AGENCY BACKGROUND 1. Rest. 2nd of Agency 2. Principal & Agent a. Agent acts on behalf of Principal w/ 3rd parties b.
Principal can be BA, need Agents to act 3. Consequences of having an Agency a. Fiduciary Duties attach (to both) §13 b. Agent has power to Bind Principal §12 4. Agency law governs both relations b/ween people w/in firm, & b/ween firm & 3rd parties CREATION 1. ³Manifestation of Willingness/Consent´ by both parties for Agent to act on a. Principal¶s Behalf AND b. Subject to Principal¶s Control 2. Agency is Consensual Relationship (Mutual Consent) a. Doesn¶t req written document & A written document does not necessarily mean it is an agency. b. Manifestation must go both ways i. Can be oral or by conduct ii. Usually manifestation of principal & consent of agent. 3. Examples of Not Agency a. Franchise of KFC Has control, but not on behalf of b. Trustee Has on behalf of, but not control. 4. Employee v. Independent Contractor a. Employee always Agent if in scope of employment b. Independent Contractor can be agent or not. i. Notes Distinction based on physical control (tell what to do, how to do it, etc. the more likely an employee) 5. Agency Relationship can be for Broad or narrow Scope a. Can be agent for some things & not for others b. Thus, question of agent always depends on exact facts/issue TERMINATION 1. All that is req.d to terminate is a Removal of one of the Essential Elements a. Thus can be to stop the manifestation/consent 2. Thus, Termination can be: a. At-Will of either party §§118-119 b. By Terms of Agreement §117 3. Note you can terminate agency at anytime, but that does not relieve you from any contractual duties/breaches you might have done with agency relationship existed. FIDUCIARY DUTIES 1. Duties of Agent to Principal (§§376-396) (3) a. Three Generally (two affirmative duties, one negative(no self interest) i. Due Care 1. Must be R prudent & use appropriate skill ii. Full Information 1. Must inform Principal (total candor) 2. Must account for prop/profits iii. No Self-Interests (Duty to absolutely serve P¶s Interest over Agent¶s own) 1. No Competition (on own or w/others) a. Can¶t create own business or work for competitor b. Can¶t get in business, even if person approaching would have never considered principal for the job c. Cannot hire away employees or talk to clients until after agency ends 2. No taking of Opportunities that belong to Principal a. Can¶t use Company time or prop (even just phone list) to benefit self i. However, if public information then fine 3. Obey all of P¶s instructions 4. Maintain Confidentiality a. Keep quiet what should be kept quiet b. Don¶t tell trade secrets b. Exception/Qualifications to avoid duty i. Is Agent outside scope of agency ii. Did they agree otherwise/Alter by Contract iii. Making Logistical Arrangements is OK (not competing) 1. Such as arranging financing & leasing office space
Fiduciary duties remain until the agency ends i. Thus, if agency ends on certain date, you cannot compete until after that date, even if you know it is coming. ii. Non-compete clauses can extend it longer. Non-Compete Clause Issue i. Courts frown on these clauses, & will only enforce if reasonable based on: 1. Duration 2. Geographical coverage AND 3. Nature of the employer¶s risk from the competition ii. Note Can always keep general knowledge, but not trade secrets given on the job. Use of Information after Termination i. Can take w/you general information (not given to you as part of your job) you remember (customer names), absent a noncompete clause ii. But you cannot take a customer list, or use special information
Cases: CCS v. Reilly, 4th Cir., 1963, 16 Reilly was a sales director for CCS, which conducted fund-raising campaigns for the Catholic Church. Sometime in late 59, D stopped filling daily reports with his boss in NYC as required. In January, 60, D informed P that he needed to resign for personal reasons. P later found out that during the last month of D's employ, he was setting up personal contracts with many dioceses that he had come in contact with through the course of his employment with CCS Rule: o Former employee may compete with his former employer after terminating his employment with said employer, but may not use trade secrets, in order to diminish the competitive advantage of the employer Holding: o D competed with his employer prior to the termination of his employment and thereby breached his fiduciary duty with the employer Hamburger v. Hamburger, Superior Court of MA, 1995, 19 David worked for the family wire company during high school and after his college graduation in the warehouse and then as a salesman and manager He grew the business, doubled in size His uncle and father owned the business, his uncle and father did not get along, and as a result his uncle resented David's power in the business and attempted to fire him. It was also made known that should David's father die before his uncle, David would be terminated David decided to start his own company o He obtained financing from a client o He organized corporation o He quit his job o He then actively solicited the customers of his previous employer Rule: o Cannot use trade secrets o Remembered information is not a trade secret o Customer lists are not trade secrets Importance: o If Uncle didn¶t want David to do what he did, then sign non-compete Duties from Principal to Agent (3) (§§438-440) a. Compensation b. Indemnification i. (pay back for expenses incurred for P in scope of employment) c. Duty not to Interfere w/Agent¶s work
ABILITY OF AGENT TO BIND PRINCIPAL 1. In Contract a. Three Current ways to Bind i. Actual Authority (§7) ii. Apparent Authority (§8) iii. Some other theory for DIRECT LIABILITY of Principal b. What is Authority i. Authority allows the agent to bind the principal 1. Agents bind their principals not themselves Normally ii. Rest. 3rd says there is only Actual & Apparent Authority Now & Michael agrees (& inherent isn¶t really authority either) 1. However, need to understand Inherent & Incidental also 2. However, you can work all claims of inherent & incidental authority into the real two iii. Manifestation is ³spoken, written or conduct,´ which includes that failure to secure 1. Thus, can be leaving something unattended & no notice of timing. c. Types of Authority i. Actual Authority §7 1. Reqs a Manifestation & Consent from Principal to Agent
e. In Tort a. Authority doesn¶t generally matter in tort (maybe apparent authority) Switches from the Principal/Agent terminology to Master/Servant. Every employee is an agent; every agent is not an employee. You can be an agent for some purposes & not for others. YOU MUST SAY THIS AGENT IS A PHYSICAL EMPLOYEE, in order to BIND THE EMPLOYER-vicarious liability. i. Servant is person whose physical conduct in the performance of the services is subject to the other¶s control or right of control ii. Factors to consider to determine if Servant: §220(b) 1. Extent of control of master over work, 2. Whether or not person is engaged in a distinct occupation, 3. Kind of occupation, 4. Skill req.d or occupation, 5. Who supplies the tools,
Can be Expressed or Implied a. Expressed is oral, written or by conduct b. Implied is implied from the express grant (Comment C). You imply it from something the principal said to the agent. i. Ex Granting authority to sell house gives the implied actual authority to pay fees & other necessary items to sell house. ii. However, new view says this is just expressed authority also. 3. Knowledge by the 3rd party of the actual authority is irrelevant. ii. Apparent ³Authority´ §8 1. Reqs a Manifestation from ³Principal´ to 3rd Party a. Means you have given a manifestation to a 3rd party that a person is your agent & the 3rd party reasonably relied on it. i. Reasonableness is based on 3rd party, not whether principal was reasonable. There doesn¶t have to be a relationship b/ween the principal & 3rd party ii. Reasonableness is Subjective (in eyes of that 3rd party) b. Key if 3rd party knows person doesn¶t have authority, or was unreasonable in relying on manifestation, then not apparent authority c. Key ´Agent´ cannot create his own authority i. Thus, stolen uniform is not a manifestation. ii. ³Agent´ saying he is authorized means nothing d. Can have Anti-Manifestations so that people cannot reasonably rely otherwise (such as sign when open). 2. Def the power to affect the legal relations of another person by transactions w/3rd persons, professedly as agent for the other, arising from & in accordance w/the other¶s manifestations to such 3rd parties. 3. Don¶t call a principal & agent because that not right. 4. Examples a. Leaving a Night desk unattended (manifestations is having the desk there) b. Can be by signs or advertising c. By appointing someone as President. (that giving of a label can be a manifestation) d. Letting someone have an office in your space. 5. Note we don¶t really know if ³agent´ is also bound for this. Probably yes, just like a undisclosed principal iii. Inherent ³Authority´ §8A: derived from the agency relation itself 1. Normally occurs when an agent does an act he is not authorized (thus not an agent for it) to do. a. From the desire to protect the reasonable expectations of outsiders who deal w/an agent. 2. Key²It stems from the expectations people have about a person has in a certain position (such as CEO). 3. Ex²President can bind a corp in ordinary course of business a. Thus, even if no actual authority, can apply 4. Really just actual or apparent authority now iv. Incidental ³Authority´ §161 1. Allows ³agent´ to bind Principal if he is an agent for other purposes & does conduct that he is not actually an agent to do & 3rd party reasonably believes & has no notice otherwise, that ³agent´ is authorized. a. Again just a desire to protect 3rd party. 2. Key²It stems from granting certain authority, that other authority must have been granted too. 3. Ex Selling a home & doing all the stuff necessary to sell it. 4. Really just implied actual authority, thus actual authority v. Implied ³Authority´ (part of §7) 1. This is an ³authority´ that is no longer so. (see above) Is the Agent Bound by the K also (§§320-322) i. If principal is disclosed, Agent not bound 1. Thus, agent is contracting as agent for principal ii. If partially disclosed principal, agent is bound/party to contract iii. If principal undisclosed, then agent is bound/party to contract 1. You claim to be acting on own account, but really for principal Key When something really matters, Insist on Proof of Actual Authority.
6. Length of time for employment 7. Method of payment (salary or per job) 8. How often use/employed 9. Whether they believed they were servant or not, 10. Whether Principal is in a business or not. TEST Master liable for Torts of Servent when: §219 i. Master is liable for the torts of his Servant in the course & scope of the employment (Respondeat Superior). Not apply to an independent contractor; independent contractors are NEVER employees. ii. Master not subject to liability for torts of servant outside course/scope unless: 1. Master intended conduct or consequences, 2. Master was negligent or reckless (failure to supervise) 3. Conduct violated a non-delegable duty of the master, OR 4. Servant was aided in accomplishing the tort by the existence of the agency relationship. iii. & Direct Liability possibly 1. Example is committing fraud themselves because Co. knew about it 2. Note²When an agent has knowledge of something, the principal is deemed to have knowledge of it Key No fault is req.d by Master/Principal except for direct liability Special Rule for Fraud (2nd Rest. of Agency, §261) i. A principal who puts an agent in a position w/apparent authority & allows the agent to defraud a 3rd party is liable to 3rd party. §261 ii. Thus, this is outside the Master/Servant distinction, & back to just plain Principal/Agent. Note i. Every Master is a Principal ii. Every Servant/Employee is an Agent. 1. Employee is an agent over which employer has physical control iii. Independent K is not a servant & not subject to Respondeat Superior Agent/Servant always also bound/liable in tort, thus agent cannot make principal liable in tort, & not be personally liable in tort. Restatement 3d §7.08 ³A principal is subject to liability for tort committed by an agent in dealing or communicating w/a 3rd party on or purportedly on behalf of the principal & actions taken by agent w/apparent authority constitute the tort or enable the agent to conceal its commissions.´ CASES i. Blackburn v. Witter 1. Facts: Respondent sued brokerage company of Mr. Long. Respondent invested money w/Mr. Long. He misappropriated the money by keeping for himself. Respondent sues the company that employed Mr. Long under apparent (ostensible) authority. Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a 3rd person believe the agent to possess. 2. Holding: ³A principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit fraud upon 3rd person is subject to liability to such 3rd persons for the fraud.´ The manifestation was that the brokerage placed Long in front of Blackburn to make investments as an agent. Liability is based upon the fact that the agent¶s position facilitates the consummation of the fraud, in that from the point of view of the 3rd person the transaction seems regular on its face & the agent appears to be acting in the ordinary course of the business confided to him.´ 3RD PARTIES SHOULD BE GIVEN REASONABLE PROTECTION IN DEALING W/AGENTS a. This is not actual, because Long was not allowed to misrepresent the company. Long never had that authority; rather, it was apparent. b. Long was an agent (never addressed if he was a liable). This is not actual or respondeat superior. ii. Sennott v. Rodman & Renshaw 1. Facts: Jordan Rothbart used to work for Rodman & Renshaw; he was fired, but his father still works there. He becomes friends w/plaintiff. He engaged in trades w/plaintiff, plaintiff uses his father¶s brokerage to process the trade. Eventually Jordan gets plaintiff to invest in an fake IPO, & now plaintiff complains & sues Rodman & Renshaw 2. Holding: There was no apparent authority. Jordan did not work for the firm. However, firm did contact plaintiff & said they were not responsible for Jordan¶s conduct & don¶t tell compliance people about anything. However, while some of the type of implied agency may well have existed as to other transactions, there was no reliance upon this agency in the transaction regarding the fake IPO. a. Record is silent as to if father (Rodman & Renshaw) knew about Jordan¶s illegal fake IPO trade. b. Plaintiff testified that he did not think trades were coming from Rodman & Renshaw.
We want (i) limited liability. Statutes: RULPA (1976 w/amendments). There is no flexible management & ownership. Limited Liability Partnership (LLP) i. Limited Partnership (LP) i. Limited partner is limited in their: 1. but you sign a form saying you don¶t want to be liable like a General Partnership. Can be dissolved very easily iii. e. without have to dissolve & start over. Statute UPA(1914) or RUPA(1997) b. General Partnership i. Public Corp i. These partnerships have to be very limited. Rare ii. 1. Just like a LLC. Corp w/favorable tax treatment (no corporate tax) ii. Limited Liability Company (LLC) i. Raise Capital/Multiple Owners 2.Default Rule 1. Style of management iii. Def²A general partnership w/at least one limited partner (investor) iii. 2. Limited Liability Limited Partnership (LLLP) i. Today there is usually only real estate limited partnerships or family limited partnership (for estate planning). The partnership is a personal arrangement. Individual adaptability favored over continuation. d. Limited liability w/favorable tax treatment ii. Statute: not uniform. No written agreement req. v. For LP that existed & wanted to convert. Files own tax return. Types of BAs a. Equal sharing of ownership & management (meaning) . We have BAs for two Reasons: a. (C Corp) ii. management rights iv. All are residual claimants 2. Shield Liability (separate Legal Existence) b. Extensive Fiduciary duties v. rare ii. Closely Held Corp i. It is very similar to a General Partnership. Taxed as an entity. (ii) favorable tax & (iii) flexible management & ownership.BUSINESS ASSOCIATIONS INTRO 1. but needed because some profession cannot be a LLC (such as lawyers/accountants).d vi. changes most of the rules but limits types of LPs. f. liability 2. All have right to act as agent-all can bind principal ii. Complete flexibility in: 1. No limited liability iv. Note²Can¶t limit liability for malpractice. The State Bar set this rule in order to not completely limit liability. Now there is a Re-RULPA (2001). All have full power to participate in management 3. It is taxed like a partnership (S Corp) g. 3. c.
. ULLCA is good model. Types of ownership AND 2.
Hall. parties must merely have an intent to carry on business for profit. Holding: An arrangement for sharing profits is to be considered. Landlord 4. 5. Facts: Company wants to borrow securities from Peyton. not a subjective intent to create a partnership. b.PARTNERSHIPS FORMATION 1. UPA §202(c) lists factors: (i) share prop ± but mere co-ownership alone is insufficient. iii. 2. Key Rules/Assumptions (RUPA 202(c) & UPA §7) a. it merely allows a veto but does not allow trustees to enter into business transaction). Defendant provided loan & (i)receives securities from Company. If yes. Duration of Partnership a. Issue: Are the lenders partners? If they are partners then they have liability. Partnership for a Term 8. Factors to Consider a. Can be At-will partnership OR b. Retiree ii. (ii)40% of the profits (iii)loan was not to be intermingled w/Companies money. Creditor 2. The trustees cannot bind the firm by any action of their own. Martin v. It is not decisive. (iii) sharing of profits ± is sufficient. Ex A creditor that is too involved can create a GP i. you can call the arrangement whatever. Doesn¶t have to be in writing 2. Key only cash & prop count as contributions. They can¶t enter any transaction ± they can¶t act as an agent of the firm. Statutory Rules are the Default Rules & all can be changed 2. 2 or more person ii. Parts i. Key Expressed correctly or implied i. 1. It may be merely the method adopted to pay a debt or wages. If presumption fails. Sharing of returns without more is Insufficient c. Each partner has a capital account that is: i. MY PROCESS a. Ask if they were carrying on as co-owners of a business for profit i. But it is to be weighed in connection w/all the rest. Increased by contributions & profits AND ii. Def An association of two or more persons to carry on as co-owners of a business for profit whether or not the persons intended to form a partnership (RUPA §202(a) & UPA §6(1)) a. Capital Accounts (RUPA §401) a. First ask if ³partners´ are sharing Profits i. Second. They can even veto any business they think highly speculative or injurious (THIS IS A FORM OF NEGATIVE CONTROL. Cases a. or bind the firm in anyway. Name called is irrelevant. (iv)must be advised as to the conduct of the business & consulted as to important matters. Consider the above factors & ideas 7. Carrying on as co-owners iii. Roles in Management (co-owners?). Share Profits. & it will not be determinate. unless it is proved to be something else. b. Sharing of Profits creates a Rebuttable Presumption for Partnerships i. Thus it shifts burden to other side to prove not a partnership & can be struck down by showing profits were received as: 1. Peyton i. Contributions of capital d. To be partners ± Peyton would have to do more than safeguard the loan. NOT services
. c. Employee 3. ii. If no. as interest on loan or for other reasons. Substance over Form a. 6. Even calling it a partnership does not make it so. Key To form a partnership. 3. It is to be given its due weight. As well as insurance on Mr. Intent to be co-owners i. go on b. PROFITS & LOSSES 1. probably a P¶ship but look for rebuttal ii. e. (ii) sharing of returns ± alone is insufficient. Joint ownership without more is Insufficient b. Decreased by losses & withdrawals b. but strong evidence for it. burden to prove by definition again 3. Being informed on business matters is a proper precaution to safeguard the loan. A partnership is not formed if some other BA is actually formed (by filing) (RUPA 202(b) 4. For profit b.
On Dem & (reasonable request). ii. Note. Courts want to AVOID this result. all the cases cited. A partner is only entitled to compensation where the evidence discloses an express or implied agreement that such partner will be compensated. First pay Creditors 1. they would split profits 50/50. it is more than market morals. Share the profit/losses according to the agreement iii. Default Rule Process RUPA §807(b) (Ruthless Rule²Pay other partners) i. However once all capital is lost by all. 1. Without Demand information req. Ladd put in $75K in contribution & $75K in loan to a business w/Mr. Shamloo gets nothing ± absent an agreement. Duty w/Respect to Information (RUPA §403(c)) i. more like trustee ii. Note there is always Joint & several liability & cannot get out of paying creditors. b. iii.
4. Overall Process i. Second pay Partners b. The partners never made money. Can always be the tie breaker b. In accounting terms Kovacik contribute $10K. REED WOULD OWE $4180 to KOVACIK AFTER DOING ALL THE WORK. Gentle Rule in Equity for Partner who contributes only Services (MINORITY RULE) i. Holding: (i)Mr.640. This is the default rule. Where one party contributes money & other contributes services. If a positive amount. a. Duty of Loyalty (RUPA §404(b)) (Very similar to what Agent owes to Principal) i. seems they again share losses (additional amount to be paid out of pocket) in the appropriate proportion. you can still K around this minority rule Cases a. hold that neither party is liable to the other for contribution for any loss sustained. Profits Shared Equally (meaning equal per person. ii. 2.d for partner to exercise their rights/duties 2. Statutory (Two Fiduciary (loyalty & care) & two others) a. that is the paid amount v. Ladd i. Mr. Cardozo says fiduciary duty owed b/ween partners for all partnership matters is a higher standard of duty than just Honesty (³the punctilio of an honor the most sensitive´) (pg. because this gives many problems. iii. Therefore Kovacik due $1320 & Reed $0. Reed i. & Reed would give services. Note²No certain rule on how you divide if more than one partners left to carry extra amount? iv. 2.69 from Meinhard Case) i. UNDER THIS RULE. Common Law a. Duty of Care (RUPA §404(c))
. c. No adverse Interest (could you represent both at trial) ***BIG ONE*** 1. & now the partners want to dissolve the partnership.
The Statutory/Default Rules (RUPA §401 & §807(b)) & (UPA §18) a. THERE CAN BE NO SELF-DEALINGS. No competition in Partnership business until partnership is dissolved. Kovacik thinks that Reed should pay for ½ the loss. & which out research has discovered. ii.
5. Kovacik would give money. any other information reasonably requested about partnership affairs. If a negative amount. Profits from partnership prop belong to partnership (includes accounting for it & not taking opportunity) ii. iv. Says if one partner only contributed services. Thus. Holding: Where one partner contributes the money capital as against the other¶s skill & labor. Partner shall furnish 1. b. Shamloo v. Facts: Mr. that is due by you vi.
FIDUCIARY DUTIES 1. then in the event of a loss each would lose his own capital the one his money & the other his labor. Facts: Kovacik entered into parternship w/Reed. P¶ship must pay interest on loans from Partners (no interest on capital contributions though) d. This Court went against the statute RUPA §401 & §807 ± but that happens all the time. Then add to or subtract from the amount from the partner¶s capital account for each. Shamloo. Still big argument over scope of duty. First determine if you have a profit or loss (calculate) ii. a partner is not entitled to compensation for rendering services for partnership other than profits. Partners get no payment for services in partnership Settlement of Accounts Among Partners on Dissolution (§807(b) Settlement of Accounts Among Partners) a. Reed $0. Losses shared the same as Profits c. Kovacik v. Shamloo agreed to give service. (ii) a partner who makes payments or advances beyond the amount of capital which he agreed to contribute shall be paid interest from the date of the advance BUT interest is not due on a capital contribution. They loose $8. other partners cannot recover losses from him (or at least until all capital is spent) ii. Can¶t give Reed a $10K on the onset. c.3. not per proportionate to contribution) b. Kovacik lost $8360 & Reed $0. $10K.
Cardozo & Andrews disagree as to the relationship b/ween the new venture & prior ventures. & 3rd party had notice that partner lacked authority c. But. Facts: Plaintiff involved in self-dealings w/partnership. Cannot unreasonably restrict access to information/books. (RUPA §404(d)) i. you can give standards to judge by Damages for Breach of Fiduciary Duty a. There is manifestation b/ween the principal & agent & a transaction b/ween the agent & 3rd party. However you can qualify it in saying was not violate in some cases c. Apparent Authority If partner doesn¶t have actual authority to act in ordinary course. b. Authority (RUPA §301(1)) a. Entered into a K w/a set time-period ii. Actual Authority Partner is an agent of Partnership for any act in the ordinary course of the partnership business. this adds nothing since already the rule. Facts: Salmon & Meihnard had a partnership. No forfeiture of capital contribution Burden of Proof a.
6. Plaintiff denies breaching fiduciary duty. Thus. 1. but 3rd party does not have notice of limitation. 1. Thus. Disloyal partners are entitled to their interest in the partnership¶s reserve & capital accounts and in the partnership income earned but not distributed. Holding: 1. Storch i. a. Defendant says that since plaintiff broke fiduciary duty. ii.d to carry insurance). It doesn¶t insulate the partner who made the mistake. even if no actual or apparent authority. Partners can bind the partnership by Actual & Apparent Authority b. h. because that is what ³justice req. b. but it does insulate the other attorneys. & Salmon was going into a new deal & never informed Meihnard. Cannot unreasonably reduce the duty of care d. Vigneau v. Acts outside ordinary course of the partnership business is only binding if partner had actual authority. If a partner breaches a Partnership Agreement. intentional misconduct. Every act by a Partner in the ordinary course of the partnership business is binding (by actual or apparent authority). Only means refraining from engaging in grossly negligent or reckless conduct. Holding: The fact that defendant suffered no injury as a result of the plaintiff¶s disloyalty is of no consequence & act as no excuse. negligence alone is not enough. g. Cannot eliminate the obligation of good faith/fair dealing i. Still a transaction b/ween agent & 3rd party. Limited partner status only prevents a partner from being liable for the obligations of the partnership. d. Exception Partner didn¶t have actual authority for that act. If the firm puts the partner in the position to commit the tort (malpractice). but rather b/ween Principal & 3rd Party. However. Include profits as a result of the breach b. RUPA §404(e): It means nothing or everything. it doesn¶t insulate the firm (they are req. Cannot eliminate duty of loyalty i. Non-waivable Provisions (RUPA §103) a. 3rd) might say there is authority by estoppel or restitution.3. there was a breach of fiduciary duty. e. Only get damages caused by the breach i. or it means nothing. unless he didn¶t have actual authority & the 3rd party had notice that he had no authority. However. If a partner commits a malpractice the partnership is bound according to §301(1). Lundy). e.
5. Note limited liability can be partial shield (like case) or full shield (like RUPA §306) iii. Meihnard v. it does not change anything such as how a partner can bind the partnership. After the other partners that did not commit the wrong are no longer liable. 7.
MANAGEMENT 1. he can become liable to the other partners (Haymond v. because there was no actual damage. or a knowing violation of the law. Therefore. Limited Partners can bind a partnership just like a general partner i. defendant can¶t keep plaintiff¶s partnership. it is default rule that this gives actual authority for ordinary course of partnership business ii. Obligation of good faith & fair dealing in carrying out duties to p¶ship & other partners. CASES a. ii.s´ f. i. Andrews disagrees. Cardozo said there was a nexus of relation. Summary i. Note Label of Managing partner can increase the possibility of apparent authority because it is reasonable to rely on the title
. it¶s hard to remove partner¶s right to bind partnership d. Note In some cases courts (& Rest. Thus. then defendant does not owe plaintiff his value of partnership. ii. i. that is the risk of having a partner. ii.
i. When there is no manifestation b/ween Principal & Agent. Thus. Burden of proof is on the party claiming they have met their fiduciary duty (once the other party has proven a fiduciary relationship does exist) Note Term ³partnership Business´ is very important because its definition has a huge impact. Salmon i. Either it restates everything else. then the firm is bound either because he is authorized to do it or the firm put the partner in the position to commit the fraud.
each partner has an equal say in management & conduct of partnership business. (b) In contravention of the agreement a. Note²Possible for Partner/agent to bind the partnership to only a certain extent (the 10K was that in ordinary course. ii. Changing Course (Default Rules. Facts: One partner wanted to raise rent. 2. RUPA¶s Dissociations a. However. There are different effects of leaving (p¶ship continues or not & is liquidated) i. 3rd party actually sees/knows it. Under UPA. it revokes a prior grant. 3rd party can rely on a filed GRANT of authority (unless revoked by a later filed limitation) ii. after dissolution. j. but that does not remove fiduciary duties.
4. Dissolution/Dissociation deals w/a partner leaving the partnership b. Ferguson & Williams were partners. but RUPA allows the same partnership to stay 1. thus. end of term in agreement 1. Events Causing a Departure a. Covalt v. big power to start. a partnership is different. (5) Decree of the Court in §32 1. Need majority. each partner could have been active. seems must be based on actual authority then). Partner unsound mind. b. 1. but a single partner dissociates ± therefore under RUPA the partnership may continue as a legal entity. 3rd party is not bound by a filed LIMITATION of authority unless 1. Each partner has equal rights in management (§401(f)) b.2. Holding: Negligence in the management of affairs of a general partnership or joint venture does not create any right of action against that partner by other members of the partnership. 1. Filed w/title to real prop. here Williams CHOSE not to be. but remembered as 5) i. Also some fiduciary duties in process e. other said no. Under UPA §31 & 32 Events of Dissolution(6. but not so under RUPA ii. one partner isn¶t enough. Generally a. therefore Covalt can¶t complain now. 3. 2. need MAJORITY of partners. The leaving can be wrongful or not. Changing Course (RUPA §401(f) & (j)) a. Overall: You can get out of a partnership whenever you want. d. High a.§404(b). general partners owe limited partners a duty of care. reckless. UPA¶s Dissolution v. (2) By Illegality of Business (became illegal to continue) iii. It is only when there is a breach of trust. Partner guilty of conduct that prevents carrying on the p¶ship
. Facts: Ferguson was negligent on 6 different accounts. but RUPA fixes this & says partnership continues unless certain things happen (§601 & §603) i. but do general partners now owe other general partners a duty of care???? d. the conflict of interest was well known by both parties at the beginning. b. would such action lie. can be modified by K because §103 doesn¶t say otherwise) i. Partner incapable. OR 3.
3. Note on Complete Discretion a. (1) By express Will. ii. the partnership was forced to wind up(UPA §29). expulsion if in agreement. & since only two partners. Williams i. See Fiduciary Duties above. but otherwise it only lets the partnership buy it out. & converts such to his own use. such as when one partner or joint venturer holds prop or assets belonging to the partnership or venture. because partners should check on other partners. Change in ordinary course of business. Note you can start something in the ordinary course w/just one person. because it was agreed upon . Thus.
DISSOLUTION/DISSOCIATION 1. Difference b/ween a & b is (a) is not in violation of the agreement & (b) is in contravention of agreement (this part really only applies to express will issue) ii. 2. then negligence would award damages to investors. RUPA has a more limited definition of ³wrongful´ 3. UPA dissolves the partnership. where as under RUPA the partnership is not dissolved. Change in extraordinary course or Amendment of agreement need Unanimous of partners Duty of Care (RUPA §404(c)) a. under UPA there is always are right to liquidation. If they were not partners. Because. Seems you can give someone complete discretion. 3. Key. or engage in intentional misconduct or a knowing violation of the law. c. Additionally. (a) Without violation of the agreement 2.
Filed statement of Partnership Authority (RUPA §303) i. (3) By Death of any partner iv. c. Ferguson v. (4) By Bankruptcy of a partner or the partnership v. However. To not be grossly negligent. under UPA you always get a new partnership after dissolution. CHECK In limited partnership. i. but need majority to change 2. Key is liquidation gives everyone the right to try to buy the assets.
Another partner¶s conduct makes it not reasonably practical to carry on p¶ship w/that partner c. §32(1)(c & d) meaning court ordered dissolution of a partner: i. Partner engaged in conduct relating to p¶ship business that makes it not reasonably practical to continue p¶ship w/the partner. If no agreement made on price after 120 days. (2) By the agreement (set out in it on date or certain event) iii. Under UPA §38(1) & §42 i. or BA.
4. If wrongful dissociating from P¶ship for T/PU. Problem is it uses ³in contravention´ & ³wrongful´ so not certain if the same. 2. estate. (2) In a p¶ship for a term or particular undertaking a. Not otherwise reasonably practicable to carry on the p¶ship business in conformity w/the p¶ship agreement. pay creditors. (4) By event that makes it unlawful to continue P¶ship business 5. ii. or termination of partner b. then dissociating partners interest should be bought out. the dissociating partner¶s interest shall be purchased at the buyout price from §701(b) 2. then any partner can dem & liquidation. incapability. (6) By judicial determination at request of transferee of p¶ship interest: a. termination of trust. Under RUPA §603 i. the partnership continues under §701 unless the partnership is liquidated under §801 1.4. (c) By Judicial Determination a. §701 Continuing the Partnership 1. §38(1) If non-wrongful dissolution. Notes on Buyout payment a. To wind up at anytime. meaning partnership ends called terminated. if it was a T/PU at time of transfer. §42 say if partnership continues (although as a new partnership). Under RUPA §601 Events of Dissociation (10. Consequences a. (b) By unanimous vote of the other partners in some cases 3. (5) By Death. b. On dissociation. Liquidation: reduce the partnership to cash. partnership continues until wound up. Means death. b. (a) Pursuant to Partnership agreement 2. bankruptcy. if it was a at will partnership at time of transfer. b. p¶ship must pay interest on amount §701(e) c. but remembered as 5) i. iii. KEY events under §801 are mandatory liquidation if occur. Generally On dissolution. Any other equitable reason. 1. judicial determination of not capable. By express will of majority of remaining partners to wind up within 90 days after a wrongful dissociation or a dissociation by death. Outcome varies if wrongful because wrongful dissociating partner losses right to dem & liquidation. guardian. but it is as a new partnership. then p¶ship doesn¶t have to pay until T/PU is done §701(h) Effect of Wrongfulness a. 2. Partner willfully or persistently commits breach of agreement & not reasonably practicable to continue 5. (1) By Express will (when p¶ship gets notice) ii. & distribute to partners the value of their respective interest. Incapability. thus it now seems wrongful expands the definition of ³in contravention´ 2. b. 6. Key is you can liquidate or pay off & continue the business. In contravention of agreement AND b. or Termination of Partner(7-10) 1. Partner engaged in wrongful conduct that adversely & materially affected the partnership business. Definitions of Wrongful i. To wind up at end of T/PU. (4) By Bankruptcy of the Partner v. ii. (3) By Expulsion (3-5) 1. iii. Upon expiration of term or finishing of undertaking. Wrongful means: a. b. Says if partnership is continued. 3. §801 Events of Dissolution/Liquidation/Winding up 1. Under UPA §38(2) & §32(1)(c & d) 1. Partner willfully or persistently committed a material breach of agreement or a duty owed to p¶ship c. (1) If p¶ship at will. (3) By event agreed upon causing winding up in agreement 4. & partner makes express will to dissociate (thus by §601(1)) This is when it continues ± otherwise it is liquidated. 1. By express will of all partners to wind up. c. (5) By Judicial determination at partner¶s request that: a. Economic purpose of P¶ship is unreasonably frustrated.
5. (c) conducts himself to affect prejudicially the carrying on of the business
. iv. Occurs when a partner dies. Can offset damages from Wrongful dissociation §701(c) b. P¶ship could only continue at a loss 6.
Wrongful partner subject to damages for breach of agreement. such as to preserve client relations.
7. By Bankruptcy iv. iii. etc. Termination of Non-human partner 2. Thus. or conducts himself so that it is ³not reasonably practicable to carry on the business´ ii. Under RUPA §602(c) and 1. iii. you get to keep their business you can keep the money you make. 2. provided you give the old firm an agreed charged. Thus.
.ii. Consequences of Wrongful (roughly same) i. Cannot reduce their past pay unless they did their job wrong ii. a. Asking others if they will leave w/you is not a breach unless sneaky/malicious conduct gets involved. Burden on withdrawing party to show no breach of fiduciary duty. Wrongful partner may not continue the business or call for liquidation §701(a) [§801] 3. Be careful in court when you ask for Dissociation by §601(5) because it is similar to §801(5) for liquidation & could accidentally force liquidation when you just wanted to force person out by dissociation. In a partnership for a Term/ParticularUndertaking: i. ii. Shaughnessy) 1. you run the risk of dissolution/dissociation yourself & thus having tables turned on you. Voluntary Withdrawal i. 2. Other partners still have choice c. (d) Willful/persistent breach of agreement. 1. Under UPA §38 1. best to add in there expelled for cause only. Note for RUPA a. Forfeiture of a capital account if someone leaves partnership (whether in K or not) is likely NEVER enforceable. If you take the change of seeking judicial dissolution/dissociation. Taking Partnership Opportunities i. ii. to avoid breach of fiduciary duty for this once the future prospects increase you need to come clean & let the other side know. Key you have to give the clients the choice. Wrongful dissociating Partner is liable for damages to P¶ship & other partners §602(c) 2. Generally i. Cannot go after clients until after you dissociate (Meehan v. Fiduciary duty to not take the good times without giving the opportunity to the other partner also. & obtaining financing is allowed. which means you cannot expel a partner for your own gain. Only fiduciary duty owed in Expulsion is not to act in bad faith. b. Fiduciary duties in Dissolution/Dissociation. Expulsion §31(1)(d) / §601(3) i. Dissociation is wrongful ONLY IF: a. then any partner can be expelled for any business reason. there is basically no wrongful dissociation in an At-will partnership (except maybe a notice provision). which will make you have to pay more for buy out. It attaches when the prospective profits is on the Horizon (start to be seen) a. Under RUPA §602 1. OR b. Wrongful partner may not continue the business or call for liquidation 3. 1.
6. Key. Cannot dissolve a partnership to gain the benefit of the business for himself 1. If client¶s go w/you. If p¶ship agreement says any partner can be expelled. In breach of express provision of agreement (usually only a notice provision works here). By Judicial Expulsion under §601(5) iii. Seems UPA is broader because there is more ways to be wrongful in an at-will p¶ship b. Note even wrongful dissoluter/dissociaters get their contribution to the partnership paid back 1. iv. Other partners still have choice ii. c. By express will (if not within 90 days of exception) ii. Logistical arrangements including leasing building. preparing a list of client¶s the expect to leave w/them.
Each affected client gives informed consent in writing. 2. Note if you represent a BA. not business interests in that who gets more money. d. Day to Day management iii. 2. Include insiders & outsiders. Such as mergers.ETHICAL ISSUES 1. Filed w/state. DIRECTORS CANNOT ACT UNLESS THEY ACT TOGETHER AT A MEETING. When board of directors act. Elect Directors 2. Agents of the Corp ii. there needs to be a properly called meeting.
CORPS GENERALLY INTRO 1. Powers 1. Act by MAJORITY Rule v. Can call special meeting. but tough to do iii. You cannot represent multiple parties if there is a ³concurrent conflict of interest (what is this) i. not the partners individually
2. Not powers 1. they ARE the corp. Think of this as the ³Constitution´
. Cannot do anything that is management that Directors should do iv. The representation of one client is ³directly adverse´ to another client 1. Other points a. ii. Three Constituent Groups a.03 iii. not acting on behalf of the corp vi. Amended Bylaws (default rule) v. No real power individually iii. These are legal interest as in fighting in court. There is a significant risk that representing one client will ³materially limit´ ability to represent your other client. can only approve changes. Appoint Officers 2. Ethical Issues in Representing a Partnership/Entity a. Articles of Incorp (also called certificate/charter) i. Vote on matters that are referred to them by Directors a. Even w/³concurrent conflict of interest. owners & non-owners iv. Usually passive investors w/limited powers ii. & must be in group) (VOTE. Cannot propose amendment to articles. & SUE) 1. Powers & Duties as specified in the their agency relationship w/corp as principal 1. They run & they are the corp ii. Directors: Non-owners w/plenary powers i. Remember. Act by MAJORITY Rule 1. 3. SHARE. Three Basic Documents a. May propose & amend bylaws (tough to do) a. amendment to articles b. Shareholders: Owners w/limited power i. Act together at a meeting b. Lawyer reasonably believes can give competent services ii. Rarely happens because it must be on agenda & directors decided agenda & officers tell them what to put on it. they can act TOGETHER by all signing the same piece of paper (don¶t have to have an official meeting). thus you cannot keep it from them. Have Plenary powers to run corp as a board on the whole 1. Amended by proposal of Directors & approval of Shareholders (req. or anything that changes their shares 4. Can come a future time will have to withdrawal counsel because cannot maintain confidences in suit by partners against partnership. b. Proposing mergers.s action by both) §10. Officers: agents of the corp i. However. Note -. you represent the entity. Representation not prohibited by law iii. Individually directors can do nothing. General/large management (policy decisions) a. 3. its adopted by the Incorporator ii. c.board & shareholders must act on majority Rule. Deciding Dividends c. Key Person can be more than one e. Can act as an individual. all partners have a right to know all partnership information. Not against each other in same tribunal iv.´ can represent if: i. b. Directors act together at a meeting. Powers (reactive mainly.
Items that CAN be Included: i. a. 1. Just managing information not in conflict w/Articles iii. If already named in Articles. Default rule is all shares have same rights (payment & voting) iii. Items needed to be included to be Effective: i. Shares are sold for consideration. owners of stock are not subject to liability from company¶s creditors. Name of Initial Directors e. Not misleading as to purpose ii. Can be amended by Directors or Shareholders c. must give value for a share of stock. Defining powers of people (makes tougher to change) iii. Types of Class of stock iii. c.
.02(a): i. Staggered Board d.
ORGANIZATION/FORMATION 1. Articles (MBCA §2. Corporate Name 1.d to be had. etc. Must be in state iv. Includes 1.01 & §2. Del§153 req. Number of Shares authorized to Issue iii. Done by BOD ii. Bylaws/Resolutions
b. Street address of the corp¶s initial registered office & agent at that office 1. but no req. b. This PAR VALUE is what creditors can get at.01) (creates Shareholders) i. Selection of State of Incorp a. Name & address of each incorporator. 2. Stock is equity ownership. 3. ³Par Value´ actually means nothing. Organizational Meeting under MBCA §2. Includes creation of Offices & people are appointed. First try your state.06) (includes officers) i. Delaware (favorable law & case law) 2. Can be amended by Directors OR shareholders §10. Del§102 a. Req.21(c): whatever the directors decide is fair payment for the shares. State Law and/or Stock Exchange Standards i. Filed w/Secretary of State in order to Create the Corp b.01 a. States that have ³PAR VALUE´ in state statutes. The determined value is conclusive so far as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued. If not already named.05 a. Basic rules for governance (how people can act) 2. Directors Adopt Bylaws (§2. However. Issue w/ Directors i. Limiting Liability of Directors iv. & nonassessable. set this amount in trivial amounts.
Bylaws i. they hold an organizational meeting ii. Second. Note Choice b/ween putting something in the Articles or Bylaws matter as to if they can be easily changed.3.02). but if not favorable b. Purpose of the Corp (otherwise deemed to by any lawful business) ii. unless the Articles reserve the power solely for Shareholders iv. Federal Law (but not much here) b.ments that MUST be included §2. Articles (articles control bylaws if the two conflict) d. fully paid. Hierarchy of Rules a. Then Directors carry on rest (but can be incorporator) b. ii. Usually written by BOD iii. Odd stuff like pension plans d. Think of this as the ³statute´ written by legislature c. Can only be amended on Directors proposal & shareholder Approval. but they must list the # of shares authorized. Removing Directors only for cause ii. Says who selects officers (normally BOD) ii. Resolutions & other Actions by the BOD i. Include Inc. 1. corp. Corp.s Corps in Par Value. MBCA §6. ii. incorporators hold organizational meeting & elect Directors iii. Main two (state then Stock exchanges) c.20. Not already in use c. & the Board of Directors has the authority to authorize the sell of stock.d information to be in them. Req. Must be in accordance w/§4. Then Sell Shares (§6. Trumped by Articles if conflict iv.
must have one vote per share. can be services. 51% of share can elect ALL Directors ii.01(a)) a. See problem 3-8 (pp180). 2. Pp155 problem 3-5 c. iv. In Dividends a. It is authorized by State statute. Dividends are discretionary at the board of directors. D=Number of Directors to be elected (at that meeting . b. v. The corporate income tax may be avoided. At least some directors must be elected every year b. Adds stability to board (never all new directors). S Corps are a corp that wanted to be treated like a partnership. Stock within Each class must have same rights/powers/privileges. Class must be created in articles a. Note if tie. Thus. but directors say no 3 years later. Types i. So if staggered board of 9 ± it¶d be 3. but must be set forth in Articles 1.
3. Participating. Can convert preferred into common at rate. c. §6. Types of Preferred Stock 1. Each Shareholder has one vote per share per position. Ex Class A stock elects 4 directors. Can put all votes on one person or divide them among people. 1. Anything you want vi. Used for Small Corps. (One share ± one vote). then no tied person gets in unless bylaws give a tie breaker 4. Formula tells # of shares needed to elect one director (SEE HANDOUT) a. Note to change to Give a Class more power than another. More Voting power a.if it is in the articles) 1. Cumulative Voting 1. May have different classes. d. Thus. However. 2. to be listed for public trade.
. iv. (MBCA §6. Allowed to authorize for about any consideration vii.01(c)(1) can give ³special´ voting rights. Cumulative (get paid all past before common gets any) or i.06) i. Classified/Staggered Board (MBCA §8. Certain directors only elected by them 5. you must get approval of Majority of that class so tough. allows substantial ownership (but less than 51%) certain to elect at least some directors 3. ii. N=Number of Shares Needed ii. Thus. 2. remember this is shares needed. (?) c. Must be at least one class that has unlimited voting rights. N > S/(D+1) What you need to elect one director i. b. Classified Shares i.Shares can be issued for any consideration. Doesn¶t have to be money. i. Restrictions 1. Election of Directors a. but only if the corp has only one class of stock. 3. d. In publicly traded corps. In Liquidation 3. It provides ³continuity. However preference accumulates before common share holders get something 1. but can be allocated in any fashion a. stock exchange rules prohibit DUAL-CLASS capitalization. Limits the effect of cumulative voting. Incumbent re-election rate for directors is higher than for members of Congress. board owes $15 before the common share holders get anything. Why have staggered Board 1. Prevents new majority of taking over control for at least 366 days. Convertibility a. 4. not number of votes. EX: $5 a year dividend. & you¶d have to wait at least a year to control the entire board. & Class B stock elects 5 directors. Straight Voting 1. SELECTION OF DIRECTORS 1. Better Anti Take over Device (Real reason there are staggered boards) a. tangible goods. Must be at least one class that are residual claimants. to be publicly traded must be one vote per share thus cannot have classes? iii. S=Number of Shares Voting (not just total outstanding) iii. you can only get a majority of board members for that year. 2. Each Spot is voted on Separately (each voting right gets one vote on each spot) 2. Can classify that a certain class of stock elects certain directors (Dual Class Voting Scheme) 1. 2. services to be performed in the future. b. If you newly own a majority of stock. However.´ a.
It allows for discussion/deliberation among shareholders. OR b. Court may remove direct on finding that Director 1. OR ii. Problem registration is complicated. evidence of indebtedness. Can prevent by removal of directors only for cause & putting in articles to make harder to change (since directors must propose) ii.000. An annual meeting serves several purposes other than just mere voting. Staggered Boards in Delaware ONLY a. b. Doesn¶t seem other directors can remove a director unless provided in the bylaws/Articles
c. not in KY) i. If not. Avoid it by: i. Removal of Directors a. . 2. no longer req. a. OR c. Special Meetings i.s that 80% give written consent. Key purpose of act is disclosure 2. He knew there was a meeting but was unaware it was for his removal. TSI) 2. To make only for cause must be in Articles ii. Alberstein v. Statutory Protections from Removal 1.. Alberstein initially had voting share to remove all other directors.
ISSUING SECURITIES 1.06) 1. Statutory List in §2(a)(1) of Securities Act i. Default Rule is removal w/or without cause 1. Reduces the effect of cumulative voting e. Any note.03 1. . Grossly abused position. Req.09. Sale of an unregistered security gives each purchaser the right to rescind the sale up to three years afterwards (§12(a)(1)) d. meeting is not satisfied by written consent. But in Delaware. iii. Shareholders can act by written consent if a majority of shareholders sign the consent (because they constitute a quorum). If you can prove it was security. 1. c.ment of Meeting? i. Can only be removed for cause (DGCL §141(k)) b. One of these Three. Yes. Thus. (§12(a)(1)) b. MBCA states that 10% of shareholders may hold a special meeting. Must state the purpose of the special meeting. Removal by Judicial Proceeding (MBCA §8. Directors elected by Cumulative Voting a. Registration under the Securities Act of 1933 a. . investment contract. i. Wetheimer 1.s a letter to the secretary & states we want to have a special meeting for THIS PURPOSE. You can¶t take his rights directly & you can¶t take them indirectly. . Intentionally inflicted harm on Corp.08) i. . Must be In Articles to be Effective iii. Present Howey test to determine if Investment K(need all three)
. potential liability (§11) & expensive so want to avoid it. ii. Directors elected by a ³Group´ a. Cannot be removed if number of votes sufficient to elect him under cumulative voting vote against removal 3. (Hochsett v. . Willful violations are a criminal offense (§24) e. debenture. But the other two directors called a meeting & at this meeting they voted Alberstein out. bond. . . GR Every offer or sale of a security must be registered w/the SEC (§5) i. Definition of ³Security´ a. meeting is still req.
\However Game Effect New Majority can call special meeting & amend rule or remove directors i. a. only those in the group/class can vote on removal iii. c. If elected by a group/class. Court ruled that Alberstein needed to be given notice so that he could prepare his defense. Find a Exemption (§3 & §4) f. Agenda is chosen by management.s an annual meeting. & removal is in Best interest of corp. No restriction in MBCA 2. You can¶t afford registering a security unless you are trying to raise a minimum of $10. then anyone who bought them has right to refund b. Investment Contract: ³Catch all Phrase´ ± applies to a lot of things. KY rule req. . Engaged in fraudulent conduct in respect to Corp or shareholders. a. stock. Can have 2 or 3 equal groups (thus 2 or 3 year terms) 2.000. f. Process for Staggered Board (MBCA §8. Removal by Shareholders (MBCA §8.2. Selling something that is not a ³security´. unless there is UNANIMOUS CONSENT.´ 1.d under MBCA §8. certificate of interest or participation. then you can get your money back if it was never registered. It req.
& iii. Best Rule & other stuff irrelevant. Regulation A (beyond our class) (req. not the number of buyers. b.ment? Rule 502(b) 1. Not the best exemption to go for. Addition Information Statement is req. Other Notes/Issues i.3. Req.s substantial disclosure & without many exemptions) d. Be careful w/integration 3. Req. you can have exactly the amount. What does Addition Purchaser Qualifications Mean Rule 506(b)(2)(ii) 1. Seems you can even generally solicit some 2. or amount of assets under management qualifies as an accredited investor under rules & regulations which the commission shall prescribe« ) a. c.s that each non-accredited investor: a. In violation of the Statute 3. Integration (in note of Rule 502(a))
. so long as the amount of the offering is less than $5. On Counting Purchasers (Rule 501(e)) 1.ments for Exemption a. AND/OR d. & experience in financial matters. No Dollar Limit b. iii. Very Wealth People ii. No more than 35 non-accredited Investors iii. information statement or qualification of purchasers. v. Statute ³Transactions by an Issuer not involving any Public Offering´ ii. allows a large amount in. Better Rule 506 1.s that person must know what he is doing & must be able to underst& the information. Additional Qualifications by Purchaser by Rule 506(b)(2)(ii) i. Rule 505 a.000 ii. Private distinction depends on the amount of information the buyer has. No additional qualification for purchaser.d by Rule 502(b) iv. Limited Offering §3(b) i. Slightly better than Rule 506 because no additional qualification for purchaser. offering is less than 1 Million b. 4. net worth. Have such knowledge to know what he is doing & must be able to underst& the information/evaluate risks iv. W/profits (Predominately) from efforts of others. a. Note. ii. Really by SEC rule. depends on facts of every case just to make certain knows enough. Regulation D (Rules 504 & 505) 1. In a common Enterprise. banks) b.ments for Exemption i. ii. i. Rules 504. Private offering §4(2) & Rule 506 i. (risk of resale) c. Do not count Accredited Investors (includes:banks any person who on of such factors as financial sophistication. knowledge. No limit on purchasers. Common Law 1.e. Aggregation 1. Req. but have the burden of the additional qualifications.000. Less than 5 million ii. Thus. Institutional Investors (i. Under Regulation A. where the issuer is a resident & doing business within such state´ 1. Investment of Money. Ex an investment scheme promising a fixed rate of return can be an investment K& thus a security. Intrastate Offering §3(a)(11) & Rule 147 i. Only applies to Rule 504 & 505 since the only ones w/dollar limits 2. Less than 35 non-accredited investors c. b. iii. Req. iii.
i. Means you have to send them Non-financial & financial information for them to look over. cannot exceed. Rule 147 deals w/where everyone is resident 2. c. Rule 504 a. DO NOT include offers/amount under intrastate exemption. Addition Information Statement is req.ments for Exemption i. Special Problem Any resale of security within 9 months must not ruin the intrastate aspect. (SEC v. Req. 2. Edwards) Exemptions (under Securities Act of 1933) a. What is the additional information req. Must include in amount all offers in the last 12 months that were issued under: a. Rule 505. Statute ³Offered & sold only to persons resident within a single state. 3.d by Rule 502(b) d. b. Public v. Key You cannot have 1 person without the information b. Thus.
Suit in Corp¶s Name/on its behalf a. Derivative Litigation 1. THUS. a. e.d? No Limit Yes (502(b)) if any nonaccredited investors Yes (502(b))
Additional Qualifications of Purchasers Req. Any damages rewarded must go to Corp. Standard of Conduct MBCA §8. loyalty & good faith).31 Business Judgment Rule 1. Many Court call director¶s ³fiduciary duty´ but they are NOT like the fiduciary duties of a trustee (a director is similar to a trustee). We don¶t want directors to be subject to this liability. a. i. Same plan of financing b. Must act in Good Faith 2. Two Types of Lawsuits i. (ii)(B)Reasonably Informed d.4. The more ³yes´s you get the more likely to integrate. it could destroy the exemption (such as one person out of state) 2. Must act w/reasonable belief the action is in the Corp¶s best interests.. meaning they are just safe harbors. Note Shareholder can only bring if he has already demanded the corp to do it first. Directors are better at making business decision that Judge 2. will not be integrated 3. Damage paid directly to shareholder b. Same general purpose. KEY These Rules explain ways to comply w/Statutory Exemption. More likely by Minority shareholder 2. If the corp refused to sue its directors. Direct Litigations 1.d? No Limit No
Yes (506(b)(2)(ii)) ² sophisticated investor
DIRECTORS DUTIES 1. fiduciary standards ± because when good business decisions go bad then they¶d resemble negligence. tort standards. At or about the same time d. ii.31(a)(2)Burden on P to show Director was NOT acting w/ (rebut by:) Sets forth the Standards of Liability ± not yet adopted by many states. (iii). When the director owes the shareholder a duty 2. First 6 Month Safe Harbor a.30 (IRRELEVANT) 1. MBCA §8.
Regulation D RULE Stat Basis
# of Purchase rs No Limit No more than 35 (nonaccredited Investors) No more than 35 (nonaccredited Investors
§ 3(b) § 3(b)
$1 M $5 M
Informatio n Statement Req. Very similar to Business Judgment Rule a.31 i. If more than 6 months apart. a.
Determines if ³separate offerings´ will be considered separate or will be forced to be considered as one. no exact rule to get. Same type of consideration received e. 2. then this a separate kind of business judgment than can also have consequences. (ii)(A)Reasonable Belief in Corporate Best Interest. Key if you consider one.(v)Not self-interested
. c. not shareholder 3. but you could still have State law issues (Blue Sky laws)
1. & they failed a. Key Presumption that the action of a director is fine (in accordance w/duties of care. ii. so you can satisfy Exemptions otherwise. Standards of Liability MBCA §8. (i)Good Faith b. Same Class of Securities c. Can be by directors b. Intro/Generally a. Note On Securities These ends the Federal Inquiry. Integration Factors a. By a Shareholder for a Direct wrong a. Basics of MBCA §§8. Director¶s duties are NOT agency standards.30 & 8. BJR is a rebuttable Presumption for Director i.
Judges are not business experts so don¶t want to make business decisions. a. Corporate Opportunities i. supplies. OR 2. but not allowed under MBCA e. Dodge v. 2. Applies to Directors & Senior Executives/Officers a.
4. Note all of these seem pretty easy to prove. ii. Any opportunity in which Director or Senior Executive became aware of by: 1. 2. b. Good Faith b. Is it a corporate opportunity 2. The directors are chosen to pass upon such questions & their judgment unless shown to be tainted w/fraud is accepted as final. (a)²Cannot take a Corporate Opportunity Unless: i. The power of the directors are to be employed for that end. ALI¶s Principle of Corporate Governance Test §5. Honest belief in Corp¶s best interests c. Plaintiff must allege a taking of a corporate opportunity or a interested director transaction (No BJR application) b. was the decision being challenged WHOLLY FAIR to the Corp. ³Of Interest´ is broader than ³Closely Related´
. c. Facts: Minority shareholders assert that Ford continue to pay dividends to stockholders & not cut prices. Key to duty of loyalty is serving the interests of the Corp over your own interests.
4. Shlensky v. Court points out that directors can have goals that at the short term appear detrimental but in the long run these can be very good business decisions ± therefore much deference is given to the board in making these decisions. If the presumption is overcome. However. Seems BJR applies & Presumed Director is Fine b. Duty of care is in managing/running business 1. It is rejected. Statutes can give Directors the right to ³MAY´ consider other interests such as community.05 1. or the offer was expected/intended to be offered o the corp. Any opportunity of which a Senior Executive becomes aware of in any fashion & is ³Closely Related´ to business of Corp.3.
Why we have BJR? i. Ford Motor 1. or Show lack of good faith. AND ii. Held: Not a breach of fiduciary duty. rebut presumption by. Thus. ii.
C/L Business Judgment Rule says (Delaware Supreme Court in Aronson): a. Intro i. to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes. directors still have to show it was FAIR. General Process a. Can I take it in rare cases iii. Individual transactins 2. Without self-dealing or personal interest (Gries) ***NOT SURE IF ACTUALLY PART OF BUSINESS JUDGMENT RULE*** Regardless. CASES i. Generally²Fiduciary Duties i. A business corp is organized & carried on primarily for the profit of the stockholders. etc. The discretion of directors is to be exercised in the choice of means to attain that end & does not extend to a change in the end itself. ii. ALI Test §5. Duty of loyalty is to prevent self interest ii. Learned about it on the job. Generally You cannot take a Corporate Opportunity ii. Courts don¶t want to make long term business decisions & will not weight return now over return in future d. now the defendant has to prove what it did was FAIR. Key seems Duty of care is almost irrelevant now since Director limited from liability from it if in Articles d.05 (pp252) a. Facts: Plaintiff contends that Cub¶s should install lights. 2. Using Corp. informed judgment or not in best interests. ii. Notes i. Held: Court ordered payment of dividend. (b)²Definition of Corporate Opportunity i. Note part a rarely matters since usually after the fact. General Oversight f. i. especially best interest test (just have to mention long term ³planning for best interest´)
3. Duty of Loyalty a. The response which courts make to such applications is that is it not their function to resolve for corps questions of policy & business management. Discloses it & conflict to Corp. so that Cub¶s could play baseball at night. (Only applies to senior executives NOT directors) c. Informed Basis d. Information/prop in getting it & ³of interest´ to corp (objective test). Process 1. Wrigley 1. Then shifts to D to prove entire fairness c. i.
Defendant received the offer. However. but defendant bought it instead. & that company wanted CIS.Ct. but now some of these transaction are allowed because all not wrong. MBCA Subchapter F §§8. i. Loft Test: Pepsi Cola v. Balancing Test of Eight Factors all of which must be considered a. Ask if parents gets something out of the detriment of the subsidiary. (Sinclair Oil v. Issue Spot 1. CIS a. i. it was a corporate opportunity & under §5. unless their terms are fair & just. Director may take a business opportunity if it is referred to the corp. v. No business judgment rule here since there is some self dealing (on both sides) ii.
ii. Statutes 1. 2. The fact that the another company had planned to acquire the company in which Broz is a board member. MBCA §8. Interest/Expectancy (of corp) d. Held: Court applied the Guth test. Held: A trustee may not cling to Ks thus won. Financial Ability (corp has ability) b. then plaintiff can invoke common law & now directors must prove that it was fair. P has burden to prove ³Interested Director´ on both sides. Burden on D to prove Fairness Test. Burden of Proof on Party Challenging the taking of corporate opportunity 3. CASE: Broz v. Strict Disclosure iii. b. it is immaterial. but will not happen/practicable. Thus. Globe Woolen Co. because it was directors that made judgment. Regardless. therefore Court applies Business Judgment rule. Thus. of Maine) a. Thus. because defendant was president of the club. Harris (S. P must be a prima facie case of interested Director transaction (on both sides) i.c. Process under C/L a. iv.31 (KY Law) b. MAY Take Corporate Opportunity If: a. Key Process Overall a. removes business judgment presumption & now void/voidable. Utica Gas & Electric Co. However. should fully disclose. & is sued by CIS which is trying to buyout a company he is on the board of. because there can be unfair bargaining. No use of Corporate Resourses (to get it) 4. it then shifts burden to proof to plaintiffs. EX: If a director is on both sides. 3. Transaction is approved by the Shareholders. Statutes say ³Interested director Transaction is Not void/voidable for having an interested director if: a. c. AND b. Line of Business (of corp) c. Intro 1. (Fair & Just) 3. Coke case) 1. CASE: Northeast Harbor Golf Club v. Common Law Rules 1. Fact: Broz buys a cellular phone company. No Interest/Expectancy (of corp) d. MAY NOT Take Corporate Opportunity If: a. Black Letter Law Interested Director Transactions are void unless ³Fair & Just´ (In Delaware Intrinsic Fairness Test) a. 2. Thus. therefore. Req. Levien) 2. The second piece of prop she found out through a friend. Includes transactions w/officers too. b. thus statutes only effect burdens. OR c. C/L says you always have to have the 3rd one. Issue when you Find a Director on both sides of the deal/table iii.05(a) she must disclose the opportunity to the Country Club ± she did not do this. comes down to ³fair & just´ i. v. Personal Capacity (came in your personal capacity) b. Burden shifts to D to prove Fairness
. Mix of ALI & Guth Test. Transaction is approved by disinterested (except Delaware) directors b. Not Essential (to corp. Direct Conflict (puts you in direct conflict from corp) 3. DGCL. Includes a.60-8. ii. Old MBCA §8. Transaction if Fair to Corp. The more Yes you get the stronger that side. defendant breached fiduciary duty of loyalty. & is rejected ³Interested Director´ Transactions i. §144 i. Broz was not under a duty to consider interests of the company planning to acquire his company.) c. Original they were wrong no matter what. a. L& was suppose to be referred to the corp. iv. i. 2.70 1.63 2. Delaware Test (Guth v.
A plan then is drafted to constitute what happens. Seems to force them to prove Lack of fairness (Lack of Fair Dealing or a Lack of Fair Price) 4.likely UOP will be the surviving name of merged company because nothing has really changed. & result is A. CLASS ACTIONS CAN CHALLENGE FOR ³FAIRNESS´ & ³BUSINESS PURPOSE´ f. minority sues claiming $21 was too low. Burden initially on directors ii. Allows two Companies to converge (A & B). Approved by Both Set of Directors iii. Coggins v. Held: UOP never received a report by a UOP director (also employee of Signal) about a $24 fair value purchase price. Thus. then shifts burden back to P to Unfairness. Reach a Plan of Merger. Facts: Signal buys 51% of UOP. Then Plan takes effect d. Approved by Both Set of Shareholders. Therefore. iv. For Approval by Disinterested Directors or Shareholders to work. Interested Director can be in the form of business/financial or familial relationship which is reasonably expected to affect his judgment. Doesn¶t Work too well because not really clear & can be manipulated. (MBCA. How Statutes Vary a. Signal can do this buy forming acquisition subsidiary of Signal (really small short lived company whose only purpose is for merger) & that will merge w/UOP & form a new corp .s transaction to be fair in the circumstances also d. However. it is first the burden on the plaintiff attacking the merger to demonstrate some basis for invoking the fairness objection e. rather. ii. UOP. Req. b.MENT i. Business Purpose Test (Only good in Massachusetts) a. Such as wanting to all ownership ii. Weinberger v. MBCA Chapter 11: Any two corps so they chose may merge.v. History i.s a Legitimate Business Purpose for ousting the minority Shareholder i. Used to be governed by BJR. not personal reasons 1. defendants purpose was personal so that he could obtain a loan & pay it back without having to pay dividends.
. First Req. Signal¶s acquisition sub paid UOP $21 a share which enabled Signal to own 100% of UOP. Conflict seemed to be that parties forced out in Merger seemed only to have an Appraisal Remedy Only (cash-value). Signal later wants to buy the 49% minority shareholder interest through a merger. ii. Cash-Out Mergers (subset of Interested Directors Transaction) 1. Most (including MBCA) says Interested Shareholders do not vote ii. Inc. The duty of a corporate director must be to further the legitimate goals of the corp. Burden on party relying on vote to prove informed. Here there was NO legitimate purpose. Who is Covered? i. Delaware includes Transactions w/Officers. New Engl& Patriots Football Club. i. Key is it needs to be for business reasons. they must be Fully Informed i. Others do not. or C (new). if D proves transaction approved by disinterested directors or by shareholders. ii. Now. Delaware has ³cleansing´ saying even interested shareholders get to vote. i. tougher to be interested) 5. Not good enough that business runs more efficiently w/no minority shareholder (Coggins) c. but Delaware is different. b. Dissenters can dem& to be paid in cash the ³fair value´ of their share. Signal places it employees on the board. Minority shareholders vote & agree on merger. Which Shareholder may Vote? i. Inc. e. c. Important notes a. Whoever gets stuck w/Burden usually Loses c. 3. i. B. Defendant couldn¶t prove a valid business purpose. but now just entire fairness 2. However.
But. ³Entire Fairness´ Standard (Weinberger) : DELAWARE TWO PART TEST (I)FAIR DEALING & (II)FAIR PRICE a.s complete & all relevant information disclosure (on both sides etc) b. Key Burden on Majority for Both to LGP & Fair i. FAIRNESS REQ. NOW. ii. i. or are these two just part of fair dealings) ii. b. f. The other 49% is owned by minority stock holders. Second req. Lehman issued a $21 fairness opinion which occurred
b. Process i. Overview on Merger a. Signal wants to merge UOP & Signal. Shifts to plaintiff if transaction approved by directors or shareholders. Seems P now has to prove unfairness by gift or waste (need more help/why not just fairness.
Key No Self Dealing/On Both Sides a. Basically Owe a duty to exercise reasonable care in performing their duties w/respect to the corp¶s affairs. however. Note You don¶t have to choose up front. It is more liberalized. Recap BJR Means a. In Making Decisions i. KEY Seems proving Weinberger Fairness Removes Taint of Interested Director Transaction. iii. Business Judgment Rule Applies(Van Gorkom/ Common Law. Still Presumption of Directors Acted Fine (BJR) ii. If you only problem is ³fair price. Duty of Care a. 4. & sit on the subsidiary) iii. Two-siders could actual resign from one board before starting 5. How do you do Fair Price 1.d to demonstrate their utmost good faith & scrupulous inherent fairness of bargaining. Generally it is duty to act in an informed business judgment (BJR) ii. lack of best interests of corp c. 3.´ court decides whatever remedy is equitable. Intro i. you can¶t rescind the merger. you can only recover on one b. If too late. Note Seems that anytime Fairness is mentioned now it should be Weinberger Fairness. ii. or gross or palable overreaching´ 3. vii. Good Faith
. b. Def ³fraud. self dealing. Remove the Two-siders that are on both boards for those discussions (no involvement on either end) 4. which is appraisal value. How was it initiated 3. Thus. Actual Case said approval by disinterested directors & shareholders was no good since not fully informed (as to top price of $24 it would pay) c. What was the Timing of the Transaction 2. So. Remedy Issue For Wrongful Merger a. How was approval obtained 7.only over 4 days & had executives on UOP¶s board. Just a ³battle of the experts´ & does not req. How was it disclosed to directors 6. 1. When directors are on both sides of a transaction. Did they get highest/max value 2. Remedy: You can bring in an appraisal proceeding. Normally get Rescission (Coggins) ii. If you are concerned w/³fair Dealing. iii. by not giving the report. Generally Now i. so tough to find Directors Liable. How was it negotiated 5. Notes i. Just only deal w/the independent directors of the other board (subsidiary board in case) (thus interested ones only get involved w/the parent. Was there waste iv. lack of informed judgment. Everyone Else Uses This ii. not value on date of merger. Generally. can get Rescissionary Damages 1. How was it structured 4. misrepresentation. b. This is value of stock today. Need to be truthful also 2. thus can bring both. Moves away from Business Judgment Rule because there is interested directors here. P¶s prima facie case is rebutting the BJR presumption by showing lack of good faith. What is Weinberger/Entire Fairness i. they are req. Did they make a reasonable investigation 9. Coggins Case i. this was in an unfair dealing. any misconduct on the director¶s part.´ you use the statutory appraisal proceeding (difference in stock price) ii. General Process i. Fair Dealing & Fair Price = ENTIRE FAIRNESS 1. Fair Price is whatever the approved method of valuation is. a. shifts burden to D to prove entire fairness. d. You only get $$$. Is this Right? 5. Disinterested Parties 8. Delaware Ct.) 1. vi. If P proves requisite failure of care. How do you do Fair Dealing (3 from case) 1. Factors 1. Duty of Care is Protected by BJR. Must consider both & weigh both ii. deliberate waste of assets. Directors must display duty of care in making decisions.
Statutes (Del. KRS §271B. but rarely occurs. Held: Minority shareholders won. Thus. Unlawful Distribution 4. Pritzker decided to buyout Trans Union. we presume fine unless prove Bad faith. Thus. He agreed to buy 1. sue because shareholder get less than they thought they deserved in a corporate buyout. Look to see if Violation of Fiduciary Duty. Must be some thing to make/req. ii. b. The shareholders vote was not enforceable because the board failed to turn over information & therefore the shareholders were not fully informed.30(f) & Del §141(e) In General Oversight/Duty of Attention i. a.2-020(2)(d) a. iv. Below is each statute & Action which Liability CANNOT BE LIMITED/ELIMINATED c. Additionally. §102(b)(7) & MBCA §2. What do you need to Prevent this Finding (FACTORS) a. b. Must then Take some action c. Acts not in Good faith.ments of SBO a. Key You must opt in by putting in Articles b. v. 4. Check exemptions to make certain doesn¶t apply. intentional misconduct.000 shares of Trans Union at its current stock price & have an option to get complete control of the company. §102(b)(7) a. 2. OVERALL: Regardless of state statute. Unlawful Distribution 5. Thus.
. ³Improper Personal Benefit´ d. minority shareholders. problem here is Director made no decision at all. Intentional infliction of harm on Corp or Shareholders. Committee hires the Auditors that must make certain reports. Breached by a ³Sustained or Systematic Failure´ (Caremark) 1. 3. 2. Then look for statutory protection (limited liability allowed in Articles c. 2.
Honest belief in Corp¶s best interests Informed Basis (Gross Negligence Standard) i. or knowing violation of law. 6. Req.e. Need Some Independent Auditor (helps) 3. the directors cannot act in bad faith. Now also have Compliance w/SarsBanes. c. Breach of Duty of Loyalty b. MBCA §2. c.Oxyley now to fix this problem after Enron. There has to be BAD FAITH. Make Board go over actual document c.000. c. All Statutes eliminate/limit the personal liability of Directors to Corp or Stockholders for Money damages or breach of fiduciary duties. Standard of Care: GROSS NEGLIGENCE. iii. No provisions about duty of loyalty (thus can limit/eliminate) b. but the Court should have still made their own opinion. Needs to be fully informed. hard to breach duty of care in general oversight/duty of attention. Get independent Evaluation of what a Fair Price is (³Fairness Opinion´) d. Generally it is duty to know what is going on. Key Don¶t have to spy on them. Van Gorkom a. At least one must be a financial expert (rules define what an expert is). Key Process a. Not enough to rely on Background Education of Directors 5.
b. Note Directors are allowed to rely on Experts or high employees under MBCA §8. ³Improper Personal Benefit´ d. Make Expert explain reasoning for opinion. (question him) b. not in best interest of Corp. i. the directors themselves were not fully informed. or knowing violation of law. intentional misconduct. Acts not in good faith. or not informed. 3. Note You can still bring injunctive action. Must follow up to some extent to make sure working/complying d. Problem sometimes you will be sued either way so leave paper trail. Must have an audit Committee (committee of board) made of all independent members. i.02(b)(4)) 1. Financial Benefit to which he/she is not entitled d. if you comply w/SBO. iii.02(b)(4) a. Case: Smith v. Unlawful Distribution 6. Director action. b. or Intentional Violation of Law c. Del. Personal Financial Interest in conflict w/Corp/shareholders (like no self dealing) b. Facts: Plaintiff. 2. An outside fairness opinion is not necessary. How to make Certain Fully Informed? a. b. ii. by buying stocks at a set price. but do have to check on management. but it is overkill & a waste of resources 1.
c. BUT NOT ³Gross Negligence´ b. Derivative suit i. Seems it still easily be.
7. if no don¶t 4. Thus. Motive other than advancing the corp¶s interests ii. can Give Broader indemnity (mandatory or permitted) by saying so in Articles (w/only limited exception in MBCA §2. Improved Business Judgment Rule a. & also have agency law.20(b)(5))
.d (MBCA §8. & thus if fails just like duty of care if directors have opted-in to protection iii. A LACK OF GOOD FAITH IS NOT ENOUGH TO OVERTURN THE BUSINESS JUDGMENT. Is it Prohibited If yes stop & don¶t do it. Components of Bad Faith: i. ii. iii. both boards didn¶t exercise a business judgment at all. Who Decides figure out. Not in a conflicting-interest transaction. When it is Prohibited (MBCA §8. Note it does not req.
8. Facts: Stockholders sue Disney over the hiring/firing of Ovitz. Because insurance policy (Director & Officer Liability Policy) only pays if you are legally supposed to indemnify. Lack of business judgment is gross negligence. Intential Conduct ii. However. When is it Permitted (MBCA §8. If ³wholly successful on the merits or otherwise´ MBCA ii. If ³successful on the merits or otherwise´ Del. §102(b)(7) says you cannot limit/eliminate act in good faith. NO BUSINESS JUDGMENT AT ALL IS NOT A LACK OF GOOD FAITH. 1. v.52. Why Insurance Included 1. The New Board also failed to act. Violation of positive law. Possibly a Separate Req. Del. ii. they made no decision. In good faither/honest belief in the corps best interest. b. Held: The Old Board exercised no business judgment. Note Directors can be indemnified to same extent in MBCA. Del. i. Indemnification (& Insurance) a. ii. ii. Is it Permitted If yes move on. Acted in Good faith. Courts are split if a settlement is successful on the merits? 2. 2.51(a)(1) . Del. Is it Req. a. §145(b)) i. §145(a) i.
Good Faith a. 3. Why need Separate Law 1. Successful 1. ³Conscious Disregard´ of duty iii. Judgment is given in favor of Corp against Director 1.ment to get around Statutes limiting liability for due care 1. §145(c)) i. a finding of nonliability so better claim that settlement would be NO. Acted in (or not opposed to) the corp¶s best Interests AND 3. Del. General Elements 1. liability (but permits legal expenses)or settlement (judgment against you for harming corp) 1. a lengthy interview ect.ment of being fully informed) 1.ment only helpful in Delaware. iii. However. Intentional Failure to act ³conscious disregard´ for duty c.d if Yes stop & do it. (i)Ovitz was hired & his Kgave him many benefits for termination without cause.6. Overall. you to be fully informed. 3. ii. b. BUT YOU MUST PROVE THEY ACTUALLY ACTED IN BAD FAITH. Del. Act on a reasonably informed basis (due care) c.51(d) . because duty of good faith is not exempt. When is it Req. But MBCA adds ³for financial benefit to which he is not entitled´ d. iii. Easy to see because it will be a follow up question & Someone (Director) will be wanting to be paid back iv. There was NO TIME ISSUE which differs this from VanGorkon. But you are still permitted for expenses. Might have separate req. Agency law doesn¶t work since Directors are not agents they are the Corp & they want to be paid back from lawsuit defenses also. (ii)New Board should have not paid the entire termination without cause because there was cause. What is Wholly Successful v. General Rule (same sections) (Generally BJR less info req. Issue Spotting 1. Brehm v Eisner i. they didn¶t look to implications of a nofault termination & they never questioned this no-fault termination. No cause to believe conduct was unlawful (for criminal Suits) 4.ment from Duty of Care (after Eisner Case)(from Delaware) i.e corp suing the board. AND 2. Acquittal of a criminal charge is successful. this extra req. they basically rubberstamped the hiring without expert opinion. Intro i. ³wholly´ under MBCA seems to req. Not as Relevant in MBCA.
Determination (MBCA §8. Del. Note if you say in Articles that you will give indemnity to the broadest extent allowed by law. 2. §145(f).
1. Meaning you put it in the articles/ bylaws/agreement & once you determine to indemnify then you must pay (allowed by Delaware Act but not Model). (Owens Corning). Authorization (MBCA §8. a.55(a-b). can be in bylaws. §145(b) 1. §145(d)) a.e. then must indemnify unless prohibited.55(c)) a. Corp (2 Step Process) 1. can even order it where expressly prohibited. Director can petition court to make Corp pay indemnification or advance of expenses. Who Decides? (all provisions tell how also) i. larger unknown limits. Seems MBCA is a little broader authority than Del.51(a)(2) Del.54. in Delaware ³good faith´ still req.d. 3. §145(f)) i. This is Business Judgment Decision c. Means Do we write the check? b. Del. anything. 2. Can Preauthorize (MBCA §8. Not. ii. Cannot be predetermined because determines on facts of the case. 2. Means Should X be Indemnified? b. Courts (MBCA §8. a.
. Del. However. agreements.
Shareholder Agreement i. Statutes clearly gave power to do change these norms 2. It is only a ³slight invasion´ of Directors¶ powers 3. If you met them. Unanimous Agreement of the Shareholders 2.ments Though: i. iii. Usually happens in two Areas i. Can modify anything. Common law says it doesn¶t have to be. a. d. even if against Corporate norms as long as not contrary to Public Policy. In articles or bylaws. Closely held Corps are different because the shareholders are normally in control & there is no real market to sell the shares. govern or authorize the making of distribution« b. Old MBCA §8. Dealing w/ways to vote/elect other than single vote at meeting. therefore requiring unanimous consent. need for exit/lack of market for shares. but it is only enforceable against the people that have signed it. McQuade Case said you couldn¶t alter the way Directors run the business. there can be a discharge of officers & directors at will. Some States even have separate closely held corp laws ii. a. there is a consensus decisionmaking. Statutes/Safe Harbor Rules say yes 2. can still be OK by Common Law above c. ii. Dodge said Shareholder Agreements are Permitted if: (basically No Harm no Foul) 1. MBCA §7. Controlling Director Election 2.01 (KY). Blount v. Under Statutes i. Notes i. expectation of permanent employment. Facts: An executive committee has been hired to approve hiring decisions under the bylaws. Intro i. to change bylaws it needs majority vote by directors. b. a. Does there have to be a Unanimous Decision to create a Shareholder Agreement 1. or shareholder agreement & All Know.
. Written ii. 2. Bylaws 1. No other entity is harmed (i. In a closed corp: Traditionally. Additionally. Controlling Director Action ii. i. you are fine b. If you don¶t. Bylaws v. Said you can modify the corporate norms by putting in the Articles a. iii. 3. Types 1. Intro a. Shareholder Agreement 1. Regarding Director Election a. in S/A then unanimous ii. There is a perpetual life for the business & a market for shares. They are adopted by directors (or shareholders) ii. Intro 1. one of the parties disagrees to the bylaws. Taft 1. cuts off at 50 shareholders. Mainly an issue of new shareholders coming in after. §141(a) b.32 (BEST) a. Have Special Closely Held Rules to Follow 3. however. Kurtz 1.CLOSELY HELD CORPS INTRO 1. Need majority vote to amend. establish who will run the corp.e. Be Careful how amended (in bylaws only majority. Del. Shareholder agreements attempt to alter the Corporate norms to make/allow closely held corps to work such as limiting the power of the Directors or limiting how Directors are elected b. Effect Zion v. Argued it was a shareholders agreement by not an amendment to the bylaws. Need Unanimous Consent to amend. BUT Clark v. Statutes are JUST SAFE HARBORS a. Evaporates upon becoming a public corp (sold on exchange) iv. They are adopted by all parties to the agreement. Under Common Law i. 2. In a public corp: majority rules & directors have supremacy. combined ownership & control. 2. Regarding Director Action a. Can eliminate directors. SHAREHOLDER AGREEMENTS 1. There is separation from ownership & control. Now. a creditor) b. Req. Signed by All iii.
Facts: Plaintiff is a minority shareholder in a closed corp. without transferring to a trust (just a Contract) ii.22 / Del. unless the plaintiff can show ³bad faith. He is not given dividends. Duration 1. However.
c. He is not given a pay raise & resigns from his position. Req. Thus Revocable at Will b. Remember General Rule is ³Majority Rule´ & Majority Shareholders have not fiduciary duty to minority shareholders i. challenge shareholder action by claiming bad faith b.b. Must be Written 2. but not ii. 2. Proxies MBCA §7. You can give it away. Plaintiff sues for dividends. Must state who can vote 2. or even sell your shares) iii. Like an agent. iii. iv.´ 1.22(d) gives lists of good enough interests: i. Dealing w/Minority Shareholders a.ments 1. Note Voting Trusts & Voting Agreements matter a lot because it is a way to bind parties without having all shareholders having to agree. Intro 1. Must make beneficiary of trustee known to public record.s the appointment. (key trust becomes legal title holder of shares ii.d to be filed w/corp 3. Generally Revocable a. Shield (only applies to Voting Trusts) i. If you give two.´ a. Zidell case gets at. First Duty of Good Faith i. then later one prevails 2. Voting Agreements MBCA §7. When Irrevocable a. 1. Plaintiff did not carry his burden of proving a lack of good faith of the Board. Duration 1.
FIDUCIARY DUTIES IN CLOSELY HELD 1. §218(a) i. ³If coupled w/an Interest´ b. The Corp stated that they could only afford moderate dividends. A proxy is a ³written authorization signed by a shareholder giving another person or persons power to vote w/respect to the shares of such shareholder. OR v. iii. these the FIDUCIARY DUTIES OF MAJORITY SHAREHOLDERS (that exist if any) 2. MBCA less than 11 months b. THUS.
e. Pledge (example you borrowed money on stock & bank wanted proxy to take it so they can vote & you cannot revoke) ii. Intro a. Seems this is what Zidell v. Business judgment rule normally applies. unless otherwise noted. Revocability 1. Person purchased it. ii. Key MBCA says courts will specifically enforce these agreements (such as force you to vote accordingly. Create a trust & transfer all your share to the trust & give the trust instructions on how to vote them. we have worked one in because this is like a partnership. Shareholders make an agreement to vote the same. but you cannot sell proxies v.30 / Del. How Works 1. Usually Less than 1 Year a. Default rule is good for 10 years. Thus. & in it partners owe each other fiduciary duties (the utmost sensitive duty stuff) b. §281(c) i.
ii. KEY Must put in the Agreement what happens if agreement is not followed (forced or vote or forced to sell normally). Must be signed by person giving right iv. Limitations 1. Stock Exchange req. More successful as a shield (saying it is good & all have to follow) then a Sword (claiming it was not done right & we don¶t have to follow). You can freeze them out for a little while but eventually you cross the line to bad faith. Req.ments 1. MBCA §7. A & B get together to make certain they have power over C.31) Voting Trusts MBCA §7. Party to a voting agreement (under §7. §212 i. Default Rule is you can Vote by Proxy (can remove if wish) iii. Held: Court ruled corp did not owe a duty to pay higher dividends.s only good for 1 year vi.
d.31 / Del. Creditor of corp that extend credit requiring appointment. Second Duty of Equal Opportunity
. Sword v. An employee of the corp whose employment Kreq. Usually req.
basically. The minority shareholders must demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority¶s interest. Majority Shareholder owes a duty to give equal opportunity to minority shareholder (i. F: Four men formed a partnership. a. ii. If called on to settle a dispute. but cannot just be sold by Directors (selling their office/position) ii. i. However. 1. just in a separate transaction iii. Donahue (Equal Opportunity Rule) Massachusetts Court. if any. Control can be sold by selling majority/controlling shares. just must be a Controlling Interest (as low as 28% has been allowed). 2. against the practicability of a less harmful alternative. i. in that you have to give them the same chance to sell their shares at the same price) 1.d to show that there was at the time of the Ksome other organized block of stock of sufficient size to outvote the block of stock the new party was buying. that controlling interest at a premium price. Sale of Control a. ii. Duties w/Sell of Control can be even when less than a majority interest is sold. Plaintiff is req. Note a normal way to show a less harmful alternative is by showing there is a ton a cash laying around & you could have paid a dividend w/no harm. 2. c. Springside Nursing Homes (Defendant must show a legitimate business purpose & plaintiff may rebut w/µless harmful alternative. This Does NOT apply to ANY OTHER CORP. provided in the sale of that stock he has done nothing to injure the corp & its stockholders. This is effective control. Sell every single share of a corp for a set price.´ Tryon v. Transfer/Sale of Control i. even if the party that appointed him by voting based on number of shares has sold their stock. iii. These directors must resign on their own accord. 1. but 28% is close enough.
i. b. P claims it is not strict good faith/being frozen out. Arranging for Directors¶ Resignation is Allowed 1. Intro i. D then has to prove a legitimate business purpose. all have similar fiduciary duties to each other. P then gets change to prove a less harmful alternative 4. but just depends on how many shareholders there are & how many are needed for control a. Majority/Control holder owes not duty to minority to say that he thought he could get a better deal. or some self interest maybe (not clear) 2. Can¶t be as small as 3%. b. H: The Court asserts that if there is a legitimate business purpose.3. Wilkes does not adopt Donahue. The Corp must have a legitimate business purpose & the action must be narrowly tailored. b. If the stockholder whose shares were purchased was a member of the controlling group. Controlling stocks are valued more than non-controlling shares. cannot be done in bad faith or fraud. after major share. then the offer does not have to be equal among everyone. There is no reason why a purchaser of majority control should not ordinarily be permitted to make his control effective from the moment of the transfer of stock. Opponents to this want a tender offer. or else some circumstance making it likely that enough of the holders of the remaining stock would b& together to keep new buyer from control. Plaintiff(s) assert this price was entirely too high. directors just resign one at a time & new directors of the New Majority are appointed. D then stuck will having to prove good faith/fair iv. a.
. Duties w/Sell of Control can be even when less than a majority interest is sold.e. Look to size of % the party owns. Smith iii. This is a closed corp. (Like BJR but not it) 3. the controlling shareholders must cause the corp to offer each stockholder an equal opportunity to sell a ratable number of his shares to the corp at an identical price. A controlling shareholder is free to sell & a purchaser is free to buy. all have management rights. but just depends on how many shareholders there are & how many are needed for control b. Each partner will take ¼ income if they all actively participate. ³The mere fact that a man accepts the position of a director or an official in a corp should not as rule deprive him of his right to dispose of his stock as he sees fit & to make any profits that he might gain. Thus. From Donahue & also Wilkes cases ii. Fact of life that selling a majority share/interest w/control is worth more than other shares. We are dealing w/someone selling control in the company without a merger. A director can state it is his fiduciary duty to remain for his appointed period.¶) a. the majority shareholder can¶t force them to resign. H: This is similar to a partnership because they are all co-owners. Process/Burdens 1. just must be a Controlling Interest (as low as 28% has been allowed). our courts must weigh the legitimate business purpose. F: Board paid $800 a share for stock from former board member. Sale at a Premium i. Wilkes v.
Just agreeing to dissolve (proposed by directors. a. Reasonable Expectations(BETTER) Conduct which substantially defeats expectations (objectively viewed) that were both reasonable & central to party¶s decision to join the Venture.02 i. (iii) Deadlock in that shareholders cannot elect directors in the past two annual meetings. Deadlock MBCA §14. Applied reasonable prudent person duty to NOT harm anyone else & applied it to corporate law. CBC determination ii.34. but there was no expectation that the shareholders had to be working in order to receive a dividend therefore this is OPPRESSIVE. ³Why don¶t you just buy my shares at an inflated price. Problem this borrowed theory from tort law is wrongly just assuming there is a duty to begin with. Involuntary MBCA §14. i. Factors to consider is the history of the seller. & a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely. Rare ii. 4. Assets being misapplied or wasted ii. When there is visible departure from the standards of fair dealing. but often can¶t find the looter) 1. By Creditors (3) 3. & then you¶ll still have control of the corp. (iv) Corp.. if you fail to pay the fee the secretary of state can administratively dissolve your partnership. approved by shareholders b. Seems to be based on taking a corporate opportunity & the fact that Perlman was the majority shareholder.d. Bolstein) i. i. & sold shares instead. What is Oppressive? (use in order) a. 1955) Similar to Donahue ± Mass. c. (similar to a fiduciary duty). (Gimpel v. (In re Kemp & Beatley. Unfairness Conduct which is ³burdensome. Attorney General (1) a. Majority shareholder cannot knowingly sell to a Looter. Rare ii. Feldman (2nd Circuit. or should have reasonably believed to be a Looter (was going to come in & sell apart company).) i. Effect if Found Oppressive a. Based on you failing to pay you necessary nominal fees. Voluntary MBCA §14. but Cotrolling Shareholder said NO. Issue w/Looter (Looting is criminal. Usually for non-profit corportations 2.. but for less than it would cost to buy all the shares. Corp is Dissolved OR b. a lack of probity & fair dealing in the affairs of a company to the prejudice of some of its members. When no Expectations. When person has acted so wrong that there is no more expectations. & wrongful conduct. Non-Deadlock MBCA §14. director & officer. (ii) Directors OR ³those in control´ are acting in a manner which is illegal. THERE IS NO FIDUCIARY DUTY OWED IN SELLING CONTROL THROUGH MAJORITY SHARES W/THE EXCEPTION OF THE LOOTER ISSUE Perlman v. PROCESS a. THUS. b. Administrative MBCA §14. Bolstein).30(2)(i) & (iii) i. oppressive. b. such as they have stolen. Inc. If someone wants to buy a corp. What is By Shareholder Petition a. If the corp has always been paying dividends & elects to stop paying dividends once two share holding employees no longer work at the corp.20 i.30 i. (Gimpel v.´ Perlman you have to let the other shareholders have the opportunity to have their shares bought as well ii. 2.30(2)(ii) & (iv) i. Second Definition. Note²KY law does not include oppressive part.d) 1.
iii. the majority shareholder can¶t say. Applies in Two Cases: (USUALLY THE LAST OPTION) 1. (i) Cannot go on because Directors are deadlocked in management of the corp & shareholders cannot break the tie & it has caused irreparable harm ii. 2. iv. First Definition. not req. instead of dissolution (only majority has this right not minority) Modeled off NY provision. Election trumps courts right to give equitable relief
. KEY Must be a Director or someone in Control to use this so Have to make it person in CONTROL. harsh. It is a corporate opporunties case ± supposibily Feldman took an opportunity for himself instead of giving it to the Company. By Shareholder petition****FOCUS ON THIS (2) 2. 2. Case. since inherited or otherwise obtained. Majority (directors or shareholders) can Elect to buy out (buy the shares) of the minority MBCA §14. b.01/14. NOT COMPLETELY CLEAR
DISSOLUTION 1. Harris v Carter (Delaware) i. A merger was likely to happen where everyone would have benefited. Majority Shareholder has a duty not to sell to someone they know. or fraudulent 1. reasonably believe. Can be by Judge on petition of: (MAY. or the provision about waste (only deadlock or Illegality/fraudulent) 3.
Inadequacy/Excessiveness of Price is not enough to prevent enforcement b. Reasonableness MBCA §6. Can prohibit sell to particular people or group as long as manifestly unreasonable. Note this is stated in the answer to the complaint & changes the case from about dissolution to a fair price determination. It adds nothing either way. Do not mix fiduciary duties from employee relationship to that of the shareholder relationship. Restriction may obligate person to give corp/other shareholders to offer to the right of first refusal 2. Here. as stated in the mandatory buyback provision. 34. because the defendant was FORCED to retire. It must be for a reasonable purpose including 1. but req. 4. then only enforceable against people w/actual knowledge of the restriction. We Kfor certainty. Intro i. Articles. iii. in the case of uncertifcated shares. Can be in Bylaws. lifetime employment. Price a. ii. 2. ii. a restriction. See note in Supplement pag. c. Shareholders are not liable for the death of the corp unless they did something which makes them personally liable. unless there is some equitable reason not to. Notice MBCA §6. Court upheld Mandatory Buyback Provision even though it appeared unfair. Can NEVER pierce the veil of a public company 1. to maintain the corp¶s status when it is dependent on the number or identity of shareholders 2. b.25 & 6. b. To Preserve Exemption under Federal/State law 3. an employee can be fired without reason unless either the K or a law (such as fired for race. duress. & basically any price will be upheld. It is the shareholders deciding up front how a shareholder can get out. Fiduciary Duty a. Right to buyout price does not limit right to other damages. even though permitted by this section. Intro a. GR Courts will generally enforce these agreements even if the purchase price is substantially less than FMV. Req. its initial value. Veil-Piercing for KCases (Often on the Bar Exam) a. Purpose MBCA §6. & repurchase rights do not change your employment rights. This is because the agreement was when the employee (i)wished to retire & (ii)wished to sell his stock. If not so noted. & full stock price. including price to buy out. Req. Plaintiff got more than what security retirement agreement stated. Court will not step in just because it turned out to be a bad deal 3. he was FORCED. Corp/other shareholders to approve the sale.27(d) i. If meeting isn¶t held.
. don¶t bring suit unless you are willing to be bought out. As such. overreaching.ments for Restriction on Transfers a. Note on Damages i. 1. STOCK REPURCHASE AGREEMENTS/RESTRICTIONS ON TRANSFERS 1.27(c) i. overreaching. duress. state old provision & stock price will remain the same. Plaintiff was fired 20 days before agreed upon date stated in mandatory buyback provision. 2. Pedro v Pedro a. In an at-will employment. Will only step in for fraud. Awarded atty fees. religion) specifies otherwise. Delaware: Unless noted conspicuously on the certificate representing the security or. or Shareholder Agreement c. Courts look to culpability. iii.ii. In drafting Kspecificy that old provisions stay in effect unless they all jointly agree. Restriction on transfer must be conspicuously noted on the front or back of the certificate. undue influence. The agreement/Kdefines the scope of the fiduciary duty b. Could obligate the corp/other shareholders to buy the shares. Thus. i. 3. MUST HAVE NOTICE ii. employment does not change your shareholder rights. employer paid small price for stocks. contained in the notice. c. d. i. undue influence. or mistake at the time of the agreement i. Gallagher v. There is nothing you can do to draft around this. 1. i.26 i.ment cannot be unreasonable 4. b. SHAREHOLDER LIABILITY FOR CORPORATE OBLIGATIONS 1. or mistake at the time of the agreement. Will only step in for fraud. Tells what restraints are reasonable/allowed 1. is ineffective except against a person w/actual knowledge of the restriction. Lambert a.
d. Powell Test (3 Factors) (AKA Instrumentality/Alter Ego Rule) i. a. To Pierce the Veil need all of: (w/Elements. Transfer: a. defendant also took high salaries when each company was in dept. Cases i. Including using corp. This is FRAUD. or wrongful towards the P. Injustice Prong the shareholder¶s conduct in using the subsidiary was unjust. & held that plaintiff could not pierce the defendant. Fraud/Constructive Fraud/Fraudiness i. c. Here. Remember 1. Fraud/Constructive Fraud/Fraudiness i. Real problem is Piercing the Veil really has nothing to do w/Corporate Law. AND a. Do WRGO Test b. Constructive Fraud (fraud without intent) (UFTA a. Control: He was solely in control. as device for fraud c. as device for fraud 3. there was no FORMAL control.
iii. If shareholder did the wrong personally. Lender sues. (constructive fraud) 2. UFTA provides that a transfer of prop is recoverable by a creditor if (i) made w/intent to defraud the creditor or (ii) no equivalent value was received & the transfer made the transferor insolvent. Causation Prong i.
. 2. Do Powell Test 2. Held: Court Applied the Powell Test. Ultimately. i. Here. However. What can Fraud Be: 1. Control Prong the shareholder completely control & dominate the corp (MUST BE BIG control) a. iii. didn¶t repay. but the lender knew defendant was already in depth & thus is also liable. Facts: D took out loans. Including using corp. Olsen 1. Causation Prong P actually suffered some harm as a result a. even though there were meetings. Undercapitalization is inadequate assets or at & distinct change for business. He let creditors think they¶d be OK. the plaintiff actually waived their right to claims. Olsen never repaid loan & now Co-op wants to pierce the cooperate veil & sue Olsen personally because the ECO corp is not bankrupt. fraudulent. while continuing to advertise w/the consumer by the same business name. defendant never used fraud. Actual Fraud (fraud w/the INTENT) OR 2. when he knew they wouldn¶t. There were no formalities. these weren¶t formal. You cannot take money for yourself when it is owned to your creditors. b. Plaintiff could have just sued for FRAUD. Defendant committed fraud. the company had 7K at start which could said was adequate ± because it shows that individuals put their own assets in the company. Lack of Formalities b. No equivalent value was received & the transfer was made while the transferor was insolvent. On Top Roofing a. a. What is Fraud 1. What is Really Going ON: i. ECO. defendant did continue to take loans. Fraud/Fraudulent Transfer is the KEY/ESSENTIAL ii. Undercapitalization (inadequate assets at formation or at any distinct change for business risks) b. more tort/fraud/other stuff. non determinate) 1. Veil Piercing for TORT Cases a. KC Roofing Center v. Injustice 1. Tougher because they cannot be based on fraud like contracts because there is no reliance anymore. Court determine that the plaintiff can pierce the veil of the company. ii. because they continued to loan money to the plaintiff after they knew the plaintiff was indepth. which took a loan from Consumer¶s Co-op. Intro i. General Process for Both 1. b. but this is stretching liability when he wasn¶t directly involved. iv.2. Injustice: i. ii. Consumer¶s Co-op v. then he is personally liable. Control: Olsen never mixed personal interest w/cooperate interest which establishes that he didn¶t completely control & dominate the corp. Commingling (mixing personal & business assets) 2. Facts: Olsen & parts established a corp. Held: Apply Powell Test. He has setup multiple companies over several years & would switch companies after the former went bankrupt. Additionally. 3. Made w/intent to defraud the creditor (actual fraud) OR b. Waiver/Estoppel will prevent it b. Additionally. but court said it didn¶t really matter.
Thus. Best Approach i. it is the problem of making deals before the corp is formed. Thus. Key There is a presumption for liability for Promoter. 1.d a statute authorizing the creation. because Estoppel is just extra filler. Intro (back to agency law) i. d. i. But doesn¶t make a lot of sense c. d. thus you cannot be an agent until the corp is formed ii. Occurs when we have tried to incorporate first. If defendant had actually done the blasting then he would personally be liable & a tort claim could easily be made against him. Promoter Liability a. & actual se of the corporate franchise to avoid liability e. Knowing there is no corp. Rule 2 Corp by Estoppel ³The parties who thought there was no corp may not recover against individuals when it turns out there was no corp´ i. ii. Focus is on the other party from the corp f. this is harsher than the old De Facto Corp rule because it is so easy to incorporate so do it right. ³purporting to Act´ means Investment + Active Participation a. & the defendant is better off to compensate my client for his loss than the corporate shell. Key agents for nonexistent principals are personally liable because they are not agents & there is an inference that a person intends to make a present contract. 1. & they are liable under tort law. & thus the ³agent´ is not an agent. Use of the corp as an ³Instrumentality´ or ³device´ to do wrong. unless clearly otherwise. Intro i. Note if Both rules apply. b. H: D was dominating force behind Corp. Promoters are acting knowing there is no corp & planning to do so soon. Test is still the Powell TEST i. directed & controlled by them through the corp device. BUT it is better to wait & just form the corp first. MBCA §2. De Facto Corp only req. What is Really Going On? i. Two Approaches i. Evaluate against tort policies of Compensation & Deterrence. the Promoter remains liable until the other party EXPLICITLY releases him e. Defective Incorp a. Davis i. This whole same idea can happen again if the corp stops existing for sum reason (such as by judicial dissolution §14. served as a device though which defendant could carry on destructive blasting at the expense of the plaintiffs. ii.04 i. & at the same time be personally insulated from legal & financial responsibility against wrongs which were knowingly permitted.
iii. Rule MBCA §2. v. which had no assets & was in financial difficulty. Remember. b. it allows you to act as if you were always a corp. but if you fix problem within 2 years.
. binds the corp when organized & releases the promoter upon adoption. but have failed & thus do note have a corp going. The defendant created an ³instrumentality & device´ which harmed my client. Exception Unless the other party agrees to solely look to the corp alone for responsibility 2.20). You can make a Kthat is a presently binding obligation.04 ii. Just being an investor is not enough 2. focus is on the Corporate D¶s actors iii. F: Plaintiff sued for damage from defendant¶s using dynamite. a shell corp. Promoter Liability General Rule i. BUT probably just the next reason ii. the agent/actor is always still liable for the tort.3. c. Assuming this incorporates all meaning from old MBCA saying Assume to act. Key even if corp is alter formed. A promoter will be held personally liable on contracts made by him for the benefit of a corp he intends to organize. Estoppel c. You cannot be an agent for a nonexistent principal. an good faith attempt to incorporate. d.
4. KEY PARTS 1. ³All persons purporting to act as or on behalf of a corp knowing there was no incorp are liable´ are jointly & severally liable ii. b. 3. Thus. Western Rock Co. That corp. MBCA trumps. f.
d in some states not in others. immutable rules are like Partnership 6. As to those persons. Member has not authority/not an agent of LLC ii. Members only bind outside the ordinary course is they have actual authority.d to be filed d. Each manager has equal rights in management/conduct & generally items are determined exclusively by the majority rule of the managers c. can have defective organization issues just like Corps & defective incorp ULLCA §202(b) a.s the consent of all members to be done
.LIMITED LIABILITY COMPANIES (LLCs) INTRO 1. Key Most courts treat them the same even though they have to read in something like MBCA §2. Gives you Limited Liability & Pass through tax treatment 2. Thus.03. Generally a. ULLCA §301(a) is for Member Managed LLCs i. If you filing wrongly. Manager is Held to the Same standards as Member in Member LLC above 1. SUMMARY i. Like a partnership w/pass through tax treatment most likely 4. But Michael says it is Like a Director/Officer c. ii. Thus. Must include whether it is member or manager managed 3.04 as being implied from MBCA §2. All Members are agents & bind in ordinary course UNLESS the member had no actual authority & person w/whom he was dealing new he had no authority 2. ULLCA §301(b) is for Manager Managed LLCs i. Req.d. but basically you can always pick b/ween like a Partnership or like a Corp a. ULLCA §404(a) is for Member Managed LLCs i. Member owes no fiduciary duties to the LLC just from being a member. Member in Manager-Managed Like a shareholder in Corp iii. OPERATION (AUTHORITY/FIDUCIARY DUTIES) 1. 3. ULLCA §404(c) applies to Both LLCs i. For Tax Treatment you CHECK THE BOX of tax treatment you want a. These rules are just default rules & most start out as the Partnership default rules because that is how LLCs evolved first. 5. then like a Corp 2. It must included ULLCA §203 i. but most do it. & member¶s transferees. FIDUCIARY DUTY ISSUE ULLCA §409 a. AUTHORITY ISSUE ULLCA §301 a. ULLCA §207: Articles of correction are effective retroactively on the date of the record they correct ex cept as to the persons relying on the uncorrected record & adversely affected by the correction. List 12 items which req. Want it to be written even if not req. EVERYTHING IN STATUTE EXCEPT §103 is GUIDANCE/DEFAULT ± so an OPERATING AGREEMENT CAN CHANGE THE RULES ANYWAY YOU WANT. Member in Member-Managed like Partner in p¶ship ii. but Articles trumps as to 3rd partiess §203(c) 4. b. More like a Corp 2. Manager is just like the member in member managed above. KEY Just about All Rules can be Changed (see §103 for nonwaivable provisions which are a lot like RUPA). members. If Member-Managed LLC then like a Partnership b. Operating Agreement a. 2. b. If Conflict b/ween Articles & Operating Agreement. this seems to add the Partnership Fiduciary duties to Managers. Manager in Manager-Managed Like director/officer in corp 1. Basics a. ULLCA §404(b) is for Manager Managed LLCs i. Like articles of incorp b. But debatable based on the Language of §409(h)(2) 4. MANAGEMENT RIGHTS ULLCA §404 a. Operating Agreement trumps as to manager. c. ULLCA §409(b) is for Manager-Managed LLCs i. Must file Articles of Organization ULLCA §202 a. Says members owe same fiduciary duties as General Partners in a Partnership (see RUPA above) b. If Manager-Managed LLC. It is like the bylaws/Shareholder agreement b. You are allowed to choose your tax treatment & the way it runs 3. FORMATION 1. & not req. ULLCA §409(a) is for Member Managed LLCs i. Each member has equal rights in the management/conduct of business & generally decided by majority Rule b. Says it is just the same authority as RUPA 1. articles of correction are effective when filed.
EXIT & LIQUIDATION 1. Default rule is more like Corp in that distributions must be in equal shares. More like a Partnership b.) 2. Exception. Rule You can dissociate at any time (rightfully or wrongfully). Note²Could say after paying creditors all are paid out equally instead of based on contribution. However. b. but no management rights go w/it & old partner is still liable because he is still a partner c. i. Default rule more like Partnership on Contribution repayment because you get all your contribution back first. Partner can transfer his distributional interest. ULLCA §303 says Members & managers have Limited Liability 3. but cannot transfer management rights/liabilities ii. you can completely sell your interest & be completely done w/it. Generally Can be Variable (like p¶ship) or Fungible (like corp. contribution repayment is only for cash/prop value contribution. Generally can be at Will (like a p¶ship) or not (like a corp. i. DISSOLUTION/WINDING UP ULLCA §801 a. plus one Corporate option i. piercing the corporate veil can apply just as it does in corps. Not certain if you have to pay out of pocket. 1. However. But can change to make like a corp also 4. Thus you have RUPA plus oppressive LIMITED LIABILITY 1. Sharing Profits/Losses ULLCA 405(a) §405 Distribution Interest a. i. Can transfer distributional interest. Seems then that you could have to pay other member then. not services) ii. Partnership i. 3. iii.PROFITS/LOSSES 1. ABILITY TO LEAVE §602(a) a. Payout on Winding Up §806 a. KY default rule is like partnership. TRANSFERING YOUR INTEREST ULLCA §501-503 a. Member Managed LLC i. Default rule is like a partnership b. you can change to otherwise in the operating agreement 3. More like a Corp 2. then you share the rest equally. is if it is a manager managed LLC you can use corporate law stuff about oppression to dissolve.) 2. e.
. More like a Partnership. However. d. Corp i. However. Transferee only becomes a real member on consent of other members.
Sarbanes-Oxley certifications (as a result of Enron) ± it greatly increases the cost of running a company. Form of Proxy Rule 14a-4 i. * A question of materiality is going to get to trial because it is a question of both law and fact. 2. ii. Proxy statement says why I am asking for your vote & what I plan to do. Additionally. a half truth (or omitted fact. Says you have to have authority to vote for each person (not just your power to vote generally) c. insider trading reports/restrictions (e. (p. 3. CANNOT BE Disbelief or undisclosed motivation. Key Prohibits fraud (false or misleading statement or omission or failure to correct) in connection w/the solicitation of proxies i.g. Price was really lower 2. We have a reliance on substantial public disclosure (the market is efficient because there is always the latest information). reasonable shareholder would consider it important in deciding how to vote i. What is Antifraud Req. It is an OBJECTIVE test (reasonable investor) 2. Public market is semi-strong efficient (meaning everything that the market knows as of this moment is reflected in the price. It makes corps do a lot of extra work.PUBLIC COMPANIES DEFINITION OF PUBLIC COMPANY 1. Sandberg a. It would have assumed significance in the deliberations of a reasonable shareholder c. §14(a) gives Commission power to regulate proxies a. Thus. has a private right of action (if you¶re going to solicit a proxy.ment. a director or officer can¶t buy shares within 6 months and make a profit.ments b. must have a financial expert. we¶re only talking about proxy regulation) 1. but req. e. Private Right of Action Elements to Violate 14a-9: Private parties have a right to bring suit. What is Disclosure Req. 5. or fail to correct an earlier statement which has become false or misleading.L. Annual Report showing how you are doing b. 14a-5 i. Can be a lie/misstatement.d by SEC Rule. all this stuff applies to Public Corps 4. Public Companies must file: proxy solicitation. But the rarely ever work. the profits go back to the company). What is Req. which has shifted the market to PRIVATE EQUITY. but «.´
. It would have altered the total mix of information made available. c. Three definitions of Materiality Must be a Substantial Likelihoods that: a. standing alone. Antifraud (substantive regulations) 4. v. needs to be something that is provable ii. By Securities Exchange Act of 1934 (SEA) a. There is a Private Right of Action under 14a-9 3. proof that the shareholder would actually change his vote. the price will immediately change). Must provide Annual report & proxy statement 14a-3. Rules for what is on proxy form ii. (J. (must have directors that???. Misstatement 1. VA Bankshares. etc) a. tender offers (by taking controlling interest of shares of company). *A court will pick of any of these to use since they essentially say the same thing.d by Commission (SEC): a. As soon as more info is disclosed. or omit to state any material fact necessary in order to make the statements therein not false or misleading. because there is always a duty to speak in proxies) a. there are ³influential institutional shareholders´ who own many shares & thus has a sizeable influence on a company. Purpose is supposed to be on ³protection of investors´ It has a disclosure req.212) ii. i. (& doing interstate commerce) 3. Contested Elections Rule 14a-11 d. you can¶t lie or tell half truths) b. Basically says you cannot lie or mislead/tell have truth. b. Borak) i. current reports (if certain events happen). Guarantees shareholder the right to put a statement on the shareholder ballot & force them to vote on it. No solicitation shall be false or misleading w/respect to any material fact. Materiality (Northway Case) 1. Listed on a Stock Exchange OR b.e. Rule 14a-9.ment: a. b. if he does. because they are NOT liable for Sarbanes-Oxley test ± which keeps the costs down. 2. Because people that own the shares like the company & generally don¶t want change. Corp governance rules . 1. d. Inc. annual & periodic (quarterly) reporting. It does not req. is insufficient to satisfy the element of fact that must be established under §14(a) (Virginia Bankshares) 3. Greater than $10 Million in Assets & Greater than 500 Shareholders i. Case v.ments w/Proxy: a. Disclosure Req. Shareholder Initiatives Rule 14a-8 i. The proxy stated ³The plan of Merger has been approved by the Board of Directors because it provides an opportunity for the Bank¶s public shareholders to achieve a high value for their shares. As a result of Enron. Sarbanes-Oxley was adopted. ANTIFRAUD RULES APPLY TO ALL TRADES OF SECURITIES PROXY REGULATION SEA §14(a) (Proxy Fraud) (Because of time constraints. Thus.
but the test is unhitched from causation. therefore minority vote meant nothing. it is not a defense. Money Damages: recoverable if shown. They way we distinguish btw an opinion and an actionable claim is whether or not we can prove it. Modern Test Mill¶s Essential Link Test a. The merger could have been consummated had minority voters all voted ³no. b. Held: Shareholder approval was not a condition of the merger. However. a. ii. Must have suffered Damages 2. It can be showed that by not stating they were willing to go up 25.d 2. If they plead the second argument it can¶t be proved. You can win in the Mills sense and have an essential link. a. b. 4. Seems to Req.i. the Mills test is now used) 1. Inc. The only reason why they got a shareholder vote was because they were self dealing on both sides.e. and get no damages. but the question becomes if it¶s a half truth. it was half truth. 2. If he solicitation was an essential link (i. the merger wouldn¶t happen) in the accomplishment of the transaction. Great American Energy 1. So under the misstatement prong.) v. (i. I. Attorney fees may be appropriate even on an interim basis.d/needed to do what you wanted to do. 3. i. Virginia Bankshares. this can scarcely be inquired into. Sandberg a. i. In this case they offered $21 but are willing to go as high as $25. Rationale: Use of a solicitation that is materially misleading is a violation of the law. So often times proxy fraud suits are monetarily unprofitiable. 918) 1. This statement could be wrong or false in two different ways. Reliance/Causation (first 3 rules. The whole pupose of talking about this is so we can advise future clients on how to properly solicit proxies. Seems to be Req. (i)Value wasn¶t high or (ii)if directors had other reasons for approving the merger or did not have this reason. Facts: Material misrepresentation. Any appropriate relief may be awarded: a. but most of them are. but for the solicitation. 2. So if the solicitation was an essential link in the accomplishment of the transaction. ³But for´ the misstatement. we don¶t know what the board was thinking ± as a matter of judicial policy. Injunction (tough) b. Or it can be argued that omission of the hightest price is not a mistatement. Belief of the directors will not have any proof. Can be a problem because w/reliance/causation assumed. On different facts. Only the first one is actionable because it can be proved. then we are going to say there is causation i. 1. the outcome would have happened) a. Mills Essential Link Test might be satisfied if the proxy caused a loss of a state law remedy. v. if proxy was needed. but uncertain & tough i. However.e. we analyze whether the statement made was a lie or half truth. Fairness of the merger is a defense to any misstatement a. Scienter (intent) ± (probably) (deliberate & knowing) 1. Rescission (tougher) c. therefore. 1.You know this is a proxy cause question because they are soliciting proxy frauds. Also. It¶s def not a lie. Intent. If the solicitation was req. This was a lost state remedy. it
. they lost the state right to get appraisal. 3. *Loss of a state remedy is another way to establish mills causation. Caused only to get appraisal rights. p. it won¶t allow these frivolous litigations (bluechip). Facts: Parent company already owned 80% of shares. Might even just be negligence by 2nd circuit. So you can win. the vote would have turned out differently. So. Under the materiality prong. Basically Assumes Reliance/Causation. Damages (Mills p. even if it was fair. Held: Plaintiff lost opportunity for state appraisal which could yield a greater value than the price they received. Wilson v. not intended by Congress in §14a. . causation exists. It can go both ways.e. Problem 9-3. This is an OPINION/BELIEF. Not every proxy fraud cases is damage free. there can often be no damages. 4. 5. Plaintiff asserted that transaction wouldn¶t have occurred without minority vote for pubic relation reasons. shareholders would have been able to allege loss of state remedy (bc they voted yes. 921. iii.´ Plaintiff PR complaint is too shallow. iv. causation exists. but not really ever a concern 3. b. thus loss other remedies by voting yes ii.
3. c. But How can the corporation be deceived when 3 of the directors obviously knew. Securities act covers fraud in offers d. Problem 9-4 a. iii. and plaintiff must be a purchaser or seller. 4.ments like security for expense statutes b. we always have depressing disclosures because there is no liability for running people away ii. 3. Not enough to claim breach of duty of loyalty. including insider trading) i. Green) 1. Rule: In order to be a 10b5 plaintiff you must be a purchaser or seller. Same as proxy Fraud covers lies & half truths. 2.´ so this strategy doesn¶t work. Thus. Insider Trading 2. They could get $4 dollars. Initial issuance of securities b. b. Exact Language of SEA §10(b) & Rule 10b-5 is irrelevant because we have stretched it. An unfair price that is adequately disclosed is not a violation b. 1. but Ps always pick Federal Proxy Regulation avenue. or (ii) to make a misstatement. But everyone knows ³no comment means yes. Seems a lot like Proxy Regulation Private Right of Action b. However a duty to disclose is always only a short time away 2.
would be considered material bc a reasonable shareholder would us the information in making a decision. Better anyway since you get nationwide services e. because if you give price & say it is too low but offer it anyway there is no deception 3.
TRADING REGULATION SEA RULE 10b-5 (Securities Fraud) pp927(Rule is on) It shall be unlawful for any person to (i)employ any device. Two prongs: fair dealing. Making a tender offer or acquiring 5% of a company. Note This Proxy Regulations stuff overlaps w/State Fiduciary Duties a lot. Very difficult to bring in federal law. Intro a. You can¶t defraud people w/ respect to the purchase or sale of any security (it doesn¶t matter if the stocks are registered). regardless if rumors or true or not. Security Fraud by Corp under Elements ii. This question should also alert you to Weinberger fairness. State Law Claim-Interest director transaction. Plaintiff must be an ACTUAL purchaser or seller (Blue Chip) 1. Periodic (quarterly & annual) reporting. You can remain silent & say ³no comment´ until there is a req. or artifice to defraud. e. KEY There is a private right of action under Rule 10b-5. Silence (or No Comment) without a duty to disclose is not actionable. Antifraud under Rule 10b-5 a. Must be (allege) Manipulation or Deception. b. ELEMENTS of Private Right of Action for Securities Fraud: a. Two Main Parts of Securities Fraud under Rule 10b-5 i. plus omission when duty to disclose/speak ii. Limitation that state law claims are left to state court. d. fair price. KEY D doesn¶t have to be an actual purchaser/seller 4. This is the informal dividing line between federal and state law. Avoid state procedural req. Advantage of Federal Procedure like Nationwide Service. It would lead to excessive litigation ± causes settlements that shouldn¶t occur. They would be entitled to what money damages they can prove. or (iii)to engage in any act or practice which would operate as a fraud on the purchaser in connection w/the purchase or sale of any security. v. Limitations (apply to all. Under the causation link«????No solicitation problem because they already owned a majority of the subsidiary so they did not need to solicit any proxies. Cannot say I would have bought or would have sold. a. THE PLAINTIFF MUST BE A PURCHASER OR SELLER. Fed Law Claim-There was no manipulation. not enough just some State Fiduciary Duty Claim (Santa Fe Inc. because: a. When is there a Duty to Speak 1. 5. Securities laws a. Stock Exchange Regulation a.6. Seems deception must be not coming clean. Must release quickly to the public any news or information which reasonably might be expected to materially effect the market for its security 2. Misstatement i. 3. a. Silence is not a misstatement without duty to disclose. Applies to all Purchase & Sales of Securities i. So the P¶s could sue under duty of loyalty. (This created a private right of action) c.d disclosure (usually the quarterly reports). scheme. Proxy solicitations. Insider trading. Manipulation is a term of art. must show some manipulation/deception by artificially affecting Market Conditions( like a wash sale or fake activity) a. What is Silence 1. Must be Brought in Federal Court (exclusive jurisdiction) i. Refers to (wash sales or fake activity) 2.
is the same as relying on a direct lie (this is because you assume the market price is correct). There is clearly something wrong is there is change in stock price like this. a. b. an investor¶s reliance on any public material misrepresentations. Failure of duty to monitor 2. From definitions of manipulative/deceptive 2. former shareholders believed lies. Here. Look at Top Executive Action. Key Just have to allege that misstatement caused you loss
. EX: Misstatement: must state he statements which are misleading & the reasons why ³w/particularity. a. AND ii. There must be loss/damages & the misstatement must have caused them. Size of the premium (higher the premium the bigger the magnitude then more likely material. Could have raised it by selling stock. Don¶t have to reveal confidential source. Size of the companies matter (not certain if relevant or absolute) b. Balancing of both the indicated probability that the event will occur & the anticipated magnitude of the event in light of the totality of the company activity & decided on CBC basis 2. therefore negligence is NOT enough for action. no change occurred. ii. PSLRA ± SEA §21D State of Mind & Pleading (1995): must plead particular facts giving rise to a strong inference that the D acted w/the req.3. Didn¶t disclose bc they wanted to go ahead w/ the merger. Held: This was a material lie. might have a duty to speak/disclose when you seriously consider new goals/methods
Other a. just his relations. Deliberately illegal conduct.´ which the company clearly was. 3. Reliance/Causation (Transaction Causation) i. Damages (Loss Causation) i. v. Ernst & Ernst v. Congress wrote rules that protect large companies who make forward looking meaningful cautionary statements identifying important factors that could cause actual results to differ materially. Fraud on the Market Theory Causal connection is based on reliance on the market. & sold their shares as a result at a lower price.d state of mind or talk about which statements were misleading and the reason why. i. Means ³intentional´ a. there must be some intentional act. However.
A duty to disclose arise whenever secret information/later event renders prior public statements materially misleading. Definitely Req. not merely when that information completely negates the public statements Ex you announcing you are pursuing a particular goal/method. 1. how likely 3. b. Figure out who would have been harmed. they wouldn¶t have bought. iv. 2.You can lie about immaterial misrepresentation. therefore. It was a presumption that the misstatement affected the stock price. iii. Basic v. ii. and had they have been told the truth.
c. Scienter ³intent´ (Ernst and Ernst) i.s ³w/particularity´ for other elements also iii.s Scienter 1. But instead bought Warner. Concrete Benefit to person that acted b. Strong Inferences is often: a. Show they sold for a different reason/would have traded either way b. Market didn¶t accept the lie & thus no effect in price. What is Probability Test ³indiciar of interest´ a. Facts: Time needed money. How do you show it didn¶t effect anything is by showing after the truth came out. c. Safe Harbor Rules 1.s a manipulative or deceptive device. may be presumed for purposes of a Rule 10b-5 action. In re Time Warner Inc. iv. Should have been silent. recklessness can be enough for most courts (knew something but disregarded). Test Probability & Magnitude Weighing Test for Negotiations/Contingencies 1.
d. Plaintiffs bought stock in Time Warner. ii. Because most publicly available information is reflected in market price. Req. Rebuttable Presumption of Reliance just by relying on the integrity of the Market/participating in the market at that time. It is not practical to take the deposition of everyone in the class. Basic v. Securities Litigation 1. Levinson 1. How do you rebut the Presumption (you can rebut the presumption individually or class) 1.
Material Fact/Materiality i. Facts: Basic made material lies stating they were not engaged in ³merger talks.
e. What is Magnitude Test ³size of companies or premiums a.´ 1. which put them in debt by $10billion. Test is same OBJECTIVE materiality from proxy fraud ³substantial Likelihood a reasonable investor would consider it important in deciding to purchase/sell. Levison. Anything that severs the connection b/ween the misstatement & the decisions or the misstatement & the effect a. b. Hochfelder: A 10b-5 req.
GR A corporate Insider (a fiduciary position in company & thus owes a fiduciary duty to trader) who has material Nonpublic information about the enterprise is under a duty either to abstain from trading OR disclose the nonpublic information (SEC v. When you EFFECTIVELY DISCLOSE i. Special Notes a. WE have a safe harbor rule for Projections. ii. b.) a. not just that you have told the public 1. every two months you sell stock). The duty of Insiders to traders is DISCLOSURE.) 1. Disclose the Nonpublic Information 1.g. alleging inflated price is not enough. (Dura Pharmaceuticals v. if on the date of purchase 9/11 occurred. Duty of insiders to corp. CALL OPTION: a right to buy a number of shares of a particular stock at a fixed price. but not suing the Corp. KEY Standing SEA §20A any person who violates the Act by trading while in possession of insider information shall be liable to contemporaneous traders. Uncertain meaning But you must wait until the market has digested the information. Sometimes Lawyer/Accountant. reliance. Insider has no duty to people they were trading with.´ b. No Certain time b. Disclose iii. or maybe earlier. but taken for personal. Director/High Officer/Majority Shareholder/some employees b. In setting forth the judicial consensus. iv. v. (constructive/temporary insiders) 2. a. 10b-5 does NOT apply because there is NO MISTATEMENT. iii. a. (all the advantage has to gone).³on the basis´ means ³had´ 1. there needs to be a duty imposed in order to make the silence actionable. It is the corp¶s info not the insiders. bc they can¶t promise when it is a good time.unless you can show you bought this stock pursuant to a plan (e. Thus. 2. 1. Must abstain from Trading OR ii. etc. in that if you make disclosure that it is just forward-looking information & not guaranteed. 2. Based on Duty owed to the Trader because of being in a fiduciary position in the company whose shares are being traded. Must have Material nonpublic information 3. Therefore. Texas Gulf Sulphur Co. Most lawyers will advise not to trade at all. ii. because there should be no inside information at that point. 10b5-1a. simply because it is unfair not to. c. c. iii. then OK. Problem under State Law 1. 10b5-1b. to get loss. seems insiders can trade right after a Annual/Quarterly Report.
. Intro i. Must then either: a. So you have to have prove that the truth impacted the market price net of anything else going on in the market. You have a suit anytime there is a Big drop in Stock Price Insider Trading (Special Subset of 10b-5) (SEC v. FIRST Traditional Insider Theory i. just an insider who had more information than rest & used it for his own profit.it¶s illegal to trade on the basis of nonpublic info i. Must be an ³insider´ (which owes a fiduciary duty of DISCLOSURE to trader) a. When can Insiders Trade a. Thus. 2. Key Points 1. not just individual companies. Thus might have to wait until price stabilizes. PSLRA put cap on damages for 90 days after revealing truth 4. Abstain from Trading OR b. must alleged the drop off happened while you still own the stock & then sold or bought. b. Like above. There is a need to prove proximate cause. Basically this rule give equal access to all traders.Thus. This is bc fairness is what we¶re after. damages). Texas Gulf Sulphur Co. KEY the drastic change in price after the truth is going to satisfy/prove most of these elements (material. Insider has no breach of duty w/Corp because not injury since Corp couldn¶t use info anyway. Key insider information is information meant for corporate purposes. losses do not afford any basis for recovery if brought about by business conditions or other factors. Result of Finding Insider Trading i. a person who ³misrepresents the financial condition of a corp in order to sell its stock becomes liable to a relying purchaser ³for the loss´ the purchaser sustains when the facts«become generally known & as a result share value depreciates.
1. Broudo ± Held: something must happen. the entire market would have dropped. you must be damaged to get damages). So for example. c. No duty arises just by having nonpublic information (thus must be an insider) iv. 10b5-1bc. Key Parts 1.
2. 11-4-violated FD rule bc he didn¶t promptly disclose after he talked to analysts. & they say fine. iii. Can be a gift. US: There was no fiduciary duty b/ween defendant & company. you don¶t breach 2. a. However. Based on a Fiduciary Duty owed by the Misappropriater to the Source of the Information ii. The Breach of duty by an insider can be inherited by tippee. Options magnify the risk. Examples of Fiduciary Duty 1. it¶s kinda modified the previous rule. Regulation FD Solution for Selective Disclosure 1. THEN it must be followed ³Promptly´ by public disclosure a. 2. Wall ST. Insider is breaching his fiduciary duty by telling: a. 3. If information is disclosed to someone by an issuer. SECOND Extension of the Theory²Derivative Duty i. From Rule 14e-3 Prohibits using information if it is obtained from an offering person/(tender offer) 1. Here.--> no favored positions for analyst. Father-Son Yes. 11-1.´ 2. because he didn¶t owe the market at large to refrain from leaking this material information. Employer-Employee Yes 2. ect. reputational gain. you must disclose to rest. He was allowed to use this information. Was not illegal. ii. Thus. Family Relationship alone is not enough (but SEC presumes family relationship is good enough by rule unless rebutted) 3. Secrest was NOT receiving a personal benefit by giving him this information. ii. but you can buy an option to buy a stock at stock price of $9 at a later date ± so you pay $1 for option. End Result says if you disclose to one person. Problems 1. this duty arising from a relationship of trust & confidence b/ween parties. 3RD Misappropriation Theory i. The information has value ³ordinarily´ in a securities trade. Traded stock. Can be Passed over & over.d. iv.ments 1. THERE MUST BE A SPECIFIC RELATIONSHIP. not a fiduciary duty FOURTH The Duty Free Liability i.
f. It¶s more about fiduciary duty. SEC: Tippee assumes a fiduciary duty to the shareholders of corp. An insider breaches his duty when he personally benefits either directly or indirectly & includes: pecuniary gain. it is necessary to make market effecient. Would apply to printing press employee
1. then must make public disclosure immediately 3. Dependence. 1. Thus. reputation. Breach is just using the information for personal gain b. Req. Chiarella v. thus we threaten the issuer to prevent Analyst from profiting. unless they have a duty to speak to being with. IF you can¶t show quid pro quo for the tip«you have have to show the fiduciary duty was inherited by tipee. Journal Probably 3. Husband-Wife NO.Person overheard corp exec talking about merger.
e. Test for breach is some improper personal benefit i. Dirks v. if disclose intention to sell to source. money. but can vary on the facts 6. not ³equal access to information.
. not to trade on material nonpublic information only when the insider has breached his fiduciary duty to shareholder by disclosing the information to the tippee & the tippee knows or should have known there was a breach. 11-2. When does the Fiduciary Duty pass w/the Information: (Dirk v SEC) 1. Key it is a fiduciary duty not to use information for an improper personal benefit.Yes this could violate 10b5 if father got a personal benefit. Cannot be Unilaterally Imposed (meaning Fiduciary duty is not imposed by just saying ³don¶t tell) iv.
EX: Stock $10. A duty is breached owed to the source of the information AND a. Government Official-Constituency N/A 5. 2. etc. He is an analyst & found this information through talking to Secrest. If it was intentional disclosure. Discretionary Authority AND b. v. Solves the Analyst Problem. a. this real case held that it wasn¶t a violation of 10b5 bc son and father was having a normal conversation with his dad. A personal benefit can be a gift. Must have: a. Old GR Recipient of insider information does not have a duty to disclose or abstain. a. of them finding out information & profiting from it. & Tippee Knows or should know there has been a breach iii. This is fine. Dirks was not a tipper. 2. Seems to apply to anyone that acquires the information about a tender offer. All tipping is NOT illegal. 2. Psychiatrist-patient Yes 4. When is there a Fiduciary Duty 1. b.