Attack Corp Outline

Corporations Attack w/ Sample Answers
CORPORATIONS ATTACK W/ SAMPLE ANSWERS 1
DUTY OF CARE 9
DUTY OF LOYALTY 13
ACCOUNTING 19
CORPORATE FINANCE 20
FORMING THE CORPORATION 23
VOTING 30
PROBLEM SET 3 – VOTING RULES 32
PROXY CONTEST 35
CLOSE CORPORATIONS 37
CORP ACQUISITIONS, TAKEOVERS, AND CONTROL TRANSACTIONS 43
S’HOLDER SUITS 47
ESSAYS TIPS 53
SAMPLE ANSWERS 63
RANDOM DEFINITIONS 75
Wilson 1 | Corporations with Stevie C Fall 2018

Corporations
1. The Players
A. Shareholders –
1. Make money by
a. Collecting dividends
b. Capital appreciation – increased value of stock
c. Potentially through dissolution of the corporation if money left over after debts
(when the corp ends, they pay off parties to whom they owe and then the
s’holders become the residual claimants of what is left)
2. Power to vote on fundamental matters, but not everyday matters
a. Del 216 – s’holders elect directors
b. 242 –vote on amendments on the cert of incorp
c. 251 – vote on merger
d. 271 – vote on sale of substantially all of the corp’s assets
e. 275 – vote on whether or not the corp dissolves
B. Directors (§141)–
1. Elected by s’holders via 216
2. Manages the business - they do broad work
3. Directors are not full time employees, unless also officers.
C. Officers –
1. Full time employees, run the day to day
2. Execute the director’s scheme
3. Appointed by the directors
D. Officers tend to have the best information about the corp. S’holders can’t monitor and Directors
work 2-3 days a year. This gives rise to a classic agency problem – separation of ownership
(s’holder) and control (director/officer). How do you ensure people in control do the right thing?
1. Agreements
2. Connect compensation to performance – problem with measuring performance
(financial statements are not perfect)
3. Common law fiduciary duties of loyalty & care
E. After making money what can the corp do with it?
1. Hire employees, give raises, improve products, pay down debt, expand product line,
expand sales facilities, pay dividends to s’holders, make contributions to charity.
2. 122(9) – Corp are permitted to make charitable contributions. Adams v. Smith
a. Why? Tax benefits, idea of good corp citizen, quasi advertising, induce
investment (less likely), don’t want to be the only one that doesn’t
b. If donations are excessive, s’holder may sue and win.
c. Tax benefit because donation is tax deductible from corp level taxation.
d. Problems – picking a charity, inability to track funds after they are
donated, s’holder disagreement  S’holders could do this with dividends, but
double taxation problem (Corp tax AND dividend tax) & other issues

II. Business Organization Structures
A. Defining characteristics of a CORPORATION:
1. Limited Liability – extent of loss is the purchase price paid for their shares. Individual
CANNOT be personally liable for the debts of the corporation.
a. Generally, creditors cannot pierce the corporate veil, the debts of the corp
must be satisfied by the corp’s assets.
b. Often, requiring formalities to form to reward corps with LL
c. Exceptions to LL –
i. Piercing the corp veil
ii. 102b(6) – the AOI may include a provision that makes s’holders
personally liable.
102(b)(6) – personal liability for debts of the corp on its stockholders or
members to a specified extent and upon specified conditions; otherwise, the
stockholders or members of a corp shall not be personally liable for the
payment of the corp’s debts except as they may be liable by reason of their
own conduct or acts.
2. Perpetual Existence- legal status of the corp is unaffected by the death, withdrawal, or
insolvency of a s’holder.
a. Gives certainty to investors, supports long-term K’s
b. Exception – AOI may contain provision limiting the duration of the corp
102(b)(5) A provision limiting the duration of the corporation's existence to a
specified date; otherwise, the corporation shall have perpetual existence;
3. Free Transferability- ownership interest in the corp are represented by shares that are
transferable.
a. Exception 202 - Management can restrict FT
4. Centralized Management- s’holders delegate responsibility and authority to run the
business to the BoD and Officers
a. Barbarians handout – it is easy to spend $ when its not yours. Consequence of
CM when s’holders have a weak check on mgmt’s control
b. Benefits – allows s’holders to participate in the business when they don’t have
the time or expertise.
5. Taxation
a. Double Level - taxes at corporate level and individual level
b. Single Level- only taxed at personal level (for partnerships)
1. 2 owners in a Partnership and Corp. Each earns $100.
a. Corp must pay tax at 30%, leaving $70 between the 2 owners.
Each owner pays tax on their $35, leaving each with $25
b. Partnership doesn’t pay corp tax. Each owner gets $50, and is
taxed leaving each with $35.

Formalities req. to Investors enjoy limited Investors interests freely Management centralized? Perp. Single or
organize? liability? transferable? Existence? double
taxation?
Corp Yes. Yes. Liability limited to Yes. S'holder can sell shares Yes. S'holders elect Yes. Double – this is
amount of investment. without seeking directors, directors the main
Must file proper permission. Facilitates appoint managers. 141 & negative about
paperwork with Exception #1, 102(b) trading on secondary 142. This is attractive b/c: Corps
proper info in you can give s'holders market. Makes the
proper state entity. more liability through investment more enticing. - S'holders can make
cert. of incorp. money in an industry they
Exception: We can restrict know nothing about
Exception #2, Piercing FT of shares. Often seen in - You can run one business
the corporate veil closely held corps. (e.g. and invest in another.
particular person you don't (tanning salon/lotion)
want to do business with) - Allows diversification of
s'holders investments?
[General] None, only need No, unlimited liability. No. Need consent of other No. Every partner is a No. Taxed at
P'ship intent and partners. manager. investor/indiv.
agreement. You can If the assets are Ex- Partner Level
2 or form a partnership depleted and creditors UPA 301(1) dies, then
more by accident. are still wanting, they Exceptions – authority, p’ship dies. Pro.
persons can go after partners. notification (ex- A and B
engaged Substance over realestate partners and
in biz as form. Con. agree to only work in
co- Norman. B buys home in
owners Tulsa. B had no authority
and A had no notification)
Can be changed by K
yes yes No. Look to Art of Incorp or yes May qualify for
Close s’holder agreement single tax if
Corp Practical restrictions on FT, there is only an
bc so few shares had to find investor level
people to buy tax
LLC Yes Yes Look to Art of Incorp Need consent of other Trend to Taxed at
members before you can yes investor/indiv.
Allow to become a member to level
K for vote. 18-702(b)(1).
what
they De-CM all members
want. participate
Member Managed. 18-305

LP Yes General Partner- ULL GP – no transferability Yes- GP runs day to day. no Taxed at
Limited Partner- LL LP- yes, but may be LP may vote or suggest to investor/indiv.
problems trading GP, anything more they level
may lose their LL
LLP Yes Yes Look to partnership Look to partnership No Taxed at
Very agreement agreement investor level,
new no entity-level

III. Problems
* for the following questions assume the AOI are the same as the MBCA.
A. Peg is the Chairperson on the Board and CEO of Pangea Corp. Pangea wants to acquire Tiny Co.
Peg calls a special meeting of the board for the next day. The notice of the special meeting
specifies the date, time, and place of the meeting.
1. Valid notice? No, special meetings require 2 days notice
a. MBCA 8.22 (a) Unless the AOI or bylaws provide otherwise, regular meetings of
the BOD may be held without notice of the date, time, place or purpose of the
meeting. (b) . . . special meetings of the BOD must be preceded by at least 2
days notice of the date, time, and place of the meeting.
2. How can you cure invalid notice?
a. MBCA 8.23 (a) A director may waive any notice req’d . . . the waiver must be in
writing, signed by the director, and filed with the minutes or corporate records.
(b) A director’s attendance or participation in a meeting waives any req’d
notice to him of the meeting unless the director at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting
and does not thereafter vote or assent to action taken at the meeting.
3. Why is there no notice requirement for regular meetings?
a. Efficiency – regular meetings are informal and informative. Special meetings
address fundamental matters that should require notice.
B. Peg does not put the purpose of the special meeting she called to acquire Tiny in the notice.
1. Is the notice invalid for failure to state the purpose? No, notice for special meetings
need not state the purpose.
a. MBCA 8.22 (b) . . . The notice need not describe the purpose of the special
meeting unless req’d by the AOI or bylaws.
b. Policy  Confidentiality, when notice is sent it may pass through several hands.
C. Assuming valid notice, only 3 of the 9 board members come to the meeting. All 3 live in a
different area of the US.
1. Will a unanimous approval of a merger plan by those 3 directors constitute valid action
by the board?
a. MBCA 8.24 – Unless provided otherwise, a quorum of a BOD consists of: 1) a
majority of the fixed number of directors if the corp has a fixed board size; or 2)
a majority of the # of directors prescribed, or if no number is prescribed, the #
in office immediately before the meeting begins, if the corp has a variable-
range size board.
b. Default rule requires quorum to be the majority of the board. Here, there is
not a majority
c. MBCA 8.24(b) - Although we can change the # for quorum, the floor is 1/3 of
directors.
d. Some corp provide a fixed # of directors (i.e.- “the BOD shall consist of 9
directors”). The bylaws may provide for the BOD to set the number of directors
when the COI provides a fixed number.

2. Why would a co require a supermajority constitute quorum instead of a simple
majority?
a. Example – Board of 9; therefore quorum 5. Under 8.24(c) corporate action
requires 3 directors (3 is majority of 5 which is quorum). Many don’t like this
so the increased # is common. Many times, particular actions require a
supermajority of 2/3
3. What alternatives are there for having the directors travel to the HQ for a meeting?
a. MBCA 8.20(b) Unless the AOI provide otherwise, the BOD may permit the
directors to participate in a regular or special meeting by any means of
communication by which all directors participating may simultaneously hear
each other during the meeting.
b. Remember - yelling NO in an email is not the same as in person.
Videoconference is probably OK bc it provides audio and picture.
D. Based on their collective experience, the members of the Board formed the “Executive
Committee” which is comprise of 3 members of the Board, to address matters that arise
unexpectedly and require prompt attention
1. What notice requirement is there for their meeting?
a. 8.25(e)  The same rules apply to committees that are found in 8.20-8.24
2. Could the committee approve Peg’s merger?
a. 8.25(e)(2) A committee may not: (2) approve or propose to s’holders action
that this Act requires be approved by s’holders.
b. General rule – if there is a fundamental change, s’holder approval required.
c. Example – Butter Corp manu butter. Sam wants to invest in butter and is a
s’holder. Gun Co wants to transform butter making material into gun making
material. Merger between butter and gun co. This will fundamentally change
the way butter co does business, therefore all the s’holder vote required.
E. Delaware Code 141
1. (b) – a majority of the directors constitutes a quorum, unless the charter or bylaws
provide more. The bylaws may provide for less than majority, but the floor is not to be
less than 1/3. Unless when board member of 1, that member constitutes a quorum.
The vote of the majority at quorum constitutes action by the board (not in MBCA).
2. (c) – the BOD can create committees
3. (c)(2) – committees can exercise all powers of the board. BUT – limitations (1) they
cannot approve or adopt any action expressly req’d to be submitted to s’holders for
their vote; (2) they cannot adopt, amend, or appeal any bylaw.
4. (i) – directors don’t have to meet face to face, teleconference is okay so long as
everyone can hear eachother.
Policy  tone and irony need to be picked up on
5. (f) – exception to getting all directors together to discuss. Default rule, any action req’d
to be taken at a meeting can be taken without a meeting if all members consent in
writing
Policy  importance of meeting, but unanimous consent is efficient

IV. Agency
A. In what situations is the corporation liable for the actions of its agents?
B. Restatement 3d. Agency Terms:
1. Manifestation – written, spoken, or other conduct
2. Apparent Authority – P’s manifestation reasonably interpreted by the 3rd party
3. Actual Authority – P’s manifestation reasonably interpreted by the Agent that A may act
on P’s behalf
4. Inherent Authority – 1) The agent acted within the usual and ordinary scope of his
authority; 2) the third party reasonably believes that the agent is authorized to do the
action; 3) and the 3rd party has no notice that he is not so authorized
5. Subagent- a person appointed by an agent empowered to perform tasks of the
agent for the P. The agent agrees with the P to be primarily responsible for the
subagent’s actions.
7. Estoppel – reliance. There may be liability when a 3rd party changes their position bc of
a reasonable belief that the transaction was entered into by or for the P, if the P
intentionally or carelessly caused that belief, or knew of that belief, and didn’t take
reasonable steps to notify the 3rd party.
8. Ratification – after the fact authorization
C. Problems
1. Adam works for AllSports. He has a resolution that says he can act on behalf of AS to
execute a contract with Leaseco. He does. AS is offered a better space by Rentco.
a. Will AS be able to rescind the agreement with Leaseco?
i. Actual authority – bc he has the principals written manifestation.
Therefore P is liable for the K.
2. Same facts, except the board of AS does not give Adam a resolution or any other
indication that he is authorized to lease office space for the co. The BOD gives Leaseco a
copy of the resolution giving Adam authority. Adam executes the lease and AS wants to
rescind.
a. Apparent Authority bc written manifestation reasonably interpreted. There is
no actual authority because there is no manifestation that Adam knows of.
3. Same facts as 1, except BOD gives no resolution to Adam or Leasco. Adam is CEO and
executes the lease. AS wants to rescind.
a. Inherent Authority – 1) this is the type of thing a CEO is empowered to do; 2)
reasonable that someone at the officer can rent space, if someone can, then
the CEO can; 3) no notice.
4. Same facts as 1, except resolution gives Adam power to delegate authority. Ben is
Adam’s secretary, Leaseco sent over a lease bc Adam told them to, Ben receives it and
Adam tells him to execute it on his behalf. AS wants to rescind.
a. Subagent or Coagent? Need more facts.
b. Difference –
i. Coagent errors - hold the principal liable

ii. Subagent errors – the appointing agent is responsible to the agent for
the subagents conduct
5. Variation of 4, Adam is busy after a meeting and tells Ben to review the lease and
execute it if the terms were right. Ben executes the agreement in the presence of the
Board. A furnitureco rep saw this happen and subsequently Ben and the rep agree to
furniture deal. The furniture is delivered and AS seeks to rescind.
a. Apparent Authority – no, agreement executed in the presence of the Board,
although Adam was giving the direction, not the board. LOOK for a
manifestation reasonably interpreted by furnitureco to give authority.
6. Ben calls Furnitureco on his own. He says he is the CEO of AS and states that no one
from the co knows what he is doing but he wants to surprise his boss with the furniture.
The furniture is delivered. AS pays the monthly rental fee for 3 mo. wants to rescind.
a. Ratification 4.01 – after the fact authorization
b. Ben wasn’t authorized in the first place, but conduct of paying monthly fee is
ratification.
7. BOD authorizes Adam to hold a party for $10k. He contracts with Martha Stewart for
$250,00k. Rescind?
a. Actual Authority – up to $10k.
b. Apparent authority - none for Martha to see P’s manifestation.
c. Inherent Authority – he was CEO, 1) acted within the scope for his authority as
CEO, not unusual to enter K to cater, if someone can, the CEO can. 2) But
$250k is a lot. Need facts to see if this is reasonable. 3) No notice.
8. At a party BOD compliments Martha on her food but makes It clear that the Board
didn’t authorize $250k and it never would in the future. The next month a Xmas party is
hosted and board hives Adam 10k authority, he K’s with Martha for $500k. Rescind?
a. No Inherent Authority – 3) Board given notice
C. Other Considerations –
1. We may want to impose an obligation on a party to inquire further to ask questions.
a. Ex – CEO of Corp 2 guarantee’s Corp 1 loan. The bank should inquire into this
rather than Corp 2 being responsible to monitor its agent. Court held bank has
duty to investigate, if this is fulfilled then Corp 2 should have monitored its
agent better.

Duty of Care
I. General Overview
A. Dealing with the conduct of directors or officers bc they have a duty to act on behalf of the corp.
B. Internal Affairs Doctrine - fiduciary duties are matters internal to the corp therefore the law of
where the corp was organized is applied.
C. Derivative Action – claim that belongs to the corp and the s’holders bring it on behalf of the
corp.
D. 2 Types of Claims
1. Duty of General Oversight/Monitoring
2. Considered Action/Inaction – BJR
II. General Oversight Claim/Monitoring
When a Corp suffers loss bc of the Officers/BOD’s failure to monitor
A. TEST FROM CAREMARK: To show breach, P must show:
1. They knew or should have known violations of the law were occurring,
a. Francis- A reasonably prudent director should:
i. Obtain basic understanding of a corps business activities
ii. Regularly attend board meetings, review docs presented
iii. Review financial statements regularly
iv. Make a reasonably inquiry into any improper activities that come to
her attention.
2. They did not take good faith efforts top prevent or remedy the problem, AND
a. Good Faith - only sustained or systemic failure to oversee, such as a
utter failure to attempt to assure reasonable info and reporting
systems exist.
i. High standard, cannot expect directors to identify every
problem
ii. After implementing the system, consciously fail to monitor it.
3. The failure to oversee proximately caused the losses complained of
***Now discuss STONE v. RITTER!!!!
*Director Friendly test – in sum, directors have a duty to keep adequately informed of the
general activities of the co. Doesn’t require detailed inspection of day to day activities, but does
require general monitoring of corp affairs and policies
B. Other considerations
1. The size of the corp - Francis small corp means greater oversight and control
2. If the P fails to show a breach, then there is no director liability
3. Arguably, BJR doesn’t apply bc they never made a decision, but there may be overlap
depending on how you frame it. P should probably bring both claims.

III. Considered Action/Inaction **Ct’s presume good faith & informed**
A. Business Judgment Rule – Absent fraud, illegality, or self interest; the courts defer to the BOD
decision so long as it was informed and the board has a good faith belief that its action/inaction
was in the best interest of the Corp or S’holders (did BOD go thru process?)
1. Illegality – don’t defer to BOD’s illegal decisions bc they will be motivated to perform
efficient breaches (FedEx double parking)
2. Self dealing - go to duty of loyalty
3. Informed – we look to evidence as to whether BOD has acted in deliberate and
knowledgeable way in identifying and exploring alternatives
a. Van Gorkom Factors. Gross Negligence Standard for liability
4. Policy  courts looking to defer to judgment of the BOD because they are in the best
position to make business decisions.
a. 141(a) – s’holders can vote out BOD if they don’t like their decisions
B. BJR - STEPS
1. Fraud or Illegality – if yes, not BJR deference; if no, move head
2. If self interest – move to duty of loyalty.
3. Were BOD a) informed and b) acting in good faith?
Informed
a. Standard for liability gross negligence – if decision informed, BJR protects.
i. P must prove BOD was uninformed to the level of gross negligence.
They cannot just be negligently uninformed, they must be reckless in
their lack of being informed.
b. To determine this look to whether they conducted a reasonable investigation
c. Factors to consider – courts look to process not substance bc they are not
equipped to decide whether ot not the decision was a good one.
i. Availability of documents – time to review
A. Notice requirements don’t require explanation of purpose of
meeting. You can comply with statute and still violate
fiduciary duty.
ii. Length and # of meetings
iii. Q&A
iv. Degree of negotiations
v. Market Test
vi. 3d Party expert
vii. 141(e) – BOD can rely, in good faith, on officers employees
committees, or other people so long as they are talking about matters
in their professional competence. These people must be selected with
reasonable care.
Good faith – Did directors have GF belief that their action was in the best interest of the
corp? Must be at least rationale.
a. Absence of good faith by
i. Actual intent to do harm

ii. Conscious disregard for a known duty
*Gross Neg cannot show absence of GF, does establish uninformed
4. If P shows grossly negligent in being uninformed or lack of good faith –
Burden may shift back to BOD to show -
a. They disclosed all material facts and got informed s’holder approval (§144ish)
A. Do we care if uninformed if the s’holders approve?
b. Under Del law, D has a defense if he can demonstrate that the transaction was
entirely fair to the corp and its s’holders. (similar to entire fairness)
i. Fair Price – substance
A. If fair price to do we care if they were informed? SHH’s won’t
approve if it isn’t fair… absent fraud (hiding information)
ii. Fair Dealing – process (time, structure, approvals, disclosed to
directors). Not going meet this.
C. Cases
1. Wrigley – Chicago Cubs Corp’s inaction of putting lights on the field for night games
a. Held – not fraudulent, illegal, or a conflict of interest. Evidence that the BOD
was informed bc even if lights increase attendance there are other costs such
as maintenance and installation. Gross neg standard for informed was not
violated.
2. Miller v. ATT – ATT didn’t make DNC pay 1.5 million owed.
a. Held – could be violation of statute, therefore illegal campaign contributions
and BJR doesn’t protect.
i. Discuss illegal bc illegal or illegal bc inherently wrong. (FedEx)
3. Van Gorkom – Sold company within a week for $55/share when the market value is
$38/share. Application of the BJR rule  they were grossly neg in failure to be
informed:
a. Availability of documents – no time to review, no docs at meeting, board relied
on presentation of agreement by VanGorkem who never read it
i. 141(e) – BOD can rely in good faith on others so long as it is within
their professional competence
ii. Here, reliance was unreasonable and Q&A would have revealed his
lack of info.
b. Length and # of meetings – 1 meeting, 2 hours – too short
c. Q & A – none, if they had they would know VanG never read the agreement
d. Market Test – look to amount other co’s sold for
e. Negotiations – none
f. Expert – none
 grossly negligent met.
g. After this case 102(b)(7) was adopted – Cert of Incorp can limit the personal
liability of a director to the corp or its s’holders – this is limiting Duty of Care
liability. BUT - cannot eliminate liability for breach of a directors’ duty of
loyalty.

i. Needs s’holder approval.
4. Disney – Hired Ovitz as President under a 5 year K. After a year he was fired for bad fit,
no fault termination. Under his K, if he was fired for cause he didn’t receive
compensation. Now he received $131 mill compensation. Application of BJR 
a. P fails to show grossly uninformed standard.
i. Meetings – 2 with documents, term sheet showing salary and bonus
ii. Market Test – knew how much he was paid before at previous job,
and what past Pres made
iii. Negotiations – Ovitz wanted to be paid upfront, this was against
Disney policy so they made a compromise

Duty of Loyalty
I. General Overview
A. Focusing on the legal obligations of directors, officers, and s’holders when:
1. Corp’s K’s with interested Directors
2. Their compensation for services to the corp
3. Their ability to take advantage of corporate opportunities
DOL - ANALYSIS
Did the P meet his burden by taking us out of the BJR by showing a BOD or Officer was engaged in self-dealing or
self interest? ** LOOK FOR MAJORITY BENEFITTING TO DETRIMENT OF MINORITY
II. Was there a self-dealing K or Transaction?

A. If yes - Apply §144 test: IF P takes us OUTSIDE BJR, BURDEN IS ON DEFENDANT
1. Del 144(a)– A K or transaction between a corporation and one or more of its
directors/officers or an entity of which the directors/officers have a strong interest is
not void bc of conflict of interest if –
(1) Director discloses material facts of his interest to the board, and a majority
of the disinterested directors in good faith authorize the transaction
a. Maj of all disinterested directors, not just maj present. (If there is only
1 then okay)
b. “material facts” – info that would have altered the decision process
c. Stautory Interpretation – Authorized or Ratified?
1. Says authorized and (3) is ratified so this is what they meant
and we don’t want BOD to question a director’s K after the
fact to place blame.
2. Some allow ratification – consider 4 treatments of ratification
(2) Director discloses material fact of his interest to the s’holders and the
s’holders in good faith authorize the transaction, OR
a. Doesn’t matter if dis/interested.
b. Note – when there is disclosure of all the terms of the agreement, the
s’holder has the obligation to learn of the tax effects.
c. Cookies – when maj SHH is interested director they cannot vote in
GF, so look to majority of minority s’holders for approval. §144(a)(2)
1. Statutory interpretation – if they wanted to include
disinterested s’holders they could have
(3) the K is fair to the corp  not a point, fairness is a range; burden on BOD
a. **Can be fair before the fact (authorizes) or after the fact (ratified)

b. You can have an unfair transaction that is approved via (1) or (2)
Note the
difference btwn c. S’holder ratification of interested director transactions? – 4 possible
after the fact effects. Delaware has NEVER done #4
ratification and
i. It acts as a complete defense breach of DOL
giving approval
before. Feel free ii. Ratification shifts test from one of fairness to waste (is the
to tell her that option so large and disproportionate that it is a waste of the
her man sucks
before she goes
corp assets?)
on a date. iii. Ratification shifts BOP that there was unfairness to P
*preferred test; problem of fairness being a range
iv. Ratification doesn’t matter at all.
B. If No, apply BJR bc no breach of DOL
C. Cookies v. Lakes Warehouse - Herring minority s’holder at cookies, he also owned auto parts
store and Lakes Warehouse. He contracted with Cookies to help their distribution and he
increased their sales. Herring eventually became majority s’holder and he replaced 4 out of 5
board members (via 141k); he replaced all directors through the remaining director via 223.
Herring has several K: extended distributorship agreement btwn Cookies and Herring; created
taco sauce that he received royalty on; new ware house agreement; consulting agreement in lieu
of salary.
1. Apply BJR?
a. No, Herring was acting in self-interest and the court will not give automatic
deference.
b. This shifts burden to Herring to show one of 3 exceptions from 144(a).
i. Held (3) and (2) arguably met.
A. BOD knew Herrig owned the distributing corps
B. Herring was the majority s’holder under (2) – when this
occurs, the burden shifts to P to show it is unfair.
iii. Fairness (3) may taken into account special skills. Herring had special
distributing skills (Lebron gets paid more than Cleveland bc of special
skills). Warehouse agreement not in excess of market rate. Royalty
agreement not unfair bc his recipe.
A. Fairness a range.
B. May require more disclosure outside of a related party
transaction (difference btwn selling car to your mom and
stranger)
c. CL requires honesty, good faith, and fairness in (1) –(3). Del does not.
i. Note – Herring is the majority of s’holders “entitled to vote” under the
statute. If GF applies, he probably can’t vote.
III. Was there a Self-Dealing Parent /Subsidiary Transaction?
A. If yes, Entire Fairness Test – when Parent has received a benefit to the exclusion and at
the expense of the subsidiary.
1. Sub must show that the Parent is benefiting to their detriment.

2 Then burden shifts  Parent must to prove that its transaction with the
subsidiary was objectively fair to corp.
a. How? 144 analysis
b. If Parent doesn’t meet burden – inquiry stops and D liable for breach
of DOL
3. If Parent meets burden then in some juris P must show unfair; some juris P
loses
B. If no, apply BJR bc no breach of DOL
C. Cases
1. Case v. NYC RR – Mahoning owns rail lines, Central (M’s majority s’holder) has
the trains leases the lines. M’s BOD approved M and C consolidated tax return
(normally M would pay in while C would have losses on the year and pay
nothing). Now M doesn’t have to pay in their normal $3.8million, so they pay C
$3.5million for the agreement. Minority S’holders of M sued
a. Does BJR apply? No, this is self dealing
b. Parent show Fairness?
i. 144 - No disclosure or approval from BOD or S’holders under
(1) or (2).
ii. (3) Fair? Does the parent benefit to the detriment of the
subsidiary?
A. Not here, Parent gains $300k instead of paying
$3.8million.
1. Note, problem of + and – comparison. One
gets 7million and the other 1 cent.
B. Consider bargaining power – M needed C to lower
taxes, but C had could have done this with another
Co. C had more bargaining power and get more $
2. Sinclair Oil Corp v. Levien – Sinclair (parent) owns 97% of Sevin. Sinven BOD is
all Sinclair people. Sinclair caused Sinven to declare dividends, including
dividends n excess of earnings. Sinven this prevented Sinven’s development.
a. BJR? Self Dealing? no
i. No, dividends were given pro rata to every s’holder; parents
just got more. They received nothing to the exclusion of
minority s’holders.
ii. Sinclair had no obligation to give any opportunities it had to
Siven.
iii. But - Sinven also had a breach of K claim – K required Sinven
to send oil to Sinclair and they were to pay upon receipt.
Sinclair fails to pay on time and Sinven is injured for their loss
of (time value of money)
A. This IS a parent benefiting to the detriment of
minority s’holders

B. This finding shifts the burden to Sinclair to show its
actions were fair. Which they couldn’t do
IV. Was there an issue with Board Member Compensation?
A. Potential conflicts of interest will arise when the BOD compensates directors or officers for their
services.
B. Del Statutes-
1. 122(5) – BOD can appoint officers/agents and determine their pay
2. 122(15) – BOD can pay pensions, retirement benefits, stock options, compensation
plans ect, for any officer, director or employee
3. 211(c) – If there is an absence of a s’holder meeting for 13mo, any s’holder can go to ct
and a s’holder meeting will be ordered.
4. 141(h) - BOD sets compensation for directors
C. Types of Claims
1. Directors paying Directors – self interest and apply 144a
2. Directors paying others/officers – BJR bc no self interest
3. Claim for waste  can fit under either 1 or 2
D. If there is self-dealing in compensation - Del 122 gives BOD authority to pay, as long as it is
consistent with their fiduciary duties, and the BJR gives them great deference when a decision to
do so was absent fraud, illegality, self-interest, and done in good faith
1. 144(a) – note (3) Courts don’t want to determine fairness of compensation and will
defer to board unless excessive compensation or unreasonable waste
a. If D can show any of §144(1) – (3) then burden shifts to P to establish waste
1. Traditional Waste Rule – Corp cannot give away its assets without
Waste is NOT
protected by BJR.
consideration because this is illegal (unless the charter gives the board
It is a separate the power to do so)
claim that P’s a. Easily avoidable, Corp can usually get consideration.
may use but –
HIGHLY unlikely b. Ex– widow of deceased director paid benefits by corp. illegal
that s’holders bc no consideration given. Therefore BJR doesn’t apply.
would approve a
Consultation or non-compete fixes this
transaction that
allows waste. 2. Modern Waste Trend – consideration for gratuitous payments can be
for past services performed. Trend toward reasonableness
of waste.
i. Policy  retention and attraction of talent
3. Compensation Suitable (Modern Application) –
i. If P shows compensation is not suitable then burden shifts to
D to show compensation fair.
A. Note – Del doesn’t like “reasonable compensation”
so they use “suitability”
B. Fairness consideration – compensation must be in
proportion to executive’s ability, services, time
devote, responsibilities, profits and all other relevant
factors.

D. Golden Parachutes -
1. Protect executives in the event of a takeover of the corp. Commonly 3x salary
2. Requirements
a. Change of control in the hands of someone new, and
b. Something terrible happens to the officer (i.e. - fired, office moved far away)
3. Policy  helps induce executives to stay with the company in the face of a takeover.
Reduces chances executive will engage in harmful tactics to prevent takeover.
4. Problems – can be too much $ that it promotes takeover so they can collect.
E. If no, BJR applies bc no DOL violation
V. Is there Self-Dealing in Stock Options?
A. The right to purchase company stock at a specified price (strike price), typically these cannot be
exercised until after the passage of time (vesting period), but must be exercised within a
specified period of time (term of option).
1. Valuable because it gives incentives to the indiv to work hard to increase the value of
the stock so that they can purchase at strike price and gain instant equity
2. Different from buying it now, and then price later increasing because you don’t have to
tie up capital. If the price goes down, if you had owned you would lose money and
option allows you to wait until the price raises again.
B. Del 157b – gives authority to BOD to create and distribute stock options (absent fraud)
B. If yes, 144(a) when interested BOD grants itself options
1. If 144(a) satisfied, burden shifts to P to show - Unfairness or Waste (both hard to prove)
D. Stock Option Requirements –
1. Plan must contain conditions (vesting period), or circumstances designed to ensure the
corporation gets what it seeks AND NOT BE WASTE (totally unreasonable to anyone,
high std.).
2. **NO LONGER GOOD LAW** Del. moved away from reasonableness standard. Beard v.
Elster. There must be a reasonable relationship between the value of the benefits
passing to the corp and the value of the options granted
E. S’holder ratification of interested director transactions? – 4 approaches Del. Cts can/have used
VI. Was a Corporate Opportunity wrongfully taken?

A. When managers 1) take a business opportunity for themselves that belonged to the corporation;
or 2) engage in business that compete with the corporation
B. START - How to determine if a Corp Opp?
1. Was the opp discovered in the official or individual capacity of the officer?
a. Easy example – CEO offered at the lake on 4th of July
b. Harder example – Bill Gates at a bar. May take into account 3d party
expectations that Bill Gates = Microsoft all the time
2. Position of the person discovering the offer
a. Director or janitor? Full time or Part Time?
b. The farther down the chain the less it looks like Corp Opp.
3. Was the opportunity in the line of business of the corp?

a. Ex – Golf balls co, are clubs in the same line of business? Squishy area
4. Was the opportunity essential to the corp’s existence?
a. Ex - 2 brothers in vitamin business. One brother cures cancer, this is not
essential to the vitamin business.
b. Some say this is too high of a standard and the test should be for desirability of
opportunity. Problem is that bar too low, most opps desirable, especially the
ones worthy of lawsuit
c. Is there an existing plan in place? Problem – plan to do what? All business
plans are to make $, too easy to meet.
5. Resources used to develop the opportunity
a. If individual uses corp resources it may be a violation of DOL. Look to hard
assets (equipment, cash, facilities) v. soft assets (info, work time). Usually hard
assets more dispositive.
6. Del 122(17) – can limit what is defined as corp opp in COI
C. IF not a Corp Opportunity then we don’t care, the directors can pursue it.
D. IF it IS a Corp Opportunity the director may still be able to pursue it if –
1. The Corp is financially unable to pursue the opportunity
a. Cts apply this narrowly bc it creates disincentives directors from searching for
money so the corp can pursue an opportunity.
2. Quasi 144 – disclosure and rejection of corporate opportunity by disinterested directors
or s’holders
a. Ct like 144 type analysis but the actual statute only applies to K btwn Director
and Corp
3. Is there a provision in the COI that renounces the interest or expectancy of a corp opp or
categories of business activities? If yes, may be okay. 122(17).

Accounting
I. Accounting Overview
A. Financial statements are Very important because third parties rely on them to determine the
value of the corp. Accounting isn’t black and white; the statements are prone to manipulation
and alteration in order to make the corp look better.
1. Balance Sheet
a. Assets = Liabilities + Owners Equity (ALOE)
i. Must always remain equal.
b. Balance sheet is “as of a moment in time”
2. Income Statement
a. Reflects how much money the corp has made, their financial performance.
b. Issued as “over a period of time”
c. Doesn’t follow the cash
i. Ex – carpenter builds dec in Dec; billed in Jan; pay in Feb.
3. Statement of Cash Flows
a. Evaluated over a period of time.
b. Follows the cash, shows when collected, unlike an income statement
c. Cash flow impt bc without cash you won’t be able to meet obligations.
B. Off Balance Sheet Debt-
1. Debt is often disguised, all the good stuff is explained in the notes.
2. Increasing debt over time could be a bad sign. It will be harder to get loans
3. Because of Enron, people want greater disclosure of off balance sheet arrangements

Corporate Finance
I. Financing a Corporation
A. How? By issuing different types of securities: debt, common stock, preferred stock
1. Common Stock - MUST be issued in order to have s’holders to elect the board. It is
residual.
a. 102(a)(4) – COI must include the authorized # of share that corp is authorized
to issue. These are different from shares sold to the public called shares
outstanding.
b. Par Value must be set in COI - this is the floor that the stock can be sold at so
set it low
2. Capital Appreciation – buy low, sell high
Voting Dividends Capital Callable Dissolution

Appreciation Priority
Common Stock Voting rights- 1st Residual claimants. Yes. If corp Not generally Residual rights to
102(a)(4) -elect Dir. (216) Whether & what to appreciates in callable assets remaining
-amend charter (242) pay is discretionary value, S’holder after dissolution
-merge (251) – 3rd realize on this – 3rd
Payment Priority -sell Assets (271)
3rd -dissolve (275)
Preferred Stock 2nd - COI gives full, Fixed but not req’d No, but May be able to sell 2nd.
102(a)(4) med, or none But – (k may specify if not possibly their stock back to
this can be changed paid they get convertible to the corp bu there is
by amendment cumulative common stock usually a premium to
(242b). dividends or voting for a fee pay
Payment Priority rights). – 2nd
2nd
Debt 3rd - no , but may Req’d and specified No, may be Yes, usually 1st
122(13) create a vote or in loan agmt convertible if stipulated in K to be
prohibition of certain - 1st corp sets it up ab
Payment Priority 1st actions (spending $ that way to
on man boobs) satisfy debt
B. Reasons why to prefer one type of security over another

1. Stock is better
a. No risk of bankruptcy – dividends are not req’d to be paid when the corp cant
afford it (unlike interest on debt)
i. Corp managers value is within that corp, often not transferrable
knowledge if the company dies

b. Removes handcuffs on mgmt spending
2. Debt is better
a. Stock dividends are taxed at the s’holder and corp level (2x). Interest payable
on debt is tax deductable
b. Debt can act as a handcuff to limit management ability to throw money away
bc they must pay interest. But if they are funded by stock, BOD may throw
money away and not pay dividends (Barbarians).
c. Debt can serve as a signal – issuing debt to show confidence in the stock (trying
to avoid idea that talk is fluff). Wouldn’t sell stock that you thought was
increasing tomorrow.
d. Debt allows leverage
i. Ex Non-leverage – need to raise 100 for investment that will increase
10%. Round up 10 people to contribute 10 each. Everyone becomes a
s’holder and the investment returns 10%. All 10 made 10% on their
investment.
ii. Ex Leverage – 2 guys each give 10. Bank gives 80 at 5% interest. We
have 100 and make 10% return at 110. Pay back bank their 80 +
interest of 4 (5% x 80). Each s’holder makes 13, which is 30% return
on a 10% investment
II. Opportunism by Holders of Financial Assets
A. Ways S’holders appropriate wealth from debtholders
1. Increasing the riskiness of the corp
a. S’holder use debt holder’s money to gamble on a higher return for themselves.
If they win, good. If they lose, it is limited to their investment, while debt
holders lose everything.
Like b. A(1000) = L(750) + OE(250)
s’holders
i. High Risk Investment with 50/50 chance of turning $1000 into
going to
Vegas, they $2,200 or Zero
either lose A. Success – A(2,200) = L(750) + OE(1450)
$1 or win
B. Failure – A(0) = L(0) + OE(0)
1mil –
worth the ii. Expected return (add OE from success & failure and divide by 2)
risk A. Debtor’s could get 750 or 0 – their ER = 375
B. S’holders ER = 725
2. Withdrawing funds from the corp
a. Paying dividends – leaves less money to pay debts
Legal
b. Having the BOD buy back shares Equivalents
i. Paying dividends and stock buy back are
economic equivalents, you should limit them both, otherwise
SHH’s will circumvent the other’s limitation.
B. Ways to protect against Corporate Opportunism by s’holders
1. Statutory protections – don’t really work
a. 170 – Directors may declare and pay dividends either 1) out of the surplus or

2) if no surplus, out of net profits.
i. Surplus = excess of the net assets (-) capital
ii. Net Assets = total assets (-) total liabilities (which is OE)
iii. Capital is aggregate par value.
A. This is par value x shares outstanding
iv. But bc par value is very low – capital is low – and surplus is high. This
allows $ to be paid from surplus, causing s’holders to appropriate
wealth from debt-holders.
e. Legal Capital System does not protect debt-holders bc there will always be a
surplus.
2. Fraudulent Conveyances Statutes – when money is fraudulently conveyed to the
S’holder disguised by a dividend
a. Usually statutes require scienter to be proven, which is very difficult. Thus,
ineffective
3. Contract – debtholders often protect themselves thru K with the corp.
a. Ex – Collins lends Cleveland money and he uses it for man boobs. Next time
Collins will contractually put limits on how the money can be spent.
b. Ex – 6 Flags Agreement (written by debtholders bc of statutory failures)
i. Restrict payments of dividends and stock buy back
ii. Restrict corp from incurring debt (fear of risky investments)
iii. Limit the ability to sell assets (fear of selling safe assets, like cereal co)
iv. When there is change of control the Corp must offer to buy back
debtholder’s debt at 101%. (Cereal becomes managed by Yatch
people)
v. If default, 60 days to cure, then acceleration
c. But – may be unforeseen gaps in a K
4. Fiduciary Duty – general rule that fiduciary duties owed to s’holders, debtholders
protect themselves thru K. When a corp becomes insolvent, then duty to debtholders
a. No zone of insolvency, bright line rule. Cannot look to interest of creditors and
s’holders at the same time.
c. Some may argue that as you approach insolvency you may consider creditors.

Forming the Corporation
I. Where to Organize
A. Delaware
1. 101 – any person, without regard to residence or domicile, can incorp in Del by filing a
COI. A corp can be organized to conduct any lawful business purpose
a. 131 – but you must keep a registered office in Del (doesn’t need to be the
principal place of business)
2. Benefit of responsive and friendly legislature
B. Consider size of the corp
1. Small business – usually organize where you operate bc you will remain in that state.
Otherwise corp is subject to 2 state’s taxes: where you organize, and where you operate
2. Large business – taxes are nominal for huge business like Exxon. Concern is for getting
the best law they can.
a. This creates competition among states to attract the big Co’s .
b. Race to the Bottom – Managers look for most permissive corp law so they can
do what they want without s’holder meddling
c. Race to the Top – s’holder’s don’t want to be exploited by managers
C. What law applies?
1. Internal Affairs Doctrine – issues internal to the corp are resolved by the juris in which
the corp is incorporated (ex – fid duties).
a. External claim, such as tort, would be the law of the location
2. Foreign Corps – usually pay fee to operate in the state.
II. How to Organize

A. §102 – must file COI with the Sec of State & pay a fee: and it SHALL CONTAIN
1. COI must contain a magic word (Incorporation, Corporation, Professional Corporation –
or their abbreviations)
a. Policy  third parties care whether or not they are dealing with a corp or
partnership bc corp has LL and can only go after assets of corp, not its people.
2. Address is req’d in order to locate corp for process
3. Nature of business purpose to be conducted
a. Del form already fills in “purpose of biz to engage in lawful conduct”
b. OK form is blank – problems arise when coffee store later sells books.
4. Must specify authorized shares of common and preferred stock. May also provide
interest rate for preferred stock.
a. Authorized shares – how many you are allowed to sell
b. Outstanding shares – how many that have been sold to the public
c. Treasury shares – shares repurchased by the corp
d. Probably don’t want to set interest rate, likely that it will change in the future

and no longer be competitive.
5. Name and addresses of incorporators
6. Name and addresses of directors until 1st s’holder meeting
B. §102(b) – it MAY also contain:
1. Any provision for mgmt of the business and conduct of the corp
3. Provision granting shh’s preemptive rights (prevents one becoming maj by issuing stock)
a. Existing SHH’shave the right to purchase as many SH’s to maintain ownership %
4. Provision requiring greater % of votes to approve corporate action
5. Provision limiting duration
6. Provision imposing personal liability for debt of corp to s’holders
7. Provision limiting personal liability of directors to SHH’s or Corp. for breach of duty
a. CAN’T ELIMINATE ALL LIABILITY**
III. Defective Formation

A. General – sometimes businesses try to become incorporated but fail to meet the statutory
obligations.
1. Issue – whether to sue the Corp or the SHH’s
B. 2 Types (individual will fight for these so they aren’t sued!) Corp liable not invidual
1. De Jure Corp - if there has been substantial compliance with the statute, then cts will
recognize the entity as a corp to all parties, including the state
2. De Facto Corp – there has been (1) colorable or apparent attempt (2) in GF to
incorporate and (3) there has been some exercise of corp powers, then the ct will
recognize as a corp to all parties except the state
C. 2 Rules (Make both arguments if approached with this type of question!)
1. Statute – one that acts for the corp w/o authorization (for a defective corp) can be held
liable for the resulting debts. D loses & is personally liable; similar to promoter liability
a. Policy  it is simple to organize and file out the appropriate paper work. The
penalty for failure is personal liability
2. Estoppel - one who deals with the corp as if it is validly organized cannot subsequently
challenge whether the corp was validly organizes; benefit of the bargain, SUCKA
a. Policy  if P knew they couldn’t go after the individual, but could after the fact
this would be windfall. P should have protected themselves by K (personal
guarantee)
D. 329 – cannot use a defective corp as a defense.
1. Issue as to whether a P can use this as a claim since it says “as a defense”
E. Cases
1. Thompson & Green v. Music City Lumber - Corp CEO signed K the day before the corp
formed. Both parties thought it had been formed. When CEO defaulted on the
promissory note, sued CEO for money under the theory that one who acts for a corp
without authorization will be liable
a. Held – Under Tenn. law and model act, no de factor corp can exist bc even
receiving COI is substantial compliance.

i. One who purports to act as corp without authority will be personally
and severally liable for corp debts and liabilities that result from such
actions.
2. Don Swann Sales Corp v. Echols – P K’d with D who thought the corp was in existence
when it was not. D argues that corp not in existence and cannot be held liable.
a. Held – estoppel doesn’t apply. One who purports to act on behalf of non-
existent corp can’t escape liability under estoppel. Can’t use defective corp as
defense/shield
3. Sulphur Export Corp v. Caribbean - Caribbean’s AOI required $1k capital in order to
begin. They began business before capital was there and K’d with P thru 3 officers.
a. Held - When a corp transacts business w/o req’d initial capital, all officers who
participated and didn’t dissent are j/s liable for debts arising out of the corp
i. Note – cts determine if the corp is adequately capitalized when
determining if the veil should be pierced. Should always keep a low
number. Reqmt is to protect creditors up to that #.
ii. No statute bc cts can create one to cover mom/pop to Exxon; a statute
couldn’t cover all of the possibilities; C/L is more flexible (case by case)
IV. Piercing the Corp Veil

A. General – Corporations hold LL. But there are times when s’holders should be personally liable.
1. Note – no publicly held corp has ever had their veil pierced
2. Rule – It must be established that the corp has a lack of independent existence; there
has been fraudulent, wrongful use of the corporate form; AND there is a causal
relationship to P’s loss.
B. Factors to Determine Whether to Pierce (C/T CF DC S C F IC SP)

1. Contract v. Tort issue
a. Cts more likely to pierce when tort claim. K’s can protect themselves by
personal guarantee, but you don’t have an opportunity to negotiate before you
are harmed by a tort
2. Corporate Formalities
a. Setting up BOD, keep minutes, have meetings – less likely to pierce
3. Domination/Control
a. When an individual has undue control over the corp it looks more like mere
alter ego of the person
b. Generally, not a determinative factor bc often Close Corp with few s’holders
welding lots of control
4. Siphoning
a. Drawing off substantial funds from the corp (for personal use) so that there is
inadequate funds to honor its obligations.
5. Comingling
a. Mixing personal funds with corp funds – vice/versa

i. Ex – paying mortgage with corp check
6. Fraud
a. When the corp is a sham to commit wrongs, piercing more likely.
7. Inadequate Capitalization
a. When the assets of the corp (not just cash, consider insurance) are insufficient
to pay future obligations.
b. Cts usually defer to legis if amt pre-set. If not, often use of experts.
c. Make the determination by looking at time of organization. Otherwise, a
business owner that was losing money would constantly have to pump $ in to
keep adequate cap
8. Subject of Pierce
a. Corp less likely to pierce when individual harmed bc we want to give individuals
more incentive to invest so shield them from liability (Except Pres/CEO might
be treated different than obscure s’holder). More likely to pierce if you pierce
one corp and reach another corp
C. PCV for Affiliated Corps
1. Cts more likely to pierce when the subsidiary is a mere instrumentality or alter-ego of
the parent. Plaintiff must show:
a. Parent and subsidiary operated as single economic entity, and LOOK AT (b)!
i. Adequate capitalization of subsidiary
ii. Solvency of subsidiary
iii. Parent and subsidiary have common directors/officers
iv. Corporate formalities observed with subsidiary
v. Parent siphoning from subsidiary
vi. Subsidiary a façade for parent.
b. Overall element of injustice or unfairness present (PCV factors)
D. Cases
1. PRES v. Michaelson - PRES and MPI formed p’ship for real estate investment. MPI’s sole
s’holder was Micahelson. Pship defaulted on a loan and MPI didn’t pay their portion so
PRES paid and then they go after Michaelson.
a. K v. Tort – K and they should have included personal guarantees
b. Wrong or Siphon? Pship paid dividends from leftovers after future liabilities to
MPI and PRES. It is okay for MPI to pass along $ to sole s’holder for personal
use when there is enough to cover obligations. NOT used as device of sham to
disguise wrongs or fraud
c. Held – no piercing. Failed to show that Michaelson used the corporate form to
disguise wrongs. Michaelson didn’t mislead PRES as to its financial condition,
he didn’t disguise anything. They should have protected themselves by K when
they had the chance
2. Kinney Shoe v. Polan - D formed 2 corps and obtained COI but didn’t elect officers,
issue stock, hold mtgs, or maintain separate accounts. The corps leased property from
the P, and didn’t pay rent. The P seeks to hold the individual D liable

a. K – lease and P should have know the D corp didn’t have any assests after lease
investigation.
b. NO corp formalities except COI issued, looks like alter ego
c. Commingling of assets bc corp had NO money
d. Inadequate capitalization – no assets, income, account; zero is inadequate
e. HELD – defendant abused the corporate form and veil should be pierced
3. Walkovsky v. Carlton – P injured by cab. Cab was owned by Corp, which owned 2 cabbs
total. But the owner had 10 of these corps. Each cab had minimum liability insurance
req’d by law.
a. Ct defers to state legislature re: minimum insurance determination (adq cap)
b. The cab co’s didn’t have an existence of their own, but this is different from
being a “dummy.” Not enough to be a part of a larger corp entity unless
wrongdoing occurred.
4. Fletcher v. Atex – Kodak is parent, Atex is subsidiary. P trying to PCV bc Atex assets
won’t cover the obligation. Cts look to see if Kodak and Atex are one entity or 2 – is
Atex alter ego of Kodak?
a. Corporate formalities observed with Atex (meetings, officers, taxes, minutes).
b. Not siphoning – Kodak controls Atex money and pays their obligations with it.
Kodak is holding the money for them, it is always available for Atex
c. Overlap of BOD – but what is good for Atex is good for Kodak.
d. Assignment of lease okay bc at FMV
e. Held - no PCV bc no fraud or alter ego
5. Bartle v. Home Owners Coop - D was cooperative of Vets formed to build low cost
homes for members. Subsidiary went bankrupt and trustee sought to hold members
liable.
a. No PCV - complied with formalities, K claim, no withdraw of funds from sub, no
fraud, misrepresentation or illegality.
V. Successor Liability and PRE-Formation K’s

A. Situations where we hold the successor liable for the obligations of its predecessor
B. Three Ways to become Successor –
1. Purchase Stock – Acquirer purchases stock of target corp to own target corp. They
remain 2 distinct entities
a. Liability if PCY???? because 2 separate entities
2. Merger (251) – Acquirer and Target merge so 2 become 1. S’holders of T lose their
interest and usually won’t approve w/o compensation.
a. §§251 and 261 - A gets all of T’s assets subject to their liabilities
3. Acquisition of Assets – purchase of all or substantially all of the assets in a corp while
leaving the target behind.
a. Acquirer only acquires assets and does not succeed to liabilities. EXCEPT -
i. Fraud – cannot buy assets for 1cent and leave liability
ii. Explicit/implicit assumptions of liabilities – why? When nonpayment

would hurt the acquier
A. Ex – mortgage – take prop but not mortgage bc if it isn’t paid
you lose property.
B. Ex – paying employees, if they are unpaid they won’t work
iii. De facto merger (“merger in fact”) – achieving end of merger w/o
formalities of 251 because merger requires Acq to take liability.
A. A gives T their stock for T’s assets. T has A’s
stock and dissolves, making distribution of A’s stock to
s’holders. Leaving A with T’s old s’holders having stock in A.
iv. Continuation of seller – purchaser of assets is simply continuing biz of
seller. Consider –
A. Same facilities, assets, products, officers, employees, name.
Look for whether acquirer knew he would be getting liabilities
and could negotiate accordingly
B. Policy  don’t want new corp’s created to escape liability
4. How would you advise your client if you didn’t want to look like a continuation of a
seller?
a. New name, new location, take less assets so seller has many buyers let a long
time pass. Prob can’t change product or business.
5. JF Anderson Lumber v. Meyers - Leekly had an insolvent corp. Before a creditor
received a judgment, he transferred assets to a new corp that was in the same biz, with
same s’holders. Paid FMV for assets.
a. Acquirer of corp assets does not become liable for debts/liabilities of the
predecessor unless one of 1-4 is present
i. Fraud? No, FMV paid
ii. No express/implied assumption
iii. No defacto merger bc 2 entities remain.
iv. Continuation of seller? Same business, same name, same owners; but
not all assets passed, substantial K’s left and not a continuation
b. Held – mere fact that purchasing corp is carrying on same biz as selling corp is
not sufficient to make the purchasing corp liable for debts of seller
VI. Promoter Liability
Under corporation law a PROMOTER is anyone who helps organize, finance or form a new corporation.
Promoters have a FIDUCIARY DUTY to the new corporation and are liable to the corporation if they
obtain secret or unjustified profits from their position.
They are PERSONALLY LIABLE to third parties for the financial commitments they make prior to the filing
of Articles of Incorporation unless they expressly state they are acting on the behalf of a corporation to
be formed.
A. Generally
1. All the parties know there is NO corp yet – Who is on the hook?

2. Promoters – those helping to incorporate the business
a. May engage in certain transactions prior to incorporation
b. May K with outsiders to obtain benefits for to-be-formed corp
3. Problems arise when determining whether the K’s can be enfoced by or against the corp
once it is formed; or whether promoters are individually liable.
B. K’s made by Promoters on Behalf of Corp
1. NO Agency – promoters cannot legally bind the corp bc the corp is not in existence to be
the principal.
2. Rule – corp is not liable for K of promoter bc they had no choice
a. EXCEPTIONS
i. If the corp expressly or impliedly adopted the K
A. Express – resolution by BOD
B. Implied – silent acquiescence; harder to prove
ii. Quasi-K liability (quantum meriut)
A. When a corp expressly disapproves for promoters K, they
cannot keep the benefits of it.
iii. Promoters are not liable on K’s in the name of the to-be-formed corp
when that is the intent of the contracting party.
3. The promoter may be liable when the corp never comes into existence, rejects to
perform K negotiated for, or ratifies the K but never performs or pays
a. UNLESS – the other party agreed to look to some other person or fund for
payment.
C. Cases
1. Kridelbaugh v. Aldrehn Theatres – D promoters engaged with P attny to form per-incop
services for D. The 3 promoters become directors and after incorp they hired P attny to
perform more legal services, promising to pay future and past due amts.
a. The conversation showed express ratification or adoption. But promoters were
not agents because there was no principal until incorporated.
2. Sherwood & Roberts v. Alexander – P offered to finance D’s land development if D paid
GF deposit to ensure payment of his services. D signed in the name of the to-be-
formed corp which both parties knew didn’t exist. P sued D individually
a. Rule – promoter may be held personally liable on a K negotiated for a
nonexistent corp UNELSS the other party agreed to look to some other person
for payment/funding
i. No exceptions met - P looked exclusively to the prospective corp for
payment
3. How Associates v. Boss – P presents K to D promoter, the signature line contains the
name of the Co, and the promoter strikes it and signs “Ed Boss, Agent for Corp to be
formed, which will be the obligor”
a. General rule that promoter signing for non-existent corp is personally liable
unless the intent is clearly expressed otherwise.

b. The ct used K rules for ambiguous “which will be the obligor” and they
construed against the drafter – holding that this is not clear intent to look
elsewhere for payment. Promoter liable.
4. Stewart Realty v. Keller - In K with P, defendant promoter expressly refused to be
named individually on the K. The corp was never formed.
a. P chose to K with the corp and not the promoter based on the signature
Voting
I. General
A. Voting is a way to resolve the conflict btwn BOD and S’holders
1. Voting can discipline directors who are doing a bad job b/c they can be voted out of
office (141k).
B. Problems with s’holder voting as discipline
1. Rational apathy – in large corps more likely that s’holders won’t vote bc the cost of
informing themselves is high, and of little benefit to their shares
2. Free-Rider – s’holders won’t act bc they can ride on the efforts of others
a. May cost more to a s’holder to contest the actions of the corp than would be of
benefit to their shares.
b. The law addresses this action by allowing expenses of winning derivative action
to be paid by corp.
3. Vote with your feet – cheaper to get out and sell shares than it is to fight.
C. General Rules
1. WHO gets to vote?
a. Del – common s’holders
i. Policy  bc they have the best incentives to increase corp
wealth since they benefit from capital appreciate and are residual
claimainants
b. §151 – Corp may issue different classes of stock with full, none, or limited
voting power (Preferred may have voting rights here)
c. §221 – corp may confer debtholders right to vote in their charter.
2. WHAT vote is req’d?
a. §216 – The election of Directors is a required vote, defaults to pluraility unless
otherwise stated in COI. Fundamental changes require majority of outstanding
shares (merger, sale of assets, amendment). **PROXY VOTING!**
i. Policy  voting expensive, BOD can deal with daily matters
b. “Majority of outstanding shares”
3. Power of Initiative – s’holders should not be able to initiate action; they should only
approve or disapprove.
a. Cindy 1) rabbit 2) cat 3) dog
Jan 1) cat 2) dog 3) rabbit
Marcia 1) dog 2) rabbit 3) cat

b. This allows Jan to tell Cindy we both like cats better than dogs so vote NO for
dogs. Eventually all 3 eliminated. Don’t want vote after vote.
4. WHEN must voting occur? Annual meeting req’d under Del 211
a. “Annual meeting” doesn’t mean that regular meeting must be held every 365
days. But must be within 18mo. (Hilton I); 13 months for DELAWARE §211(c)
i. Directors can control vote by delay, but not acceleration
D. Removing S’holder Vote - Hilton II
1. In response to a hostile takeover bid by P, D corp proposed a formation of 3
subsidiaries, each with staggered 3 yr terms,
a. This got around 141d – requirement for s’holder approval of staggering.
i. Couldn’t just stagger the parent board bc this req’d COI amendment,
which req’d BOD and s’holder approval and the s’holders want to
accept tender bc over market price.
b. Also got around s’holder vote bc need s’holder approval for sale of
substantially all the assets under 271 – unless sale to subsidiary
2. ITT’s actions consistent with statute – BUT are they consistent w/ fiduciary duties?
a. UNOCAL - When the BOD takes defensive actions, the ct must look to -
i. Whether BOD undertook 1) reasonable investigation and 2)
reasonably perceived threat. 3) Whether defensive actions were
proportional in response to the perceived threat
b. BLASIUS - If the primary purpose of the target’s action is to disenfranchise
s’holder and to eliminate s’holder vote, the ct may require a compelling
justification for their action
3. Application
a. Unocal – failed, BOD liable for breach of duty
i. Perceived threat? No price in adequacy or evidence that Hilton had
Note – this different policy then sitting board.
is an ex of ii. Reasonably perceived? More credence to the perception if it is by
applying
Unocal and
outside officers.
Blasius as iii. Proportionality? Cannot preclude Hilton’s success. This is like a
separate
cram down on s’holders bc they have no opp to vote. S’holders
tests
precluded from having a say
d. Blasius – failed, primary purpose was to disenfranchise and there was no
compelling justification.
i. Timing suspicious bc ITT’s subsidiary plan on night before vote.
S’holders don’t have a say on BOD bc staggered, ITT has no credible
justification for not seeking s’holder approval. Previously ITT sought
approval for split
E. Other Cases
1. Lacos - D Briskin wanted to create new class of stock with new rights. Threatened not to
support any subsequent transaction. D was s’holder and director

a. When determining whether an action is valid, must determine what capacity
the action was taken
i. S’holders have power to vote as they see fit, even if acting selfishly.
Directors owed duty of loyalty to the corp to act in its best interests.
2. Schrieber v. Carney – Di was 35% s’holer of Tx Int’l and had veto power over merger
btwn TI and Tx Air. D threatened bc they wanted to exercise their warrants before a
merger but they couldn’t afford it. TI loaned D the money to do so. BOD and
disinterested s’holders approved the loan. P argues this was illegal vote buying.
a. Actions of vote buying statutorily okay – Fid Duties?
i. Vote buying is lawful unless the purpose of the agreement is to
defraud or disenfranchise other s’holders
ii. Held – okay, no fraud and s’holders are free to act in own self interest
3. Note – looks like threat Briskin made. Difference is that in jet capital, s’holders benefit.
In Briskin he was only one to benefit.
Problem Set 3 – Voting Rules

1. What is the record date?
a. Date on which the corp determines who is entitle to notice of an approaching
s’holder meeting and who is eligible to vote at it. May also be used to determine
who you will pay dividends too.
2. What is the purpose of a record date?
a. An administrative necessity - to provide fixed moment in time to determine who
will be able to vote at the s’holder meeting by establishing who the s’holders are
b. HYPO – what if s’holder on record date, but you later transfer your vote to a
proxy? Still entitled to notice of meeting, payment of dividends . . .
3. Under the Delaware General Corporation Law, what, if anything, does one know
about the date on which a shareholder meeting will be held if the record date is
October 1?
a. 213 – the record date is 60 to 10 days before to the date of the meeting.
i. Could be from October 11 – November 30
b. Policy  To prevent the BOD from choosing a record date that has past so that
hostile acquirer cannot vote
4. If a shareholder delivers a revocable proxy to corporate management, how, if at
all, may that shareholder revoke the proxy?
a. Proxies are legally revocable at the will of the s’holder unless the recipient of the
proxy has some equitable interest that permits the proxy to be irrevocable
5. How to revoke?
i. By issuing a proxy card with a later date
ii. Show up at the meeting a vote

iii. Some proxy statements include written ballot that officers that do attend
the meeting will use to vote. Often BOD writes – “BOD recommends vote
For/Against #1-6”. If you return proxy without direction on how to vote,
BOD says they will vote how they want.
6. Would you expect that an owner of a small number of shares of a publicly held
corporation is a “shareholder of record”? Why or why not?
a. S’holder of Record is a person on the books of the corp as an owner of the
shares.
b. Most s’holders are not of record bc their shares are not registered in their name.
They are registered in the name of the investment bank or broker who are
s’holders of record. This helps save transaction costs. Called Street Ownership
i. Beneficial S’holder – the individual behind the s’holder of record.
Beneficial s’holder still enjoys all the benefits, but their name is not in the
books as a holder of record.
7. What is cumulative voting?
a. A system of voting for directors that is intended to give minority S’holders more
of a voice by allowing them to concentrate their votes in a limited # of nominees
b. Contrast with straight voting
i. Corp with 6 shares outstanding. 2 S’holders with 4 and 2 shares. S’holder
with 4 shares will always beat s’holder with 2 shares.
1. Note – not really one person, one vote – it is one vacancy = one
vote
ii. Ex – same as above but with cumulative
1. 4 s’holder can vote 5/5/2 and 2 s’holder can vote 5/1. Therefore
giving minority s’holder voice by being able to elect one directors
8. Why is it good? Why is it bad?
a. Good bc it gives minority s’holders a voice
b. Bad bc it fosters dissension and forces majorities to find ways around it
9. Is cumulative voting permissible in a corporation formed under Delaware law?
a. Defualt – no cumulative voting
b. 214 can include in CoI
10. If so, may such a corporation provide for cumulative voting in its by-laws?
a. Can put in CoI
11. With regard to a corporation with one class of stock and cumulative voting, how
many shares must a shareholder own (or direct the vote) to ensure the election of
one director if there are nine director positions to be filled and there are 100
shares outstanding?
a. # of shares reqd > number of shares voting/number of directors to be elected +1
b. 10 > 100/9+1
12. Same question as before, except that there are only four director positions to be
filled.
a. 21 (greater than 20)
13. Same question as before, except that there are only three director positions to be
filled.

a. 26 (greater than 25)
14. How may the effects of cumulative voting be minimized? Explain.
a. Stagger the BOD so that they are elected one at a time or decrease # up for vote
(See (c))
b. Adding a by-law authorizing the removal of directors by majority vote only
c. Reduce the # of directors – the smaller the board, the more shares are needed to
elect.
d. Use nonvoting stock or stock with limited voting rights
e. Removal without Cause – letting the minority get their guy in and then removing
him with a majority vote
15. Under the Delaware General Corporation Law, are shareholders generally
empowered to remove a director “for cause”? “without cause”? What constitutes
“cause”?
a. 141(k) - Directors can be removed with or without cause by a Majority of
s’holders entitled to vote – unless otherwise provided in the CoI
b. Cause – situation where breach of trust such as: conviction of a felony, insanity,
bankruptcy, organizing a competing company, harassment of corporate officers
i. Pretty narrow.
c. 225(c) – NEW – at one time, only s’holders could remove directors. Now
directors can remove directors but not by themselves (don’t want ganging up). If
director convicted felony, breach of duty, THEN upon application by corp via
directors or s’holders, then you can go to ct and they will remove the director.
16. If shareholders may remove directors, what is the vote generally required to do
so?
a. 141(k) - Majority
17. If a Delaware corporation has cumulative voting, may shareholders remove
directors? If so, in what situations may shareholders do so?
a. 141k – any director or the entire board may be removed with or without cause
by majority shares - except when cumulative voting, then you can only remove
without cause if the people voting against this removal would have enough to
elect him under cumulative voting or staggered board.
i. Otherwise, they would be elected by cumulative voting minority, and
would be subsequently removed without cause by the majority
18. If a Delaware corporation has a staggered (or classified) board, may shareholder
remove directors? Under what circumstances?
a. 141(k)(1) - If the BOD is staggered, the removal can only be for cause
19. If there is a mid-term vacancy on the board of directors of a Delaware corporation,
may that vacancy be filled in advance of the next annual meeting of shareholders?
If so, by what means may the vacancy be filled?
a. 142(e) - If vacancy occurs, it should be filled as the bylaws require. If they are
silent then it can be filled by the BOD
b. 223(c) - 10% of s’holders may go to ct to order new election if there are a lot of
vacancies

Proxy Contest
I. General
A. A proxy contest is a contest btwn 2 parties to solicit proxies.
B. 212(b) – Allows a party to appoint another party as fiduciary to vote shares
1. Proxies contest expensive. Must disclose info to millions of s’holders. A dissatisfied
s’holder will have to pay for the material sent out. The Corp’s proxy can defer the cost
to the corp.
2. Commonly coupled with big changes bc even if dissatisfied s’holder wins, their shares
won’t increase by much. Better to gain more shares with transaction
3. Expires after 3 yrs.
C. Proxy Contest Expenses
1. Director Expenses - directors have the right to make reasonable expenditures from the
corporate treasury for the purpose of persuading s’holders .
a. 112 (new) – the corp may include in its bylways a provision that allows a
dissatisfied s’holders proxy information to be included in the packet the BOD
sends out to all the s’holders. Cole-Dodd preempts this… corp is REQUIRED to
include dissatisfied SHH’s proxy info in the packet
i. Unsuccessful attempt to stop future Fed Law that may require this
b. § 113 (new) – The bylaws may provide for the reimbursement of
expenses incurred by a s’holder in soliciting proxies for director election:
i. Conditioning eligibility based on proportion of people

nominated seeking reimbursement; limitations based on
proportion of votes in favor of the person nominated by the
s’holder, or on the amount spent by the corp; or any other
lawful condition
2. Contesting S’holder Expenses – s’holders have the right to reimburse successful

contestants for their reasonable expenses incurred in a policy contest
a. Policy  incentivize defense of legitimate policy (not the same if used to keep
someone in power as in… Rosenfeld v. Fairchild)
b. Not waste – works to overcome free-rider problem
D. Director Vacancies and Supervision of Elections
1. In corporate elections, the incumbent board has the advantage of being able to advance
or postpone the election date or issue new shares at the last minute.
2. Date Rule - When a meeting date is specified in the corp bylaws for the election of
directors, even if the bylaws permit this to be changed, directors are not allowed to
change the date for a fraudulent or inequitable purpose (primarily concerned with
earlier dates, delaying typically simply delays the inevitable) Schnell
a Ex – Moving the date up for s’holder meeting so they can’t get proxies together
to throw out directors. Violation of Blasius. Schnell v. Chris-Craft
2. JOINT  Unocal and Blasius (MM v. Liquid Audio)

a. When the primary purpose (Blasius) of the defensive action (Unocal) is to
impede the effective exercise of s’holder franchise, then both tests are
implicated.
i. BOD must demo a compelling justification for the action
ii. Then – the ct will consider reasonableness of the perceived threat
and proportionality of the BOD’s response
A. Some argue you don’t even need Blasius bc if you can show
compelling justification, you should be able to show
reasonableness
B. Good lawyers can think of a valid primary purpose
b. MM – P launched proxy contest to get 2 members on D’s BOD and to expand
the board to 9. In response, D postponed the s’holder meeting and expanded
the BOD to 7 with their own members. P sues, challenging D’s appoint of
directors in response to their offer to add more directors and take over.
i. Held – Joint Unocal and Blaisus test should be used when primary
purpose of defensive action was to disenfranchise s’holders. Here, no
compelling justification was shown and P loses.

CLOSE CORPORATIONS
I. General
A. Problems arise in CC because no separation of ownership and control. There are few s’holders
with competing views, often alliances among the members affecting the minority (Survivor)
B. Problematic Characteristics of CC
1. Few s’holders
2. High overlap btwn s’holders and managers
3. S’holders have little investment liquidity
4. Value of ownership has no observable market price
5. Deadlocks bc small number and often req’d higher than majority vote
C. DEL Statutes
1. §341 – a corp that is not a CC must opt-into CC subchapter (341-356)
2. §342 – Definition of CC
(a) A CC is a corp organized under this chapter whose COI contains provisions
req’d by §102 and –
(1) All of a close corps issued stock must be represented by certificates
and can’t be held by more than 30 people
(2) All the issued stock of all classes must be subject to one or more of the
transfer restrictions from §202, AND
(3) The corp won’t make any offering that would be considered “a public
offering”
3. §202 – Restrictions on transfer of securities (CC requires 1!)
(a) Written restrictions must be conspicuous on the certificate, otherwise
ineffective unless S’holder has notice
(b) Restrictions may be imposed by charter or bylaws or agreement. Not
retroactive to securities issued, unless by vote
(c) A restriction is permitted if it –
(1) Gives the corp/s’holder/designated person right of first refusal
(2) Obligates corp to purchase securities (“Put right”)
(3) Requires consent by corp before transfer (NOT unreas’bly withheld)
(5) Prohibits unreas transferability to only designated persons or classes
4. §343 – Formation of CC: In accordance with §§ 101, 102, and 103 – except:
(1) Charter shall have heading stating name and that it is a CC, and
(2) Charter shall contain provisions req’d by §342
II. Restrictions on Transfer of Shares

A. S’holders in CC usually want to exercise control over transfer of shares because they want to
determine the identity of those they work with on a daily basis.
B. Rule – the corp may restrict the right to transfer if it is 1) reasonable and 2) the stockholder
acquired the stock with requisite notice of the restriction.
1. Biltmore – S’holder died, BOD voted to exercise their right of first refusal to buy back his

stock. The executor of the estate declined to sell.
a. Right of first refusal is permissible, but must be limited to reasonable
amount of time.
b. No price reasonableness req’mt in §202. Cts tend to leave alone.
2. Rafe v. Hindin – restriction prevented s’holder in a CC from selling his shares unless
the other SHH approved. If the SHH declined, the seller was left frozen and couldn’t sell
to anyone.
a. Unreasonable restraint bc s’holders approval could be unreasonably w/held
b. Cts read “reasonableness” requirement into consent. But Note – the legis
included reasonableness in 202(c)(5)- so they knew how to draft it in.
3. §349 - When a restriction is held invalid, the corp has option for 30 days after jdmt to
acquire at agreed upon price. If no price agreed, the ct will determine (hire appraiser)
III. Special Agreements Allocating Authority

A. The CC may not like CC default rules, so they try to allocate authority to assure themselves an
effective rule in the execution of corporate policy. So they take extra measures that were
already available to them through DGCL.
1. Cumulative Voting - 214
a. Giving the minority the power to elect a director if they meet the formula
2. Different Classes of Stock – 151
a. Class A & B; giving different voting rights to each
3. Voting Agreements & Trusts– 218 (no secret trusts; can be secret agreements)
4. Unanimous or Super-majority voting reqmts –
a. 216 - Default rule that directors elected by plurality, this can be changed
b. 102(b)(4) – allows corp to require a vote of a larger portion of stock to be req’d
for corp action in COI or bylaws
B. Voting Agreements
1. 218(c) – 2 or more s’holder may agree in writing how to exercise their vote according to
agreement.
2. S’holder agreements are valid when they are for the benefit of the corp, there is no
fraud, and it does not violate public policy
a. Ringling Bros – Ringling and Haley agree to vote together to beat North. After a
deadlock, arbitratror decides. Haley breached arbitrator’s decision.
i. Arbitrator was acting in best interest of corp.
ii. Remedy – don’t count Haley’s breached votes. Otherwise giving
Ringling irrevocable proxy (like voting trust). (Note- R loses under this
remedy)
C. Voting Trust
1. Formal transfer of voting shares usually for a designated period from the owners to
trustees
a. Gives trustees legal title to the share and a right to vote in the manner agreed

on. The s’holder become beneficial owner and are issued transferable trust
certificate for their shares. This carries rights to distributions.
b. Can be difficult to foresee what votes will arise in 5 yrs. Instructions usually
says “vote to the max value of the shares” or “whatever is in the best interest
of the s’holder.” Decision made by majority of trustees.
c. MBCA 7.30 – limits 10 yrs
2. 218(a) - VT allowed, but must be in writing, filed with Sec of State (no secrets),
3. Ct will look to substance over form to determine if there is a VT
a. Abercombie v. Davis – transferred share certificates, indorsed in blank, to
“Agents.” 2 agents refused to abide by voting agreement. Suit arose claiming
agmt invalid.
i. Because the “agents” held title to the shares (opposed to Ringling and
Haley agreeing how to vote) it was a VT. Use of “agent” instead of
“trustee” doesn’t matter.
ii. Agreement invalid bc they didn’t file with Sec of State – NO secret VT!
D. Agreements Limiting Director Discretion
1. Business affairs of a corp are managed by the BOD (141a). This section deals with
s’holder action to limit that power.
2. A S’holder agreement may not limit the Board’s management discretion
a. EXCEPT –
i. When the agreement’s infringement is slight and negligible
ii. When directors are sole s’holders
3. Statutes – Director Discretion
a. 350 – COI of CC may allow the s’holders to run the corp
b. 351 – BUT, if s’holders exercise 350, then they will be subject to DOL and DOC.
4. Cases
a. McQuade - 3 s’holders agreed to vote share to keep each other as directors.
McQuade was not re-elected and dropped from officer position.
i. The agreement was unlawful bc it controlled/sterilized the directors
by preventing them from exercising jdmt.
ii. *Note – McQuade now frozen out. No dividends bc determined by
BOD and can’t use cap appreciation bc no one wants to by CC shares
and he holds no power.
iii. McQuade could have protected himself by changing voting rules to
require unanimity for removal. Problems arise if there was someone
better to replace him. For him not to vote for that person may be a
violation of his fid duties.
b. Clark v. Dodge – agmt btwn sole s’holders and directors. (case I coverd in class)
i. This was valid bc it was tied to performance (faithful, efficient,
competent). This leaves BOD discretion.
ii. All s’holders involved, agreement didn’t hurt a minority (McQuade)
5. Powers:

a. S’holder make $ by –
i. Cap Appreciation
ii. Dividends (3rd in line to get dividends) (easy to show surplus tho)
b. Directors make $ by (chosen by s’holders 216)
i. Salary – determined by themselves
ii. Stock options – determined by themselves (157)
c. Officers make $ by (chosen by directors 142)
i. Salary – determined by directors (141a)
ii. Bonuses – determined by directors
iii. Stock options – determined by directors
E. Maj S’holder’s Fiduciary Duty (ONLY IN CLOSE CORPS!!!) SHH’s generally do not owe duties!
1. CC are often treated like pships bc they look similar. A Corp’s SHH’s owe no duty to
each other, but a partner owes fiduciary duties to other partners. CC is somewhere in
between.
2. Majority SHH in CC cannot remove a minority from mgmt position and denying a
return on investment. Unless they can show legit biz purpose. (avoiding freeze outs)
Framework: To contes this…
Trying to a. Burden Minority s’holder must show they were exploited
protect Maj b. Then burden shifts to Majority to show legitimate business purpose
& Min in a
Close corp
c. If legit biz purpose, Min then shows there was a less damaging alternative
 policy of wanting s’holders to have discretion and give deference
to maj rule, but need to protect this from abuse.
3. Absent corp policy to the contrary, there is no obligation for a director to offer shares
to the corp first or SHH equally. A selling SHH can sell all his shares to another SHH w/o
seeking approval from other SHH’s. Zidell
a. Not corp opportunity bc no expectation or plan to repurchase.
b. These problems can be prevented by restricting transferability via 202 OR by
giving SHH’s preemptive rights under §102(b)(3) or entering into a K
4. Cases
a. Wilkes – 4 CC SHH’s. Wilkes was phased out by other 3 SHH’s bc of the
personal desire and NOT bad behavior. Wilkes had continued to carry on his
duties for the corp. Relationship with president fell apart. (Nursing home case)
i. Held – CC SHH’s owe duty of GF and loyalty. They can freeze out a
minority if there is a legitimate business purpose. None here. Breach.
b. Zidell – sold all his stock to another CC SHH who is now in control. New
minority sues. Because now minority has less power than the new majority.
i. Held – there is no violation and no duty of CC SHH to give opp to
corp or all SHH’s, unless contained in COI (preemptive right) or K
F. Director Delegation of Mgmt Authority
1. SHH’s may seek to secure their employment and income by K with the corp for a
designated position at a stipulated salary. But we don’t want directors sterilizing
themselves by delegating too much power to others.

a. 141(a) – business affairs of the corp shall be managed by or under the director
of the board.
2. The BOD can delegate authority to act, but it cannot give all discretion and delegate
every function to an agent, retaining only ministerial functions.
3. The corp cannot enter into a K that is contrary to its bylaws.
a. Pioneer - Bylaws allow 1 yr tenure. Nelson K for 2 years. Fired before end of 2
yr term. He still recovered after he was fired for breach of K damages.
i. 142b - officers shall hold terms in accordance with what is specified in
the bylaws and agreed by the BOD
b. Rank – 1) statute  2) AOI  3) bylaws
IV. Resolution of Disputes and Deadlocks
A. CC more likely to have irresolvable conflicts bc of close tie in shares. More likely than when
Exxon has tons of SHH’s; Mom & Pop CC MUST HAVE LESS THAN 30 SHH’s (ties more likely)
B. Means of resolution
1. Arbitration - better than litigation bc:
a. Less time consuming (discovery, ct oversight, trial delays)
b. Less expensive
c. Confidential – corps don’t want dirty laundry out making value go down
d. Uncertainty of litigation can have neg consequences – customer may not want
to renew K or enter into long-term K
e. Allows creative decisions – litigation is zero sum game (win some or lose all)
2. Receivers (bomb), Custodians (gun), & Provisional Directors (pepper spray)
a. Receivers – most powerful, can take over and may be able to liquidate the biz.
Ct will appoint in smallest number of circumstances (bomb)
b. Custodians – same, but can never liquidate. Ct more willing to appoint (gun)
c. Provisional Directors - hold no role unless directors are deadlocked, then they
will step in and vote. Ct most likely to use them (pepper spray) **ONLY FOR CC
d. §226 – upon application of a SHH, the ct may appoint a custodian or receiver if
the corp is insolvent when
(1) SHH’s so divided they have failed to elect new directors (must be 50/50)
(2) Directors are so divided the Corp. is suffering.
e. §352 – (opt in) in addition to §226, you can elect a receiver or custodian when
(1) When pursuant to 351 the SHH’s manage the business and they are
divided and the corp has suffered irreparable injury.
(2) the petitioning SHH has the right to dissolution under §355
(b) Or the ct can elect a provisional directors
f. §353 - appointment of a provisional director if directors are divided (only CC’s)
(only in the event of a tie; no other power besides casting a vote)
V. Dissolution
A. Dissolution is another standard approach for resolving disputes in CC. (extreme resolution)
B. §275 – Corp Dissolution

(a) Requires approval by maj BOD
(b) Must be approved by maj outstanding s’holders
(c) S’holders can initiate with unanimous vote; This require NO BoD SUPPORT!!!
(different from other fundamental changes that bod must intiate)
C. 355 Stockholder’s Option to Dissolve a CC (must opt-in to CC subchapter)
(a) the COI of any CC can include a provision granting any SHH the right to dissolve the
CC at will, or on occurrence of specified event. Can be added to charter if later adopted
by all SHH’s of outstanding stock entitled to vote
(b) Charter may be amended to include (a) if certain requirements are met
*empowering the minority to dissolve disciplines and checks the majority.
D. Cases
1. A minority SHH may petition for dissolution of the corp when the maj SHH or directors
have breached their fid duty they owe the minority that they are now disqualified from
exercising the exclusive discretion and dissolution power given to them by statute.
a. Nelkin v. HJR Realty - 3 corp tenants operate and occupy building for lower
rent. 2 moved out or gave up their benefits. They then sought to dissolve
when the maj refused to charge themselves increased rent in order to profit.
i. Dissolution not proper. LOOK to what the parties would have
originally agreed to, reasonably expected beforehand. Here,
minorities actions changed, not maj.
b. Meisleman – factors relevant for whether minority SHH entitled to
dissolution
i. Minority SHH must show their reasonable expectations
ii. That they were frustrated
iii. The frustration was without fault of the P and beyond his control
iv. Under all the circumstances, P is entitled to some form of equitable
relief.
E. COASE Theorem
1. Party with the right gets a bigger piece of the pie
2. Manu pollutes costing farmer 10. Filter costs 5.
a. If the right to pollute is granted to the Manu the farmer will pay the manu over
$5 to stop and manu profits after buying the filter
b. If farmer has right to no pollution then Manu will pay the farmer to let him
keep polluting. If Farmer won’t accept les than 5 the manu might as well buy
the filter
3. Application to dissolution – it matters who has the right to dissolve. Corp that has to
liquidate won’t get FMV. If corp has 100 assets that will sell for 80 under dissolution -
a. If minority of 10% has the right to dissolution – they will make 8 and maj will
make 72. Thus the minority can demand $15 from the maj for them not to
exercise their right to dissolve and the maj will give it to them bc they will be
better off this way at 85. Minority gets bigger slice of pie

Corp Acquisitions, Takeovers, and Control Transactions
I. General
A. Three methods of obtaining control
1. Merger (251) – acquisition of target (friendly)
a. BOD approval – 251(b)
b. S’holder approval – 251(c) maj of outstanding shares (no show = no)
2. Sale of assets (271) – A purchases T’s assets (friendly)
a. BOD and s’holder approval
3. Purchase of stock – bypasses need for BOD approval (friendly or hostile)
B. Hostile v. Friendly – “hostile” means that the tender offer is made directly to the s’holders,
circumventing the BOD. “Friendly” means the transaction has the support of the target BOD
C. Approval of BOD and SHH’s as protection – SHH’s must approve the sale of all or substantially all
of the corps assets or its merger.
1. This allows SHH to rely on BOD expertise. Guards against mgmt making self-interested
transactions bc SHH vote checks.
a. Note – this protects against BOD self-interest of bad ideas, not against BOD
self-interest of good ideas. If good merger comes along but is rejected by BOD,
SHH never see it. This is why hostile tender offers are important. BOD may
take defensive actions to guard against Hostile transactions
II. Hostile Transactions
A. Defensive mechanisms – when a hostile tender offer is made to SHH’s, the BOD can do certain
things to block the bid.
1. These actions can be motivated by 1) legit concern over the quality of the transaction
(BJR) or 2) the self-interest of the BOD to maintain their positions after a takeover
(Fairness)
2. Poison Pill – makes the corp “indigestible” by the acquirer
a. 2 Step Process (TWO STEP PROCESS FOR HOSTILE TAKEOVER NOT PP)
i. 1 – Tender offer contingent on gaining MAJ of SH’s (51%)
A. Usually A won’t want to do all the hard work to improve
value of target corp and get the rewards of 49% of s’holders.
So usually see 2
ii. 2 – Merger (MAJ forces a merger)
A. After hostile takeover, then merger. Before couldn’t get bc
lack of approval – BOD can be removed without cause and
vacancies filled by maj of s’holders; also MAJ SHH vote
b. Preclusive problems – to solve, the Poison Pill can be amended or disengaged
by the BOD. Redeemable rights are given to s’holder, then it isn’t preclusive
and in violation of Unocal. Cannot leave pill in place for too long
c. See Shark Repellent chart

B. Early Doctrine – Cheff v. Mathes:
1. Primary Purpose Test- defensive actions of BOD allowed if mgmt had GF belief after
reasonable investigation that led them to perceive a threat to corp policy. Cannot act
solely to perpetuate themselves in office.
C. Unocal – new test (MM v. Liquid Audio) p.627
1. If the BOD defends against hostile acquisition, the BOD bears the burden to establish:
a. They made a reasonable investigation and had GF belief that there was
reasonably perceived threat to significant corp policy, corp or SHH’s
b. Defensive action was proportional to the threat (range of reasonableness)
c. Not preclusive of the hostile acquirer’s proposal; NOR coercive on SHH’s
2. HELD – BOD’s action proper when they reasonably determined that Mesa’s offer was
threat to corp and defensive action proportional. It was coercieve, inadequate price,
and front loaded with back end junk bonds. The BOD’s self-tender was proportional,
only occurred if step 1 succeeded.
APPLICATION:
1. P must show that D is defending
a. If shown, move to 2
b. If not shown, MTD
2. BOD must show that they conducted reasonable investigation and possessed GF
reasonably perceived threat to corp, corp policy or s’holders AND
a. Reasonable investigation – presentations, outside opinions, length of meeting,
informed, docs before
b. Threats that may be defeneded against:
i. Inadequacy of price offered – just bc above FMV doesn’t mean its
sufficient, they must offer control premium. Should be based on
independent advice
ii. Nature and timing of offer – if control premium offered when stock
temporarily low, this is not fair price
iii. Questions of illegality
iv. Risk of non-consummation
v. Impact on constituencies other than s’holders
vi. Quality of securities being offered in return – junk bonds?
vii. Negative characteristics of the A
viii. Coercive threat – s’holders would rather sell now for cash at step 1
than get junk bonds later at step 2
c. Indep Board – cts give more deference to determination of threat bc
independent’s ass isn’t on the line
3. If purpose of defensive action is disenfranchisement of s’holder vote, Blasius requires
that there is a compelling justification
a. If purpose is not to disenfranchise then move to 4
4. BOD must show that the defensive mechanism was proportional to the threat (not
preclusive or coercive and within range of reasonableness)

a. Target board does not have unbridled discretion to defeat any perceived threat
by any means available. Cannot be preclusive or coercive
i. Preclusive – cannot preclude A from proceeding w/ transaction. If
another avenue of gaining control is available, defensive action is not
preclusive (Paramount)
ii. Coercive – cannot be cram down of mgmt alternative transactions
b. Within range of reasonableness – if proportional, it is within range of
reasonableness
5. If target board passes, deference to BOD under BJR
6. If target board fails, target BOD may now prove fairness
III. Entire Fairness Test (Primarily concerning “Freeze-out” Mergers)

A. We impose obligation on majority shareholders to treat minority shareholders fairly. This
includes fair dealing (process) and fair price.
1. §144 reflects this by requiring disclosure and approval by independent BOD or good
faith approval by majority of s’holders. That is process.
B. “Freeze Out” Mergers –
1. After successful hostile takeover, the A will be the majority s’holder. Concern for
“freezing out” minority s’holders by converting the target into its wholly-owned sub;
this is accomplished by the A forming a sub and then forcing the target to merge into
the sub. Consistent with statute, but does it violate fiduciary duties? Entire Fairness test
a. OK under §141(k) – a maj of s’holders can vote to remove directors. The
controlling s’holder votes out old directors, more in their own, then propose
merger. The merger will be approved by new BOD and new maj s’holders.
2. BUT – does this violated fid duties? Test of entire fairness
C. TEST – WHEN? Controlling s’holder, freeze out transaction, or insiders on both sides engaging in
self-dealing – then that party bears the burden of showing the transaction met EF.
1. Fair Dealing/Process –
a. Timing – A has access to info about T so they will time the acquisition in a way
that it will benefit at s’holder expense
b. Was the transaction unfairly intiated
c. Negotiation – A makes the offer so they make the terms. Cts like pushback so
the T gets something out of the deal. We like arms-length dealing
d. Disclosure to directors – was self-interest disclosed
d. Director approval – was it informed
e. Disclosure to s’holders – no threats
f. S’holder approval
2. Fair price
a. BOD must demonstrate that the price offered was the highest value reasonably
available under the circumstances. Consider:
i. Look to other similar transactions in the industry
ii. Expert Opinions

iii. Asset values, market values, future prospects, earnings
b. Note – meeting in middle btwn counter and offer doesn’t equal fair price
3. Kahn - When an independent committee or informed approval by majority of minority
s’holders, then burden shifts back to minority- IF
a. Committee of s’holders had real bargaining power that it could exercise at
arms-length basis, and
b. Controlling s’holder couldn’t dictate terms of the merger to the committee or
s’holder
D. CASES
1. Weinberger v. UOP
a. Facts: Signal acq’d 50.5% stock of UOP; Signal put several directors on UOP
board; Signal/UOP directors began looking at feasibility of cashing out the
minority shh’s, without telling the disinterested directors, and made low-ball
offer to the UOP board; this was approved
b. Held: NOT fair dealing
i. This is NOT arms-length because there is disparity in information; the
target disinterested dir’s and shh’s are uninformed.
ii. Evidence of fair dealing can be shown by having independent
committee evaluate the transaction and price; negotiate with acquirer
at arms length; wasn’t done here.
iii. Invest. banker evaluated, but gave blank price.
iv. Since the board was interested, BJR doesn’t apply here
2. Kahn v. Lynch Communications
a. Alcatel owned 40% of Lyncy and has 5/11 BOD seats. Lynch has a bylaw
provision that requires an 80% supermajority for business combinations. Lynch
Alcatel’s subsidiary. Eventually, Alcatel just decided to acquire Lynch. In order
to do this they formed an independent committee to review the deal. Alcatel
made offers and the committee rejected them as too low. They raised their
offer price and eventually threatened a hostile takeover at lower price if not
accepted. The committee and disinterested members of Lynch BOD approved,
and minority s’holders sued as unfair and breach of fiduciary duty by
controlling s’holder
i. Rule – entire fairness test.
A. Alcatel was controlling s’holder and they have the maj has
the burden of showing the transaction has fair price and
dealing.
B. Although they had independent committee there was no
evidence that the negotiation was at arms-length bc they
threatened to proceed with the hostile take over.

S’holder Suits
I. General
A. S’holders that disagree with the corps management have 4 options
1. Seek to persuade mgmt to modify its policies.
2. Seek to persuade a sufficient number of other s’holders to elect new directors
3. Sell their shares
4. Litigation – if the management has violated their obligations
B. Reasons why current director discipline inadequate
1. DOC – doesn’t require enough of directors (BJR very deferential)
2. DOL – provides discipline, but directors can utilize other processes to get around
(independent committees, informed s’holder approval)
3. Voting – discipline, but s’holders apathetic (free-rider, etc.)
4. CC – K may ensure directors are behaving in accordance with s’holder interest, not with
large corp (K’s more effective as the Corp gets smaller)
5. M&A – extremely expensive, need enough mismanagment to justify. Target board may
also resist. Has to make business sense for Acquirer to do M&A; huge mismanagement
C. Types of S’holder Suits
1. Direct – mgmt violates statute, K, or CL duty owed to s’holders. Direct harm
a. P doesn’t like - bc SHH pays expenses
b. P likes – recover paid directly to s’holder and no procedural hoops
c. Ex – Del 220 gives SHH access to corp records, if SHH denied it’s a direct harm;
ALSO, M&A cases because SHH’s suffer from not getting $$ for their shares;
preemptive rights as well, because it’s individual to the SHH
2 Derivative – mgmt’s wrongdoing has directly injured the corp and thereby harmed
s’holders indirectly (USUALLY A VIOLATION OF A FIDUCIARY DUTY)
a. D prefers bc of procedural hoops are req’d (demand or futility)
b. P likes bc attny fees awarded to successful P (overcome free-rider)
c. Ex – BOD violate duty to corp, s’holders suffer indirect harm
II. Demand – Derivative Suit
A. Policy for demand –
1. BOD better equipped to make decisions as whether a suit should occur.
2. May also want to require demand to avoid litigation altogether.
3. Avoidance of non-meritorious suits
B. DEMAND rule - s’holder desiring to bring a derivative suit must make a demand on the BOD
before suing; Universal demand rule  always have to make demand NO MATTER WHAT (rare)
1. If the BOD says yes, then go to ct (they wont’). If they say NO then see 4
2. If s’holder didn’t make demand then it may be excused as futile, see 3
3. Futility if - P must plead with particularity facts giving reason to doubt that
a. Majority of directors are disinterested or independent, OR
i. Martha – very hard to show lack of independence/interest. Need

something more than friendship. Must be willing to put yourself at
risk for that person or longtime family + friend ties.
ii. No discovery, but use 220 to uncover books
b. The challenged transaction was otherwise the product of a valid exercise of BJ
4. Demand wrongly refused – (**can’t claim self-interest if demand was made**)
a. Ct looks to BJ of refusal and deference given unless there is lack of GF or BOD
not informed. (not looking at BJ of BOD’s acts the s’holder is suing over)
b. Note – P is preclued from asserting BOD interested when they make a demand.
Therefore, they will just go w/o making it bc it is easier to make futility
argument than wrongly refused argument.
5. IF demand excused bc of futility, BOD may win on MTD if
a. BOD has independent committee (141(c)(2) powers) and the committee has 1)
Independence 2) GF and 3) made a reasonable investigation - AND
b. Ct exercises its own independent BJ and decides the committee’s MTD is
granted.
i. Policy  Cts usually defer to BJ, but here ct is in best position to make
jdmt as to whether suit should proceed. Not issue of true workings of
biz
C. Marx – claim that BOD paid executives too much, failure to plead with particularity, rather use of
conclusory statements. Claim that BOD paid themselves too much had reason to doubt directors
were disinterested thus this demand excused.
1. Note – normally burden on D to show self interest and fairness, here P must show. This
is bc directors decide how they are paid, keeping the burden with P limits frivolous suits.
D. Statutes
1. 141(a) – BOD has power to manage affairs of corp
2. 141(c) - BOD may form a committee and delegate decision to it, exceptions
a. Not troubled by small committees bc 144(a)(1) suggests okay – can approve
interested party transaction by uninterested BOD so long as there is quorum
III. Demand on S’holders
A. Generally – some juris require that prior demand also be made on s’holders
1. Oklahoma requires s’holder demand, Del does not.
2. EXCEPT – if P alleges fraud, demand on s’holders is not necessary. Mayers v. Adams.
a. Policy  fraud can’t be approved over the objection of a single s’holder.
S’holder approval can cure things like breach of DOL or DOC – but not fraud.
IV. Contemporaneous Ownership Required
A. General Rule – must be a s’holder on record in order to bring suit. This means you must have
owned stock at the time of the wrongdoing. Courtland Manor v. Leeds.
1. 220 – must be s’holder of record
B. Examples
1. 2 s’holders and Corp worth 20. A tells B they are siphoning money from the corp and A
takes home 10. B is pissed and sells shares to W. This transaction is at 50% the current
value (5).

a. B can’t sue A bc no longer has shares. They could have sued before they sold.
b. W can’t sue A bc not an owner at the time of harm. If he would recover he
would have a windfall
2. Same facts except A siphons money secretly. B sells to W for the full 10 bc he thinks the
corp is worth 20.
a. B cannot sue A bc no longer a s’holder
b. W also has no CoA bc not an owner at the time of harm
i. We don’t like this. Some courts would allow W to have standing to sue
A when the wrongs were unknown at the time of the transaction.
3. Same facts, A siphons and when they sell their stock for more than it is worth.
a. Rule – regardless of knowledge, the buyer who acquires the shares from the
wrongdoer has no CoA
i. Note – they have other remedies besides derivative CoA on behalf of
the corp
V. Judicial Review of Derivative Settlements
A. Issues potentially arise in settlement of derivative suits. At ct’s discretion.
1. This court look at when reviewing settlement agreements
a. probable validity of the claims
b. apparent difficulties in enforcing the claims through courts
c. collectability of any judgment recovered…
2. Issue arises centering around information disparity

a. atty’s have tons of information and are looking to make money; while
corp is looking to not pay out any more, so they settle, but allow atty’s
to collect more of the pie.
b. Two ways to structure atty’s take from settlement (bonding)
1. % of award (easy for court)
2. billable hours (huge pain for the court)
hrs = hours x rate x kicker (for risky suits)
c. Cts are likely to just accept the settlement to get it off their docket and
because they are bred to encourage settlement… This leaves SHH’s
potentially vulnerable
VI. Direct or Derivative?
A. Direct
1. A right that is individual to the s’holder - right via K, Statute (ie- 220), Charter; M&A
2. Del 102 – COI may include –
a. (b)(3) –provisions granting holders of stock the preemptive right to buy pro-
rata portion of any new issuance of shares
i. Ex – 3 s’holders Swank, Coates, Cleveland. Swank/Coates can issue 2
more shares each to themselves as maj sholders. CL can prevent

against – whenever shares are issue, CL has right to buy prorata
portion of any new issuance of shares. Now CL won’t get screwed
ii. This is right granted by charter, when it is breached, the s’holder has
direct claim bc they are directly harmed by it.
B. Derivative
1. Usually violation of fid duty
C. Sometimes gray area determining difference from Direct/Derivative

1. Grimes – You can have a claim that fits both criteria - Look to nature of the wrong
alleged and the relief that is sought
a. Claim for abdication – P sought declaration that agreement invalid. Could be
breach of fid duties bc BOD failed to abdicate for s’holders
b. More likely to have non-meritorious strike suits when $ is at stake. If we are
less skeptical when no money is at stake, we won’t impose procedural hurdles
for derivative suits and P can proceed in direct claim.
c. *Cts more likely to allow direct claim when P is only injunctive relief (no $)
2. Barth v. Barth
a. Each claim can be framed as breach of fid duties
i. Excessive Salaries claim - Can be framed as breach of fid duties bc
obligation to corp not to take more than he gives. Prob DOL claim
ii. Using Corp employees for personal business – DOL
iii. Lowered dividend payments - BOD decides payment of dividends.
Easily framed as breach of fid duty
iv. Corp funds used as personal investment – DOL
b. Gen Rule – s’holders of corp may not maintain a claim in their own names to
redress an injury to the corp even if the value of their stock is impaired as a
result of the injury.
i. Exception – CC. CC may be treated differently – overlap btwn s’holders
and mgmt; less reason to fear derivative and direct may be allowed.
ii. Some juris – if minority has derivative, may allow direct bc they don’t
want the $ wont on a derivative to go back to the corp, and thus the
wrongdoing maj s’holder.
iii. Some juris will give money directly to s’holders instead of giving back
to corp
iv. Here, consider obligation to creditors – if money leaves corp then they
will be shortchanged
c. If direct claim – derivative formalities won’t be used (demand, Zapata
committee, corp pays way, D may pay P’s attny fees to prevent free rider
problem, no counter claims)
VII. Indemnification
A. Indemnification is thought to be one of the legs on the three-legged stool that provides
protection for directors: “Three-legged stool”  Insurance, indemnificaiton, or limiting in COI

1. §102(b)(7) – Corp can include provision in charter eliminating liability of directors in
certain cases
2. Insurance §145(g) – Corp can pay for insurance that protects directors
3. Indemnification §145 - Way of helping attract talent so they know they wont be thrown
under the bus as a result of a SHH suit
B. DGCL §145 – Indemnification of Officers, Directors, Employees and Agents; Insurance

1. (a) NON-DERIVATIVE – corp may indemnify officer, director, e’ees, or agents for jdmts,
fines, or settlements that are actually and reasonably incurred in connection with a suit
or proceeding, if the action was in GF belief to be in the best interest of the corp (fact
that they lost doesn’t mean no gf)
a. Expenses (including attorney’s fees), judgments (you can lose), fines and
amounts paid in settlement
b. Consistency Principle – Charter cannot be inconsistent with statute so you can’t
take GF req’mt out of this provision in charter (Waltuch v. Conti)
c. Termination of the action (by judgment, order, settlement, conviction) doesn’t
give presumption of bad faith and no reasonable belief of best interests of corp
d. Same application for criminal action
2. (b) DERIVATIVE – corp may indemnify officers, directors, e’ees, or agents in derivative
actions for attny’s fees actually and reasonably incurred in connection with
defense/settlement if he acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corp – except if the person
is liable, and then only to extent ct determines they are entitled to indemnity
a. Note: different from (a) bc no judgments, fines, settlement here
b. No indemnification shall be made in respect to a claim in which the person is
adjudged liable to the corporation (unless the court says so)
3. (c) the corp SHALL indemnify officer’s and directors when they are successful on the
merits or otherwise in any action suit or proceeding for expenses, attny fees
a. Merritt – dismissal of parties claim pursuant to 3d party settlement might
satisfy the “otherwise” language (“Success is sufficient to constitute
vindication”)
4. (d) Indemnification under (a) and (b) shall be made by corp upon a determination that
they met the applicable standard of conduct from (a) and (b)
a. Determination of whether they have met standard made by:
i. Majority vote of directors who are not parties to the action even if
less than a quorum (disinterested)
ii. Committee of disinterested directors designated by majority vote of
disinterested directors
iii. Independent legal counsel in written opinion if there are no such
directors or if such directors want this

iv. S’holder
5. (e) Expenses incurred by an officer may be paid in advance by the corp but if it is
ultimately adjudged that they are not entitled to them, they agree to repay
a. Attorney’s fees could be very expensive and this allows director to hire
competent counsel and exonerate themselves when they have a legit defense
b. Corp can obligate itself to do this in charter or bylaws regardless of whether
they think the parties have a chance (Ridder)
6. (f) corp may provide for greater indemnification rights than those granted by 145.
a. You can supplement §145 but cannot take away from it (ie – gf out of (a)
(Waltuch)).
7. (g) Corp may purchase officer’s and director’s liability insurance poly to cover situations
where direct indemnification is not permitted, whether or not corp has power to
indemnify under 145.
C. Fees Upon Fees
1. Baker - Siegel CFO was sued in securities fraud class action. Due to unique facts he was
a director that was purchasing stock instead of selling like the others. Thus he got
separate counsel, and eventually there was dismissal as to all claims against him. He
requested indemnification for his legal fees. The corp denied. Now he sued and is the
P. He wants fees for when he was a D - And fees for this coa as a P (fees incurred
getting back fees when D)
a. Charter requires fees to be incurred “as a result of” such action or proceeding.
b. Siegel argues that but for the first suit, he wouldn’t have incurred fees from
2nd suit. Ct says no – this is too attenuated, no but for test. Needs to be a
close nexus btwn the fees and underlying suit
c. Ct Argues As a “result of” means “in defense of.” Thus, he isn’t in defense of in
his claims as a P so no recovery for it. Siegal argues 145(c) – includes “in
defense of”, and since the legis used as a result of here, if they wanted to use in
defense of they would have in 722. Ct responds – no, bc of the legis history

Essays Tips
Skeleton Frame
Explanation Written Statement
1. [ISSUE stated as an easy question]?
[Numbered, Underlined issue statement]
[Cite Authority] Under [Authority]
[State Rule with each Element.] [What you are proving (Rule 10b, etc.) is …
Element 1, Element 2, etc.]
[Address the first Element by saying "Here…" and Here [Element 1, underlined] is proven/shown
cite the first Element to be proven, “because” and to be true because ["Fact 1", Quoted].
quote a given fact that proves that element (or
perhaps disproves it).
[Repeat for each additional Element, but vary the And [Element 2, underlined] is proven/shown to
introductory word. Don’t say be true because ["Fact 2", Quoted].
“Here…Here…Here…]
[Give a terse and definite Conclusion] Therefore, [ISSUE is true/false.].
If the question involves a business organization issue, your answer should usually be structured
separately for each DEFENDANT following the chronological order the issues are presented in the facts.
1. If a corporation is involved consider discussion of promoter liability first.
2. If officers, directors, controlling shareholders or company lawyers are involved consider
discussion of breach of fiduciary duty for each act or failure to act that occurs.
3. If securities are being traded consider discussion of trading violations of the Securities Exchange
rules in the order they occur.
4. If there is any discussion of a company attorney there is probably a professional responsibility
cross-over.
EX: BUSINESS ORGANIZATION Issue Examples:

1) Was the business a GENERAL PARTNERSHIP? 6) Is A liable for a violation of SEC Rule 10b for
2) Was A the AGENT of B? INSIDER TRADING?
3) Was A acting within the SCOPE OF AGENCY? 7) Is A liable for a violation of SEC Rule 14e-3 for
4) Does A have PROMOTER LIABILITY for the TRADING ON TENDER OFFERS?
contract? 8) Is A liable for a violation of SEC Rule 16b for
5) Did A BREACH HIS DUTY OF LOYALTY? SHORT-SWING TRADES?

After clearly stating the ISSUE to be discussed start your essay answer by citing the
AUTHORITY upon which your answer will be based. Use the word "UNDER" as an introductory
phrase as you cite the authority and rule.
Ex: "Under state corporation laws… "
"Under Securities Exchange Rules 10b and 10b-5…"
"Under the DUTY OF LOYALTY… "
"Under the DUTY OF DUE CARE… "
Instead of IRAC
1) State an ISSUE raised or suggested by the given facts,
2) Cite LEGAL AUTHORITY for a rule,
3) State the LEGAL RULE and its highlight its ELEMENTS, and then
4) PROVE that HERE EACH and EVERY ELEMENT of the rule can be proven BECAUSE a
relevant SUPPORTING FACT exists in the fact pattern.
Tom and Dick agreed to form a corporation, and they issued themselves a million shares each on January
1 in exchange for unsecured notes. On February 1 Tom secured a bank loan and on March 1 Dick filed the
Articles of Incorporation. On April 1 they went public, and Tom lied to the Wall Street Journal that sales
were soaring. On May 1 a competitor sent them a confidential buy out offer, and on June 1 Dick sold his
million shares for a big profit. Discuss.
Issues:
1) Promoter liability? Tom is personally liable for the bank loan because he was a promoter and he
secured the loan before the corporation existed.
2) Breach of loyalty? Tom and Dick misused their positions as promoters by giving themselves
stock in exchange for an unsecured note.
3) 10b violation? Tom materially misrepresented sales and thereby manipulated the market for
the stock. He is liable to all who traded stock based on his lie.
4) 14e-3 violation? Dick traded based on inside information concerning the tender offer.
5) 16b violation? Dick traded the stock within 6 months, but was it an improper short-swing trade?
Since Dick did not own any stock at the time he first took a position (January 1) he does not
qualify as a "significant shareholder" at both ends of the transaction. And the facts do not state
that Dick was a director or officer. If Dick was a director of officer he would come under 16b and
would have to disgorge all of his profit.

If the question says, "Dan, president of the Bank, learned that profits were up sharply so he called his broker and
bought 10,000 shares. What is Dan's liability?”
. as follows:
Analyze
"1. ISSUE -- Can Dan be liable for INSIDER TRADING?
Under Securities Exchange Rules 10b and 10b-5 people are liable for the losses suffered by other investors if they
knowingly trade using inside information obtained through a breach of fiduciary duty or make misleading
statements affecting stock values.
Here Dan had a fiduciary duty because he was the "bank president." And, he traded because he "bought 10,000
shares." This trading appears to have been based on inside information because he bought as soon as he "learned
profits were up", and he would have learned this from inside sources rather than through the media because he
was the "bank president".
Four Ploys to Save You on an Exam:When you are taking law exams you will invariably find
yourself in perplexing and difficult situations. Here are four ploys you can use to get yourself out of a tight spot.
1. “Actions Imply Intentions.” If no facts expressly state what the parties’ intentions were at the time they acted,
their actions (or lack thereof) imply their intentions.
For Example: You are presented with facts that don’t expressly say what a defendant’s intentions were at some
point in time. You can say, “The defendant impliedly did not intend to steal at the time of the breaking because she
did not take the TV until the next morning.”
2. “The Courts Have Often Been Split.” If you are presented with an issue that you have either never seen before
or else you recall reading something about it but can’t remember which way the Courts decided the issue, you can
always say, “The Courts have been split on this issue…” It sounds very “lawyer-like” and it is always true. Then you
should probably discuss the “balance rule” and “reasonableness” standards presented below.
3. “The Court Would Balance.” For almost every issue in every area of law there is some sort of “balance test”. In
these “balance tests” the Court considers the interests of the parties, the plaintiff and defendant, the interests of
the Court itself, the interests of third parties, and the public interest. So if you don’t know what the law is or what
to say consider saying, “The Court would balance the interests of the parties in light of the public interest and the
Court’s own interest considering the impact on the efficient administration of justice.” This sounds good, and you
can make it up on the spur of the moment.
4. “Reasonable expectations…reasonable behavior…reasonable person…” For virtually every issue in every

area of law the rule of law is based on what is “reasonable”. Sometimes it is “reasonable expectations”, sometimes
“reasonable behavior”, sometimes “reasonably foreseeable”, and sometimes “reasonable person”. But it is always
“reasonable”. So if you use the word “reasonable” liberally in describing the rule of law and the considerations of
all concerned, you usually cannot go wrong.
For Example: Putting this all together, suppose you are presented with some dispute that raises an issue that you
have never seen before and don’t know the law at all. You have to fake it. A good approach is to say, “The Courts
have been split on this issue. The Court would balance the interests of the parties in light of the public interest and
the Court’s own interest considering the impact on the efficient administration of justice. The decision would
depend on the reasonable expectations of each party in light of the reasonable needs of third parties and the
impact on the Court. Here the reasonable expectation of …. And a reasonable person would believe… And it was
reasonably foreseeable that… Therefore…”

BUSINESS ORGANIZATION ISSUES AND ANSWERS
FOLLOW THE CALL of the question. But if the call is general list the issues as follows:
1. What was the FORM of business relationship?

 Under business law the relationship between two or more people engaged in a business for profit can be a
GENERAL or LIMITED PARTNERSHIP, a JOINT VENTURE, a CORPORATION, or a simple AGENCY
RELATIONSHIP.
 The default form of business whenever two or more people join together for a business profit is the GENERAL
PARTNERSHIP. A JOINT VENTURE is a general partnership formed for an expressly limited purpose.
 LIMITED PARTNERSHIPS and CORPORATIONS require appropriate filings and approvals by state
government, and establishment of a corporation requires the filing of articles of incorporation.
 An AGENCY RELATIONSHIP exists where one party, the agent, is authorized to act and agrees to act for
another party, the principal. [Important!]
 [This is always a good way to start a business organization essay unless the facts clearly state the business
form (e.g. a corporation). It immediately creates a focus on the rules of law that apply. Abbreviate the rule
statement as appropriate.
 Sole Proprietorships are ignored here because law-school essays seldom involve them.
 Note that not everything casually described as "partners" creates a partnership. If Tom and Dick agree to
be "partners" in forming a corporation, the form of the business relationship is a corporation, not a
partnership.
 The only important distinction between a partnership and a joint venture is that the latter has an
expressly limited scope.]
[Note that people who form a limited liability company (e.g. corporation, LLC, LLP, limited partnership,
etc.) but operate without making it clear the company has limited liability (e.g. fail to state “Inc.” or “Ltd.”
on their advertising, contracts, etc.) may be held PERSONALLY RESPONSIBLE for all company debts.]
2. What are the RIGHTS AND LIABILITIES of a general partner?

 Under business law general partners share equal control of the business unless otherwise agreed, and each
is jointly and severally personally liable for all liabilities arising out of the acts by the other partners within
the scope of the business. All profits and losses pass through to the general partners.
 [The most common issue that arises is whether one general partner will be personally liable for the ill-
considered act of another partner. Perhaps Tom runs over a pedestrian while driving the company
vehicle, and the question is whether his partner Dick is personally liable in the resulting wrongful death
suit. The focus of analysis should be on whether Tom was acting within the scope of the business at the
time of the accident.]
3. What TERMINATES a general partnership?

 Under business law a general partnership automatically terminates with the death of any partner, by
unilateral withdrawal of any partner, or by agreement between the partners. No partner can transfer his
share of the partnership to another person except by unanimous agreement.
4. What are the rights and liabilities of the partners in a LIMITED PARTNERSHIP?
 Under business law a limited partnership consists of one or more general partners and one or more limited
partners, and formation requires state approval.
 The general partners in a limited partnership have the right to manage the partnership activities, and they
have unlimited liability. However, the general partner may be a corporation.

 The liability of limited partners is limited to the amounts they have invested. To maintain limited liability,
the limited partners must generally maintain a passive role and refrain from management decisions.
However, a limited partner may take a more active role in management if reasonably necessary to protect
his or her investment.
 The profits and losses of limited partnerships pass through to the individual partners, but losses are subject
to passive loss limitations of federal income tax law.
[One common essay question scenario is a limited partner that meddles in the daily operations of the
business to the point they can be held personally liable as a general partner.]
5. What TERMINATES a limited partnership?

 Under business law a limited partnership automatically terminates with the death of a general partner, or
by agreement. A limited partner can transfer his share to another person at any time subject to previously
agreed upon transfer limitations, but a general partner can only transfer his share to another person with
the unanimous agreement of all partners.
6. What are the rights and liabilities of a CORPORATION SHAREHOLDER?

 Under state corporation laws the liability of a corporation shareholder is generally limited to the amount of
his or her investment. Shareholders can vote for a board of directors to control the corporation, but the
shareholders have no direct control. If the board of directors declares a dividend to a particular class of
stock, all shareholders in the class have a right to receive the dividend.
 A legally incorporated corporation is a DE JURE corporation. When necessary documents are not filed but
the parties have proceeded in a good faith belief a de jure corporation exists a promoter may argue a DE
FACTO corporation exists as a defense against unlimited liability.
 The rights of a shareholder to alienate shares, receive income or claim losses depends on the corporate
form. The Internal Revenue Code allows corporations to elect to be either "C" or "S" corporations. State
laws may also allow corporations to elect to be "closely held".
 Generally stock in "C" corporations is freely alienable. Stock in "S" and "closely held" corporations is subject
to transfer restrictions involving the number of shareholders and the relationship between them. To
protect its own legal status, the “closely held” or “S” corporation will usually have a “right of first refusal”
when a shareholder wishes to sell her interest.
 The income of "C" corporations is taxed at corporate rates before distribution of dividends and losses
cannot be "passed through" to the shareholders. The income and losses of "S" corporations "pass through"
to shareholders without tax but are subject to "passive loss restrictions".
[Abbreviate the above as appropriate to the situation. The important feature of a corporation that you
should expressly state in your essay answer is that the shareholders are generally not liable for more
than they have paid for stock.]
7. What TERMINATES a corporation?

 Under state corporation laws a corporation has perpetual life unless the board decides to dissolve the
corporation and liquidate the assets.

8. What are the rights and liabilities of an AGENCY PRINCIPAL?
 Under business law an agent is a party that agrees to act on the behalf of another party, the principal, with
approval from the principal. The principal is liable for all acts by the agent if they are within the scope of
the agency relationship.
 The existence and scope of an agency relationship depends on the level of control of the principal over the
actions of the agent.
 An agency relationship may be ACTUAL, INHERENT or IMPLIED. An ACTUAL AGENCY is based on an
express or implied agreement between the principal and agent. An INHERENT AGENCY is implied by the
position or title given to the agent by the principal. And an APPARENT AGENCY is implied by the
representations of the parties. [Important!]
 A party that reasonably relies on the existence of an agency relationship may raise ESTOPPEL to prevent
subsequent denial of the agency.
[The most common essay scenario is an "apparent agency" implied by the acts and words of the parties.
Remember, if they look like an agent, talk like an agent and act like an agent, chances are they are an agent!]
[Agency issues are independent from, and overlap, business organization issues. They concern whether
one entity (e.g. a person, a general partnership, a corporation, etc.) is LIABLE for the acts, promises, and
agreements of another entity (e.g. a person, a general partnership, a corporation, etc.) because of the
actual, apparent or implied RELATIONSHIP between them.]
9. Did A have PROMOTER LIABILITY?

 Under state corporation laws a PROMOTER is anyone who helps organize, finance or form a new
corporation. Promoters have a FIDUCIARY DUTY to the new corporation and are liable to the corporation
if they obtain secret or unjustified profits from their position. [Important!]
 Promoters are PERSONALLY LIABLE to third parties for the financial commitments they make prior to the
filing of Articles of Incorporation unless they expressly state they are acting on the behalf of a corporation
to be formed. [Important!]
 Promoters that act under a good faith belief that the Articles of Incorporation have been filed when they
have not been, and no DE JURE corporation exists, may argue that a DE FACTO corporation existed as a
defense against unlimited personal liability.
 Promoters are liable under BREACH OF WARRANTY theory to parties injured by any misrepresentation
that they 1) will act or 2) have acted to form a corporation, 3) that a corporation exists, or 4) that they are
authorized to act for an existing corporation. [Important!]
[One common scenario is that promoters lease office space or contract to buy materials for a corporation
that they intend to form. If promoters do not make it expressly clear they are acting on behalf of a
corporation that does not yet exist they are personally liable for the contracts. Another common scenario
is for promoters to take stock in the corporation they form without paying par value for it.]
[A common law student mistake is to suggest a promoter is relieved of liability for pre-incorporation
contracts “on behalf of the corporation” if the corporation subsequently “ratifies” the contracts. That is
absolutely not true.]

10. Should the court PIERCE THE CORPORATE VEIL?
 Under state corporation laws a shareholder may be personally liable for corporate obligations if a court
finds it is necessary to prevent fraud and achieve equity. Evidence of fraud would be if the corporation is 1)
deliberately undercapitalized or 2) run like a proprietorship without corporate formalities, commingled
funds, and no payment of dividends. [Important!]
[A common law student mistake is to suggest that piercing the corporate veil is relatively easy by anyone
losing money in dealings with a corporation. Absolutely not true.]
11. Can a corporate action be voided by a SHAREHOLDER DERIVATIVE ACTION?

 Under state corporation laws a shareholder may file a DERIVATIVE SHAREHOLDER ACTION on behalf a
corporation 1) under the ultra vires doctrine, 2) for director gross negligence and/or 3) for breach of
fiduciary duty by directors, officers or controlling shareholders. [Important!] Generally, the shareholder
must first ask the Board of Directors to act and can only file a derivative action after the Directors have
failed to act.
 Under the ULTRA VIRES DOCTRINE a shareholder can have a corporation action declared VOID if it is
outside the scope of the declared corporate purpose. [Important!] 1
 Under the BUSINESS JUDGMENT RULE, good faith decisions by disinterested directors [directors that are
not breaching the duty of loyalty] are VOIDABLE by a Court if the directors committed gross negligence, a
deliberate breach of the duty of due care. A Court will NOT void good faith decisions by disinterested
directors for inadvertent negligence. And fully informed shareholders may ratify all the negligent acts of
directors in any case. [Important!]
 Failure of directors, officers, or corporate attorneys to disclose a personal interest in a corporate action is a
BREACH OF LOYALTY. And otherwise any act by directors, officers, corporate attorneys, or controlling
shareholders that is harmful to the corporation is a BREACH OF LOYALTY. Transactions are VOID if there is
clear abuse because of unfairness to the corporation or personal advantage or improper motive by the
breaching party, and in this case the transaction CANNOT be ratified by either directors or shareholders.
The corporate transaction is VOIDABLE if there is no clear abuse, and in that case the transaction may be
ratified by the fully informed and disinterested directors and/or shareholders. [Important!]
[Synopsis: Directors, officers, and corporate attorneys all have a duty of due care to the corporation, but
only acts by directors are VOIDABLE (by Court or corporation) for gross negligence (deliberate breach of
duty). Acts resulting from inadvertent negligence by directors and any negligence by officers or
corporate attorneys are NOT VOIDABLE. And acts resulting from negligence by directors can always be
ratified by shareholders. Directors, officers, corporate attorneys and controlling shareholders have a
duty of loyalty to the corporation, and corporate acts resulting from breaches of loyalty that are clearly
abusive to the corporation are VOID AD INITIO and CANNOT be ratified. Acts resulting from other
breaches of loyalty are VOIDABLE (by Court or corporation). But they can be ratified by fully informed
disinterested directors or shareholders.]
1 The Ultra Vires Doctrine has little real importance modernly because few corporations are formed
modernly for narrowly defined purposes.

12. Was the instrument a SECURITY that was supposed to be REGISTERED?
 Under the SECURITIES EXCHANGE ACT a SECURITY is a financial interest in profits generated by the efforts
of others.
 Securities must be registered with SEC if they are 1) publicly traded, 2) sold by an issuing company, a
securities underwriter or by a securities dealer, or 3) the assets of the issuer or the number of security
owners exceeds statutory amounts. An underwriter is a party that buys a security with intent to resell it
rather than hold it for investment. Securities do not have to be registered otherwise.
[The issue here is simply whether a given financial instrument falls under SEC jurisdiction and is subject
to Rules 16b, 10b, etc. SEC rules apply to all “registered securities” including stocks, bonds, and
“derivatives”. A “derivative” is any financial instrument that “derives its value” from the value of some
other financial instrument. Some common “derivatives” are shares of mutual funds, stock options and
“warrants”.]
13. Is the defendant LIABLE under RULE 10b-5 for MISLEADING STATEMENTS or
INSIDER TRADING?
 Under the SECURITIES EXCHANGE Rule 10b-5 a person is liable to the SEC and for the losses suffered by
other investors if the defendant KNOWINGLY breaches a duty to conceal inside corporate information,
trades using inside information revealed in breach of fiduciary duty or makes false or misleading
statements to manipulate security values [an “artifice to defraud”]. [Important!] Both the SEC and
investors suffering losses have standing to initiate an action.
 Actions against insider trading may be brought against those who breach a fiduciary duty to keep
information confidential (“tippers”) and those who trade on or pass on inside information with knowledge
it resulted from a breach of fiduciary duty (“tippees”). [Important!]
[An action for "insider trading" requires a knowing breach of a fiduciary duty to keep the information
confidential. The officers, directors, attorneys, and trusted, confidential employees of a corporation such
as executive secretaries and accountants have a fiduciary duty to keep information confidential and not
use it for personal gain. Likewise, every attorney has a fiduciary duty to conceal all client confidences
and not use them for personal gain. Nobody else has any such duty UNLESS they know the information
they have received has been the result of a breach of fiduciary duty. Therefore, a company janitor can
legally trade on non-public information he finds in the garbage.]
14. Is the defendant LIABLE for TRADING on INSIDE TENDER OFFER INFORMATION?
 Under SECURITIES EXCHANGE rule 14e-3 any person is liable for losses suffered by other traders caused
when the defendant trades on inside information concerning a tender offer, whether or not the information
resulted from a breach of fiduciary duty.[Important!] An action can be brought by the SEC, by the
corporation, or by any investor suffering a loss as a result.

[Here "inside trading" can be charged if the information involves a tender offer no matter how the
information was obtained. Therefore, a company janitor CANNOT legally trade on non-public
information about a tender offer he finds in the garbage.]
15. Is the defendant LIABLE for SHORT SWING TRADING?

 Under SECURITIES EXCHANGE rule 16b an officer, director or significant shareholder must disgorge profits
to the corporation made on short swing trades in registered securities. A short swing trade is a buy and sell
or sell and repurchase within a 6 month period. Rule 16b applies to any person who is either an officer or
director at the time of any purchase or sale of securities, or to any shareholder who owns at least 10% of
the outstanding corporation common stock at the commencement of both the purchase and the sale of the
securities. [Important!] An action can be brought by the SEC or by the corporation. 2
 The profit that must be disgorged to the corporation is calculated as the difference between the sale price
and the lowest price the stock sold at during any time it was held by the individual.
[For a "significant shareholder" to be liable, they must own at least 10% of the corporation prior to both
the purchase and the sale of securities that creates the "trade" in question.
Suppose defendant bought stock at $10 a share, that it fell to $5 a share and bounced back to $9. Suppose
that the defendant then sold it for $9 a share, all in less than 6 months. Although the defendant did not
make a "profit" in the normal sense, they will still have to disgorge a "16b" profit of $4 per share because
the stock was sold for more than the lowest traded price of the holding period. Ouch!]
16. What are the rights of shareholders in PROXY FIGHTS and POLICY DISPUTES?
 Under state corporation laws shareholders generally have a right to present proposals at the annual
shareholders’ meeting and to have legitimate policy proposals mailed to other shareholders with proxy
statements. State law may also require a corporation to provide a list of shareholders to opposition
shareholder groups if requested for a proper purpose. No federal law requires production of such lists.
 In the case of a proxy fight, a corporation may generally pay the expenses of one or both sides if the fight is
over legitimate policy issues and not merely to retain control of the corporation.
[Note, the shareholder only has a right to present proposals that are relevant to the policies and
purposes of the corporation. There is no right to use the proxy statements as a political forum or as a
means of challenging management decisions.]
17. What are the rights of MINORITY SHAREHOLDERS in the case of a MERGER?
 Under state corporation laws mergers often give shareholders APPRAISAL RIGHTS. Some states hold that a
sale of all assets is a de facto merger that gives stockholders appraisal rights, but other states hold there
are no appraisal rights in these cases if the stock is publicly traded.
2 An action for insider trading could only be brought by a shareholder as a derivative action on behalf of
the corporation after the Directors fail to act.

 Shareholders claiming a "FREEZE OUT", that they have been unfairly forced to sell out their ownership
interest in a corporation, have the burden to prove the transaction was inherently unfair.
18. What are the rights of MINORITY SHAREHOLDERS in the case of a SALE OF
CONTROLLING INTEREST?
 Under state corporation laws the control of a corporation can generally be conveyed only by selling stock.
And a controlling stockholder may generally sell his controlling interest at a premium price. The buyer of a
controlling block can generally control the corporation directly. Any premium paid for a controlling
interest belongs to selling shareholder unless breach of fiduciary duty is shown.
19. What are the duties of DIRECTORS in a TAKE OVER SITUATION?

 Under the PARAMOUNT COMMUNICATIONS RULE corporate directors may resist take over threats if they
are a threat to corporate operations. But under the REVLON RULE the directors have a duty to maximize
shareholder return once it becomes obvious the corporation will be taken over in any event.
20. What are the duties of DIRECTORS toward BOND HOLDERS?

 Under state corporation laws the duty of the corporation to bond holders is defined by the BOND
INDENTURE AGREEMENT. The corporation must redeem bonds if corporate assets are liquidated, but
there is no implied fiduciary duty to the bond holders.
21. Can a corporation INDEMNIFY DIRECTORS and OFFICERS?

 Under state corporation laws the corporation can generally indemnify its agents from liability for actions
taken in good faith, and this can be broadened in the Articles of Incorporation. Unless set forth in the
Articles of Incorporation, the corporation cannot indemnify its agents for breach of duty to the corporation
or settlement of third party claims.
Note: The above issue statements provide virtually every important issue, definition, rule and term that
you will ever see on a Business Organization essay examination in law school or on a Bar Exam. If you
know the above issues and responses you have everything you really need.

Sample Answers
Sample Answer 15-1: General Partnerships, Joint Venture
1. Can AdArt collect if Tom, Dick and Harry originally agreed that TDH Travel was only a reservation
system?
Under business law the default form of business whenever two or more people join together for a
business profit is the GENERAL PARTNERSHIP, and a JOINT VENTURE is a general partnership formed
only for an expressly limited purpose.
General partners share equal control of the business unless otherwise agreed, and each is jointly and
severally personally liable for all liabilities arising out of the acts by the other partners within the scope
of the business.
Here there were two or more people because Dick and Harry were people and Tom's
"corporation" would be recognized as a "person" by law. And business profit was their purpose. There
was no effort to form TDH Travel as a corporation or limited partnership, so TDH Travel was a general
partnership by default.
But TDH was formed for an expressly limited purpose because it was for the "limited purpose of handling
airline reservations for the Olympics." However, there is no evidence that AdArt was made aware of this.
And Tom's act of hiring an ad agency was within the scope of the joint venture anyway because a
reservation system needs to advertise.
Further, the partners expanded the scope of the business enterprise by raising "no objections" to the
"slogan" that said TDH handled "all travel needs."
Therefore, AdArt can collect against TDH Travel.
2. Who is liable to AdArt?

As stated above, general partners are jointly and severally personally liable for all liabilities arising out of
the acts by the other partners within the scope of the business.
Here Tom was acting within the scope of the business, so the partners (Tom’s Travel, Inc., Dick and
Harry) are all jointly and severally liable. But if Tom's corporation has "no assets" AdArt would have to
recover from Harry and Dick. Dick is dead so his liability would become a liability of his estate. Tom could
only be personally liable if creditors could pierce the corporate veil of his corporation there are no facts
to suggest that could be done. No facts suggest Tom was acting to defraud anyone.
Dixie has no personal liability because she was never a partner in TDH.

Therefore, the original partners (Dick, Harry and Tom's corporation) would all be jointly and personally
liable for the AdArt campaign, but AdArt could only feasibly recover the debt from Harry and Dick's
estate.
3. Can Grand Hotel collect against TDH?

Under business law a general partnership automatically terminates with the death of any partner, by
unilateral withdrawal of any partner, or by agreement between the partners.
Here there was a death because Dick "suddenly died", and this would automatically terminate the
general partnership. Tom did not enter into the agreement with Grand Hotel until after the partnership
terminated because it was "after he heard" the news of Dick's death.
Therefore, TDH no longer existed when Tom entered into the agreement with Grand Hotel, and Grand
Hotel cannot collect against TDH.
4. Who is liable to Grand Hotel?

Here Grand Hotel cannot collect from TDH Travel because it ceased to exist before the contract was
executed.
Tom misrepresented the continued existence of TDH and is personally liable for the commitment he
made to Grand Hotel. He may argue that he did not accept personal liability because he only entered
into the contract "on behalf of TDH.” But that argument will fail.
Therefore, Tom is liable to Grand Hotel, not TDH.
5. Can Palace Hotel collect against TDH?

Like Grand Hotel above, Palace Hotel cannot collect from TDH because the general partnership
terminated before the contract was made. Harry misrepresented that TDH continued to exist, and that
he was authorized to enter into contracts on its behalf.
Therefore Harry alone is liable to Palace Hotel.
[ANSWER EXPLANATION: Two things are illustrated by this answer. First it shows that if the question
presents issues for discussion, you should phrase and present those same issues in your answer and in
the same order.
Secondly, the answer illustrates that no matter what issue is presented first the first task is to
determine the BUSINESS FORM of the organization. Here the first thing to establish was that this was a
general partnership rather than a corporation, etc.

Corporations, limited partnerships, LLCs, LLPs, etc. are all legally “people” who can become general
partners in a general partnership. While they have unlimited liability as general partners, that liability
does not pass through to their limited liability owners.
A general partnership ceases to exist as soon as a member dies or withdraws. The remaining partners
can reform the partnership by entering into a new agreement. But until that happens any member that
acts “on behalf of the partnership” is personally liable, and the other former partners are not.]
Sample Answer 15-2: Limited Partnerships, Termination of Corporations, Agency
1. Was Louie liable as a general partner of LimPart because he was a limited partner who stepped in to
manage daily activities?
Under business law a limited partnership consists of one or more general partners and one or more
limited partners, and formation requires state approval. The general partners in a limited partnership
have the right to manage the partnership activities, and they have unlimited liability.
The liability of limited partners is limited to the amounts they have invested. To maintain limited liability,
the limited partners must generally refrain from management decisions. However, a limited partner may
take a more active role if reasonably necessary to protect his or her investment.
Here there was one general partner, InCorp, and two limited partners, Huey and Louie. Huey was
managing LimPart as "president of InCorp", the general partner.
But when Louie "stepped in" and ran "day-to-day operations" he was acting in the role of a limited
partner because he was not an officer of InCorp. Although Louie "stepped in" because "Huey had a coke
habit" there is no evidence that this was necessary to protect Louie's investment. Absent other facts it
would appear that Louie assumed the role of general partner from InCorp.
Therefore, by acting as if he were a general partner, Louie incurred unlimited liability.
2. Was LimPart terminated when Dewey Corp "pulled out"?

Under business law a limited partnership must have one or more general partners. The limited
partnership automatically terminates with the death of a general partner, or by agreement.
Here there was no agreement to terminate LimPart. And there was no death of a general partner.
And LimPart continued to have one general partner because InCorp remained as general partner.
Therefore, LimPart did not terminate when Dewey Corp pulled out.
3. Can Betty Ford control Huey's stock without InCorp's approval?

Under corporation laws shareholders can vote for a board of directors to control the corporation, but the
shareholders have no direct control.
Stock in "S" and "closely held" corporations is subject to transfer restrictions. To protect its own legal
status, the “closely held” or “S” corporation will usually have a “right of first refusal” when a shareholder
wishes to sell her interest.
Here InCorp was a "closely held S corporation", and the bylaws of InCorp gave the corporation the "right
of first refusal" before shares in the corporation could be sold. And since Huey "signed over the shares"
to pay a debt, he effectively sold the shares to Betty Ford.
Therefore, InCorp was not afforded its right of first refusal, and the sale from Huey to Betty Ford was
invalid as a result. InCorp could waive the error, but otherwise Betty Ford cannot exercise control of
Huey's stock.
4. Did Betty Ford effectively TERMINATE InCorp?

Under state corporation laws a corporation has perpetual life unless the board decides to dissolve the
corporation and liquidate the assets. And shareholders can vote for a board of directors to control the
corporation, but the shareholders have no direct control.
Here the directors were "Huey and Louie," and they did not vote to dissolve and liquidate. Betty Ford had
no direct control because she was just a shareholder and she had no authority to dissolve the
corporation.
Therefore, Betty Ford cannot terminate InCorp by filing a notice with the state as a shareholder.
5. Did Louie contract with KXZ within the SCOPE of his AGENCY authority?
Under business law an agent is a party that agrees to act on the behalf of another party, the principal,
with approval from the principal. The principal is liable for all acts by the agent if they are within the
scope of the agency relationship.
The existence and scope of an agency relationship depends on the level of control of the principal over
the actions of the agent. An agency relationship may be ACTUAL, INHERENT or IMPLIED. An ACTUAL
AGENCY is based on an express or implied agreement between the principal and agent. An INHERENT
AGENCY is implied by the position or title given to the agent by the principal. And an APPARENT AGENCY
is implied by the representations of the parties.
Here Louie acted without approval from InCorp because it had "not approved" and he had been told "not
to enter into contracts." Although Louie was "running InCorp" he had no inherent agency because he
was not an officer of InCorp. And Louie claimed no apparent agency because he said he was acting "as
CEO of LimPart." Therefore, Louie did not contract with KXZ as InCorp's agent.

Louie did have inherent agency for LimPart because he was "CEO" and he claimed apparent agency
because he was "acting as CEO of LimPart." But the ads were beyond the scope of any agency because
the ads "did not benefit LimPart."
Therefore, Louie did not contract within the scope of an agency relationship.
6. Can KXZ raise ESTOPPEL to hold LimPart liable for ads promoting InCorp?
Under business law a party that reasonably relies on the existence of an agency relationship may raise
ESTOPPEL to prevent subsequent denial of the agency authority.
Here KXZ relied on the existence of agency because it "ran the ads because Louie was CEO of LimPart."
And this was reasonable because Louie was "CEO" of LimPart and "running" both LimPart and InCorp.
Therefore, KXZ may raise estoppel to prevent LimPart from denying Louie's authority to enter into the
contract.
[ANSWER EXPLANATION: The restriction that limited partners cannot manage the partnership is a
common issue on exams. Otherwise this answer simply touches on some general rules of agency and
the means by which limited partnerships and corporations can terminate.]
Sample Answer 15-3: Promoters, Ultra Vires, Business Judgment Rule, Breach of Loyalty,
Piercing
1. Is Ann liable as a PROMOTER?

Under corporation law a PROMOTER is anyone who helps organize, finance or form a new corporation.
Promoters have a FIDUCIARY DUTY to the new corporation and are liable to the corporation if they
obtain secret or unjustified profits from their position.
Here Ann helped form a new corporation because she was "hired to help form" TheCorp, "typed" the
Articles of Incorporation and "filed" them. Therefore Ann is a promoter. And Ann received unjustified
profits because she received stock with a par value of $2 million when she was only owed $2,000.
Therefore Ann is a promoter and will be liable to the corporation for using her position to benefit at the
corporation’s expense.
2. Is Betty personally liable to Big Bank?

PROMOTERS are defined above. Promoters are PERSONALLY LIABLE to third parties for the financial
commitments they make prior to the filing of Articles of Incorporation unless they expressly state they
are acting on the behalf of a corporation that does not yet exist.

Promoters are liable under BREACH OF WARRANTY theory to parties injured by any misrepresentation
that they 1) will act or 2) have acted to form a corporation, 3) that a corporation exists, or 4) that they
are authorized to act on the behalf of an existing corporation.
Here Betty helped finance a new corporation and made a financial commitment because she "secured a
line of credit" for TheCorp. Therefore she is a promoter.
And Betty did this prior to filing of the Articles of Incorporation because she did it while Ann was "typing
them out". Betty may argue that she said TheCorp was a “corporation in formation” bit that term could
be interpreted to either mean “in the PROCESS of formation” OR “a corporation in FORM”.
Therefore Betty did not expressly state she was acting on behalf of a corporation that did NOT EXIST and
she will be personally liable to Big Bank as a promoter as a result.
3. Can ULTRA VIRES DOCTRINE void the purchase of the refinery and oil contracts? Under the ULTRA
VIRES DOCTRINE a shareholder can have a corporation action declared VOID if it is outside the scope
of the declared corporate purpose.
Here the declared purpose of the corporation is "real estate development," and the purchase of the
"refinery" and "oil contracts" are not within the scope of that corporate purpose.
Therefore, the ultra vires doctrine could be used to declare these acts void.
4. Does the BUSINESS JUDGMENT RULE indemnify Betty?

Under the BUSINESS JUDGMENT RULE a Court will not void good faith decisions by disinterested
directors unless they acted with gross negligence, a deliberate breach of their duty to act as a
reasonably informed, prudent person would. But even if directors act negligently, fully informed
shareholders can ratify the directors’ negligent acts.
Here Betty was not “disinterested” when she agreed to buy the refinery because “her family had an
interest” in it. Therefore this corporate act resulted from a breach of loyalty and the business judgment
rule has no application
Therefore, the business judgment rule will not indemnify Betty.
5. Is the refinery purchase voided by BREACH OF LOYALTY?

Under state corporation laws a corporate act resulting from a breach of loyalty is VOID ab initio if it is
clearly abusive to the corporation and VOIDABLE if it is not clearly abusive and not ratified by the fully
informed and disinterested directors and/or shareholders.
Here there was clear abuse and improper motive because Betty approved a $200 million corporate
decision because her family would "directly benefit ".

Further, even if the action was not clearly abusive to TheCorp it has not been ratified by disinterested
shareholders because "Betty and Ann voted as a block" and Betty is clearly not disinterested.
Therefore, the refinery purchase is either void ab initio or voidable as the product of a breach of loyalty.
6. Can Lenny PIERCE THE CORPORATE VEIL to attack Betty's personal assets?
Under state corporation laws a shareholder may be personally liable for corporate obligations if a court
finds it is necessary to prevent fraud and achieve equity. Some evidence of possible fraud would be if the
corporation is 1) deliberately undercapitalized or 2) run like a proprietorship without corporate
formalities, commingled funds, and no payment of dividends.
Here the corporation was undercapitalized "from the beginning”, Betty “ignored formalities" and ran it
“like her own business”. She "paid no dividends" and often "commingled" her funds with the corporate
funds. However, it is not clear whether piercing the corporate veil is necessary to achieve equity because
Lenny may be able to hold Betty personally liable for breach of duty as both a promoter and as a director
and officer.
Therefore, Lenny may be able to pierce the corporate veil if he can prove it is necessary.
[ANSWER EXPLANATION: The most important part of this answer is promoter liability.
And a breach of loyalty by any party with fiduciary duties (director, officer, controlling shareholder) may
be ratified by the disinterested directors or shareholders if it is NOT clearly abusive to the corporation.
But a breach of loyalty that is a clear abuse of fiduciary duty motivated by personal interest cannot be
ratified at all and will be void ab initio.]
Sample Answer 15-4: Securities Exchange Rules
1. Did Sandy trade UNREGISTERED SECURITIES?

Under the SECURITIES EXCHANGE ACT a SECURITY is a financial interest in profits generated by the
efforts of others.
All securities must be registered with SEC if they are 1) publicly traded or 2) sold by an issuing company,
a securities underwriter or by a securities dealer. An underwriter is a party that buys a security with
intent to resell it rather than hold it for investment. A security does not have to be registered if it is a
private placement, a sale to fewer buyers and for smaller amounts than certain limits specified under the
Act

Here these were securities because they were “shares” of stock that gave financial interests in the profits
of Sandy’s company. And they were sold by the issuing company because they were sold by
“MuyCaliente.com” over the “web.”
And these shares apparently needed to be registered with the SEC and were not because Sandy was
charged with selling “unregistered” securities.
Therefore, it appears that Sandy traded unregistered securities.
2. Is Sandy LIABLE under RULE 10b for MISLEADING STATEMENTS or INSIDER TRADING? Under
SECURITIES EXCHANGE rule 10b-5 a person is liable for the losses suffered by other investors if the
defendant knowingly trades using inside information obtained through a breach of fiduciary duty or
makes misleading statements affecting stock values.
Here Sandy made a misleading statement because she said “sales were increasing 100% a month” and it
was “not true.” This caused other investors to suffer losses because “stock prices soared,” and Yang
offered to buy at a price based on the “distorted earnings report.”
Further, Sandy knowingly traded with inside information because she sold out to Yang knowing that the
price was “very attractive” because the earnings report was “distorted.” Sandy’s information came from
a breach of fiduciary duty because she was the “President” of the company. As President she had a duty
not to use her access to inside information to her personal advantage.
Therefore Sandy is liable under Rule 10b for the losses traders suffered in this stock.
3. Is Sandy LIABLE for TRADING on INSIDE TENDER OFFER INFORMATION?

Under SECURITIES EXCHANGE rule 14e-3 any person is liable for losses suffered by other traders caused
when the defendant trades on inside information concerning a tender offer, whether or not the
information resulted from a breach of fiduciary duty.
Here Sandy had inside information concerning a tender offer because Yang sent her a
“confidential e-mail” that he was going to make a “public offer” to buy shares. And Sandy traded on the
information because she “bought shares” to “take advantage of Yang’s offer.”
Therefore, Sandy is liable for insider trading on the information about the tender offer.
4. Is Sandy LIABLE for SHORT SWING TRADING?

Under SECURITIES EXCHANGE rule 16b an officer, director or significant shareholder must disgorge
profits made on short swing trades in registered securities. A short swing trade is a buy and sell or sell
and repurchase within a 6 month period. Rule 16b applies to any person who is either an officer or
director at the time of any purchase or sale of securities, or to any shareholder who owns at least 10% of
the outstanding corporation common stock at the commencement of both the purchase and the sale of
the securities.

The profit that must be disgorged is calculated as the difference between the sale price and the lowest
price the stock sold at during any time it was held by the individual.
Here Sandy was an officer because she was “President”. The securities were not registered but
apparently were supposed to be registered.
Sandy originally “gave” herself 100,000 shares, but then she bought another 100,000 shares. Then she
sold all of her shares. The buying and selling all had to take place within six months because the
corporation did not exist until January 1 and she sold all of her shares on June 15.
Since Sandy was an officer and bought and sold stock within six months, she must disgorge all profit. The
sales price was $200 per share, but the lowest price for the stock while held by Sandy was her original
value of $1 per share. Therefore, Sandy must “disgorge” to the corporation $39,800,000 of her profits on
the stock.
[ANSWER EXPLANATION: This answer simply illustrates the four important SEC rules. The first rule is
only important in cases when it is not clear if something is a “security” or not. If you know the rule, it is
clear. Is the title and registration for a car a “security” for purpose of the SEC? No, because it does not
give you an interest in profits. Rather, it gives you an interest in an existing asset – a car.
In the case of 10b violations, look both for misleading statements and trading. For 14e-3 violations look
only for trading. The trading does NOT have to be by the defendant – it can be by someone that used
information received from the defendant. The measure of liability should be the amount of “loss”
traders in the market suffered. That is difficult to determine.
In the case of 16b violations be prepared to calculate how much profit the defendant must disgorge. If
the numbers are given to you, give a number back. And remember the profits go back to the
corporation.]
Sample Answer 15-5: Proxy Fights, Takeovers, Mergers
1. Did Dr. Fuzzy have a right to have his policy proposal put in the PROXY STATEMENT and presented
for a vote at the SHAREHOLDER MEETING?
Under state corporation laws shareholders generally have a right to present proposals at the annual
shareholders’ meeting and to have legitimate policy proposals mailed to other shareholders with proxy
statements.

Here Fuzzy is a shareholder because he owns “one share.” And his proposal appears to be legitimate and
concerns policy because it raises a genuine issue concerning the potential liability of the corporation for
toxic contamination.
Therefore, Fuzzy had a right for his proposal to be presented for consideration at the shareholder’s
meeting, and to have it mailed to the shareholders with the proxy statements.
2. Are the directors liable for the $25 million spent resisting the TAKE OVER BID?
Under the PARAMOUNT COMMUNICATIONS RULE corporate directors may resist take over threats if
they are a threat to corporate operations.
Here the only facts given are that J.J. Bauer “fumed” about the “damned foreigners.” If there was no
other reason for resisting the takeover, the directors would have been liable for breach of their fiduciary
duty to use corporation assets with due care. But if the bid by Sato was a threat to corporate operations
the directors’ resistance to the takeover would be justified.
Therefore, absent additional facts, the directors could be liable for the money spent resisting the
takeover.
3. Did J.J. Bauer have a right to sell his CONTROLLING INTEREST?

Under state corporation laws the control of a corporation can generally be conveyed only by selling
stock. And a controlling stockholder may generally sell his controlling interest at a premium price.
Here J.J. was a controlling stockholder because he “held the controlling interest” and he conveyed the
controlling interest by selling when he “sold” to James.
Therefore, Bauer had a right to sell the controlling interest.
4. Does Bauer have to “disgorge” the $50 million PREMIUM?

Under state corporation laws any premium paid for a controlling interest belongs to the selling
shareholder unless a breach of fiduciary duty is shown.
Here a premium was paid because “Bauer received a premium of $50 million to give up control.” And no
facts show a clear breach of fiduciary duty. If Bauer knew that James intended to deny the minority
shareholders their rights, it would have been a breach of duty to sell control to James. But no facts show
that Bauer had such knowledge.
Therefore, Bauer may keep the premium.
5. Did James have a right to immediately install NEW DIRECTORS?

Under state corporation laws a controlling stockholder may generally control the corporation directly.

Here James bought a “controlling interest” in the corporation. Given that, he would have a general right
to immediately install new directors and exercise that control over the corporation as long as it did not
violate the corporations’ bylaws. No facts are given to show such a violation.
Therefore, James had a right to install new directors.
6. Can the Board INDEMNIFY itself by resolution?

Under state corporation laws the corporation can generally indemnify its agents from liability for actions
taken in good faith, and this can be broadened in the Articles of Incorporation. Unless set forth in the
Articles of Incorporation, the corporation cannot indemnify its agents for breach of duty to the
corporation or settlement of third party claims.
Here the Board did not attempt to indemnify itself for actions taken in good faith because it said “any
action” taken was protected. This language would include a breach of duty. While indemnity can be
broadened, the indemnity here was not in the Articles of Incorporation because it was set forth in a
“resolution.”
Therefore, the Board cannot grant itself this broad an indemnity in a resolution.
7. Did the directors breach its duty to MAXIMIZE SHAREHOLDER VALUE?

Under the REVLON RULE the directors have a duty to maximize shareholder return once it becomes
obvious the corporation will be taken over in any event.
Here it was obvious the corporation would be taken over because “it was apparent Bauer Corp.
would be taken over somehow.”
And shareholder return appears to have been possible between $100 a share and $150 a share because
$100 was the “market” price paid by Fuzzy and $150 was the “takeover” price offered by Sato. Since the
shareholders only ended up being paid the par value of $1 the directors failed to maximize shareholder
return.
Therefore, it the directors breached their duty to maximize shareholder return.
8. Did the shareholders have a right to APPRAISED VALUE following the merger?
Under state corporation laws mergers often give shareholders APPRAISAL RIGHTS. Shareholders
claiming a "FREEZE OUT", that they have been unfairly forced to sell out their ownership interest in a
corporation, have the burden to prove the transaction was inherently unfair.
Here the minority shareholders were not paid based on appraisal rights because they were given “$1 par
value” of the stock. This appears inherently unfair because the stock sold at $100 before the takeover
attempt.

Therefore, it appears the stockholders have a right to appraised value or at least a price that is fairer.
[ANSWER EXPLANATION: This question presents a structured CALL, so the structure of your answer
should reflect that CALL.
The question, like most, fails to state some possible facts. Did Bauer breach his fiduciary duty by selling
to James? It depends on what he knew, and no facts are given. In these cases, note the problem and
then take the easy out. Don’t over-analyze the facts.]

Random Definitions
1. AGENCY (BUSINESS ORGANIZATION). AGENCY is a term used to describe a

relationship, usually a business relationship, in which one party, the agent, is authorized to act by,
and agrees to act for, another party, the principal. The principal is liable for all acts taken by the
agent that are within the scope of the agency. The existence and scope of an agency relationship
depends on the level of control of the principal over the actions of the agent.
An agency relationship may be ACTUAL, INHERENT or IMPLIED. An ACTUAL AGENCY is based on an

express or implied agreement between the principal and agent. An INHERENT AGENCY is implied by
the position or title given to the agent by the principal. And an APPARENT AGENCY is implied by the
representations of the parties.
Once third parties rely upon the existence of an agency relationship, ESTOPPEL may prevent
subsequent denial of the agency.
2. APPRAISAL RIGHTS (BUSINESS ORGANIZATION). Under state corporation laws minority

shareholders often have APPRAISAL RIGHTS that guarantee them payment of the appraised value of
their interests if there is a corporate merger. Some states recognize a DE FACTO MERGER if a
corporation sells all assets to another business entity.
3. ARTICLES OF INCORPORATION (BUSINESS ORGANIZATION). Under business law the formation of a

CORPORATION requires the filing of ARTICLES OF INCORPORATION that define the purpose and
structure of the corporation.
4. BOND (BUSINESS ORGANIZATION). Under state corporation law a BOND is a

negotiable corporation note or debt obligation that gives the holder the right to receive periodic
payments defined by the terms of a document called the INDENTURE agreement. The dollar
amount of the periodic payments is referred to as the "coupon rate." The directors of a corporation
have no fiduciary duty to bond holders.
5. BREACH OF LOYALTY (BUSINESS ORGANIZATION). Under state corporation laws DIRECTORS,

OFFICERS and CONTROLLING SHAREHOLDERS have a fiduciary duty to
act in the best interest of the corporation. The corporation or shareholders acting on the
corporation's behalf may bring an action against directors and officers that breach their duty of
loyalty. (See DERIVATIVE SHAREHOLDER ACTION.)

There is a breach of loyalty by directors, officers or controlling shareholders if there is a failure to
disclose a personal interest in a corporate action. The corporate transaction is void if there is clear
abuse because of unfairness to the corporation or personal advantage or improper motive by the
breaching party. The corporate transaction is voidable if there is no clear abuse but the transaction
is not ratified by the informed and disinterested directors and/or shareholders. (See
RATIFICATION.)
6. BUSINESS JUDGMENT RULE (BUSINESS ORGANIZATION). Under the BUSINESS

JUDGMENT RULE, good faith decisions by disinterested directors are voidable if the directors acted
with gross negligence and breached their duty of due care to act as a reasonably informed, prudent
person would do, unless shareholders ratify the directors' negligent act. (See RATIFICATION.)
7. COMMON STOCK (BUSINESS ORGANIZATION). Corporations generally issue two types of stock,
common and preferred. Common stock gives the holder the right to vote for
directors and the right to a share of corporation profits in excess of the amounts distributed to the
preferred stockholders. (See PREFERRED STOCK.)
8. CONTROLLING SHAREHOLDER (BUSINESS ORGANIZATION). Under state

corporation laws CONTROLLING SHAREHOLDERS have a fiduciary duty to act in the best interests of
the corporation. A controlling shareholder is one that controls sufficient stock to control decisions
by the DIRECTORS.
Control of a corporation can generally be obtained only by buying common stock and it is a breach
of loyalty for a shareholder to convey PROXY rights without selling the common stock itself. A
controlling stockholder may generally sell the controlling interest at a premium price. The buyer of
a controlling block can generally control the corporation immediately. Any premium paid for a
controlling interest belongs to selling shareholder unless breach of fiduciary duty is shown.
9. CORPORATION (BUSINESS ORGANIZATION). Under business law the formation of a CORPORATION

requires appropriate filings and approvals by state government including the filing of ARTICLES OF
INCORPORATION. The liability of each shareholder is generally limited to the amount of his or her
investment.
Shareholders can vote for a board of directors to control the corporation, but the shareholders
have no direct control.
Whether shareholder may freely transfer shares depends on the corporate form. The Internal
Revenue Code recognizes "C" and "S" corporations, and state laws allow corporations to be "closely
held". Stock in "C" corporations is freely alienable, but stock in "S" and "closely held" corporations

is subject to transfer restrictions involving the number of shareholders and the relationship
between them. A “closely held” or “S” corporation may have a “right of first refusal” when a
shareholder wishes to sell her interest.
The income of "C" corporations is taxed at corporate rates before distribution of dividends and
losses cannot be "passed through" to the shareholders. The income and losses of "S" corporations
"pass through" to shareholders without tax but are subject to "passive loss restrictions".
Under state corporation laws a corporation has perpetual life unless the board decides to dissolve
the corporation and liquidate the assets.
10. DE FACTO CORPORATION (BUSINESS ORGANIZATION). If all necessary filings

and approvals have not been completed, but parties proceed in a good faith belief a DE JURE
corporation exists, promoters may argue limited liability on the grounds that a DE FACTO
corporation existed.
11. DE JURE CORPORATION (BUSINESS ORGANIZATION). If all necessary filings and approvals have
been completed, a DE JURE corporation is created.
12. DIRECTOR (BUSINESS ORGANIZATION). Under state corporation laws DIRECTORS are selected by
the vote of COMMON STOCK holders to set broad policy for the corporation and to select corporate
OFFICERS who make top-level management decisions. Directors and officers owe the corporation a
fiduciary duty to act for the best interests of the corporation.
13. FREEZE OUT (BUSINESS ORGANIZATION). Under state corporation laws mergers often give
shareholders APPRAISAL RIGHTS. A "freeze out" is a claim by minority shareholders that they have
been unfairly forced to sell their ownership interest in a corporation for an amount less than fair
appraisal value. Minority shareholders have the burden to prove the transaction was inherently
unfair.
14. GENERAL PARTNERSHIP (BUSINESS ORGANIZATION). Under the common law a

general partnership is the default form of business organization anytime two or more people or
entities join together for a business purpose without taking the necessary steps to form a
corporation, limited partnership or other statutorily defined entity. A general partnership formed
for a very narrowly defined purpose may be called a JOINT VENTURE.
15. INDEMNIFICATION AGREEMENT (BUSINESS ORGANIZATION). Under state

corporation laws the corporation can generally indemnify its directors, officers and agents from
liability for actions taken in good faith, and this can be broadened in the Articles of Incorporation.

Unless set forth in the Articles of Incorporation, the corporation cannot indemnify its agents for
breach of loyalty to the corporation or settlement of third party claims.
16. INDENTURE (BUSINESS ORGANIZATION). Under state incorporation law the rights of corporate
BOND holders are defined by the terms of a document called the INDENTURE agreement.
17. INSIDER TRADING (BUSINESS ORGANIZATION). Under Securities Exchange rules

10b, 10b-5, 14e-3 and 16b security trading is restricted or prohibited by "insiders" or with "inside
information." Inside information is information affecting security values that is unavailable to and
unknown by the general public. Insiders are generally anyone with access to inside information.
18. JOINT VENTURE (BUSINESS ORGANIZATION). A JOINT VENTURE is a general partnership formed for
an expressly limited purpose.
19. LIMITED PARTNERSHIP (BUSINESS ORGANIZATION). Under business law a limited partnership
consists of one or more general partners and one or more limited partners. Formation requires
state approval. The general partners in a limited partnership manage the business and have
unlimited liability. The limited partners are prohibited from management beyond that reasonably
necessary to protect their investment. The liability of limited partners is limited to the amounts
they have invested.
A limited partner can transfer his share to another person at any time subject to previously
agreed upon transfer limitations, but a general partner can only transfer his share to another
person with the unanimous agreement of all partners.
Profits and losses of limited partnerships pass through to the individual partners without taxation,
but losses are subject to the passive loss limitations of federal income tax law.
A limited partnership automatically terminates with the death of a general partner, or by

agreement.
20. MERGER (BUSINESS ORGANIZATION). A corporate MERGER is a combination of two or more

corporations into a single corporation. Many state corporation laws give shareholders APPRAISAL
RIGHTS when there is a merger. If one corporation agrees to sell all assets to the other corporation,
some states hold it to be a de facto merger that gives stockholders appraisal rights. Other states
hold there are no appraisal rights in these cases, or that there are no appraisal rights if the stock is
publicly traded.
21. OFFICER (BUSINESS ORGANIZATION). Under state corporation laws the OFFICERS of a corporation
are those people selected by the DIRECTORS to make top level management decisions. Officers

usually include a president, vice presidents, treasurer, chief counsel and secretary. Directors and
officers owe the corporation a fiduciary duty to act for the best interests of the corporation.
22. PARAMOUNT COMMUNICATIONS RULE (BUSINESS ORGANIZATION). Under the PARAMOUNT

COMMUNICATIONS RULE corporate directors may resist TENDER OFFERS, PROXY FIGHTS and other
take over threats if they are a threat to corporate operations.
23. PARTNERSHIP (BUSINESS ORGANIZATION). Under business law the default form of business
whenever two or more people join together for a business profit is the GENERAL PARTNERSHIP. A
JOINT VENTURE is a general partnership formed for an expressly limited purpose. General partners
share equal control of the business unless otherwise agreed, and each is jointly and severally
personally liable for all liabilities arising out of the acts by the other partners within the scope of the
business.
No partner can transfer his share of the partnership to another person except by unanimous
agreement.
All profits and losses pass through to the general partners.
A general partnership automatically terminates with the death of any partner, by unilateral
withdrawal of any partner, or by agreement between the partners.
24. PIERCING THE CORPORATE VEIL (BUSINESS ORGANIZATION). Under state

corporation laws a corporation shareholder may be personally liable for corporate obligations if a
court finds it is necessary to prevent fraud and achieve equity. Evidence of fraud may be that the
corporation is 1) deliberately undercapitalized or 2) run like a proprietorship without corporate
formalities, commingled funds, and no payment of dividends.
25. PREFERRED STOCK (BUSINESS ORGANIZATION). Corporations generally issue two types of stock,
common and preferred. Preferred stock gives the holder the right to receive a prescribed periodic
dividend from corporate profits, if profits are realized. (See COMMON STOCK.)
26. PROMOTER (BUSINESS ORGANIZATION). Under state corporation laws a PROMOTER is anyone
who helps organize, finance or form a new corporation.
27. PROMOTER LIABILITY (BUSINESS ORGANIZATION). Under state corporation laws PROMOTERS have
a fiduciary duty to the corporation and are personally liable to the corporation if they obtain secret
or unjustified profits from misuse of their position. Promoters are personally liable to third parties
for financial commitments they make on behalf of the corporation prior to the filing of Articles of
Incorporation unless they expressly state they are acting on the behalf of a corporation to be
formed.

Promoters are liable under a breach of warranty theory to any parties injured by
misrepresentations that they 1) will act or 2) have acted to form a corporation, 3) that a
corporation exists, or 4) that they are authorized to act on the behalf of an existing corporation.
28. PROXY FIGHT (BUSINESS ORGANIZATION). A PROXY is the right to vote the shares of common
stock. A PROXY STATEMENT is a list of proposed directors and policies mailed annually to
shareholders by a corporation for their consideration and vote. A PROXY FIGHT is a struggle for
control of a corporation between two competing groups of shareholders. Under state corporation
laws shareholders generally have the right to present policy proposals at the annual shareholders’
meeting and to have legitimate policy proposals mailed to other shareholders with proxy
statements. State law may also require a corporation to provide a list of shareholders to opposition
shareholder groups if requested for a proper purpose. No federal law requires production of such
lists.
In the case of a proxy fight, a corporation may generally pay the expenses of one or both sides if the
fight is over legitimate policy issues and not merely to retain control of the corporation.
29. RATIFICATION (BUSINESS ORGANIZATION). Fully informed shareholders may vote to RATIFY acts of
gross negligence by directors and officers, and fully informed and disinterested directors and/or
shareholders may ratify breaches of loyalty where there was no clear abuse of position.
30. REGISTRATION (BUSINESS ORGANIZATION). Under the Securities Exchange Act all securities must
be registered with SEC if they are 1) publicly traded or 2) sold by an issuing company, a securities
underwriter or by a securities dealer. An underwriter is a party that buys a security with intent to
resell it rather than hold it. A security does not have to be registered if it is a private placement, a
sale to fewer buyers and for smaller amounts than certain limits specified under the Act.
31. REVLON RULE (BUSINESS ORGANIZATION). Under the REVLON RULE directors confronted with
TENDER OFFERS, PROXY FIGHTS or other take-over threats have a duty to maximize shareholder
return once it becomes obvious the corporation will be taken over in any event.
32. SEC RULES 10b/10b-5 (BUSINESS ORGANIZATION). Under Securities Exchange rules
10b and 10b-5 a person is liable for the losses suffered by other investors if the defendant
knowingly 1) trades using inside information obtained through a breach of fiduciary duty or 2)
makes misleading statements affecting stock values.
33. SEC RULE 14e-3 (BUSINESS ORGANIZATION). Under Securities Exchange rule 14e-3 a person is
liable for losses caused by trading on inside information concerning a TENDER OFFER, whether or
not the information resulted from a breach of fiduciary duty.
34. SEC RULE 16b (BUSINESS ORGANIZATION). Under Securities Exchange rule 16b an

officer, director or significant shareholder must disgorge profits made on short swing trades in
registered securities. A short swing trade is a buy and sell or sell and repurchase within a 6 month
period. Rule 16b applies to any person who is either an officer or director at the time of any
purchase or sale of securities, or to any shareholder who owns at least 10% of the outstanding
corporation common stock at the commencement of both the purchase and the sale of the
securities.
The profit that must be disgorged is calculated as the difference between the sale price and the
lowest price the stock sold at during any time it was held by the individual.
35. SECURITY (BUSINESS ORGANIZATION). Under the SECURITIES EXCHANGE ACT a SECURITY is a
financial interest in profits generated by the efforts of others.
36. SHAREHOLDER DERIVATIVE ACTION (BUSINESS ORGANIZATION). Under state corporation laws a
shareholder may file a DERIVATIVE SHAREHOLDER ACTION on
behalf a corporation 1) under the ultra vires doctrine, 2) for director gross negligence and/or 3)
for breach of fiduciary duty by directors, officers or controlling shareholders. (See ULTRA
VIRES DOCTRINE, BUSINESS JUDGMENT RULE, BREACH OF LOYALTY.)
37. SHORT-SWING TRADE (BUSINESS ORGANIZATION). A short-swing trade is a buy and sell or sell and
repurchase within a 6 month period and subjects certain parties to the restrictions of SEC RULE 16b.
(See SEC RULE 16b.)
38. SIGNIFICANT SHAREHOLDER (BUSINESS ORGANIZATION). Under Securities

Exchange rule 16b a significant shareholder is any shareholder who owns at least 10% of the
outstanding corporation common stock at the time they commence either the purchase or sale of
the securities of the corporation.
39. TENDER OFFER (BUSINESS ORGANIZATION). A TENDER OFFER is an offer to purchase a large
number of the shares of a corporation in an effort to obtain a controlling interest. Trading on INSIDE
INFORMATION about a tender offer is a violation of SEC RULE 13e-3.
40. ULTRA VIRES DOCTRINE (BUSINESS ORGANIZATION). Under the ULTRA VIRES DOCTRINE a
shareholder can bring a DERIVATIVE SHAREHOLDER ACTION to have a corporation action declared
void if it is outside the scope of the declared corporate purpose. The Ultra Vires Doctrine has no
application if the Articles of Incorporation define the corporate purpose in general terms.

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Corporations Attack w/ Sample Answers

CORPORATIONS ATTACK W/ SAMPLE ANSWERS 1

FORMING THE CORPORATION 23

PROBLEM SET 3 – VOTING RULES 32

CORP ACQUISITIONS, TAKEOVERS, AND CONTROL TRANSACTIONS 43

Wilson 1 | Corporations with Stevie C Fall 2018

Wilson 2 | Corporations with Stevie C Fall 2018

Wilson 3 | Corporations with Stevie C Fall 2018

Member Managed. 18-305

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II. Was there a self-dealing K or Transaction?

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VI. Was a Corporate Opportunity wrongfully taken?

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Voting Dividends Capital Callable Dissolution

B. Reasons why to prefer one type of security over another

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II. How to Organize

Wilson 23 | Corporations with Stevie C Fall 2018

III. Defective Formation

Wilson 24 | Corporations with Stevie C Fall 2018

IV. Piercing the Corp Veil

B. Factors to Determine Whether to Pierce (C/T CF DC S C F IC SP)

Wilson 25 | Corporations with Stevie C Fall 2018

Wilson 26 | Corporations with Stevie C Fall 2018

V. Successor Liability and PRE-Formation K’s

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Problem Set 3 – Voting Rules

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i. Conditioning eligibility based on proportion of people

2. Contesting S’holder Expenses – s’holders have the right to reimburse successful

Wilson 35 | Corporations with Stevie C Fall 2018

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II. Restrictions on Transfer of Shares

Wilson 37 | Corporations with Stevie C Fall 2018

III. Special Agreements Allocating Authority

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