called the Conoco customer service and then tried to walk back in to get the clerk’s name. and it erred in finding no agency relationship between Smith (Arguello) because she acted outside the scope of her employment. (2) An issue of material fact as to whether Smith was acting in her scope of employment.” After calling Conoco customer service. Inc. Esobedo like “you Mexicans need to go back to Mexico. The group appeals on the grounds that the court erred in finding to agency relationship between Conoco. Arguello was told by the store clerk that her out-of-state license was not an acceptable ID and then began insulting Arguello. screamed profanities to Mrs. Escobedo was told by a store clerk. The three incidents: (1) Arguello and her father Govea entered a Conoco-owned store after pumping gas to pay for the gas and to purchase other items.Arguello v. but the clerk and another employee locked the doors. were subjected to racial discrimination while purchasing gasoline and other services at Conoco-owned and Conoco-branded stores. Conoco. Although Conoco set guidelines and had debranding power. Issue: Is there an agency relationship between Conoco. using the intercom system to continue to yell racial epithets after Arguello and Govea went outside. Inc and Conoco-branded stores was not an agency relationship. First. Reasoning: (1) The Court found that the Petroleum Marketing Agreement between Conoco. did not participate in the daily operations of the branded stores or the personnel decisions. (5th 2000) Facts: Seven Hispanic and African-American consumers of Conoco. (1) No agency relationship between Conoco and Conoco-branded stores. They commented about bein followed and then they were refused service. A district manager counseled the store clerk for her inappropriate behavior and then sent her to work at another store for her protection because of an expected picketing in the near future. all at different Conoco-branded stores.
Part C. It does say that a contractee should be liable to an innocent third party for the negligence of the contractor because the contractee has the power to select his contractor. (NJ 1959) Facts: Majestic owns a building and leases the first floor and basement to Bohen’s Inc. using the intercom.Liability imposed if the work constitutes a nuisance per se. v. beginning with the property adjacent to Majestic’s building. place. The crane operator swung the ball 15 feet below the wall. The Appellate Court reversed. for the purpose of creating a public parking area. or where (c) the activity contracted for constitutes a nuisance per se. Held: Authority is liable. Toti Contracting Co. Toti used a 3500 lb ball to demolish the building beside the Majestic building. Reasoning: Part B to the exception.of her employment. Inc. it renders no decision on it and expressly reverses. 4) There is no evidence as to whether Conoco would reasonably expect such act would be performed. The Authority contracted with Toti Contracting to perform the demolition work. The Parking Authority of the City of Paterson acquired properties along the same street. 2) Smith’s acts were authorized by Conoco= selling gasoline.. a dry goods business. built up section of a city is inherently dangerous. intentional tort. Hist: Majestic and Bohen’s sue Toti and the Parking Authority. The trial court held that the work constituted a nuisance per se and ruled that the Authority could not be held liable for the negligence of its independent contractor. the Court analyzed five factors: 1) Time. E. causing a 15x40 foot section to fall on Majestic’s roof and a 25x40 foot break in the roof. Although the Court seems to feel that the Authority would be liable for this.was not raised at trial or in the briefs. Issue: Is the Authority liable to Majestic for the negligence of its independent contractor? Rule: A person who hires an independent contractor is not liable for the negligent acts of the contractor in the performance of the contract unless (a) the landowner retains control of the manner and means of the performance (agent type).The Court equates “nuisance per se” to “inherently dangerous. [(3)] also commonly performed by Conoco performed 3) Smith departed from normal methods of performance= epithets. Regen United Kingdom (1948) .” The Court adopts the NY rule that says that the razing of buildings in a busy.incompetent contractor. (b) he engages an incompetent contractor. Liability for Torts of Independent Contractors Majestic Realty Associates. running credit cards.” It finds that the demolition of buildings is inherently dangerous because it involves a “peculiar and high risk of harm to members of the public or landowners unless special precautions are taken. and purpose of the act= Smith was on duty at work and processing Arguello’s transaction. § 4: Fiduciary Obligation of Agents A. Duties During Agency 16 Reading v. The work performed constitutes a nuisance per se because it is inherently dangerous.
Reading did this for Manole several times and received over 20. Held: Petition dismissed. The Special Investigation Branch of the army got suspicious when several thousands of pounds were placed in Egyptian banks in his name. General Automotive Manufacturing Co. Singer began soliciting side business when customers had orders that Automotive could not perform. Singer Facts: General Automotive is a business that does machine shop work.Facts: Reading was a sergeant in the Royal Army Medical Corps stationed in Cairo. several thousand pounds were in his apartment. Problem 3 page 79. The K also said that Singer was never to disclose any business information for his own benefit or to the detriment of the company. *Misused his agency position to make money. It hired Singer as a machinist-consultant and manufacturer’s representative. Issue: Is a servant who takes advantage of his service and violates the duty of honesty and good faith to make a profit for himself accountable to his master? Rule: A servant who unjustly enriches himself by virtue of his service must account for his profits to his master. In the employment contract Automotive and Singer entered into. but writing a book is outside of his duty as an agent. have another machine shop do the work at a lesser price. Singer was to receive a monthly salary and 3% of sales. However. He eventually set up his own business. He would make the customer a price. brokering orders for Automotive products while still employed at Automotive. labor. skill. so he was skilled at machine work and was qualified in estimating the costs of machine-shop products and the competitive prices for which products can be sold. Hist: Reading sues because he wants his money back. and when he bought a car worth 1500 pounds. Then the contents would be transferred to another lorry. so he must hand over the money to the Crown. Maybe violating military regs for wearing uniform. v. would board a lorry (a big truck) and escort it through town so it could pass civilian police without inspection. Reading issued a statement and told the Army how he acquired the money. 17 . and they possessed it. and attention to his job and not engage in any other business while employed with Automotive (moonlighting clause). Singer had 30 years of machine shop experience. he started taking bribes from a man named Manole to transport goods. while in uniform. and then he pocketed the difference. Reading. While stationed. time. Reasoning: Reading was unjustly enriched by virtue of his service to the Royal Army. His uniform and position are the only reasons why he was able to get the money. Problem 2 page 78. Profit for being a hero.000 pounds in payment. Hero has breached no fiduciary duties. Singer was to devote his entire. not a soldier.
but instead he was getting customers for his own side business. The trial court dismissed the complaint. reversed in part. Issue: Was Singer’s side business a violation of his fiduciary duty to Automotive? Rule: Agents have a fiduciary duty to exercise good faith and loyalty so to not act adversely to the interests of his employer by serving or acquiring any private interest of his own. quit and formed their own business. 18 . *He never informed his bosses that they couldn’t fill all the order they were receiving. Default rule. Reasoning: Court doesn’t speak on unfair competition. B. holding that the employees had conspired to engage in unfair competition and breach of fiduciary duties. Inc. Reasoning: Singer had a duty of loyalty to Automotive. and the appellate court reversed. almost always a breach of loyalty. They began soliciting their accounts through the customer lists they obtained while working for Town and Country. A violation of fiduciary duty. a home cleaning service.you owe a limited amount of loyalty to your previous employer after employment endssuch as confidential information. particularly because of the employment contract’s stipulations. Held: Affirmed in part. Trial court found Singer liable for 64k. Duties During and After Termination of Agency: “GRABBING AND LEAVING” Town & Country House & Home Service. v. Newberry Facts: Employees of Town and Country. Hist: Town and Country sued for unfair competition. *Why didn’t you just tell me? *Pretty straight forward case. *Even after you leave. anyone can get it. He appealed. Issue: Can former employees use confidential customer lists of their former employer to solicit new customers of their own? Rule: Former employees may not use confidential customer lists belonging to their former employer to solicit new customers. Says Newberry is liable for using the customer list to solicit business because the list is a trade secret that was obtained through employment with Town and Country. His position with Automotive was to get customers. What if hired a PI to tail the truck to see where it stops? Open information. only says that employees are only liable for using the customer list.Hist: General Automotive sued Singer to account for secret profits he received while working for Automotive. Held: Affirmed. so Automotive entitled to recover Singer’s profits. This is detrimental to Automotive and Singer is liable for the profits he made. you have a duty not to disclose confidential information. trade secrets. No. If you are profiting solely because of your position.
. ex-employees may not use a customer list that qualifies as a trade secret. *An agreement is necessary to create a partnership. Hist: Cheshire applied for Unemployment but was denied because the Commission said that the agreement was just an agreement to fix compensation. About a year later. and the partnership could terminate on 10 days notice. Cheshire would make no investment.an association of 2 or more persons to carry on as co-owners a business for profit. Key Factors Establishing Partnership: (1) Profit sharing and (2) Control § 1: WHAT IS A PARTNERSHIP? AND WHO ARE THE PARTNERS? A. UPA. Fenwick would have all control and management of the shop. Unemployment Compensation Commission (NJL 1945) Facts: Fenwick hires Mrs. Fenwick and Cheshire enter an agreement stating that they were entering a partnership for the operation of the beauty shop. and she had no authority or control in operating the business. *Co-owners. (Not all customer lists. Cheshire as a cashier and receptionist with a salary of 15/wk. UPA (1914) 6. The agreement was only to set Cheshire’s compensation. and was not held out as a partner. Issue: Are Cheshire and Fenwick partners? Rule: A partnership is an association of two or more persons to carry on as co-owners a business for profit. *Must be for profit business.Analysis *The default rule in Town and Country is the law of trade secrets. Accordingly. Fenwick appealed the judgment of the Supreme Court reversing the determination of the Unemployment Commission. Partners Compared With Employees Fenwick v. Cheshire terminated the relationship three years later. A partnership has not been established. profit. (2) the right to share profits= 19 . Reasoning: The Court looks at several factors to determine if a partnership relation exists. she requested an increase in pay. public info no. Held: Reversed.Risk of loss. The Supreme Court held that they were partners because of the agreement. etc) CHAPTER 2: PARTNERSHIPS .1 *Must have an agreement of some sort to form an association. Cheshire receives 20% of end of year profits and Fenwick 80%. Fenwick is liable for all of the debts. Sharing of profits is prima facie evidence of partnership but no such inference shall be drawn if such profits were receieved in payment. (1) Intention of the parties= only to increase Cheshire’s compensation. not subject to losses.
5m in securities and in return would receive some of the firm’s securities and 40% of the firm’s profits until the loan repaid and an option to join the firm if desired. And the option doesn’t reach the conclusion that they are a partnership. it would have been the same as if she had quit. Peyton. (7) conduct of the parties toward 3d persons= filed partnership income tax returns and held themselves out as partners to the Unemployment Commission but never held themselves out as partners to anyone else.did exist’ (3) obligation to share in losses= absent b/c Cheshire does not share in losses’ (4) ownership and control of the partnership property and business= Fenwick reserved himself all control and he contributed all capital and Cheshire had no right to share in capital upon dissolution. the trustees could inspect the books and veto any business they thought would harm the firm. Here. They were considered “trustees” and were advised and consulted on the firm’s matters. and Freeman entered into three agreements with the firm. Inc. v. the firm members’ interest in the firm were assigned to the trustees. Peyton (NY Ct App 1927) Facts: Peyton lended 500k in bonds to the firm Knauth. control existed but was not regularly exercised. Cheshire excluded from most of the ordinary rights of a partner. Hist: Martin. Nachod. B. The agreements stated that Peyton Perkins and Freeman would loan the firm 2. (6) language of the agreement= although call themselves partners. Partnership Versus Contract Southex Exhibitions. PARTNERS COMPARED WITH LENDERS Martin v. Trial court said they were not partners and Martin appealed. Reasoning: The agreement was a loan of securities. (1st 2002) 20 . and Kuhne. and the authority granted to the trustees just to safeguard the loan. Then Peyton. The indenture just to secure the performance of the agreement. Perkins. but were refused. Rhode Island Builders Association. Inc. a creditor of the firm sued Peyton. (8) rights of the parties upon dissolution= on Cheshire’s part. Not partners. *Different from Gay Jenson Farms v. C. (5) community of power in administration= Fenwick had the exclusive control of all management of the business. where Peyton and other respondents work when the firm was in financial difficulties so that the money could be used as collateral to secure bank advances. Perkins. Perkins. and Freeman wanted to become partners in the firm. Issue: Are the defendants partners in the brokerage firm? Rule: Held: Affirmed. and Freeman claiming that they were partners and liable for the firm’s debt. Must analyze the extent of control. Cargill. Just the “right to control” is too vague here.
Reasoning: The Court analyzed the agreement and determined that there was no partnership. The financial statement turned out to be fraudulent and Young’s money disappeared from the bank. Partnership by Estoppel In order to establish. Southex then acquired Sherman’s interest under the agreement . a professional show owner and producer. Hist: Young sues Price Waterhouse United States alleging that there waw a partnership between PW-Bahamas and PW-US or in the alternative that they operated as partners by estoppel. SEM indemnified RIBA for all show-related losses. Young v. The letterhead said “Price Waterhouse” and had the PW trademark. mutual control over designated business operations. Jones Facts: Young deposited over 500k in a SC bank after receiving a letter from PricewaterBahamas regarding the financial status of Swiss American Fidelity. D. must prove 4 elements: (1) P must establish a representation. Hist: Southex sued the Builder’s Association alleging that the agreement between Sherman and the Builders established a partnership and that the Builders breached its fiduciary duties to Southex. no concrete evidence that SEM or RIBA contributed any corporate property with the intent that it become jointly-owned partnership property. 21 . Southex never filed a partnership tax return. Southex appealed. Fixed term agreement. that one person is the partner of another. The agreement stated that that both would participate in the shows as sponsors and partners. by the 3d person in reliance on the representation.ie that there was a holding out of a partnership. Issue: Did the trial court properly use the totality of the circumstances test? Held: Yes. The Builder’s Association wasn’t happy with Southex’s performance and refused to renew the agreement. for production of the Builders Association home shows. However Sherman’s president said he wanted no ownership of the show. with consequent injury. and the respective contributions of valuable property to the partnership.Facts: The Builders Association entered an agreement with Sherman. its co-partner by wrongful dissolution of the partnership and appointment of another producter. (2) The making of the representation by the person sought to be charged as a partner or with his consent (3) A reasonable reliance in good faith by the 3d party upon the representation (4) A change of position. It also stated a 5545 sharing of profits. and was signed Price Waterhouse. Judgment for Builders. SEM agreed to advance all monies to produce the shows. so Sherman became known as the producer. either express or implied.
Reasoning: There is no evidence that Young relied on the brochure to make the decision to invest. Salmon appealed. but Salmon refused. 22 . Toward the end of the lease. is liable to any such person to whom such a rep. to anyone as a partner in an existing partnership or with others not actual partners. Meinhard then demanded that the lease be held in trust as an asset of the venture to be shared. Salmon should have told Meinhard what he was doing so that both of them could have the opportunity to compete for the project. an opportunity that should have belonged to the joint venture. No evidence that Young relied on any statement of a PWUS partner indicating the existence of a partnership and no evidence that PW-US had anything to do with the audit letter sent to Young. Meinhard filed suit to enforce his share and the trial judge ruled that he was entitled to 25%. Held: Not a partnership and no partnership by estoppel.Issue: Are they partners by estoppel? Rule: A person who represents himself or permits another to represent him. The fiduciary duty owed to co-adventurers is the same owed to a partner. is made who has. on the faith of the rep. Introduction Meinhard v. Gerry approached Salmon (Gerry didn’t even know about Meinhard b/c he was more of a silent partner) and offered a new lease which would cover a larger tract of property and would last for a period of 20 years with options to renew to extend up to 80 years. Salmon signed the lease for Midpoint Realty Company. Meinhard provided the majority of the funding for the lease and Salmon managed and operated the property. Salmon Meinhard and Salmon entered into a joint venture to lease a hotel in NY from Gerry for a twenty year term with reversion to Gerry. The subject matter of the new lease was the same as in the old lease only extended and with a larger tract of property. No evidence that credit was extended on the basis of any rep. Under the agreement. of a partnership existing between PW-Bahamas and PW-US. Do joint adventurers owe to one another the highest fiduciary duty of loyalty while the enterprise is ongoing? CARDOZO: Yes. the appellate court enlarged Meinhard’s interest to 50% of the whole lease. Salmon excluded Meinhard from any chance to compete or enjoy the opportunity that had come to him alone by virtue of their adventure. Salmon didn’t tell Meinhard until the new deal was completed. § 2: FIDUCIARY OBLIGATION OF PARTNERS A. Both were responsible for any losses. given credit to the actual or apparent partnership.. in secrecy and silence. After cross-appeals. Salmon appropriated to himself. a company Salmon controlled exclusively.
but ALL potential voters must be included to determine the percentages and ALL votes were not included. Prometheus Development Company. majority vote is sufficient for ratification. A proxy statement was sent to the limited partners describing the terms of the merger and soliciting their vote to approve the merger. Shaughnessy .Judgment affirmed but modified to provide for a trust attaching to shares of stock on the lease and giving Salmon one share more than Meinhard. Prometheus Income Partners and Prometheus Development Company were a partnership organized to manage two large apartment complexes. The interested partners. BUT CA law will not allow interested parties to count their votes in ratification. Here. by voting were not “neutral” and there has not been a valid ratification. It was only designed to exploit a particular lease and contained to mention of the venture continuing beyond the date of its termination. C. Since this was not a general partnership then the majority is incorrect. object. Construing it as so. Inc. OPTING OUT OF FIDUCIARY DUTIES Peretta v. which was owned by DNS Trust and by the daughter of the director of DNS Trust. A partnership may vary or permit ratifications of violations of the duty of loyalty if not manifestly unreasonable. *A partnership agreement provision that allows an interested partner to count its votes in a ratification vote would be “manifestly unreasonable” and therefore the Court construes the Partnership Agreement provision as requiring a majority vote of the outstanding limited partner units owned by unaffiliated partners.” The partners were not harmed at the expense of the partnership. GRABBING AND LEAVING 23 Meehan v. The partners properly ratified. the merger was not approved by a majority and the ratification was not valid. B. Proxy Statement said that PIP Partners would vote neutrally. meaning that their votes would Peretta alleges that the merger was a self-dealing transaction which violated PDC’s duty of loyalty by setting an “unfairly low price. and duration of times. DISSENT: Andrews: The joint venture between Meinhard and Salmon was entered into for a limited scope. Majority was not achieved. Prometheus Development is 100% owned by DNS Trust. Burden on Prometheus to show complete good faith and fairness to the other limited partners. Peretta was a limited partner in the Partnership between the Prometheus companies. so there was no violation of the duty of loyalty. Prometheus Development notified its limited partners that it was going to merge the partnership into PIP Partners-General.
Cohen and Shafer fulfilled their fiduciary duties to the former partnership. The former partners counterclaim that Meehan and Boyle violated their fiduciary duties. 24 . the Finance Committee decided to recommend Lawlis’s severance as a partner. and each year a Partner is with the firm gives him more units. He has been sober since his second treatment. So Lawlis went to the Finance Committee and proposed that his units of participation be increased from his then 60 units to 90 units. Parker Coulter also filed an action against Cohen and Schafer who left the firm to work for Meehan and Boyle and Cohen’s new firm. AGREED. At the Senior Partners Meeting. compensation is based on a unit system. They breached their fiduciary duty by unfairly acquiring consent from clients because the notice letters sent to the clients didn’t let the clients know that they had a choice to remain with Parker Coulter or to move to MBC. breached the partnership agreement. Instead. They left to start their own firm and they sued Parker Coulter to recover amounts they claim their former partners owed them under the partnership agreement and to obtain a declaration as to the amounts they owe the former partners for work done at Parker Coulter on cases they removed to their new firm. Parker Coulter appealed claiming that the judge erred in finding that M. Two days later. they had the “guillotine” severance provision. were more compassionate. The Firm immediately sought help for him and then drafted a document called “Program Outline” that set forth conditions for Lawlis’s continuation with the Partnership. Lawlis’s units were reduced while he was battling is alcoholism. At the Firm. Trial court rejected all of Parker Coulter’s claims for relief and held that Meehan and Boyle were entitled to recover amounts owed to them under the partnership agreement. but actually didn’t use the method to sever the Partnership. Here. Kightlinger & Gray Lawlis was a partner for Kightlinger and Gray. all files removed from his office. D. and tortuously interfered with their advantageous business and contractual relationships. Parker Coulter was entitled to recover for time billed and expenses incurred on the cases M and B removed to their own firm. REJECTED> Breached fid duties by unfairly acquiring consent from clients to remove cases from Parker Coulter. the partners voted to accept the severance recommendation. Lawlis was told he would return to full partnership status if he complied with treatment and consultations with specialists and if he could provide favorable reports from the specialists. M and B violated fiduciary duty by handling cases for their own benefit and intentionally not resolving cases while with Parker Coulter but moving them to their new firm. Breached fid duty not to compete by secretly setting up a new firm while still at Parker Coulter. MBC. Lawlis later relapsed and he was given a second chance. REJECTED.Meehan and Boyle were partners in the the Parker Coulter law firm. Also. stating that there is no second chance. EXPULSION Lawlis v. He became an alcoholic and told the Finance Committee of the firm. *As long as they follow the provisions set forth in the Partnership Agreement then acted in good faith. B.
000. If 20/40 partners do so. and the partners acted in good faith b/c their conduct did not cause a wrongful withholding of money or property of the expelled partner.500+ new 12. The equity value= (12.000/3.500= $16. (2) “Penalty Dilution”—Permits the managing partner to offer the partners new points at a lesser cost that the original price.Permits the managing partner to issue a call for additional funds and provides that if any partner does not provide the funds called for. So the total points would equal 3. his expulsion must have been ‘bona fide’ or in ‘good faith’ for a dissolution to occur without violating the partnership agreement.000 points= $333.000.000. requesting an additional 12. **So even non-contributors’ point value goes up. and the transfer agreement to Shoaf cannot be changed because of Putnam’s ignorance of the embezzlement. Ex: Originally there were 1.000 ($12. Additional share points are sold at the original price of $1. This would be a $12. 68k was paid and Putnam claims 50%.5 points at $1. So. a total of 500 (25 points * 20 partners) new points added to the original 1. The total number of points offered is 50 points* 40 partners= 2.500) each= $1.000. Contributors can now 25 .contributing partner now has $12. The partnership owns the property or asset.500.333. § 4: Raising Additional Capital The only way to get around obstacles regarding raising additional capital is to place provisions in the partnership agreement. A non.000.500/1. contributors get $25. Each point will be worth $1. Then each person’s shares are now equal to the total points divided by total dollar amount of shares. When Shoaf employed a new bookkeeper. Ex: Offer for 50 points at $250 each (a 4 to 1 dilution= $1000 original cost/4= $250). § 3: PARTNERSHIP PROPERTY Putnam v. his/her share is reduced. A co-partner may only convey an undivided interest in the value or deficit of the partnership.000. There was a no-cause expulsion clause in the agreement.5 points per contributing partner= $12. Putnam conveyed all of her interest in the partnership so she has no interest in the lawsuit.000. The Firm was compassionate.666. The company sued the old bookkeeper and Putnam intervened claiming an interest in any fund paid to the banks.500)*40 partners= $1. Shoaf Putnam severed her relationship as partner with the Frog Jump Gin Company.000 new).000 (1. contributed by 40 partners with 12. he discovered that the old bookkepper had embezzled a lot of money from the company.*Wrongful dissolution claim *Breach of fiduciary duty When a partner is involuntarily expelled from a business.000/1500 =$33.500 contribution by the 40 partners. There are no default rules in UPA or RUPA.000 points.000 original plus 2. not greedy by recommending a step-down severance rather than an immediate severance.000 points= extra $500. Some common provisions: (1) “Pro Rata Dilution”-.000.
§ 5: The Rights of Partners in Management National Biscuit Company v. (4) Selling new partnership shares to anyone at whatever price can be obtained. There is a problem with specifying the consequences of a partner failing to comply with the loan request. The loans usually bear interest a few points above the prime rate. Dooley found out and said that no additional help was necessary and he would not allow for him to be 26 .” UPA Held: Affirmed lower court. value doesn’t change. Issue: Can a partner restrict another partner’s equal rights of management and conduct of the partnership business? Rule: Partners have “equal rights in the management and conduct of the partnership business. he could provide a replacement at his own expense. Summers asked Dooley if he could hire an additional employee. **So in this case. This is like a corporation selling new shares in common stock on the stock market in order to raise new equity funds. Hist: Lower court found Stroud liable for the purchase of bread by Freeman. Stroud and Stroud’s Food Center are bound by the purchases of Freeman. The agreement provided that if either was unable to work. Per the dissolution agreement. Stroud told Biscuit that he would not be personally responsible for any additional bread sold to Stroud’s Food Center.333. with no distributions to partners until the full amounts of the loan and interest are paid. He discovers that bread was sold to Biscuit and sues them. Dooley became unable to work and hired an employee to take his place. Summers v. (3) Pro Rata Loans-. However.000. Non-contributors (if all offered points are bought) now have their original 25 points*$333 new point worth= $8. if contribute amount requested. Freeman requested bread from Biscuit and Biscuit sold and delivered it to Stroud’s Food Center. but Dooley refused. Dooley Facts: Summers and Dooley entered a partnership agreement to operate a trash collection business. Summers hired an additional employee anyway and paid him out of his own pocket. Stroud was to liquidate the firm’s assets and discharge the liabilities. Stroud Facts: Stroud and Freeman entered into a general partnership to sell groceries under the name of Stroud’s Food Center. If don’t contribute. Stroud is not a majority so his decision has no effect on Freeman. Stroud cannot restrict the power and authority of his co-partner to purchase bread because the act was within the scope of the business. Stroud and Freeman agreed to dissolve their partnership.have 75 points (50 new and original 25) worth $333*75= $25. point worth decreased by one third. One possibility is to compensate nondefaulting partners by repayment of 150% of the loan plus interest.Permits the managing partner to require partners to make pro rata loans.
Dooley: National Biscuit In a partnership to sell groceries. Buying bread is ordinary for this type of business and within the scope. Summer loses b/c partnership matters are decided by majority vote. Rule: UPA 18(h). Under 9(1) and 9(4). even though another partner tried to diminish his authority. Summers sued Dooley for $6000 because he was never reimbursed from either partnership funds or by Dooley. What to do when there is a deadlock in decision-making between partners? Lawyer to mediate. Stroud and Summers v. which stands. The partnership gave him actual authority. Summers asserted that Dooley ratified his act of hiring an additional employee because be retained profits earned by the help of the new employee and should be estopped from denying the need and value of him.Any difference arising to the ordinary matters connected with the partnership business may be decided by a majority of the partners.paid out of partnership funds. Summer and Dooley had equal stakes in their partnership. a partner cannot have apparent authority where the 3d party with whom the partner dealt knew he has no actual authority to make the contract. Stroud Hiring a third man is out of the scope of the ordinary business. it would be manifestly unjust to permit Summers to recover an expense incurred individually and not for the benefit of the partnership. Differences between National Biscuit v. Deadlock: UPA 9(1): Every act of every partner binds the partnership unless the person with whom he is dealing has knowledge of the fact that he has no such authority. Held: Since the decision was not made by majority of partnership and Dooley objected to the hiring of the additional employee.” Stoud “business differences must be decided by a majority of the partners provided no other agreement between the partners speaks to the issues” 27 . Hist: Summers granted only partial relief and appealed. notice to Biscuit doesn’t matter because Freeman still had actual authority to purchase the bread. In Biscuit. National Biscuit “Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of partners.
Also. and his unwritten understanding cannot contravene the Agreement. Sidley & Austin Facts: Day was a senior partner for Sidley & Austin. As between the partners. UPA 9(1) (2) All partners have equal rights to participate in the management of the partnership.Contract binding because: “Stroud was not. Day couldn’t have reasonably believed that no changes would be made following the merger. He also alleges that S&A breached their fiduciary duty by negotiating on the merger without consulting the other partners who were not on the executive committee.Day says that breach because not fully disclosed to all partners. but never attended. Hist: Day alleges that misrepresentations about the merger void the approval of the merger. Duty. This is not a breach because there was no advantage at the expense of the firm. Him losing his status as the sole chairman does not support a c/a for fraud because he was not deprived of any legal rights as a result of his reliance on the statement. the latter controls (Summers). he’s alleging failure to reveal information regarding the internal structure of the firm. S&A thought about merging with the Liebman firm. The final Memorandum of Understanding and final amended Partnership Agreement were executed by all partners. Here. a co-chairman was appointed of the Washington office.” Reconciliation: Contract not binding because “a majority of the partners did not consent to the hiring of the 3d man. Once the merger took place. the Partnership Agreement that he signed makes no mention of status. Day resigned because of the appointment of co-chairman. The Agreement also gave the executive committee the authority to decide questions of firm policy. and could not be.Day says that he was told that no S&A partner would be worse off because of the merger. the executive committee decided to consolidate the Washington offices and the Washington offices committees. Day v. 28 . Once this happened. including Day. Fraud. Held: No misrepresentation or breach of fiduciary duty. like appointing chairmen. Day was given notice of meetings to discuss the possible merger.” Cases illustrate a clash of two principles: (1) All partners are agents of the partnership with power to bind the partnership. the former principle controls (Biscuit). 18(e) As between the partners and some 3d party. a majority of the partners.
reimbursement for the loan he made. Held: Court held that pursuant to UPA § 32 cause was found for judicial dissolution. 31(2): In contravention of the agreement between the partners. and $100 for his costs. Cohen said it would cost too much to get rid of him. approval. No duration expressed. and under the condition the parties were incapable of carrying on the business.” UPA 32: Hist: Owen brought an action for the dissolution of the partnership and for the sale of the partnership assets.63 as a loan to repaid out of business profits. then dissolution wouldn’t have been necessary. Owen received 1/2 the proceeds. The Right to Dissolve Owen v. Owen advanced $6986. Cohen told Owen that he would act as manager and that Owen should do all manual labor. not upon proceeds of the sale of partnership assets. by the express will of any partner at any time. equip. They entered a partnership agreement stating that Collins would furnish all the funds to build. lack of cooperation. dissolution is caused by the express will of any partner when no definite term or particular undertaking is specified. then Owen should not be reimbursed for the loan since agreement that only repaid from profits. Soon after opening the bowling alley. Collins v. or consent. Cohen started taking money out of partnership funds for his own use without Owen’s knowledge. 31(1)(b): Without violation of the agreement between the partners. Rule: Any partner at anytime can walk away. 31(2).§ 6: Partnership Dissolution A. Trial court found that the partnership was dissoluble and ordered the assets sold by the receiver. Cohen sues alleging that the dissolution was unwarranted. Cohen Facts: Owen and Cohen entered oral agreement to become partners in the operation of a bowling alley. and if Court doesn’t agree. The bitter feelings between the parties. Lewis Facts: Lewis and Collins leased a basement for a term of 30 years to open up a cafeteria. Owen asked Cohen if he would either buy out his interest or sell him his.“Dissolution is caused…By the express will of any partner when no definite term or particular undertaking is specified. differences arose regarding management and rights and duties under their agreement. and open the cafeteria (no $ cap) and Lewis was to plan and supervise construction and manage 29 . Potential for wrongful dissolution: UPA 31(b) v. Why sue? Judicial determination of status of loan required. where the circumstances do not permit a dissolution under any provision of this section. UPA 31(1)(b). Loan reimbursement in “complete accord with estd principles of equity jurisprudence” because if not for Cohen’s acts.
Get appraisal and offer to buy out George at fair price. buy partnership assets in liquidation.) Lewis guaranteed repayment to Collins of at least $30k plus interest the first year and $60k plus interest each year thereafter. B. but Collins paid. P appealed. *Be careful how you draft agreements. oral partnership agreement with no expressed duration (at will). which dissolves it by operation of law. Hist: Collins brought an action for dissolution of the partnership and foreclosure of a mortgage upon Lewis’s interest in the partnership assets. (Express term of 30 years. of George is willing. Page Hist: Brothers in a linen supply business. and Lewis guaranteed against loss up to $100k.” Held: Trial court erred when it held that the term was such reasonable time as necessary to enable the partnership to repay from profits the indebtedness. After opening. Should have put a monetary cap on Collins’ contributions. Rule: UPA. The Consequences of Dissolution Prentiss v. The costs incurred to build the cafeteria exceeded the amount estimated by Lewis. and but for Collins’s conduct there would be a reasonable expectation of profit under Lewis’s management. Court says no term because every partnership hopes for a profit. as a partner. particularly when it comes to contributions. so Collins demanded that Lewis make it profitable or he would not advance any more funds. to terminate the relationship. Plaintiff sought a dissolution and the trial court held that no right to dissolution because the partnership was set for a term. there was no reasonable expectation of profit under Lewis. put partnership into bankruptcy. The trial court found that Lewis was competent to manage the business. Held: Collins has no right to dissolution because if not for his conduct. continue business. Collins’ failure to protect Lewis on his obligation to the bank is a breach of K by Collins. Lewis could have performed his partnership obligations.the cafeteria operations as long as the lease term.A partnership may be dissolved “by the express will of any partner when no definite term or particular undertaking is specified. Collins can’t say that he should not be forced to endure a continuing partnership with no reasonable expectation of profit. He threatened Lewis that he would lose all his interest. *Options: Foreclose on note. Collins’s extended credit with the bank was his financial responsibility and Lewis only obligated to pay the rate agreed upon. Lewis would surrender his interest to Collins upon default. Collins was to furnish the money and Lewis the management. He has the inherent right. Shefel 30 . This is a partnership at will and either partner can dissolve with express notice to the other as long as exercised in good faith (meaning subject to fiduciary duties). Page v. cafeteria in a lot of debt.
No indication that wrongful expulsion was done to obtain partnership assets in bad faith. and trial court entered an order confirming the sale to them. partition. The paragraph of the partnership agreement regarding the return of PSC’s patents is void b/c in contradiction of UPA 38 since the partnership never really ended. *At will partnership. Vasso decided to continue the business. and Sheffel. Held: Court affirms. can buy it at judicial sale. By mutual consent. Shefel’s interest was enhanced by the sale because Prentiss’s participation raised the final sales price significantly compared to the two initial bids. the party who did not cause the dissolution wrongfully may continue the business and with the partnership’s property. and licenses granted under any patents for the term of the agreement. Vasso’s owner. Trial court found PSC wrongfully terminated the partnership. Prentiss and other partner sought dissolution because Shefel derelict in partnership duties by failing to contribute his share of the operating losses. Vasso cc’d for wrongful partnership termination. Dale. Trial court appointed a receiver to sell. Shefel counterclaims for a winding up of the partnership and the appointment of a receiver b/c his rights as a partner violated since wrongfully excluded from the management of the partnership. Meersman ousted Dale and assumed management. and the terminating party to pay 4 times the gross royalties received by Pav-Saver Corp in the 1973 fiscal year. it was dissolved and replaced by PSC and Vasso. Also said that specs and drawings the property of Pav-Saver and to be returned at the expiration of the partnership. another. Shefel’s request to forbid Prentiss to bid on the sale was refused. Vasso could continue the business using the patents and trademarks.Facts: 3-man at-will partnership owned by Prentiss. Hist: PSC sued for a court-ordered dissolution. and Vasso entitled to liquidated damages pursuant to the dissolution clause in the partnership agreement. Pav-Saver Corp. patent rights and license to use its specs and drawings. v. return of its patents and trademarks. Prentiss should not be allowed to purchase the partnership assets at a judicial sale. Pav-Saver grants exclusive right to its trademark. Prentiss won the bid. would provide all financing. permanent partnership (=express term) only terminated or dissolved by mutual approval of both parties. Also. Hist: Trial court found that a partnership-at-will existed and was dissolved as a result of a freeze-out or exclusion of Shefel from the management of the partnership. 31 . Held: Terminated in contravention of the agreement since a “unilateral” termination. Vasso Corp.their majority shareholder. have the right to dissolve. Pursuant to UPA § 38. Facts: Pav-Saver Corp. Partnership agreement stated that Meerman. They also requested permission to continue the business and a fixed value for Shefel’s interest. Shefel appeals the order alleging that since he was wrongfully excluded from the management of the partnership. and Vasso Corp. and distribute assets. paid over 10 years. and he gets to keep the property. and an accounting. Both appealed. entered a partnership agreement to manufacture and sell Pav-Saver (concrete paving) machines. PSC then terminated the partnership.
One of the partners (Nordale) starts using cocaine & caused a lot of problems that affected the business. Δ said he never agreed to share losses & refused to pay. as per the partnership agreement. Court says filing of the complaint was not a dissolution. They would share 50-50 in profits. damages for breach: other partner may continue the business and with partnership property. Other partner. ever. Belman Facts: Limited partnership to receive ownership of an apt complex. Neither party is liable for any loss sustained to the other. so will the right to use the patents. RUPA (1997) § 401(b) expressly cites and rejects Kovacik: “Each partner is entitled to an equal share of the partnership’s profits and is chargeable with a share of partnership losses in proportion to the partner’s share of the profits. The party who contributed $ isn’t entitled to recovery from the party who contributed only services. Hence.Stouder dissent: Clear intention of the parties. seeking dissolution. wrongful dissolution. The option to continue a business carries with it no guarantees. Nordale dies. so partners have the option of a buyout. The Sharing of Losses Kovacik v.” [losses follow profits] D. Because partnerships result from contract. only a court decree could do that. so partnership needs to be liquidated & net proceeds go to partners. The agreement here provided for a buyout if one of the partners’ died. ever draft or enter into a “permanent partnership” agreement. i. C. as stated in the agreement. Never. Buyout Agreements G&S Investments v. Reed Facts: Partnership in a business to remodel kitchens. where Π invested $10k and Δ would be the job superintendent & estimator. But Nordale dies before such decree could be entered. Although the exact provision in the 32 . Where one party contributing $ and the other contributes service then in the event of a loss each would lose his own capital – one his $ the other his labor. Nordale’s estate says the complaint was a dissolution of the partnership. is that when the agreement is terminated. After a year. G&S files a complaint. but the matter of sharing losses was not discussed. Before it went to court. 31(2) and 38(2): When in contravention of the agreement. the Court determines that Nordale’s conduct breached the partnership agreement. the partners’ rights and liabilities are subject to the agreement made among them. Even if he hadn’t died. Π tells Δ the venture had lost money & demanded that Δ contribute to the losses. Early dissolution of a term partnership constitutes a wrongful breach. Filing a lawsuit does not lead to dissolution. and paid by wrongful partner his interest and damages for breach.
agreement calculated the value of the interest as less than the fair market value. it must purchase the interest of the departed partner (interest that belongs to the estate). and Bowman. Camcraft said Southern had no c/a since Southern was not of corporate existence at the time of entering the K and now incorporated under British West Indies laws. Southern and Camcraft executed a Vessel Construction Contract with a condition stating that Southern warranted that it was a citizen of the US within the meaning of the Shipping Act of 1916. v. Hist: Southern sued Camcraft for breach of K and requested specific performance and consequential damages. forming a corporation as the vehicle for investment by other people. a. confirmed. courts have recognized three types: (1) Defined Partnership--Specified in Agreement. as President of Camcraft. Camcraft never delivered the ship. terminates upon death of partners (3) Implied Term—The partnership ends when the implied erm has been fulfilled. and adopted the previous agreements. Southern incorporated in the Cayman Islands of the British West Indies. (Owen. Later. No.” The agreement was signed by Barrett. Southern never appeared as a TX corporation to approve of any substitution of parties or assignment so its ratification of the agreements was ineffective. Page) § 7: Limited Partnerships. (Capital acct = partner’s capital contribution to partnership minus losses and reduced by any distributions already made). 9. the buyout formula is the capital account of the deceased partner plus the average of the prior 3 yrs’ earnings.can be considered a general partnership depending on the amount of control Chapter 3: The Nature of the Corporation §1 Promoters and the Corporate Entity A “promoter” is a person who identifies a business opportunity and puts together a deal. Lewis) (2) Explicitly “At Will”—No terms. and Barrett wrote Bowman a letter telling him this and that Southern’s Board of Directors have ratified. Southern-Gulf Marine Co. Also. absent a showing of fraud or duress in the inducement. Trial court held that Southern was not incorporated at the time of the Vessel Construction Contract so there was no K. When it comes to the duration of a partnership. Here. The next year. Inc. The agreement stated that Southern was “a company to be formed. Permanent is a type of Defined (Pav-Saver. Southern then incorporates in Texas. Collins v. 33 . Buyout provision here – if the remaining partners choose to continue the business. Facts: Southern entered into a purchase agreement with Camcraft for a supply vessel from Camcraft. Bowman signed a written acceptance and agreement to the letter. court says that parties must be bound by the contracts into which they enter. Inc. individually and as President of Southern. Camcraft. no breach or penalty for dissolution.
He alleged that the corporations were operated as a single entity with regard to financing. Carlton. Walkovsky alleged that Seon was one of ten cab companies of which Carlton was a shareholder. Camcraft probably only breached b/c the vessel’s value appreciated between time of K and agreed delivery date. Walkovsky. Like PCV. Issue: Did the complaint state a sufficient c/a to recover against each cab corporation. employees. Camcraft has the right to raise the relevance of the incorporation due to Shipping Act of 1916 paragraph in the K.000). unless its substantial rights might thereby be affected. Walkovsky named each corporation and its shareholders as defendants since the multiple corporate structure constituted an unlawful attempt to “defraud members of the general public” because each corporation only carried the minimum auto liability insurance required by law ($10. The substantial rights of Camcraft were not affected. Dissent: The corporations were formed by Carlton and intentionally undercapitalized for the purpose of avoiding responsibility for acts that were bound to arise as a result of the operations 34 . §2 The Corporate Entity and Limited Liability Walkovsky v. and each corporation’s shareholders? Held: No. assigning error to the trial court for (1) finding that Camcraft did not agree to be bound to the Vessel Construction K due to its acceptance of the letter. is asking for enterprise liability so all treated as one corporation.Southern appealed. The court will only “pierce the corporate veil” and hold the stockholders liable if it can be shown that the stockholder was conducting business in his individual capacity. but must show disrespect for corporations vis a vis the corporations. supplies. Camcraft is estopped from denying Southern’s corporate existence in the execution of the K. are insufficient to assure recovery. together with the liability insurance. (3) failure to hold Camcraft estopped from denying the corporate existence of Southern. repairs. and garaging. and each of the ten only had two cabs in its name. Regarding the remand issue. who also wants all corporations to be liable. where that is showing disrespect vis a vis the shareholders. The corporate veil may not be disregarded just because the assets of the corporation. Both parties relied upon the Vessel Construction K. Held: Reversed and remanded on the issue of incorporation in the Cayman Islands. Unlike PCV. none of which existed.) Rule: A D should not be permitted to escape performance by raising an issue as to the character of the organization to which it is obligated. (Court says if had been argued. Carlton Facts: Walkovsky sues Carlton after run down by a taxicab owned by Seon Cab Corporation. (2) finding that the Vessel Const K was not a K at all. Leave it to the legislature. and (4) failure to consider the letter as evidence of a valid assignment if the trial court was correct in stating that Camcraft did not consent to the terms in the letter. But that shouldn’t be grounds for avoidance of the K since Act prohibits transfers during war or national emergencies. rather than in TX as represented by Southern. they would find merit in the arg that Barrett could enforce the K individually.
No proof that Archbishop had any dealings with the Canons Regular of St. If don’t PCV. is not enough to show that injustice would be promoted. Marchese (D) and Pepper Source (D) appealed. by itself. Sea-Land (P) is required to show the kind of injustice necessary to evoke the court's power to prevent injustice. The Bishop of Rome. All income was drained out of the corporations for this purpose.) Yes. and so individual shareholders should be held liable. the corporate veil of one subsidiary may not be pierced to satisfy the liability of another. v. Augustine for it to be liable under the alter ego doctrine. The alter ego theory cannot be applied simply because the plaintiff simply won’t be able to collect. Sea-Land (P) filed another law suit. PS (D) was undercapitalized. On remand. The agreement was that Sheffield would pay in installments. PS (D) then took the necessary steps to be reinstated as a corporation in Illinois. when a parent corporation controls several subsidiaries. Sea-Land (P) moved for summary judgment. The corporate veil will be pierced where there is a unity of interest and ownership between a corporation and an individual and where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice. unjust enrichment. a requirement that the failure to pierce would lead to an inequitable result. Hist: The Archbishop moved to dismiss and for summary judgment. To apply. it could not collect on the substantial freight bill because PS (D) had been dissolved. Moreover. look at whether promoting injustice through fraud. The complaint alleged that there existed a “unity of interest and ownership between all and each of the defendants” and they were all “alter egos” of each other. and corporate assets have been moved and tapped and borrowed without regard to their source. Unable to recover on a default judgment against PS (D). ISSUE: Will the corporate veil be pierced where there is a unity of interest and ownership between a corporation and an individual and where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice? HOLDING AND DECISION: (Bauer. Held: The court abused its discretion in denying summary judgment. Sheffield Facts: Sheffield entered into an agreement with a monastery operated by a Roman Catholic order (The Canons Regular of St. seeking to pierce the corporate veil and hold Marchese (D). Trial court denied both. PS (D) apparently had no assets. sole shareholder of PS (D) and other corporations. Furthermore. Sea-land Services. and Sheffield sued The Roman Catholic Church dba The Roman Catholic Archbishop of San Francisco. An unsatisfied judgment. Augustine. etc. This additional injustice must be found. shipped peppers for the Pepper Source (PS) (D).of a large taxi fleet. funds and assets have been commingled with abandon. personally liable. 35 . Inc. There can be no doubt that the unity of interest and ownership part of the test is met here. Pepper Source FACTS: After Sea-Land (P). and Father Cretton. an ocean carrier. J. The Canons Regular of St. Roman Catholic Archbishop of San Francisco v. Corporate records and formalities have not been maintained. which the court granted. Reversed and remanded. The second part of the test is more problematic. Bernard. Fraud is a crucial part of the PCV analysis. The Holy See. however. The monastery breached. Augustine) for the purchase of a St.
Bristol helped MEC conduct market studies. and whether the subsidiary operates with grossly inadequate capital. no board meetings. Delaware courts do not necessarily require a showing of fraud if a subsidiary is found to be the mere instrumentality or alter ego of its sole shareholder. Mannon (D) and Baxter (D) were limited partners of Commercial and also officers. In a corporate control claim seeking to pierce the corporate veil to abrogate limited liability and reach the parent corporation. FACTS: Frigidaire (P) entered into a contract with Commercial Investors. EDITOR'S ANALYSIS: While limited liability is the rule. a corporation can be liable if negligently provides services to another. or inequity in a contract case do not do so in a tort situation. Inc.In Re Silicone Gel Breast Implants Products Liability Litigation FACTS: Plaintiffs from many states claimed that they had been injured by breast implants produced by Medical Equipment Corporation (MEC) (D). as a parent corporation. or common business departments. piercing the corporate veil of the subsidiary occurs. in many cases where a plaintiff seeks to reach the assets of the parent to satisfy a judgment. While the standards vary from state to state. a limited partnership. Mannon (D). asserting that they should incur general liability for the limited partnership's obligations because they exercised day-to-day control and management of 36 . injustice. Mannon (D) and Baxter (D) controlled Commercial by exercising day-to-day control and management of Union (D). Many jurisdictions that require a showing of fraud. was expected to exercise some control over its subsidiary.) Yes. which. summary judgment could be proper if the evidence presented could lead to but one result. officers. may veil-piercing ever be resolved by summary judgment? HOLDING AND DECISION: (Pointer J. Although Bristol (D) itself had never manufactured or distributed breast implants. and shareholders of Union Properties (D). Bristol lawyers regularly worked for MEC. directors. and Baxter (D). Bristol (D). Bristol set the employment policies. whether the parent and subsidiary file consolidated financial statements and tax returns. Frigidaire Sales Corporation v. Bristol (D) contended that a finding of fraud or like misconduct was necessary to pierce the corporate veil in Delaware. Bristol (D) is not entitled to dismiss the claims against by summary judgment. The corporation MEC (D) was owned by a single shareholder. Union Properties. Commercial breached the contract and Frigidaire (P) filed suit against Union (D). summary judgment must be denied. whether the parent finances the subsidiary. Therefore. When a corporation is so controlled as to be the alter ego of mere instrumentality of its stockholder. The totality of the circumstances must be evaluated in determining whether a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholders. plaintiffs claimed that Bristol (D) could be held liable by piercing MEC's (D) corporate veil. Because a jury could find that MEC (D) was but the alter ego of Bristol (D). Ignored corp formalities. the corporate form may be disregarded in the interest of justice. all jurisdictions require a show of substantial domination. the only general partner of Commercial. a wholly-owned subsidiary of BristolMyers Squibb Co. (D). ISSUE: In a corporate control claim seeking to pierce the corporate veil to abrogate limited liability and reach the parent corporation. Under direct liability. Factors the courts consider include: whether the parent and subsidiary have common directors.
Commercial. Mannon (D), and Baxter (D) argued that Commercial was controlled by Union (D), a separate legal entity, and not by them in their individual capacities. The trial court declined to hold Mannon (D) and Baxter (D) generally liable, and Frigidaire (P) appealed. ISSUE: Do limited partners incur general liability for the limited partnership's obligations simply because they are officers, directors, or shareholders of the corporate general partner? HOLDING AND DECISION: [Judge not stated in casebook excerpt.] No. Limited partners do not incur general liability for the limited partnership's obligations simply because they are officers, directors, or shareholders of the corporate general partner. In Washington, parties may form a limited partnership with a corporation as the sole general partner. To hold that Mannon (D) and Baxter (D) incurred general liability for the limited partnership's obligations would require the court to totally ignore the corporate entity of Union (D), when Frigidaire (P) knew it was dealing with that corporate entity. Although Mannon (D) and Baxter (D) controlled commercial through their control of Union (D), they scrupulously separated their actions on behalf of Commercial from their personal actions and the corporations were clearly separate entities. Frigidaire (P) knew that Union (D) was the sole general partner of Commercial and that Mannon (D) and Baxter (D) were only limited partners. If Frigidaire (P) had not wished to rely on the solvency of Union (D) as the only general partner, it could have insisted that Mannon (D) and Baxter (D) personally guarantee contractual performance. When the shareholders of a corporation, who are also the corporation's officers and directors, conscientiously keep the affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation's separate entity should be respected. Affirmed. EDITOR'S ANALYSIS: The court's opinion does not preclude a finding of general liability of limited partners where there is a showing of fraud or deception. Other courts have been less lenient in protecting limited partners and have held them generally liable if their actions constituted control of the corporation. In some states, on the other hand, a corporate entity is not permitted to be a general partner because such arrangements are viewed as shams. GENERAL PARTNERSHIP — A voluntary agreement entered into by two or more parties to engage in business whereby each of the parties is to share in any profits and losses therefrom equally and each is to participate equally in the management of the enterprise. LIMITED PARTNERSHIP — A voluntary agreement entered into by two or more parties whereby one or more general partners are responsible for the enterprise's liabilities and management and the other partners are only liable to the extent of their investment.
§3 Shareholder Derivative Actions
A. Introduction Cohen v. Beneficial Industrial Loan Corp.
FACTS: Cohen (P) owned 100 of the more than two million shares of the Beneficial Industrial Loan Corporation (D), a Delaware corporation. Cohen's (P) shares never had a market value of more than $5,000. In 1943, Cohen's decedent (P) brought a derivative action in U.S. district court in New Jersey, alleging that since 1929 certain managers and directors of Beneficial (D) had engaged in a continuing and successful conspiracy to enrich themselves at the expense of the corporation. Specific charges of mismanagement and fraud extended over a period of eighteen years and the assets allegedly wasted or diverted exceeded $100,000,000. Cohen (P) had demanded that Beneficial (D) institute proceedings for its recovery, but by their control of the corporation the directors and managers prevented it from doing so, and the derivative action was filed. In 1945, New Jersey enacted a statute that required a plaintiff having less than a 5% or $50,000 interest in a corporation to be liable for the reasonable expenses and attorney's fees of the defense if he was unsuccessful in his suit and entitling the corporation to indemnity before the case could be prosecuted. Beneficial (D) moved to require such security, seeking a bond of $125,000, and Cohen's decedent (P) challenged the statute as unconstitutional. The district court declined to fix the amount of indemnity, the court of appeals reversed, and the Supreme Court granted review. ISSUE: Is a statute holding an unsuccessful plaintiff liable for the reasonable expenses of a corporation in defending a derivative action and entitling the corporation to require security for such payment constitutional? HOLDING AND DECISION: (Jackson, J.) Yes. A statute holding an unsuccessful plaintiff liable for the reasonable expenses of a corporation in defending a derivative action and entitling the corporation to require security for such payment is constitutional. A stockholder who brings suit on a cause of action derived from the corporation assumes a position of a fiduciary character. The Constitution does not oblige the state to place its litigating and adjudicating processes at the disposal of such a representative, at least without imposing standards of responsibility, liability, and accountability which it considers will protect the interests the representative elects himself to represent. It cannot be said that the state makes such unreasonable use of its power as to violate the Constitution when it provides liability and security for payment of reasonable expenses if the litigation is adjudged to be unsustainable. Although it is perhaps not the optimal determinant of liability for litigation, nothing forbids the state using the amount of financial interest in the corporation of the litigant as a measure of his accountability. Such a measure will undoubtedly prevent a number of the harassment suits the statute was designed to target. Furthermore, the statute should be applied in a federal diversity case and cannot be disregarded as a mere procedural device. Affirmed. Eisenberg v. Flying Tiger Line, Inc.
FACTS: In July 1969, Flying Tiger (D) organized a wholly owned Delaware subsidiary, the Flying Tiger Corporation (FTC), which in turn organized a wholly owned subsidiary, FTL Air Freight Corporation (FTL). The three corporations then entered into a plan of reorganization under which Flying Tiger (D) merged into FTL, FTL took over operations, and Flying Tiger (D) shares were converted into an identical number of FTL shares. The plan was approved by the necessary two-thirds vote at the annual meeting on September 15. The effect of the merger was that business operations were confined to a wholly owned subsidiary of a holding company whose shareholders were the former shareholders of Flying Tiger (D). Eisenberg (D) filed a class action on behalf of himself and other shareholders contending that the merger was a complex plan to deprive minority shareholders of any vote or influence over the affairs of the new company and seeking to overturn the reorganization. Flying Tiger (D) moved for an order to compel Eisenberg (P) to comply with a New York law that required a plaintiff suing derivatively on behalf of a corporation to post security for the corporation's costs. The trial judge granted the motion, Eisenberg (P)
failed to comply, and his action was dismissed. Eisenberg (P) appealed, arguing that his class action was representative, not derivative, and that the statute requiring security was not applicable. ISSUE: Can a cause of action that is determined to be personal, rather than derivative, be dismissed because the plaintiff fails to post security for the corporation's costs? HOLDING AND DECISION: (Kaufman, J.) No. A cause of action that is determined to be personal, rather than derivative, cannot be dismissed because the plaintiff fails to post security for the corporation's costs. The essence of Eisenberg's (P) claim is that the reorganization deprived him and fellow stockholders of their right to vote on Flying Tiger's (D) affairs. This was in no sense a right that ever belonged to Flying Tiger (D) itself. Eisenberg (P) argues that the right belongs to stockholders per se, and that his action therefore cannot be deemed derivative. Although there has been much debate over the precise definition of a derivative suit, the current codification deems a suit derivative only if it is brought in the right of a corporation to procure a judgment in its favor. Such a definition clearly supports Eisenberg's (P) argument that his suit is not derivative and therefore no security need be posted. Reversed.
In most derivative suits, the shareholder is required to first make a demand, and then post security. The Delaware supreme court adopted a two-prong test to determine whether a stockholder’s claim is derivative or direct. Who suffered the alleged harm, the corp. or the suing individual? Who would receive the benefits of any recovery, monetary to the corp. or nonmonetary? B. The Requirement of Demand on the Directors Grimes v. Donald FACTS: DSC created employment agreements with Donald gave him the right to declare a constructive termination without cause in the event of unreasonable interference, as perceived in good faith by Donald, through the Board or a substantial stockholder of the company. Grimes, a shareholder, wrote to the Board, demanding that they abrogate the agreements as excessive compensation. The Board refused and Grimes filed suit, seeking a declaration of the invalidity of these agreements made between the Board of Directors and Donald, and requesting damages from Donald and other members of the Board. Grimes alleged that the Board had breached its fiduciary duties by abdicating authority, failing to exercise due care, and committing waste. Donald claimed that the Board had made a business decision which was entitled to protection under the business judgment rule. The Chancellor dismissed the abdication claim, which was a direct claim. Contending that demand was excused, Grimes later filed a derivative suit alleging waste, excessive compensation and due care claims. The Chancellor held that Grimes had waived his right to argue that demand was excused with respect to those claims because he had already made demand that the agreements be abrogated as unlawful. Grimes appealed. ISSUE: If a shareholder demands that the board of directors take action and that demand is rejected, is the board rejecting the demand entitled to the presumption that the rejection was made in good faith unless the stockholder can allege sufficient facts to overcome the presumption? HOLDING AND DECISION: (Per curiam) Yes. If a shareholder demands that the board of directors take action and that demand is rejected, the board rejecting the demand is entitled to the presumption that the rejection was made in good faith unless the stockholder can allege sufficient facts to overcome the presumption. Demand having been made as to the propriety of the agreement, it cannot be excused as to the claim that the agreement constituted waste, excessive compensation or was the product of a lack of due care. Since Grimes (P) made a pre-suit demand with respect to all claims arising out of the agreements, he was required to plead with 39
particularity why the Board's refusal to act on the derivative claims was wrongful. The complaint failed to include particularized allegations which would raise a reasonable doubt that the Board's decision to reject the demand was the product of a valid business judgment. An abdication claim can be stated by a stockholder as a direct claim, as distinct from a derivative claim, but here the complaint failed to state a claim upon which relief could be granted. Affirmed. First, if a shareholder has a beef against the corp., why not provide a day in court (without a demand)? These are derivative actions, and the action is representative. The other shareholders should have a say through their corporate representatives. The shareholder should not be allowed to waste the assets of other shareholders. Second, the purpose of the demand is to allow the corp. to take over the c/a or resist it according to the judgment of the directors. But where the directors cannot be expected to make a fair decision, demand would be futile and is excused. Under WV law, the idea of a written demand with a 90-day wait period is followed. Three, if a demand is made, the P is deemed to have conceded that it was required, which in turn makes the decision of the board on whether to dismiss a matter of business judgment, which in turn means that the P inavariably loses (Business Judgment Rule). And, where demand is required (or made) the P is not entitled to discovery. Four, well-advised Ps in DE almost never make a demand. So the issue is whether demand is excused. Marx v. Akers FACTS: Marx, a shareholder of IBM, commenced a derivative action against IBM alleging that Akers, a former chief executive officer of IBM, and other directors violated their fiduciary duty and engaged in self-dealing by awarding excessive compensation to other directors on the board. IBM moved to dismiss the complaint for failure to state a cause of action and failure to serve a demand on IBM's board to initiate a lawsuit based on these allegations. The supreme court dismissed the complaint stating that Marx failed to show that demand would have been futile, and the Appellate Division affirmed. Marx appealed. ISSUE: Is a demand on the board of directors futile if a complaint alleges with particularity that: (1) a majority of the directors are interested in the transaction; (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; or (3) the directors failed to exercise their business judgment in approving the transaction? HOLDING AND DECISION: Yes. Demands on boards of directors are futile if a complaint alleges with particularity that: (1) a majority of the directors are interested in the transaction; (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; or (3) the directors failed to exercise their business judgment in approving the transaction. Directors are self-interested in a transaction if they receive a direct financial benefit from the transaction that is different from the benefit to the shareholders generally. Voting oneself a raise excuses a demand. However, the inquiry must still be made as to whether this is a sufficient basis to support a cause of action. Courts have repeatedly held that a cause of action will not stand alone on the basis of excessive salary raises unless wrongdoing, oppression, or abuse of a fiduciary position is also demonstrated. The evidence presented is not ample to support Marx's (P) allegations of wrongdoing, so the Appellate Division's order should stand. Affirmed. 40
The business judgment doctrine recognizes that courts are ill-equipped to evaluate what are and essentially must be business judgments. ISSUE: May a court inquire as to the adequacy and appropriateness of a special litigation committee's investigative procedures and methodologies? HOLDING AND DECISION: (Jones. Wallenstein (P).000. DISSENT: (Cooke. In this case there is nothing in the record to raise a triable issue of fact as to the independence and disinterested status of the three directors on the special litigation committee. The board of directors then adopted a resolution creating a special litigation committee to investigate the derivative action and determine what position GTE (D) should take. alleging breaches of fiduciary duty. Affirmed. J. Another shareholder. and GTE (D). four of the directors (D) named in the action were no longer on the board. The Role of Special Committees Auerbach v. Bennett FACTS: With the assistance of special counsel and Arthur Andersen &Co. who are in exclusive possession of much of the factual information concerning the case. and that some directors (D) had been involved. was substituted as plaintiff and appealed. To disqualify an entire board would be to render a corporation powerless to make an effective business judgment with respect to prosecution of a derivative action. In September 1979.'s (D) best interests. Auerbach (P). Zapata Corp. Maldonado (P) instituted a derivative action against ten officers and/or directors of Zapata (D). (D) should continue the litigation. GTE (D) had made payments abroad and in the United States constituting bribes and kickbacks totaling more than $11. The audit committee subsequently released its report. because the continuation of this suit is so dependent upon the motives and actions of the board members (D) and the special litigation committee. comprised solely of the two new directors. or as to the sufficiency and appropriateness of the investigative procedures they employed. ISSUE: Should a court automatically grant a special litigation committee's recommendation to dismiss a derivative action? 41 . A court may properly inquire as to the adequacy and appropriateness of a special litigation committee's investigative procedures and methodologies. Zapata Corp. GTE's (D) general counsel filed for and was granted summary judgment. The derivative suit was brought against only four members of the fifteen-member board. The committee concluded that Arthur Andersen (D) had acted in accordance with generally accepted auditing standards and in good faith and that no proper interest of GTE (D) or its shareholders would be served by continuing the claim against it. believing that demand would be futile because all directors (D) were named as defendants and allegedly participated in the wrongful acts. (D).C. and the remaining directors (D) appointed two new outside directors to the board.000. Arthur Andersen (D). to investigate Maldonado's (P) allegations and determine whether Zapata Corp. (D) filed a motion for dismissal or summary judgment. The committee comprised three disinterested directors who had joined the board after the alleged transactions had occurred. The board then created an independent investigation committee. The committee's determination was intended to be final and binding upon Zapata Corp. (D). Maldonado FACTS: In June 1975. Maldonado (P) did not first demand that the board bring the action. J. By June 1979. the committee concluded that the action should be dismissed because it was not in Zapata Corp. v.) Yes. The decision of the disinterested special litigation committee forecloses further judicial inquiry. However. which stated that evidence had been found that. which was granted by the court of chancery. but may not consider factors under the domain of business judgment. instituted a derivative action on behalf of GTE (D) against GTE's directors (D). a shareholder. GTE's (D) audit committee conducted an investigation into GTE's (D) world-wide operations. in the period from 1971 to 1975. and the three members of the special litigation committee joined the board after the alleged transactions occurred. the rule shields the deliberations and conclusions of a special committee only if its members possess disinterested independence and do not stand in a dual relation that would prevent an unprejudicial exercise of judgment. alleging breach of corporate duties and seeking damages as reimbursement for the wrongful payments. The committee also found that the claims against the individual directors (D) were without merit.) Summary judgment should not be granted prior to disclosure proceedings.
the New Jersey legislature provided that every corporate charter thereafter granted would be subject to alteration and modification at the discretion of the legislature.P.P. ISSUE: Can state legislation adopted in the public interest be constitutionally applied to preexisting corporations under the reserved power? Held:Yes. and made a reasonable investigation. Smith Mfg. The court held that the donation was intra vires..P. Therefore. Smith because it was created long before their enactment.) No. there were ties between Stanford U. While courts should be mindful of judicial overreaching. and (2) the New Jersey statutes that would have expressly authorized the contribution did not constitutionally apply to A. in good faith. However. a court must: (1) determine whether the committee acted independently.P. In re Oracle Corp. Smith Mfg. Derivative Litigation Facts: Shareholders of Oracle brought a derivative action asserting insider trading by four of Oracle’s board of directors members. J. Smith Mfg. was a New Jersey corporation incorporated in 1896. Smith Mfg. v.P. Shareholders of A. the Oracle. Two Stanford Professors joined the Board after the allegations were made. Fifty years before the incorporation of A. A similar reserved power was incorporated into the state constitution. and the trading defendants. Barlow FACTS: A. the reserved power may be invoked to sustain later charter alterations even though they affect contractual rights between the corporation and its stockholders.'s best interest to donate $1.P. or settle. the board of directors adopted a resolution stating that it was in A.'s implied and incidental powers under common law principles. State legislation adopted in the public interest can be constitutionally applied to preexisting corporations under the reserved power. Smith (P) possessed no implied power to make it. the interests at stake necessitate the fresh view of a judicial outsider. A board has the power to choose not to pursue litigation when demand is made upon it. 42 .P.P. courts have struggled between allowing the independent business judgment of a board committee to prevail and yielding to unbridled plaintiff stockholder control. Affirmed. Smith Mfg. Smith Mfg.P. Smith Mfg. a statute enacted in 1930 encouraging and expressly authorizing reasonable charitable contributions is applicable to A. and must be upheld as a lawful exercise of A. and they were named to the SLC. Over the years it regularly made donations to various community organizations and public universities. Issue: Did the ties impair the independence of the SLC? Held: The SLC has not met its burden of proving an absence of a material dispute of fact about its independence where its members are professors at a university that has ties to the corporation and to the defendants that are the subject of a derivative action that the committee is investigating. In 1951.P. and the shareholders (D) appealed. A. so long as the decision is not wrongful. The investigation was extensive and produced a lengthy report explaining why Oracle should not pursue the claims. terminate the action. sought a declaratory judgment following the shareholder's challenges.500 to Princeton University's annual fund. Motion to terminate the derivative action is denied. §4 The Role and Purposes of Corporations A. The test promulgated here allows for the balancing of these competing interests under appropriate court supervision. When assessing a special litigation committee's motion to dismiss a derivative action. New Jersey courts have repeatedly recognized that where justified by the advancement of the public interest. Oracle formed a special litigation committee (SLC) to investigate the charges in the derivative action and to determine whether to press the claims raises. Co. Where demand has been excused. and (2) apply the court's own independent business judgment. with the burden of proof on the corporation. questioned the corporation's authority to make the contribution on two grounds: (1) its certificate of incorporation did not expressly authorize the donation and A. Smith Mfg. Reversed and remanded.HOLDING AND DECISION: (Quillen.
In 1916. this discretion does not extend to a change in the end itself. Wrigley has suggested that night games in the Wrigley Field area would have a 43 .000. and Ford appealed. Though Shlensky alleges that night games haven't been considered due to Wrigley's personal feelings about the sport. a minority shareholder. Wrigley FACTS: Wrigley was the majority shareholder and a director of the Chicago Cubs baseball team. There are valid reasons for refusal to install lights in the stadium.000.000 and more than $50. In 1913. Shlensky. After the announcement of the new dividend policy. and the price of the company's cars would be reduced. which competed with Ford. The powers of a corporation's directors are to be employed to that end and their discretion is to be exercised in the choice of means to attain that end. FACTS: Ford Motor Co. This is free advertisement for the corporation. sought to bring a shareholders' derivative action to compel the directors to equip Wrigley Field with lights so that night games could be played. despite having profits of almost $174. Ford Motor Co. or conflict of interest? RULE: A shareholder's derivative suit can only be based on conduct by the directors which borders on fraud. profits would be reinvested into the business to build a smelting plant. etc. the Dodges formed their own auto company. but there is no showing of fraud. Affirmed. attacking both the dividend policy and Ford's plans to expand manufacturing facilities. ISSUE: Is a corporation's primary purpose to provide profits for its stockholders? HOLDING AND DECISION: Yes.000 cash on hand. However. or conflict of interest. or to the nondistribution of profits among stockholders in order to devote them to other purposes. ISSUE: Can a shareholders' derivative suit be based on conduct by the directors that does not border on fraud. and revenues could be increased. Shlensky v. was incorporated in 1903 with Henry Ford as the majority shareholder and the Dodge brothers owning ten percent of the common shares. or conflict of interest. the Dodges filed suit. The trial court was correct in ruling that a large sum of money should have been distributed to the shareholders. John Dodge met with Ford to complain about the new policy and offered to sell his and his brother's shares to Ford for $35. The trial court ruled in favor of the Dodges.000. Held: No.000. A corporation's primary purpose is to provide profits for its stockholders. Shlensky is attempting to use the derivative suit to force a business judgment on the board of directors of the Chicago Cubs. After Ford rejected the buyout offer. illegality. illegality. to the reduction of profits. Dodge v. Henry Ford announced that in the future no special dividends would be paid. illegality. The trial court sustained Wrigley's motion to dismiss over Shlensky's contention that the refusal to install lights was a personal decision of Wrigley's and not in the best interest of the shareholders.Barlow’s argument is basically that they are taking money away from the working class peoples’ retirement funds (largest shareholders come from pension funds) to give to artsy organizations.
there is no showing that night games would significantly increase revenues. Only when the agreement is inconsistent with mandatory statutory provisions will the agreement be invalidated.detrimental effect on the neighborhood. Flahive. v. The statute allows parties to contract away their right to file suit in DE. Inc. though. d/b/a Westec v. a. or even that additional expenses wouldn't be required. Inc. LLCs should not be treated differently than corporations. Π later brings a deritative suit on behalf of Malek LLC claiming that Δ breached its fidcuiary duty. & thus never consented to those clauses. The various factors to justify piercing the LLC veil would not be identical because of the differences in organizational formalities. did not sign the agreement. Additionally. Agreement contained an arbitration clause covering all disputes arising out of the agreement. 727 A. although in existence when the agreement was executed. and a forum selection clause providing for exclusive jurisdiction of CA state & Fed Cts. It is designed to give maximum effect to the freedom to contract & to the enforceability of LLC agreements. Lanham §2 The Operating Agreement Elf Atochem North America. Waste & Land. is a claim to pierce the LLC veil an available remedy? Held: Yes. this is a derivative suit on behalf of Malek.2d 286 (1999) – Elf (Π) and Jaffari (Δ) entered into an agreement to form an LLC. Another issue Π brought up was Malek LLC. b. it is valid even though Malek LLC never signed. (Wy. The statute involved here provides broad discretion in drafting the LLC agreement & funishes default provisions only when the agreement is silent. 44 . Ct disagrees & says that since the members of the LLC executed the agreement. 2002) Issue: In the absence of fraud. §3 Piercing the Corporate Veil Kaycee Land and Livestock v. Chapter 4: The Limited Liability Company §1 Formation Water. Malek LLC. Jaffari.
In competing. Limited liability partnership involves same fiduciary relationship as a partnership. bad faith or oppressive conduct in the complaint.303(2) says case law conditions for piercing corporate veil apply to LLCs as well. self-dealing. Minn. II. Hunt Sports Enterprises. There is no evidence that McConnell acted in a secretive manner or that he tortiously interfered w/ prospective business relationship.ULLCA §303 says no piercing the LLC veil. the Court would toss this out since can’t prove those 4 dominated and controlled the other directors. If the company had sold the stock. Limiting Fiduciary Duties by Agreement McConnell v. The shareholders recognized the divided income equal to the FMV ($4m) of the DLJ stock. Even if evidence of clear self-dealing by the four directors. Chapter Five: The Duties of Officers. Normally this relationship would preclude direct competition btwn members of the company. and got a basis in the DLJ stock equal to that amount. 45 . appellees didn’t engage in any acts that would constitute wrongful behavior. and Other Insiders §1 The Obligations of Control: Duty of Care Kamin v. However. Strong Abstention doctrine use by the Court. b. This was a business decision. American Express Company Facts: Stockholders sue AmEx because they didn’t like what AmEx was doing with the shares of DLJ that AmEx had acquired. terms of the operating agreement allow members to compete w/ business of the company.2d 1193 (1999) . it would have recognized a $26m tax loss that could have been offset against its taxable income. Held: The Court said no claim of fraud. The courts will not impose liability for dumb decisions. a. Members shall not in any way be prohibited from or restricted in engaing or owning in any other businss ventrue of any nature. Shareholders wanted AmEx to take the benefit instead of issue the stock as a dividend which would cause AmEx to lose the tax benefit. 725 N. Directors. Fiduciary Obligation A.E. including any venture which may be competitive with the business of the Company.LLC operating agreement provision states that”Members may compete. Stat.” Hunt claims that McConnell & other members violated a fiduciary duty by forming and joining their new limited partnership. §322B. 1.
" Wouldn’t have entered into a multi-million dollar corporate transaction without being fully informed. and (2) the intrinsic value of the company (not necessarily $39/share market). BNA Corporate Accountability ReportFeb.25%. a. is devoid of any competent 46 .” The record. According to “The Economic Implications of Corp.Experienced directors such as these are not easily taken in by a "fast shuffle. Senior mgmt & CFO responded negatively to this. but $60/share difficult. began to explore the opportunity to sell to a company w/ more taxable income. CEO gave the Bd a 20 min presentation & the Bd approved the proposed Merger agreement. Smith v. Timeline: Aug-Sept 1980: Mgmt discussions.Andrew M. CEO said he would take $55/share for his shares. Oct 8 1980: BoD approves revised deal. who agreed to make a cash-out merger offer at $55/share. Trans Union CEO. CFO tells him a leveraged buy-out by mgmt at $50/share would be easy. Financial Reporting” financial executives are focused on short-term results and are willing to sacrifice long-term value to achieve them. Feb 10 1981: TU shareholders approve merger by 69. CEO then met with a corporate takeover specialist. Sept 13-19 1980: Van Gorkem agrees to LBO (leveraged buy-out). Directors are liable if they were grossly negligent in failing to inform themselves. according to a study released by Duke U and U of Wash Feb. Ballard. The Bd breached their fiduciary duty of care to stockholders by (1) failure to inform themselves of all info reasonably available to them and relevant to their decision to recommend the merger and (2) failure to disclose all material info such as a reasonable stockholder would consider important in deciding whether to approve the offer. 9. but he still brought it to the Bd. They were grossly negligent in approving the sale in such a short period of time & without important info. Dissent . b. HELD: Πs attacking a Bd decision must rebut the presumption that its business judgment was an informed one. Survey Finds. Van Gorkem FACTS: Van Gorkom (Δ). apart from the company’s historic stock market price and Van Gorkom’s long association with Tran Union. 13. The party must prove gross negligence by directors who failed to inform themselves of “all material information reasonably available to them. 2004: 3/4 of surveyed corporations would knowingly sacrifice shareholder value to meet earnings expectations.9% to 7. Directors did not adequately inform themselves as to (1) the CEO’s role in forcing company’s sale & in establishing the per share purchase price. Sep 20 1980: Senior Mgmt Meeting and TU BoD approves merger after 2 hour meeting. w/o reserving the right to actively solicit alternate offers ($55/share higher than market price of $39/share). Majority of Companies Will Sacrifice Value to Meet Earnings Expectations.
Ct.Y. Beran. Why wasn’t that enough? What is the firm worth to Pritzker? Under Del.2d 2 (Sup.evidence that $55 represented the per share “intrinsic value” of the company. The board knew Pritzker was willing to pay a $17 premium over the prevailing market price. 49 N.S. Directors acted in free exercise of their business judgment 47 .500 shares.000 share of a total outstanding issue of 1. Some of these tother directors were originally employed by Dr. Directors and Managers Bayer v.1944) Facts: The Doctors Dreyfus and their families own about 135. § 2 Duty of Loyalty A. Additionally.376. History: The advertising cause of action charges the directors with negligence. 141(e). the president of the company. United Jersey Bank Creditors sue the trustee of Pritchard’s estate. His wife. All ofher suggestions as to personnel were adopted by the advertising agency. waste and improvidence in embarking the corporation upon a radio advertising program beginning in 1942 and costing about $1 million a year. Camille Dreyfus. IT is further charged that they were negligent in selecting the type of program and in renewing the radio contract for a second year.000 shares of common stock. In this case. to ho he has been married for about 12 years is known professionally as Miss Jean Tennyson and is a singer of wide experience. the other directors about 10. Francis v. there is a charge that the directors were motivated by a noncorporate purpose in causing the radio program to be undertaken in expending large sums of money therefore Issue: Was there a breach of fiduciary duty on the part of the directors? Holding: No. there were no reports relied upon. BoD are able to defend actions like this on the basis that they were lied to in the reports by directors.
Abdo sent a memo to Dornbush. Dornbush. In April 2005. Some care.2004. Joseph expressed concern that Benihana would not have sufficient available capital to complete the Construction and Renovation Plan and pursue appropriate acquisition. 2004. Joseph sent BFC a private placement memo. The president knew his wife might be one of the paid artists on the program. Benihana. On April 22. Adbo (representing BFC) negotiated with Joseph for several weeks. to review the terms of the transaction. and John E. The Board met again on Bebruary 17. which would provide the funds needed and also put the company in a better negotiating posistion if it sought additional financing. and recommended that Benihana issue convertible preferred stock. to avoid the possibility of fraud and to avoid the temptation of self-interest (2) included within the scope of undivided loyalty is every situation in which a trustee chooses to deal with another in such close relation with the trustee that possible advantage to such other person might influence. diligence. to develop financing options. met with Schwartz. and if there is any evidence of improvidence or oppression.. The full board met with Joseph on January 24. Benihana of Tokyo. Shortly after this meeting. On January 9. and prudence were exercised by the directors before they committed the company to the program. Abdo. the board’s executive committee. Abdo made a 48 . any indication of unfairness or undue advantage. They acted reading studies reported to them by the advertising department. the transactions will be voided (3) Directors’ dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagement with the corporation are challenged the burden is on the director not only to prove the good faith of the transaction but also to show its inherent fairness form the viewpoint of the corporation and those interested therein (4) As a general rule. He went over all the financing alternatives that he had discussed with the executive committee. 2004. Abdo contacted Joseph and told him that BFC financial corporation was interested in buying the new convertible stock. Schwatz. Behnihana hired WD Partners to evaluate its facilities and to plan and design appropriate renovations.2009.Rule: (1) The business judgment rule yields to the rule of undivided loyalty. He did not sent it to any other member of the Benihana Board. Benihana hired Morgan Joseph & Co. and Joseph listing the agreed terms of the Transaction. marked “confidential” containing an analysis of the proposed stock issuance (the Transaction).2d 114 (Del. 906 A. Fred Joseph. consciously or unconsciously. 2004. Joseph gave the directors a board book. of Morgan Joseph. the judgment of the trustee (3) Personal transactions of directors with their corporations when challenged are examined with the most scrupulous care. At its next meeting on May 6. Inc. Failure to follow formal requirements was not fatal when the board was close working. the entire board was officially informed of BFC’s involvement in the Transaction. Evidence fails to show that the program was designed to foster or subsidize her career as n artist or to furnish a vehicle for her talents. v. Inc. but the other directors did not know this until they had approved the campaign of radio ads and the general type of radio program. directors acting separately and not collectively as a board cannot bind the corporation Reasoning: The radio program was not adopted on the spur of the moment or at the whim of the directors.2006) Facts: Benihana is a subsidiary of Benihana of Tokyo.
the board reviewed and approved the transaction. But the board did know that Abdo was a principal of BFC. and directors of CIS told Broz that CIS was not at all interested in the transaction. Broz was contacted about RFBC’s possible acquisition of Michigan-2. Pri closed its tender offer for CIS. Nine days later. In May of 1994..2d 148 (Del. Benihana and BFC executed the stock purchase agreement. On May 18. thereby meeting the terms of Pri’s option agreement. June 28. June 8. Aoki’s counsel then sent a letter asking the board to abandon. Prior to this. in food faith. An asset purchase was then executed between seller and RFBC. a competitor of RFBC at the time of the events at issue. CIS. Borz agreed to pay 7.presentation on behalf of BFC and then left the meeting. Corporate Opportunities Broz v.1996) Facts: Broz is the President and sole stockholder or RFBC. authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors (2) Corporate action may not be taken for the sole and primary purpose of entrenchment B. subject to receipt of a fairness option Issue: (1) Section 144(a)(1) approval (2) Abdo’s alleged fiduciary duty (3) Dilution of BOT’s voting power Holding: (1) Directors understood that Abdo was BFC’s representative in the transaction (2) The record does not support the claim that Abdo breached his duty of loyalty (3) There is ample support for the trial court’s factual determination that the transaction was subjective and based on the best financing vehicle Rule: (1) Section 144 of Delaware General Corporation Law provides a safe harbor for interested transactions if the material facts as to the director’s relationship or interested and as to the contract or transaction are discloses or are known to the Board and the Board. On Nov 14. Michigan-2 was not offered to CIS. Board approved resolutions ratifying the execution and approved the transaction again after suit was filed. Cellular Information Systems. Joseph distributed an updated board book. 2004. 1994. PriCellualr’s interest in Michican-2 was fully disclose to CIS’s chief executive. History: The trial court found that the board was not informed that Abdo had negotiated the deal on behalf of BFC. Inc. 1994 CIS directors entered into agreements with PriCellular to sell their shares in CIS.2 million for the license. Broz was also an outside director member of the Board of plaintiff. the stock issuance was publicly announced. After discussion. Pri owned no equality interest in CIS History: Court of Chancery held that Broz had usurped a corporate opportunity? Issue: Did Broz breach his fiduciary duties to CIS by usurping a corporate opportunity? Holding: No 49 . 2004. which explained that Abdo had approached Moran Joseph on half of BFC and included the negotiated terms. 673 A. The letter was read at a May 20 meeting and the board then approved the transaction in spite of the letter.
C. Defendants were able to flip investments into instant profits. Broz was not obligated to refrain from competition with Pri. profited in the millions of dollars on numerous issues of IPO allocated to them by Sachs. CFO. and. but that was improperly diverted to them. Broz took care not to usurp any opportunity which CIS was willing and able to pursue. Inc. Sachs was asked in 2001 to serve as ebays financial advisor in acquiring PayPal. ebay retained Goldman Sachs and other investment banks to underwrite and IPO of common stock. Sachs rewarded the individual defendants by allocating to them thousands of IPO shares at the initial offering price. defendants argue that this is not a corporate oppornity within ebay’s line of business or one in which ebay had an interest or expectancy Issue: Did the defendants usurp a business opportunity? Holding: Yes. is. it is not cognizable that they had an interest or expectancy in the license. He is ebays largest stockholder. Sahcs allocated him shared in at least forty IPOs at the initial offering price. by embracing the opportunity. In 1998. in the line of the corporation’s business and is of practical advantage to it. Shareholders Litigation. In re eBay.Ch. Around 1998-99. the law will not permit him to seize the opportunity for himself (2) Financially. 2004 WL 253521 (Del. the self-interest of the officer or director will be brought into conflict with that of the corporation.skipped 50 .Rule: (1) If there is presented to a corporate officer or director of a business opportunity which the corporation is financially able to undertake. History: (1) Plaintiffs claim that defendants usurped a corporate opportunity of ebay. Four other defendants. the corporate opportunity doctrine is implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity (3) The It is not the law of Delaware that the presentation to the board is a necessary prerequisite to a finding that a corporate opportunity has not been usurped.)(Memorandum Opinion) Facts: Defendants Omidyar and Skoll founded ebay. Reasoning: CIS was not financially capable of exploiting the opportunity. ebay made a second offerind and Sachs again was the lead underwriter. Omidyar has been ebay’s CEO. is one in which the corporation has an interest or a reasonable expectancy. each ebay officers or directors. from tits nature. During the same time period. Sachs was the lead underwriter. defendant’s motion to dismiss denied Rule: (1) Usurp rule above (2) A cognizable claim is stated on the common law ground that an agent is under a duty to account for profits obtained personally in connection with transactions related to his or her compnay Reasoning: (1) Ebay financially was able to exploit the opportunities in question and ebay was in the business of investing in securities (2) the conduct challenged involved a large investment bank that regularly did business with a company steering highly lucrative IPO allocations to select insider directors and officers at that company. Dominant Shareholders . agedly both to reward them for past business and to induce them to direct future business to that investment bank (3) Defendants breached duty of loyalty by accepting a gratuity that rightfully belonged to ebay. Although the opportunity was within CIS’s line of business. or both. and President.
Ch. In re Wheelaborator Technologies. although less than unanimous. History: Derivative action brought on behalf of Agau against its officers and directors and USAC to recover the 800. however this is not the case if the majority of shares voted in favor were cast by officers and directors in their capacity as Agau shareholders Reasoning: Agau received properties which by themselves were of substantial value. Upon the completion of that vote. and received a promising potential self-financing and profit generating enterprise with proven markets and commercial capability which could be expected to provide Agau with the cash it needed to undertake further exploration and develop its own properties. Agau board resolved to exercise the option. 361 A.000. Thus it was decided to transfer the properties to USAC. Ratification Fiegler v. and this was approved by a majority of shareholders. 1976) Facts: Defendant Lawrence in his individual capacity acquired certain antimony properties under a lease-option for $60. Agau was gratned a long term option to acquire USAC if the properties proved to be of commercial value. Agau was to deliver 800. To consider the agreement.000 shares and for an accounting Issue: Whether the defendants in their capacity as directors and officers of both corporations wrongfully usurped a corporate opportunity belonging to Agau. and whether all defendants wrongfully profited by causing Agau to exercise an option to purchase that opportunity Holding: Defendants proved the intrinsic fairness of the transaction Rule: (1) Shareholder ratification of an interest transaction. Lawrence. but after consulting with Agau’s Board he and they agreed that the corporation’s legal and financial position would not permit acquisition and development of the properties at that time. WTI’s board held a special meeting. Shareholders Litigation. Inc.469 Waste shares for each WTI share they held. 663 A. The option agreement was executed. shifts the burden of proof to an objecting shareholder to demonstrate that the terms are so unequal as to amount to a gift or waste of corporate assets. Upon its exercise and approval by Agau shareholders.574 WTI shares and .D. Waste and WTI negotiated a merger agreement in which Waste would acquire another 33% of WTI stock. The two firms the distributed a proxy statement explaining the transaction to WTI shareholders.2d 1194 (Del. All members other than Waste designees attended.000 shares of its restricted investment stock for all authorized and issued shares of USAC. Lawrence offered to transfer the properties to Agau. The exchange was calculated on the basis or reimbursement to USAC and its shareholders for their costs in developing the properties to a point where ti could be ascertained if they had commercial value. a closely held corporation formed just for this purpose. At a 51 . a majority of whose stock was owned by the individual defendants.2d 218 (Del. The seven non-Waste directors of WTI then unanimously approved the merger agreement. Investment bankers and WTI’s attorney’s declared the transaction was fair. the court Waste directors joined the meeting and the full board unanimously approved it as well. and WTI shareholders would receive .1995) Facts: Waste bought 22% of WTI stock and elected four of its own directors to serve on WTI’s eleven member board.
Issue: Holding: Summary judgment granted dismissing duty o disclosure claim. Engineers hired by Glenn performed the test but. and such approval is granted. Approval by fully informed. a 22% stockholder exercise de jure or de facto control over WTI such that a fairness standard was necessary §4 Disclosure and Fairness A. IT is reasonable to infer that WTI’s directors had. who pledged to invest up to $25 million in Geophone. 2003) Facts: Glynn was GeoPhone’s majority shareholder and chairman. did not use CAMA. Glynn. LLC alleging that Glenn committed federal securities fraud when he sold Robinson a partial interest in GeoPhone Company. The main focus of the complaint was that the WTI had deliberated only three hours before voting to approve and recommending to shareholders. Robsinson learned for the first time that the CAMA technology had never been implemented. a substantial working knowledge of Waste during the March 30. Pursuant to agreements. Inc. The merger was approved by a fully informed vote of a majority of WTI’s disinterested stockholders.1960 meeting.special shareholder meeting. Gylnn and his associates contacted Robinson. In 1998. Robinson. Plaintiff. Glynn Scientific. LLC if the field test indicated that CAMA worked in the GeoPhone system.. and were able to draw upon. It also specified that the certificates were exempt from registration under the Securities Act of 1933 and that the certificates could not be transferred without proper registration under the federal and state securities laws. but where the merger is conditioned upon approval by a majority of the minority stockholder vote. $14 million was to be invested after the field test. with Glynn’s knowledge. 52 . but the burden of demonstrating that the merger was unfair shifts to the plaintiff Reasoning: The argument lacked evidentiary support. the standard of review remains entire fairness. disinterested shareholders pursuant ro 14(a)(2) invokes the business judgment rule and limits judicial review to issue of gift or waste with the burden of proof upon the party attacking the transaction (3) In a parent-subsidiary merger the standard of review is ordinarily entire fairness. Geohone became a LLC in September of 1995. No evidence was presented that Waste. 349 F. Robinson received 33.3d 166 (4th Cir. a majority of WTI shareholders (not counting Waste) approved the agreement History: Plaintiffs brought suit. The review standard applicable was business judgment with plaintiffs having the burden of proof Rule: (1) The effect of an informed vote of disinterested shareholders it to extinguish the claim that the Board failed to exercise due care in negotiating and approving a decision (here a merger) (2) “Interested” transactions will not be voidable if approved in good faith by a majority of disinterested shareholders. and Geophone Compnay.333 of GeoPhone’s shares. filed suit against Glynn. claiming that the defendants breached their duty of disclosure because the proxy statement issued in connection with the merger was materially misleading in several respects. Definition of a Security Robinson v. with the directors having the burden of proving that the merger was entirely fair. Glynn told Robinson that the field test had been a success. On the back of the share certificates the restrictive legend referred to the certificates as shares and securities.
claimant must prove fraud in connection with the purchase of securities (2) An investment contract is “a contract. It is the “economic reality” of a particular instrument. All but the plaintiff declined. PMC and two other signatory officers of PMC for $50. the conferring of voting rights in proportion to the number of shares owned. • Robinson v. Throughout this period. rather than a mere passive investor Rule: (1) In order to establish a claim under Rule 10b-5. ultimately resulting in decreased yields and default on a not for which Doran was primarily responsible. rescission of the contract based on violations of the Act.. transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party” (no court has required the investor to expect profits “solely” from the efforts of others” (3) Agreements do not annul the securities laws by retaining nominal powers for investors unable to exercise them (4) The question must be whether an investor as a result of the investment agreement itself or the factual circumstances that surround it. typically: i. in turn. that ultimately determines whether it falls within the reach of the securities laws (6) Securities law applies when an instrument is both called stock and bears stocks usual characteristics. delegated extensive responsibility to a four-person executive committee of which Robinson was also a member. the ability to be pledged of hypothecated iv. and the capacity to appreciate in value Reasoning: Robinson not only had the power to appoint two of the board members. Petroleum Management Corp.50 plus interest and attorney’s fees. the wells were deliberately overproduced. because Robinson was an active and knowledgeable executive at GeoPhone. The board. 1977) Facts: PMC organized a California limited partnership. PMC periodically sent Doran production information on the completed oil wells of the limited partnership. 545 F. is left unable to exercise meaningful control over his investment (5) Agreements cannot invoke laws simply by labeling commercial ventures as securities. Glynn o investment contract analysis investment of money in a common enterprise with an expectation of profit from the efforts of others Doran v. the right to receive dividends contingent upon an apportionment of profits ii.815.History: The district court held that Robinson’s membership interest in GeoPhone was not a security and dismissed his securities fraud claim. rather than the label attached to it. It is established that no registration 53 . A judgment was obtained against Doran. Robinson carefully negotiated for a level of control antithetical to the notion of member passivity required to find an investment contact under the federal securities laws. Issue: Was the dismissal proper? Holding: Affirmed. PMC contacted only four other persons with respect to possible participation in the partnership.2d 893 (5th Cir. Doran filed suit seeking damages for breach of contract. and a judgment declaring defendants liable for payment of the state judgment. but he himself assumed one of the board seats and was named as the board’s vice-chairman. negotiability iii.
The district court held that the offering was a private placement. which turns on the knowledge of the offerees (4) The number of offerees. The record indicated that eight investors were offered limited partnership shares. However. a total consistent with a finding of a private offering. and defendants used interstate transportation or communication in connection with the sale or offer of sale. Reversed and remanded so that the trial court could determine if offerees knew or had a realistic opportunity to learn facts essential to an investment judgment Rule: (1) Defendants bear the burden of the affirmative defense that an offering was private (2) Four factors are relevant to whether an offering qualifies for 4(2) exemption: i. from the registration requirement of that Act Holding: It was not a private placement. the manner of the offering (3) The applicability of 4(2) should turn on whether the particular class of persons affected needed the protection of the act. the number of units offered iii. with relatively modest financial stakes.statement had ever been filed. • Doran v. Defendants sold or offered to sell these securities. History: Investor brought suit to rescind a purchase of limited partnership interest. is the relevant figure in considering the number of persons involved in an offering. the size of the offering iv.” 25 person rule of thumb) • size of the offering • manner of offering Relationship to issuer: • offeree’s knowledge and sophistication • offerees’ access to information 54 . and the offering was characterized by personal contact between the issuer and the offerees free of public advertising or intermediaries. they could not bring their sophisticated knowledge of business affairs to bear in deciding whether or not to invest (7) There must be sufficient basis of accurate information upon which the sophisticated investor may exercise his skills (8) Availability of information means either disclosure of or effective access to the relevant information Reasoning: A small number of units were offered. The record does not show that defendants proved that they were entitled to the limited sanctuary afforded by 4(2). Petroleum Management Corp o Private Placement Test: applied Four factors • number of offerees and relationship to issuer • number of units offered (small number (4 or 8?) “a total…entirely consistent with a private placement. not the number of purchasers. A private placement claimant’s failure to adduce any evidence regarding the number of offerees will be fatal to the claim (5) Evidence of a high degree of business or legal sophistication on the part of all offerees does not suffice to bring the offering within the private placement exception (6) If plaintiffs do not possess the information requisite for a registration statement. Defendants raise an affirmative defense that the relevant transactions were exempted from registration under 4(2). not all of the offerees were informed of the facts. number of offerees and their relationship to each other and the issuer ii. Issue: Whether the sale was part of a private offering exempted by 4(2) of the Act.
643 (SDNY 1968) Facts: Plaintiffs allege that the registration statement with respect to the debentures contained material false statements and material omissions. or the fact that is omitted when it should have been stated to avoid misleading.Supp. to fill that need. have defendants established their affirmative defenses? Holding: (1) Yes (2) yes (3) no.required of all investors or all offerees? (offerees) How much information required? (what would have been found in a registration statement • How may information be provided? (private placement memorandum. Defendants fall into three categories: (1) those who signed the registration statement (2) the underwriters. History: Action by purchasers of 5 ½ per cent convertible subordinated fifteen year debentures of BarChirs. be “material” (2) “material” matters are those as to which an average prudent investor ought reasonably to be informed. He is presumed to know his responsibility when he becomes a director.. Rule: (1) It is a prerequisite to liability under section 11 of the act that the fact which is falsely stated in a registration statement. he proceeds of the sale of debentures involved in this action were to be devoted. and (3) BarChris’s auditors. The experts did not purport to certify the 1961 figures. Issue: (1) Did the registration statement contain false statement of fact. Bar Chris was in constant need of cash to finance its operations. if he did. no matter how new he is. and which such an investor needs to know before he can make an intelligent. Bar Cris filed a petition for bankruptcy. (2) if so. 283 F. were the facts which were falsely stated or omitted “material within the meaning of the act. Affirmative Defense Analysis: (1) Vitolo (president) and Pugliese (vice president) 55 • • • . All defendants to which it was available. (3) if so. BarChir defaulted in the payment of the interest due on the debentures. BarChris Construction Corp. a need which grew more pressing as operations expanded. Defendants’ motions to dismiss are denied. pleaded the affirmative defense of due diligence. some of which are expressly stated in the prospectus to have been unaudited. whether or not he understood what he was reading (4) Section 11 imposes liability in the first instance upon a director. informed decision whether or not the buy the security (3) The liability of a director who signs a registration statement does not depend upon whether or not he read it or. or did it omit to state facts which should have been stated in order to prevent it from being misleading. He can escape liability only by using that reasonable care to investigate the facts which a prudent man would employer in the management of his own property. Plaintiffs purport to sue on their own behalf and on behalf of other present and former holders of the debentures. (5) The statute imposes liability for untrue statements regardless of whether they are intentionally untrue Reasoning: There was an abundance of material misstatement pertaining to the 1961 affairs. access to files and records) o The private placement test is the most predominant exemption for determining whether a security needs to be registered Escott v. in part at least.
(4) Auslander (“outside” director) knew that Peat. who did most of the work) Peat.Could not have believed that the registration statement was wholly true and that no material fact had been omitted. He did not spend an adequate amount of time on a task of this magnitude. Berardi simply asked questions and got answers which he considered satisfactory. he could not shut his eyes to the facts and rely on Peat. Birnbaum did not establish his due diligence defense except as to the audited 1960 figures. Grant honestly believed registration statement was true and that no material facts had been omitted from it. became secretary and director on April 17. There were things which Grant could readily have checked which he did not check.1961) Signed the later amendments. his law firm was counsel in matters pertaining to registration of securities) He drafted the registration statement for the debentures.M. Marwick (experts) for that portion (3) Birnbaum (house counsel and assistant secretary. He is sued as both director and signer of the registration statement. (2) Kircher (treasurer and CFO) Knowing the facts. he did not have reasonable ground to believe that all these statements were true. and did nothing to verify them. thereby becoming responsible for the accuracy of the prospectus in its final form. Marwick (specifically. He had no reasonable ground to believe otherwise. Having failed to make an investigation into the truth of all the statements in the unexpertised portion of the document which he signed. He believed them to be correct because he had confidence in P. Had not established his due diligence defense with respect to the misstatements and omissions in those portions of the prospectus other than the audited 1960 figures. (5) Grant (director. would have put him on his guard. (6) Peat. He has not established his due diligence defense except as to the audited 1960 figures. As to the nonexpertised portions. Kircher had reason to believe that the expertise portion of the prospectus was in part incorrect. however. Berardi. Marwick did not have reasonable ground to believe and did believe that the 1960 figures were true and that no material fact had been omitted from the registration statement which should have been included in order to make the 1960 figures not misleading. he made no investigation to the accuracy of the prospectus. They have not proved their due diligence defense. There are too many instances in which Grant failed to make an inquiry which he could easily have made which if pursued. 56 . Marwick had audited the 1960 figures. There is nothing to show that they made any investigation of anything which they may not have known about or understood.
including petitioners here. and on the following day publicly announced its approval of Combustion’s tender offer for all outstanding shares. rather than requiring each class member to show direct reliance on Basic’s statements. 57 . (2) There is no valid justification for artificially excluding from the definition of material information concerning merger discussions merely because the agreement in-principle as to price and structure had not yet been reached by the parties or their representatives. asserting that defendants issued there false and misleading public statements and thereby were in violation of 10(b) of the 1934 Act and of Rule 10b-5. (3) An investor may rely on public material representation. History: Respondents brought a class action suit against Basic and its directors. 485 U. Holding: (1) The class. Judgment of the court of appeals vacated. v. and before the suspension of trading in December 1978. 224 (1988) Facts: Beginning in September 1976. During 1977 and 1978. case remanded for reconsideration of the question whether a grant of summary judgment is appropriate on the record. are contingent or speculative in nature. as certified. but reversed the District Court’s summary judgment and remanded the case Issue: (1) Whether the courts below properly applied a presumption of reliance in certifying the class. it is difficult to ascertain whether the reasonable investor would have considered the omitted information significant at the time. Rule: (1) a private cause of action exists for violation of 10(b) and rule 10b-5 (2) an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote (3) to fulfill the materiality requirement there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of the information made available (4) Materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipate magnitude of the event in light of the totality of the company activity (5) An investor’s reliance on any public material misrepresentations. Combustion representatives had meetings and telephone conversations with Basic officers and directors. (2) Whether the information concerning the existence and status of preliminary merger discussions is significant to the reasonable investor’s trading decision. In December of 1978. Basic’s board endorsed Combustion’s offer of $46 per share for its common stock. Basic made three public statements denying that it was engaged in merger negotiations. Therefore. Respondents are former Basic shareholders who sold their stock after Basic’s first public statement of October 21. may be presumed for purposes of a rule 10b-5 action Reasoning: Merger negotiations. 1977. has established the threshold facts for proving their loss. Basic asked the NYSE to suspend trading in its shares and issued a release stating that it had been approached by another company concerning a merger. On December 19. Levinson.S. Respondents allege that they were injured by selling Basic shares at artificially depressed prices in a market affected by petitioners’ misleading statements and in reliance thereon. The Circuit Court affirmed the class certification. (3) Whether it was proper for the courts below to apply a rebuttable presumption of reliance. The District Court certified the class but granted summary judgment for the defendants. concerning the possibility of a merger. therefore.Basic Inc. and the case remanded to that court for further proceedings consistent with the opinion. support in part by the fraud-on-the-market theory. because of the ever-present possibility that the contemplated transaction will not be effectuated.
Inc. liability can only arise where the defendant had a duty to disclose o Basic probably did not have a duty to disclose on these facts . the price of a company’s stock is determined by the availability of information) o Efficient Capital Market Hypothesis Thesis: in an efficient market. 1978 . current prices always and fully reflect all relevant information about the commodities being traded o Derivatively Informed Trading The market sometimes behaves as thought it knows nonpublic information Often the result of derivatively informed trading: • some market participants observe insider activity and follow • volume and/or price ticks attract other investors o Reliance Invoked when there is a material public misrepresentation and there is an efficient market o How do you rebut the presumption? 58 . in fact. under a fraud-on-the-market theory. Northway.priced at $46 o Plaintiff class: investors who sold stock between time the rumors started and time the announcement was made Claim they could have obtained a higher price had Basic not issued denials o Why did Basic deny the rumors? It made it a cheaper transaction o Issues: Were Basic’s statements materially false? • Standard: whether there is a substantial likelihood that a reasonable shareholder would consider the fact important. Inc.• Basic o President of Basic made three public statements that they were not in negotiations when.so investor need not have seen misrepresentation (the fraud on the market theory is based on the premises that. v. TSC Indus.. (1976) o Highly fact dependent inquiry o Where 10b-5 liability is premised on an omission of material fact.Issue not decided o In a class action suit. in an open and developed securities market. but Basic consistently denied them o Merger announced December 19. reliance on integrity of the market price is presumed . they were o Basic entered a merger deal o Combustion had been negotiating a merger with Basic for 2 year o Rumors about the deal persistently circulated.
Goodwin sued. Agassiz at the time knew of a geologist’s theory about the existence of copper on the property that Goodwin did not know about. Finn M.W. The claim is that these statements placed an artificial floor under the market price of B’s stock and that purchasers of B’s stock and purchasers of call options in B’s stock made purchases at prices which were artificially inflated by the market’s reliance on defendant’s misstatements. to the extent that the problems had passed. Caspersen.2d 502 (3rd Cir.2d 833 (2d Cir. on Beneficial’s behalf issued statements which they knew to be false and misleading about insurance division problems. Halvorsen. Issue: Did Agassiz have the right to buy a stock from Goodwin without disclosing the theory to him first? Did Agassiz have a duty under state law to disclose the information to Goodwin? Held: Agassiz had a right to buy and no duty to disclose the knowledge to Goodwin first. Beneficial Corp. 841 F.. Goodwin was a former stockholder who sold his shares contemporaneously. Inside Information Goodwin v. 283 Mass. owned by Goodwin at the time. Complaint alleged violation of 10(b) of the Act Issue: Did plaintiff have standing as purchaser of an option contract to seek damages under 10(b) for affirmative misrepresentation? Holding: Yes Rule: (1) Section 10(b) prohibits use in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe (2) Plaintiffs in 10(b) actions need not be in any relationship of privity with the defendant charged with misrepresentation Reasoning: The compliant satisfies every requirement for 10(b) damage action imposed by the Supreme Court when dealing with affirmative misrepresentations which may affect the market price of a security. “market makers” not deceived corrective statements specific plaintiffs would have sold anyway Deutschman v.. 1969) 59 . § 5. TX Gulf Sulphur Co. SEC v. 358 (1933) Facts: Agassiz bought 700 shares (through a broker) of Cliff Mining Co. and that purchasers of both stock and call options suffered losses as a consequence. its CFO. Agassiz. Benificial’s Chairman and CEO. 1988) Facts: Caspersen and Halvorsen. and Andrew C. 401 F. History: 12(b)(6) dismissal of plaintiff’s class action complaint against Beneficial Corporation.
Remand for corporation. Rumors circulated through Canada. “arising from his role as a participant after the fact in the insider’s breach of a fiduciary duty. Told Wall Street Journal all about it. The tippee’s liability is derivative of the tipper’s. and told its employees to keep all of the drilling results secrets. Held: The Individual Ds are in violation of 10b-5. Dirks v. “Material” information is that which a reasonable man would attach importance to determine his choice of action in the transaction in question. Issue: Is a tippee who has no connection to a corporation liable for disclosure of information to investors who relied on it in trading? Held: Dirks had no duty to refrain from using the insider information he obtained. Decided to buy a promising area. So. the VP Fogarty drafted a press release to quell the rumors on April 13. SEC. TGS employees and their “tippees” bought a significant number of shares. Issue: Individual defendants in violation of 10b-5 for not disclosing material information? Did the corporation violate Rule 10b-5 for the April 12 press release issuance? Rules: Insiders: Anyone in possession of material information must either disclose to investing public before trading or abstain from trading until it is disclosed.S. official statement disclosing the discovery was made at 10am. SEC filed a complaint against the company and began investigating Dirks. Dirks spread word. and the company’s stock fell. 463 U. A tippee only has a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached a fiduciary duty. but nothing of value and more drilling would need to be done to reach a definite conclusion. the NY Herald Tribune and NY Times reported on the rumored ore strike. but they didn’t believe him. He stated that drilling and examinations had been made. 646 (1983) Facts: Dirks investigated into allegations of corporate fraud in another company after told by a former officer of that company.Facts: TGS began exploratory drilling in Canada. Clayton purchases 200 shares on the 15th. On April 16. ALJ found Dirks for aiding and abetting of 10b-5 by repeating the fraud allegations to investors who later sold their stock. Crawford purchased 300 on the 16th before the release was published. Corporation: The release must have been “in connection with the purchase or sale of any security” and have caused reasonable to rely on them. Wall Street Journal published story and mentioned Dirks’s involvement. On April 11.” A tippee therefore can be held liable only when: The tipper 60 . Coates left the press conference and called and ordered 2000 shares for family trust accounts. After the purchase.
Held: The misappropriation theory is a valid basis on which to impose insider trading liability. Inc. of security involved. The court of appeals reversed as to the profits from the second sale. 423 U. and Emerson decided to sell enough shares to bring its holdings below 10% to immunize the remainder of its shares from liability under §16(b). The section states that a 10% owner must be “both at the time of the purchase and sale . without disclosure of such use to the principal. v. Emerson sold enough to reduce its holdings to 9. §6 Short-Swing Profits Reliance Electric Co. v. Foremost-McKesson.” A person can sell enough shares to bring his holdings below 10% and then. . Provident Securities Company.S. sell additional shares free from liability under the statute. Emerson Electric Co. Reliance demanded the profits Emerson made on both sales. A fid’s undisclosed use of info belonging to his principal. Then Dodge merged with Reliance. Issue: If a holder of more than 10% stock in a corporation sells enough shares to reduce its holding to less than 10%. 418 (1972) Facts: On June 16. and then sells the balance to another buyer within six months after its acquisition of the stock. 404 U.S.96% on August 28. 61 . 232 (1976). for personal gain constitutes fraud in connection with the purchase or sale of a security and thus violates Rule 10b-5. and the tippee knows or has reason to know of the breach of duty. Emerson acquired 13. A person avoids liability if he does not meet 16(b)’s definition of “insider.S. 642 (1997) Facts: Lawyer at firm retained by Grand Met regarding a tender offer to Pillsbury purchased shares. United States v. options before Grand Met made its tender offer. . O’Hagan 521 U.2% of Dodge stock pursuant to a tender offer it made in an unsuccessful attempt to take over Dodge. and sold the remaining shares to Doge on September 11.breached a fiduciary duty by disclosing info the tippee. Emerson filed an action for declaratory judgment as to its liability under §16(b). is it liable to the corporation for the profit it made on the second sale? Held: No. Hist: The trial court held Emerson liable for the profits from both sales. still within 6 months.” or if he sells more than 6 months after purchase.
Strategic Use of Proxies Levin v. shareholders may propose own slate of candidates and solicit proxies as well. Court’s concern is that shareholders are fully and truthfully informed as to merits of contentions of contesting parties. 2. Foremost would register 25m and participate in an underwriting agreement by which debentures would be sold to the public. the 62 . 264 F. Just like a corporation can solicit proxies. Provident distributed the cash proceedings to its stockholders and dissolved. Must be a beneficial owner before the purchase. Foremost appealed. Court of Appeals affirmed. Each group actively solicited proxies. Provident sued for a declaration that it would not be liable.25m and 49. Inc. each intending to vote for their own directors at the SH meeting by introducing own slates. Issue: Whether illegal or unfair means of communication.. then they have to pay for it. Ch. and MGM big corporation worth over $251mm.Supp. Sums are not excessive . 6: Problems of Control §1 Proxy Fights A. If mgmt wants to enter proxy fight.$125k cost. Thus.Facts: Provident decided to liquidate and dissolve. Π-SHs filed action against one the groups (Δs) alleging they wrongfully committed MGM to pay for attorneys. Incumbent directors may use corporate funds and resources in a proxy solicitation contest if the sums are not excessive and the shareholders are fully informed. Foremost and Provident executed a purchase agreement whereby Foremost would buy 2/3 of Provident’s assets for 4. Metro-Goldwyn-Mayer. must a beneficial owner account for profits only if he was a beneficial owner before the purchase? Held: Yes. so injunctive relief sought is denied. Π says the individual directors should pay these expenses personally. Issue: In a purchase-sale sequence. PR firms. 797 (1967) Facts: MGM has a conflict for control between 2 groups (the Levin Group and the O’Brien Group) in its mgmt with different ideas about how to run the company. such as demand of judicial intervention. Foremost could sue Provident to recover any profits on the sale of the 25m debenture to the underwriters under the statute. 1. If the insurgent group wants to do that. Very expensive to enter a proxy fight. Provident’s holdings in Foremost debentures was large enough to make it a beneficial owner of Foremost under §16. Such a rule protects incumbents from insurgent groups with enough money to take on a proxy fight. so seldom happens. Hist: District Court granted summary judgment for Provident.75m in convertible subordinated debentures (long-term unsecured debt securities issued by a corporation). Held: No illegal or unfair means of communication and sums were not excessive. and other proxy-soliciting orgs in connection with the proxy fight. are being employed by the present management.
. 63 .Y. 375 (1970) Facts: Mills asserted that corporate merger accomplished through the use of a proxy statement that was materially false or misleading (like Borak). Mills v. 377 U. Hist: The trial court said it was limited to redress the violations solely with declaratory relief under §27 of the Act. C. The district court granted an interlocutory judgment in favor of Mills on the grounds that a causal relationship had been shown between the solicitation and the injury. but reversed on the causation issue. 168 (1955) Facts: Π-SH files a derivative action seeking to compel the return of $260k paid out of corporate treasury to reimburse expenses to both sides in a proxy contest. v. Directors must have the right to incur reasonable expenses for proxy solicitation and in defense of their corporate policies. The court of appeals affirmed that the proxy statement was materially misleading.corporation bears the costs. a private c/a is available under the Act. 309 N. Issue: Whether §27 of the Act authorizes a federal cause of action for rescission or damages to a corporate stockholder with respect to a consummated merger which was authorized pursuant to the use of a proxy statement alleged to contain false and misleading statements violative of §14(a) of the Act.. Electric Auto-Lite Co.S. Whether or not you can have a private c/a under 14a-9. Fairchild Engine & Airplane Corp. 396 U. No reimbursement if the funds were used for personal power. court will allow reimbursement of proxy fight expenses. Held: Yes.S. The Court of Appeals reversed. 426 (1964). 3. Theory behind the rule: The best representatives of the company are the insiders since they know what’s going on. Case Co. Reimbursement of Costs Rosenfeld v. Borak. B. If in good faith. Facts: Stockholder Borak sued alleging that the merger between Case and the American Tractor Corporation was effected through the circulation of a false and misleading proxy statement in violation of §14(a) of the 1934 Securities Exchange Act.I. Private Actions for Proxy Rule Violations J. or private advantage and not in the best interest of the corporation. 4. To hold otherwise would place directors at the mercy of anyone wishing to challenge them for control so long as such persons have amply funds to finance a proxy contest. individual gain.
Bartz.Issue: Where a proxy statement is found in violation of §14(a). and included a statement that is materially false and misleading. Materiality discussed: “An omitted fact is “material” if “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.D. Shareholder Proposals 64 . Instead. Northway (U. 2002 WL 243597 (N. not material information. Seinfeld brought a derivative action against Cisco and its ten directors alleging that they violated SEC proxy rules by failing to include the value of the option grants based on a commonly used theoretical so-called Black-Scholes pricing model. it is sufficient to establish a substantial likelihood that.” Modern definition: “Omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.S. “under all of the circumstances. were negligent in the proxy solicitation statement preparations. 2002) Facts: Shareholders approved an amendment that raised the stock options granted to outside directors. the statement of omission must have a “significant propensity to affect the voting process.” A plaintiff does not have to demonstrate that disclosure of the face in question would have caused a reasonable shareholder to change her vote. Cal. Seinfeld v. 1976).” In other words. the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. There was no substantial likelihood that the disclosure of omitted facts would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available. Issue: Are valuations of option grants to outside directors material information which must be included in a corporation’s shareholder statement to solicit proxy votes? Held: No.” TSC Industries v.” D. does the shareholder have to prove that he relied on the misleading statements and that caused him to vote? Held: No! Materiality defined in Mills: Information “might have been considered important by a reasonable shareholder who was in the proves of deciding how to vote.
3d 121 (2d Cir.Supp. Rule 14a-8(i)(5).Lovenheim v. the meaning of “significantly related” is not limited to economic significance. Iroquois Brands.e.D. Reasoning: Looking at the meaning of the Rule. and is not otherwise significantly related to the issuer’s business…. The Division sent a no-action letter indicating that the proposal could be excluded. and for less than 5% of its net earnings and gross sale for its most recent fiscal year. Issue: Whether a shareholder proposal requiring a company to include certain shareholder-nominated candidates for the board of directors on the corporate ballot can be excluded from the corporate proxy materials on the basis that the proposal “relates to an election” under SEC Rule 14a-8(i)(8). 462 F. Iroquois refused to allow info regarding his proposal to be included in the proxy statement relying on the exception to 14a-8. Still didn’t end. i. what does “otherwise significantly related” mean? Held: The ethical and social significance of the proposal and the fact that it implicates significant level of sales gives the P a substantial likelihood of prevailing on whether the proposal is “otherwise significantly related” to Iroquois business. Rule: 14a-8(i)(8)Anything can be excluded. AFSCME sued.C. Usually it would end here. Rule: Rule 14a-8(i)(5): An issuer of securities “may omit a proposal and any statement in support therof” from its proxy statement and form of proxy “if the proposal relates to operations which account for less than 5% of the issuer’s total assets at the end of its most recent fiscal year. Must be phrased in such a way as to not be binding under state law.” Issue: Is the exception applicable when the proposal relates to operations accounting for less than 5% of the issuer’s total assets but is significantly related to the issuer’s business. AIG. Surprising to everyone that 2d Circuit reversed contrary to SEC decision. His proposal calls upon the Directors of Iroquois to set up a committee to study the methods its French supplier produces pate de foie gras. AFSCME v.. 1985) Facts: Lovenheim seeks to bar Iroquois from excluding a proposed resolution he intends to offer at the upcoming shareholder meeting from the proxy materials sent to shareholder in preparation for the meeting. when it seeks to amend the corporate bylaws. 65 . as long as it relates to an election. Ltd. 618 F. submitted a shareholder proposal to AIG to amend bylaws relating to the election of directors if approved. 2006) Facts: AFSCME. 554 (D. AIG felt it did not have to include per the election exclusion of the Rule and sought the input of the SEC Division of Corporation Finance. holder of almost 27k shares of voting common stock of AIG. Inc. and District Court affirmed the decision.
E.) Yes. Why would you want the shareholder list rather than have the company send the proposal out? If company does it. making it Anaconda’s single largest shareholder.Held: The proposal is non-excludable. Issue: May a qualified stockholder inspect the corporation’s shareholder list for the purpose of soliciting a tender offer? Held: (Affirmed. how does it relate to the business of the corporation? Hist: Special term dismissed. and to rebut misleading statements disseminated by Anaconda.” This is all about control. If shareholder gets the list. There have been 2: (1) in its amicus curiae brief for this case and (2) in 1976 when the election exclusion was revised. but the appellate division reversed. So petitioner bought 100 shares of Honeywell for the sole purpose of giving him a voice to be able to persuade Honeywell to cease production of the munitions. This statute should be liberally construed in favor of the stockholder whose welfare as a stockholder or the corporation’s welfare may be affected.2d 14 (1976) Facts: Crane proposed a tender offer (an acquisition offer denoting the amount of share it will purchase at x amount over market price) of Anaconda’s stock. 322 (1971) Facts: Petitioner attended a meeting went to a meeting where participants believed that Honeywell produces munitions used in the Vietnam War and Honeywell should stop the production of munitions. 66 . 291 Minn. Honeywell. Shareholder Inspection Rights Crane Co. 39 N. Unless the shareholder list it sought for an objective adverse to the company or its shareholders.” Court said were going to construe NY statutes liberally. Anaconda appealed. State ex rel. The language of the regulation is ambiguous so the Court looks to guidance by the agency’s interpretation. claiming that Crane’s motives were not for a purpose relating to the business of the corporation.Y. in favor of the stockholders. the shareholders qua shareholders are necessarily affected and the business of the corporation is involved within the purview of section 1315 of the Business Corporation Law. Inc. everyone gets the same. v. Anaconda refused to give the list. Crane requested a copy of Anaconda’s shareholder list so it could inform other shareholders of the tender offer. Pillsbury v. they can choose who to “court. “Whenever the corporation faces a situation having potential substantial effect on its wellbeing or value. Anaconda Co. Crane had acquired over 11% of Anaconda’s common stock. The Court uses the 1976 interpretation because the SEC has not explained its departure from prior norms. A desire to make a tender offer does relate to the business of the company and the shareholders should have the opportunity to make an informed decision regarding the sale.
S.2d 48 (2d Cir. so AT&T and the Sadlers sued. in a situation where the shareholder could not obtain such documents in the company’s state of incorporation? Held: Yes. Though not required in every case. The NY law is not unconstitutional because it does not impose an inconsistent regulation on interstate commerce. current shareholder ledger. and all corporate records dealing with weapons and munitions manufacture. NY residents and owners of 6k shares of NCR stock. Issue: Did petitioner prove a proper purpose to inspect corporate records? Held: No.Corporate governance issues controlled by law of state of incorporation. “Internal Affairs Doctrine”-. Constitution’s Commerce Clause. Hist: Trial court dismissed the petition. here NCR policy treats nonvoting shares as voting in favor of mgmt and shareholder access is crucial. NCR attempted to block the tender offer and AT&T sought to call a special meeting in order to replace the board of directors. He had no interest in the long-term wellbeing of the company or the enhancement of the value of his shares. Delaware is to the contrary. Issue: May a state require a foreign corporation with substantial ties to its forum to provide resident shareholders access to its shareholder list and to compile a NOBO list. Sadler v. petitioner submitted two formal demands requesting its original shareholder ledger. Issues regarding stockholder lists are an exception to the internal affairs doctrine (governed by state in which you are domiciled). Only those with a bona fide interest in the corporation can have the power to inspect. Petitioner appealed. NCR refused. AT&T and the Sadlers. Petitioner did not have any interest in the affairs of Honeywell before he learned of its production of fragmentation bombs. Honeywell refused. holding that the relief requested (writ of mandamus to compel) was for an improper and indefinite purpose. 1991) Facts: AT&T (NY corp with ppb in NY) placed a tender offer for stock of NCR (MD corp with PPB in Ohio with ties to NY). since that power may be the power to destroy. Noneconomic Purposes: There are limits on the scope of proper purpose. AT&T entitled to both CEDE and NONO. NCR must prepare NONO list even if not pre-existing. NCR appealed. Hist: The district court ordered NCR to comply with the request. NCR Corporation 929 F. DE only requires preparation of CEDE list. attempted to acquire the NOBO list (non-objecting beneficial owners who have consented to their identity being disclosed) and other docs. A proper purpose regards investment return. though. (Skipped §§ 2-3) 67 . Authorized under NY law and is not in violation of the U.Before this suit.
the Court acknowledged “a strict obligation on the part of the majority stockholders in a close corporation to deal with the minority with the utmost good faith and loyalty. the majority has not shown a legitimate business purpose for severing Wilkes from the payroll or refusing to re-elect him as a salaried officer and director. Some erosion visà-vis controlling shareholders of public corporations.” Donahue. The Court dismissed the complaint. Remanded to determine Wilkes’s damages based on inequitable enrichment of the others. Wilkes was not reelected as a director or officer and was told that his services and presence in the nursing home were unwanted. and Wilkes was left off the list. This was a designed “freeze out”. In Donahue. Inc. They decided to turn it into a nursing home. had the same number of shares. Hist: Wilkes sued in the county Probate Court for damages based on breach of fiduciary duties owed to him. The burden then shifts to the minority to demonstrate a less harmful alternative course of action. and Wilkes gave notice of his intention to sell his shares in January 1967. “[S]tockholders in the corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. Note: Wilkes had Riche and Connor on his side. At a director’s meeting in February. and any corporate funds of Springside to satisfy the claim. The stockholders decided to sell a portion of the corporate property to Quinn. and each was a director. This is an odd case because this is a corporation that the court is analyzing under partnership analysis. Here. Riche. Riche and Connor were given the same as their weekly return had been. 842 (1976) Facts: Wilkes. Each invested equally. the directors established salaries for its officers and employees. Issue: Did the Probate Court err in dismissing Wilkes’s complaint? Held: Yes. but Wilkes bought the property for a higher price. Quinn. and Pipkin decided to jointly purchase a building and lot as a real estate investment. Quinn was given a raise.” Terminating a minority stockholder’s employment frustrates that stockholder’s purposes for entering the corporate venture and deny him an equal return on his investment. shareholders qua shareholders had no fiduciary obligation to firm or fellow shareholders. Springside Nursing Home. In March. The judgment dismissing Wilkes’s complaint and awarding costs to the defendants is reversed.§4 Abuse of Control Wilkes v. then they sided with Quinn after they allowed Wilkes to procure a higher sale price for the property instead of selling to Quinn. More erosion in close corporations. 68 . This strained the relations between the four. Fiduciary Duties: At early common law. loss of salary. Pipkin became sick and sold his shares to Connor. 370 Mass. and incorporated Springside to own the property. Wilkes appealed. Balancing Test: The burden is on the majority to demonstrate a legitimate business purpose for its action.
Glamore later issued an additional 60 shares. Amerson said this rule is bad because it treats the majority as a homogenous group and each shareholder votes with the same purpose. Ingle was an at-will employee. Wilkes did bring this as a derivative action. This is a case where you do have a shareholder agreement. Hist: Ingle initiated two actions claiming breach of fiduciary duty that would protect him against being fired and breach of K. Issue: Is a minority shareholder of a closely held corporation who is also employed atwill by the corporation entitled to a fiduciary duty by the majority against termination of his employment? Held: No. and to terminate him as operating manager. which were purchased by Glamore and his two sons. and paid themselves! Quinn was paid a high amount maybe not even commensurate to his worth. The board of directors then voted to remove Ingle as director and secretary. How to show a violation of loyalty? Self-dealing or Conflict of Interest. Inc. but it wasn’t good enough to mitigate some potential issues. with an option to purchase an additional 18 shares. by arguing excessive salary but if he lost the corporation wins. Loyalty. Glamore. There was no employment K restricting the rights of Glamore Motor Sales to terminate him. Glamore retained the right to repurchase Ingle’s shares if he should terminate employment with Glamore Motor Sales for any cause. or regarding the repurchase of his shares upon termination. and later entered into a shareholders’ agreement with sole shareholder. The Board voted Wilkes out. Ingle v.BJR: Duty of Care. to purchase 22 of Glamore’s shares. then the buyback provision kicked in. If employment is terminated for any reason. that is not legitimate. Good Faith. Common law does not recognize an implied duty of good faith and fair dealing for at-will employment. So at-will employment superseded the duty of good faith. The relationship of a minority shareholder to a close 69 . He could argue that Quinn’s payment was an excessive salary in violation of the BJR. 73 N. This would have been a derivative suit had he sued the Board. corporation. and he appealed. Ingle later exercised the option to purchase. Glamore then exercised his option to repurchase Ingle’s shares at a cost of 96k. Reconcile with Wilkes: Is there a legitimate business purpose for firing Ingle? Glamore wanted to bring his sons in.2d 183 (1989) Facts: Ingle was hired as sales manager of Glamore Motor Sales. Glamore Motor Sales.Y. The appellate division dismissed. as a shareholder v. and a second shareholder agreement was executed. denied him any salary. Dissent: An employee’s status as a minority shareholder necessitates special safeguards to protect his investment in the corporation. Glamore nominated and voted for Ingle as director and secretary.
She nominated herself as a director. He was paid a consultant’s fee in 1994 and 1995. and without a K. and the question is what type or remedy upon remand to restore to her. She also requested a valuation of the company so she could ascertain the value of her shares. money damages for deprivations. and consider the fact that the P has enjoyed no economic benefit from her shares. He was President from 1979-1992. Defendants appealed to the Supreme Court. Atlantic Properties. but a clause in the articles of 70 . (1981) Facts: Smith. and his wife inherited his 1/3 interest in Malden. the benefits she reasonable expected to receive. Ct. In 1997 Brodie died. 12 Mass. All had an equal amount of shares (25/100). Remanded to determine the remedy. The Superior Court judge abused his discretion by creating a remedy that placed the plaintiff in a significantly better position that she would have enjoyed absent the wrongdoing. the Court assumes liability and the whole discussion regards the proper remedy. On remand. a corporation that produces ball bearings. when he was voted out as president and director and Jordan was elected president. regarded as nothing more than an employment at will. but the valuation was never performed. Inc.corporation cannot be equated with an ordinary hiring. Smith v. Brodie v. Inc. Issue: Whether the plaintiff was entitled to the remedy of a forced buyout of her shares by the majority? Held: No. but received no other money or compensation from the company since 1995. and Burke formed Atlantic Properties. Jordan 447 Mass. The remedy for freeze-out of a minority shareholder is to restore the minority shareholder those benefits which she reasonably expected but has not received because of the fiduciary breach. as minority shareholder. the judge may determine Ps reasonable expectations of ownership. Zimble. and hindering her ability to sell her shares in the open market. The Superior Court ordered Jordan to purchase Brodie’s shares. An understanding that the widow is owed some type up remedy. but Barbuto and Jordan (the other two shareholders) voted against her. The Appeals Court agreed. to acquire real estate. and well exceeded her reasonable expectations of benefit from her shares. App. Hist: The Superior Court determined that this was a freeze-out because the defendants interefered with Brodie’s reasonable expectations of benefit from her ownership of shares by excluding her from corporate decision-making. Wolfson. In this case. 866 (2006) Facts: Walter Brodie was a founding member of Malden. denying her access to company information. injunctive relief to allow her to participate in company governance.
the Wilkes analysis applies. Jordan v. The motion was denied. Extends fiduciary duty of majority shareholders to minority shareholders who exercise majority powers. the Corporation shall buy back the shares. he was in essence. Reconcile with Wilkes: Legitimate business purpose for this deadlock? In Wilkes.incorporation gave any one of the 4 shareholders a veto in corporate decisions because it stated that any decision must be made by an 80% affirmative vote. (Another case. Wolfson. He did not cash the check issued for the book value of his shares of stock and demanded his stock back. SEC v. Duff refused. also minority shareholders with veto powers designated via contract! Also. Wolfson consistently voted against dividends. Jordan learned of a pending merger between Duff and another company for $50 million. purchases stock in the company at book value. Inc. she threatened suit and they allowed her to keep her shares!) After leaving. while the other 3 wanted a declaration of dividends in order to avoid penalty taxes by the IRS. no evidence put forth that Wolfson did this at the expense of others. This is a deadlock case that was specifically contracted by the parties by including in the Articles of Incorporation! Now it’s not just majority shareholders who have a fiduciary duty. 815 F. Hist: Smith and the others filed suit. seeking an order determining the dividends to be paid. However. In this case. and gave the minority an ad hoc controlling interest. Duff and Phelps. The damage caused by Wolfson’s refusal to vote in favor of any dividends was beyond reasonable.2d 429 (1988) Facts: Jordan. the removal of Wolfson as director. a freeze-out case. Smith requested payment for attorney’s fees. The merger never occurred though 71 . a securities analyst for Duff. After informing Duff of his intent to resign.” (The Agreement stated that if employment terminated for any reason. and plaintiffs appealed. same Wolfson shed light on a scandal and a judge resigned. Therefore. The trial court ruled in favor of Smith. the 80% provision reversed the usual role of majority and minority shareholders. Wolfson and Atlantic filed a motion for a new trial and to amend the judge’s findings.) When he had the veto power. The motion was denied. upon terminating another employee. Wolfson wanted earnings devoted to building repairs. He wanted to improve the rental property. and Jordan filed this suit for damages determined by the valuation his stock would have under the terms of the acquisition. acting as a majority shareholder. he stayed on until the end of the year in order to receive the book value of his stock at the end of that year rather than the prior year per the “Stock Restriction and Purchase Agreement. Issue: Do stockholders in a close corporation owe one another the same fiduciary duty in the operation of the enterprise that partners owe to one another? Held: Yes. and the IRS assessed a penalty tax. Wolfson and Atlantic claimed an appeal from the judgment and Wolfson from the denial of the motion. and an order that Atlantic be reimbursed by Wolfson for the penalty taxes assessed against it.
and Crow have been the only directors and officers of Alaska Plastics. Gillam. Just because one deal falls through does not mean that another is impossible at a similar price. Discuss how the analysis affects the decision. Coppock. Crow and Coppock divorced. so the Board of Governors of the Federal Reserve would have to approve. Duff was sold to trust for $40m. Gillam. Gillam. In 1920. To recover. Coppock was not notified of shareholders meetings in 1971. the 72 . Jordan asserts that the package was worth almost $2000/share or $497k if he had held 250 shares in December 1985. Jordan sold his stock in ignorance of facts that would have established a higher value. Inc.2d 270 (AK 1980) Facts: Alaska Plastics was incorporated by Stefano. or 1974. and Crow. establish fact pattern that is similar. and Crow voted themselves each a $3k annual director’s fee. and Ds liable for fraud. and Statutory Dissolution Alaska Plastics. In 1971. At the 1971 and 1972 meetings. Then the firm’s management formed a Trust to borrow $40 million. Reversed and remanded. Causation is a question for a jury. §5 Control. but Jordan was given permission to amend his complaint. 621 P. he would have dropped his plan to resign and stayed for another year so he could receive payment from the buyout. if employment case. and Coppock received 150 shares (1/6 interest in the corporation). then he wins. he loses. v. Dissent (Posner): The existence of a fiduciary relationship between a corporation and its shareholders does not require disclosure of material information to the shareholders. gave Duff the option to buy back Jordan’s stock at any time at a fixed price. As a shareholder. Stefano. Jordan’s status as a shareholder was contingent upon his employment. She was notified of the 1973 shareholders meeting 3 hours prior to the meeting. 1972. In 1974. Jordan. Duff asked the district court to dismiss the suit. since it required Jordan to surrender his stock upon terminating his employment. Jordan must prove causation. who each held 300/900 shares of stock. In both this case and in Brodie. That option denied Jordan the right to profit from information Duff had about its prospects but preferred not to give him. Stefano. Less than a year later.because the company who sought to acquire Duff was a bank holding company. The Fed granted the approval with a particular condition that caused the firms to abandon the transaction. He must show that on learning of the merger negotiations. Issue: Do close corporations buying their own stock have a fiduciary duty to disclose material facts? Held: Yes. The news that a firm was willing to pay $50m for Duff allows investors to assess the worth of the stock. Duration. in effect. he would have a right to know something that is clearly material. A failure to disclose is a violation even if things later don’t turn out as planned. For final. If this is a shareholder case. and a jury could conclude that Jordan would have stayed. wives of shareholders were brought to the meetings at the company’s expense.
The derivative complaint was properly dismissed because Coppock failed to allege any harm to AK Plastics. and Coppock has never received any money from Alaska Plastics. At that meeting.board members also authorized an annual salary of $30k/year to Gillam for his employment as general manager. (2) if the shareholder petitions the court for involuntary dissolution of the corporation. She also requested an appraisal of Alaska Plastics’ property. the rest was interests. but the board would only raise its offer to $20k. The fourth method could apply if the trial court upon remand determines that the payments to the directors and personal expenses paid for their wives were constructive dividends. All manufacturing and sales of Alaska Plastics resumed through its subsidiary. Both sides appealed. It entered judgment against Stefano. Valley Plastics. but negotiations failed. Alaska Plastics’ Fairbanks plant. whether Coppock was deprived of other corporate benefits. The trial court held that Coppock was oppressed because she was forced to retain her shares since the Board’s offer was so low. Hist: Coppock filed a suit. Stefano individually offered $20k to Coppock. Courts are reluctant to order involuntary dissolution. it decided that the best remedy would be to direct transfer of her shares in exchange for fair and equitable value. and (4) if there is a finding of a breach of fiduciary duty between directors and shareholders and the corporation or other shareholders. Method 2 could apply if Coppock amends her complaint to request a dissolution and can establish that the acts of Stefano. which was uninsured. in AK. Majority shareholders cannot derive a benefit at the expense of 73 . the directors decided to offer Coppock $15k for her shares. In 1976. Later in 1974. Gillam. and Crow and AK Plastics for $52. which it later renamed Valley Plastics. The Court found that not enough on the record to fulfill any of the 4 methods. At the 1974 board meeting. An accountant estimated the value of the shares to be between $23k-$40k. Method one does not apply because no existing provisions. the director’s agreed to make a $50k offer for another plastics firm. burnt down. but she did not dissent from a shareholder vote ratifying all the acts of the directors for the previous year. or whether the majority shareholders violates AK law. She retained a lawyer who demanded an inspection of the books and records of the corporation. $32k represented the value of the shares. the statutory appraisal remedy is only available upon the merger or consolidation with another corporation. No dividends have ever been authorized.314. The fire essentially turned AK Plastics into a holding company for Valley Plastics. and attorney’s fees. Remanded. costs. and Crow are illegal/oppressive/fraudulent or corporate waste. The third method doesn’t apply because. (3) if there is a significant changes in corporate structure the shareholder may demand a statutory right of appraisal. Issue: May a court require a buy-out of a minority shareholder’s shares in a close corporation? Held: Yes. Gillam. Coppock did not learn of the purchase of Valley Plastics until the 1975 shareholders meeting. Coppock offered her stock to the corporation for $40k. Broadwater Industries. Then. There are 4 ways in which a court may require a buy-out of a minority’s shares: (1) If there is a provision in the articles of incorporation of bylaws providing for the purchase of shares upon a particular event. but could require the purchase of her shares at a fair and reasonable price as an alternative remedy.
a bonus worth 1/2 of profits once Talcott’s initial loan was repaid. a minority shareholder will feel frozen out. However. then opened the Redfin Grill. In 2001. Talcott. Excessive salaries. minority gets frustrated and takes to court for oppression. Coppock was the only one who didn’t get any benefit. Ch. and a guarantee that he would not be terminated under any circumstances. 74 . The Real Estate Agreement granted Haley the option to purchase the property where the Grill was situated at 50% of the cost as to make him either a 50% owner of the land or 50% owner of the entity formed to hold the land. In 2003. each owning a 50% interest in the LLC. Haley v. then court often will form its own buy-out remedy. and disagreements between Haley and Talcott resulted in Talcott sending Haley a letter accepting his resignation and forbidding him to enter the Grill. especially with dividends. Rule: DE LLC Act §18-802: The court may dissolve an LLC whenever it isn’t reasonably practicable to carry on the business in conformity with a LLC agreement. there is a deadlock. So if going to pay out a dividend. pay-outs that go to one person only. LLC.2d 86 (Del. but an Employment K and a Real Estate K defined many rights granted to Haley. voting to terminate any lease of the Grill. Take away point: Idea of dissolution as an extreme remedy. If not. majority will low-ball them. with 50% interest. Haley was given substantially full discretion to make management decisions. and voting to sell the property. Haley’s duties could not be lessened. The Grill is owned solely by Talcott. 1/2 of any proceeds from all sales. LLC and purchased the property. 2004) Facts: Haley and Talcott are the only members of Matt and Greg Real Estate. it provides for neither a release from the personal guaranties that both Haley and Talcott signed to secure the mortgage on the property nor for a requirement that any dissatisfied member exit rather than file a suit for dissolution.minority shareholders. The Employment K made it clear that the parties were operating a joint adventure. etc. 864 A. rejecting the new lease proposal for the Grill. then majority will negotiate a different price. Often times. The court was hinting at the idea of benefits. Each individually signed personal guaranties for the entire amount of the mortgage to secure the loan. However. Haley responded with two letters denying his resignation. The exit mechanism of the LLC agreement provides for the remaining member to purchase the shares of a member who has quit. Haley thought that he would be provided the opportunity to own stock in the Grill at some point. Talcott contributed most of the start-up money and Haley managed the Grill without drawing a salary for the first year. you must pay it out to everyone equally (unless the class of shares is specific). the parties formed Matt and Greg Real Estate.
Eugene would undermine Alfred’s management authority at the TPC plant and was threatened to cooperate and forget about the discrepancy or he’d be fired. On remand. would not permit the LLC to proceed in a practicable way because he would not be relieved of his obligation under the personal guaranty he signed to secure the mortgage of the property. but an LLC with an exit provision. the other brothers agreed to hire an accountant. The K was clearly negotiated with an exit provision. During this time. Pedro. he would get screwed if forced to take exit provision. Carl and Eugene appealed again.). though.2d 798 (Minn. App. Alfred. At the end of October. prejudgment interest. However. In May 1987. Forcing Haley to exercise the exit provision.W. Pedro v. Alfred says the accountant admitted to all three brothers that there was an unexplained $140-147k discrepancy. discovered a $330k discrepancy between the TPC accounting records and the checking account. parties are 50% members in a joint adventure (equal share of profits as provided in the Empl. 489 N. the trial court awarded damages for breach of fiduciary duty and for wrongful termination of lifetime employment. and attorney’s fees? 75 . (3) and they are unable to agree on whether to discontinue the business or how to dispose of its assets. Hist: Alfred requested a dissolution of the corporation. (2) the stockholders are engaged in a joint adventure. Here. The jury awarded damages and Carl and Eugene appealed. DE LLC Act 18-802 is similar to DGCL 273. and there is a deadlock regarding the future of the LLC. Alfred was placed on a mandatory leave of absence from TPC and was fired in December. This would not equitably separate the parties because Haley would still have to make good on any future default of the LLC over whose operations he would have no control. a company that manufactures and sells luggage and leather products. the brothers hired another accountant who reported an unexplained $140k discrepancy. 273 provides for dissolution when (1) the corporation only has two stockholders. with each member of the LLC having a 50% interest in acts of the company. Issues: Was there a breach of fiduciary duty? Did Alfred have a reasonable expectation of lifetime employment? And did the TC make proper determinations regarding joint and several liability. K. the respondent. given the deadlock probably not long before not profitable. Each brother received the same compensation and benefit as the others as well as an equal vote in the mgmt of the company. 1992) Facts: The brothers Pedro each owned a 1/3 interest in The Pedro Companies (TPC). Haley only entered to make money.Issue: May the court decree dissolution or is Haley limited to the exit provision of the LLC Agreement? Held: Dissolution is the adequate remedy. In October 1987. but dismissed the accountant after one month and no results. In 1987. Although LLC making money now. this is not a corporation. recusal of the trial judge. Eugene and Carl moved that the action proceed as a buyout. This court remanded because the jury’s verdict was merely advisory.
Stuparich and Tuttleton offered a buy out of their shares to Malcolm Jr. Liquidation is not reasonably necessary to protect the rights or interests of the complaining shareholders.33% non-voting shares of Harbor Furniture. Sr. Stuparich v. The individual defendants and all c/a other than that for dissolution were dismissed. (2) Courts may look at the nature of employment of a shareholder in a closely held corporation to determine the reasonable expectation by the employee-owner that his employment is not terminable at will. Malcolm Jr. 802 F. and gave the difference as damages for breach of fiduciary duties.SRA (Stock Retirement Agr. can outvote Ps. (3) Carl and Eugene both breached fiduciary duties and acted arbitrarily. Ps are not entitled to substitute their own business judgment for their brother’s with respect to the viability of the furniture operations. They learned of the sale after proposing a separation of the mobile park and furniture business due to the financial losses the business was incurring each year. From 1984-1996. giving him 51. and thought they together had voting control. Jrs wife and son for involuntary dissolution. and b/c they have consistently received dividends. the trial court thus has discretion to award attorneys fees. Statute allows for double recovery. as owner and as employee. Dad and brothers all planned on making life-time career out of business.2d 941 (7th Cir. Jr.56% of voting shares and 33. their brother. Malcolm Jr. Stuparich and Tuttleton did not know about the sale of shares between their dad and brother. Inc 83 Cal. and otherwise not in good faith.) purchase price.Held: (1) Yes.App. bought their dad’s voting stock. Eugene and Carl even admitted to acting in an unfairly prejudicial way toward Alfred. BJR.05% voting shares and 33.33% of non-voting shares. and damages for fraud. Harbor moved for summary judgment. Issue: Whether the Ps raised a triable issue of material fact as to deem involuntary dissolution of the corporation “reasonably necessary” to protect their rights or interests.. brother told them their meeting notice regarding the proposal was defective. Malcolm Tuttleton. declaratory relief. but the distribution of shares from his father to him was not illegal. 1986) 76 . but he refused. Stuparich and Tuttleton. Held: No triable issue of material fact.4th 1268 (2000) Facts: Harbor Furniture is a furniture manufacturing business and also owns and operates a mobile park. Malcolm Sr was privileged to sell his own shares to his son at whatever price he chose. Reasonable to believe that Alfred did too.. §6 Transfer of Control Frandsen v. Inc. vexatiously. Harbor Furniture Mfg. sisters and each owners of 19. Jenson-Sundquist Agency. and negligence. Even if the shares were discounted as alleged. and the trial court granted because the Ps could pursue a representative on the BoD to protect their interests. Trial court properly awarded the FMV of shares. Hist: Sisters initially sued Harbor. conspiracy. the sisters each received over $800k in dividends.
Jenson would liquidate. and the stockholders would end up with the cash and the insurance company. This was completed over Frandsen’s protest. Issue: Was the merger a breach of the stockholder agreement? Held: No. First Wisconsin agreed to purchase all Jenson shares at $88/share. (Clause 2 would apply). The district court properly dismissed Frandsen’s claims. and the rest to other non-family members. (Clause 1 and 2).) If the minority declined the offer. The sole stockholder sold 52% of his stock in the holding company to his family (the majority bloc). Questions: Assume there is a Possible Clause #3: Should the family negotiate a merger of the firm into another firm. Deal 1: In 1984. but the whole company. the First Bank of Grantsburg.Purpose is to share the control premium). (Take-me along Clause. Frandsen shall have the right to enjoin the merger and buy the family’s shares at the effective price of the merger. then the Agreement provided that the majority bloc would offer to buy the minority’s shares at the same price it sold its shares. 77 . but doesn’t get him all the way there. and each Jenson shareholder would receive $62/share= $88/share of the bank. They agreed that First Wisconsin would buy Jenson for cash. Frandsen’s right of first refusal was bypassed when the majority bloc found someone to buy not just its shares. Jensen asked each minority shareholder to waive his rights in the transaction. The stockholder agreement only gave Frandsen the right of first refusal if the majority stockholders wanted to sell only their stock. (Right of first Refusal. the president on Jenson began discussions with First Wisconsin Corporation over the acquisition of Jenson’s principal property. 1 is consistent. Motive 3: Want to acquire FGB without getting into a bidding war with another potential bidder. 8% to Frandsen. The district judge granted summary judgment for the defendants and Frandsen appealed. Hist: Frandsen sued the majority bloc for breach of the stockholder agreement. Frandsen refused to sign and announced that he was exercising his right of first refusal and would buy the majority’s bloc at $62/share. merge First Bank of Grantsburg into a subsidiary of First Wisconsin.) Is the proposed merger an offer to sell under the definition of the RFR? Posner says No. Which clause is best for the following motives? Motive 1: To force the majority to share a “control premium” with him. advising each that they had no rights other than to receive the $62/share.Facts: Jensen-Sundquist was a holding company whose principal asset was a majority of the stock of the First Bank of Grantsburg. and also owned a small insurance company. Each signed or was expected to sign except Frandsen. Motive 2: To avoid dealing with a majority shareholder that he didn’t know or didn’t know. The Stockholder Agreement had a provision that the majority bloc would first offer its shares to the minority shareholders if it decided to sell. (Cl. Deal 2: So Jenson and First Wisconsin restructured the deal. not sell the company.
Ds sold shares to Flintkote Co. 219 F. and book value $17.” Issue: Are minority shareholders entitled to share equally in any premiums paid for a controlling interest in a corporation? Held: No. 48 N. and restitution of Feldman’s gains from the sale of his controlling interest to Wilport Company. Feldman sold his controlling interest in the corporation to Wilport Company during a market shortage because of the Korean War. although the market price was $12. and president of Newport.Zetlin v. 305 F.4% of Gable’s shares. The selling price was $20/share. Feldman. that controlling interest at a premium price…. the majority shareholder.2d 684 (1979) Facts: Defendants owned 44. By selling his stock.2d 173 (2d Cir. Hanson Holdings. Perlman v. conversion of a corporate opportunity. breach his fiduciary duties to Perlman.38/share. so his privilege to sell was not terminated. Zetlin contends that minority stockholders are entitled to an opportunity to share equally in any premium paid for a controlling interest in the corporation. a minority shareholder. Essex Universal Corporation v.Y. 1955) Facts: Feldman was the dominant shareholder.” Dissent: Feldman was not proved to be under any fiduciary duty as a stockholder not to sell the stock he controlled. chairman of the BoD. Yates. Hist: Perlman initiated a derivative action to compel an accounting for. This proposed rule is contrary to existing law and would require that a controlling interest be transferred only by means of an offer to all stockholders (a tender offer). a corporation that operated steel mills. A fiduciary may not appropriate to himself the value of an unusually large premium during a market shortage. Inc. Rule: “Absent looting of corporate assets. a controlling stockholder is free to sell. The lower court found that Feldman had no reason to know or reason to believe that Wilport Company intended to exercise the power of management to the detriment of the corporation. Zetlin owned 2%. he acts on his own behalf. when the market price was $7.2d 572 (2d 1962) 78 . fraud or other acts of bad faith.03/share. and a purchaser is free to buy. Feldman personally gained from a situation that would have many corporate advantages such as building up patronage and continuing to use the “Feldmann plan. when he sold his interest in the corporation at a higher price than market value due to the shortage of steel? Held: Yes. for a premium price of $15/share. Issue: Did Feldman.
Immediate transfer of control will not void a sale of a controlling block of stock.5% of the outstanding stock of Glen Alden. a holding company. and List would be dissolved. Concurrence: (Clark): Summary judgment was improper. and Takeovers §1 Mergers and Acquisitions A. purchased 38. a mining and manufacture corporation.Facts: Yates was a shareholder and president of Republic Pictures. It allows the removal and replacement of directors without any say of the minority shareholders. when market price was 6/share. a shareholder of Glen Alden. Yates moved for summary judgment. 79 . Notice of this agreement was sent to the shareholders of Glen Alden. Inc. who approved the agreement at their annual meeting. This should be illegal. Hist: Essex sued. Concurrence. 393 Pa. Issue: May a sale of a controlling interest in a corporation include immediate transfer of control? Held: Yes. (Friendly): Paragraph 6 of the K violates corporate democracy. arguing that the clause calling for immediate transfer of control was illegal per se and voided the K. There is no reason why a transfer of control should not be assignable upon sale of a block of stock. 427 (1958) Facts: List. Glen Alden defended on the basis that the form of the transaction was a sale of assets rather than a merger so the merger statute was inapplicable. to be filled by Essex. filed this suit to enjoin performance of the agreement on the ground that the notice to the shareholders of the proposed agreement did not conform to the statutory requirements for a proposed merger. A disagreement as to the value of the shares caused Yates to back out of the deal. The De Facto Merger Doctrine Farris v. Essex appealed the judgment. Glen Alden Corporation. List shareholders would receive negative stock in Glen Alden. Farris. Transfer of control is inevitable in such a situation. but this should be remanded for trial with great discretion to the district court. Acquisitions. Chapter 7 Mergers. and placed three of its directors on the Glen Alden board.. which operated a film studio. but cannot be applied retrospectively and cannot void the transaction. Reversed. He contracted to sell his interest to Essex at 8/share. The contract called for a transfer of 28% voting shares and the resignation of a majority of Republic’s board. Control of a corporation may not be sold without the sale of sufficient share to transfer that control. The two corporations entered into a “reorganization agreement” under which Glen Alden was to purchase the assets of List and take over List’s liabilities.
Farris still has a right to dissent. Sup. Per the Agreement. despite the form which states that Glen Alden is acquiring List. a shareholder of a corp which is planning to merge has a right to dissent and to get paid fair value for his shares. The new corp will have a majority of directors appointed by List. Arco moved for summary judgment and dismissal of the complaint. This. even if this were a purchase of assets. If this agreement is performed. Therefore. and the market value of his shares will decrease. and under PA law shareholders of a purchased corp also have a statutory right to dissent. Farris will become a shareholder in a larger corporation which is engaged in an entirely different type of business. The Plan was approved at the annual stockholder meeting. 1963) Facts: Arco Electronics and Loral Electronics Corporation entered into a Reorganization Agreement and Plan. Farris will have a smaller percentage of ownership because of the shares issued to the List shareholders. force him to give up his shares in one corp and accept shares in an entirely different corporation.. and to force him to exchange his stock in the corporation he chose for stock in an entirely different corporation is to deprive him of his property.Issue: Do ‘reorganization agreements” which are de facto mergers. if the agreement will so change the corporate character that to refuse to allow to shareholder to dissent will. require conformance by the corporations to the merger statutes? Held: Yes. Arco would dissolve and distribute the acquired shares to its stockholders upon its liquidation. Affirmed. To decide whether a transaction is in fact a merger or only a share of assets. then. The Vice Chancellor granted the motion and Hariton appealed. De Facto Merger: When a trans so fundamentally changes the nature of the business as in effect to cause the shareholder to give up his shares in one co and against his will accept share in a diff bus. is a de facto merger and Glen Alden must follow the statutory merger requirements even though the transaction is in the form of a purchase of List’s assets. and these rights be granted to dissenting shareholders. 80 . Arco Elecronics. 188 A. Arco would sell all assets to Loral. Main Reason: Financial loss. 283k shares of Loral. in effect. Also. Inc. Under PA law. Hariton v. the reality of the agreement is that List is acquiring Glen Alden. a court must look not to the formalities of the agreement but to its practical effect. even if this were not a de facto merger. Hist: Hariton sued to enjoin the consummation of the Plan on the grounds that it was illegal because Arco did not call the transaction a merger. when it was a de facto merger not just a sale of assets. and the parties consummated the transaction.2d 123 (Del. in exchange. Ct. A transaction is a de facto merger. but has no such rights if his corporation is merely purchasing the assets of another corp. Arco would receive. *Analysis: The rationale of the appraisal right is that the shareholder purchased the shares of a specific corporation.
A sale of assets involving dissolution of the selling corporation and distribution of the shares to its shareholders is legal. The chancery court held the merger valid. B. Fairness means fair dealing and fair price. Issue: Is a freeze-out merger approved without full disclosure of share value valid? Held: No. they would not have voted in favor of a cash-out at $21/share. Sup. The remedy upon remand shall be a liberal appraisal determining fair value after taking into account all relevant factors. UOP. 525 (1986) 81 . The statutes controlling mergers and those controlling asset sales are independent of each other. filed an action seeking to enjoin the merger. 1983) Facts: The Signal Companies acquired a majority interest in UOP through market purchases and a tender offer. Freeze-Out Mergers Weinberger v. At the annual shareholder meeting of UOP. Two directors of both corporations conducted a feasibility study and determined that a share price of up to $24 would be a beneficial deal to Signal. To hold otherwise would be to create unnecessary uncertainty in litigation. There was no fair dealing because the directors who conducted the feasibility study used UOP information for the sole benefit of Signal without full disclosure of the findings. Minority stockholders were denied the information that $24/share would have been a good investment for Signal. a minority shareholder who had voted against the sale. Signal announced to minority shareholders in UOP that it was offering $21/share to acquire all shares in UOP. Inc. it must be fair. Coggins v. Weinberger appealed.2d 701 (Del. the fact that it might be a de facto merger should not invalidate it any more than an otherwise legal merger should be invalidated because it is a de facto asset sale. This would have meant over $17m for the minority. and must be voided. For a freeze-out merger to be valid. 397 Mass. Signal later decided to acquire all shares of UOP. Issues Addressed (Five ideas of a Freeze-out merger: 1) Business Purpose. and 5) Valuation in appraisal. If an asset sale meets the legal requirements of such a sale. 4) Requirement of entire fairness as between the dominant shareholder and the minority. 457 A. 2) Exclusivity of appraisal. 3) Burden of Proof when a freeze-out merger is challenged. a majority of the minority shareholders approved the sale. Hist: Weinberger. which resulted in a forced sale of all shares. Had they known this. New England Patriots Football Club. Inc. The merger was unfair.Issue: Is a sale of assets that results in a de facto merger legal? Held: Yes.
He contributed his AFL franchise. To acquire the shares. Sullivan increased his voting stock to 23718 shares and acquired 5499 shares of nonvoting stock. he then voted out the other directors and replaced them. but was ousted from the presidency and from operating control of the corporation. and resumed presidency. and then change the name of the New Patriots back to the Old Patriots.Facts: Sullivan purchased an AFL franchise and then incorporated the American League Professional Football Team of Boston. The proxy statement was issued. Since there was no legitimate business purpose for the merger. The next year he obtained ownership of all 100k voting shares. The K provided that any further purchases of stock within the next year would be made for $25/share. The trial judge ruled in favor of Coggins. Held: The trial judge properly found that the offered price for nonvoting shares was inadequate after he considered the totality of the circumstances. 498 A. agreed to purchase a majority interest in Hunt. but damages will be assessed according to what the stockholders would have if the merger were rescinded. The burden is on the defendant to prove that the merger was for a legitimate business purpose. The corporation then sold 120k shares of nonvoting common stock to the public at $5/share. the court need not consider fairness. it must then consider the totality of the circumstances to determine if the transaction was fair. despite the filing of class actions on behalf of minority shareholders who sought to enjoin the proposed merger. approved the merger. The result of a freeze-out merger is the elimination of public ownership of the corporation. The judge ordered further hearings to determine the amount of damages.2d 1099 (Del. If the court is satisfied that the merger was for a legitimate business purpose. Olin waited for that year to end before discussing the possible acquisition of the Hunt minority stock. Sullivan. each of the ten investors received 10k of voting common stock of the corporation. Hunt Chemical Corporation. Sullivan’s voting shares from the Old Patriots were exchanged for 100% of the New Patriots stock. The merger was approved at $20/share to the minority. The merger was also approved by the class of nonvoting stockholders. and with 9 other investors contributing $25k. as the entire voting class. The remedy to Coggins is rescissory damages based on the present value of the Patriots. so rescission of the merger is impossible. Philip A. Hist: Coggins. Rabkin v. who voted against the merger. nonvoting shares of the Old Patriots would be cashed out at $15/share. Sullivan had taken out loans under the condition that he would reorganize the Patriots so that the income of the corporation could be devoted to the payment of the personal loans. Inc. The merger took place ten years ago. however there was no requirement of approval by a majority if the minority shareholders for the merger. 1985) Facts: Olin Corp. The trial court did not err when it found that “the Ds have failed to demonstrate that the merger served any valid corporate objective unrelated to the personal interests of the majority shareholders” (Sullivan!). commenced a class action suit on behalf those stockholders who believed the transaction was unfair and illegal. So Sullivan organized a new corporation to merge with the Old Patriots to extinguish the voting stock of the Old Patriots. but determined that the merger should not be undone and that Coggins was entitled to rescissory damages. 82 .
Castiel. Reversed and remanded. C. a majority shareholder of RCA. timing. and that is ok. i. and the like. Issue: Did the trial court err in dismissing the claims on the ground that absent deception the sole remedy is an appraisal. In the context of a cash-out merger. De Facto Non-Merger Rauch v.) 83 . LLC Mergers VGS. if redeemed. but does not allege unfairness in the merger transaction.e. In cases of fraud. Equal dignity with respect to structure over form. This allegation is sufficient to withstand a motion to dismiss. 2000 WL 1277372 (Del. but it is not the only remedy. Although this could have been accomplished by redemption. self-dealing. Hunt moved to dismiss which was granted for failure to state a claim upon which relief can be granted. RCA chose not to do so. negotiation. Appraisal is appropriate in many cases. The Vice Chancellor’s reasoning was that absent claims of fraud or deception a minority shareholder’s rights in a cash-out merger were limited to an appraisal. Affirmed.2d 29 (2d Cir. If Rauch has claimed that the 40/share price was unfair.. 1988) Facts: General Electric Company. manipulation. 861 F. v. which is perfectly legal under DE law. If appraisal rights granted. The allegation here is that Olin mgmt knew that it was going to acquire Hunt and delayed the merger to avoid the K provision requiring Olin to pay more per share than it wanted to. He argued that the merger had the same effect as redemption. The district court dismissed the complaint b/c it concluded that the transaction was a merger in accordance with DE General Corp Law. Rauch challenged the merger on the grounds that the articles of incorporation of RCA contained a provision that Preferred Stock. was to be paid $100/share. improperly interpret Weinberger? Held: yes. Shareholders of preferred stock were paid $40/share. the new corporation pays for the appraisal. structure.Hist: Rabkin sued on the grounds that the price offered was grossly inadequate b/c Olin unfairly avoided the one year commitment of 25/share within the Olin-Hunt stock purchase agreement. then he may obtain an appraisal. RCA Corporation. Inc. and disclosure are all factors to be taken into account in ruling upon the fairness of the transaction. Issue. RCA accomplished its merger by converting its stock to cash. Does a cash-out merger that is legal trigger any right to the shareholders with respect to share redemption? Held: No. Ch. D. merged RCA into itself. any remedy that will make the aggrieved shareholder whole may be considered.
The Chancellor agreed and entered a judgment awarding damages against some of the directors. 41 Del. began buying shares of Holland. and their capacity of managers does not entitle them the protection of the BJR. Mathes. a DE corporation. Provisions of the LLC agreement allowed the Bd of Mgmt to act by majority vote. 494 (1964) Facts: Holland Furnace Co. Sahagen and Quinn owed Castiel a duty of loyalty. Ch. However. and 500k to Sahagen Satellite.54%. Maremount. The LLC statute did not require notice to Castiel before Sahagen and Quinn could act by written consent. Introduction Cheff v. This caused Holdings and Ellipso’s combined ownership to drop from a 75% controlling interest in the LLC to a 37. Sahagen Satellite went from owning 25% of the LLC to 62. filed a derivative action alleging that the directors of Holland effected the sale solely to preserve their positions.5% interest in VGS. Sahagen executed a promissory note of $10m plus interest to VGS for 2m shares of VGS Preferred Stock. Sahagen Satellite later became the third member. companies controlled by Castiel. They named themselves and another man as the BoD.Facts: Castiel formed Virtual Geosatellite LLC to pursue an FCC license to build a satellite system to increase outer space real estate. The merger is invalid and is ordered rescinded.5% of VGS. Holdings received 65. but was not. Then he began purchasing many more of Holland’s shares. Mathes. the president of Motor Products. The agreed price was higher than the prevailing mkt price. and Sahagen Satellite received 25%. The statute only allows action without notice only by a constant or fixed majority. 230k to Ellipso. and Sahagen named himself. The state legislature never meant for the LLC statute to deprive “clandestinely and surreptitiously” a third manager representing the majority interest in the LLC of an opportunity to protect that interest by taking action that the third manager’s member would surely have opposed if he had knowledge of it. He demanded to be placed on the BoD. He proposed a merger. and no provision of the LLC agreement modified the statute. Holland heard that Maremount had a history of looting companies he acquired. Issue: Do managers of a LLC owe to one another a duty of loyalty to act in good faith? Held: Yes. 84 . Castiel and Sahagen began disagreeing about how the LLC should be managed and operated. a shareholder of Holland. so Holland decided to repurchase the shares that Maremount had acquired. Sahagen and Quinn merged the LLC into VGS. they knew that Castiel would have removed Quinn from the Bd and blocked the planned merger had he known. so Sahagen convinced Quinn that they needed to oust Castiel from leadership. 1.2m shares of common stock were issued to Holdings. Ellipso received 11. which Holland rejected. was a furnace company that’s shares were held by several family members and a holding company owned by the same individuals. The first two members were Holdings and Ellipso. Castiel named himself and Quinn to the Bd of Mgrs. §2 Takeovers A. Without Castiel’s consent. Inc.46% of the LLC’s total equite.
Unless. Unocal appealed. Reversed and remanded. as shown by a preponderance of the evidence that the directors’ acts breached a fiduciary duty such as fraud. the BoD of Unocal approved a defensive tactic where Unocal would issue an exchange offer for its own stock. and this was a matter of business judgment. Mesa was specifically excluded from the offer. Greenmailing: Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover. Corporate funds must be used for the good of the corporation. Unocal’s selective exchange offer was reasonable in relation to the threat posed. The court must look at the reasonableness of the tactic employed and determine that the Board lacked self-interest. Mesa Petroleum Co. B. There is no justification for holding the directors personally responsible. Courts find two-tiers coercive because of the prisoner’s dilemma.2d 946 (1985) Facts: Unocal was faced with a hostile tender offer by Mesa Petroleum Co. Any time a bond is issued that is graded as an untrustworthy investment. The Maremount takeover was perceived as a threat to Holland. it’s called a junk bond. The primary purpose of using these takeover defense measurements cannot be to perpetuate control. Defensive measures must be reasonable in relation to the threat posed.Issue: May corporate fiduciaries use corporate funds to perpetuate their control of the corporation? Held: No. 493 A. The Board’s actions must be measured by the BJR. which it extended into an injunction. Unocal Rule: The BJR is not automatically applied to defensive tactics.. the repurchase of corporate shares using corporate funds was not self-dealing. Development Unocal Corporation v. Following consultations with financial professionals. Acts of the directors to defeat a takeover must be shown to have been done in good faith and b/c the takeover would danger the corporation. the Court will not substitute its judgment for that of the Board. However. Hist: Mesa then filed an action seeking to enjoin Unocal’s selective exchange offer. etc. The tender offer was of a “two-tier” structure such that the shareholders first tendering their stock obtained much greater value than those who tendered theirs later in the offer. Reversed. being uninformed. The purpose of the plan was to motivate the shareholders to sell their shares lest they find themselves in the second tier of the offering. Its riskier b/c the 85 . The Chancery Court issued a temp restraining order halting the proposed offer. lack of good faith. Issue: Is a selective tender offer effected to thwart a takeover in itself invalid? Discriminate self-tender offers bad? Held: No. Unocal directors concluded that the Mesa offer price was very low and Mesa was a known greenmailer. at an amount higher than that offered by Mesa.
v. the directors become little more than auctioneers. MacAndrews & Forbes Holdings. Investopedia explains Poison Pill 1. In the 80s high interest rate b/c riskier. By purchasing more shares cheaply (flip-in). but subtly different too.change of default is greater. Revlon Rule: When it is clear that a target is going to be sold. Court says you only have to look at shareholders. Revlon. Inc. The Chancery Court ordered. The transaction with Forstmann is invalid. As part of a defensive strategy. so people would place bets on default then cash in. but all were rejected. Affirmed. Std of review: BJR? No. Are lockups and other defensive measures permitted where their adoption is untainted by director interest or other breaches of fiduciary duty? Held: Yes. must look at best price only. 506 A. Here. With a poison pill. 2. Inc. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. Revlon directors did breach fiduciary duties though.25/share. Revlon’s board adopted a plan that would exchange shareholders’ shares for bonds. The Board’s main responsibility is to the shareholders. Pantry Pride filed an action seeking to enjoin the agreement between Revlon and Forstmann. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger. The deal with Forstmann favored the noteholders but was to the detriment of the shareholders. the target company attempts to make its stock less attractive to the acquirer. Long-term corporate interests are no longer considered. 1985) Facts: Pantry Pride offered to purchase Revlon at $45/share. Forstmann agreed to support the value of the notes. The deal included a lockup provision that would have made any acquisition of Revlon by another unprofitable. A strategy used by corporations to discourage hostile takeovers.2d 173 (Del. There are two types of poison pills: 1.. Why not? The “omnipresent specter that a board may be acting primarily in its own interests. Ct. The board then announced a leveraged buyout by Forstmann at $57. and Revlon appealed. Once you become this auctioneer. Revlon ended the bidding for the corporation by preventing a higher share price. investors get instant profits 86 . it was clear that Revlon was going to be taken over. so the Directors duty is to obtain a maximum sales price. Flipover Poison pill: allows stockholders to buy acquirers shares at a discounted price in the event of a merger. Issue. Sup. Pantry Pride tried to make more tender offers. but Revlon’s Board rejected the offer.” Primary purpose? Relevant.
holding that defendant reasonably responded to a competing offer in a reasonable and proportionate manner. QVC Network. New Castle (Delaware). DE S. An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger. defendant's response in creating a merger would not place the transaction in violation of the business judgment rule where plaintiffs' alleged a corporate threat solely centered on inadequate stock value. When the Board puts the company up for sale. The court used the Unocal analysis and found that 1) Time’s Board used proper business judgment to determine that Paramount’s offer posed a threat to corporate policy and effectiveness and 2) the response was reasonable in relation to the threat perceived. Distinguish between lockups that draw a bidder in and lockups that end an active auction. 1994) 87 . The lower court denied plaintiffs' motion on the grounds that defendant did not breach the business judgment rule in making a tender offer.and. Ct. they dilute the shares held by the acquirer. Paramount Communications Inc. more importantly. 571 A. Lock-up agreement gives exclusive rights to the White Knight. *The court rejected the Revlon argument because there was no substantial evidence to conclude that Time’s board made the dissolution or break-up of Time inevitable due to its negotiations (including a lock-up agreement and no shop clause) with Warner. 637 A. Inc. The lock-up ended the bidding prematurely. OVERVIEW: Paramount filed suit against Time seeking a preliminary injunction to halt defendant's offering of shares in preparation of a merger with Warner. they have a duty to maximize the company’s value by selling to the highest bidder. Further. On appeal. The state supreme court affirmed the lower court. Time Incorporated. which denied their application to preliminarily enjoin defendant corporation from concluding a merger. 2. 1989) PROCEDURAL POSTURE: Plaintiff shareholders appealed a judgment from the Chancery Court. OUTCOME: The state supreme court affirmed the lower court's dismissal of plaintiffs' request for a preliminary injunction on the ground that defendant's decision to initiate a merger was made in a reasonable and proportionate fashion.2d 1140 (Del. v. v. Paramount Communications. requiring Time to maximize shareholder value before the merger. Inc.2d 34 (Del. This makes the takeover attempt more difficult and more expensive. struck down the lock-up. plaintiffs asserted that defendant's tender offer triggered Revlon duties.
NCS began to improve though and decided to look into different transactions so the shareholders would get something. The defensive measures of the original Agreement were not eliminated or modified. but the corporations could not agree on the merger price and the terms of the stock option granted to Viacom. The Board and the Independent Committee both approved the Genesis proposal. v. The Agreement has a no-shop provision. or (b) a break-up of the corporate entity. Omnicare sued to enjoin. Genesis and Omnicare both began negotiating with NCS.Facts: Paramount began negotiating a possible merger with Viacom. Inc. looked at the Omnicare deal and concluded it was better. QVC publicly announced a tender offer of Paramount’s outstanding shares and filed suit due to the slow pace of the merger discussions. Viacom began discussing a revised transaction with Paramount due to QVC’s hostile bid. NCS Healthcare. Within hours. Omnicare. Paramount appealed. The Paramount Board breached its fiduciary duties by not analyzing the consequences of the transaction with Viacom and not modifying or eliminating the defensive measures of the Agreement. the directors’ obligation is to seek the best value reasonably available to the stockholders. The contractual provisions are invalid because they prevent the directors from carrying out their fiduciary duties under DE law. The Paramount Board approved an Amended Merger Agreement with Viacom including a provision for a tender offer by Viacom and the power of Paramount’s Board to terminate the Amended Merger Agreement if it withdrew its recommendation or recommended a competing transaction. and then QVC proposed a merger to acquire Paramount. NCS Board got a waiver from Genesis.2d 914 (Del. Directors must focus solely on securing the transaction that offers the best value reasonably available to shareholders by analyzing the entire situation and comparing alternatives. minority shareholders lose the power to influence corporate direction and must rely on the fiduciary duties owed to them by the directors and the majority shareholders. The Stock Option Agreement contained a Note Feature (Viacom could pay with a note rather than cash) and a Put Feature (Viacom could elect to require Paramount the difference between the purchase price and market value of Paramount’s stock in cash). When a corporation undertakes a transaction which will cause: (a) a change in corporate control. Paramount and Viacom announced their proposed merger. Impossible for Genesis to reject the bid b/c the merger agreement required a Genesis stockholder vote for any change or modification. The Paramount directors were required to evaluate the transaction with Viacom and determine if the results were reasonable and in the best interest of the stockholders. Inc. In the mean time. Held: Courts must undergo enhanced judicial scrutiny in cases of a sale or change of control because once control has shifted. QVC expressed its interest in Paramount. Paramount and Viacom resumed negotiations and later the Paramount Board approved a merger agreement with Viacom. 88 . 818 A. Termination Fee provision. Paramount Board determined that the QVC offer was not in the best interests of the stockholders. 2003) Facts: NCS was in a lot of debt and was going to enter a transaction with Omnicare whereby NCS would sell its assets in bankruptcy. Viacom and QVC both commenced tender offers and began a bidding war . Hist: A preliminary injunction in favor of QVC was ordered. and Stock Option Agreement. Omnicare had irrevocably committed itself.
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