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I. Agency a. List of business entities (you should know by the end of the semester) i. sole proprietorship ii. company iii. partnership iv. lp v. lllp vi. s corporation vii. llc b. section 1-agency theory i. Gorton v. Doty p. 1 (1937) 1. Father is suing the lady who lent her car to the driver. 2. Facts that triggered agency: a. she lent the car b. specifically conditioned the loaning of the car based on that the coach would drive. 3. 2nd restatement of agency § 1 agency; principal; agent a. (1) agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. b. (2) the one for whom action is to be taken is the principal. c. (3) the one who is to act is the agent. 4. If you are trying to find someone liableuse agency theory 5. Effect: principal is responsible for the acts of his/her agent. 6. Does not have to involve business 7. it can occur naturally and without a formal agreement a. hypo/ I walk over to you and give you $5 to buy me a sandwiche. You are, now, my agent. 8. 3 principal forms of agency: a. principal/agent b. master/servant c. employer OR proprietor/independent contractor 9. holding: there was an agency because doty had exercised control over the coach by making a condition precedent to the lending of the vehicle. 10. how the principal could have avoided liability in this situation a. sign a release or make a contract that would enable the principal to indemnify the agent. ii. Gay jenson farms 1981 1. 86 farmers brought suit against Cargill who was the principal of Warren b/c Warren failed to pay the farmers. 2. Facts that triggered agency
a. warren got financing from Cargill, provided Cargill with access to warrens’ books for inspection b. Cargill knew of warren’s shady business practice c. Cargill knew of warren’s indebtedness 3. how could have Cargill remedied this? a. buy out Cargill and change the management. 4. Holding: Cargill, THROUGH ITS COURSE OF DEALING WITH WARREN, became a principal by exercising its control and influence over Warren. iii. steps on exam 1. identify the action as a tort/contract 2. agency?-rule a. elements: i. fiduciary relation which results ii. from manifestation of consent by a principal 1. element usually at issue. 2. Circumstantial evidence usually used to show this. iii. to the agent to act on the principal’s behalf iv. and subject to the principal’s control 1. the above cases demonstrate this. v. consent by the agent to do so. b. ways to create an agency i. there MUST be an agreement, but the agreement does not have to be a contract ii. an agreement may result in the creation of an agency relationship although the parties did not call it an agency AND did not intend the legal consequences of the relationship to follow. c. ways to prove agency i. circumstantial evidence. 3. policy arguments? 4. Ways to have remedied this/prevented liability. c. Section 2-liability of principal to third parties in contract i. Authority 1. authority § 7 of 2nd restatement of agency: authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him. 2. mill st. church of Christ v. Hogan (1990) a. the church needs to be repainted and hires Bill Hogan. b. Bill Hogan hires Sam who gets injured. c. Did Bill have authority to hire Sam? d. Def; implied authority-actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. i. Factors to determine implied authority 1. agent’s understanding of his authority
a. does the agent reasonably believe that the principal has extended him authority b. 2. nature of the task/job a. implied authority may be necessary in order to implement the express authority 3. existence of prior similar practices 4. specific conduct by the principal in the past permitting the agent to exercise similar powers. e. Def; apparent authority-authority the agent is held out by the principal as possessing f. 3. ii. apparent authority 1. Lind v. Schenley Industries, inc. (1960) p. 16 a. 3 different types of authority i. actual authority 1. authority that the principal expressly or implicitly gave the agent ii. implied authority 1. actual authority given implicitly by a principal to his agent 2. authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. iii. apparent authority (§ 8-inherent agency) 1. occurs when the principal acts in a manner as to impress to a 3rd party that an agent has certain powers which he may/may not possess 2. there is uncertainty as to whether the third party must have relied upon the principal’s manifestation. b. Ways to avoid liability: i. Bureaucratic system ii. Employee manual. 2. Three Seventy Leasing Corp. v. Ampex Corp. (1976) p. 22 a. What could have ampex done to protect itself? i. better supervision. ii. more strict rules in regards to this sale iii. put certain clauses on the form/contract of sale that limit the authority b. Definition of apparent authority-an agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent has
incur obligations on behalf of the partnership. Scenario: undisclosed OR partially disclosed principal c. iii. but solely from the agency relation and exists for the protection of the persons harmed by OR dealing with a servant OR other agent. what could Edison have done? i.” b. if usual or necessary in such transactions. 28 a. undisclosed principal ii. although contrary to the directions of the principal. Also. 27 a. inherent agency 1. expressly stated in the contract that is both written/printed c. b. b. Rationale of inherent agency-comment b to § 8A-this type of authority is NOT based on consent by the principal NOR upon a principal’s manifestation. inherent agency power is a term used in the restatement of this subject to indicate the power of an agency which is derived not from authority. Fenwick p. an agent has the apparent authority to do those things which are usual/proper to the conduct of the business. Notes p. ARCO (1980) p. 25 (1892) a. although forbidden by the principal. Edison. Kidd v. 2. inherent authority is a new classification. Nogales Service Center v. Inc. elements of inherent authority i. 2nd R § 8A inherent agency power. 31 a. 3. Watteau v. Because there was no manifestation by the principal.the authority he purposes to exercise. 3. and 3)agent is 4 . look to the customary/normal/traditional duties in a business 4. (1917) p. RESERVE INHERENT AUTHORITY FOR CASES INVOLVING UNDISCLOSED PRINCIPAL OR PARTIALLY UNDISCLOSED PRINCIPALS. 2)agent acts purely for his own purposes in entering into a transaction which would be authorized if he were actuated by a proper motive. This authority arises in 3 situations 1) agent does something similar to what he is authorized to do. to determine the scope of authority. c. but in violation of orders. § 194 of 2nd R-undisclosed principal is liable for acts of an agent done on his account. § 195 of 2nd R-an undisclosed principal who entrusts an agent with the management of his business is subject to liability to 3rd persons with whom the agent enters into transactions usual in such business and on the principal’s account. Thomas A. c. apparent authority OR estoppel.
2. e. Def: ratification-affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. Botticello v. c. b. b. Policy driven: the court stated that they wanted to put down a policy that would place liability on the dept. ratification 1. iii. Effect: If the principal knows of the agent’s misuse of the authority and does nothing otherwise. prof’s wordsi. Estoppel argument-similar to apparent agency. 36 a. Ratification requires: 1)acceptance of the results of the acts with 2)an intent to ratify with 3)full knowledge of all the material circumstances. The doctrine of authority by estoppel is that a principal may nevertheless become subject to liability on the transaction to a person who has changed his position 5 . 1st R § 82 (1958) c. Koos Bros. 5. they are estopped from denying an agency relationship exists because they did not do enough to protect the consumer. the plaintiff could still use an estoppel argument to find that the imposter was an agent for the department store. then it becomes risky/not beneficial for one party.authorized to dispose of goods and departs from the authorized method of disposal. 40 a. Holding: The court stated that although an agency theory is probably lacking. e. store to ensure that the customers would not be tricked/hustled by imposters. Stefanovicz (1979) p. the principal MAY BE ESTOPPED from using the defense that the agent does not have authority. Ratification requires: 1)acceptance of the results of the acts with 2)an intent to ratify and 3)full knowledge. f. estoppel 1. 3) the 3rd party must have changed position based on this reliance. iv. and if the facts drastically change btw/ the deal and the acceptance of the offer. Elements for estoppel. d. Hoddeson v. 1) the principal must allow either actively or tacitly allow that this person has authority. 2) the 3rd party must in good faith reasonably rely on that. v. ii. Policy of ratification-both parties have knowledge of the facts. g. d. Scenario: This occurs where the principal knew of this wrong belief and could have prevented the harm. b. (1957) p.
3rd party sues agent 1.because of the belief that the transaction was entered into when he carelessly permitted such belief to exist. knowing of the belief. Curan (1992) p. Other circumstances are if the agent acts beyond his authority. he did nothing to notify the other party of the erroneous belief. 43 a. Holding: whether or not a 3rd party has the means to ascertain the identity of a principal. OR when. b. making the agent liable to the 3rd party under a misrepresentation theory. if the agent fails to properly disclose who the principal is 2. This is the only case where the plaintiff is going after the agent.c. 47 1. if an agent wants to avoid liability. e. agent disclosed false information about a principal. ii. not an independent contractor-respondeat superior. 2 types of independent contractor a. vii. 3rd party sues principal 1. servant agrees to work on behalf of the master. 6 . the principal for whom the agent is acting is a partially disclosed principal d. agent i. principal sues agent 1. Various situations i. AND b. when do you think we go after the agent? i. Atlantic Salmon A/S v. This is a new wrinkle. obviously. servant has agreed to be subject to the master’s control OR right to control the “physical conduct” of the servant 3. the agent MUST disclose the identity of his principal. case where a master is held liable for the act of his employee.2) a. if the agent acts beyond his authority 2. ii. Other circumstances if the agent fails to disclose OR accurately disclose who the principal was. vi. principal will be liable if the agent acted within his authority 2. 2nd R of Agency § 4(2)-if the other party has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity. 2. d. Servant Versus Independent Contractor p. 2. you do not go after the principal if the principal does not exist OR insolvent. c. agent’s liability on the contract 1. Section 3-Liability of Principal to Third Parties in Tort i. elements for master/servant relationship ( 2nd R of A §§1. iii.
Murphy v. 56 d. so Sun’s motion for summary judgment was granted. the critical test is the nature and extent of the control agreed upon. b. A: it did not matter to the court. in analyzing whether a contract establishes an agency relationship. Sun Oil Co (1965) p. i. 2nd R of Agency § 219(1) A master is subject to liability for the torts of his servants committed while acting in the scope of their employment. b.c.i. d. is whether the defendant has retained the right to control the details of the day to day operation of the service station b. c. 57 i. little business discretion left up to Schneider … c. agreement. paid 3/4s of the utility bills. 53 a. (1975) p. 4. plaintiff slipped and fell on an area of a walk where water draining from an air conditioner had been allowed to accumulate. Inc. 6. I THINK IT SHOULD HAVE MATTERED. one who has agreed to act on behalf of another. non-agent i. LOOK AT THE NATURE OF THE TORT AND THE NATURE OF THE BUSINESS 5. holding: holiday inn was not a master b/c it did not control the other party. one who operates independently and simply enters into arms’ length transactions with owners. The comments make it clear that a principal is NOT LIABLE for the torts of his non-servant agents. Murphy sues Holiday Inn for damages sustained. Martin (1949) p. the principal. Holiday Inns. rule: the test to determine whether a person is an employee or an i. holding: sun never controlled the day to day operation of Barone. Hoover v. while humble oil is really in regards to oil? i. 50 a. Humble Oil & Refining Co. while she was a guest of the hotel. e. 48 a.c. how should they have protected themselves? 7 . ii. IN MY OPINION. does it/should it matter that the tort arose out of repairing. v. analysis and planning p. but not subject to the principal’s control over how the result is accomplished b. Factors listed on p. f. Analysis-facts-humble oil dictated the hours of operation. Key difference btw/ master servant and ic is the amount of control involved/used.
Traditional test: conduct of a servant is within the scope of employment if the act is done by a purpose to serve the master. United States (1968) p. from which spring the same legal consequences as those which result from an actual agency. POLICY ARGUMENTS-loss spreading/deterrence 2. so he loses his temper and throws the baseball directly at the fan. c. then attaching liability to the principal/master is fair. Manning v. Court analyzed the case under an actual agency theory and did not use apparent agency d. 2. Made an insurance provision in the contract with patrons and with the franchiser. 58 a. He rents the room based on the name of the hotel. Grimsley (1981) p. e. Manifestation by an alleged principal which creates a reasonable belief in a third party that the alleged agent is authorized to bind the principal create an apparent agency. c. Actual agency-authority which a principal expressly or implicitly grants to an agent. Ira S. BUT the apparent relation i. Magness Construction Co. iii. this court decided that reliance by the 3rd party on the authority represented by the principal must be demonstrated. Issue is whether the baseball club is liable. Drunken sailor opens valves that floods a dry dock. Pitcher is heckled. the employee’s assault must be in response to the plaintiff’s conduct which was PRESENTLY INTERFEREING with the employee’s ability to perform his duties successfully. i. The director of the hotel wrongfully asks for additional payment and locks the patrons/bangs on the door/and more. When a plaintiff seeks to recover damages from an employer for injuries resulting from an employee’s assault. damaging a ship that was docked. b. Tort liability and apparent agency 1. 61 a. Guy rents a room from a hotel. Bushy & Sons v. In order to find liability based on an apparent agency. b. 1978 p. Scope of employment 1. According to this court. words can be considered conduct. f.i. b. Apparent agency-focuses not upon the actual relation of the principal and agent. 8 . ii. d. New test: if the servant’s conduct is foreseeable. 66 a. Billops v.
(1959) p. b. Conoco. place. Principal hires an incompetent i. nuisance per se) d. 9 .conduct of an independent contractor does NOT affect a principal’s liability c. ii. Liability for torts of independent contractor 1. 76 a. privileges… without regard to race. then he is accountable for it to his master. Duties during agency 1. Arguello v. Fiduciary obligation of Agents i. Whether the servant is accountable to the master for the money received. religion. iii. Regem (1948) p. c. iv. b. Title 2-all persons shall be entitled to the full and equal enjoyment of the goods. Servant gets money from drugs. Generally. The activity is inherently dangerous (i. and purpose of the act ii. 2nd restatement § 219-factors for deciding within the scope of employment i. Guy demolished a house and accidentally damaged an adjacent house. Notes p. whether the master would reasonably expect such act would be performed e. d. 3.e. e. (2000) p. Principal retains control of the manner and means of the work of an agent. color.c. time. Majestic Realty Associates. if a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself.c. b. Reading v. 2. inc. 69 a. services. extent of departure from normal methods v. similarity to acts which the servant is authorized to perform iii. 81 a. 69: 2nd restatement § 228(2)-a servant’s use of force against another is within the scope of employment if the use of force is not unexpectable by the master. Exceptions: i. Still analyzed the existence of an agency and the scope of employment. v. facilities. v. Conoco attendant says racial epithets to patrons of the service station. Toti Contracting Co. 2. Inc. or national origin. Statutory claims 1. whether the act is commonly performed by servants iv. General rule.
The advantage must come not from solely the service that gave the opportunity. 88 a. We want to discourage the cheapest form of freeriding. Inc. but we can think of this as a breach of an agency theory. Common practice iv. b. b. 84 1963 a. GA sues him for his breach of his duty as an agent to General automotive. Violates statute-exp/ insider trading v. Result: they found that there was a breach of the duty. The court said that they breached this fiduciary duty although the agency was terminated. partnerships can be created without documentation. They get sued for unfair competitive activity. c. They still owed certain duties. V. The three people who have worked for this company left to start a rival company. Section A-Partners Compared with Employee 1. iii. Town & Country House & Home Service. Court looked at the facts that he wore a king’s uniform/position of a soldier. ii. Examples of violation of duty-financial benefit with out the consent of the principal i. since they had been employees of town and country. Newbery (1958) p. 2. Seems more policy based decision i. partnership characteristics-notes 01/14/04 a. c. iii. II. PARTNERSHIPS a. gift d. He acts as a broker for other firms and does not give the commission to GA. Whether the servant is exercising the authority given to him. facilities he controls. v.i. singer p. 10 . He was not acting in good faith and had a duty to inform the company of the money coming in. Section 1-What is a partnership? And Who are the partners? i. general automotive manu. 2. but from the position of the service. it is clearly a brach of te agent’s fiduciary obligation not to disclose it and quietly take the profits for himself. Kickback ii. Duties during and after termination of agency: herein “grabbing and leaving” 1. Bribe iii. It does not matter whether general automotive would have benefited from this conduct. c. ii. real cause.
she was not a co-owner definition: UPA § 6(1)-partnership is an association of 2 or more persons to carry on as coowners a business for profit. this is a problem. Fenwick v. but this inference will not be drawn if the profits were received as a. Sharing of gross returns solely does not establish a partnership. longevity i. c. Unemployment Compensation Commission p. partner cannot transfer his partnership share. traditional partnership. this was a problem b/c if one partner died. ii. A debt by installment.b. transferability of ownership i. Sharing of title does not solely establish a partnership iii. Interest on a loan. 11 . partnerships are not taxed. iv. Upa § 7-rules for determining the existence of a partnership: (gist) i. Wages of ee/or rent to Landlord c. then you have prima facie evidence of a partnership-general rule (not conclusive) 2 factors for finding that this was not a partnership: i. receptionist. Court has to decide whether a partnership was set up or not. 2. e.. in regards to taxation. she did not control any aspects of the business iii. Annuity to widow OR rep to deceased d. if you share profits. She didn’t share any of the losses. d. or otherwise b. she does a good job as a receptionist. management of a partnership is more decentralized than a corporation and have more voices that could decide how the partnership is to be run/controlled. Except as provided in § 16 ii. partnerships do not have limited liability. but the income that the partners receive are taxed (flow-thru taxation) c. Apparently. then you have to start over with a new partnership (this is changing b/c the new partnership act is allowing a partnership to live after a partner dies/leaves) f. e. Has a hair salon and hired Cheshire as a b. d. Receipt by a person of a share of the profits in the business is prima facie evidence that he is a partner. 92 (1945) a.
b. plaintiff loses its money-500k. fixed renewable term. jones (1992) p. South Carolina bank goes belly up. What could they have done differently? i. ii. did not share cost/loss 4. the south Carolina transferred the money to swiss American. peyton (1927) p. 3. 97 a. Result: No. they are not a partnership c. 4. could have incorporated. iii. rather than indefinite duration 3. i. conducted business in their own name 5. c. Young v. d. Southex exhibitions. rhode island builders association. contributions to property shared ii. Ppf’s rights in return include receiving 40% of the profits of the firm until the return was met. inc. KNK has engaged in financial trouble. Con partnership 1. They were putting on these home exhibition shows in the convention center. v.e. Result. Consideration for the sale of a good-will of a business f. Martin v. sharing of control 3. inc. We have 2 firms that might have formed a partnership. Analysis: e. 12 . Section B-Partners Compared with Lenders 1. agreement was titled agreement. they should have just loaned the money for interest and not for a share of profit of 1. and the RIBA is the power behind the scenerepresentative of all the rhode island builders. its existence must be analyzed under a totality of circumstances approach. b. Issue: whether PPF is a partner so that the creditors can go after them. prima facie evidence when you share in the profit-look at the upA f. (2002) p. Pro partnership 1. 102 a. make the loan more explicit-sate in the agreement that the loan does not subject the two firms to be partners ii. Ppf has loaned money to KNK with some conditions. 107 a. profit sharing 2. These 2 firms are SEM and RIBA. not partnership agreement 2. testimony that each regarded as own co. Analysis: because partnerships can be created without any written formalities.
the plaintiffs did not even see the brochure.-upa § 7(1) e. 2. so how could they say that they relied on it. So they sue price waterhouse-question is whether pw Bahamas is co-partners with pw us? c. Result-no partnership i. d. A person who represents himself. you should explicitly write what the share of the profits are/is in the partnership agreement. Salmon. The primary thing is that they failed to demonstrate a level of reliance on a holding out of them. given credit to the actual or apparent partnership. You could also analyze this in terms of agency-is price water house us the principal. As a fiduciary. joint adventurers is considered narrower than partners. 111 a. is liable to any such person to whom such a representation is made who has.current event 01/21/04-Cingular buys out AT & T wireless-possibility of anti-trust law of monopoly. They agree to lease the property and split the property. If not. Salmon was a property mogul and got with Meinhard who had a lot of money. iii. seems less disingenuous. and the pwb the agent. there was no reliance. Salmon had a duty to disclose to Meinhard the opportunity of another business opportunity f. 1. A-introduction. later. on the faith of the representation.b. then common law would specify what the share would be. Meinhard wins under the theory of fiduciary obligation of partners/joint adventurers. c. b. persons who are NOT partners as to each other are NOT partners as to third persons. d. Joint adventurers and partners are used interchangeably. Section 2-the fiduciary obligations of Partners i. They are coadventurerspartners. 13 . e. How to remedy: For partnership. Would it have made a difference if salmon did this after the partnership ended? i. Generally. Yes. Section C-Partnership by Estoppel b. to anyone as a partner in an existing partnership OR wit others not actual partners. does a new property deal with someone else. Meinhard v. Rule: partners are held to the highest degree of duty as a fiduciary to each other. g. with Salmon as the manager. but the UPA is still triggered for joint adventurers. OR permits another to represent him. Salmon (1928) p. –upa § 16(1) f.
d. E. 14 . F ii. he OR his wife is supposed to get retirement payments. Rule: After dissolution. 117 a. The theory is that the fiduciary duty was violated b/c they did not take care of the retirement account. profit. Bane is a partner in this firm. Part of the plan. OR a knowing violation of the law. All Salmon had to do was disclose the deal to Meinhard. Bane was a retired partner. 2.general standards of partner’s conduct (a) the only fiduciary duties a partner owes to a partnership and the other partners are the duty of loyalty AND the duty of care set forth in (b) and (c). including the appropriation of a partnership opportunity. c. 116 revised uniform partnership act (1994) § 404.h. e. (2) to refrain from dealing with partnership in the conduct OR winding up of the partnership business as OR on behalf of a party HAVING AN INTEREST ADVERSE TO THE PARTNERSHIP. and he retires. Bane v. and the result is that the entire firm dissolves. His theory was negligent mismanagement b/c there was no issue as to whether there was a failure of disclosurecourt rejected—side issue. and (3) to refrain from COMPETING with the partnership in the conduct of the partnership business before the dissolution of the partnership. His firm merges. (c) a partner’s duty of care to the partnership and the other partners in the conducting AND winding up of the partnership business is limited to refraining from engaging in grossly negligent OR reckless conduct. B-After dissolution 1. b. Upa 9(3)(c) f. Ferguson (1989) p. or benefit derived by the partner IN THE CONDUCT AND WINDING UP of the partnership business OR derived FROM A USE BY THE PARTNERSHIP of partnership property. p. Result: he loses. (b) a partner’s duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership AND hold as trustee for it any property. SKIPPED D. intentional misconduct. not a partner. a person who is no longer a partner is not owed a fiduciary duty from the partnership or the partners.
Lawyers are allowed to keep their clients (unlike the laundry case) b/c clients may want a particular attorney c. Kightlinger & Gary (1990) p. d. UPA § 31 Causes of dissolution. Congress has passed laws that will enable them to get retirement benefits-applies to blue collar worker. He is expelled. this was the breachlied h. 2.g. Upa § 20 duty of partners to render information. Lawlis v. and he is given one partnership share. the partners did NOT breach their fiduciary duty not to compete. b. PROVIDED that they do not act in violation of their fiduciary duties. Contravened the duty of fair dealing c. and the partnership agreement details the procedures for this. 2. f. 119 a. parties shall render on demand true and full information of all things affecting the partnership to any partner OR the legal representative of any deceased partner OR partner under legal disability. iv. D-Expulsion 1. To avoid this: more precisely outlined the procedures for partners leaving the firm. iii. Shaughnessy (1989) p. Removing partnership files from a partner’s office does NOT constitute dissolution. Basis for lawsuit i. Partners leave a firm to create another law firm. b. 127 a. NOT partnerships. g. 15 . C-Grabbing and leaving 1. The partners lied when asked if they were planning on leaving. Professor feels that the partnership acted correctly b/c the partners properly acted pursuant to the partnership agreement. Dissolution is caused: (1) without violation of the agreement btw/ the partners. e. e. To protect retired persons. d. Told that he will be expelled. Lying seems contrary to the highest degree of fiduciary duty imposed on partners. How could you resolve this? Should have a separate trust fund established by the partnerships. Meehan v. Dissolution of partnership by removing files ii. 3) secretly competing with the partnership. factory workers. The only breaches were: 1)failure to be honest about their leaving 2)fair about the way they notified their clients. vested retirement fund. by secretly setting up another firm.
2. Ms. This was probably a policy decision. Now. She’s paying $21k to get the Shoaf’s to come in and take over ½ interest. either before OR after the termination of any specified tem or particular undertaking. but only property interest. c. Putnam v. significance: a partner cannot convey a personal. and his wife wants to exit the business and arranges to sell to the Shoaf. Putnam reappears wanting her cut by alleging that she is still a partner b/c she did NOT sell her partnership interest. and partner’s interest in the partnership defined as “his share of the profits and surplus and losses” It is a right to share in the profits and distributions of surplus. (d) by the expulsion of any partner from the business BONA FIDE in accordance with such a power conferred by the agreement btw/ the partners. h. That is personal property of the partner. 4. Putnam. Section 3-Partnership Property i. and that CAN BE assigned. Putnam dies in 1974. 6. they discover that the bookkeeper has been swindling her. 134 1. …. Shoaf (1981) p. (c) by the express will of all the partners who HAVE NOT assigned their interests OR suffered them to be charged for their separate debts.(a) by the termination of the definite term or particular undertaking specified in the agreement. Hint: look at the procedure set out in the partnership agreement for this analysis. g. specific interest in partnership property. after she pays her interest. Skipped 2-6 f. Mr. Expulsion must be done in good faith for a dissolution to occur without violation of the partnership agreement. 3. (b) by the express will of any partner when no definite term or particular undertaking is specified. 5. The Court agreed with Ms. UPA § 24 Extent of property rights of a partner The property rights of a partner are (1) his rights in specific partnership property and (2) his interest in the partnership. 16 . 2. Partnership agreement is violated if the expulsion is exercised in bad faith OR for a predatory purpose (more money).
but they also consider the lowest method of achieving this. You cannot. BUT he has no right to possess such property for any other purposes without the consent of his partners. all partners have equal rights in the management and conduct of the partnership business. however. equal to the co-partners. e. UPA § 18 (e) subject to any partnership agreement. own purposes. Consequently. You have a right of possession. opposed to a tenancy in partnership. Sec. ii. Section 4-Raising Additional Capital i. Businesses often need additional funds to finance their activities. the partnership needs another 500k to build a house worth 10 million. Another problem that comes up is whether some item is really partnership property or a partner’s property. You could use the warehouses. READ IT IN THE CASEBOOK-PROF WAS CONFUSING. this section allows a partner to possess and use specific partnership property for specific partnership purposes. iv. iii. subject ot the provisions of this act and to any agreement between the partners. NO ONE WOULD OFFER THE additional 500k b/c that would be a loss. 17 . and 1 million is sold to 40 investors=24k. The Rights of Partners in Management i. (2) the incidents of this tenancy are such that: (2)(a) a partner. has an equal right with his partners to possess specific partnership property for partnership purposes. but not for personal. d. however. Undivided interest as cotenants. widges over to that warehouse. 25 (explains the rights in specific partnership property)… nature of a partner’s right in specific partnership property 1) A partner is a co-owner with his partners of specific partnership property holding as a tenant in partnership. (2)(b) A partner’s right in specific partnership property is NOT assignable except in connection with the assignment of rights of all the partners in the same property. the partnership borrows 9 million. the partner would have a fee simple. store in that warehouse your personal stash of weed.(3)his right to participate in the management. Section 5. ii.
and he begins working for the partnership. 18 . 142 (1959) 1. Knowledge=actual knowledge. Skipped 3-4 7. Summers wants a 3rd guy. which is not apparently for the carrying on of the business of the partnership in the usual way DOES NOT bind the partnership UNLESS authorized by the other partners. 1) Every partner is an agent of the partnership for the purpose of its business. there was no majority. Summers. UNLESS the partner so acting. 4. rather benefiting the individual. 2) An act of a partner. not what should he have known. 3.Stroud could not change the partnership agreement b/c he only had 50%. Summer pays him out of his own personal funds and demands that the partnership pays the 3rd guy. so the court held the partnership liable. partnership. iv. 5. Stroud p. partner did an act that was for the ordinary matter connected with the partnership business. Also. UPA § 9 Partner Agent of Partnership as to Partnership Business ability of an agent to bind the principal. summers and D are partners 2. Each partner has the authority to act as an agent of the partnership as carrying out the normal acts of the partnershipUPA § 9 3. and the act of every partner. partnership NOT liable b/c it did not benefit the partnership. 4. has in fact. partnership was liable. UPA § 18 (h) subject to any partnership agreement. not a majority. in a contract situation. including the execution in the partnership name of any instrument. 2. for apparently carrying on in the usual way the business of the partnership. of which he is a member binds the partnership. result: The court held that the plaintiff CANNOT recover. and the person with whom he is dealing has knowledge of the fact that he has no such authority. Mr. Summers v. issue: Whether the partnership is obliged to pay for the salary of the 3rd guy although Dooley never authorized this. Dooley p. 144 (1971) 1. no authority to act for the partnership in the particular matter. National Biscuit Company v. apparent agency is lingering behind the scene 6. any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. iii. but no act in contravention of any agreement between the partners may be done rightfully without the consent of all his partners. result.ii.
Day alleges that the partners breached their fiduciary duty by beginning on the merger without notifying/consulting the other partners. and the 2 firms relocated and consolidated the chairmen of both firms as co-chairmen. 3. 6. Mr. partner must account for any profit acquired in an injurious manner to the interests of the partnership 19 . Mr. and 2) S & A agreement implicitly authorized the executive committee to create. Mr. Day alleges fraud due from the merger & acquisition agreement that provided “no sidley partner would be worse off in any way…. 146 (1977) 1. or eliminate firm committees. better partnership agreement v. pursuant to S & A agreement. which requires only a majority vote. breach of contract. in 1963. b. conspiracy and wrongful dissolution OR ouster of partner a. 3 basic fiduciary duties i. c. law firms create an executive committee in regard to the rainmakers (persons who bring in business/clients) 5. have a provision that allows an arbitrator/mediation. underwriterpartners are the persons who have given the greatest capital contribution.5. putting Mr.” b. in 1972. which resulted from his forced resignation. Day was first associated with S & A in 1938. control. Problem under summers a. a. breach of fiduciary duty. court rejects this because 1) the partnership agreement never specified Mr. 4. He was a senior underwriting partner. the partners can outvote him. Day’s position and his legal rights.Day alleges loss of income. Day on notice of a possible relegation. The court viewed the merger as similar to admission of new attorneys or severance of current ones. fraud a. assign the jobs/tasks to the better suited partner. S & A merged with Liebman. 6. damage to his professional reputation and personal embarrassment. UPA provides that its laws are subject to a partnership agreement. 7. and he was instrumental in establishing a Washington Office. solution: better partnership agreement. Sidley & Austin p. 8. rather than dissolution. Court states that fiduciary duty is primarily concerned with partners who make secret profits at the expense of the partnership. b. Day v. Mr. 2. b.
Policy – for not extending fiduciary duty to this type of case there may be an imposition of too much duties. under the UPA (1914) §§ 29 and 31. cohen (1941) p. b. the two enter into an partnership for a bowling alley. 9. owen v. That he would continue to be the managing partner of the WA office. after about 4 months. Rule: courts of equity MAY order the dissolution of a partnership where there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation between the parties has been destroyed OR where one of the parties by his misbehavior ii. the 2 partners begin to bicker in regards to the management of the partnership and their respective rights and duties under the agreement. Issue: whether the evidence warrants a decree of dissolution of the partnership e. there was no secret profit NOR any financial loss for the partnership as a whole. partnership dissolution i. vi. Under UPA (1997). d. 11. b. acquire for himself a partnership asset iii. d. Moreover. he must NOT compete with the partnership within the scope of the business. Day have done to protect himself? a. this provision is a “continuation agreement”-agreement obligating the remaining partners to continue to associate as partners under the existing agreement. conclusion: summary judgment granted. section 6. a new partnership is formed. 152 1. 20 . Notes p. 154 a. 3. the old partnership is dissolved by the retirement and when the remaining partners continue working. if the remaining partners have an agreement that contains a provision specifying that the remaining partners will continue as partners. rather than be a co-partner. 2. Plaintiff loans the partnership about 7k. c. right to dissolve 1. Court rejects this b/c they did not feel that disclosing internal structure of a partnership is encapsulating in a fiduciary duty. a partner CANNOT without the consent of the other partners. Plaintiff brings suit to dissolve the partnership/sell its assets b/c he’s scared of losing his 7k investment. if he had good rainmaking skills. He may have been able to get the other partners to agree to these terms. When a partner retires. 153 vii.f. and this would constrain business. if a partner retires pursuant to an appropriate provision in the partnership agreement. there is a dissociation (§ 601) rather than a dissolution (§ 801)… p. what could Mr. 10.
UPA § 29 Dissolution defined. the partner who wrongfully dissolves. Under the 1914 UPA. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business. j. Good will value of the customer loyalty/value of intangible aspects. OR (iii) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. g. UPA ( 1997) § 801(5) On application by a partner. (d) a partner willfully or persistently commits a breach of the partnership agreement. (e) the business of the partnership can only be carried on at a loss. If you wrongfully dissolve a partnership. m. a judicial determination that: (i) the economic purpose of the partnership is LIKELY to be UNREASONABLY frustrated. you WILL NOT have control of the winding up affairs. Conclusion: dissolved.f. he does not get the good will value 21 . materially hinders a proper conduct of the partnership business. UPA § 32 Dissolution by decree of court (1) on application by or for a partner the court shall decree a dissolution whenever: (a) a partner has been declared a lunatic in any judicial proceeding OR is shown to be of unsound mind (b) a partner becomes in any other way incapable of performing his part of the partnership contract (c) a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business—this was satisfied b/c the other partner demeaned the other partner and was unwilling to work. i. h. (ii) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner. (f) other circumstances render a dissolution equitable. OR Analysis: court finds that the deprecating treatment by the defendant to the plaintiff disrupts the proper conduct of the partnership business. k. OR otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him-same as above. l.
Collins would contribute money. Plaintiff owns a corporation that is the partnership’s major creditor. Rule: a partnership may be dissolved by the express will of any partner WHEN NO definite term OR particular undertaking is specified. there exists a potential for money in the business c. Plaintiff wishes to dissolve the partnership c. Analysis: the court rejected the lower court’s finding that the partnership was for a term (when they would make money) b/c there was no evidence to suggest this. The consequences of dissolution 22 . plaintiff and defendant are partners in a linen supply business. Still subject to a fiduciary duty of good faith. e. This court recognized that when a partner advances a sum of money to a partnership and was to be repaid as soon as feasible from the prospective profits of the business. a partnership at will is presumed by the courts. 2. the partner who wrongfully dissolves DOES get the good will value. 157 a. page (1961) p. the partnership is for the term reasonably required to repay the loan.n. 162 a. How to protect Lewisput in provisions in the p. iii.—upa 31 (b) i. but the other partners is entitled to damages. Under the 1997 UPA and CA. The court refused to order a dissolution b/c Collins was acting unreasonable by lending additional monies and that Lewis is competent to manage/work. 3. Collins v. b. The court also stated that a hope to make a profit is not equal to an implied understanding that the partnership is for a term to repay the loan.a. d. e. Lewis (1955) p. How to protect Collinslimit the money asked for. f. d. ii. f. page v. The court was probably protecting the partnership from preventing Collins buy the partnership at a reduced sale and have Lewis still have an outstanding debt. As a result. A partnership for a term can be implied from fact. The fiduciary duty still continues even during winding up phase of a partnership. ii. 4. Lewis (Appellee) approached Collins to start a partnership. b. POLICY prevent one partner from becoming a victim of a judicially enforced dissolution. When there are no implicit or explicit intentions otherwise. while Lewis would contribute his expertise and management ability of operating a cafeteria.
this was done in good-faith and instituted a dissolution of the partnership. if they get to keep the patents. He was not confident that he could win on the covenant not to compete. How could he protect himselfkeep bidding with new investment buddies. c. b. Permanent licenseopen ended. here. and they dissolve. Consequences of dissolution other partners are allowed to purchase the partnership assets 2. They have a falling out. not terminable at will. How to protectbetter written p. rather than covenant theory? i. (1986) p. The conflict. Conclusion: general provisions (default provisions) of the upa PREVAILED over the partnership agreement. Vasso Corp. LOOK AT UPA A § 38 23 . 3. 171 a. g. He could recover more money ii. Conclusion: yes c. b. d. then dale would get to keep some money. The court found that there was a partnership at will. The partnership agreement calls for dale’s corporation to give the exclusive license to give the patents of the partnership. Partner signs a negative covenant not to compete. 165 a. f. Pav-Saver Corporation v. Sues for breach of partnership agreement. Monin (1989) p. Partners are both corporations. Result: Charles prevailed. Monin v. Issue: whether 2 partners in a 3-man-partnership at will. c. and have not completely wound up and settled the partnership affairs. Sheffel (1973) p. Rationale: the purpose of the fiduciary duty is to prevent a partner from benefiting at the partnership’s expense. Prentiss v. agreement and the general provisions of the upa (non-wrongfully dissolving partner is entitled to continue running the partnership) d. f. b. Partnership for a milk hauling. d.1. By selling his interests and actively pursuing a contract with the milk company. and although the other partners excluded the one partnerappellant. 168 a. Rule: a partner’s fiduciary duty extend beyond the partnership to persons who have dissolved the partnership. is between the p.a. e. e. who have excluded the 3rd partner. should be allowed to purchase the partnership assets at a judicially supervised dissolution sale. e. Sonny benefited both ways at the expense of the partnership. but he does. Why sue under fiduciary duty.
provisions in a partnership agreement WILL PREVAIL over the default provisions of the UPA. whether by way of capital OR advances to the partnership property AND share equally in the profits and surplus remaining after all liabilities. Reed (1957) p. then the court will defer to the default provisions of the UPA 2. d. UPA § 18 Rules determining Rights and Duties of Partners The rights and duties of the partners in relation to the partnership shall be determined. SKIPPED (b) (c) 4. iii. subject to any agreement between them. 5. 4. K would provide the financing. the partnership must buy out the withdrawing (dissociated) 24 . irrespective of any inequality in the amounts each contributed to the capital employed in the venture. The 2 never discussed possible losses. § 701if a partner has rightfully withdrawn from a partnership. Exceptions: 1. sustained by the partnership according to his share in the profits.g. a partnership does NOT dissolve IF a partner withdraws from a partnership in contravention of the partnership agreement. neither party is liable to the other for contribution for any loss sustained. 2. with the losses being shared by them in the same proportions as they share the profits e. Upon loss of the money. LOOK AT PAGE 179 3. 1952. and K demanded that R contribute the amount that K had advanced. are satisfied. whether of capital OR otherwise. i. f. There was a loss. by the following rules: (a) each partner SHALL BE REPAID his contributions. § 701 of the UPA (1997). Exception to the general rule: when one joint partner or joint adventurer contributes the money capital as against the other’s skill and labor. the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise. General rule: in the absence of an agreement to the contrary. GENERALLY. c. including those to partners. if the partnership agreement is not clear. 177 a. Kovacik (K) approaches Reed (R) and asks him to become a superintendent for possible remodeling jobs. The Sharing of Losses –Section C 1. b. the party who contributed it is not entitled to recover any part of it from the party who contributed only services. and must contribute towards the losses. Kovacik v.
Issue: whether the surviving general partner is entitled to continue the partnership after the death of Nordale. G & S Investments v. method of payment i. Century Park=limited partnership with Nordale and G & S. Look at the (2)(3)(4) 25 . (NOT when the dissolution was filed) i. Nordale began using cocaine. details of a buy/sale a. d. pricefair market value/capital account/ i. c.authorizes the court to dissolve a partnership when a partner’s conduct affects the carrying on of the business. book value=accounting-what was paid for the business. raise rents). and HOW the value of Nordale’s interest in partnership property is to be computed. iv. cash OR installments (with interest?) e. first mover forces others to set price. procedure for offering either to buy OR sell i. In 1979. 3. 2. or some assets of the firm. set price each year v. Due to his erratic behavior and unreasonable requests (p. buyout=agreement that allows a partner to end her or his relationship with the other partners and receive a cash payment. He also lived in one of the apartments and sexually solicited an underage female. Time of dissolution: Court found that the time for dissolution was when Nordale acted in contravention of the partnership agreement. usually lower than appraisal value. ii. relation to duration d. and acted improperly. b. appraisal iii. 4. e. in return for her or his interest in the firm. Buyout Agreements 1. formula (e.partner for an amount equal to his/her share of the value of the assets of the partnership. Belman (1984) p. b. (gist). first mover sets price to buy/sell (set pricethen buy/sell) ii. 182-change it to condos.g. 181 a. triggeryou should describe the triggering events for a buy/sale event in a partnership agreement. obligation to buypartnership/other partners/other investors c. UPA § 32. protection against debts of partnership f. 5x earnings) iv. G & S decided to dissolve the partnership. OR series of payments.
Partnership agreements are binding. Upon the death. g. The mere filing of a dissolution of a partnership in the court DOES NOT constitute wrongful dissolution. they must purchase the interest of the retiring OR resigning general partner. 2. b. h. Holding(gist) rule against extra compensation to law partnerships i. regardless of which former partner provides legal services in the case after the dissolution. jewel v. holding: in the absence of a partnership agreement. now. and Leary. rule prevents partners from competing for the most remunerative cases during the life of a partnership in anticipation of a dissolution. i. No partner except a surviving partner is entitled to extra compensation for services rendered in completing unfinished business… look at holding. the UPA requires that attorneys’ fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership. Boxer. Ways of buying out fair market value OR capital account (represents the amount of equity each partner has in the business)=lower estimate than f. 26 . 5. after Nordale’s death: the court looked at Article 19 of the Partnership agreement i. Law Partnership Dissolutions 1. In order to carry on the partnership. Policy justifications 1. insanity OR resignation of one of the general partners. v. discourages former partners from scrambling to take physical possession of files and seeking personal gain by soliciting a firm’s exiting clients upon dissolution. Elkind. Boxer (1984) p. Rules: a dissolved partnership continues until the winding up of the unfinished partnership business. 185 a.v. retirement. and Elkind was dissolved by the mutual agreement of its 4 partnersJewel. and the rights and liabilities of the partners among themselves are subject to such agreements. the law firm of Jewel. the surviving or remaining general partners MAY continue the partnership business. 12/2/1977. c. Boxer. Should the surviving OR remaining general partners desire to continue the partnership business. d.f.m.
There must be AT LEAST one general partner who has unlimited liability and other limited partners who have limited liability. decreased by the losses. and decreased by the amounts withdrawn. There is nobody with unlimited liability. increased by profits over the years. g. they still get to keep their overhead expenses and their share of the profits. pursuant to UPA § 21 (fiduciary obligation statute).e. 2. c. and the trustee brought this action against 2 limited partners to hold them accountable as general partners. 3. Bop the party that took the cases have to prove that the clients would have consented if they were fairly notified of their option to stay with them. 27 . Holzman v. Money could be withdrawn from the partnership’s account on the signatures of any 2 of the 3 partners. a. 4. 3. Forced the general partner to resign and selected his successor. 196 1. Profit=received amount that exceeds 1)any reasonable overhead expenses and 2)the fair charge that is owed under a partnership agreement. a partner’s capital account=account of a partner’s initial investment of cash OR property. 190 a. vi. Shaughnessy (1989) p. f. Court found that the limited partners were general partners based on their conduct. The point of limited liability if everything is done upfront and the creditors know who the general partner is. Court reiterates that partners are free to put into a written partnership agreement provisions for completion of unfinished business. Took part in the control of the partnership business b. limited partnership i. g. they had a partnership agreement that stated dissolution and an instant winding up of the partnership. Dissolution = (upa § 31 of 1914) comes first. –UPA § 21 e. Illustrates how one court shaped a decision concerning partners who wrongfully removed cases. increased by later contributions. There was a limited partnership that went into bankruptcy. De Escamilla (1948) p. b. The client still has the freedom and final decision as to who they want to represent them. h. Meehan v. to protect against a long winding up period=probably not desirable put provisions in the partnership agreement OR negotiate a partnership agreement 2. then winding up. c. f. d. Assuming that the cases were wrongfully removed.
there are no requirements 2. more expensive than partnership ii. taxation (not much distinction) a. inc 7. v. cost of formation a. ii. longevity a. If have less than 75 shareholders. forming a corporation as the vehicle for investment by other people. ii. File name with secretary of state. 28 . partnershipflow through taxation 3. partnership DOES NOT have limited liability 4. corporationgeneally. THE NATURE OF THE CORPORATION a. III. do a name search. partnershipdecentralized 6.5. then amount of time to make it will be same… however. PROMOTERS AND THE CORPORATE ENTITY i. Articles of incorporation are analogized to a constitution iv. formation (not much distinction) a. Buy/sell agreement-urge client to draft. corpsome clients prefer it to the sound of --. Bylaws are analogized to statutes pursuant to the constitution. and bylaws. h. DO NOT MIX UP WITH A LLC and a LP. management a. need certificate of inc. then you can make a sub-chapter S corporation that has flow through taxation b. promoter-refers to a person who identifies a business opportunity and puts together a deal.. PAY a lot of salary to make 0 profit. avoid this by pay no dividends. client perception a. Key distinction btw corporations and partnership: 1. corporationlimited liability b. but not anymore with 1997 UPA (dissociation – last indefinitely) 5. ii. get a form book with samples of articles/use it as a model. corporationtake very specific/formal steps. in) i. iii. corpdouble taxation i. articles of incorporation. corplast forever—pass the shares b. b. partnershipnot long b/c dissolve. corpcentralized management: CEO is in charge b. liability (major difference) a. get certificate of incorporation and file it with the secretary of state (wherever you want to inc. Partnershipif partnership agreement.
Plaintiff. holding: a defendant. Exp/ joe makes a contract for corp to be. and plaintiff seeks specific performance and damages. no corporation-fraudliable c. having given its promise to construct the vessel. and the defendant ratifies the previous contract for the sale of a ship. 199 a. generally. no corporation/ no fraud/did not disclose profit (agent has duty to disclose to principal profit) agent liable. hypos-book p. Southern-Gulf Marine Co. 2. good faith effort to form a corporation 2. while defendant asserts a defense of legal status. b. ii. Inc. Camcraft. Corporation by estoppel. plans to incorporate in texas. defendant defaults. (la. v. Promoter/sets up corporation/do not tell the other owners of the corporation that he bought the land for 100k and sell to corp for 200ka promoter is not an agent of a corporation. later. a. 4. unless its substantial rights might thereby be affected. iii. but the promoter is. promoter is liable for any obligation of a corporation that is going to be formed. i. the formation of the corporation does not terminate the promoter’s liability. particularly when the obligations are sought to be enforced. The point is that you have to do something more in order to have the promoter escape liability. examine the fiduciary obligations of promoters to 3rd persons for pre-incorporation 2. i. should not be permitted to escape performance by raising an issue as to the character of the organization to which it is obligated. provides limited liability.1. 3. is ESTOPPED from denying its corporate existence. held to owe a fiduciary duty to a corporation. if nothing is said about liability. Inc. initially. 3. 1982) 1. i. Joe is liable until corp is made. incurring obligations in its favor. d 29 . Hypo/ plaintiff asks secretary to mail a letter that would incorporation. 9. Disclosure is critical. incorporates his organization in the Cayman Islands. rule: one who contracts with what he acknowledges to be and treats as a corporation. but plaintiff. e. App. Difference btw/ this and corporation by estoppel: 1. but secretary fails to do so difference— de facto corporation. b. No. plaintiff makes a contract to purchase a ship from defendant. d.
then you will not have to sign as an individual. 4.y. Agency theory. law permits the incorporation of a business for the very purpose of enabling its proprietor to escape personal liability.5. analysis: the fact that both parties relied on the contract shows that each party acknowledge and treated the plaintiff as a corporation. 3 theories asserted: a. rules: a. Walkovsky v. 5. plaintiff was run down by a taxi cab in New York city. the purpose of a corporation is limited liability. enterprise theory-requires piercing the corporate veil and reverse piercing. supplies. the taxi cab is owned by defendant Seon Cab Corporation. Agency-problem-this goes against the principles of corporation. he is also entitled to hold their stockpersons personally liable for the damages sought b/c the multiple corporate structure constitutes an unlawful attempt to defraud members of the general public. 7. liability will transfer to the corporation. 2) make a provision that (if sign as individual). if represent plaintiff. then go after Carlton. Carlton (n.” 30 . 1966) p. pierce the veil. 3. iv. employees. and garaging. then reverse pierce the other corporations to get more money enterprise theory. c. but there are limits to this rule. 6. repairs. 206 1. 2. including Seon. business planning: a. 9. unless you can establish piercing the veil. Carlton is claimed to be a stockholder of 10 corporations. The corporate entity and limited liability-section 2 i. if represent defendant wait until the corporation is formed/ whether or not the corporation is formed. Plus. cannot trump the limited liability of corporations.s. the minimum automotive liability insurance required by law is 10k. unit and enterprise with regard to financing. piercing the corporate veil b. 6. 8. each of which has 2 cabs registered in its named. plaintiff asserts that he all 10 corporations should be named as defendants because they are operated as… a single entity. and it was driven by defendant Marchese. generally. b. make sure that the guy who is behind the deal signs it and is liable for the contract. really just wanted to leave it up to the state legislature to decide this. did not set up corp1) set up the corporation first. once it is set up. b. b. Courts will “pierce the corporate veil” whenever necessary to “prevent fraud or to achieve equity.
so Sea-Land could not recover. 1987. 16. but PS had dissolved in mid 1987. the defendant was carrying on the business in his personal capacity for personal ends by using the corporation as a dummy. PS did not pay the freight bill. business planning: increase insurance amount rather than primarily relying upon the limited liability characteristic of the corporation. Also. rule: a corporate entity will be disregarded. 1991) p. 211 1. 12. equitable/fair—protect the passive investor. 10. and the fact of using minimum liability insurance does not mean this. the fraud would be the intentional undercapitalization of these corporations to avoid liability. ii. Sea-Land Services. Inc. b. and the veil of limited liability will be pierced when 2 requirements are met. b. closely held corporation-almost all the stock is owned by an individual shareholder. 4. Pepper Source (7th Cir. there was a larger corporation that controlled the smaller corp. PS has no assets. 11. 13. 2. v. Appellee Sea-Land Services (ocean carrier) shipped peppers on behalf of The Pepper Source (ps). 3. b. 14. On Dec. why does a corporation have limited liability? Limited liability for persons who do not have control over a corporation is an incentive for this type of investment and business association. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. a. 2. provide adequate capitalization to ensure that the courts do not view the corporation formation as fraud. two theories of recovery for the plaintiff a. 15. Agency theory applies whenever anyone exercises control of the corporation to further his own interest rather than the company’s business. Does honoring the defendants’ separate identities promote injustice? 31 . ALL the piercing the veil cases involve investors who control. he will be liable for the corporation’s acts upon the principle of respondeat superior. court rejected the claim b/c the facts do not suggest that the defendant was doing this for his own personal interest. the district court entered a default judgment in favor of Sea-Land. Unity of interest and ownership that the separate personalities of the corporation and the individual (or other corporation) no longer exist.c. parent subsidiary case-almost all the stock is owned by the parent corporation. scenarios for piercing the veil: a. i.
Piercing the corporate veil requires: i. piercing the corporate veil is an equitable remedy. single office. Failure to maintain adequate corporate records OR to comply with corporate formalities b. Under-capitalized corporation. plaintiff claimed that the injustice was that the defendant failed to pay its bill. Polan (4th Cir. 3) marchese runs all the corp out of the same. One corporation treating the assets of another corporation as its own. 1984. corporate façade to avoid its responsibilities to its creditors. 32 . 1991) p. c. New third prong-DISCRETIONARY OF COURT-if a party fails to conduct an investigation that would disclose that the corporation is grossly undercapitalized. 6. is there evidence to support the contention that the defendant schemed to commit fraud? 2. or other agreements of the corporation. 217 1. without interest. 3. adverse possession case. However. b. sealand satisfies prong 1 because: 1) no corporate meeting. examples/ 2 partners sue another. with the same phone line. 2)no articles of incorporation. and the burden rests with the party asserting the claim. Commingling of funds or assets c.1. Industrial and Poland. Polan and Kinney negotiated a sublease. Would an equitable result occur if the acts are treated as those of the corporation alone. same expense account. iii. iii. a. bylaws. Because almost every contract case deals with a failure to pay a bill. requires some element of injustice ii. Unity of interest and ownership such that the separate personalities of the corp and the individual shareholders no longer exist ii. in 1984. then that party has assumed the risk of loss. Polan formed 2 corporations. Kinney Shoe Corporation v. rules: a. iii. policy 5. terms of the lease=Kinneypolandindustrial 4. 4) borrows from the other corp. Polan defaulted on his rent payments. factors in finding that the corporation was controlled by another to justify piercing the veil. Nov. Totality of the circumstances test is used to determine whether to pierce the veil. the court did not want this to be considered as an injustice to prevent a floodgates of litigation. 2. Undercapitalization d. 5)pays personal bills with the accounts.
respondents were limited partners of commercial and were officers. 4.d. and shareholders of Union Properties. exercised the day to day control of Commercial. In re Silicon Gel Breast Implants Products Liability Litigation (n. and it seems that courts take a more lenient approach in piercing the veil of corporations in tort cases as opposed to contract cases. and the respondents through U. are sufficient to piece the corporate veil in order to hold them liable. conclusion: yes. 6. Unity of interest test. conclusion: Court refused to extend the liability of the limited partners because petitioner had knowledge that Union Properties was the only party with general liability. (Wash. supra b. if you are worried about abuse of the limited partnership. petitioner arg: limited partners should incur liability as a general partner for the limited partnership’s obligations because they exercised the day-to-day control and management of the limited partnership. Ala. parent subsidiary case. 5. implement formalities in your plan. v. DOES NOT require the equitable result prong. Union Properties. Inc.P. 6. Court suggests that undercapitalization is equal to fraud or injusticeprof. insurance. conclusion: summary judgment denied. the general partner. Tort case. factors on page 225 4. run credit check. Union properties was the general property of commercial. 33 . has limited liability. directors. 2. Piercing the corporate veil requires a. This remedy is still available if there is injustice/fraud AND a unity of interest. 229 [limited partnership with a corporation as a general partner] 1. the court found polan liable.d. business planning: do not undercapitalize your corporation. when the general partner incorporates. the doctrine of piercing the corporate veil s an answer to this concern. Grossly inadequate capitalization combined with disregard of corporate formalities. causing basic unfairness. Frigidaire Sales Corporation v. petitioner entered into a contract with Commercial Investors. 5. 221 (situation-first corporation is generally referred to as a parent corporation and the second as a subsidiary) 1. 5. a limited partnership. vi. 7. 3. 1977) p. However. 3. courts have had difficulty with this because the essence of a limited partnership is that there is 1 general partner who has unlimited liability with limited partners who have limited liability. 1995) p. now. 2. The court focused on the fact that the petitioner was NOT DECEIVED. Bristol-Myers Squibb is a parent corporation of Medical Engineering Corp that produces breast implants. iv.
c. 1971) p.000 shares… his shares+ intervenor= 150 shares=0. d.000 stockholders and owns 100/2. Strike suits-plaintiff’s attorney does not have much of a case. 2. Significance: this is an action that lies in a court of equity. j. k. 232 a. use forum state’s law for Substantative law and procedural law. use FRCP. This case would really deal with a breach of a fiduciary duty. b. 34 . including attorney’s fees. The shareholders derive their power to sue from the corporation. removed the action to the District Court for the Eastern District of New York. Based solely on diversity. a Delaware Corp. Defendants=corporation and certain of its managers and directors who allegedly engaged in fraud over 18 years to get about $100 million.0125% of the outstanding stock and about $9k market value price. f. b. Eisenberg v.000. Flying Tiger=Delaware Corporation with its ppb in CA. Beneficial Industrial Loan Corp (u. but brings this suit in order to get a quick settlement. and the shareholders elect a board of directors that chooses a CEO. of the defense and entitles the corporation to require security for their payment. h. It was not unreasonable to apply the statute that would make the plaintiff liable for reasonable expenses. liable for the reasonable expenses. Plaintiff is a stockholder of Beneficial Industrial Loan Corporation. They used new jersey’s law—permit the plaintiff to bring the suit. e.s. the shareholder brings the suit on behalf of the corporation and on behalf of all the shareholders of the corp—def of derivative lawsuits. Cohen v. Inc. introduction 1. Point of this case—in diversity suit. sc. Plaintiff is 1/16. i. if unsuccessful. Flying Tiger Line. Holding: a federal court with diversity jdx must apply a state statute providing security for costs if the state court would require the security in similar circumstances… g. Issue: whether a federal court. (2d Cir. having jdx. 1949) p.c. Max Eisenberg=resident of New York=stockholder of The Flying Tiger Line. 236 a. shareholder derivative actions i. Inc. Shareholders own title to a corporation. MUST apply a statue of the forum state which makes the plaintiff. commenced this action in the Supreme Court of New York to enjoin the plan of a reorganization and merger. Plaintiff’s lawyers usually bring/construct these types of lawsuits.
and in order to do so. or whether it is to compel the performance of corporate acts which good faith requires the directors to take in order to perform a duty which they owe to the corporation. Reversed. --. LIMITED ONLY TO THE FACTS OF—stockholder seeking to force directors to call a stockholders’ meeting. Issue: whether Eisenberg should have been required to post security for costs as condition to prosecuting his action. Derivative suit—individual does not get the money. Class actions are brought to enforce the independent rights of a particular group of persons. the suit is derivative. Why did it do this? They wanted to diversify. 1. the former corporation deprived him and other minority stockholders of any voice in the affairs of their previously existing operating company. Court overruled this test whether the object of the lawsuit is to recover upon a chose in action belonging directly to the stockholder. e. After the merger. it just owns the stock of another corporation. 35 . k. j. but the corporation gets the money damages.little use ii. h. and through it. Personal suit-suit on behalf of individual person. Difference btw/ class action and derivative action: derivative suits are brought to enforce the rights of the corporation. i. but if the injury si one to the plaintiff as a stockholder and to him individually and NOT to the corporation. the suit is individual in nature and may take the form of a representative class action. notes: a. d. New test: suits are derivative ONLY IF BROUGHT in the right of a corporation to procure a judgment in its favor. Conclusion: we find Eisenberg’s cause of action to be personal and NOT derivative within the meaning of § 627. to its stockholders.c. Test: i. ---is this suit derivative (corp) or personal f. if a derivative actionsettled a corporation CAN pay the legal fees of the plaintiff and defendant. Individuals who have breached their duty to the corporation has to pay money damages to the corporation. ALL of the shareholders. they have to create a holding co. iii. 3. Gravamen of the complaint is injury to the corporation. g. Holding company-usually does not have its own business.
Direct claim of alleged abdication by a bd. d. f. assert that the demand is excused. 241 a. corporate managers who have harmed the corporation will be relieved of risk of personal losses if the corp. g. The requirement of Demand on the directors 1. under § 141(a). based on the allegation that the Board has breached its fiduciary duties by abdicating authority c.ct. of directors of its statutory duty. court-abdication claim can be stated by a stockholder as a direct claim. the CEO controls the day to day activities of a corp. 185 801(b)-same thing. c. Claim is that there are potentially severe financial penalties which the company would incur in the event that the Board attempts to interfere in Donald’s management of the company. the stockholder plaintiff MUST ALLEGE more than an injury resulting from a wrong to the corporation. court-stockholder MAY NOT. e. When a pres-suit demand in a derivative suit is required OR excused? iv. in reality. GrimesDonald (CEO) and DSC for an award of damages. Issues: i. pays large attorney fees in return for their willingness to accept a settlement. What are the consequences of demand by a stockholder and the refusal by the board to act on such a demand? 1. To pursue a direct action. d. 1. b. If a judgment for money damages is imposed defendant is required to pay those damages and pay the cost of their defense. the injury MUST BE separate and distinct from that suffered by other 36 . ii. As a matter of law. Donald (del. the board is responsible for the corporation. Look at § 141(a) (delaware code)-the board is ultimately responsible for a corporation’s activities. thereafter. 1. Test for direct or derivative i. Together as a whole. and this would deter the Board from exercising its duties. all corporate power shall be exercised by… board of directors. 1996) p.b. iii. Grimes v.supp. In re general tire 1984-defendant paid hefty attorney fees to plaintiff and did an equitable remedy that really did not do anything. 4. but. P. Distinction btw/ direct claim and a derivative claim? ii. especially one other than money damages.
consequently. courts interpret this pretty loosely b/c realistically. then the court tends to label the suit as a direct action.shareholders OR wrong involving a contractual right of a shareholder… ii. (exp/show fraud or corporate bribery) 2. iv. majority of board is incapable of acting independently. business decisions ARE NOT an abdication of directorial authority merely b/c they limit a board’s freedom of future action. one ground for alleging with particularity that demand would be futile is that a reasonable doubt exists that the board is capable of making an independent decision to assert the claim if the demand were made. Only in clear abuse or violation of laws will the court step in. OR iii. BOP is on the plaintiff. deference to make business judgments. iii. business judgment rule-the court follows and gives a board of directors from a corp. directors may NOT delegate duties which lie at the heart of the management of the corporation ii. it is very difficult. if the plaintiff is only asking for an injunction (look at remedy pursued). Basis for a claim would be – i. the board rejecting the demand is entitled to 37 . 1. for derivative suits a stockholder MUST allege either that the board rejected his pre-suit demand that the Board assert the corporation’s claim or allege with particularity why the stockholder was justified in not having made the effort to obtain board action. h. or underlying transaction is not the product of a valid exercise of business judgment. a. rules: i. OR ii. if a demand is made and rejected. board has a material financial or familial interest. an informed decision to delegate a task is as much an exercise of business judgment as any other.
2. A plaintiff does not have to wait for a response IF the corp is in risk of harm. 3)discourage strike suits commenced by shareholders for personal gain. ii. d. j.y. Suit for waste-violated the business judgment rule by paying too much to the employees.the presumption of the business judgment rule UNLESS the stockholder can allege facts with particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption. unless the demand would be futile. CA law (kind of easier than NY or DEL) i. that a majority of the board of directors is interested in the challenged transaction 2. ii. c. deliver a copy of the complaint to the corporation before filing suit. Policy for demand requirement: 1) let the corporation deal with it. 249 a. 2) provide corporate bd. k. Demand is excused b/c of futility when a complaint alleges with particularity 1. Rule: Demand is required before initiating a derivative suit. Purpose of the rule: 1) relieve courts from deciding cases that should be better left for the directors. plaintiff (shareholder derivative action) IBM and IBM’s board of directors b. 2)minimize the burden on the court by first requiring the plaintiff to resolve the problem with the corporation. Akers (n. PROBLEM—Does plaintiff choose to make a demand or not. marx v. 15/18 members of the board voted for excessive compensation. AND 2. Under the model business act.— 38 . with protection from harassment by lawsuits. difficult to do v. i. Stockholders must allege in particularity the reasons for not making such effort 1. during a decline in profitability. MAKE a demand.s. that the board of directors did NOT fully inform themselves with the challenged transaction to the extent reasonably appropriate under the circumstances. 1996) p. DEMAND is required as a condition for suiing. OR explain to the court why you didn’t make an effort. i. demand is universal.
The Role of Special Committees 1. shareholder OR director of any governmental or private consumer OR 2)used to reimburse any officer of the corp. or other person for such payments. prof dislikes excessive corporate compensation-consider that other nations are being paid less-argue well. After reports that numerous multi-national companies had made questionable payments to public officials OR political parties in foreign countries. Conclusion for excessive compensation does NOT state a claim upon which relief can be granted. c. 255 a. iii. 4. (fiduciary duty???) d. corporate funds had been 1)paid directly or indirectly to any political party OR person OR to any officer. for breach of their duties to the corp.e. Auerbach filed suit against this company and Arthur Anderson & Co. 3. A disinterested group was elected to see what was in the corporation’s best interest-decided that it would NOT be in the best interest of the corporation for the present derivative action to proceed. P. b. Bennett (n. Conclusion for outside directors: demand was excused b/c 13/18=majority.different from Delaware law that requires managers to be independent. iii. Auerbach v. Federal securities laws prevent US corporations from paying bribes to foreign persons/country. would be excused (whenever a violation of the duty of loyalty. 39 . After this. i. Demand was futile in regards to prong 1. An audit revealed that between 1971 and 1975. e. problems p. the damages will go to the corporationderivative b. 257 e. this is NOT protected by the business judgment rule) c. Only 3 directors got excessive compensation out of the 18== not equal to majority f. that the challenged transaction was so egregious on its face that it could NOT have been the product of sound business judgment of the directors. 256 a. directed that an internal preliminary investigation. Failed to allege particular facts in contending that the board failed to deliberate or exercise its business judgment. 3. conclusion for not outside directors: defendant’s motion to dismiss for failure to make a demand as to the allegations concerning the compensation paid to IBM’s executive officers was properly granted. employee. g. ii. GT & E Corp.2d 1979) p.
j. i. or a. Business judgment rule DOES NOT confer power to a corporate board of directors to terminate a derivative suit. falls under the business judgment rule (b/c this is a 40 . instituted a derivative actions in the Court of Chancery on behalf of Zapata against 10 officers and/or directors. g. Maldonado (Del. KNOW difference of derivative/direct lawsuits. so the remaining 6 appoint 2 new outside directors to the board. Rule: i. 2. Two ways to initiate a derivative suit 1. Business judgment rule. f. were no longer on the board. In june 1975. Issue: whether the Committee has the power to cause the present action to be dismissed e. Was there sufficient independent/care given that was within the discretion of the board of directors. Difficult to argue for money damages b/c the bribes probably helped the corporation to make more money OR positively affected a rise in the stock of the corporation.shields the deliberations and conclusions of the chosen representatives of the board only if they possess a disinterested independence AND do not stand in a dual relation which prevents an unprejudicial exercise of judgment. ii. c. stockholder of Zapata. This board created an independent investigation Committee. 1981) p. Maldonado. Four of the def. alleging breaches of fiduciary duty. differences for demand requirements (remember Delaware and model rule requirement of universal demand and CA) & UNDERSTAND POLICY behind the disputes. d. Zapata Corp. case brought as derivative and that demand was excused. and the Committee concluded that each action should be dismissed. Conclusion: the court defers to the board’s methodologies and procedures b/c they find it to be adequate. Maldonado did not make a demand. but stated that it would be futile.f. 261 a. v. Standard for assessing whether the court should grant that motion the business judgment rule had been complied with. issue: whether the corporation can appoint a board of independent directors to decide whether the suit should be dismissed and whether it is in the corporation standard. g. h. demand is made and wrongfully rejected. b.
(ex/ family relations). the action MUST be dismissed. 41 . unless the plaintiff can show that the rejection was wrongful. Many corporations incorporate in Del.presumption). considered a variety of factors and reached. conclusion: the court remanded this to see whether the committee was independent. Q: do you think the fact that they will be in the same litigation and were appointed by directors support a lack of independent? Not really b/c they are in the same litigation. when demand would be futile (must show) iii. an individual stockholder DOES NOT exclusively have the power to control a derivative lawsuit. supreme courtformer corporate attorneys. nodeny motion to dismiss b. conducted a proper review of the matters before it. ii. 2. NYdiscretion with the corp. well established corporate law. iii. j. the motion should include a thorough written record of the investigation and its findings and recommendations 2. and more.. yesstep 2=b ii. holding: i. does the committee have both independent and good faith acted to supports its conclusion i. this is in the court’s discretion. two step process a. if a committee composed of independent and disinterested directors. a stockholder may initiate a derivative suit without prior demand. Delaware courts discretion is given to the court ii. 1. k. in good faith. h. b/c lenient laws in Del. a business judgment that the action was not in the best interest of the corporation. To show that they are independent. A committee with properly delegated authority would HAVE the power to move for dismissal OR summary judgment if the entire board did. court determines. i. i. you need to show something very direct. by applying its own BJR.
p. The company donated $1500 to Princeton. and. because alleging with particularity the reasons why demand would be futile is a higher burden on the plaintiff than a rejected demand. fire hydrants. The Role and Purposes of Corporations i. mainly for water and gas industries. 268 and 269 a. 276 1. 4. policy: encourage corporations to give donations. iii. conclusion: the court sustained the validity of the donation. A. Business planning: step 1. d. iv. at which Ford expressed no such interest. and make sure that at least the appearance of impartiality. there would be no special dividends. Barlow (1953) p. Co. rule: there must be fraud OR a breach of that good faith which directors are bound to exercise toward the stockholders in order to justify the courts entering into the internal affairs of the corporation. 42 . 270 1. v. In regards to step 2. look to see if any persons were disciplined or dismissed. Ford announced that n the future. hire big named law firm as independent committee. Profits would be reinvested in the business. since the co. 1919) p. was created long before the statute. the Dodge brothers offered to sell their shares for 35 million. All corporations exist based state law. The Dodge brothers owned 10% of the Ford stock and received 120k annually. plaintiff’s argument a. so state amendments can be made. Ford Motor Co (mich. see whether there are some conduct that are so atrocious. see if there are any suspicious relationships involved. based on this. Dodge v. Smith Mfg. 2. 3. 5. there is an indirect benefit from donating to a university by helping the community. in 1916. and this was questioned by stockholders. c. under common law. the company does not possess any implied OR incidental power to make it b. and special equipment. Although the primary purpose of corporations is to make money. b.3. plaintiff’s certificate of incorporation does not expressly authorize the contribution. New york BJR is more favorable than Del.P. 2. and had a share of the special dividend of $1 million. new jersey statutes which expressly authorize the contribution MAY NOT constitutionally be applied to the plaintiff. An argument of a violation of a Duty of care can be extinguished by the business judgment rule. 3. ii. Company incorporated in 1896 and manufactures/sells valves. 4.
OR to the nondistribution of profits among stockholders. to the reduction of profits. was not concerned with the financial interest and welfare of the corp. 6. 6. 5. and the plaintiff attributes those loses to inadequate attendance at Cubs’ home games. The discretion of the directors is to be exercised in the choice of means to attain that end. conclusion: has to pay a dividend of 19. Appeal of a stockholders’ derivative suit against the directors for negligence and mismanagement. holding: court felt that although the corp. plaintiff=minority shareholder of defendant corporation. IV. and defendant Wrigley is president of the corp and owner of 80% of the shares. the concern for the surrounding neighborhood was enough. 19/20 major league teams schedule night games. Even if he was holding out for a new attractive stadium. A business corporation is organized and carried on primarily for the profit of the stockholders. He concludes that if lights were installed. pay the 19. 281 1. and does not extend to a change in the end itself. Shlensky v. LLC mix of the corporate form and general partnership 43 . during 1961-1965. Trend: Courts do not like to second guess board of directors (exp/ Ford case and Chicago Cubs). and can build the smelting plant.). 8. Chicago National League Ball (inc. then the night games may help the financial situation. 9. and this would not be a violation of BJR. Formation i. iv. the decision must be showed to be fraudulent. 4. The Cubs operated at a loss. there is a reluctance to second-guess the decision of CEOs and directors. illegal or a conflict of interest in their making the decision. v. b.3 million dividend violation of duty of care 8. this would probably be in the best interest of the corporation. smelting plant bjr 7.3. The Limited Liability Company a. 7. 2. 3. plaintiff alleges that night lights were not installed because Wrigley views that baseball is a daytime sport AND that the night games will have a deteriorating effect upon the surrounding neighborhood. type a. Wrigley (Illinois 1968) p. 5. business planning: should have said that the temporary loss of profits would be to encourage investment and increase future profitability. conclusion: not a violation of the business judgment rule.4. in order to inquire into a board’s decision. rule: a. Characteristics (limited liability company AND limited liability partnership) 1.
Lanham and Clark approached Westec to perform engineering work.183. LLP file a document with a state official. LLC may be managed by all its members (like partnership) OR by non-member managers (like corporation) more leniency than corporation. management a. Secretary of state. c. and Westec completed the engineering work and sent a bill for $9. Inc. LLP limited liability in regards to only contracts. b. LLC limited liability for members. and on this business card.288 1. issue: whether the members or managers of a limited liability co are excused from personal liability on a contract where the other party to the contract did NOT have notice that the members or managers were negotiating on behalf of a limited liability company at the time the contract was made 2. 4. Waste & Land. insurance (malpractice) a. investors in an LLC are taxed. only once on the profits. 3. desirable b/c maintains the partnership structure. Investors in an LLC can account. Operating agreement can have provisions for buy/sell agreement (when they would be triggered). b. like partners. there were no representations that their company was a LLC. Some states impose fees and taxes on LLCs c. and operating agreement ii. ii.40 to Lanham. CA file both Articles of organization AND operating agreement. 2. NOT tort. 1998) p. tax a. Lanham (Colo. like a corporation. of any losses of the LLC ( losses “pass thru”) c. on their individual tax returns. rules: a. similar to corporations. LLPlike llc. liability a. There was an oral agreement. where a 3rd party seeks to impose liability on an LLC’s members OR managers simply due to their status as 44 . creation a. requires some paperwork and filings with a state agency. 6. iii. b. requires proof of adequate insurance for establishing a LLP in CA. 5.b. Same for LLP 4. Water. i. Clark gave a business card to Westec. CA LLP only allowed to lawyers and accountants. 3. d/b/a Westec v. File articles of organization. No payments have been made.
ii. whether contractual provisions directing that all disputes be resolved exclusively by arbitration OR court proceedings in CA are valid under the act. To get Lanham. ELF approached Jaffari. 5. Elf Atochem North America. The undisclosed principal would be the LLC/Lanham. make Clark and Lanham personally liable on the contract. IS nevertheless BOUND by the agreement b. issues: a. the filing of the articles of organization serve as a constructive notice of a company’s status as a LLC.managers OR members of the LLC. 6. c. i. Different with agent who is liable if he does not fully disclose the identity of the principal. entered into an agreement in which Elf would be the worldwide distributor for Malek LLC./CA corp. Inc. Elf sued Jaffari and Malek LLC. b. the court used agency theory. 1999) p. and the agreement provided that Jaffari will be the manager of Malek. They. 3. failed to 45 . The 2 created Malek LLC. alleging that Jaffari pushed Malek LLC to the brink of insolvency by withdrawing funds for personal use. since the Act DOES NOT prohibit the members of an LLC from vesting exclusive subject matter jdx in arbitration proceedings. because the EPA categorized the masks as hazardous. Lanham was found liable. interfered with business opportunities.-developed an innovative. inc. 4. 6. the agreement is binding on the LLC as well as the members b. the contractual forum selection provisions MUST govern. business planning: they could have put it on a business card LLC/document/sign/advertisement. conclusion: the LLC Act’s notice provision WAS NOT intended to alter the partially disclosed principal doctrine. 293 1. Defendant Jaffari-president of Malek. iii. i. whether the LLC. 5. LLC. Ct. Jaffari would also be the CEO. Sup. conclusion: a. How about Westec? check the credit rating. v. environmentally-friendly alternative to the solvent-based maskants that presently dominate the market. Jaffari (del. 2. also. 7. plaintiff-Elf-makes/distributes solvent-based masks to the aerospace and aviation industries throughout the world. which DID NOT execute the LLC agreement in this case defining its governance and operation. b. The Operating Agreement i. 7.
Piercing the LLC Veil i. 10. Default rules are used if the members DO NOT decide otherwise. concerning operating agreements. A derivative action can be brought on behalf of the LLC’s behalf. 8.-Court 46 . rules: a. Courts are still working on this. c.3d 2002) p. 9. b. Kaycee and Livestock seeks to pierce the LLC veil. Kaycee alleges that Flahive Oil & Gas caused environmental contamination. Flahive (p. holding: if the members and officers of an LLC fail to treat it as a separate entity as contemplated by statute. they should not enjoy immunity from individual liability for the LLC’s acts that cause damage to third parties. of the member OR members as to the affairs of a limited liability company and the conduct of its business. Kaycee Land and Livestock v. significance: piercing the LLC veil is permitted as an equitable remedy. Flahive=Wyoming LLC 3. BUT they are silent in the LLC context. Counterargument-legislative expressly mandates piercing in the corporate context. unity of interest (alter ego). § 18-101(7) defines the limited liability company agreement as “any agreement. d. to pierce the LLC veil a. to pierce the corporate veil (review) a. issue: in the absence of fraud. 6. 300 1. and threatened to make poor quality masks. is a claim to pierce the LLC an available remedy against Wyoming Limited Liability Company 2. Raise unconscionability argument. courts take the position of allowing freedom of contract. rationale: court speaks of the similarities between corporations and LLC 9. where the agreement is inconsistent with mandatory statutory provisions. ii. written OR oral. Kaycee-contract-Flahive to use the surface of its real property 4. fraud or injustice. significance: court upheld an arbitration clause in the llc agreement. fraud or injustice 11. no allegation of fraud 7. unity of interest (alter ego)—difficult to show b. the members’ agreement will be invalidated. 8.make disclosures to Elf. AND b. Roger Flahive-is and was the managing member of Flahive 5.” c. e.
47 . The court. Tom Thumb Food markets. found a lease agreement to be unacceptable. 2. Also. They needed to get an arena. a llc. Cannon of Construction-if the legislature does NOT want to follow Common Law. 6. wealthy group of persons created CHL. there was NO tortuous interference with a business relationship. construction of written contracts is a matter of law b. only where the language of a contract is unclear OR ambiguous OR when the circumstances surrounding the agreement invest the language of the contract with a special meaning. b. but they say that the LLC is liable for its failure to fulfill the contract. rules a. 2. Fiduciary Obligation i. and. holding: a. involves a fiduciary relation. says that there is no piercing of the veil. a. another investor. his group was awarded a franchise. McPherson liked the lease agreement. d. conclusion: they look at the agreement. they were the first. but Hunt. silence may be seen as accepting/mandating the common law. LLC p. ultimately. in this case. McConnell v. Rationale: McPherson did NOT act in a secretive manner. 303 1. like a partnership. c.Rejected—b/c when Wyoming made the LLC statute. extrinsic evidence will be considered. ii. McPherson filed a suit to establish its legal right to the franchise without the inclusion of Hunt or CHL. TLH Properties. v. on the other hand. 4. so this silent does not mean that they wanted to exclude this equitable remedy. 1999) p. 3. then they will expressly state this. consequently. Hunt Sports Enterprises (Ohio App. pursuant to operating agreement. later. and the court concluded that the exclusion was not a breach of the fiduciary duty b/c the operating agreement allowed such acts. 5. 305 1. they try to pierce the LLC. Test for determining whether a term is ambiguous is that common words in a written contract will be given their ordinary meaning UNLESS manifest absurdity results OR unless some other meaning is clearly evidenced from the face or overall content of the contract. 12. Inc. NOTE: this conclusion was reached by taking into consideration the context of members’ ability. iii.
conclusion: The court orders her to pay. number of units/shares. e. they are the most flexible to have limited liability and pass thru taxation. Other theories available-profi. American express bought Donaldson. the court found it to be…???? READ book. New Horizons sues Haack. Operating member (have one person who is in charge of the day-to-day operations) e. 311 1.s.??? d. Because she did not use the proper steps to make a LLC. becomes defunct. To sum up 1. New Horizons Supply Cooperative v. Piercing the veil ii. Proper dissolution requires giving notice in order to liquidate your assets…. directors. spoke about the duty of loyalty. 7. 2. and other insiders. inc. but based on the few cases. Kamin v. 2. there is a trucking arrangement and made a contract regarding fuel. American Express Company (n. ii.y. b. later. induces OR otherwise purposely causes a third person not to enter into OR continue a business relationship with another…. c. c. 2. duty of care is owed by officers. look at the operating agreement. –court found that McPherson engaged in willful misconduct by filing the actions at issue. so they wanted to get rid of it. Dissolution i. the llc does not pay. without a privilege to do so. the company did bad. lufken and Jenrette. now. Theory used: a. Haack (wis. 3. 5. ii.b. 3. Unpub. 4. there is a risk that the characteristic of limited liability may be set aside. Already. but appellate court rejected this. tortuous interference with a business relationship occurs when a person. AND OTHER INSIDERS a. 6. 1999) p. but she does not. iii. Failure to dissolve properly iii. V. llc are popular. THE DUTIES OF OFFICERS. Haack promises to pay. An operating agreement of a llc MAY limit OR define the scope of the fiduciary duties imposed upon its members. and. 316 1. To find that a member was an operating member (operating members can be liable for willful misconduct). 1976) p. 48 . The Obligations of Control: Duty of Care i. DIRECTORS. Lower court used piercing the corporate veil.
a. if its approval by majority vote of the shareholders IS FOUND to have been based on an informed electorate. notwithstanding the infirmity of the board’s action. issue: whether the directors reached an informed business judgment in agreeing to sell the Company. Ct. you put up a small amount of capital (may be a few %) and borrow the rest of the money to put up with what you need to take over the company. as a practical matter. b. i. 3.3. 5. rules: a. The discovered failure of the board to reach an informed business judgment in approving the merger constitutes a voidable. the merger can be sustained. Whether the directors reached an informed business judgment on 9/20/1980. The director who would face mandatory retirement actively sought to merge his company. pursuant to the terms of the 9/20 agreement. later. rather than a void act. class action brought by shareholders of the defendant Trans Union Corporation defendant member of the Board of Directors there were merger talks. use the company’s own assets to do a deal. a. 1. 6. ii. Sup. the corporation had a lot of tax losses. was the information inadequate 2. 1985) p. b. 6. CEOs and board of directors are concerned with short term stock rises and dips. Van Gorkom (Del. Whether the directors’ actions taken subsequent to 9/20 were adequate to cure any infirmity in their action taken on 9/20. which would be attractive to another corporation that had a lot of profit b/c they could use the tax losses as write offs. was the information inaccurate? 2. and the board agreed to the merger. business planning: don’t give stock options to CEO b/c they will want to manipulate the stocks in order to make more of a profit for themselves. 7. Therefore. business judgment rule-the courts will accord the maximum amount of discretion in how directors and the boards run a corporation. 49 . there were board meetings. 320 1. without the board’s knowledge. Smith v. leveraged buy out-when managers try to buy out a corporation. American Express chose to spin off the corporation by giving each American Express shareholder a proportionate number of shares of Donaldson. 5. directors are fully protected in relying in good faith on reports made by officers. 4. 4.
3) given these circumstances. b. 8. reached 9/20/1980 to approve the proposed cash-out merger was NOT the product of an informed business judgment b. at a minimum. The court emphasizes the fact that the board of directors relied entirely and primarily on Van Gorkom’s representations. directors of a corporation have a fiduciary duty to their stockholders to inform themselves of all information reasonably available to them AND relevant to their decision regarding mergers/acquisitions. c. but was denied this b/c of the forced nature of the merger. the board’s subsequent efforts to amend the merger agreement and take other curative action were ineffectual. Should have had more information/evidence. business judgment: 50 . Directors of a corporation have a fiduciary duty to their stockholders to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve a merger/acquisition. based on its duty of care to its shareholders. b. board’s decision. the directors 1) did not adequately inform themselves as to Van Gorkom’s role in forcing the “sale” of the company AND in establishing the per share purchase price. d. d. 10. d. 12. significance of the case (ALL DUTY OF CARE) a. and the company COULD have received a better offer. that the Board did NOT deal with complete candor with the stockholders by failing to disclose all material facts. they were grossly negligent in approving the “sale” of the company upon 2 hours consideration. No written documents before them ii. conclusion a. and c. seems like the major beef was that this was a forced merger. The court also notes that the board knew that the shares were undervalued and had no other information as to the intrinsic value of Trans Union. BOTH legally and factually. a. 9. Is there an implied duty of care to get the highest possible price for the company 11. 2) were uninformed as to the intrinsic value of the company. A corporation’s board MUST get adequate information and adequate deliberation in regards to mergers/acquisitions. analysis a. c. before securing the stockholders’ approval of the merger. c.ii. i. which they knew OR should have known.
i. directors of a corporation have a fiduciary duty to their stockholders to inform themselves of all information reasonably available to them AND relevant to their decision regarding mergers/acquisitions. 3. board of directors breached its fiduciary duty in approving an extravagant and wasteful employment agreement of Michael s. A board member can escape liability by. board of directors breached its fiduciary duty in agreeing to a “non-fault” termination of the Ovitz employment agreement i. CEO had hard bargained the raising of the stock price (no real possibility of more money) b. 2000) p. Ovitz as president of Disney b. b. allegations a. 3) iii. DOES NOT mean that the board MUST be informed of every fact.supp. employment contract of Ovitz had a provision that would allow him to get full payment of his 5 year contract. Technicolor case 1. the employment agreement was structured to give an incentive to Ovitz to seek an early nonfault termination. 2. if he were terminated for good cause. Fiduciary duty is a broad umbrella for a duty of loyalty and duty of care iv. 339 1. c. b. Thorough job of investigation vi. Exception: 1. distinguished from Van Gorkom b/c a.ct. Brehm v. in good faith. directors were not disinterested and independent. Eisner (de. did not believe that the expert was competent 51 . hire an investment banking firm to issue an opinion as to the fairness of the price that has been offered. Amend a corporation’s certificate of incorporation to have limited liability for the directors. directors did not. rely on the expert 2. 2) liability insurance for the directors. relying on an expert. P. in fact. 337-DIFFERENCE between intrinsic value and market price v. rules: a. reliance was NOT in good faith 3. i. Director would care that senior managers would care about their opinion b/c 1) their approval would help in a potential lawsuit. c.a.
Jr. Jr. 349 1. a related duty of care. 1981) p. conclusion: case was properly dismissed vii. but to creditors. 4. procedural steps are similar: 1) lack of action or 2) substantative decision. rules a. She was physically incapacitated and had no idea about how the corporation worked. died.j. and this was attributeable to the directors 5. Lillian Pritchard inherited a 48% in P & B from her husband. A reinsurance broker acts as an intermediary between an insurance company who cedes the premium and the risk to another company. Charles P. Later. 8. the remaining shares were owned by Charles. 2.4. not only extends. After Charles. 10. significance: total inaction can be a violation of the duty of care. The 2 sons misappropriated about $12 million that was taken from funds that the corporation was supposed to hold in trust for its clients. P’s estate. 11.” 7. 6. duty of director to 3rd party a. died. United Jersey Bank (n. Sr. decision of the board was so unconscionable as to constitute waste OR fraud. 52 . it is VERY RARE for a plaintiff to win a claim based on a breach of the fiduciary care. c. trustee in bankruptcy (interests of the various creditors) Mrs. 4. a. board’s failure to consider subject matter that was material and reasonably available was so obvious grossly negligent. to shareholders. 6. She was also the largest shareholder and the director. P & B were in the business of acting as a reinsurance broker. but she was put on notice that her son had an unscrupulous character by her husband’s statement “my son would take shirt off my back. –van gorkum??? 9. Francis v. a. and William. P. 5. Mrs. expert was not selected with reasonable care. dominated the management of the corporation. directors owe some type of duty of care to outside creditors. Charles. 3. director should acquire at least a rudimentary understanding of the business of the corporation. due care in the decisionmaking context is process due care ONLY. who were also directors.
355 1. WHETHER a corporate director owes its creditors a fiduciary duty depends on the facts f. (duty of care) c. Usually. case: caremark’s board of directors BREACHED their fiduciary duty of care to Caremark in that the directors exposed the corporation to enormous legal liability. 2. they cannot set up as a defense lack of knowledge NEEDED TO exercise the requisite degree of care. court found that mrs. p. Accordingly. a director should become familiar with the fundamentals of the business in which the corporation is engaged. i. i. holding/conclusion: a. was in charge of millions of dollars. Dissenting director is absolved from liability. d. and more). d. c. g. x. However. A director who votes for or concurs in certain actions may be liable to the corporation for the benefit of its creditors OR shareholders to the extent of any injuries suffered by such persons. Because directors are bound to exercise ordinary care. ii. there was a duty owed ii. a director can absolve himself of liability by informing the other directors AND voting for a proper course of action. e. breach of the duty was the proximate cause of the injury. as a result of any such action. A person who is silent at a meeting is held to have concurred. 13. a corporate director has a fiduciary duty to the corporation and its stockholders. Generally. viii. 1996) p.ch. creditors. The director should either acquire the knowledge by inquiry OR refuse to act. 53 . (duty of care) b. ix. she had a duty to protect the clients of P & B against policies and practices that would result in misappropriation of money they had entrusted to the corporation. Derivative Litigation (del.b. conclusion: there is a very low probability that it would be determined that the directors of Caremark breached any duty to appropriately monitor and supervise the enterprise. In re Caremark International Inc. h. employees. 355 hypo: point is that you owe a duty of care to multiple persons (stockholders. 12.P had a fiduciary duty to its creditors b/c the business acted more like a bank than a small family business because the corp. to establish a duty of care violation— i.
rules: a. when a board makes a decision that results in a loss b/c that decision was ill advised OR negligent. considered higher than a duty of care. duty of loyalty i. p. the court was used to determine whether or not the settlement was fair. although separate and distinct. and a duty of loyalty is. 360-benefits (list of settlement) 9. 7. absent grounds to suspect deception. a. and that failure to do so. also. 1. neither corporate boards NOR senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the company’s behalf. which the board concludes is adequate. Duty of care 1. 8. breached that duty of care by failing to take steps that in good faith would have prevented or remedied that situation iii.—usually BJR protects ii. a duty of loyalty is considered to be a subpart of the duty of care. the directors adopted a new plan to prohibit a referral fee type of service. 6. b. knew or should have known that violations of law were occurring ii. may render a director liable for losses caused by non-compliance with applicable legal standards. 5.3. potential liability for directorial decisions i. the court decided this because they might determine that the plaintiff’s lawyers had a different stake in it. 4. Breach of their fiduciary duty of care requires i. breach proximate cause of the injury/losses b. xi. after the DOJ subpoenaed caremark’s predecessor. p. exists. iii. Caremark’s predecessor had contracts with physicians to refer Caremark’s products to patients for a referral fee. directors and managers 54 . Liability to the corporation for a loss arose from an unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. conclusion: a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system. 366 xii. b. if breach of duty of loyalty then breach of duty of care 1. under some circumstances.
Rules i.y. Lewis v. c. All 6 of the children entered into a shareholders agreement with LGT. Moreover. Beran (n. Breach of duty of loyalty-court inquired as to whether the evidence showed that the designation of the president’s wife fostered or subsidized his wife’s career as a singer. If the director can show that the decision was fair and reasonable. sup. undervaluing the SLE stock. Sr. under which each child who was not a shareholder of LGT would be required to sell his or her SLE shares to LGT.L. Lewis. but the lease remained at 14. Action was brought b/c the corporation thought that the director had engaged in waste by paying $1 million dollars in 1943 for a radio advertisement. f. 3. 1944) p. & E. but SLE would pay the rental tax. ii. legitimate end? iv. Bayer v. SR. SLE was not making a profit. gives his stocks to his children (6) d. As rental tax increased to about 11k. other singers 2. then the court will find that there WAS NOT a breach of the duty of loyalty. Rules: 55 . Inc. b. Business judgment: ask approval from the other directors. Lewis. 2. Lewis.. (2nd Cir. S. evidence that another singer would have enhanced the business 3. c. f. Conclusion: there was no breach of the fiduciary duty of loyalty e. e. iii. 1980) a.400. Factors 1. but the motives of the director will probably be questioned.1. brought this suit that his brothers who were pursuing the shareholders agreement breached their duty of loyalty by causing waste. SLE owned the land and complex. LGT was a tire dealership. b. g. there was a lease agreement that LGT would pay SLE 14. 400 per year. breach of the duty of loyalty usually arises when there is a conflict of interest. It is not improper to appoint a relative of an officer or director to responsible positions within a corporation. d. Jr. Ct. cost disproportionate 4. the singer of the advertisement was the wife of a director who allegedly breached his duty of loyalty. 368 a. was the principal shareholder of SLE and LGT.
Rules i. a company that began acquiring CIS. so they consulted a brokerage firm who decided that RFBC might be interested in purchasing Michigan 2. h. i. 2.i. Another company wanted to sell Michigan 2. g. Inc. expressed an interest in Michigan 2. buyout LGT. 377. Director and officers have the burden of proving that their business decisions were fair and reasonable. j. Doctrine of corporate opportunity-a corporate fiduciary agrees to place the interests of the 56 . when you owe a corporate duty to another corporation that could take advantage of this opportunity. ii. (Del. better buy/sell agreement. CIS sells some 15 separate cellular license systems. it is improper to take advantage of an opportunity. then it does not matter (not a problem b/c he owns all the stock). i. rescind the lease as being unconscionable. this would be ok. problem p. Broz v. this would probably be a violation of the duty of loyalty. Analysis: defendants gave no evidence and made no effort to determine what rental fee would be fair during the years between 1966 and 1972. Broz was also a member of the board of directors. 1996) p. f. known as Michigan 4. shareholders will probably not be too thrilled to give 1/5 of the company’s worth to start a business. a. h. Business judgment: could have renegotiated the lease. CIScompetitor of RFBC c. 4. when Broz tries to buy Michigan 2. Conclusion: defendants failed to prove that the rental paid by LGT to SLE was fair and reasonable. d.S. and 4 more areas. Broz calls a bunch of CIS persons who tells him that CIS is not interested in the purchase. also. d. Broz=president and sole stockholder of RFB CELLULAR (RFBC)-provides cellular telephone service in Midwestern U. Broz talks to CIS’s CEO who tells Broz that CIS is not interested in buying Michigan 2. corporate opportunity is a smaller sub-part of the duty of loyalty. However. b. 377 a. If kane owns 100%. b. c. Cellular Information Systems. corporate opportunities 1. One could argue that there is a conflict of interest although there does not seem to be an apparent direct benefit to the singer. RFBC owns and operates a FCC license area. e.
b. financially able to undertake the opportunity—p. paid more than they earned). 385 a. Sinclair Oil Corp. shift in the burden of proof. and the self interest of the officer OR director. d. AND 3. Corporate opportunity (when corp. k. v. (3000/120. Intrinsic fairness 1. Breached duty of loyalty late payment of oil that Sinclair purchased from Sinven. Sinclair oil-holding co. Has to be in the same line of business OR 2. Allegation: i. firm has the interest or a reasonable expectancy 4. Sinven paid out excessive dividends (did not have the means to pay these dividends. Conclusion: Broz DID NOT breach his fiduciary duties to CIS.5% of the public stock. directors. Business planning: could have formally presented the opportunity to the board. Sinclair elects Sinven’s board of directors. 1971) p. Holding: i. all the officers. iii. as a result of your employment with the corporation. iii. or employees of the corporations in the Sinclair complex held the same position in Sinclair.corporation before his or her own in appropriate circumstances. must have acquired the knowledge of the opportunity. 57 .000) c. does not have the finances to take advantage of the opportunity) j. e. 3. dominant shareholders 1. high degree of fairness 2. conflict with the interests of the corp. ii. breach of duty of loyalty ii. 380 5. Corporate opportunity to be triggered requires 1.-business of exploring for oil AND of producing and marketing crude oil and oil products-owns 97% of the Sinven’s stock. test of intrinsic fairness ii. Levien (del. Plaintiff owns 2. Court finds that Sinclair owed Sinven a fiduciary duty.
they controlled and dominated the management. under a contract between Sinvent (court found that this was self-dealing) g. business and affairs of Axton-Fisher. court DOES FIND that Sinclair breached its contract when Sinclair failed to pay for products. v. business planning: could draft the contract more openended (more flexibility for the payments). When parent/subsidiary with the parent controlling the transaction and fixing the terms 1. 389 a. Transamerica Corporation (3rd cir. you must take that into account. e. b. but you owe a duty to all the classes of shareholders. Transamerica purchased about 80k shares of AxtonFisher’s Class B. Z sues Transamerica Corp. Majority shareholder owes a fiduciary duty to the minority shareholder i. directorate. If more than one class of shareholders. 1947) p. should have used the business judgment rule iii. intrinsic fairness test CAN BE applied in cases of dividend payments that are of a parent corporation’s self-dealing. financial policies. buy out the minority shareholders. Because Transamerica had a majority of the stocks. alleging that he should have gotten $240 per share instead of $80. in a derivative suit. not to any minority shareholder. d. test of intrinsic fairness is applied.80. court finds that the lower court erred in applying the intrinsic fairness test b/c Sinven DID NOT give the excessive dividends to only Sinclair (also gave it to the minority shareholders) ii. situation: parent receives a benefit to the exclusion and at the expense of the subsidiary. The problem is that they did NOT disclose information as to whether it was a good idea to 58 . b. (requires self-dealing) i. c. all the money goes to Sinclair. structure the transaction to get the minority shareholders to benefit. Zahn v. ii. f. 2. Zahn holds stock common stock of Axton-Fisher Tobacco Co. conclusion i. It is not just a duty owed to one particular class of shareholders.iii. fiduciary duty iv. a.
(informed shareholders) this DID NOT apply b/c READ THE STATUTE ii. Waste and Wheel are the 2 corporations b. What is the point of ratification b/c it did not help them here 2. i. Lawrence (del. so they. A majority of those who voted were the defendants. 1995) a. if there is some sort of ratification. d. Inc. ii. Another corporate opportunity case-think of broz. code-conflict of interest is not avoidable solely for that reason if it is ratified by disinterested shareholders OR informed shareholders i. they are also in control of the mining property. 3. There WAS NOT a ratification by a majority of disinterested shareholders ii. ii. themselves. c. Usually. g. Issue: why was this ratification NOT effective i. f. Fliegler v. ratification 1. In re Wheelabrator Technologies. h. think of this as will this shareholders approval save this transaction? i. Shareholders Litigation (del ch. Anything that is a violation of the duty of loyalty. iv. 1976) p. there could be shareholder approval before the transaction/board of directors approval e. may be lawful. Ratification is easier i. Fiduciary duties. Defendants personally acquire the mining property. but they did win. b. but everyone else owns like 1%) c. obviously were not disinterested f. ratification means that it is after-thefact acceptance/approval. Waste owns 22% of the stock of Wheel—not enough to exert absolute control. Defendant did succeed in showing the intrinsic fairness of this… defendant wanted the easy victory of ratification. They form a new corporation called USAC-the shareholders of auga approve it. 395 a. In some situations. 22% ownership of the stock MAY be a strong control (exp/ you own 22%.convert—the failure to disclose was the shortcoming of this case iii. g. § 144 of the Delaware corp. Rules: 59 . i. Sometimes.
v. 2 goals of the securities act: 1) mandating disclosure of material information to investors and 2) prevention of fraud.i. d. c. (subsequent sale of primary issue) b. De facto controlling shareholder??? (LOOK UP) iv. but the burden of proof shifts to the plaintiff to prove that that the intrinsic fairness test WAS NOT satisfied) iii. g. mandating disclosures by issuers in connection with primary market transactions). p. 4. A valid ratification (if there is a controlling shareholder). secondary secondary-governed by the security EXCHANGE act of 1934 a. e. the company that created the securities-sells them to investors. Primary market-issuer of the securities. after the initial sale of the act. h. tend to be far more numerous than primary issues. b. Disclosure and Fairness i. Prospectus-usually written by security lawyers and investment bankers. it only shifts the burden of proof (intrinsic fairness test still applies. f. 1933 governs primary issues (original sale of the corporation). 60 . primary market-governed by the security act of 1933 a. prospectus (disclosure statement i. Definition of a security 1. issues its shares to the public. Problem with IPO (initial public offering): when a new corporation.e. when you have a new public offering (IPO). OR c. ii. Shareholder ratification is an absolute defense to a duty of care claim. 2. As to disclosure. Underwrite the issuance of a security—buy the security from the issuer and resell them to another buyer. the securities act follows a transactional disclosure model (i. Ratification matters AND could be achieved by asking disinterested shareholders OR directors OR both to ratify. Effect of ratification by minority shareholder (not 51%) business judgment rule (the standard) v. any other sale of the stock. which has never before sold a share to the public. New stock is being issued by a corp d. Conclusion: court says that they are not controlling shareholders (b/c not 51% ownership) 3. 402 dream team hypo a.
in which investors trade securities among themselves without any significant participation by the original issuer. RATIONALE: profits do NOT come from others’ efforts (profits come from your own). e. great lakes purchased NSC technologies company. securitiesa. Members’ Interest in llc=security?--. LLC from Monsanto and STI.depends on the facts of a case. § 10(b) –consumer protection-anti-fraud-applies to any security f. v. Issue: whether the interests sold to Great Lakes were NOT “securities. 10(b) consumer protection act that you cannot mislead or omit material information from investors. g. maybe a security i. short-swing profits by corporate insiders. whether it is closely held or major corp. profits-solely from the efforts of others f. it was state law. contribution investment of money 2. i. Great Lakes alleges that Monsanto & STI violated § 10(b) of the Securities Exchange Act of 1934 by failing to disclose material facts in connection with the sale of securities. including: insider trading AND other forms of securities fraud. regulation of shareholder voting via proxy solicitations. Partnership interest is NOT a securityi. 5. d. a. (del. Monsanto co.c. Security law is an area that federal government has regulated. Bond is always a security d. AND periodic disclosures by publicly held corporations. great lakes chemical corp. can start with the proposition that any stock sold is a security. 3. Stock is always security. Sarbanes oxley act (enron legislature/bipartisan bill)-passed to try to deal with the Enron problem. 405 a. What kinds of factors ii. e. 2000) p. b. c. Requires both the CEO and CFO’s signature for a corporation’s financial statement. Secondary market. common enterprise 3.” 61 . b. while before. A lot of issues fall within its purview. c. 5/3/1999. b. bond is ALWAYS a security. regulation of tender offers. 4. Howie test of investment contract-security 1. This is also important b/c it created the securities and exchange commission.
no pooling of money btw/ great lakes and Monsanto and sti. --no a. Generally. they are members. f. Monsanto and STI created NSC LLC. Howey (supreme court) test-(define “investment contract” OR “investment known as a security”) 1. in a common enterprise—no a. stock. conclusion: case dismissed b/c it’s not an investment contract. The securities act prohibits the sale of securities UNLESS the company issuing the securities has “registered” them with the SEC. rejected forman application b/c not traditional stock. There is really no standard for LLCs. partnership interests ARE NOT securities b. Great lakes had a lot of control. ability to be pledged or hypothecatedyes 4. they each contributed. c. respectively assets totaling 81. with profits to come solely from the efforts of others.d.5%. ability to appreciate in value--yes iii. Analysis i. right to receive dividends contingent upon an apportionment of profits-yes 2. 3. § 5 of the act requires that 1)a security may NOT be offered for sale through the mails or by use of other means of interstate commerce UNLESS a registration statement has been filed with the SEC. e. limited partnership interests are securities. 2)securities MAY NOT be sold until the registration statement has become effective. Generally. d. 3)the prospectus 62 . or an investment known as a security. so they look at the operating agreement. 6. Forman (“stock”) 1. ii. ii. investment of money-yes 2. the registration process 1. g. so this cannot be. voting rights in proportion to the number of shares owned--yes 5.5% AND 18. negotiability-yes 3. unless the limited partner has exercised substantial control over the management of the partnership.
and assumed responsibility for the payment of a $113. ii. 5. satisfied b/c defendants used interstate transportation OR communication in connection with the sale or offer of sale. the issuer must give the commission extensive information about its finances and business. PMC organized a CA limited partnership for the purpose of drilling and operating 4 wells in Wyoming. Private offering exemption: no registration statement was filed with any federal or state regulatory body in connection with the defendants’ offering of securities. § 5 unless a registration statement is in effect as to a security. (5th cir. Exempts some transactions in securities NOT otherwise exempt. Doran then agreed to contribute $125k toward the partnership. directly or indirectly 1) to make use of any means OR instruments of transportation or communication in interstate commerce OR of the mails to sell such security through the use or medium of any prospectus or otherwise…. when the SEC reviews a registration statement. Some securities entirely b. Petroleum Management Corp. satisfied b/c there was no registration 2. District court correctly concluded that the limited partnership interest was a “security. The core of the registration statement thus is the “prospectus. from the registration requirement. (disclosure statement) MUST BE delivered to the purchaser before a sale. D’s have the bop to show that the b. The securities Act includes 2 types of exemptions to the registration requirement: a. 3. Doran v. the SEC analyzes whether the registration statement contains the disclosures required by the statute and the SEC rules thereunder and whether that information appears to be accurate. 4. Issue: whether the sale of a limited partnership in an oil drilling venture was part of a private offering exempted by § 4(2) of the securities act of 1933.” iii.2. d. to register securities. 6. it shall be unlawful for any person. 1.” until the SEC has approved the prospectus. iv. c. Defendants raise an affirmative defenseoffering of securities was NOT a public offering. 63 . Conclusion: it is NOT a private placement. 417 a. e. Doran was to pay PMC $25k. 643 note owed by PMC to Mid-Continent. companies cannot sell the new securities. Analysis i. 1977) p.
in most cases.offering was private. the issuer CANNOT widely advertise the security. AND IN ALL CASES. manner of the offering. of 35 buyers. yes b. Relationship: “access to the kind of information which registration would disclose” analyze both “availability of information” AND “effective access” 2. larger the number public 3. in this case. if raises no more than $5 million (5 million and less). it may sell the securities to a maximum of 35 buyers. Yes. Note on other exemptions a. issuer raises NO MORE than $1 million. 1-8 offerees. had intermediary-Offering characterized by personal contact btw/ the issuer and offerees free of public advertising or intermediaries. it generally may sell them to an unlimited number of buyers without registering the securities (Rule 504) ii. 64 . b. larger the offering public 4. AND each buyer must pass various tests of financial sophistication (rule 506). rule: the more offerees more likelihood that it is public. c. if raises more than $5 million. number of offerees and their relationship to each other AND the issuer a. number of units offered (how many shares of stock) a. a. Public ads OR intermediaries public f. yes/modest stakes b. b. (rule 505) iii. iv. Private placement exception v. Regulation d-(only initial sales) i. relevant factors 1933 act § 4(2) 1. 7. size of the offering a. it may sell the securities to a max. Conclusion: court remanded to examine the relationship of the offerees to the issuer.
principal executive officers. § 11 has no privity requirement. everyone who signed the registration statement (by statute. Safe harbor rule 144. problem this is that § 2(11) defines an underwriter as someone who buys the security “with a view to” resell it.must file with the SEC a notice of the sale shortly after it issues the securities. § 4(1) exemption-“transactions by any person other than an issuer. so the list of potential defendants is expansive. ii. brokers. most buyers CAN RESELL the securities only if they find another exemption. Defense: due diligence b. and print those restrictions directly on the stock. b. d. and a majority of its board of directors… expert. disclose to the buyers that the stock is unregistered and subject to various resale restrictions. p. 8. i. banks. note on securities act civil liabilities a. i. and other financial institutions and wealthy buyers. underwriter. c. or dealer” i. NOTE: b/c the misrepresentation is in the registration statement. securities act § 12 (a)(1) 65 . iii. has to be issuer. the rule ALLOWS buyers to resell stock they acquire in a Regulation D offering if they first hold it for two years and then resell it in limited volumes. ???? what is the limitation? vi. THIS WILL NOT apply to exempt offerings. Regulation D provides that issuers CAN PROTECT the exemption by using “reasonable care” to make sure the buyers are planning to hold the stock themselves. because Regulation D (and § 4(2)) generally exempts only the initial sale. the limits on the number of buyers does not apply to “accredited investors”-in general. subject to various qualifications. 424). v. To deal with resale problems. Securities Act § 11 is the principal express cause of action directed at fraud committed in connection with the sale of securities through the use of a registration statement. they should exercise reasonable inquiry into the buyer’s plans.
i. plus interest. by a defendant who offered or sold the security. containing an untrue statement OR omission of a material fact 5. d. ii. securities act § 12(a)(2) i. Plaintiff’s prima face case has 6 elements (note: plaintiff does not have to prove reliance) 1. under § 12 (a)(2) ONLY with respect to material misrepresentations OR omissions made in written documents OR oral communications used in connection with public offerings. Applies to § 12(a)(2) AND § 11. as a defense i. iii. DOES NOT arise in secondary market transactions OR private placements. less income received on the security. any defendants who delegated 66 . 1. imposes PRIVATE CIVIL LIABILITY on any person who offers or sells a security in interstate commerce. violates gun-jumping rules. Issuer’s officers an directors delegate their due diligence the lead underwriter’s counsel. liability may arise where the seller improperly fails to register the securities AND where the seller registers but fails to deliver a statutory prospectus. iv. ii. iv. sale of a security 2. Due diligence is usually delegated to lawyers. If the lawyers fail to carry out an adequate due diligence review. which defendant knew OR should have known of the untrue statement. who makes a material misrepresentation OR omission in connection with the offer OR sale. Supreme court held that liability arises. Due diligence. by means of a prospectus OR oral communication 4. c. or commits any other violation of § 5. AND cannot prove he did not know of the misrepresentation OR omission and could not have known even with the exercise of reasonable care. through instruments of interstate commerce OR the mails 3. iii. the main remedy is rescission: buyer can recover the consideration paid. and 6. iii. ii. Defense: defendants who conduct a reasonable investigation CANNOT be held liable. Under § 12(a)(1).
Before Barchris went bankrupt. can sue for legal malpractice v. § 11 p. Every defendant can raise a due diligence defense except one: corporation (must always answer for the 67 . d. g. and directors. Barchris Construction Corp. e. h. 431 (copy) iii. Plaintiffs allege that the registration statement with respect to these debentures filled with the SEC contained material false statements and material omissions. Analysis i. Did the registration statement contain false statements of fact. part of the registration statement NOT purporting to be made on the authority of an expertafter reasonable investigation. court found to be material b/c they were overstatements of sales and gross profit. were the facts which were falsely stated OR omitted “material” within the meaning of the act. lawyers. Barchris specialized in constructing bowling alleys c. Suit is brought. Escott v. 1. someone sues you for failing to make full and honest disclosure b. (SDNY 1968) p.their due diligence tasks to that counsel will lose the defense. Issue: i. 9. they made a filing with the SEC and made a prospectus. it issued bonds to raise money. reasonable ground to believe… such effective. f. iii. any part of the registration statement purporting to be made upon his authority as an expert after reasonable investigation. Example of what goes wrong when you file the initial prospectus. 2. OR did it omit to state facts which should have been stated in order to prevent it from being misleading. have defendants established their affirmative defense. while doing this. If so. 2) underwriters. and 3) auditors accountants. reasonable ground to believe AND… the statements were true. 426 a. due diligence defense1. under § 11 of the 1933 act against 1) persons who signed the registration statement. ii. Material-what a reasonably prudent investor ought to be informed of before purchasing security. ii. If so.
steps a. 1. reasonable investigation ii. Note on integrated disclosure and exchange act disclosures i. Due diligence defense: make a reasonable inquiry to ensure that the information in the registration statement is correct (applies to each person). iv. 440 questions i. money they paid+interest-money that they received. they put their name on it must be responsible for what was said in the registration statement) i. The firm MUST SHOW that it has to make a reasonable effort to inquire into the facts OR that the inaccuracies … are not due to them. can the buyer recover yes iii. iii. but not on future numbers (future technology).i. auditing firm is expert on past numbers. legitimate issue—could argue. how about? – difference of what they paid and what the bonds would have been worth (if there was full and accurate disclosure). 2. buyer successful against accounting firm that audited the statement distinguish expert/nonexpert—yes. p. 1. To calculate damages: one measure may be the difference that was paid AND the price that would be resold. usw-register with the SEC-when one person owns all of the stock-no. not knowing the law is not a defense. damages “difference btw/ investor paid and what investor would have paid if full disclosure was made” v. j. 2 different disclosures (33) and (34) 68 . 1.—not a single one satisfied this defense.---prof’s answer 3. Accounting firms: the auditing firm was responsible for auditing material and gave their stamp of approval on. not an excuse. lack of education is not a defense. shortcomings in the registration statement. 1. ii. b/c they would be experts. the buyer NEED NOT read … iv. what about the sale agents/manager(change of the facts) maybe/maybe not. 2.
4. always includes at least a summary (incorporate the entire auditing report. 10k-has to be filed annually with the SEC. change of control.ii. integrated disclosure system 1. v. sale of assets. k. the forms then direct the drafter to regulation S-K for the Substantative disclosure requirements. 5. affecting the corporations operations OR financial condition). b/c by the 4th. make it public). iv. 2. 1. rule 10b-5--. under the 1934 act. 8k report-special events (i. has to disclose a 10k. any publicly traded company. 7. under 34 act 1.based on the 1934 Act § 10(b) of / SEC promulgated the rule. 3. 10.—on the sec’s website. iii. purchase of additional assets. 3. within 15 days. 10Q-quarterly report and has to be filed only 3x a year. under the 33 act 1. iii. an issuer planning a registered offering first looks to the various registration statement forms to determine which form it is eligible to use. edgar—makes public the 10k report. each of the main registration statement forms requires disclosure of 2 basic types of info: information about the transaction AND information about the issuer.e. it is a 10k report. l. § 10(b)5- 69 . and 8k report (of any company that is publicly trade). such as new issues of stocks OR bonds to the public. imposes a system of periodic disclosures on certain companies 2. requires disclosures with respect to particular transactions. which is required only once under the Act. 10Q. 6. covered corporations MUST register with the SEC by filing an initial Form 10.
when the corp was. practice. including securities of closely held corporations that generally ARE NOT subject to the exchange act and to transactions in government securities. in connection with the purchase OR sale of any security. b. Applies to any security. e. 12/18/1978. is a 10b-5 violation. v. 10b-5 governs any fraud by any person in connection with the purchase or sale of any security. Issue: whether the 3 public statements denying it was engaged in merger negotiations. During 1977 and 1978. Respondents are Basic Shareholders who are angry b/c they sold their stocks at a depreciated value. consequently. OR of the mails OR of any facility of any national securities exchange. Basic asked the NYSE to suspend trading its shares and issued a release stating that it had been “approached” by another company. 70 . c. 2. g. derivative action: minority shareholder on behalf of the corp. NOT misleading. suing the officer. or artifice to defraud (b) to make any untrue statement of a material fact OR to omit to state a material fact necessary in order to make the statements made. Inc.it shall be unlawful for any person. by the use of any means or instrumentality of interstate commerce. Basic. in the light of the circumstances under which they were made. (a) to employ any device. NOTE THAT 10B-5 IS NEVER A DERIVATIVE ACTION: shareholder is suing the corporation. Basic made 3 public statements denying that it was engaged in merger negotiations. based on the 3 public statements. Policy: consumer protection Act. d. or course of business which operates or would operates as a fraud or deceit upon any person. Holding: i. Combustion is interested in acquiring Basic. Levinson (us sc 1988) a. the board endorsed Combustion’s offer of $46/share. OR (c) to engage in any act. 12/19. directly OR indirectly. Private cause of action exists for a violation of 10b-5. scheme. they are alleging a violation of Rule 10(b)-5 f.
material-probability x importance 2. 3. NOT personal suit-requires showing of reliance) h. whose evaluations of that information and trades quickly influence securities prices. b. iii. Also. Issue: whether the action may proceed.—rebuttable presumption – (can show that the stockholder DID NOT rely by showing that he/she sold the stock based on other reasons). West v. Fraud on the market theory—from basic 1. iv. - fact based/specific 1. Although reliance is an element of a 10b-5 claim. since the information was not made public. Rule: i. an obligation exists to correct the statement. this is counter to the fraud on the market theory. Broker who worked for prudential securiteis lied and said that a stock would rise. (7th cir. Analysis: since the information was only disseminated to a few persons. Because most publicly available information is reflected in market price. if make an untrue statement. an investor’s reliance on any public material misrepresentations. This is NOT insider information b/c this was a lie/outright fraud. therefore. 2002) p. c. e. the court DOES NOT require a positive proof of reliance. but on behalf of everyone who bought the stock. d. j. MAY BE PRESUMED for purposes of a rule 10b-5. where a duty to disclose the material information had been breached… p.ii. ii. Prudential Securities. Fraud on the market theory plurality (only applies to class action suits. 71 . Analysis: i. 450 v. 457 a. Preliminary merger discussions SHOULD NOT be excluded from the materiality prong of 10b-5. then it would have been insider info. not on behalf those who received the false information. only those persons could demonstrate reliance. although if it were true. Conclusion: remands to see if the information was material. Material-substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. public information reaches professional investors. Inc.
d. misleading that the takeover was imminent f. b. Material means a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly…. i. ii. Demand for individual company shares are not equal to information. while this was information that went to a few. 4. calculating damages: difference between the value of the stock and the price of the stock on the day of when the stock was purchased if there had been full disclosure. or defraud. Alleged 10b-5 violation that they got false information in connection with the sale of the stocks. b. Conclusion: DID NOT WIN h. Ernst & Ernst v. A person who has issued a false or misleading statement MUST BE proven to be reckless. Medtest Corporation (7th cir. Blue Chip Stamps v. g. i. Manning 31% and West 26%. 462 a.f. Pommer v. manning sells 3% of the shares to Pommer. ii. c. The stocks are of Medtest Corp. Distinguish btw/ this and Basic: the information goes to the professional investors/public. standing. Secondary liability AND scope of Interpretation i. Scienter. 1992) p. notes on judicial limitations on actions under rule 10b-5 p. even if the materially false statement becomes true. e. Rule: i. 5. Holding: fraud on the market theory CANNOT be extended to persons who did not receive the false information. This standard is done in an ex ante perspective. and this could have been material. 466--a. Central Bank of Denver v. or had an intent to deceive. g. Manor Drug Stores (us sc 1975) i. Hochfelder (us sc 1976) i. it is still to be determined at the time the statement was made. manipulate. First Interstate Bank (us sc 1994) 72 . conclusion: found the statement to be materially misleading. c. a potential buyer or seller DOES NOT have standing to assert a 10b-5 cause of action. The court talks about what Medtest could have told Pommer in inducing them to buy stock.
Green (us sc 1977) a. 2. 2. 3. Conclusion: the court stated that the plaintiff DID have standing. santa fe acquired Kirby by an increase from 60-95%. 6. i. e. ii. does NOT cover breaches of fiduciary duty. ii. b. 1933) p. no implied private right of action against those who aid and abet violations of Rule 10b-5. d. Plaintiff never bought shares or owned shares. you have to make a filing in court to have the court supervise the appraisal of the stock. Agassiz (mass. ii. put option—an agreement to sell a security at a fixed price with the anticipation of a decrease in the security price. Rationale: did not want to extend 10b-5 to other types of abuse/other breaches of fiduciary duties. santa fe industries. inc. Holding: call/put options are securities subject to the 10b-5 rule. d. f. defendants followed the statute. (3rd cir. 8. no violation. Beneficial Corp. the SEC would look for unusual trading activity in a stock in the last 24 hours before a public offering was made. insider trading gives an unfair advantage to those who are privy to the information. Under this. Goodwin v. deutschman v. 1988) p. Law. state common law) 73 . short form merger/cash out merger from Del. ii. requires us to know what options are: i. when the SEC investigates insider trading. c. you could force shareholders to sell. inside information i. 7. before the 1934 act (pre-federal law. conclusion: NOT a violation of 10b-5 b/c there was no manipulative/fraud. b.-limits secondary liability. c. prof notes: 1. Significance: you CANNOT extend 10b-5 beyond the fraud disclosure area. call option—essentially an agreement to buy a security at a fixed price with the anticipation of an increase in the stock price.1. BUT the court REMANDED to see whether a violation occurred. 477 1. d. v. 472 a.
iv. Directors did not personally seek the shareholder —over the NYSE ii. applying federal law. rules: a. i. after a published article stated that explaratory operations on Cliff Mining Company were to cease. Now. Unknown to plaintiff. insider trading 1. c. no fraud in this case iii. 2. fraud v. Texas Gulf Sulphur Co. 5. d. now. 74 . so the defendants bought the plaintiff’s shares over the NYSE. Special effects doctrine: exception to the rule (no unlawful behavior in insider trading). still a violation if the court finds that the information was material (info. no corporate official was accussed of profiting (no allegations of insider trading) b.2. the courts were willing to impose liability. 3. and all the other factors are showed). just wishes/hopes and theories that there would be copper deposits. Goodwin sold stocks to Agazzi. Where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts. defendant was the director of the company. neither defendant. defendant knew that there may be possible copper deposits. fraud-failure to release necessary information c. (may set aside the transaction) i. 7. we see cases of insider trading (people with the knowledge—making trades for their own benefit based on the inside information). Requires a finding of fraud 1. 6. within his peculiar knowledge AND not within reach of the stockholder. nor plaintiff knew that they sold/purchased the stock from the other. d. if you could show that you personally dealt with the owner of a stock. conclusion: defendants win/plaintiff loses iii. e. And a material fact 1. Accurate dicta: b. 4. that was not released. the transaction will be closely scrutinized and relief may be granted in appropriate instances. no material facts. SEC v. generally. after 10b-5. fraud-basic a. directors DO NOT occupy a position of trustee toward individual stockholders. (2d cir-us sc-cert denied 1969) p. 480 1.
it is unlawful to trade on material inside information UNTIL such information has been disclosed to the public AND has had time to become equally available to all investors. i. essence of the rule: anyone who. i. 75 . 484. 9. numerous TGS employees bought stock and call options. after the newspaper report. 7. SEC brought an action against them. 5. while not disclosing the information to the public. must abstain from trading in OR recommending the securities concerned while such inside information remains undisclosed.2. the court states that congress’s intention behind this statement was that whatever that might be relied upon by reasonable investors. trading for his own amount in the securities of a corporation. has “access. the company released a press statement that refuted the account. 6. c. material—situations which are essentially extraordinary in nature AND which are reasonably certain to have a substantial effect on the market price of the security if [the extraordinary situation is] disclosed. Such material fact must be effectively disclosed to the investing public prior to the commencement of insider trading in the corporation’s securities. to info. defendant engaged in exploratory drilling and seemed to find some ore. OR. rule: a. Test: whether a reasonable person would attach importance to the information… p. yes. Duty to disclose information or to abstain from trading depends on whether the information is material. Anyone who has material inside information MUST either disclose it to the investing public. b. substantial amounts of ore. directly or indirectly. 10b-5 i. however. issue: is it unlawful to trade on material inside information UNTIL such information has been disclosed to the public AND has had time to become equally available to all investors? holding: a. “in connection with the purchase…” i. b. 8. intended to be available ONLY for a corporate purpose and NOT for the personal benefit of anyone” MAY NOT take “advantage of such information knowing it is unavailable to those with whom he is dealing…” ii. after an unauthorized newspaper report that the company found 4. they kept it secret 3. the company confirmed the discovery of a vast mineral strike. d.
2. and at the last minute. a. 493 1. Rule 10b-5 is based on the justifiable expectation of the securities marketplace that all investors have equal access to material information. 5. holding: a corporate insider MUST abstain from trading in the shares of his corporation UNLESS he has first disclosed all material inside information known to him. 4. you could sue and collect damages. 2. 6. business planning: set a standard period of buying/selling once a year or set a window to buy/sell stock. 3. they would fill in the blank. either disclose the material information OR don’t trade (cady Roberts) b. rationale: a. Dirks v. Chiarella v. U. vi. 3. 4. vii. 492 (note case) 1. SEC (us sc. even if he is forbidden by the company from disclosing it to the public.e. 10b-5 b/c he was not an “insider” of the corp. Left the name/address/phone number out. if you identify a person who is an insider trader. significance: a. was a fraudulent corporation. ability to make a private recovery can be eliminated/offset by the damages collected by the SEC. b. 10. side notes 1. Duty to abstain from trading in the shares arises from the relationship of trust between Chiarella and the shareholders. 13. Dirks learned that equity funding. supreme court let him off the duty b/c there was no fiduciary duty owed to the shareholders. Chiarella DID NOT violate sec. UNTIL it has been publicly disseminated. (us sc 1980) p. a. conclusion: all stock purchases were done in violation of 10b-5. directors owe a fiduciary duty to the shareholders. 10b-5. no fiduciary duty when a person sells land to another c. 12. he figured out who the company was and purchased some shares. 76 . 7. print shop that printed materials of mergers. 1983) p.S. but it was pretty clear that Congress considered it a violation. b. 11. c. v. Congress passed sec. Anyone in possession of material nonpublic information CANNOT properly trade on that information. how did they protect the information of merger? a. Court remanded to see whether the april 12 release violated 10b-5. which he had no connection with.
United States v. you CANNOT have private meetings with stock analysts. The SEC was not happy with this case. significance: SEC is NOT happy with the outcome. afterwards. 5. it makes insider liable for selective disclosure to analysts: b. 7. using confidential information misappropriated in breach of a fiduciary duty to the source of info. Seacrest-tipperi. issue a. guilty of 1(b)? b. 2. the SEC was not going to delicense him/reprimand him.2. 3. directors. anymore. 6. regulation FD (full disclosure??) a. viii. holding a. 4. Tippee-Can be liable for insider information(assumes a duty to abstain… or to disclose) if the tippor discloses the information for the wrong reasons. but they gave him a written record. 3 categories of persons who can be punished for insider trading a. insiders (persons who have the fiduciary themselves. temporary insiders (lawyers. b. However. Dirks fought this all the way. O’Hagan (us sc 1997) p. is a person who trades in securities for personal profit. PR) c. 501 1. state of the law as of dirks 1. 8. ix. employees) b. ii. Dirks is a tippee. he is guilty 77 . tippees (liable only if the insider who disclosed the information was acting on an improper motive). holding: because he did not have a pre-existing duty to Equity Funding. a. 9. issue: whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure. you have to make the meetings public. c. yes.does not have a pre-existing interest/fiduciary duty i. Dirks’ clients sold a lot of the shares/stocks. accountants. did the commission exceed is rulemaking authority by adopting rule 14e-3(a)? 2. Disclosed this information FOR NO personal gain. 3. Seacreasts’ motivation in this fraud was to help unfurl the massive fraud. Test: has the TIPPER disclosed the information for PERSONAL GAIN. he did not have a duty to abstain from trading or disclose the material information publicly.
Classical theory: The relationship of trust between the shareholders of a corporation and those insiders who have obtained confidential info. nonpublic information.—deception is required. and thereby violates § 10(b) AND rule 10b-5. Rule 10b-5 is violated when a corporate insider trades in the securities of his corporation ON the basis of material. which went public later that year. acquired 13. there is a prophylactic rule against insider trading. O’Hagan sold the stock and made a profit of more than $4.3 million. the commission did not exceed their rulemaking authority. conclusion: guilty of violating 10(b) b/c O’Hagan was found to have committed fraud. august 28. Targets a corporate insider’s breach of duty to shareholders with whom the insider transacts c. 4. O’Hagan was a partner at a law firm of Dorsey & Whitney. § 16(b): officers. under the misappropriation theory. This law firm represented Grand Metro. within a 6month period. directors. who have confidential information. by reason of their position with that corporation GIVES RISE to a duty to disclose OR to abstain from trading b/c of the necessity of preventing corporate insider from taking unfair advantage of uninformed stockholders. short-swing profits i. in addition to § 10(b) of the 1934 SE Act. 8. 1967. no. Before the IPO. Emerson Electric Co. 1. pursuant to counsel’s recommendation to avoid 16(b). v. ii. in breach of a duty owed to the source of the information. Misappropriation theory: a person commits fraud “in connection with” a securities transaction. i. at a purchase price of $63. O’Hagan began purchasing call options for the stock AND regular stocks. 6. 512 1. b. 2. rules a. i. Emerson Electric Co. Co. june 16. from buying and selling the firm’s stock. when he misappropriates confidential information for securities trading purpose. Emerson sold 37. (us sc 1972) p.b. 7. x. d. 3.000 shares of Dodge common stock at 78 . 5. – really admin law. Protect the securities markets from abuses by outsiders to a corp. when the stock went public. e. and 10 percent shareholders MUST PAY to the corporation ANY PROFITS they make.2% of the outstanding common stock of Dodge Manu. Reliance Electric Co.
must Emerson return the profits of the second selling? 5. and Foremost-Mckesson emerged as a potential buyer. on may 19. 2. 517 1. as a result. Inc. Occidental Petroleum Corp. Foremost-McKesson. conclusion: no. 7.” 7. whereby Emerson reduced its holdings in Dodge to 9. b. 6. 3. issue. on 9/25/1969.96%. they did not own the statutory requisite of 10% of the shares at the time of the second sale. 4. Emerson sold the remaining shares.” so that he must account for profits realized on a sale of those securities within six months. a beneficial owner MUST ACCOUNT for profits ONLY IF he was a beneficial owner before the purchase. on 10/24. of the security involved… 4. the board of directors announced that it had approved merger proposal advanced by Tenneco. conclusion: no 3. 2. whereby reducing the company’s holding to less than 10%. Provident distributed the $15 million and Foremost stock to its shareholders. (us 1973) p. Occidental bought more than 10% of Kern’s stock. 6. is it a 16(b) sale when the target of the tender offer defends itself by merging into a third company and the tender offeror then exchanges his stock for the stock of the surviving company and also grants an option to purchase the latter stock that is not exerciseable within the statutory 6 month period. holding: in a purchase sale sequence.$68/share. 515 1. by may 10/11. provided that the owner held more than 10% “both at the time of purchase and sale. 9. issue. 3. 11. 5. iv. statute provides “shall not be construed to cover any transaction where such beneficial owner was NOT such both at the time of the purchase AND sale. v. the merger was closed. v. Provident Securities Co (us 1976) p. 4.25 million and ownership of foremost stock. Occidental wanted to merge with Kern County. 8. 79 . rule a. Foremost decided to buy 2/3 of Provident’s assets for $4. iii. issue: whether a person purchasing securities that put his holdings above the 10% level is a beneficial owner “at the time of the purchase. 5. but this was unsuccessful. rationale: a. on august 30. Provident Securities decided to liquidate its assets. occidental decided to buy Kern stock. or the sale and purchase. On Sept. § 16(b) provides that a corporation MAY RECOVER for itself the profits realized by an owner of more than 10% of its shares from a purchase and sale of its stock within any six month period. Kern County Land Co.
to protect itself. iii. Rationale: look for facts that suggest insider trading or unfair advantage. politics of § 16(b): b/c recovery of the profits is distributed to the corporation. 7. Occidental made an agreement to sell its Tenneco share in exchange for Old Kern stock. courts consider classes of stock separately (class A v. 80 . many lawyers are active in this area. Generally. regarded as a sale. 9 (6 months and 1 day after expiration of Occidental’s tender offer). b.f. matching stock: the court uses the lowest priced purchases and the highest priced sales. stockholders may enforce this derivatively. officers: § 16(b) applies to trades by directors and officers. the amount of damages can be large and the expenses of defense may be a lot. example p. 16a-1f provides “officer” shall mean an issuer’s president. ii. 5. Although the risk of liability may be remote. a. generally. As a result. i. 2. an exchange in stock is not considered a sale subject to 16(b). notes 1. The shareholders of Old Kern would receive a share of Tenneco at 1:1 ratio. mere execution of an option to sell is NOT. deputization: a firm’s employee who was asked to serve on another firm may be held liable under 16b as a deputized officer. 9. v. 4. indemnification and insurance i. stock classes and convertible debentures: to determine the 10% stock requirement under § 16(b). OR any other person who performs similar policy-making function for the issuer. 6. Insurance may be available to corporations to cover damages and the expense of defense. 6. class B). and companies with assets of at least $5 million and 500 or more shareholders. holding: a. 10. principal financial officer. 523 vi. § 16(b) applies ONLY to companies that register their stock under the 1934 Act. principal accounting officer.and other officer who performs a policy-making function. the complaint is that the june 2 agreement was a “sale” covered by § 16. 3. and for the expenses of defending themselves. any vice president of the issuer…. a. these include companies with stock traded on a national exchange. after dec. 8. most states have detailed statutory provisions covering the authority or obligation of a corporation to indemnify officers and directors for any damages that they might incur in connection with their corporate activities. between may 30 and june 2.
article 9 exceeded the scope b/c (a) limits indemnification to good faith. analysis: a. v. or employee OR agent of the corporation… if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation 7. the price fell. civil suit was settled for 35 million. claims a. Waltuch is bringing suit to indemnify Conticommodity for 2. 5. holding a. the silver price skyrocketed. 3. 1996) p. the other subsections of this section SHALL NOT be deemed exclusive of any other rights…. § 145(f)-the indemnification and advancement of expenses provided by. 6. Under what circumstances could a corporation reimburse officers whom have been sued. Waltuch v. 145(a) deals with permissive/discretionary reimbursements???? vi. § 145(a)-A corporation SHALL HAVE power to indemnify any person who was OR is a party… by reason of the fact that he is OR was a director. in private lawsuits? 9. He traded silver for the firm’s clients. 8. Inc. Does § 145(c) require Conti to indemnify him b/c he was successful on the merits OR otherwise. 145(f) DOES NOT permit a corporation to bypass the “good faith” requirement of § 145(a). Conti’s article 9. (2nd cir. how to interpret §§ 145(a) & (f) of the Delaware general corporation law. 4. obviously exceeds the scope. 2. viii. Waltuch was vice president and chief metals trader for Conticommodity Services Inc. In late 1979 and early 1980.2 million in unreimbursed legal fees.2 million in unreimbursed legal fees that he spent in defending the private lawsuits. vii. officer.iv. which allows indemnification for bad faith. just as quickly. Conti MUST indemnify Waltuch under § 145(c) for the $1. which would require indemnification of Waltuch even if he acted in bad faith. 10. so article 9. 81 . 145(b)??? LOOK AT THE STATUTE BOOK. OR granted pursuant to. i. Conticommodity Services. assuming that Waltuch acted with less than good faith? b. and he was manipulating the market. is inconsistent with § 145(a) and thus exceeds the scope of a Delaware corporation’s power to indemnify. director is successful on the merits OR otherwise. 145(c) deals with mandatory reimbursement—must reimburse when the officer. 526 1. b.
provided that the agent shall undertake in writing to repay any such advances in the event that it is ultimately determined that the Agent IS 82 . employee or agent of a corporation HAS BEEN successful on the merits in defense of any action…. Roven (del. Court reads § 145(a) as a limitation on a corporation’s ability to reimburse to situations when the director. 145(f)--indemnification rights MAY BE broader than those set out in the statute. i. court declined to give the statute a narrow reading. Citadel Holding Corp. by laws. separate agreement to indemnify. i. § 145(c) will allow indemnification from the corporation. 145(f) provides other rights…. 534 1. officer is successful as a defendant in a suit. Citadel=savings & loan holding company=delaware corporation. significance: a. 6. 145(f) is still subject to the 145(a) requirement of “good faith. 4. 5. which would limit indemnification to only successful suits that were solely attributeable to the director or officer’s efforts-11. Costs/expenses shall be paid in advance of the final disposition of such matter. c. 2. but he gets reimbursement of the civil suit. § 145(c) allows indemnification when a director. corporation shall not be obligated for indemnification in regard to any liability or expense FOR an accounting of profits made from the purchase or sale by the agent of securities of the corporation… within § 16(b) of the SEA. v. conclusion: he does not get the legal fees for the first claim of 145(a). as delineated in the statute’s Substantative provisions. officer. the agreement provided: a. conclusion: court upholds the reimbursement of sums paid or incurred by Roven to defray (settle) litigation expenses. BUT they cannot be inconsistent with the scope of the corporation’s power to indemnify. 12. 1992) p.” ii. officer is in good faith. roven and citadel entered into an indemnity agreement that provided more protection than Citadel’s certificate of incorporation. As long as the director. ix. then del. b. Policy: to provide security to a director OR officer by allowing indemnification concerning actions against them. 5/1987. roven=director of citadel from 4/1985 to 7/1988. Court one deals with profit c. LOOK UP. (roven wins/corporation loses) 3. corporation shall indemnify the agent… b.b.
b. 541 a. inc. Each group intends to nominate a slate of directors at the MGM stockholder annual meeting. c. cites General Corporation Law of Delaware (corporation “may” pay an officer or director’s expenses in advance).” d. and the court feels compelled that Citadel meant to allow an advance payment of funds. Court deals with legal expenses/fees.d. 9. 2. x. better drafting of the agreement b. Manner of solicitation of proxies: wrongfully committed MGM to pay for the services of 83 . KNOW § 145 OF DELAWARE CODE VI. citadel does not want to advance funds for the expenses of this action and states that the agreement does not apply to federal violations court rejects 8. 1 i. like tender offers. proxy fights are subject both to 1934 Securities Exchange Act and to state corporate statutes. c. which is to be held on 2/23/1967. the court looks at the language of “shall” in the agreement. (s. significance a. b. analysis: a. Proxy Fights-sec. Strategic uses of proxies 1. Plaintiffs=6 stockholders of MGM b. Each has been actively soliciting proxies for this meeting.NOT entitled to indemnification under the terms of the agreement. e. There’s a power struggle between “O’Brien group” AND “Levin group. a. metro-goldwyn-mayer. roven’s claim of indemnification was prompted when Citadel brought suit against him alleging violation of § 16(b). 7. Noting the permissive authority of the code. notice that this is permissive. 10. 1967) p. shareholders may appoint an agent to attend shareholder meetings and vote on their behalf. rather than taking the permissive approach. f. PROBLEMS OF CONTROL a. proxy-under corporate law.n. Levin v. directors. corporations frequently use agreements to provide more indemnification rights for its officers. g. Scenario: fight from an outside group to take over a corporation. background info: a. Complaint: i. Defendant=MGM and 5/13 members of the board of directors c.y.
specially retained attorneys, public relations firm and proxy soliciting organizations ii. improperly used the offices and employees of MGM in proxy solicitation and good-will and business contacts of MGM to secure support for the present management. iii. g. holding: the court DOES NOT find that illegal OR unfair means of communication, such that would demand judicial intervention, are being employed by the present management. h. conclusion: court lifts the temporary injunction and finds that the amounts recited to be paid ARE NOT excessive OR that the method of operations disclosed by MGM management is unfair or illegal. i. IF the fight is over personality, then there’s no reimbursement; however, if it is over policy, then it is ok. REREAD….LOOK FOR THIS…. 3. ii. reimbursement of costs 1. Rosenfeld v. Fairchild Engine & Airplane Corp. (n.y 1955) p. 543 a. Another proxy fight for control of the corporation. Asking that none of the reimbursements should have been paid. b. Majority is saying that this a fight over policy, NOT personality. c. Plaintiff, an attorney, who owns 25/2,300,000 shares, brings a shareholder’s derivative suit. d. In this suit, the plaintiff seeks the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. e. Old board reimbursed itself $106,000 f. Later, the new board reimbursed the old board with $28,000. g. New board reimbursed itself $127,000. h. Holding: i. In a contest over policy… corporate directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. ii. Stockholders have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny.
iii. However, corporate directors CANNOT disport themselves in a proxy contest with the corporation’s money to an unlimited extent. i. Dissent-the distinction between policy and personality does not seem strong. 2. notes on the regulation of proxy fights a. § 14(a) of the 1934 securities exchange act prohibits people from soliciting proxies in violation of SEC rules.
b. Solicitation-studebaker corp v. gittlin (2nd cir. 1966)
shareholder is held to have solicited proxies when he asked selected shareholders to join him in demanding the shareholder list, even though his purpose in getting the list was THEN to ask the shareholders for their proxies. i. 14(a-3), (a-4), (a-5), and (a-11) require people who solicit proxies to furnish each shareholder with a “proxy statement,” which must disclose information relevant to a shareholder’s decision. ii. 14(a-6) requires the parties soliciting the proxies to file copies of this material with the SEC.
c. economics failure in a proxy fight requires you to
bear the full cost of the solicitations, and, consequently, most people do not find the slight advantage of winning a proxy fight to overcome this economic burden. Net effect is people tend not to engage in proxy fights. 3. iii. private actions for proxy rule violations 1. § 14 of the 1934 Securities Exchange Act a. the SEC has issued rules, based on § 14. b. 14(a-7)—gives management a choice: i. it can either mail the insurgent group’s material to the shareholders directly and charge the group for the cost, OR it can give the group a copy of the shareholder list and let it distribute its own material. ii. Most would just send out the materials. c. 14(a-9)—consumer protection rule, similar to 10b-5 i. regulates false, or misleading statements in regards to proxy statements ii. parallels 10b-5’s regulation of false or misleading statements in regard to purchase/sale of stocks. d. 2. J.I. Case Co. v. Borak (us sc 1964) p. 550 a. Stockholder of JI case brought this suit, alleging that the merger between Case and American Tractor Corp. was effected through the circulation of a false and misleading proxy statement.
b. Allegation of violation of § 14(a) of the Securities Exchange Act of 1934. c. Issue: whether § 27 of the SE Act authorizes a federal cause of action for rescission OR damages to a corporate stockholder with respect to a consummated merger which was authorized pursuant to the use of a proxy statement alleged to contain false and misleading statements violative of § 14(a) of the act. d. Analysis: i. Purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive OR inadequate disclosure in proxy solicitation. ii. e. holding: derivative and direct (private) actions are both subject to § 14(a); federal courts have the power to grant ALL necessary remedial relief to victims of deceptive proxy statements. i. There was an implied private right of action, under § 14(a). ii. Could have not found the implied right and left it to the SEC, but that would be too burdensome. iii. Policy: without private actions, there would be no way of enforcing § 14(a-9).
3. Mills v. Electric Auto-Lite Co. (us sc 1970) p. 553 a. Issue: what causal relationship MUST BE SHOWN
between a false/misleading proxy statement AND the merger to establish a cause of action, based on the violation of the act? M owns 54% of Auto-Lite; with this 54% ownership, M nominates all the directors. Now, the directors want to merge Auto-Lite into M corporation. The directors of Auto-lite send out a proxy statement urging them to approve the merger. Complaint: minority shareholders state that the proxy statement was fraudulent and deceptive, violative of 14(a-9). i. Conflict of interest directors of Auto-Lite. Holding i. This misstatement was material. ii. To put aside the appointment, examine the materiality of the proxy statement AND the necessity of the election…???? LOOK UP iii. conclusion: the plaintiffs DO NOT get damages. Significance: courts will usually take a broad approach concerning causation in order to receive damages because the courts want to deter 14(a-9) violations.
f. Ltd. i. 2002) p. Exp/ 60 now. c.-teacher DOES NOT LIKE. cal. unless the market literally correct. so the directors issue a proxy statement. 5. Look on p. You will see sometimes the things that shareholders put on the ballot. this means that you could put a proposal on the ballot for the next shareholder election. c. Prof social policy statements should not be made in proposals. 1985) p. Value-difference between future worth and present worth. b.000. e. 14(a-8) Shareholder Proposals-rule issued by the SEC a. e. and making social policy statements. Alleged deception=failed to indicate the price of the stocks. Directors of the cisco corporation were paid 32k AND got stock options for $396. ii. c. at the time/ did not state the value of the stocks. 564. Plaintiff owns 200 shares of the common stock of the Iroquois and wants to put on the shareholder proposal to study how a French chef cooks patte. 565 a.i. shareholders proposals are used for valid reasons. (d.c. 561 a. Because the directors are approving their own conflict of interest. 275 of statutory supplement—who is eligible to submit a proposal—anyone who owns $2k of the stock OR 1% of the shares. ii. generally. rather than used to promote your personal feelings about certain things. Lovenheim v. 2. This costs nothing. d. Bartz (n. WHICH LATER rose to $1 million. Shareholder proposals can be used for valid reasons.d. Conclusion: this information was NOT material. P.d. Iroquois Brands. d. corporation must cover the cost. Stock options for directors b. i. they want ratification from the shareholders. b. iv. Lovenheim (P) sought an injunction barring Iroquois Brands (D) from excluding from its proxy statements as proposed resolution he intended to offer at the upcoming shareholders meeting. Black shoales formula-formula for determining the value of stock options. 4. shareholder proposals 1. Holding: a shareholder proposal can be significantly related to the business of a securities issuer for 87 . 60 later=value is 0. g. Seinfeld v.
b. 5.d. including social and ethical issues. Concise rule: in attempting to exclude a shareholder proposal from its proxy materials. d 6. Austin v. b/c he would want to do a proxy take over. bharder to get an exception for proposal B. question 1 (proposals are exempt or not) i. Most CEOs will not give you the list. i.n. Consolidated Edison Co. ii. 4. this relates to 14(a-7) b/c any shareholders can ask for the right to have a statement distributed at the shareholders own cost or have the list given to him. The New York City Employees’ Retirement System v. C could be under ordinary business… b.d. (s.y. Dole Food Company. Shareholders (P) sued to compel Consolidated Edison (D) to include a proposal in his proxy materials endorsing a change in the company’s (D) pension policies. 1992) p. iii. 88 . Concise rule: corporations MAY OMIT shareholder proposals from proxy materials ONLY IF the proposal falls within an exception listed in Rule 14(a-8)(c). Social and ethical issues It still has to be related to the business d.noneconomic reason. the burden of proof is on the corporation to demonstrate whether the proposal relates to the ordinary business operations of the company. inc. 575 a. p. a exclude under the ordinary business exception and losing money (3%). Why would the shareholder want the shareholder’s list? i. if it is a money loser 1. v. 578 problems a. b. if the proposal forces the discontinue and is inconsistent with the state lawexception. shareholder inspection rights 1. a. but the corporation will distribute it. and therefore MAY NOT be omitted from the issuers proxy statement even if it relates to operations which account for less than 5% of the issuer’s total assets. 1992) a.y. Inc. easier to get on the ballot. (s.n. of NY. 3. Dole (D) omitted NYCERS’ (P) proposal for action at an upcoming shareholders’ meeting from its proxy materials on the basis that it was properly excludeable within three of the exceptions listed in Rule 14(a-8)(a) b.
Sadler (P) and At&T (P) attempted to obtain shareholder lists from NCR (D) in an effort to execute a tender offer. b. Concise rule: A state may require a foreign corporation with substantial ties to its forum to provide resident 89 . Sadler v. Anaconda Co. 585 a. There were 2 companies. Crane Co (P). Honeywell did this because he was anti-war. DIFFERENT standards for shareholder list AND inspecting the corporate doc. 1991) p. g. demanded access to Anaconda’s (D) shareholder list for the purpose of informing other shareholders of a pending tender offer. Honeywell. c.2d 1976) p. State corporation law may enable the shareholder to get the list AND sometimes a right to inspect corporate documents. Honeywell made bombs. Crane wanted the list b/c they wanted to take over Anaconda. State ex rel. v.e. d. inspect the corporate documents shareholder. NCR Corporation (2nd cir. 5. Concise rule: in order for a stockholder to inspect shareholder list and corporate records. Inc. 2. Burden of proof for improper business purpose: i. f. Mr. 1971) p. Pillsbury v.ii. e. c. b. h. These are particular types of shareholder lists: i. the court looked at his intention. and Dao made napalm. Rule: a shareholder wishing to inform others regarding a pending tender offer SHOULD BE permitted access to the company’s shareholder list UNLES it is sought for an objective adverse to the company OR its stockholders. c. (minn. (n. Pillsbury purchased shares in Honeywell for the sole purpose of persuading Honeywell to cease its production of munitions. Mr. They ask for a CEDE list and a NOBO list. Nobo: list of beneficial owners of shares who do not object to disclosure of their name c. e. Conclusion: he lost. Cede: street names of clients????? ii. 4. a stockholder. 579 a. Crane Co. and Mrs. ii. Burden for shareholder list corporation. which were the target of Anti-war protests. d. the stockholder must demonstrate a proper purpose relating to an economic interest. 3. 582 a. Applying new york law b. during the Vietnam War.
5. you can sell different class stocks different types of vote. 4. State of Wisconsin Investment Board v. sent a solicitation letter to all Peerless shareholders urging them to vote against proposal 2. CA. Peerless=del.000 the number of Peerless shares available for issuance through the Company’s existing option plan. Peerless issues a proxy statement with 3 proposals: 1) reelect 4 members of the Peerless Board.2d 1971) p. Ch. 597 1. SWIB expressed discontent with proposal 2. (n.e. if can prove improper purpose fail ii. establish that was just doing it for a marketing purpose fail b. Corp. i. representing between 7-9% of the total outstanding shares. 2. 2) increase by 1. state law 2. Stroh v. the court found that SWIB did have standing. 6. 3) ratify PWC as the company’s auditor. Peerless Systems Corp. SWIB was the beneficial owner of 950.000. in a situation where the shareholder could NOT obtain such documents in the company’s own state of incorporation. defendant wants to prove improper purpose. provided that it not limited OR negate the voting power of any share. although SWIB did NOT attend the annual shareholders meeting and the reconvened meeting. Shareholders (P) of Class B stock in Blackhawk Holding Corp (D) claimed that a limitation on their rights at dissolution rendered their shares invalid.shareholders access to its shareholder list AND to compile a NOBO list. 90 . with its ppb in el Segundo. must McWindsor give the list? Under new york law. standing a. 3. 2000) p. 4. Everywhere. this is allowed b/c it allows greater flexibility is part of your tools of setting up the corporation.000 shares of Peerless common stock. 6. Blackhawk Holding Corp. 592 1. p. therefore. Plaintiff=state of Wisconsin investment board that invests the assets of the Wisconsin Retirement System. iii. and. (del. 3. ii. different classes with different voting rights OR different prices OR different directors. b. 590 a. Shareholder Voting Control i. concise rule: A corporation MAY PRESCRIBE whatever restrictions or limitations it deems necessary in regard to the issuance of stock. vi.
John Ringling North had 370. Barnum & Bailey Combined Shows v. Ct. the board has the burden to demonstrate a compelling justification for its actions. Ringling (del. B-67%. This case would be voidable act. Ringling Bros. blasius std-defendants have the burden of proof to show a compelling justification for their actions. plaintiff must establish that the board acted for the primary purpose of thwarting the exercise of a shareholder vote. 9. b/c Peerless only informed shareholders who would have voted in favor of proposal 2. c. ii. b. denial of both the plaintiff’s and defendants’ motions for summary judgment. Duty of loyalty bjr b. Ringling Haley had 315 def. analysis: a. the court found this to be contrary to the public policy of widespread ownership of corporate securities. 2 part test 1. a. Voidable acts can be enforced after ratification by the shareholders. b. when would you want to engage in cumulative voting? i. 10. conclusion. A-33%. 7. 606 a. def. If attendance was mandatory in order to preserve the right to bring suit. Control in Closely Held Corporations 1. cumulative voting: accumulate all the votes for a particular candidate. Look up ii. i.i. d. Distinction btw/ Void acts & voidable acts i. ( LOOK UP THE RELATIONSHIP OF BLASIUS AND VOIDABLE) c. Compelling justification-court rejects all the justifications. 8. Sup. exp/ 3 directors. rather than all the shareholders. iv. plaintiff c. primary purpose thwart-yes. blasius standard v. Edith Conway Ringling had 315 shares. 91 . 2. 1947) p. Issue: what is the effect of an agreement between 2 out of 3 present stockholders with relation to the exercise of voting rights by these 2 shareholders? b. business judgment review a. Aubrey B.
613 a. e. f. i. just b/c they are not mentioned in the code DOES NOT mean they are not authorized. 1. Dodge agrees to retain Clark as general manager and will get 25% of profit of the corporation and in return. As part of the transaction. but the code is silent concerning voting agreements. because there is express authorization for voting trusts. 1934) p. viewed as an unlawful attempt to limit the governing power of the directors. McQuade v.-. Dodge (ny 1936) p. Conclusion: court finds that the agreement is NOT enforceable because it takes away from the directors the ability to run the corporation according to their best business judgment. issue: whether this was an enforceable agreement. ii. ii. Karl D. Plaintiff and defendant McGraw each purchased 70 shares of his stock. c. The agreement was entered in 1941 and stated that they were to act jointly and if there were any disagreements. The disagreement was about who were to be voted as directors for the board (7 needed). Analysis i. g. 2. 618 a. j. McGraw as the VP and that McQuade would be Treasurer. Court seems to think that the parties were to agree in accordance with the arbitrator’s decision and that no decision of the arbitrator could ever be enforced. Argument: i.y. entered into to secure the control of the National Exhibition Company. Voting trusts are legal. Stoneham (n. Clark v. 92 . AND the agreement agreed to the amount of compensation. f. k. b. g. Action is brought to compel specific performance of an agreement btw/ the parties. the argument is that voting agreements ARE NOT allowed. loos would be the arbitrator. concise rule of law: voting agreements are LAWFUL in DE. Conclusion: did not get specific performance. Under DE law. ringling got 3 directors and north got 3 directors. The shareholder agreement said that they would maintain Stoneham as the CEO/president. 3. d. they made an agreement. Voting trusts deposited with a trustee and they have legal title to vote. or a majority of the stock of National Exhibition Company. h.e.§ 18 of DE. Defendant Stoneham became the owner of 1306 shares. code iii.
g. 5. easy way to distinguish closely held firms from publicly owned: is it publicly traded? a. which each owning ½ of the outstanding 220 shares of stock. Holding i. Next. Conclusion: the shareholder agreement SHOULD BE enforced. brothers. as a result. Rationale: because there were no other shareholders that may be injured. were equal partners in Galler Drug company. Conclusion: the court gives specific performance to the shareholder agreement. c. but whether the stock in the corp. Electing persons to the board see rule iii. dividends j. Rule: shareholders in a closely held corporation are free to contract regarding the management of the corporation absent the presence of an objecting minority.b. Analysis: b/c the corporation was so closely held. they had an agreement about salary to a spouse of a deceased shareholder. d. then you can be frozen out. Duration??? ii. h. Important b/c if you are a minority shareholder and the corporation is NOT paying dividends or benefits. d. Clark is suing for specific performance. the business was incorporated under Illinois business corporation act. significance: you can enforce shareholder’s agreement even with fairly extensive limitations on what the board 93 . 4. e. and threat of public injury. AND buy/sell agreement. they had discretion. The distinction does not really lay in how many persons own stock. Clark has to reveal a secret formula to maintain the corporation. Clark does everything he was supposed to do. there is a provision providing for reimbursement. 1919-1924. 624 a. Also. the court upheld the agreement. b. Galler v. c. is publicly traded. but Dodge fires him. b. Benjamin and isadore galler. They come up with a shareholder’s agreement and that there will be 4 directors (2 chosen by each of the brothers OR by their surviving spouse). 1924. Business planning: should have had an employment contract that specified the duration of employment. Reconcile with McQuade. f. e. Galler (Illinois 1964) p. i.
660 a. 9. put in a buy/sell agreement (would end a fight). Holding: this was an enforceable shareholders agreement by showing that Delaware law is following CA trend. Inc. f. Jordan purchased 188/20. enforceable ringling bros. c. d. 1980) p. Issue: did Estrada violate the shareholders agreement when she voted for the ventura’s group for CEO? e. b. 632 a. 655 a. the Ventura group has 50%. (mas. Zion v. Business planning: sue for specific performance. c. It sells the credit ratings. 1981) p. Holding (concise rule): voting agreements binding individual shareholders to vote in concurrence with the majority constitute valid contracts. b. Duff & Phelps. NOTE a. could have set up a LLC (has the benefits of limited liability with a partnership set up). 7. c. investment research. (7th cir. 8. and financial consulting services. Ramos owns 50% of the broadcast group. 6. the bottom line was that they would all vote the same on the issue of the board of directors in order to maintain control. 1983. nov. Jordan started to work there in May 1977. i. 1986) p. 94 . 12. SKIPPED TO 660 10. make odd number of directors. better shareholders agreement that ensures an alternative when there is a deadlock. Duff & Phelps evaluate the risk and worth o firms and their securities. In 1981. k. Smith v. Inc. Atlantic Properties. Business planning: get advice from lawyers about the shareholder agreement. and 5 other own 10% (including Estrada). Sugarman v. 1987) p. 1992) p.of directors can do (shift in the change of opinion concerning shareholder’s agreement).100 shares. There is a broadcast group that owns 50% of the shares + 2. Estrada (cal. 651 a. There is a shareholders agreement that binds everyone in the Broadcast group. it is enforceable b. ii. Jordan was offered some stock. Ramos v. 11. The broadcast group is owned by 6 different people. p. Kurtz (n.y. 636 a. b. Sugarman (1st cir. 636 i. Jordan v.
as a result. Issue: is statutory dissolution of a close corporation reasonably necessary for shareholder protection on the grounds of animosity among the corporate directors? f. pedro (minn. Animosity iii. coppock (Alaska 1980) p. g. Close corporations that purchase their own stock MUST DISCLOSE to the sellers all information that meets the standard of “materiality. e. 1 month later.” ii.d. He decided to switch jobs. prof: duty of loyalty still applies in closely held corporations. inc.5 million dollars c. However. The fact that they lost so much money ii. 688 a. prof: could the lawyer have used the other facts to make a stronger case? i. and he did. inc. Alaska plastics. making his old stock worth $452k. there was an announcement of a merger. concise rule: statutory dissolution of a close corporation is NOT reasonably necessary for shareholder protection on the grounds of animosity among the corporate directors--. harbor furniture mfg. this corporation was in 2 lines of business: i. (cal. control. stuparich v. b. lack of meaningful participation. pedro v. duty of loyalty inherent fairness test a. h. 3. Could have argued conflict of interest 1.§ 1800(b)(5)??? 95 . there was animosity between the shareholders. duration. 2. App 2000) p. Before Jordan was sold any stock. As a result. he demanded his stock back. can prevail if you ratify (independent shareholders who do not have this conflict of interest) b. mobile home park—wanted to keep ii. but the burden is on the def. App. 2.. he received $23k. v. v. 673 a. furniture—wanted to get out of the furniture business—lost 2. pursuant to the agreement. d. iv. there was an agreement that mandated a sale of all stock owned by an employee whose employment is terminated. f. and statutory dissolution 1. prove that the transaction is inherently fair. 13. 1992) p. e. 682 a. Rules: i.
ii. If they sold a controlling interest in their corporation. transfer of control 1. frandsend had right of first refusal. Tort-interference with contractual relations: an intentional tort whereby a defendant intentionally elicits the breach of a valid contract resulting in damages. If Jensen wants to sell his stock. Hanson (D) and members of the Sylvestri family (D) owned 44% of Gable’s shares. are the rights of first refusal to buy shares at the offer price to be interpreted narrowly? d. F has right ot have his stock be sold at the same price as the stock which the J is selling. Inc. J has to buy F’s stock at the same price the J is selling. Rationale: this would prevent F from being stuck owning his minority share when someone new comes along operating the company as majority shareholder. frandsen v. Gives him a chance to buy control.g. f. i. i. Business planning: buy/sell agreement. Right of first refusal: allows one to meet the terms of a proposed contract before it is executed. 1979) p. 4.s. iii. b. ii. Anything that is negotiated. Jensen-sundquist agency. Business planning: should have had a buy/sell agreement. J has to take F along and pay for him the same price as they are getting. The agency owns an insurance company and the bank. 700 a. Sylvestri family and Hanson sold their controlling interest at a premium price per share. b. Gives him a chance to buy control of the corporation before anyone else. inc. Prof—thinks that the court should have ordered a buy out h. 2. so Z brought suit contending that minority stockholders were entitled to an 96 . g. Hanson Holdings. c. Issue: in a transfer of control of a company. F was allowed to have been taken along. If frandsen declines to buy the stock. h. Take me along: if J are selling to some one else. (n. then the majority had to buy frandsen’s stock at the same price. Zetlin (P) had a 2% interest in Gable ndustries. 1986) p.y. concise rule: in a transfer of control of a company. the rights of first refusal to buy shares at the offer price are to be interpreted narrowly. e. vi. Zetlin v. 695 a. he has to offer it to frandsen at the same price. i. (7th cir.
ii. AND a purchaser is free to buy. (point. Feldman (2nd cir. Defendants sell their shares for $15/share. Essex Universal Corporation v. but the market price is $7.30. Majority—you cannot do that. 8 resign. Issue: may a sale of a controlling interest in a corporation include immediate transfer of control? c.opportunity to share equally in any premium paid for a controlling interest in the corporation. fraud OR other acts of bad faith. e. 1962) p. Concise rule: a sale of a controlling interest in a corporation MAY INCLUDE immediate transfer of control. d. b. Hypo/ 14 directors. then everyone shares equally. Yates has 9 directors. Prof: prof thinks that the facts are NOT compelling. Issue: Should this be a direct suit or derivative suit? i. essex has 6) 1. i. 1955) p. that controlling interest at a premium price. a controlling stockholder is free to sell. 5. Prof: when a director resigns. if you are going to extract a premium f. look at social policy 4. directors and dominant shareholders stand in a fiduciary relationship to the corporation and to the minority stockholders as beneficiaries thereof. so he believes that the courts are not happy with the Zetlin rule. Perlman (P) and other minority shareholders (P) brought a derivative action to compel accounting for. g. d. d. then the plaintiff gets their money accordingly. 707 a. Yates owns 28% of the corporation and agrees to give his shares to Essex. Conclusion: plaintiff (perlman) wins. Conclusion: Z loses 3. and restitution of. there is 6. What can you do? 97 . After Feldman (d) sold his controlling interest in the Newport steel corp (37%). Concise rule: absent looting of corporate assets. Yates (2nd cir. lotta confusion in this area. c. Background: Korean war. government fixed steel prices c. e. allegedly illegal gains accruing to Feldman (D) as a result of the sale. Concise rule. If it is a direct suit. b. conversion of a corporate opportunity. the remainder of the boards vote to replace the directors. 703 a. Perlman v. It should be a derivative suit.
P. staggered elections in time. class A gets to elect 5 directors. acquisition. 1. i. mergers and acquisition. but the right of control runs with the right to sell shares. prof holding: it is LAWFUL to sell the directorship. Rationale: i. 2. 716 i. he was not happy with the money. Perks of control: access to the corporation’s list of shareholders and its funs (for waging a campaign in a proxy fight). 98 . ii. essex-unlawful to sell the directorship. notes a. The parties agree which the surviving corporation will be (could continue under the present corporation OR a new firm). f. Acquisitions. then you can use staggered boards. 2. this should not be unlawful.section 1 p. class b gets to elect 3 directors. Rationale: 1. b. in this case 1. want to minimize the effect of cumulative voting. Mergers. the De Facto Merger Doctrine 1. and Takeover a. 3. h.can be accomplished by allocating shares pursuant to the proportion of a company’s worth b. greater stability for the controlling group. In order to get instant change to get majority control. BUT HAVE to put it in the articles. he uses 28% is legal b/c it is de facto control. successive. 712-715. introduction a. burden is on the plaintiff to prove that 28% is not de facto control. g. he wanted more money.a. Seriatim resignation: in order. gives example of 50%+1=legal ii. d VII. i. merger: 2 corporations merge/fold into one. to analogize this. Staggered boards: a percentage of a board being voted on every year. Classified boards: one for which different classes of stock elect different sets of directors. Yates-was the incumbent-had control of the board of directors AND of the management of the corporation. e. statutes 7. Example. 6. i.
assets acquisition. drafted by the parties.appraisal rights. the treatment of the shareholders of each corporation. practical mergers-do not use the statutory procedure. Under a statutory merger. the terms of merger are spelled out in a document called a merger agreement. f. i. ii. However. State laws vary on the requirement of a shareholder vote and on the availability of an appraisal right where a combination is accomplished by an asset acquisition. If this is used. Pennsylvania law i. offer its shares to the shareholders of another co. Shareholders who voted against the merger WOULD HAVE BEEN entitled to demand that they be paid in cash the fair value of their shares. 99 . DE requires approval of majority of shareholders/ no appraisal rights ii. statutory merger-combination accomplished by using a procedure prescribed in the state corporation laws. merger-------. g. Penapproval of majority of glen alden shareholders/have appraisal rights. Exp/ co. d. which prescribes. Delaware law i. i. Generally. h. sale (assets acquisition) appraisal right ii.one corporation buys all the assets of the other corporation for cash. there may be times when less than 50% ownership of all outstanding shares can be de facto control. stock acquisition: one corporation acquires another corporation by acquiring the stocks of the other. iii. sale (assets)—no appraisal ii. ii. i. a stock acquisition requires over 50% of the share. in return for their shares. i. this is good b/c the corp buying DOES NOT assume any liability of the old corp since the purchase price would include this. (appraisal right). e. merger—appraisal right (allow a dissenting minority shareholder to get the fair value of their share). approval by votes of boards of directors AND shareholders OF EACH OF THE 2 corporations would have been required. among other things.c. there are no votes b/c this is a transaction btw/ one corp and the individual shareholders of the other.
complaint: the notice of the meeting did not conform to the business corporation law by 1) did NOT give notice to the shareholders that the true intent/purpose of the meeting was to effect a merger OR consolidation of Glen Alden and List. Glen Alden-penn corporation. They are not ii. a shareholder WHO DOES NOT wish to continue his vi. in order to determine the nature of the corporation transactions. purchased 38. Lauman test: when a corporation combines with another SO AS TO lose its essential nature and alter the original fundamental relationships of the shareholders among themselves and to the corporation.5% of Glen Alden’s outstanding stock.000. this acquisition enabled List to place 3 of its directors on the board. a majority voted in favor of a resolution approving the reorganization agreement. 718 i. 3. What is relevant is the true market value of the stock before and after the acquisition. the court looks at 1) provisions of the agreement. vii. 4. Farris v. iv.. 2) failed to give notice to the shareholders of their right to dissent to the plan of merger OR consolidation and claim fair value for their shares.iii. 000. and 3) purpose of the provisions of the corporation law that is to be applicable. shareholder election-majority must approve of a sale (asset)—rationale. v. iii. 2) consequences of the transaction. Penn business corporate law— shareholder who dissents to a merger shall be entitled to fair value of his shares. 2. and 3) it did NOT contain copies of the text of certain sections of the business corporation law as required. Glen Alden Corp. List-DE corp. rules 1. no injustice if majority agrees… so no appraisal right j. doing so well and have tax loss carryovers of $14. 719 at the meeting. 100 . (PA 1958) p. the 2 corporations entered into an “reorganization agreement” subject to stockholder approval p.
2. xi. defendant ARCO and Loral Electronics Corporation. (del. then you can sell it--. 80% of the shareholders approved the plan. exp/ phillip morris sells all its assets to windows. he does have an appraisal right. while after it would be worth $21. ix. Present day worth of his stock is $38. Although the defendants thought it was a sale assets. the 2 companies negotiated for a mixture of the companies and entered into a “reorganization agreement and plan. 1. 2) merger. There are 2 ways that you could combine under DE law 1) sale of assets. 5. it was a de facto merger. so the plaintiff DID get appraisal rights. New co—assets of $169 million and debt of $38 million… old one was much less 4. nature of the corp. Plaintiff cannot sue phillip morris b/c they have sold all their assets—sometimes de facto merger is used in this context. if you do not want the stock. are both engaged. then dissolves. in somewhat different forms. merger viii. complaint: plaintiff sued to enjoin the consummation of the plan on the grounds that 1) it was illegal. conclusion: the reorganization was legal. 6. New administration would be List since they would have 11/17 directors 5. and it was therefore consummated. analysis 1. Arco Electronics.” 3. a New York corporation. 725 Hariton v. x. 101 . inc. used lauman test 2. so under Penn law. in the electronic equipment business. Could use asset acquisition to avoid liabilities. 1963) p.court is saying. and 3) sale of stocks. 4. conclusion: it was a merger. 1. The shareholders of glen alden should have been notified accordingly and advised of their statutory rights to dissent and appraisal. changes from coal mining to textile company.membership therein may treat his membership in the original corporation as terminated and have the value of his shares paid to him. 3.
2. as well. d.7. ii. the burden entirely shifts to the plaintiff to show that the transaction was unfair to the minority. They SHOULD HAVE shown it to UOP. freeze. 727 1. inc. using UOP. Where corporation action has been approved by an informed vote of a majority of the minority shareholders. 4. Problems 726 to prevent from being frozen out from an unwanted merger. 1) buy/sell agreement. xiv. 2) set value. Supp. ii. then you must vote AGAINST the merger. xiii. 3. He challenged the elimination of UOP’s minority shareholders by a cash-out merger btw/ UOP and its majority owner. 4) “take me along” agreement (right of first refusal). 1. class action plaintiff brought this case. UOP directors who were appointed by Signal made a study about the appraisal price. 1983) p. Business purpose requirement of these cases IS NO longer the law of Delaware. holding a. OR other items of misconduct. They use UOP’s data and give it to Signal. xii. but they wanted to acquire UOP. signal had 51% of the shares of UOP. (del. 5. the plaintiff must allege specific acts of fraud.out mergers OR short form mergers i. Weinburger v. DID NOT REALLY UNDERSTAND If you want to exercise your appraisal right. Remedy for minority shareholders in a cash-out merger is an appraisal. 102 . 2. It was not a matter of controlling UOP. UOP. the material significance was the amount worth and paid of stock to the UOP shareholders… 21 v/s 24 & the return on the investment. c. short form merger do have appraisal right requires 85%????? Not sure. misrepresentation. b. in order to demonstrate the unfairness of the challenged merger. 1. 5) no merger unless all 3 agree agreement. 3) have an outsider appraiser ready.
5. freeze out case 2. part b of holding--. iii.000 voting shares to 9 other persons for 25k. e. Violates fiduciary duty c. 739 1. Court rejects that “Delaware Block” or weighted average method of valuation SHALL be exclusive valuation of stocks. sold 120k of nonvoting common stock at $5. b. analysis a. v. the corp. full disclosure. another 4 months later. He got this through a loan. d.READ 1. 6. get an independent party to do this. under de law. Fair dealing requires candor (honesty)—NOT HERE b/c did not know of 24 price. NOT inherently fair: inherent fairness means 1) fair dealing and 2) fair price. 2. business planning: get someone who is NOT on the UOP board to do the appraisal. inc. Delaware eliminated dissenters rights when shares are publicly traded. have the signal directors recuse themselves and have the independent directors negotiate a fair price. a. b. 718 shares. 4. iv. 8. (mass 1986) p.000 shares at about $102/share and used his 100% control to elect a new board. which occurs in short-form mergers. Notes p. 738--. he ends up buying all 100. 103 . btw/ the parties of the transaction) and fair price. Sullivan buys an American Football League (AFL) franchise 3. Rationale: DE has preserved appraisal rights. there is no longer dissenters right (if publicly traded firm and dissent-as long as there is no discrimination in price) Coggins v. 6. Dissenters rights are the rights when all the shares are purchased at the same price. he sold 10.court did not find that the minority stockholder vote was an informed one. Fair price requires consideration of ALL relevant factors 7. Sullivan had 23. but the voting stockholders ousted him. New England Patriots Football Club. the standard that the Delaware court applies to a freeze out merger is the fairness test: fair dealing (requires honesty.e.
b.4% of the outstanding shares at $25/share. olin had a shareholder meeting to effectuate the merger---purchase the remaining minority shares at $20/share. 8. there an agreement that they have to pay $25/share for the minority share if purchased within a 1 year. Superior court) c. he should just get money damages discounted to today’s monetary value (court rejects appraisal rights of 1976). 3. 4. 1985) p. and the court believes that the merger was done in order to repay the loans. issue: is it legal in DE to pay a premium for the majority then pay the minority a lower amount? 7. vi. the merger agreement was approved by a majority vote of each class. problem is that he is pledging the income of the company for his own personal loans. 746 Rabkin v. 10.7. 6. Philip A.olin unfairly manipulated the timing of the merger to avoid the 1 year commitment. (step 1: prove legitimate business purpose) DE eliminated in a previous case (del. 2. DE: merger is ruled is subject to the inherent fairness rule: 1) fair dealing and 2) fair price. 9. conclusion: the merger was illegal and RECISSION is usually the appropriate remedy. pursuant to a stock purchase agreement. rules a. (step 2: that it was fair to the minority) inherent fairness test 13. 1. hunt decided to accept the 20/share merger. Olin bought 63. Can rebut an abuse of fiduciary duty by showing that the freeze-out was for the advancement of a legitimate corporate purpose. Controlling stockholder bears the burden of showing that the transaction DOES NOT violate fiduciary obligations. 12. holding: yes 104 . complaint: breach of the inherent fairness doctrine. Hunt Chemical Corp (del. while olin was incorporated in virginia. 5. but since it has been 10 years. problem: a nonvoting stock owner disapproved of the merger 11. hunt was a delaware corporation. he merged the Old Patriots to the New for 100% of the shares 8. analysis: defendant provided no legitimate business purpose.
the shareholders ONLY GET $40/share b/c they effectively merged. 756 a. significance. castile owns holdings and ellipso. b. e. k. as majority shareholder. they just cashed out upon the merger. § 251 of del. v. Sahagen has 25%. complaint: merger constituted a liquidation OR dissolution OR winding up of RCA. issue: there was some preferred shareholders. i. a. 752 a. Delaware law b. e. Rauch v. he could appoint/remove 2/3 of the board of managers. manipulated to wait until the year was over. However. significance: the only options for the minority shareholders were appraisal rights (sucks b/c they bear the cost/risk of legal rights). (misleading statements of not wanting to buy stock by that they were planning to buy the stock) 9. GE acquires RCA. inc. told that they could redeem them for $100/share. h. c. Conclusion: court says that this was NOT a redemption. i. law: a conversion of shares to cash that is carried out in order to accomplish a merger is legally distinct from a redemption of shares by a corporation. We have Castiel through his corporate entity has 63% + ownership in the LLC. iv. 105 . d. The preferred shareholders LOSE b/c the shareholders DID NOT redeem the shares. VGS. preferred shareholders sued. Minority shareholders may be able to do more than just restricted to appraisal rights. de facto non-merger 1.fairness doctrine again. § 151(b) a corporation MAY subject its preferred stock to redemption by the corporation at its option OR at the option of the holders of such stock OR upon the happening of a specified event. prof: if you called this redemption. d. Suppr. you have either appraisal rights OR sell it. RCA corporation (2nd cir. iii. f. then the shareholders would have won. Castiel owns. l. this was a cash buy out g. has 12% in the llc c. 2001) p. General corp. which in effect own 75% of the llc. 1988) p. Ellipso. Castiel (del. j. can use fairness doctrine. the court DID NOT call this case redemption they called it a merger and thus the shareholders lose. LLC mergers 1.
the LLC agreement took overridden. incumbent managers can use in a defense to a takeover (prob. stock buy back i. b. court looked at the duty of loyalty and the intent of the managers. sahagen and quinn. which leaves little if any revenue/assets. HOWEVER. iii. takeovers—section b i. and may deter a takeover b/c the price paid for the share has been increased. Castiel is pissed. One of his complaint is that you CANNOT sell this LLC without a unanimous vote (court rejects b/c the LLC agreement said majority vote) j. v. so secretly they decide to make the LLC become a public corporation in which Castiel would NOT have firm control i.f. § 18-404(d) permits managers to take an action with prior notice and without notice. board of managers: castile. hostile takeover: incumbent managers resist the takeover 2. o. crown jewel defense 106 . l. iv. the court finds the merger to be valid. introduction 1. business planning: should have disclosed the business enterprise. in defense to a takeover. One form: scorched earth: buy back stocks at a significantly higher price. but they offer to buy it $65. and Sahagen thinks that Castiel is a terrible manager. so he sues. Exp/ fair market value is $50. UNLESS a llc agreement provides otherwise. ii. Lose jobs) a. Castiel and Sahagen get into a fight. b. HOWEVER. m. court finds that the 2 managers who failed to provide notice breached their duty of loyalty to the original member and their fellow member by failing to act in good faith. n. together they convince Quyn to stop helping Castiel. an incumbent manager buys back shares at a higher value than fair market value. default rule of DE is that majority vote in approval of the operating agreement. Rationale: less desirable. i. analysis. g. provided that a majority votes in favor of it. h. Effect: increased debt OR less available cash. conclusion. k.
a corporation that is to be acquired actually acquires the other corporation. flip in (triggered by a percentage) 1. in defense to a takeover. they bend the by-laws of the corporation permitting other shareholders to get 2 shares of the corporation for the price of one EXCEPT for a company/person who has a percentage of the shares. in defense to a takeover. The effect is that it has less assets and is now a bigger/more complex corporation. to get around this. f. the corporation sells its most important asset that it has to make the acquiring firm lose interest. a corporation finds another corporation to acquire them. the corporation uses its assets to buy another corporation. a corporation iii. 2. dead hand— only persons who could waive the triggering event is the board of directors who resided at the time of the negotiations 107 . buy another corp i. c. other 80% get 2 shares for one. ii. in defense to a takeover. in defense to a takeover. defense to poison pill: rule 14a-8 can be used to eliminate the threat of a poison pill ii. pac man defense i.. board could decide to waive the triggering event. e. effect: diminishes the value and power of the percentage shareholder 3. exp/ own 20%. d. poison pill i. 4. the problem for the target corporation is that if an acquiring corporation is able to make a quick strike and replaced the current board. and this allows them to have a better deal.i.. there is 1) dead hand poison poill and 2) no hand (both struck down by Delaware court) 5. in defense to a takeover. most common 1. Exp/ golden parachutes. CEO gets a better deal. white knight i.
Conclusion. f. if there is ever a merger. If the benefit is incidental. NO ONE can waive it (the poison pill). Delaware said not allowed b/c they need to have the power to run the corporation. Court distinguishes between direct and indirect benefits on the corporate directors. iii. Prof: permissible use of corporate funds in proxy fight (could analogize). 773: a. Law. i. but the court found that the director’s fear of the corporate takeover was a legitimate business decision. mathes (del. Concise rule of law: corporate fiduciaries MAY NOT use corporate funds to perpetuate their control of the corporation. won this case.6. pros: 108 . then the use of corporate funds to perpetuate their control would be permissible. would you recommend this to the corporation. Complaint: shareholder filed a derivative action arguing that the directors effected the sale solely to preserve their positions. Holland co.. flip over (triggered by a merger AND percentage threshold) 1. Maremount kept buying shares of Holland. del. This is known as “ GREEN MAIL”— REPURCHASING SHARES AT A PREMIUM (person who receives benefit has to pay tax) j. Chef approached the other directors to repurchase their shares at a significantly higher prevailing market price. 1964) p. ii. then the event is triggered. no hand: after a certain period of time when the percent rate was reached.????? v. g. 763 a. Holland furnace co-co of Delaware manufactures warm air furnace. The repurchase would have been subject to good faith and self-dealing. e. and other home heating equipment. 4. i. c. b. matthes—shareholder d. iv. air conditioning equipment. this would prevent the payment of green-mail b. effect: 3. Chef—ceo. Analysis: i. Test: Look at purpose (preserve jobs for directors) h. as a lawyer? i. problem p. cheff v.
Acts of the directors to defeat a takeover MUST BE shown to have been done b/c the takeover 109 . ii. 2. iii. 1985) p. unocal corp. 775 a. one offer for a certain amount for the first 51% ii. e. promotes the longevity of the corporation ii. Issue: is a selective tender offer effected to thwart a takeover in itself invalid? c. one offer for a certain amount for the first 51% 2. coercive b/c it forces shareholders to try to sell their shares ASAP to receive the higher price. Two tiers/two levels of offers (exp/ 1-50/share. this is controversial b/c this would force shareholders to sell their shares as soon as possible due to the fact that the first 51% gets a higher price. Mesa did a front-end loaded two tier tender offer. Unocal was faced with a hostile takeover by mesa. tender offer-outside party tenders a certain amount of money for the corporation’s offering a number of shares. d. Concise rule of law: a selective tender offer effected to thwart a takeover IS NOT in itself invalid. lose assets (cash) or increase indebtedness ii. 2nd35/share) i. this is controversial b/c this would force shareholders to sell their shares as soon as possible due to the fact that the first 51% gets a higher price. 2nd offer for a lower amount for the 49%. 2nd offer for a lower amount for the 49%. tender offer-outside party tenders a certain amount of money for the corporation’s offering a number of shares. b. cons 1. Analysis i. mesa petroleum co. Two tiers/two levels of offers (exp/ 1-50/share. limits the flexibility by the board 2. development 1. 1. front-end loaded two tier tender offer i. BUT Unocal defended by buying its own stock at a higher price.1. (del. protect other shareholders by not paying a premium to a certain person 2. c. 2nd. f. front-end loaded two tier tender offer a. b. v.35/share) 1.
They should have maximized shareholder value ii. 3. Delaware supreme court says that these 3 do NOT meet the unocal test because i. front-ended loaded two tiered is NOW OUTLAWED by the SEC… have to be proportional a. Significance: first case that a court invalidates a defense action by a corporation to a takeover. MacAndrews & Forbes Holdings. exp/ 54/share to the first 51%.represented a danger to corporate policy AND effectiveness. g. the 3 agreements (d) were invalid. 110 . 1985) p. Cancellation fee iii. the board then announced a leveraged buyout a “white knight” at 57.25/share i. inc. f. b. Court seemed to suggest that they should have taken the role of an auctioneer selling the corporation to the highest bidder. Pantry pride wanted to enjoin the agreement between Revlon and the “white knight” corp. Should have been concerned with getting the highest value for the shareholder iii. Inc. Conclusion: unocal won. In response. i. Lock up sale of the crown jewel ii. Court states that under the conditions of this case. c. Significance: new test: 1) apply the business judgment rule. v. h. g. you can sell 51 shares (51%) at the tender price. h. (del.25/share). Revlon. then 2) assess the reasonableness of the defensive tactic employed (BALANCE-whether it was reasonable). i. if you have 100 shares. Pantry pride wanted to buy Revlon and offered 45/share. Concise rule of law: lockups AND related defensive measures are permitted where their adoption is untainted by director interest OR other breaches of fiduciary duty. d. Lurking in the background: concern of discriminatory methods. Reverse of matthes case b/c they are threatening to buy out everyone else (not to the party who is trying to takeover). 787 a. Conclusion: Revlon loses b/c they did not meet the standard of the concise rule of law. Suggestion that primary duty of the directors is to the shareholder. pantry pride persistently tries to buy them out and offers high price/share (56. Basically. Exclusive dealing promise e. 4.
5. Has to be open proportionately to all shareholders. e. but it has to offer the buy back proportionately to all shareholders. i. a. time incorporated (del. 7. b. Paramount AND other shareholders filed suit alleging breach of the fiduciary duty by time’s board. 1989) p. A board’s decision to reject a takeover offer will be upheld under the b. QVC Network Inc. 806 a. iv. f. inc.r. 797 a. Probably makes the shareholders happy b/c the market value was only 110. if the directors CAN SHOW that their decision was NOT dictated by a selfish desire to retain their jobs. c. 1994) p. Times wanted to get into tv. The original time-warner agreement had included a noshop clause which prevented time’s board from considering other options. unocal’s response is OUTLAWED by the SEC. h. Defense: times defends by stating that they DID NOT want to lose the times’ culture. iii. Conclusion: times wins. Time’s board continually rejects paramount’s proposal. Later. v. concise rule: the directors of a corporation targeted by 2 or more suitors may not institute tactic that favor one suitor in such a manner as to allow the favored suitor to offer less than it otherwise would have.j. Unexpectedly. now. Paramount Communications Inc. g. so they begin discussion with warner brothers to do a merger. b. paramount communications. a director’s decision regarding a takeover/merger may involve the duty of loyalty ii. concise rule of law: directors of a corporation involved in an ongoing business enterprise MAY TAKE into account all long-term corporate objectives in responding to an offer to take over the corporation. i. (del. a director’s act that decreases the value that shareholders would otherwise receive is a breach of their fiduciary duty. v. 111 . 6. paramount announced an all cash-offer of 175/share. Unocal can offer to buy back shares. the duty of loyalty triggers the inherent fairness test. paramount increases the offer to 200/share…. although director’s decisions are subject to the business judgment rule. directors have a fiduciary duty to seek a transaction that gives the shareholders the best value possible. d. i.
“no talk” agreement which prohibits the directors from a corp taking any action to facilitate the inquiry of another merger 1. Capital re corp (del. 2. helps to get the fees iii. paramount communications instituted talks with Viacom for a friendly merger. d. b. 3. v. Ace Ltd. 1999) p. c. no talk is more stringent than no shop b/c a director is prohibited from even talking to another party. e. no shop agreement barring paramount from discussing mergers with other suitors. prof’s tips a. this is justified b/c the company spends money on legal fees to do the merger ii. issue: may the directors of a corporation targeted by 2 or more suitors institute tactics that favor one suitor in such a manner as to allow the favored suitor to offer less than it otherwise would have? f. 1. concise rule of law: a corporate merger suitor CANNOT prevent the target board of directors from entering into a deal that effectively prevents emergence of a more valuable transaction OR that disables the target board from exercising its fiduciary responsibilities. c. extension of the unocal/Revlon framework to negotiated acquisitions 1. unlawful ONLY DUE to the circumstances of this case. the court said that all 3 are unlawful. under the circumstances of this case. court suggests that this is almost NEVER permissible by the DEL courts 112 . look at the circumstances to determine if it is lawful 2. capital rey planned to merge with Ace. 9. qvc announced a tender offer and filed an action seeking to have the defensive measures declared invalid. – fact specific 8. iii. the merger negotiation involved i. breach of fiduciary duty b/c they could have received more. 824 a. paramount and Viacom had a negotiations for defense to a possible other merger i. fee of 100 million to pay if the agreement was terminated 1.b. stock option 1.
do a balancing. probably did this to avoid shareholder vote. 834 a. this stands somewhere in between the business judgment rule AND the inherent fairness standard that is applied in duty of loyalty cases.” g. Hilton hotels corp. ace’s stock fell. v. similar to QVC. iii. issue: whether ITT’s defense to this takeover was lawful d. d. 2. the Nevada court applies Nevada law (they looked to some of Del. non-participating shareholders is probably hurt by this. concise rule: a board has power over the management AND assets of a corporation. court talks more about the contractual agreement btw/ ace and capital. conflict btw/ fiduciary duty and those contract duties. case law to fill in the tests and help them determine whether this conduct was helpful) f. shareholder lock up 1. significance: the court has applied “enhanced scrutiny” to defensive steps taken by a corporate board that might shield the corporation from a takeover attempt. which later goes up to $70. 113 . iii.3. analysis i. ii. business judgment plus more. iv. Hilton offered $55/share to ITT. so capital rey solicited merger offers from different firms e. court applies similar standard and refuses to enforce the no talk provision. ii. b. note: no shop provisions will probably be upheld by the Del court. but that power is limited by the right of shareholders to vote for the members of the board. conclusion: court refused to enforce the ace provision. ii. e. itt corp (district of nev. f. Hilton tries to get an injunction of an annual shareholder meeting. extension of the unocal/Revlon framework to shareholder disenfranchisement 1. 2. 1997) p. i. “it is not proper for a board to enter into a merger agreement that precludes the board from considering any other offers unless a lawyer is willing to sign an opinion indicating that his client is required to consider that offer. a percentage of the shareholders agreed to vote for the merger because they probably received some extra compensation. but fails. c.
g. conclusion: court strikes down the poison pill plan. a
white knight came, and the shareholders ratified the merger. h. significance: i. side note: anything unlawful for staggering the election of the directors? NO (lawful everywhere); they can do it without shareholder approval. 2. v. state and federal legislation 1. CTS corp. v. Dynamics Corp. of America (us sc 1987) p. 845 a. concise rule of law: a law permitting in-state corporations to require shareholder approval prior to significant shifts in corporate control is constitutional. b. Indiana enacted a statutory scheme whereby large Indiana public corporations could require any entity requiring either a 20%, 33.33%, or 50% interest to be subjected to a shareholder referendum wherein voting power of those shares could be withheld. c. requirements: 1) inc. in Indiana AND 2) ppb in Indiana d. issue: is a law permitting in state corporations to require shareholder approval prior to significant shifts in corporate control constitutional? e. holding: a law permitting instate corporations to require shareholder approval prior to significant shifts in corporate control IS CONSTITUTIONAL (consistent with the commerce clause AND is not preempted by the Williams Act). f. this statute is known as incumbent board of directors protection statute g. dissent: the law UNDERMINES the policy of the Williams Act by effectively preventing minority shareholders, in some circumstances, from acting in their own interests. h. internal affairs doctrine: which state law applies to the internal document. as long as it is an internal affair, you apply the law of incorporation. i. work as well for LLC (where registered), partnership (ppb). i. if fight btw corp and outside contractors, then a different choice of law would apply. 2. Williams Act of 1968 a. by 1968, the country began to see hostile takeovers. b. congress amended this act c. purpose: control hostile takeovers d. this was carefully negotiated with investment bankers on one hand AND business round table (did not like hostile takeovers b/c they were disruptive, threatened their job,
and sometimes damaged the long term interests of the corporation) e. there is a 5% threshold; when you acquire 5% of the shares of any publicly traded corporation, you have to make a disclosure, and this disclosure requires 1) the identity of the purchaser, 2) what your financing and 3) the purpose of the purchase (acquisition is), at the time you buy it. f. when you do a tender offer: 1) establish right to withdraw (so if shareholder tenders their shares, they have a certain amount of days to withdraw; can withdraw before 15 days); 2) offer must be opened for at least 20 days, 3) you must buy pro rata from every shareholder (ex/ 51%-- buy 51% of every share), 4) same price is tendered to every shareholder. g. this was an attempt to protect shareholders in response to shepp v. matthos case; it was a result of a compromise between investment bankers (who liked takeovers b/c they make a lot of money)
3. Delaware law: a. if you acquire 15% of the outstanding shares of a
corporation, then you cannot do business with the corporation in which you have acquired 15% until 3 years has passed (exp/ mergers-prohibited); b. if you acquired 85%, then you could do short-form merger (cut corners, excused from the 3 year waiting period); c. exceptions for target company waive provisions (board of directors waives the 15% threshold before it was acquired, then they are not subject to the threshold); d. opt out provision: option to protect board of directors, but can opt out. vi. VIII. corporate debt a. introduction i. debentures 1. long term unsecured debt obligations ii. bonds 1. long term debt obligations secured by property of the debtor 2. but the term of bonds usually applies to both bonds and debentures. iii. indenture 1. contract between the lending company and the bond/debenture holder 2. enforced on behalf of the debt holders by trustee. 3. the trustee is usually some bank or financial institution that acts as a proxy to protect the investments 4. tells the bond holder his rights
5. most indenture agreements say that they will be enforced under
New York law b/c 1) most are sold on Wall St. 2) most are underwritten by new york investment banks 3) iv. zero coupon bond 1. coupon-interest; no interest payments, but the interest and the principal is paid off at the end in one lump sum payment v. covenant 1. provisions in the indenture that are to protect the buyers of the bond and the debentures vi. callable bond 1. the issuer of a bond has the right to call back the bonds in and pay off principal and unpaid interest as of that date. vii. significance: 1. bonds (debt) always get paid before stock; as a result, junk bonds would be paid off before stock. b. debtor’s sale of substantially all its assets i. Sharon Steel Corp. v. Chase Manhattan Bank, N.A. (us sc-cert denied 1983) p. 862 1. concise rule of law: a clause in a debt instrument preventing accelerated maturity in the event of a sale of all or substantially all the debtor’s assets is inapplicable IF THE assets are sold piecemeal. 2. Sharon is acquiring UV industry (Mueller brass, debt, and cash) 3. the debt involved debentures. 4. rationale; the fact that they sold off other divisions would be a circumvention of the indenture agreement. 5. somebody who sells debentures using false information OR omitted information 10(b-5) 6. UA gave these debentures at a certain interest rate. Later, the interest rates went up. This was appealing to Sharon b/c the interest rate was only 5% when the current interest rate was 10%. 7. ii. c. incurrence of additional debt i. metropolitan life insurance company v. RJR Nabisco inc. (s.d. ny. 1989) p. 868 1. leveraged buy out; management of RJR Nabisco got together and bought out the shareholders at 109/share. in order to finance all the payments, the management sole a lot of debentures. 2. this angered the life insurance company b/c they were already holding debentures, which were sold previously to them. 3. the problem is that RJR sells more debentures of the same grade/quality; as a result, the increased supply of the same debenture would make the value of the already held debentures to be decrease. consequence: rating will go down. 4. conclusion: no implied covenant of good faith and fair dealing a. usually a contract claim. b. looked at previous transactions
katz v. if the debenture holders give back to the corporation. basically. 2. put a provision in the contract prohibiting RJR to increase debt? a. as the corporation is doing poorly. oak industries. 117 . exchange offers i. look at the sophistication of the plaintiff. there’s a deal a.5. the corporation would give a certain amount (lil higher than the fair market value but lower than the face value) 4. a. d. 5. IX. ii. b/c RJR would probably not agree to do this at the high rate of interest rate it gave. e. 7. inc. most of the big institutional organizations who own debentures went along with this deal b/c they thought that this deal is better than nothing. the difficulty of paying back its bond becomes more difficult. complaint: some plaintiffs sued alleging that this was coercive saying that this was a breach of the implied covenant of good faith and fair dealing. ii. there’s a large amount of outstanding corporate debt in the form of debentures owed to various persons and organizations. 3. 1986) p. rationale a. 883 1. effect: $100 bond decreases to $40. prof: why didn’t metropolitan life insurance co. conclusion: plaintiffs lose 6. b. (del.