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Theme of course – mechanisms of private governance o Governance - systems for making decisions o Comparison to contracts Contract – agreements to decide exactly what to do in the future This course – deciding how the parties will decide what to do when the time comes o Three forms of private governance Agency Partnership Corporations Forms of Business Organizations o Agency When one person contracts to “work for” or “represent” another person 2 decision making arrangements • When the boss is silent, your choice goes • When the boss is verbal, his choice goes Termination ends decision-making system o Partnership 2 or more working together, rather than one working for the other o Corporations Unlike agencies and partnerships, not created by common law Governance scheme created by statute Formally seperates ownership from control • Assigns ownership and control to a fictional person (corp itself) created by state • So directors and officers can run business w/o having ownership in it • Shareholders can enjoy benefits of owning business w/o power to run it
o Meaning of a Governance Arrangement Governance • agreeing now on a system for deciding what to do in the future Non-Governance Contracts • agreeing now on what you’ll do in the future Elements of a Governance Arrangement Who decides? (Authority) • Discretion o Governance means giving someone else power to make decisions for you without your direction or approval • Limits on Discretion o Discretion to govern is always limited. What kinds of decisions does the power cover? • Obedience o Can someone override the decision making power if it has not yet been exercised and direct the decision? How to decide? (Fiduciary Duty) • General Idea o Assuming governing authority means agreeing to make decisions for another person. The duty to faithfully pursue that person’s interests in exercising governance authority is the fiduciary duty • Care o People make their own decisions carefully to avoid harm to themselves. Fiduciaries have a duty to exercise care to avoid harming the people they serve • Loyalty o People naturally consider their own interests when they make their own decisions. Fiduciaries have a duty to consider the interests of the people they serve as if those were the fiduciaries own interests
1. RST § 1. Agency. Agency is the fiduciary relation which results from the manifestations of consent by one person to another
that the other shall act on his behalf and subject to his control, and consent by the other to so act. i. §1 Agency; Principal; Agent – page 4 ii. §14 Control by principal – page 4 1. Principle controls agent iii. §15 Manifestations of consent / Creation of agency – page 4 1. Agency relationship only exists if there has been manifestation of consent by principal to agent that the agent may act on his accoundt 2. And 3. Agent must consent too 2. Termination of Agency: Agency exists only so long as mutual consent continues (RST § 118); a. §118 Termination of agency – page 5 i. Principle or agent manifests to the other dissent ii. Principal – power to REVOKE iii. Agent – power to RENOUNCE iv. Comment b 1. Statement in contract that authority can’t be terminated by either party is effective only to create liability for wrongful termination 2. if termination of agency constitutes a breach of K, agency is STILL terminated but terminating party may owe K damages. 3. General Agency Duties: Two-Tier Governance Structure: a. 1. Authority: If the principal doesn't want to intervene, the agent's authorized decisions are binding between the principal and agent. i. Duty to act only as authorized by the principal (RST § 383) 1. except when an agent is privileged to protect his own or another’s interest. 2. An Agent is subject to a duty to principal not to act in principals affairs except in accordance w/ principals manifestation of consent b. 2. Obedience: If the principal wants to intervene, the principal's decisions are binding between the principal and agent. i. Duty to obey all reasonable directions of the principle (RST § 385) 1. Agent has discretionary authority only if the principal leaves the decision to the agent 2. Reasonability: Compatible with what the agent signed on to do in general. Reasonability puts an objective limit on the agent's duty to obey (courts decide what's reasonable, not principals or agents). a. What is “reasonable” principal order? i. Compatible with the agency; as long as it is compatible then the principals decision governs ii. Reilly v. Polychrome Corp. 1. 1) An agent has relative authority/discretion to decide ( to come into work or stay home or not) in this type of situation when the principal is Absent or Silent, BUT this is irrelevant b/c the principal spoke.. a. 1. there was an express provision in the contract that stated he had to come in at certain times b. and c. 2.his superior 3 t imes demanded he come in at these times….and “generally accepted business customs” do not rise above OBEDIENCE DEMANDED IN A CONTRACT 2. was the demand reasonable? - “compatible w/ the agency” a. here it was reasonable b/c it was a year end closing and although possibly not necessary for reily to come in, it was certainly reasonable for it to be asked of him, especially considering the circumstances (asked three times)
4. Authority of Agent to Bind Principal: Authority is the power of the agent to affect the legal relations of the principal by acts
done in accordance with the principal’s manifestations of consent to him. (RST § 7)
i. scope of discretion to act on behalf of the principal without direct supervision 1. if there is some type of authority, the agent will not be liable to principal for bad results
5. Actual Authority: Principal manifests consent directly to agent; if actual authority exists principal is bound by agent’s
authorized actions even if the party with whom the agent deals is unaware that the agent has actual authority or it would be unusual for agent to have such authority. Can be (1)express or (2)implied. a. express (express statements/directions from principal to agent) b. implied - because it is hard to define actions in every situation, agents often have a lot of Implied authority i. Makousky, Inc. v. Stern 1. IMPLIED AUTHORITY - Principals are responsible for acts of their agents that are a standard practice 2. Hiring a broker in a real estate transaction is fairly standard practice, so you are bound c. Objective test – how a reasonable person would interpret the principal’s words and actions….would a reasonable person (agent) think the principal gave them authority? 6. Apparent Authority: Arises when agent is without actual authority, but principal manifests consent directly to third party who is dealing with the agent that the agent has authority to perform the act. Third party MUST KNOW he is dealing with agent. (RST § 8). a. Agent’s actions alone are NEVER relevant, no matter how convincing – MUST be action of the principal b. Makins v. District of Columbia - FACTORS to consider (NOT sure where I got these….) 1. 1) actual authority of the agent a. In this case, just the authority to go to the conference and negotiate (not settle) 2. 2) usual or normal conduct of the agent in the performance of his or her duties, 3. 3) previous dealings between the agent and the party asserting apparent authority 4. 4) declarations or representations allegedly made by the agent 5. 5) customary practice of other agent’s similarly situated
ii. The key is in 1. 1) What the Principal ( Makins) does herself in front of third party a. Makins, herself never gave indication to DC that she had given her attorney power to settle 2. 2) what the Third Party (DC) perceives a. so DC never perceived anything from Makins that them believe she had given authority iii. Makins had only given her attorney “actual authority” to attend the conference and negotiate…NOT settle 1. . Restatement of law: in absence of contrary agreement, lawyers can generally negotiate, but not end a settlement/dispute a. This is reserved to the client 2. Burden is on third party to realize the agent might not have the power to settle
7. Inherent Authority (Not apparent authority b/c it this is indirect implication ofauthirtyt): Gap filling device used by courts
that is implied from the agency relationship. (RST § 8A).
a. if the principal puts the agent in a certain position (clerk is at front of store), the principal should expect that third parties will
presume a certain amount of authority i. Third parties can reasonably rely on actions by the principal that are only indirectly aimed at conveying the agent’s authority to them Liability for Action in Scope Manifestation of Principal’s Consent for the agents to act on their behalf Express to Agent Implied to Agent Express/Implied to Third Party Third Party Knowledge of Agency Unnecessary Unnecessary Necessary
Type of Authority Express Implied Apparent
Agent to Principal No No Possible (if didn’t grant agent specific or implied authority, may be liable)
Principal to Third Party Yes Yes Yes
2. a. was it offered to the principal)? c.Inherent Agency Power None – Implied from Agency Relationship Unnecessary Possible Yes AGENCY: FIDUCIARY DUTY OF LOYALTY DUTY OF CARE 8. Is the opportunity essential to the principal's ability to do business? Relationship of Agent to the Opportunity a. or eliminate the duty of care…. You are not required to shop at the place you work for FACTORS to consider under Duty of Loyalty Relationship of Principal to the Opportunity a. Don’t do anything stupid b. but they weren’t Broz’s true principal at that point c.e. Would the opportunity fit into the corporation's business? b. but not on the behalf of your company ii. Don’t betray me Subjectively…. part-time non-exclusive: What scope of services (and loyalty) did the principal obtain? ii. Haidinger-Hayes.be careful… GRATUITOUS AGENCY: even if gratuitous. Co. If Pricellular was the true principal. Did the agent discover/develop the opportunity in service to the principal? b. There was PROCEDRUAL negligence – not digging enough i. you still must do your best (pro bono – we will expect top quality) 1. 1. 3. they actually had an option on the bid. Full time exclusive v. (RST § 13) i. If you would have looked at everything Crescent had given you. 1. objectively…. generally you must work towards someone else’s interests…not your own…without having a specific command from them to do it 1. 4 . iii. You can work for other companies doing similar work once you are off duty at your first place ii. v. substantive care (act reasonably with information). Hayes somehow anticipated reducing the loss ratio through his own diligent work i. d. a. Inc. Exercising special care c. v. e. 1. Inc. Co. General Rule: An agent is a fiduciary w/respect to matters within the scope of his agency. Contractual variance: Elimination: The principal and agent can agree to define. But you can’t take this substantive risk on behalf of the company b/c you are an agent acing for someone else…this was not a reasonable risk taken by this agent. 2. 1. Has the corporation specifically pursued the opportunity? i. and 1. limit. “don’t do anything I wouldn’t do b. Was the opportunity offered to the agent in the agent's official capacity (i. given the information he knew 1. He must also exercise any special skill he has. you would have realized that it was a bad idea ( 1. 2. Did the agent's position with the corporation facilitate discovery or development? Relationship of Agent to Principal a. Duty of Care: An agent must act with the amount of care that is standard in the geographic area for the task performed.don’t act against my wishes This only applies to matters within the scope of the agency An agent need not be “loyal” outside of his job duties i. Would have found why it was so costly for prior insurers of crescent US Liability Ins. (RST § 379) must act a/ standard care and skill which is standard…and exercise any special skill a. You could take it on your own. (RST § 387). including i. US Liability Ins. Haidinger-Hayes. a. 3.or its scope or range Duty of Loyalty: An agent is subject to a duty to his principal to act solely/exclusively for the benefit of the principal in all matters connected with the agency. i. procedural (informed).
14. Many times can do this by “obtaining approval from a “disinterested person ii. Utica Gas & Electric Co. Even if he honestly wanted the best for both companies. v. agent is liable for loss if that loss was within the risk of the action he took.. REMEDIES FOR ABOVE BREACHES………Property of the Principal and Profits of the Agency – a. Prove that the defendant was “fat” – got something b/c of P’s loss Or that the Defendant fattened someone else that should not have gotten fat 5 . These per se rules dominate litigation and are generally just referred to as “the duty of loyalty” – duty to act in good faith and not to act in bad faith 10. Profits: Profits resulting from the agency belong to the principal unless otherwise agreed. this is a per se breach of fiduciary duty – 390 or 392 ii. i. (RST § 393).so? 1. a. 392– w/ consent) 12. B/c it is so difficult to prove subjective intent for loyalty. (RST § 388). Prove that P lost something. Comment C) if you spend money to effectuate the breach. Competing w/ Principal: a duty not to compete with principal concerning subject matter of agency. Comment a. unless principal manifested expressly that he does not want nor need to know. 390 – w/ consent) 11. 15. (RST § 391 –w/out consent. your expenses are not deducted. Nature of Position: Was the nature of the agency such as to create a duty (mail room worker v. (RST § 389 –w/out consent. Acting for One with Competing Interests: cannot act for someone who has competing interests of principal. (RST § 403). Comment e. i. Acting For Adverse Party: Agent can’t act as adverse party in transaction connected with agency without principal’s knowledge. Pre Se Rules: Per se rules create an evidentiary presumption of disloyalty (irrespective of intent) on proof of an objective conflict of interest. CEO)? If Broz was working for Pricellular. Fairness (fair dealing / fair price)=He could have the affirmative defense that his principal gave him consent to do what he wanted: Refusing to vote (he sat on the board) does not nullify the influence and predominance he exerted without a vote (he still crafted the contracts to his own benefit and his companies detriment) 3. (RST § 394). But his principal knew…. i. – Steps to Proving entitlement to remedy 1. agent still has burden of proving that any conflicted transaction was fair to the principal. If a you breach duty of loyalty and recover profits as agent by virtue of that breach. Disclosure (fair dealing)He could say that he disclosed that he was dealing with the “other team” 2. 2) “Fair dealing” with the principal (procedure and substance)-He treated the principal “fairly” i. 3. Principal’s Consent: If the principal knows (consent) (Restatement §§ 390 & 392). Prove fault of defendant. and if principal does have knowledge must deal fairly and disclose all facts that agent knows or should know would reasonably affect principal’s judgment. §403 – liability for things received in violation of duty of loyalty i. Or for violating direct orders ….if it causes a loss a loss. but he was for CIS at the time AGENCY: PER SE BREACHES REMEDIES FOR BREACHES 9. the agent can avoid liability by: a. 1) Full disclosure-He disclosed everything the principal might need to know to make a judgement about it b.392…. Acting As adverse party: Agent is subject to a duty not to deal with principal as an adverse party in a transaction w/in the scope of his agency without principal’s knowledge. c. 1. 2. common law has established per se rules b. Globe Woolen Co. you better pony up the profits you made by virtue of the breach ii.b. Fair Price (harder to get) -could say this is same price a completely neutral person would have gotten as well d. clearly this would be an obvious competition. You still owe the full amount that you profited iii. All of these must outweigh the “conflict” that the principal has a prima facie case establishing 13. must disclose all facts that would reasonably affect judgment of principal. Rule: Even if facts disclosed. and if principal does have knowledge. Inc. even if the risk was less than the risk of following the principals orders c. Miniature Precision Components. Loss Caused: §401 – liability for loss caused – agent is liable for losses caused 1. Unlike 403 below…where the profits result from violation of duty of loyalty b. Accounting for profits received: Remedy for breach of duty of loyalty is not only damages suffered but also profits taken (or conferred to others). Can be if agent just screws up (duty of care) – liability for Chattels OR Breach of Duty 2. Burg v.
underlet. They tried to prove that he didn’t show up to key things…but there was enough contrary evidence that he did do a job for them. The principal must show that the disloyalty affected the agent’s right to be compensated at all. since only through disclosure could opportunity be equalized…As a manger… EVERYHITNG WAS IN SCOPE OF HIS AGENCY …even if he wasn’t manager…the lease extension should have logically fallen in the scop c. Deciding fact: Salmon didn’t tell Meinhard b. A disloyal agent can still provide compensable services.Eg if you are a janitor in a car buying-reselling company. even if he was duplicitous in a couple of the deals 1.2. a. this is also tending to implicate you 1. Salmon. Loft. Salmon.Being a manager . The higher you go. So these profits that he made himself. Meinhard v. is it a corporate opportunity? FACTORS Broz v. Salmon -If Eldrige knew Salmon was an agent. Although there was a breach of fiduciary duty…. b. weigh following factors. lease. Two aspects important in determining whether someone has really competed w/in the scope of the agency a. or that he made wrongfully for someone else. ……. Irrespective of Scope of agency. and operate the building” a. whereas if you were the CEO.. the less of the principals business falls outside the scope of her authority 1. that suggestive thought does not matter. Salmon held it as a fiduciary.The fact that Salmon was in control w/ exclusive powers of direction charged him EVEN MORE OBVIOUSLY with the DUTY OF DISCLOSURE.Salmon has sole power to “manage. Meinhard v. If it would have been all the deals. sharers in a common venture ii. 2) how an opportunity comes (presents itself) to the agent i. Inc. 1) What role the agent plays in the principal’s business i. and run -Then you must pay back your salary 1. Inc. b. the agent can’t take it for himself 1. This is a per se rule—even if in the agent’s own mind he thought it was not a good idea for the principal. Would the Principal have “interest or expectancy” in the opportunity b. we maybe have a different story AGENCY: 2.. 3) the corporation has an interest or expectancy in the opportunity 1. Burg v. Forfeiture of Contractual Compensation (salary): Not an automatic remedy for disloyalty. Burg did not have to forfeit his salary b/c there was not unjust enrichment from the salary a. Miniature Precision Components. CIS’s financial problems would have prevented it from getting it ii. none is dispositive . didn’t do their job. it is unlikely you would be competing buy getting a great deal on a rare car for yourself. 1) the corporation is financially able to exploit the opportunity 1. for himself and another.Corporate officer or director MAY NOT TAKE a business opportunity for his own if i. 16. The more authority an agent has within the principals business (higher up you go). Meinhard v. different story 1. not just Salmon himsel b. in connection w/ functions or duties?If the third party clearly presents an opportunity to the agent as an agent for the principal. Cellular Information Sys. he would have presented the lease deal to Salmon and Meinard together. he still actually did his work/job for them. secure the opportutnity. Might have to give up your salary if you weren’t actually working for the company you were supposed to be working for i. If the agent competes with the principal then liable for breach of loyalty. Inc. Must be some tie between that property and the nature of the corporate business 6 . the more likely you are to be competing b/c almost everything comes into the scope of your agency…. 2) the opportutnity is w/in the corporation’s line of business iii. IF you used your position or corporate information to find out.. should all go to the plaintiff…(less his costs that he can prove) d.from Guth v. THE CORPORATE OPPORTUNITY DOCTRINE When conflict involves a corporation as principal and one of corporations high – level agent scope of agency – means a lot for this subject Competition with the Principal: An agent may not compete with the principal as to the subject matter of the agency (RST § 393) i. even though he sought profit for himself in a couple days i. If your payment of salary to the person ended up just being unjust enrichment – they took the money . 3. Given your position…would the corp be interested to share in your knowledge of the opportunity? a. a.
An act by a partner in ordinary course of business binds partnership.does NOT by itself create partnership. which creates a “safe harbor” (failsafe way to escape liability). Splitting profits (as opposed to revenues) creates a presumption of partnership unless it seems part of a less mutual arrangement (loan w/ equity kicker) (RUPA § 202(c)(3)).. ii. Daniels approached Broz in his individual cpacity 2) the opportunity is not essential to the corporation 3) the corporation holds no interest or expectancy in the opportunity 4) the director or offier has not wrongfully employed the resources of corporation in pursing or Broz comported himself in manner whoolly in accord w/ obligations to CIS Although he did not “present the possible opprotunity to the BOD”. BUT The partnership agreement has no direct impact on apparent authority. joint prropty . V) interst on loan. Broz was NOT required to consider the contingency of a Pricellular acquisition of CIS and the related contingency of PriCellular thereafter waiving restrictions on the CIS bank debt ii.Iii) of rent . Ordinary Course: A partner has actual general agency authority for the partnership (power to make decisions for the iii. Profits and Losses: Default rule: §401(b) . b. UNLESS (1) partner had no authority to act in that matter…. And…. A Director’s right to “appropriate an opportunity depends on the circumstances existing AT THE TIME it presented itself to him WITHOUT REGARD TO SUBSEQUENT EVENTS a. “He must be allowed to make decisions based on the situation as it exists AT THE TIME a given opportunity is preseentd” i. 3) person recing a share of profits is presumed to be a partners in business. 4) by taking the opportunity for his own. i. MANDATORY RULES Creation of Partnership: The association of two or more persons to carry on as co-owners of business for profit forms a partnership regardless of intent to form a partnership. partnership) in the ordinary course of its business. (RUPA §§ 301. (1)ordinary course: each partner is an agent for the partnership a. it is not the law of delware that presentation to the BOD is a necessary prereq to a finding that a corporate opportunity has not been usurpred. profits and losses are shared equally c. General Rule: Being a partners means both a property interest (non-fiduciary) and management powers (fiduciary power). vii. exploiting the opportunity 1. so he was fine anyway 2. Broz interest in acquiring and profiting from Michicgan – 2 cretaed no duties inimicable to his obligations to CIS a.. Presumptions under § 202: 3. tenancy in common. the corporate fiduciary will thereby be placed in a position inimicable to his duties of the corporation 1. Co-ownership of property does not create any presumption of partnership (§ 202(c)(1)). PARTNERSHIP: a. (RUPA § 202(a)). §301: Partner Agent of Partnership: 1. even if the owners were in it for profit 4. MODIFIABLE RULES. Modification: The partnership agreement can eliminate actual authority. 401(f)). a. I) of a debt. Greene 2. Directory or officer MAY TAKE a corporate opportunity for his own if (also looking at above factors) v.Absent agreement to contrary.for services . 1) the opportunity is presented to the director or officer in his individual and not his corporate capacity 1. sharing of returns. 5. vi. CREATION. Broz didn’t have to consider the future speculation of Pricelluars acquisition iv. Vi) sale of goodwill of business. RUPA § 401(f) & 301(1).Iv) annuity. Agency Authority: Partners have equal actual agency authority to act for the partnership. 2.does NOT by itself create partnership. That depends on the reasonable perceptions of third parties. Default Rules which may be modified ii. even if person sharing have joint right (RUPA § 202(b)). b. viii. ii. unless profits were received in payment: 1.–Johnston v. ACTUAL and APPARENT agency authority. 2) outside ordinary course – only binds partnership if it was authorized 7 . FUTURE OCCURRENCE in determining whether a particular businesss strategy would implicate fiduciary duty concerns” b. 1) joint tenancy. i. (2) Person whom partner was dealing knew partner lacked authority 2. “The right of a director or officer to engage in business affairs outsideo f his or her fiduciary capacity would be illusory if these individuals were required to consider EVERY POTENTIAL.
3. Lundy is still required to consult his fellow partners before giving it d. Internal Decision Making/Disputes: Partners must agree unanimously to admit new partners and amend the partnership agreement . the status quo continues. and 7: Effect of partnership agreement. Ii) may authorizy or ratify a specific act or transaction that would otherwise violate duty of loyalty (b)(5) can’t eliminate duty of good faith and fair dealing 404(d) a. Ever. a. A dissociation of a partner does not necessarily cause a dissolution and winding up i. UPA §18(h) – any change must be decided by a majority of shareholders TIE BREAKER GOES to NAYS: If partners r equally divided. (2)upon an event agreed to in the partnership agreement causing dissociation. (1) it might be a “customary referral fee. determining whether it is “ordinary course”……turns on MAGNITUDE OF DECISION c. d. So everything above 10K (which he can spend/do w/o firm permission) he owes personally §401(f) : Partner has equal rights in management and conduct of partnership business 1. ii. iv. partners are liable jointly and severally for all obligations of the partnership. RUPA § 603(a). Comment 1: joint and several liability PARTNERSHIP: DISSOCIATION DISSOLUTION WINDING UP Partner Dissociation d. Below the level of “extraordinary matters” as in 401(j) b. 103(b)(6)) 7.” and (2) court ordered Lundy to pay it c. 1. Winding Up: RUPA § 801 identifies the situations in which the dissociation of a partner causes a winding up of the business……. nonwaivable provisions i. Dissociation: Any partner can dissociate at will. 8. all other internal disputes are governed by majority vote on a one-partner-one-vote basis i. as long as it falls under the ordinary course/ordinary matters . a.Even if i.this time they put a number on the “extra – ordinary – requiring – everyone’s agreement “….. Partner Liability: Third parties can collect partnership obligations (contract and tort) from each partner individual. by judicial determination because of wrongful conduct or conduct making it impracticable to continue. e. Continuation: RUPA § 701 provides that in all other situations there is a buyout of the partner’s interest in the partnership. (4) in death or incapacity of partner. If a partner “purchases or disposes of any material asset” he must get permission of the majority of the partners if the asset’s value exceeds 10K . (RUPA § 306).a. Haymond…. they have equal rights in management of business of partnership… when disagree. he should seek council… iv. (3) upon application by partnership or other partner. If aware that it might be outside of ordinary course. (1) the partner expressly withdraws. power to exercise discretion is suspended a. I) may identify activities not violating duty of loyalty…if not unreasonable 2. partner only needs to consult other partners if he is aware there might be a disagreemeent difffernces as to extra ordinary matters must be decided unanimously a. there was no breach of fiduciary duty ( in absence of mutual agreement to contrary Default Rules which may NOT be modified 6.. Effect of a Partner’s Dissociation: If a partner’s dissociation results in a dissolution and winding up of the partnership business.when it is an AT WILL partnership 2. §103(b)(3) & (b)(5) and cmts 4. A) partners r liable jointly and severally for obligations of partnership unless otherwise agreed by the claimant or provided by law b. Covalt v. Article 801 applies. (RUPA §§ 602(a). Partner may go out and do something for the partnership without consulting the other partners. What Dissociation DOES NOT MEAN: It does not mean that the partnership or the partnership's business is ended or will end. Lundy v. one partner may not sue another partner b/c the other partner disagrees w/ a decision being made b. iii. rather than a windup of the partnership business and in those situations the partnership entity continues unaffected by partner’s dissociation. ii. NO actual or apparent agency authority b. High: Except where partners expressly agree to the contrary. §401(j) differences as to ordinary matters must be decided by a majority 2. B) liabilities before joining: person admitted into partnership is not liable for partnership obligations incurred before he joined c. Really. 8 . Events Causing Dissociation: A partner is dissociated if (RUPA § 601) i. §306(a) – Partner’s Liability 1. otherwise Article 701 applies. 1. those against the change have their way ii. Rule: In the absence of any consensus between partners. (b)(3) partnership agreement MAY NOT eliminate duty of loyalty 404(b) BUT ii.5.
Reductions of Payout: : Dissociating partner’s payout is reduced by amounts owed. It results in dissolution only if a majority of the remaining partners vote to dissolve (RUPA § 801(2)). ii. AFTER Dissolution -.Any partner may “dissociate” and therby cause a “dissolution” of the partnership by simply expressing his will to cease association with the partnership c. Partner Dissolution (continued next page) 9.. Tries to take 1/3 before they have hit 7500 mark b. RUPA § 801(5) . other than for purposes of winding up. Term/Endeavor Rule: In a term/endeavor partnership. A partner who cannot dissolve the partnership by dissociating can therefore nonetheless seek relief in extreme circumstances without wrongfully dissociating. 9 . partner’s share of the partnership’s appraised value (no right to force “market valuation” by action).” iii. can’t just be “oh I can’t keep working here with this guy. All dissociations not resulting in dissolution result in continuation by remaining partners b. Payment may be deferred (with interest) to the end of any fixed term/endeavor if the dissociation was wrongful.a. (1) breach of an express provision of partnership agreement. CAN’t MERELY SHOW Wrongdoing Or breach b. Pay off debts. This can almost NEVER BE WRONGFUL…. Sorenson 1. "At-will" partnership: A partner can force dissolution by dissociating. Inalienable Power to Dissociate: partners can dissociate at any time. RUPA § 801(1). Drasner v. Settle accounts with partners 10. Such dissociation is wrongful under RUPA § 602(b). d.unless you are breaching some other duty by doing this b. (RUPA § 801) a. i. (iii)Otherwise not reasonably practicable to continue the business under the partnership agreement b. RUPA § 602(a)) i. Wrongful dissociation when a partner a. At Will Rule: Dissolution is the moment when all the partners end their association as partners with the partnership and each other. Sorenson – guy’s bad actions makes it impossible to continue the endeavor for profit To get judicially ordered dissolution i. whatever contract says. a partner cannot force dissolution by dissociating before the end of the term/endeavor. partnership unreasonably frustrated). Conducts himself in matters relating to the partnership business so as to render impracticable the carrying on of the business in partnership with him i. act of dissociation may constitute a breach of the partnership contract (wrongful dissociation). generally thought of as a necessary compliment to unlimited liability (with limited control). Right of Dissociating Partner to Payment:: A continuing partnership must pay the dissociating c. Judicial Intervention Rule: RUPA § 801(5) provides a mechanism for a partner to seek judicial dissolution on proving certain extreme breakdowns in purpose or function of the partnership (not reasonably practicable to carry on. a. (2) in term/endeavor--before the expiration of the term or completion of the undertaking iii. including damages for breach of contract. he requests $100 Partner Dissolution . Drasner v. D threatens to dissolve when S refuses D’s requests ii.Dissolution by Judicial Decree: i. Willfully and persistently commits breach of partnership agreement i. D spent a lot of time at the bar ii.Continued 11. or ii. Wrongful dissociation: i. When D had overdrawn and was also indebted to S for personal advances. Deferral Rule when DISSOCIATION IS WRONGFUL. bringing liability for damages. definition – formed w/o agreement that the partnership shall continue for a specified term or undertaking ii. (i)Frustration of economic purpose ii. unless the dissociating partner can prove that immediate payout would not cause hardship to the partnership f. Must show impracticability of continuing …………Must be business impracticability i. However. Can continue only as long as every member assets. Importance of Judicial Power to Dissolve: a. a. (ii)Partner's bad conduct makes it reasonably impracticable to continue in business in partnership with that partner+ 1. RUPA § 602(b) iv. partners must Wind up businesss.
Continuation after dissolution: Dissolution starts the “winding up” process. NO. Escape Hatch: If partners don't provide for exit and ptnrship isn't at will. (RUPA § 803(a)) 3. Talcott Rule: An agreement does not provide an adequate exit for a partner wishing to dissociate if they would still be personally responsible (i. Winding Up(continued next page) i. RPA 803(a)) 2. iii. Selling the entire business (often to partners who want to continue it) 3. b. (2) effectively end partnership. i. RUPA § 401(h). other than profits? 1. 2) AND exit strategy must allow business to continue without resolving disagreements a. D) after settlement of accounts. it is NOT practicable…. Rights and Duties of Winding up Partners: Winding up is a fiduciary activity. H) partner is NOT entitled to remuneration for services performed for partnerhisp. Sweat equity is not capital contribution. Haley v. Partners participating in winding up are entitled to reasonable compensation for their activities in winding up. can get stuck in bad situations with no way out. EXCEPT for “reasonable compensation for services rendered in “winding up” the business of the partnership 4.d – Settlement of Accounts and Contributions Among Partners i.b..3) 1.Shamloo v. is a partner entitled to remuneration. it will generally seek declaratory relief.. 1. Ladd . a court will supervise. B) profits and losses resulting from liquidation of partnership assets are credited and charged to partners accounts iii. Right Wind Up: Each partner (except wrongfully dissociating partners) has right to wind-up partnership. Judicial supervision: If a partner shows cause.LLC example 1. partners get no compensation for their work (beyond their share of profits). iii. c. There are three things you can do in winding up……803(c). (RUPA § 802(a)). By default. the partnership actually ends (“terminates”).§807a.b. Haley would not be relieved of his liability on the joint mortgage. Talcott. for rendering services to the partnership. personal guarantee on a mortgage) but would have no further control.e. Ultimately winding up means (in order…1. Definition: The process by which a dissolved partnership pays its creditors and settles accounts with its partners (distributing any surplus in cash or collection the deficit). ii. a. A) assets must first discharge obligations to creditors. Finishing existing work (…preserve “GOING value” of bidness can justify seemingly “nonwinding up” activites) 2. Rights and Duties of Winding up Partners: a. as long as they are 401 oridinary courtse and satisfy 802(a) (partner has the right to wind up (not wrongful dissociation) 1. (RUPA § 401(h)) a. Importance of Discretion: Dissolution involves a danger of hold-up (both by the party seeking dissolution and the party opposing) and a danger of letting people out of exactly the arrangement to which they agreed.d – Settlement of Accounts and Contributions Among Partners i. Uncertainty: If a partner is uncertain whether it has the power to dissolve the partnership by dissociating. and in absence of agreement to contrary. It does not end the partnership’s business. each partner shall give.§807a. Selling individual assets or parts of the business. 401 D) partnership shall reimburse a partner for an advance to partnership beyond amount of capital (401A) the partner agreed to contribute 10 . “SWEAT EQUITY” . 12. Discretionary court power discourages misuse. Such circumstances make judicial dissolution a viable alternative.i.Upon dissolution of partnership. Here. A partnership continues after dissolution ONLY for purposes of winding up its business. (1) provide equitable opportunity to leave. seek the courts: Haley v. Negotiated agreements often modify this rule. rather than risking a wrongful dissociation (and no dissolution). IF existing exit strategy doesn’t give you a way to wind up your business. At end of process. Accounting . 1)MUST have a practicable exit strategy 2. Therefore. ii. in proportion in which the partner shares partnership loss Winding Up Continued 5. b/c current agreement doesn’t. including partners who are creditors ii.Paying all debts and other fixed obligations (including paying amounts owned to partners as salary or loan repayment) a. Accounting . which means this strategy wouldn’t effectively end the partnership b/c it doesn’t account for the mortgage 3.judicial intervention ok.2. existence during winding up: The partnership exists ( for purposes of winding up) during winding up (RUPA § 802(a)).
Reed . 401 A) each partner has an account that is Equity Capital: By default. neither party is liable to the other for contribution for any loss sustained a. Sweat equity is not capital contribution. ii.Original capital contribution losses (not from further loans or whatever) c. the person advancing capital is entitled to its return before division of income or profits-. one money iii. b. 1. 401 E) a partner’s payment or advance which gives rise to obligation under © or (d) constitutes a loan to partnership which accrues interst from date of payment or advance i. 807(b)). Shamloo. minus distributions.Shamloo v.. Laid Rule: In absence of express agreement to the contrary. WHY IS REED OFF THE HOOK (why doesn’t he have to compensate kovacik for his original 10K capital contribution loss)? i. so he should be entitled to get it back b. Ladd made a loan (not a capital contribution) to Sahmloo and Ginnyex.By default. “SWEAT EQUITY…. RUPA § 401(b). In a joint venture in which one party contributes funds and the other labor. 2) each party was to receive compensation to be paid to them before computation of the losses or profits Reed agreed to conditional compensation He would only get compensated if they both profited 401(b) ONLY APPLIES TO “OPERATING LOSS”: A “NEW” loss (loan taken out after capital contribution. ii. the initial investment or labor investment. BUT Negotiated agrements sometimes recognize a capital account for intangible contributions. 13. whether they contribute money or not. c. the capital that each partner puts down. b. a promise to work does not entitle a partner to a capital account (just profits). is a partner who has made a loan to the partnership in excesss of his capital contribution entitled to interest on the loan from the date the advance was made ii. shared…401(b) a. Shamloo v. capital loss cases (not 401(b)). each party would lose his investment. partners share profits/losses equally. “OPERATING LOSS” b. equal to money or property contributed to equity capital.. By default.. partners have a capital account. Kovacik.. even if unequal.Capital contribution are returned to partners (RUPA 401(b)(1). even if it is not equally split…it is just bore by the person that put it down 1. Ladd . When there are $0 left in the partnership at time of dissolution. b. SO. REED is off the hook… i. is acknowledged to be lost a. Reed just contributed labor ii. b. and absent an express agreement to the contrary. Kovacik v. one labor (his TIME investment) c.Upon dissolution of a partnership. b/c in the event of a loss. Returning the partners’ capital contributions (both initial and subsequent) a. plus undistributed profits. There may be no "losses" to share if a partner has agreed to contribute money (as equity capital) to cover partnership expenses. Auction versus Buyout RUPA 807 provides that partners are entitled to distribution of any surplus over creditors claims “in cash” implying that all assets must be reduced to cash (sold) 11 . (not joint) Partner’s Liability 1. i. partners share in partnership losses. Distributing anything that remains (the profits) to the partners equally (or as otherwise agreed in the partnership agreement)… 401(b)By default. IF ONE PARTNER IS UNABLE TO PAY (bankrupt) the others will have to pony up to cover for them… §306(a) – SEVERAL…. The partnership must pay out capital accounts only when the partnership dissolves and only after debts are paid. bUt this ONLY APPLIES when i. Therefore. 1) each party contributes capital (both of them contribute investment $) Here.
Shaughness They did NOT breach fiduciary duty by improperly handling cases for their own 1. but It is investigated and determined that it is ok………. if the standards are not manifestly unreasonable. 1. a. 2. They expelled her cuz she was a rat. RUPA § 103(b)(5). The partnership agreement may not eliminate the obligation of good faith and fair dealing under Section 404(d). b. There are fiduciary limits that you must acknowledge – you can go against your co-partner’s interest but can’t completely violate the basis of the partnership…see below Good Faith and Fair Dealing: Partners (like contractual parties) have a duty of good faith and fair dealing in exercising their contract rights (including expulsion and departure). Shaughnessy ABA standard for leaving attorneys i. (RUPA § 404(e)). EXPULSION AND DEPARTURE Expulsion of Partners: Neither the partnership nor any partner has a statutory power to expel a partner under RUPA. benefit Meehan v. i.Firm tells her this and also lets her know she is fired ii. so they did not breach fiduciary duty 1. Butler & Binion i. Meehan v. Judicial Expulsion: Under RUPA 601(5) the partnership or a partner may petition a court to order the expulsion of a partner on showing specified wrongdoing by that partner…… expelling partner for self gain is breach of fiduciary duty… a. You must show proof of fault §601(5) a. 1) Any notice of leaving must explain to the client that he has a choice to decide who will continue representation-1) they unfairly acquired consent b/c their letters made it seem to the client like the client didn’t really have a choice ii. but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured. 1) wrongful conduct 2. (RUPA § 404(d)). which would often destroy value. not for self gain. 12 . Some have read RUPA 807 to allow the court to value the business and order the buy out of the dissociating partner’s interest (using partnership assets) at that value PARTNERSHIP: b. You must show proof of fault §601(5) 1. Consequence of Expulsion: Dissociation: A partner expelled pursuant to a contractual power or a judicial order is dissociated from the partnership (RUPA §§ 601(3) & (5)). 1. but the partnership agreement may and often does specify a procedure for expelling a partner. 2) willful or material beach of duty 3. iii. 3) engaged in conduct which makes it NOT practicable to carry on Bohatch v. Courts often envisions that “reduction to cash” means discontinuing the business and selling its assets piecemeal. 1. No one could work with her anymore…. 1. Principals: Holders of contractual rights under which they have powers exercisable to protect their individual interests and 2. a. No Dissolution: Under RUPA § 801(1) & (3) neither contractual nor judicial expulsion causes dissolution unless the partnership agreement provides otherwise. This was ok in the contract as long as they gave notice b.a. Agents: Holders of fiduciary powers in a governance system under which they have duties to act in the interests of the partnership and the other partners. 2. The Conflict. Rule: The partnership agreement can reasonably define the requirements of loyalty and provide mechanisms for approving specific actions (RUPA § 103(b)(3)). Fiduciary Duties in Departure and Expulsion Exercise of Contractual Rights in Self Interest: A partner does not violate any duty merely by taking action to further its own interests. Loyalty: Partners have duties of loyalty in dealing with the partnership (RUPA § 404(b)). c. Rule: Partnership agreements can reasonably define the 404(b) requirements of good faith and fair dealing. i. 3) engaged in conduct which makes it NOT practicable to carry on b. Partners are both 1. ii. Bohatch suspects a partner is overbilling a client and reports it. iii.
"Officer" means "high corporate agent. address of registered office and agent. c. They should’ve talked to the firm before solicting conset iv. the board or other authorized officers select their titles and authority. c. sneaking behind their back 14. a. Classes of Directors: Directors can be divided by certificate of incorporation or bylaw. 1) by unfairly acquiring consent from clients -Lack of notice ii. be divided into up to 3 different classes. 4. Shareholders” Shareholders own shares which entitles them to a pro rata share of the corporations profits. Other nonwaivable provisions 15. nature of the business or purposes to be conducted. Filling Vacancies: Vacancies of directors may be filled by a majority of the directors then in office (DGCL § 223). 2. RUPA § 103(b)(4). Voting: Shareholders can vote on board members and specified fundamental changes. need not have any stake in the corporation 3. They took advantage of their partners confusion by not letting them also talk to the clients about it first A) They did breach fiduciary duty i. 13 . 2) referring attorney to withdraw cases-again. Must be approved by a majority of outstanding stock entitled to vote. voting and distributions. when. d. Contents of Certificate of Incorporation (DGCL § 102(a)): Name of the corporation. (DGCL § 102(a)(4)) and §151 iii. b. The certificate. (DGCL § 102(a)(4). Officers are usually employees and the agents of the corporation. ii. merger (DGCL § 251). b. i. c. the board proposes (and only the BOD can propose) amendments and shareholders vote on them. and it is unlikely they would initiate something to curb their own power g. d. MBCA §8. Formation of a Corporation: Certificate of Incorporation a. Shareholders also have individual rights to initiate action (board nomination and bylaws) and seek information (DGCL § 220). f. Issuing Stock i.they didn’t contact their firm till they had acquired consent from all the clients…and didn’t inform the firm about acquiring this consent iii. c. (DGCL § 242). Officers (DGCL § 142(a)). Provide that the articles of incorporation can only be amended on initiation from the BOD. Board's Powers Are Collective Only: Individual directors have no agency power." Officers do not differ legally from other agents (they are usually employees). General Rule: The certificate is hard to change. d. (DGCL § 141(d)). as such. It selects the corporate agents and is the source of all corporate agency authority.g. b. e. Board Has No Agency Power. Issuance: The board of directors has the power to decide how many shares will be issued. b.ii. Number of Directors: The number of directors is fixed in the bylaws unless the certificate of incorporation fixes the number in which case a change in the number can only be made by amendment to the certificate. but cannot execute directly. h. Amendment to Certificate of Incorporation (DGCL § 242(b)): Must call a special meeting of the stockholders entitled to vote or direct that amendment be considered at next special meeting. as such. It has ultimate control over all of the business of the corporation. Partnership agreement may not unreasonably restrict the right of access to books and records under 403(b). as well as value. Partnership agreement may not unreasonably reduce the duty of care under Section 404(c) or 603(B)(3). including shareholder b. CORPS: DIRECTORS OFFICERS SHAREHOLDERS FORMATION 1. bylaws. 151(a)). i. Shares of Stock: Fungible slices of the equity interest (and accompanying rights) in a corporation. Officer Power Not Dependent on Ownership: Officers. Board Represents Corporate Principal.01 and Delaware GCL §141(a) default rules 1. e. a. Authorization: The certificate must specify how many shares of stock the corporation is authorized to issue and can specify the rights of the stock (or different classes of stock) or authorize the board to set terms. (DGCL § 141(b)). amendment to the certificate of incorporation (DGCL § 242). and for what consideration (and what rights). They are selected by the board from whom they derive their authority. Typical rule: business of corporation is entrusted to directors – except as otherwise provided in the articles of incorporation Amending the articles of incorporation can only be done on Board initiation i. 16. Board Power Not Dependent on Ownership: Directors. 2) Also. need not have any stake in the corporation (DGCL § 141(a)). the leaving partner has obligation to render on the demand of any partner true and full information of all things affecting the partnership. Relation to the Board (141(a)): They select the board and can remove it. total number of shares of stock and classes of stock. RUPA § 103(b)(2). Directors: a. Parties put important protections in the certificate for this reason. but the board does not owe them a duty of obedience.
The legislature also wants to protect its franchise.shareholder A has 4 shares…he can cast 4 votes for each seat that is open (hypothetically voting the same candidate each time for each open seat (4 votes for that candidate per seat))……4 seats open b. and you can spread these votes around everyone b. ILLUSTRATINTG DIFFERENCE BETWEEN THIS AND CUMULATIVE a.easy way of determining highest possible X…set X = 1. or concentrate them in one candidate i. Amendment : Bylaws are easy to change. courts and bar are specialized. c. Straight Voting (Default): Each stockholder casts one vote per share in separate votes for each seat avilable. employees (DGCL § 109(b)). iii. (DGCL § 109). which serves to allocate the right to elect directors between different sets of investors. Rules for calling and conducting board meetings and other board actions 3. 1. 1 share. rights or powers of stockholders. b. multiplied by the number of directors standing for election. ELECTING DIRECTORS MEETINGS COI BYLAWS General Rule: The corporate law default rules may be changed by inclusion of the preferred rule in the article of incorporation or the bylaws. The Importance of Being Delaware= dominant state for incorporation. conduct of affairs. X = number of directors one group could elect.. you can’t do this in straight voting Increases likelihood that you canidtate will be one of top vote getters a. (one vote / director ) ii. Bylaws-The corporate "statutes. solve. then multiply i. directors. (DGCL § 109) iii. a. S = total number of shares voting ii. VOTING RIGHTS d.e. he dominates a. 5. iv. based on one vote per share basis With straight voting. amend. b/c you can guarantee 51% of the votes to each candidate you want…. (DGCL § 151(a)). Top offices and their basic authority ii. experienced and focused on efficiency. 2. 2. Useful for company going public. : Power to adopt. officers. or repeal bylaws is in the stockholders and any corporation can in its certificate of incorporation confer that power upon the directors as well. Cumulative Voting: Each stockholder has a bucket of votes equal to the number of shares held. 3. Dual class common mechanism a. e. SX/(D + 1) …shares….Original BOD can retain 10 or 100 votes per share while selling stock to public for 1 vote per share – retain control of corporation 14 . a 51% shareholder will be able to elect 100% of the board seats. Responsive Legal System: The Secretary of State. whereas w/ cumulative. large corporations and corporations w/ publicly-traded stock. he can cast 16 votes for one general candidate and if that candidate gets one of the top 4 vote counts. illustration…. Shareholders can always propose and vote on changes. Rules for calling and conducting shareholder meetings and other shareholder actions 2. he takes one of the 4 open sets 1. Electing Directors – pg 147 helpful illustration i. It generally allows parties great freedom to vary their governance arrangements. Shareholder casts total number of votes equal to number of shares multiplied by number of positions to be filled a. b/c 1 vote. Substance: Bylaws can contain any provision not inconsistent with law or certificate relating to business of the corporation. (DGCL § 214). Purpose – permit minority shareholders to have a place on the board Maximum voting power of a block of shares: To elect X directors. The bylaws lay out the rules for running the internal governance system: 1. This rule may change the default (above) by being included in the certificate of incorporation. whereas bylaws can be changed by directors alone and are not publicly filed. The certificate usually allows the board to change them. D = number of directors to be elected iii. Articles are public docs that can be changed only by action of corporation’s directors and shareholders. too. Class Voting: A corporation may in its articles of incorporation divide its shares into classes and permit each class to select a specified number of directors. a shareholder needs MORE THAN: a." i. Permissive Statute: Delaware's corporate law is aimed purely at protecting its incorporation franchise. Well-Developed Law: Delaware courts have answered more corporate law questions than any other jurisdiction. 1. (DGCL § 212) Directors elected by plurality vote. Gives greater voting power compared to their relative capital contributions b.
they don’t need to have the meeting b/c there is enough (not unanimous) shareholder consent ii. Notice and ACTION BY WRITTEN CONSENT 1. Annual Meeting: a. the board has exclusive power to initiate a special meeting but the certificate of incorporation or bylaws could alter this (many states allow holders of 10% or more of the stock to call such a meeting).v. Stockholder Meetings: The board must give the stockholders 10-60 days written notice of meetings. Stockholder Meetings: The board must choose a record date after the date on which it decides (what?) and between 10 and 60 days before the meeting. 3. a.shareholders don’t need unanimous…. Action by Written Consent: The board can set a date within 10 days after it decides (the default date is the decision date. Record Dates 1. Classified/Staggered Boards: By default. If there is no majority shareholder (or coalition). shareolder is asking court to exercise their discretion and force TSI to hold its annual meeting . Business Conducted – somewhat constrained: Annual meetings always elect some or all of the directors and allow the board or stockholders to raise other business. Rules Relating to Meetings Types of Meetings – power to initiate 1. 2) other matters which shareholders might want to bring up are not made irrelvent by a consent designation of directors. f. b. (DGCL § 213(b)). many certificates divide the directors into "classes" only one of which stands for election each year. DIFFerent than 141(f) which is board actions by written consent b.but 228 says can have consent of stockholders in lieu of a meeting) 1. saying under §228.TSI objects to this. Rules Relating to Meetings i. It may also determine that the meeting be held instead by remote communication (DGCL § 211(a)(1)). the board and stockholders have equal power to initiate an action by written consent and only the certificate can vary this default. The board can act by written consent only unanimously iii.different than action initiated by th board. A maximum of three classes are allowed. (DGCL § 211(c)). 1) formality of notice to all shareholders and a meeting could have an effect on how majority of shareholders vote. Consent action that designates directors of TSI fails to satisfy corporations obligation to hold annual meeting where they are elected. a. (DGCL § 213(a)).) If the board has not fixed a date. Special Meeting: By default. General Rule: Shares are transferable and the number of shares may fluctuate.this is why §228 doesn’t trump §211(c) (211© requires that there be a meeting be held…. the default is the date on which the corporation receives the first written consent. in conformity w/ certificate of incorporation iii. (DGCL § 211(d)).Other stuff that wouldn’t otherwise get brought up i. IS MANDATORY:Hoschett v. g. Notice of special meetings must specify the purpose of the meeting. b. so stockholder actions need a “record date” to fix the eligible shares and the stockholders. TSI International Software. (DGCL § 228(e)). 2. 15 . (DGCL § 228(a)). Types of Meetings – power to initiate 1. i...Not having meeting might legitimately effect how people vote – the BOARD is in a better tactical position to get their result this way…instead of regular meetings they can use “surprise attacks” 2. the entire board stands for election each year. As a defense against sudden changes of control. State corporation codes provide that shareholders entitled to vote are those owning shares on the “record date” specified by the directors. 2. Creating consent in place fo the meeting does not produce more practical and efficient system – Hoschett argues there are many reasons to have a meeting beyond just to vote…. The default is the day before notice. ii. a. Action by Written Consent: By default. Shareholders can act by written consent in lieu of a meeting…. a. Pursuant to §211(c) . Stockholder Action by written consent: Only notice after the fact is required in the case of a nonunanimous action by written consent.just enough to pass…. Court discretion to order a meeting: The Chancery Court has discretion to order a meeting if the board waits more than 13 months (or delays more than 30 days after a specified date) to hold the annual meeting. Ltd. DGCL § 141(d). Requirements for Quorum and Success Threshold iv. Annual Meeting: By default the board has exclusive power to initiate the annual meeting. (DGCL § 222). this allows strangers to take control. but bylaws often impose rules on those wishing to raise matters at a meeting (DGCL § 211(b)).
Castiel – FIDUCIARY DUTY IN LLC…. Inc. Positive 2.not sure where logically belongs in outline §18-404 of LLC Act 1. but they can remove directors at will by vote or written consent.therefore it applies to 16. Inc. National Intergroup. DGCL § 242(b). 2. a.: Defined (absentee ballot): Almost all votes are cast by proxy at meetings of publicly-traded corporations. 16 . So Q and S say we went by the law….we could technically do this! ii. 1. Bylaws: By default. (DGCL § 212(b)). setting forth the action taken. subject to preservation of fiduciary discretion and the prohibition on sale of fiduciary power. DGCL § 141(k). IV. (DGCL § 216). a majority of stockholders can amend bylaws without board involvement. the board acts as proxy for all the shareholders. v. iii. VGS.so # of directors will require a SUPER majority (even though state law only requires majority…§109) Class Rights: Certificate amendments affecting the rights of a particular class of stock require a majority vote of the class by default. DGCL § 242(b). DGCL § 109. a. and c. a majority of shares represented for other matters (eg…amend bylaws) (DGCL § 216(2)). Protection against Change in Delaware Corporations Certificate: By default. Clear 4. i. ii. Explicit 3. even if minority were notified and objected it i. iv. Holding: National’s original law in COI – 8 (requiring SUPER-majority) is clear and consistent enough that they intended and presented it to shareholders as a way to prevent hostile takeovers…. So technically Q and S didn’t’ need to give notice i. Success Thresholds: a.1. Rule: a charter or by-law provision altering (state law) principle that majority of votes cast at a stockholders meeting is sufficient to elect directors must be 1. Proxies: Stockholders can vote at a meeting without attending by giving a proxy (instructing an agent to vote their shares). i. efficient action in situations hewn a minority of mangers could not block or adversely affect course set by majority. Provision requiring supermajority stockholder vote to amend is enforceable by minority. Diff between 141(f) and 228(a)? i. v. Normally. Provision requiring supermajority stockholder vote to amend is enforceable only if contained in the certificate. is signed by the manager shaving not less than minimum votes that would be necessary authorize action at meetin a. But underlying purpose of this was to – enable LLC managers to take quick. h. To elect directors the default is a plurality of the votes of the shares represented in person or by proxy entitled to vote (DGCL § 216(3)) b. Centaur Partners. Removing Corporate Directors: The basic paradigm is that stockholders cannot control the board. The default is the majority of shares eligible to vote and the minimum is 1/3. d. Contract: Express contracts between stockholders (or stockholders and the corporation) are enforceable. Quorum: The minimum number of shares that must be represented for a meeting to convene & conduct business. ii. a majority of stockholders can amend on board recommendation. Proxy Fights: Corporate electoral contests are called "proxy fights" because the two sides compete by soliciting stockholders for proxies to vote their shares. Mangers of LLC can take actions w/o a vote IF a consent in writing. Readily ascertainable ii. which was adopted at same time….
17 . 4. loyalty and good faith. represented by the board and other superior agents. but they owe NO duty of obedience to shareholders. i. c.directors should be absolutely fair and candid in pursuing personal interests a. Here.. gross negligence: Proof that directors were grossly negligent in informing themselves (breach duty care).. The Business Judgment Rule: Directors are not liable to the corporation for their decisions if they make those decisions a. will of the wisp majority which would implode should notice be give” a.so defeats the underlying purpose THERE WAS A FIDUCIARY DUTY NOT TO DO THIS – duty of loyalty 1. loyalty. & BUSINESS JUDGEMENT RULE Fiduciary duties within the Corporation a. Castiel would have taken Q out and it would not be a “true” majority supporting the action then b. rather than form a. For the business judgment rule to apply there must have been a business judgment made (an act). If they are protected by the rule. CHALLENGERS bear the burden of rebutting the presumption REBUTTING THE BJR: 1. ii. it does not apply to a board that does nothing. Fiduciary Duties of Directors: The board generally owes its fiduciary duties to the enterprise in the abstract (the corporation). bad faith: Proof that the directors acted out of an ulterior motive (bad faith/lack of good faith).e. Q was appointed and could be removed easily (not fixed) and S was self appointed 2. Castiel was the MAIN MAN and they should have known that… v. i. OR typically…. the board fills vacancies and newly-created positions (stockholders removing directors can simultaneously elect successors to prevent vacancy. Statute should be tailored to say w/o notice by constant or fixed majority i. (3) in the good faith pursuit of the corporation’s interests (duty of good faith – not to act in bad faith). 1) loyalty . Presumption: There is a presumption that directors have acted within their fiduciary duties of care. Meant for situations where the objecting minority wouldn’t be able to block it anyway… …. courts can’t second guess their decisions 2. (not shareholders) 1. i. (2) on an informed basis (duty of care – procedural and substantive). iii. b. Wrong to unfairly compete or divert resources or opportunities to personal use 2.but here …. DGCL § 223. Equity looks to intent. care) owed to the corporation as principal. Officers’ and Employees’ Duties: These are agency duties (obedience. 3. Traditionally operates as shield to protect directors for liability from their decisiosn 1. FIDUCIARY DUTY 1. (1) without conflicting interests (duty of loyalty). courts will scrtunize decision for Intrinsic fairness to corp and minority shareholders e. If NOT protected.the majority WOULD HAVE BEEN ABLE TO BLOCK IT…. presumption that their decision falls within the scope of the business judgment rule. 2) official conduct describes bounds of acceptable conduct for directors in carrying out individual and collective duty to manage corp 2. But do have fiduciary duties owed to corporation. Filling Vacancies: By default. 2. conflict of interest: Proof that directors were personally interested in the decision (breach duty of loyalty).1. i. b. Does not apply to “illusory. d.
Directors may consider interests of other constituencies as long as there is a. Fraud Illegality Conflict of Interest Shlensky v. customers. If so doing “bears some reasonable relation to general shareholder interests” Many states have added “safety statute” a. Or c. Duty of loyalty (you are only supposed to pursue interest of corporation……. He is purusing his own personal interest (He is choosing other interest besides the corporation (principal) 2. f.potential profit corresponds to risk. more provided. Industry statistics ii. Directors acquisence a. Value of group decision making. 1. Director’s “may” consider other interests of suppliers. 18 . “give back to public” ii. Ford Motor Company. g. Desire not to deter directors from taking risks. There is no requirement that directors must consider only financial concerns in mapping out a course for the corp i..or ignoring interest of corporation in making decision – bad faith): 1. Allows directors to consider other constituencies iv. – they clearly don’t match up with corporate purpose d. 7. but this will shield them from court scrutiny if they make a decision perhaps not BEST for corp. Directors have little ability to spread risk vi. Duty of care (substantive – the research and facts (procedural) are out there. iii. Cubs statistics 2. 1) building /investment in other plant and increase productivity ii. shareholders voluntarily undertake risk of bad business judgment after the fact litigation is a bad device to evaluate decisions vii. Wrigley’s personal statements a. Wrigley a. b. Ford says purpose is to “better mankind” (more jobs. BUT iii. 2) cutting prices on cars (sell them for less) iii. burden will shift to BOD to prove entire fairness (see later) Policy Behind Business Judgment Rule i. So YES allowed to do this 3. the court looks PAST Ford’s own personal statements and looks at the entire BOD…the entire BOD still supported this decision and their motives could be good for corporation ( different than ford’s “non-corporate” goals) iv.. “some rationally related benefit accruing to the stockholders” 2. Allege that they should be receiving dividends instead of Ford using $ for i. Relative expertise of directors and judges v. a. In allowing a directors personal preference to sway their position away from corps best interest b. AFTER REBUTTING. Not a requirement. What type of breachs of fiduciary duty does this establish? i. Wrigley’s decision isn’t necessarily against the best interest of the corporation. Other Rules from Case Law i. 6. 1) building/ investment in other plant and increase productivity i. etc.. viii. Delaware . Intrinsic to centralized management separated from ownership ii. Dodge. but they are ignoring them and making a bad decision): 1. employees. so the law should not create incentives for cautious corporate decisions iii. Shareholders of Dodge are suing directors of Ford Motor b. and communities b. He wants to “better mankind”. but was good for outside interests Dodge v. In reality…this could help the corp in the long term (even if there is loss in short term) 1. Interests of Others: The board can make decisions that have an incidental benefit to those not in the corporation as long as the corporation still has the interest of the shareholders in mind (to a certain extent). 3) retaining some of it (54 mill) c.) ii. “create jobs”. 8. Ford has stated his motives i.5.
Ford says purpose is to “better mankind” (more jobs. self dealing. Dividends. corporate opportunity ii. the court looks PAST Ford’s own personal statements and looks at the entire BOD…the entire BOD still supported this decision and their motives could be good for corporation (( different than ford’s “non-corporate” goals) iii. excessive compensation. 4. Del. So it is board’s responsibility to bring litigation claims….suit brought by shareholders i. not doing anything with it…. Incentive Issues: i. Stockholder Derivative Suits: A lawsuit brought by an individual shareholder on behalf of the corporation.) ii. Difference between derivative and direct. 23. Something about dismissal 19 . this will likely be excused) b. more provided. . Direct…injury on SHAREHOLDERS….1: a. Lack of Fiduciary Duty: Stockholders do not have a fiduciary relationship to the corporation (danger of improper motives . Short term losses: Board can incur losses in the short run as long as it is doing so to gain some long term gain. Dodge v. The board was just sitting on the $20.strike suits). 6. Nature of injury 1. Ford Motor Company. There was NO RATIONAL PURPOSE FOR KEEPING THE $ i. Ford Motor Company. Protection of minority sharehlders (especially where a closely held corplll) c. Demand Requirement Del. shareholder PREFER direct. nature of injury 1. ii. Ch. must give back DERIVATIVE SUITS DEMAND REQUIREMENTS SPECIAL LIT COMITTEE 3. b/c harder to win w/ derivative 5.Board magnages businesss and affairs i. Dividends: Courts are not willing to allow a board not to pay dividends because it alleges it needs money sitting around just in case. DGLC § 170(a) Dividends. 141(a)…. sO b/c BOD couldn’t state a reason for keeping money.the corp having failed to do this itself Must make “demand” of corporation – OR show why they couldn’t do it (demand excused) ii. Inspection 2. Voting rights compromised. Economic Incentives: Plaintiff may have only a marginal interest in corp… (danger of improper cost-benefit analysis). i. R. to sue on behalf of corp. 1. Anti-takeover defense. 2.this is NOT HELPING the corp in any way (they weren’t even putting it towards the new plant.not shareholders…. fiduciary duty. Shareholders can bring suit to enforce a right of a corp or of an unicoproated association…. Shareholder must make demand to BOD to bring suit first 1. R 23. Dodge. If you are keeping money. Complaint must allege efforts to get the directors to do the action themselves…and reasons why it hasn’t happened iii. (but if they were the ones involved. a. breach of due care. a. you better be using it for the business (spending it) c.this will come to mean that shareholders must make a demand to the board first. In reality…this could help the corp in the long term (even if there is loss in short term) 1. Dodge v.1………STANDING REQUIREMENTS to BRING DERIVATIVE SUIT i. b.. 2) cutting prices on cars (sell them for less) i. BUT iii. Ch. derivative……injury on CORP…. etc.ii. before bringin action hiself b. Problems with Derivative Suits: a. 3) retaining some of it (54 mill) a. BOD can’t give any explanation ii. DGCL § 141(a). Incompatible with Corporate Governance Model: Stockholders do not have the power to make corporate management decisions (including decisions to sue). Dodge 1. which they took out loans to have) d. Court can’t find one b.
Demand refused: Stockholder made a demand on the board which the board rejected in breach of its fiduciary duty.Rales. 4..g. Stockholder must plead either: i. takes control of a derivative suit). Decision to bring suit against Easco would have impacts on Danaher’s directors….OR b. the board cannot be trusted to vindicate the corporation’s rights. did not follow adequate procedures in reaching their decision…. Name independent members to the board 2.board must be able to do so 1. (1)It is not disinterested and independent in the decision to accept or reject demand (e. The claim does not challenge a board decision (BJR wouldn’t apply at all) iii. 1. the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.In practice. 2. or Demand futile(excused): Stockholder made no demand on the board because the board is so conflicted that any board decisions to reject demand could not have the benefit of the business judgment rule. (2) The business judgment rule does not protect its earlier decision that is challenged in the suit (e. ii. independently and 2. How it works…As soon as P Files derivateive suit Or Makes demand on board a. This is really the “independent and disinterested” prong of Aronson (above) and what you are looking for in that situation. (Rales Test)……OR ii. apply the rales test i. Independent Litigation Committee: Attempt to remove taint from the board’s decision to dismiss the suit: 1. This could happen if and when the board a. but that if you sue the entire board and they are still sitting. 1.g. and (2) That relationship is material to that person.” a. b. A director is considered interested where he or she will receive a personal finaical benefit from a transaction that is not equally shared by shareholders b.1 (i.e.c. the challenged decision amounted to self-dealing by a majority of the directors who voted on it). Interest a. FOR EXAM!!!! Professor thinks Rales should be the tests. 1. Rales applies and the test is “whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that. you must cite Aronson. means that a directors decision is based on corporate merits rather than extraneous considerations or influences Other directors have pretty sweet jobs based on relationship w/ Rales so they are not sufficiently independent 9. Aronson Test: To establish that demand is excused as to a claim against the board. decision being challenged was made by board of different corporation (BJR wouldn’t apply to current BOD c. Board appoints a supposedly “independent committee 20 . 7. RALES TEST: In doing this…. as of the time the complaint is filed. Special Litigation Committees a. disinterestedly 1.e. Independence involves two things (1)That the person in question cannot be presumed to make an independent decision. The Problem: If a stockholder establishes standing under Rule 23. Constitute the independent members as a committee 3. Delegate the board’s authority to investigate and conduct litigation (including dismissing) to the committee. Rales Test: As to the claims above to which Aronson does not apply (see above) . can the board ever reassert control under DGCL § 141(a) and dismiss the suit? i. ii. b/c they are EASCO directors as well as Danaher directors 2. the shareholder should first execute a written “demand” the board to bring suit itself (to confirm that it won’t).so Aarson only matters where (1) the Board Made a decision but they were (2) both non-interested and indepent so Rale would not apply b. Ideally. A majority of the current BOD was not involved in challenged decision (BJR doesn’t apply to current BOD) ii. and Caplin… 2. The Aronson Test for Excusing Demand: a. for the Aronson test only the second prong matters B/C Rales governs all cases where the first prong might turn on facts that do not meet the first prong…. Plead with Particularity: A stockholder trying to usurp the board’s power must plead with particularity the predicate for usurpation: i. Contemporaneous/Continuing Ownership: Plaintiff must have owned his shares of stock at the time of the transaction of which he complains and he must continue to own the shares until the moment of judgment (sometimes excused by some courts if there was a merger and P was compelled to give up his shares). WHERE NOT TO APPLY THE The Aronson test: in these cases. i. a majority of directors are materially beholden to a self-dealing officer). d. Independence a. decision was so irrational as to be outside the bounds of reasonable business judgment 8. plaintiff must plead particular facts that establish (as to the hypothetical decision to accept or reject demand to sue on the claim) A “REASONALBE DOUBT” THAT… ( that the board could not be expected to pursue a valid claim because): i.
1) corps stock ledger 21 .no stay DERIVATIVE c. Non-independent board appoints (and can dismiss) the "independent" committee. Pre-requirement: ONLY when demand is EXCUSED (futile) 1.courts urge them to first find these facts by demanding company documents…which becomes another issue entirely i.ii.this is blatently obvious they are trying to protect the board… ii. Can review any documenst that have a reasonable bearing upon shareholders investment a.. 2. “independenet directors” will still look to protect other directors b. 2. General Rule: court will stay proceedings and discovery while a special litigation committee makes its determination. A) 10 days before meeting of stockholder must prepare complete list of stockholders entitled to vote list shall be “open to examination” by any stockholder for “any germane purpose” 10 days prior to the meeting on i) a reasonlbe accessible electronic network. a. b.. Corps do this b/c 1.” (DGCL § 220)…. d. STAY of PROCEEDINGS AND DISCOVERY during Special LIT a. investigative procedure.. will be protected by BJR (court would only look at Step 1 in these cases….has right during usual hours to inspect for any proper purpose to make copies and extracts from (Proper purpose – “ reasonably related to such person’s interests as a stockholder “) 1. 1. a. and conclusions only if and when it moves to dismiss. A) definitions ii.. WHY does the court refuse to grant a stay?. i. List of Stockhodlers entitled to vote – 219 1. b/c if BOD could hypothetically make decision themselves (they are independent and disinterested) then their decision to use an independent committee . and the committees subsequent decision. 3. If shareholder can prove that under no circumstances the decision would be reasonable under the BJR then we should move right on…. Independence. B) stockholder. (ie) independent committee’s decision has NO protection from the business judgment doctrine 10. good faith and. 1. courts more likely to afford “independent” committees decision to dismiss protection from the business judgdmnet rule iii.committee is appointed by directors.Normally the court would wait and see what the committee would say. Judicial Discretion: Even if you passed Step 1. Biondi Exception: If the plaintiff can demonstrate that waiting for the committee to decide is futile because its business judgment could not be respected under Zapata.no fiduciary breach…) 2. Structural bias (it is socially hard for directors to judge their colleagues dispassionately) a. Court still has discretion to exercise independent business judgment and reject the committee’s decision to dismiss the suit. Problems w/ the independent committee: 1. i.. Burden of Proof: ILC bears the burden of proving the validity of its business judgment 1. but in this case the committee is not sufficiently independent and the court would not trust its judgment regardless of what it decided a. then go to step 2 iii. SUITS INFORMATION RIGHTS PROPER PURPOSE Shareholder Information Rightsshareholders have difficulty w/ pleading w/ particularity (in complaint) b/c they don’t have facts to show mismanagemtt…. The committee moved for a stay w/o EVEN INVESTIGATING!!!. provided that a means to gain accesss Is present at place of business corp can take “reasonable menas” to make sure unauthorized 3rd parties can’t get it ii) during ordinary business hours at place of business must make it reasonably availbe upon willful neglect or refusal to produce list or make available when it involes election of directors Directors wont’ be eligible for office c.. e. court disregards the comities dismissal recommendation and allows suit to proceed………. Zapata Two part test to see if ILC committee decision not to litigate falls within BJR: i. b. 2. a court will allow the plaintiff to proceed. on written request. b. C) stock ledger shall be only evidence as to who are stockholders by this section 11..2 steps: ii. but must prove business judgment ……. considering challenges to its good faith. General Rule: Shareholders have the right to inspect corporate books and records for a “proper purpose. ii. Usually these committees will vote to dismiss 2. 1... many of whom will be “interested” in keeping their arses covered… 2. If demand is excused. reasonable investigation a. independence. Inspection of books and records (directors and shareholder)s 220 i. an independent litigation committee can move to dismiss. If answer to any of these is no.BUT IF answers are all yes. b) 1.
22 . ii. pursuit of unrelated personal goals . 1. Common Legitimate Uses of Inspection Rights: i. Can restrict the scope of the inspection. Scope of insepctions 1. Security First.gain access to trade secrtes to sell (rarely do they admit a bad purpose though) 3. Stockholder…. Schoon. Who has the Burden of Proof of Proper Purpose w/ respect to different items: a. 1.Shareholder only has to have credible showing that thare are legiistimate issues of wrongdoing 1. 2) subsidarys book to extent that a. What is a proper purpose (2 AND 4 ARE NOT) a. 2. Predicate for Inspection: (1)Sworn written demand stating (2)proper purpose reasonably related to interest as stockholder (DGCL § 220). if necessary. 1. or otherwise.1. that there are legitimate issues of wrongdoing.initiate tender offer for our shars i.court may prescribe limitations or conditions w/ reference to the inspection a.why the shareholder does need it c. Court’s routinely require stockholders to execute a confidentiality agreement with company. ii. iii. why arnt dividends being paid d. 1. c. Must prove FOR EACH DOCUMENT YOU REQUEST…that that document is i. but is NOT required to prove by a preponderance of the evidence that waste and mismanagement are actually occurring. Security First. It must be a credible showing through documents. A. i. 3.as long as shareholder is “motivated by desire to maximize investment” ii. D) director’S Right to inspect Problem with Inspection: The issues relating to shareholders' inspection rights result from a tension between the role and interest of a shareholder i.. Suit against corporation a. 2. stockholders may need information to determine the value of their shares. 13.NOT PROPER Eg. Investigation of Wrongdoing: Information to persuade fellow stockholders to get rid of the board or to make an argument for derivative standing under Rule 23. Non-Fiduciary: Shareholders cannot be presumed to be acting for the benefit of the corporation. Valuation and Sale: In closely-held corporations. ii. 12. a. Other records(e. copr has possession iii. 2. price is accurate c. 1. a stockholder has the burden of proof to demonstrate a proper purpose. 4 catagories (2 of six listed below are not proper) i. is “essential” to the proper purpose it has stated. mismanagement b. each item). Stock ledger and stockholder list (Records of the current stockholders and the history of transfers. To its stated purpose b. i. Not about whether wrongdoing has occurred…. 4) anything else 2.b. 3.. just b/c request is for list of fellow shareholders for purpose of bringing suit against them doesn’t render this an imporoper purpose – solicity co-plaintiffs ii. Essentiality: Stockholder bears the burden of proving that each category of books and records it requests (and. 220© . Ownership Interest: Shareholders may be legitimately interested in all corporate information as holders of residual profit and control rights. “essential And Sufficient” ii. even if purpose is found to be proper b. just b/c the request is hostile doesn’t mean purpose is not proper. board minutes. Solicitation of proxies – most common reason shareholder would want it b. Evaluation of investment Determine if a.. Rule: In a § 220 action. Chancery Jurisdiction: § 220(c) gives shareholders the right to bring suit on the issue of inspection and court of chancery has exclusive jurisdiction.g. Security First. hostility to management a. testimony. Judicial Balancing: Court has duty and power to limit both the scope and the terms of disclosure to balance the stockholder’s stated purpose with protection of the corporation’s interest in protecting its confidential information. logic. financial records and contracts). deal w/ shareholders as investors Contact fellow shareholders…solicit proxies. i. Corporation…burden is to show why the shareholder doesn’t need it i.just a matter of whether the shareholder is trying to abuse his right to inspect….
however. 4. As to director’s/officer’s interest b. Approved in good faith by shareholders. Must be i. Financial reports for shareholders 1. Except for requirement that corp sends shareholders an annual report 6. So court will ultimately differentiate on where confidentiality will attach BASED on WHO steel or SchooN wishes to share the information with 5. Burden of Proof Reversal: DGCL § 144 reverses the burden of proof and may restore the business judgment review in the absence of a controlling shareholder if 1. vi. SCHOOON was lying…. Troy Corp a. iii. it UNDERMINES the proper purpose…b/c if you can’t tell others about what you find… how can you maximize your value? ii. a. List of “non-objecting beneficial owners” can find list of people that perhaps have shares in trust…. Troy Corp 3. directors right of inspection…220(d) 1. or. “concerned w/ investment return” 2. Court knows that it is improper purpose to give confidential information to competitors – worried about industrial espionage a. Unless they have improper motive…. Schoon sues Troy under 220(d) – directors right to inspect a. Pursuti of social and/or political goals – NOT PROPER 1. Parent/subsidiary relations start page 259 23 . If unrelated to corps business for other reasons…. Transaction is fair to the corporation at the time authorized 15. 4. Schoon v. Once the corp attaches conditionality to this.4. There are no financial records you can automatically get w/o a request 2. “germane to his economic interest as shareholder” ii. i. Disclosure to the shareholders or disinterested of material facts: a. The Duty of Loyalty in Corporations a. iv. Rule: Self dealing/interested transactions are voidable by the corporation unless the controlling shareholder can prove entire fairness to the corporation. Schoon v. CONTROLLING SHAREHOLDERS CONTROLLING SUBSIDIARY 14.(interest in competitor) 2. Claimed purpose: “to evaluate share value” i. v.if court thinks you are lying about your purpose. As to contract/transaction 2. Many times directors have automatic/absolute right of inspection b/c they need more info than the shareholders do in general a. Authorized by majority of disinterested directors 3. But troy argues that schoon only wanted to look at recoreds b/c he would then give steel information about how much they could sell their shares for to third party competeitors of troy? i. then you won’t get access to your demanded information ii..IF “evaluating share value” is a proper purpose…then ability to disclose must be attached iii. Ramification ….
A controlling stockholder has no general duty to (1) share any control premium with the corporation or other stockholders. looking at above results. vii. They can exercise these powers out of pure self-interest or caprice.therefore they lose on this issue .just as it would be under any other circumstnace 2. 1st…court will automatically apply BJR to BOD decisions… ii. Standard Applicable to Review of Controlling Stockholders’ Actions (Sinclair): i. plaintiff fails burden b/c Levin can’t prove any loss of business opportunity due to the cash drain from sinven v. They are still paying 3% of dividends to the minority shareholders. .. Usually arises in case of not-wholly-owened subsidiary. ResultS: Sinclair gets 100% benefit from international…97% loss from sinvent i.NO protection from BJR…. 1..meaning that the benefit is PROPORTIONAL….. Sinclair wont’ be able to prove “entire fairness”….i..-. Interested-controlling-stockholder transactions are evaluated for entire fairness.in this case.failure to enforce entire contract was not intrinsically fair) leads a KEY OBSERVATION – WHEN DO (majority) SHAREHOLDERS HAVE FIDUCARIY DUTY to minority shareholders? a. the 3% of the minority shareholders in Sinven 4. 2. information. P meets burden of showing no reasonable business objective…. a. if they do. 18. Contract w/ international 1. This is NOT PROPORTIONAL b. 1st. AND to the detriment to. burden shifts to D to show fairness (-sinclair …. economic) as personal property. (1)uses its domination to 2. so if minority shareholders maybe think its too low or too high. 1. Controlling Stockholder Exception: A stockholder who actually can and does exercise control over the management of the corporation is held to fiduciary duties in doing so a. Excessive payment of dividends 1. Sinclari Oil Corp v.burden shifts 2. once minority shareholders show self dealing. Minority shareholders get 0% benefit from international and 3% loss from sinven ii. plaintiff fails burden b/c didn’t show Sinclair received a benefit at detriment of sinven minority shareholders a.Parent has fiduciary duty to other shareoldres of subsidiary b. General Rule: Stockholders are not fiduciaries when they are acting as stockholders.but does not apply in situations where parent company 1. 2. Plaintiff has the burden or proving self-dealing. then BOD has no BJR protection … burden shifts to D to show “intrinsic fairness” iii.as long as you have the largest single interest and the others are fragmented viii. or 24 . not as fiduciaries for the corporation. Dividends prevention of expansion? 1. b. SHAREHOLDERS SALE OF CONTROL What is “controlling block? If he has the power to use the assets of a corporation as he chooses NOT necessarily “majority” Even a minority shareholder owning 30% can control if they have the highest amount….Dominated board i. when parent company dominates entire subsidiary board…unless minority shareholders can ratify the self-dealing transaction. So BJR applies and BOD is protected iv. b. Therefore. SELF DEALING… CONTROLLING vi. (1)by virtue of its domination of the subsidiary causes the subsidiary to act in such a way that the (2)parent receives something from the subsidiary to (3)the exclusion of.. (3) the detriment of the subsidarys minority shareholders . they can argue self dealing and ask for court scrutiny……Often hard to make this arugment…see Sinclair above… d. the minority stockholders of the subsidiary. Business Judgment Rule normally applies BUT ii. 4. General Rule: Stockholders hold their powers (voting. When they basically control the BOD…. Dividends………Controlling parent can often control dividend policy. Merger…………When parent wants to turn subsidiary into wholly owned subsidiary by buying out minority shares and merging subidary into partent…………. (2)benefit from its control over a subsidiary to 3.Just need to make sure it is fair price to minority c. Self dealing between parent and subsidiary………. 17. This is where SELF DEALING can come into play…disproportionate transactions 16.ANALYSIS here centers on PROPORTIONALITY i. International reciveved benefits from contract (100% benefit to Sinclair) but sinven didn’t force international (Sinclair) to uphold its side of the bargain to sinven (which although screws 97% Sinclair…more importantly…it screws over the 3% of shareholders in sinven) a. Sinclair Rule: Self dealing occurs when the parent.. General rule – controlling shareholder can sell his stuff for a premium and keep premium himself 1. Levian . court can strike it down if it was not fair to them ii..
Meinhard. 1. planning to abuse control and loot the corporation’s property. Essex. where he was just a stockholder (separate from his duty as a bank president) considering sale of his personal share 21. This is not the standard for DIRECTOR liability—there the standard is GROSS NEGLIGENCE 2. Investment companies . 4) buyers lack of interst in how corp operates 23.i. Factors considerd a.when corps sole assets are liquid assets (readily calculatable) and controlling shareholder sells for more than all of these are worth….Unlike in the way it happened.(continued next page) 19. SALE OF VOTE a. Harris v. Tryon v. You can’t “sell” your office to someone… ii. 22. 3) buyers insistence on immediate posssions d. Generally (aside from sale of stock) i. Applied to sale of stock control PARENT/SUBSIDIARY 25 . Looting: Someone might agree to overpay for bare control (much less than 50% in a publicly-traded corporation). Exceptions… may NOT just sell your control…SALE OF VOTE. it aids and abets the looter’s subsequent breach of fiduciary duty. Carter Rule: While a person who transfers corporate control to another is surely not a surety for his buyer. he didn’t drive down the minority shares value…. they can sell for whatever price they want. provided they act in good faith (don’t drive down the minority shareholders value)…here. Can’t sell to one who intends to loot the corp by unlawful activity i. If a controlling stockholder recklessly sells control to a looter. Correspondingly you can’t sell stock where that would be the result b. Smith Ramifications: SHAREHOLDER duties DEPEND ON CONTEXT a. b. 1) buyers willingness to pay excessive price b. a. SEPEARTE PAYMENT.just b/c he can get a premium ii. ix. when the circumstances would alert a reasonably prudent person to a risk that his buyer is dishonest or in some material respect not truthful.he is acting as agent for bank…and accordingly has fiduciary duty to look out for ALL the shareholders….when you may NOT just sell your control……. 20. Logically you would think they should share this premium with the minority shareholders but at common law…this is not the case…. The duty of care imposed is a normal negligence duty here—knew or should have known. Someone who merely holds a fiduciary office (e.in fact he did the opposite Exceptions………." whose opportunity is it? Tryon. director) cannot sell it. 2) buyers excessive interest in the liquid and readily saleable assets c. and generally to exercise care so that others who will be affected by his actions should not be injured by wrongful conduct. a. Problem from his supplement – what if the original buyers approached Smith just b/c he was president and “seemed like he was in charge” i. Looting a. a duty devolves upon the seller to make such inquiry as a reasonably prudent person would make. b. Why does court reject Tyron (as a majority shareholder) having a fiduciary duty to minority shareholders in selling his stock? b/c it is his profit…he is selling what he owns…. Sale of Fiduciary Office: Controlling stockholder can sell stock whose voting power allows exercise of control. In this situation…. 1.courts give them wide latitude b/c they had the foresight and capital to acquire the controlling block (b) allow any other stockholder to participate in a sale of stock.g. 24. Corporate Opportunities: If a buyer approaches a corporate officer (who also holds a controlling stock interest) proposing to "buy the company.
1. (simlar to essex) 2. Whereby buyer doesn’t want to wait till next meeting to get control of BOD so seller and buyer arrange that the BOD members buyer controls will resign one by one . Yates a. court is only bothered by above approach when it is less than majority seller doing it…. Contract provided that there would be a scheduled election whereby immediate transfer of control of the BOD would go to Essex (by the control that Yates had) b. Essex Universal Corp. Sale of majority of stock – COURT is NOT bothered…. Courts find that funds should be split between all b/c i. Seriatim resignations – (not bad if this would be result in upcoming election anyway but here it is minority) 1.. Agency versus Business Judgment Rule . diversion of collective opportunity a. Therefore court won’t question this approach when it is a majority seller shareholder doing it b/c then the buyer would be able to get control anyway iv. if he sells his shares and takes action to have that majority resign and be replaced by buyers preferred directors. where control block is much less than a majority of shares but seller happens to hav unusall influence over composition of board ii. 1) the control premium was really a business opportunity that the corp should have purused as a coproation (rather than just the controlling shareholder) ii. this can equate to sale of office ii.3 IS ENOUGH to elect the entire board…then this is NOT A BREACH OF FIDUCIARY DUTY…. where contract provides for additional payment if seller delivers control of board (similar to essex) Small minority i. they will still be able to get the entire board). Even when shareholder has only small control of board. but controls majority of BOD. Separate payment for control – per se illegal a. each replaced by Buyer’s preferred directors iii. “working control” block 1.b/c wouldn’t be contrary to public policy 25.3% is NOT ENOUGH to elect the entire board….i. This IS ESSEX (see below) a.then this is circumventing the yearly election process which affords minority shareholders to share their opinion as to what should happen….. IF 28. 2) where buyer initially tries to buy most or all of the assets (and fails) and then resorts to buying controlling shareholders interests c. 1. Yates directors (which he controlled) would resign one by one and essex directors would replace them c.b/c this is just speeding up the process ( if essex buys it and waits. 3.Comparison: .b/c then the buyer is getting control he wouldn’t’ even be able to get if he were made to wait till the next meeting!! 2. When you get extra money on delivering control of board 1. 2. BOD’s DUTY OF CARE REVIEW – GROSS NEGLIGENCE 102B7 can exculpate though 26 26. v. Whereby one by one.This is to detriment of minority stockholdrs…Yates defense holds d. If 28.This is NOT to detriment of minority stockholders…Meaning Yates HAS NO DEFENSE…. Difficult to determiene b/c you don’t’ really know whether the control block will eventually allow buyer to control all of board…. When it is less than majority…but enough that buyer could technically control the BOD… 2.. 3.
iv. 2.g. DGLC § 141(e)). Aftermath of Van Gorkom: 1. And then in 2 hours BOD approves cash – out merger 2. is fully protected in relying in good faith on company records. Gives his schpiel on doing the merger b. ( i. in addition. 141e…says BODs are safe if they. 2) failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve it 3. in performance of duties. Could they rely on Roman’s study…$55…141e says yes … b. lawyer must not give unreasonable advice in light of applicable law). Standard: Gross negligence (minimally reasonable person) b.then it will be hard to call them out for the decision they make EXCULPATION (corp won’t sue you. but can’t protect you from third party lawsuits) 27 . . Rule: A director is reasonably informed if the director considers the material facts that are reasonably available. BOD. Standard: Simple negligence (reasonable person) b. Procedural: Agent must not make decisions without reasonable care to gather information (e. . DGCL § 141(e). Van Gorkum.27. ii. Van Gorkom – HELD THAT directors could be liable for gross negligence (Holding overturned by statute below) 1. c. Under the business judgment rule. As long as BOD is not GROSSLY NEGLIGENT procedural care…. VG calls meeting…quick meeting 20 minuts a. to exercise any special skill that he has.that you actually believe it 2.they adequately inform themselves in using the right “process”…. 141 says in making the decision. rely on internal records/reports a. but that is IRREVELANT to whether they used proper care in making the decision b/c they still did not use proper care i. Board breached their duty of care stockholders by a. to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform and. lawyer must diligently research applicable law). Business Judgment Rule – PROCEDURAL ONLY……CAN’T REVIEW SUBSTANTIVE DECISIONS a. they can rely in good faith on the records they have…but does NOT say whether that will be enough ( for the limited things they are relying on ) to make an informed decision v.g. Smith v. reliance on information requires good faith…. Procedure Only: The directors’ duty of care in making business decisions extends only to informing themselves. Smith v. all that is required is that they properly inform themselves – just avoid Gross negligence here iii. Agency: RST § 379. A paid agent owes the principal a duty . Substantive: Agent must not make decisions that are unreasonable in light of information actually or reasonable available (e. etc. 1. 1. Delaware legislature added 102(b)(7) very quickly to allow corporations to exculpate directors for gross negligence – delaware doesn’t want a van Gorkon case to happen again…wants to protect BOD 2. in good faith. No reported cases of liability (there might be settlements) 3. 28. a. there is no liability for an unreasonable decision based on full information. 1) not informing themselves of all information reasonably available to them and relevant to their decision to recommend the pritzker merger b.
Fredericks has exculpatory provision similar to §102(b)(7) ii. 1.d disclosed to directors. which automatically exculpates them from (1) so there is no point in going further b/c the only thing the that P’s could win on would be 2 or 3…lets not waste our time 32. Or 3. Evidence supporting gross negligence only…. 1. The plaintiff must then show the nature of the breach (if any) by each director by a preponderance of evidence. but then seek money damages… iii. the board (as a body) becomes irrelevant. Explanation of 102(b)(7): Permits exculpation by certificate only for monetary liability to the corporation for breach of fiduciary duty…………. if anything the BOD did (BASIS FOR LIABILITY). Application to Emerald i. Equitable relief ii. 2) fair price a. Duty of loyalty b. since there was no untainted board action. And then SECONCD. § 102(b)(7) a. even if wasn’t entirely fair… INDEMNIFICATION(corp reimburses you for lawsuit brought by corp or third party) INSURANCE (last page) 28 . Due care…. we won’t let this go any further…. So IF the pleadings ONLY plead a. did not breach duty of loyalty. DGCL § 102(b)(7). initiatied. BURDEN ON DEFENDANT i. Then at the pleading stage. BURDEN OF PROOF: i. Fully informed shareholder approval 4. 102(b)(7) is a way to prove for individual directors that they are not liable for money damages once a breach of fiduciary duty has been proved against them at trial. and who is liable among each director.more on entire fairness anlysis w/ 102(b)(7) a.corp must have it in COI c.look at this FIRST to find out what. If the board cannot prove that the transaction was fair. 2. Unlawful dividends (§ 174) b. Fredrickers Shareholders say it was breach of fiduciary duty for the BOD to have …breached their duty of care iv. Malpiede v. look at exculpasion (102(b)(7). within what you found in (1) d. negotiate. Shareholders initially seek to enjoin the merger. BOD can still absolve itself by showing iii. at worst. 2. ii.. 102(b)(7) is an affirmative defense but is NOT automatic…. All the board has the burden of doing is raising the affirmative defense of 102(b)(7) …. even if BOD fails entire fairness…. Breaches of duty of loyalty and breaches providing an “improper personal benefit” to the fiduciary iii. if anyone b. so they would still be absolved under exculpation. Relates to assets.BOD must represent evidene that they didt their duties in both aspects c. Which will show adequate execution of duty of procedural care. approvals from stockholdrs 2. 2. Intentional wrongs (bad faith. Both must be examined AS A WHOLE…to demonstrate either…. market value.ENTIRE FAIRENSS ANALYSIS…. that they acted in good faith. Steps for applying Exculpation…. Burdens of proof? 1. each director can try to show that any breach she committed amounted to gross negligence. intentional misconduct. 3. Exculpation (absolving MONETARY liability): The corporation prospectively gives up claims against fiduciaries for fiduciary breach.. 1. Directors have evidentiary burden of proof by a preponderance of the evidence that if they breached their fiduciary duties. b/c all the board needs to do is raise the defense (and nothing more – this is the purpose of 102(b)(7) …to take burden off the directors).ONLY APPLIES TO DUTY OF CARE VIOLATINOS…… a. knowing violation of law) iv. earning. How it was timed. not third party claims. And fail to plead adequately a.s future prospects. anything else affecting stock price 3. corporation (like everyone else) can only give up its own claims. Bad faith 3. Townson i.. structed. Even the Certificate cannot exculpate against i. d.. 31. Sufficient independent (not Hall) director approval 2.29. First look at if it was a FAIR DECISION. only breached duty of care. 30. DISMISSING CASE ON PLEADINGS…In the context of pure due care violations. Emerald Rule – ONLY IF the decision fails the entire fairness analysis must you look to the indemnification provisions………SEE 9© below…. Has 2 basic aspects 1. If the certificate contains a "102(b)(7)" exculpation provision. 1) fair dealing a.
• • • 1. c.where corporation is suing a director ii.Termination of suit doesn’t create presumption that they were bad Applies to when someone. DGCL § 145(a). 2. A) corp can indemnify by reason of fact that person is part of corp (or list of other things)… IF The person acted in good faith (see next page) and mmanner reasonably bleiveed best interest of corp AND No reason to think actions unlawful HOWEVER………. and in some cases only get defense costs (not judgments or settlements). you will still be reiumbusrsed pro-rata for the ones you won on in Delaware . Two situations i. or IN RIGHT” of corporation…. indemnification may only happen at the discretion of the court . Third Party Claims (third party suing director): The fiduciary must have believed in good faith that he was acting in (or not against) the corporation’s interest. 1. DGCL § 145. Mandatory Indemnification: Mandatory indemnification given only to the extent a fiduciary is successful. Indemnification: The corporation agrees to reimburse a fiduciary for the costs of defending and paying the consequences of claims against that fiduciary for fiduciary breach (acts or omissions). such person shall be indemnified against expenses (including attorneys fees)………. but still “technically” loses (court finds liability) then he is not indemnified 4. i. not third party claims. when director is “successful on merits or otherwise” 1.D can get litigation expenses if D has settled BUT NOT if he has been found liable 3. a. DGCL § 145(b).102(b)(7) Indemnifcation . for a settlement payment made by d to the corporation c. 1.Requires indemnification if they are successful on merits b. CL § 145(c). 29 . 2.Merritt-Chapman & Scott Corp. but paying for them when the bill comes a. 1... The corporation prospectively gives up claims against its fiduciaries for fiduciary breach.e. OR 4. besides the corp. C) if a former director was successful on merits under (a) or (b). PERMISSIVE Indemnification: (don’t necessarily have to be successful) 145(a) and (b)………. (A) and (b) do NOT require success on merits but there IS a requirement that specific factual prerequiests be established as a condition for the indemnification b. “or otherwise”…………Director raises defense of SOL and wins on technicality… (not on merits) 3. v. amount in question is payment made to corp in derivate action iv.reimbursement – not forgiving liabilties. Settlements or judgments . D pays a fine or penalty…wehre policy behind law precludes indemnification.. ii. but if the fiduciary loses case. but we will let you off the hook a. D is found to have acted in knowing violation of a serious law 2. a judgment on behalf of the corporation OR b. Derivative suits – WHAT CAN THE D RECOVER THROUGH INDEMNIFCAITION.CAN’T INDEM WHEN a. ONLY APPLIES to lawsuits brought “BY. Fines and penalties . is suing the corp or a director personally for their actions 33. Corporation’s Claims (corp suing director): Fiduciary must have believed in good faith that he was acting in (or not against) the corporation’s interest. expenses .. to prevent circular recoveries (B/c these would result in circular payment) 2. A corporation (like everyone else) can only give up its own claims. “on the merits” ………. b. If you are successful on some but not on others. B) corp can indemnify person who is or was or is threatened to be made part to procure judgdement by reason of fact that the person WAS part of corp (or list of other things)… i. Limits on Permissive Indem…. © applies ONLY where there has been a prior proceeding that determined his success…then he can be reimbursed for expense 35. d. a. Wolfson ii.?.do NOT permit corporation to indemnify a director or officer for a.May be indemnified as long as he acted in good faith 34. 1. i. The corporation agrees to reimburse a fiduciary for the costs of defending and paying the consequences of claims against that fiduciary for fiduciary acts or omissions. iii..Win at trial on the merits 2. “success” can sometimes mean a big settlement…provided the D has not conceded liability…If Director doesn’t have monetary penalties. What about multiple counts? a. ii.. corp has bound itself by contract to indemnify…but Can’t run awful of statutory prohibition (cant ditch good faith) Differnce between © and (a) and (b) a. Difference between Indemnifcaiton and Exculpation Exculpation – corp says we know you would normally liable to US. D is found to have received in improper financial benefit 3.
and this is what owens has doen 1. “pursuant to law” create a presumption of good faith whereby NO INDEPENDENT person would have to make the determination… a. Good Faith Requirement— a. b. i. 1) majority vote of directors who are not parties to such action b. DGCL § 145(e). 2) by a committee of such directors designated by majority vote d. Corp CAN extend indemnification to require “rebuttal presumption of good faith” …but this is the maximum permissible leeway you can cut them. Amending the bylaws or certificates eliminates only prospectively. E) expenses may be paid by corporation in advance on “recepti of an undertaking by or on behalf of such director” 1. 39.” 38. Can allow independent legal council to make good faith determination f. Wherever memorialized. 3) IF there are no such directors. To repay the full amount if it is determined he was bad 2. covering the costs of defending and paying the consequences of claims against that fiduciary for fiduciary acts or omissions. OR c. an indemnity commitment is always deemed a contractual right of the indemnitee. Courts are likely to use this to invalidate or refuse to enforce contracts that are inconsistent w/ public policy reasons for allowing indemnification a. i. Current Directors and Officers: The corporation can advance expenses if the indemnitee commits to repay the corporation if eventually found not entitled to indemnification. 4) stockholders F) xxx 1. bylaws. G) corp can purchase and maintain insurance on any person who is or was part of the corp… 30 . And c. i. Ad Hoc: Corporation can decide to indemnify without prior obligation to do so. In this case a. NUFI didn’t try to rebut the statutory presumption of good faith (which is the most leeway you can afford your directors – presumption…) b.36. Advancing Expenses: a. as long as it is consistent with the policies expressed in other parts of 145 i. contracts with fiduciaries. Owens 37. Owens Corning Rule: A corporation cannot avoid the good-faith requirement under DGCL § 145(d) through provision of an alternative basis for indemnification. the ability to provide indemnification is constrained by its corporate form as governed by the law of Delaware. Indemnity Obligations: Corporation can obligate itself in advance by certificate. But permits indemnification on terms other than the as set forth in the rest of 145. Corp can forward payments to director as trial goes on as long as he agrees to repay them at end if found liable b. National Union Fire Insurance Co. Owens v. or all three. Extra Shield – REUBUTTAL PRESUMPTION OF GOOD FAITH a. Or e. even if the relevant determination is not made 2. Determination OF GOOD FAITH shall be made by a. 2. 1. DGCL § 145(g). Corning v. by independent legal counsile i. A BY – LAW can. Or g. Others: As corporation “deems appropriate. i. Insurance: The corporation buys an insurance policy for a fiduciary. Mechanisms and Nature of Promises to Indemnify: a. as long as there is a technical “success on the merits” (settlement) b. So Good faith may be presumed by owens by-laws. Can’t do away with the good faith requirement ii. D) indemnifications under (a) and (b) can only be made by corp on determiatinon that person has met the applicable standard of conduct set forth in 145 (a) and (b) 1.
. In Re Walt Disney i. most business decisions in a corporation should be made by those agents without the board's direct knowledge. i.but this was NOT A CONSCIOUS DISREGARD OF DUTY or RISK…must be a CONSCIOUS (they KNEW they weren’t doing the right thing) DISREGARD 1. Information Systems: Directors must be satisfied that systems exist to get relevant information to the board. Monitoring Activities: A director must attend board meetings and understand resolutions and other materials delivered to or considered by the board. Distinction: i. Elements of Monitoring i. Limits of Board Monitoring: The board's primary role in a large corporation is to confer authority on agents.Total failure to establish systems of information and control (disconnecting the telephone). a relative or friend) ii. Stone v. 2. Too much board involvement is inefficient. Lack of Good Faith: No attempt to pursue the corporation's interest. Just 2 months of bad monitoring is not “sustained and systematic” enough d. Caremark. a. But still protected by exculpation 102(b)(7) ii. b. 1. Rule: Inattention moves from gross negligence to a lack of good faith when it is so egregious as to suggest that the director did not understand (or did not take seriously) his duty to oversee management of the corporation. 3. a.BAD FAITH (lack of GOOD FAITH) – never exculpated principal in all matters connected with his agency.Conscious failure to monitor the results of such system (refusing to answer the telephone) i. Duty to Monitor………. DUTY TO MONITOR 40. i. Unless otherwise agreed. a. They weren’t even TRYING 2. 2. DIRECTORS liable IF: a. 1. Yet another way – if your system is producing troubling results or missing things. Ideally. Disney.. Agency: RST § 387. Basic Rule: Directors have a duty to keep reasonably informed. So directors weren’t liable 31 .Bad faith or lack of good faith is BEYOND THE STANDARD OF GROSS NEGLIGENCE 41.g. Suing for 1. But court thinks otherwise – these facts lend themselves to a lack of care / disloyalty…. a. 1. This includes a continuing duty to monitor to make sure they get the information they need and to pay attention to the information they get. Inattention to the duty to serve corporate interests. iii. an agent is subject to a duty to his principal to act solely for the benefit of the 42. Lack of Good Faith: Decisions not motivated by the corporation’s interest (even if not motivated by someone elses). Bad faith: Decisions motivated by a desire to serve interests other than the corporations (e. Shareholders suing BOD of Disney ii.VIOLATION = LACK OF GOOD FAITH 44. Almost equates to Recklessness (beyond gross negligence…which is shielded by 102(b)(7)) 43. There are two kinds of subjective motivations that violate this duty: i. It is one thing to try and fail and it is another thing entirely to no do it at all. 45. Here. Gross Negligence: Slipshod attempt to pursue the corporation's interest. – CONSCIOUS DISREGARD…. Good Faith……. Firing Ovitz iii. Corporations: Directors have a duty to exercise their powers in the corporation’s interest. they had one b. or c. Hiring Ovitz 2. Or e. Caremark OVERSIGHT liability TEST :Only a Sustained and systematic Failure to exercise oversight (such as an utter failure to attempt to assume a reasonable information and reporting system exists) will establish lack of good faith that you need to attach liability: 1.. Personal Ability: Directors must have some minimum mental ability and familiarity with the business ii. Ritter.you better take action to correct this…or this will also be a conscious disregard 2. Stone.
If corporation follows the statute it is impossible for them to satisfy entire fairness standard b. Possibility of unfairness a.g..Unocal Crop……………. Stockholders may NOT recive recessionary relief in a short form merger iv.. authorizes a parent corporation to merge w/ its wholly owend subsidiarty by filing and recoding certificate 2. If instead.-using 253 to effectuate a short form merger 47. Notice required ii. – appraisal is only remedy HOLDING: absent fraud or illegality.. If we held otherwise. Whereas c. b/c wouldn’t make much economic difference iv. 32 .. Director approval iii. i. Glassman v. Lynch Claims: Applying Entire Fairness to Controlling Shareholders (It is NO LONGER APPLIED –see below) a. But this was a short form merger SO a. Vote 3. inexpensive process Short form mergers NO LONGER GOVERNED BY ENTIRE FAIRNESS……. The decision to execute a short form merger under DGCL § 253 is not subject to entire fairness analysis (statutory power granted in specific anticipation it would be exercised by controlling stockholder). 1. same w/ cash b. fast. SHAREHOLDERS SHORT FORM MERGER Actions where Entire Fairness Will Apply: i.253……. c.Unocal Exploartion Corporation (UXC) – Unocal owns 96% of UXC – controlling shareholder Glassman. S can be merged into P w/o consent of either crops shareholdrs iii.g. Short form merger…. the shareholders (as seen in Wienburger) would not be limited to appraisal…. Remedy is restricted to APPRAISAL RIGHS…court determines fair value of the minority shares. Those who object are given appraisal rights (D) 4. Breach of fiduciary duty (self dealing and lack of full disclosure) iii.so if we penalize people for following it (by applying an entire fairness standard – and then granting more than mere appraisal rights as a remedy) it will defeat the purpose of the statute 3. Percentage required…. If given stock in parent in exchange for stock in subsidiary.90% REQUIRED 1. as a contractor) ii. But if dramatically unfair (as in Weinberger) court may approve recessionary damages or injunction…purpose of this section vi. Avoid necessity of having to go through motions of getting approval by public corp shareholder c. Minority holders of subsidiary. D) if all of the stuck of a subsidiary party to merger is not owned by parent immediately prior to merger…. Oppressive Actions: Stockholder uses its power to affect the corporate machinery in order to deprive other stockholders of their proportionate rights (e.so APPRAISAL IS ONLY REMEDy 253d a. Unocal exploration corp. it would violate the purpose of the statute 2. but as a director/officer on the one hand and a “stranger” to the corporation on the other hand (e.90% or more…delaware §253 v. 46.. Vote by S is pointless. But for the statute. Deision by parent company ythat its subsidiary shall no longer exists as a separate entity] b. Approval by P is pointless (B/C P IS THE ONE DOING IT). minority shareholder of UXC sues Unocal (as the controlling shareholder of UXC) 1. Purpose of 253 was to set up this summary procedure….subsidiary gets appraisal rights ii. Statute 253 1. Rationalle 1. b.. Statute authorizes a UNILATERAL act a. they elect an independent committee to make the decision. coercing a vote by threatening to use control in a manner harmful to the corporation). so they are basically parent-subsidiary. Glassman. since P already owns enough votes to win 2. Disproportionate Transactions: The stockholder is not dealing with the corporation as a stockholder. entire fairness rule doesn’t apply…so appraisal is the only remedy (whereas when entire fairness applies (as in Weinburger) you can get more than just appraisals) 1. they lose the benefit of the statute………Simple. they might be given too little. Parodoxial statute a.CONTROLLING b. ii.they could get remedy taking into account “all relevant factors” 1. No i. If corp P owns overwhelming majority of shares of S. . 2 companies……….
Plaintiffs lawyer never refuse to settle once an independent committee has agreed on a price with controlling shareholder b. plaintiffs attorneys fees Lynch/ Short Form Merger . 33 . 1. approved by majority of minority Why give these BJR? 1. b. Factors controlling which method a shareholder will chose Controllers owenership stake Extent of public flot Pressure of big holders Desire for certaintly and closer How can a I get best price 2. In re cox communications. 3. governing standard of review always gives the plaintiffs settlement value 3. 1. Lynch. its subject to negotiation and approval of the merger by independent committee 3. 2. inc.such as 1. c. reality that signing up a merger when the votes are locked up results in greatest certainty for a controller 4. “oh. 2. usually initial offer (32) goes up in these transactions anyway (its bargaining – duh) 2. SHAREHOLDERS FREEZEOUTS LYNCH or TENDER OFFER Shifting the Burden of Proof in “Freezeouts” of Minority Shareholders 1. b. 2. greater leverage to independent committee 2.. controlling shareholder proposes merger 2. e. Conclusion –Plaintiffs lawyers really didn’t do that much to get the price that much higher a. Can only get appraisal . Independent Committee: Shifts the burden of proof as to entire fairness if the committee can convince the court it had authority to act independently and did so without coercion. e. a. cashing out the minority in the process. Mechanism: Controlling shareholder proposes merging the corporation with another corporation the controlling shareholder owns completely. Majority of Minority Stockholder Vote: Shifts the burden of proof as to entire fairness if the minority stockholders were fully informed. 2. –Cox c.4. signing up a merger w/ a special committee and a settlement w/ plantifiss lawyrs provides deal certainty and a broad release and discouragement of appraisal claims Two Paths to Freezeout 3. a. form i. g. shareholders litigation – MODIFIED Lynch –grant BJR for short Plaintiff lawyer fees a. Which method generates higher premiums? Lynch …. 3. even if the statute doesn’t require anything else CONTROLLING vi.and appraisal will take into account whether or not the corp was trying to take advantage of a low market price v.b/c 1. But there are still fiduciary duties that come along with this…. Review: Entire fairness always applies (self-dealing and the coercive threat of control – I THOUGH THIS WAS OVERULED BY GLASSMAN?) but convincing negotiation by an apparently valid independent committee or approval by a fully-informed “majority of the minority” shifts the burden. d. just to get attorneys fees a. even if appraisal is their only remedy (or accept merger consideration) you still must give be candid full disclosure on these details. independent committee helps to negociate a higher price from the controlling shareholders c. you still must give full disclosure….apply BJR to discourage frivoluous litigation and limit a. But they can still techinically claim “success” in their settlement i. 1. d. They can’t bring the suit b/c they have no case b/c of BJR protection ii.even if not required by statute 253. SO council won’t bring frivolous suits. after we filed suit for you……the price rose!” Proposes modified Lynch standard whereby these going private mergers get BJR when 1. f. iii.
you must prove that it was not entirely fair b. Promise of §253 merger on the same terms d. whereas w/ a tender offer . iv. “Non-Coercive Tender Offer”…. This rule would encourage only real litigation…. put in little effort iii. (3) the controlling stockholder has made no retributive threats (evidence of overt coercion) b. So they don’t screw the hold-outs c. 48.shareholders HAVE to tender regardless if they feel 2.d.If the controlling stockholder can show that it set up a transaction structured to simulate an uncoerced offer to buy stock. (2) the controlling stockholder promises to consummate a prompt short-term merger…merge out any non-tendering stockholder at the same price (253) if it obtains more than 90% of the shares. approval of minority stockholders was tainteid by misdisclosure or structural coercion c. COURT Chooses Solomon Appraoch – tender offer is only not coercive (we will give you business judgment rule) WHEN a. B/c OTHERWISE…. Solomon approahc b. The chance to free ride on the expected increase in controllers original proposal would be eliminated and litigation would only be filed by those who possessed real claims iv. Pure Resources.when a. controlling shareholder of pure. and played a minor role in obtaining a benefit for the stockholders. 2. Ps plead particularized facts that the special committee was not independent or effecgtive b/c of breach of fidcuarity dtuy b. its offer will be treated as non-fiduciary. Controlling shareholders (majority – like Cox family) are usually pressured to settle since litigation is expensive and the price is ok with them anyways (after their negociations with independent committee) After Cox: Chancery court limits attorneys fees in a context that i.burden of proof on P: violated ENTIRE FAIRNESS i. 1. 2.§251 merger a. so this is definitely a fiduciary issue 49. (1) it is subject to a non-waivable majority of the minority tender condition. Catch 22…. Subsidiary of Unocal. Applies to : controlling shareholder tender offer – give them extra protection in regards to tender offer c. Non-coercive tender offer . Pure resources – (“non-coercive”) TENDER OFFER…………. b/c with a negotiated merger you have some sort of say 4. Added to burden of proof of shareholders 2. 3. Majority can force minority into doing something regardless if miority approves b/c minority doesn’t have same information and timeing iii. a tender offer requires FIDUCIARY DUTIES i. TEST: EVEN THOUGH It is not “technically” coercive.. Tender offer is at least the same but perhaps even more coercive than a negotiated merger 3. Disclosure ii. you might get less than what you are offered if you hold out for an appraisal by the courts ii. Harder than just saying self dealing 3. Majority of minority iii. pure resources (PR) is suing unocal 1.solomon a. Unocal. 3. Structural coercion – structured as to force it to happen regardless 1. Result: Litigation diminishes 2. and i.. 1. b. Policy behind it : i. indicates the plaintiffs' lawyers faced little risk ii.. Burden shifting (in entire fairness) 1. Seeking to enjoin an exchange offer for ALL of PR’s shares 2. seeks to get all of PRs shares (that unocal doesn’t already own) iii. On basis of breach of fiduciary duty ii. 34 . Informational symmetry and timinig control 1. to make a prima facie case. TWO APPROACHES…………pure resources…. Now. Mechansim: Controlling shareholder makes an offer to buy any and all shares tendered by minority stockholders (a “tender offer”).
Entire Fairness Test: If the plaintiff succeeds in establishing a prima facie case that a board decision breached fiduciary duty. Fair Dealing: Was the parties’ course of conduct in making the decision honest. This is evidence of unfair dealing b. Then you will not be protected…. two advisors. minority shareholders are frozen out c. If the board cannot prove that the transaction was fair. 5. Emerging Communications. board and shareholder approals are uninformed FACTORS…. We will give you procedural protection…. the directors can try to show that any breach amounted to gross negligence.you must have i.. Full disclosure ii.d. I. 35 . were co-opted by prosser to serve as advisors.but if you tried to bum rush us. majority shareholder stands on both sides of transaction b. Failure to Prove Entire Fairness (steps): 1. 3. f. a. material financial information is w/ held e. the board (as a whole) can defend the decision by proving that it was “entirely fair” to the corporation.. Freedom of (subsidiary) board iii. Here we have a freeze-out merger (what about majority – miniorty vote of stockholders) .back to entire fairness analysis. AND of course For information and timing purposes…. FAIR DEALING ANALYSIS . 2.Going private transaction is NOT the product of fair dealing where a. they had been its advisors and possessed material nonpublic information about ECMS values. ENTIRE FAIRNESS AND ITS ABSENSE 50. 3. AND e. If the certificate contains a 102(b)(7) exculpation provision. majority of board and special comitte are not independent of majority shareholder d. Board has a fiduciary duty g. 2. open and designed and executed in a manner likely to produce a fair result? 51. who took advantage of temporarily and artiifically depressed ECM stock price…which became the “floor” for the privatiizaiton price How it was a. i.unfair b/c during ECMs existence. 3. 4. The plaintiff must then show the nature of the breach (if any) by each directors by a preponderance of the evidence. (4) the independent directors are given time and discretion to advise and inform the stockholders. the board (as a body) becomes irrelevant. Fair Price: Were the substantive terms of the transaction close to the terms that would have been reached in an arms’length negotiation? b.. business and prospects 2. since there was no untainted board action.Prudential nad cahill. When transaction was timed a. The court evaluates fairness from two perspectives (neither is determinative): a. Disadvantageous to minority and correspondingly beneficial to prosser. Structured i. In Re Emerging Communications i. Appropriation of advisors . initiated. ENTIRE FAIRNESS 1. at worst.. 4. 1.initated by majority stockholder (prosser) 1. rush us (Weinberger) or trick us w/ bad information i.
Applies only to close corporations Conditions for majority oppression exist—majority control and no third-party market for shares Differences from Normal Analysis Formal governance structure ignored and controlling shareholders are treated as fiduciaries b. but refuses a minority shareholder the same option to sell his stock ii. ii. approve a transaction that improperly bnefits another director when they knew or SHK it was not fair 5. board should have insisted that the advisors remain the ECM advisors or leave the negotations c. Only free transferability of shares enables minority shareholders to adapt individually to changed circumstances and protect themselves from majority opportunism. No guaranteed dividensts either 3. In either case managing stockholders assume duties and liabilities of directors. 6. just as no person can become partner w/o consent of all partners 1. uneven access to salaries. DIFFERING SOLUTIONS 7. Rule: If the Certificate elects formal “close corporation” status. etc. Therefore. Donahue Solution [APPLIES WHEN MINORITY BEING TREATED disproportionately (opportunity to sell)]: a. advantages from him b/c of it – raynors 2. and how director and shareholder approval was obtained i. aid another director in improperly benefiting from a transaction 3. Rule: To be a close corporation under DGCL § 342. the stockholders can contract to limit directors’ discretion or (by unanimous consent to amend the certificate) substitute stockholder management. Majority can refuse to buy it back or only buy it back at low price 2. Duty of Loyalty to Minority Disproportionate repurchase of shares from controlling shareholders is presumptively self-dealing unless equal opportunity available to the minority.4 mill compensation deal) to Prosser so they did not adequately represent the interests II. 1.. 2. controlling shareholder. The things that protect the firm from minority opportunism create risk of majority opportunism Similarity to partnership i. and no public offering. 2. fiduciary duty owed Stockholder Management by Contract in Closely-Held Corporations 2. directors breach fiduciary duty of loyalty/good faith when they 1. Or 4. Closely held businesses lack the separation of function that the corporate form permits with its distinct roles for shareholders.Massachusetts REQUIRES EQUAL treatment i. DGCL § 350. Failure to Follow Statutory Provisions—Zion rule: Agreement between sole stockholders that no business or activities of the corporation would be conducted without the consent of the minority stockholder was valid because despite the agreement’s noncompliance with the Delaware statute’s formalities (DGCL § 342) to qualify as a close corporation. the agreement’s substance did not offend Delaware public policy in view of the fact that all the stockholders were signatories to the agreement. 3. At a minimum. officers and directors No market exists for the ownership interest of closely held enterprises. the certificate must contain all those provisions in § 102 and there may not be more than 30 people. Rodd Electrotype Co…. Shareholder more vulnerable under close corp 1. uneven access to public markets or to sale of control to a third party. Therefore.1. More opportunity for majority opportunism a. Donahue v. causes corp to buy his stock. Can achive same result by restrictin transfer of corps shares w/ consent ii. Mechanisms for Disproportionate Benefit: Uneven right to re-sell stock to corporation (Donahue). they were in best positon to represent the interests o the ECM minority but were now switching sides to represent interests (Prosser’s) adverse to that minority ii. Decision must be made on director – to director basis ii. Communications were through prossers secretary ii. PROTECTING PARTICIPANTS’ EXPECTATIONS IN A CLOSELY HELD BUSINESS: CORPORATIONS CLOSE CORPORATIONS Introduction a. i. DISPROPORTIONATE TREATMENT DIVIDENDS c. 1. Predicates i. 5. Majority Oppression in Closely Held Corporations 4. 36 . committee couldn’t represent minority shareholders d. Rodd. thus no liquidity for one’s investments and no check on those in control. c. Financial things not disclosed 1. 3. reciveve improper personal benefit from transaction 2. a. Negotiated and Disclosed i. b. Puts in position not to negotiate for higher price…and gave prosser access to the committees confidential dilberations 2. directors were also financially beholden (some were getting benefits. Oppression Definition: Oppression describes a situation where majority denies the minority (but not itself) any mechanism for realizing the value of its shares. Rule: The minority must be given an equal opportunity to dispose of their shares in the same manner as the controlling stockholder when the close corporation is the purchaser.
youa re using corporate funds for personal benefit. If corp repurchases shares from one stockhorlder.Wilkes was performing fine 2. Insurance plan. and the person that makes the decision for Class A stockholders is the majority (who owns Class A stock) 3. .BUT THIS IS STILL NOT GOOD ENOUGH…why? See below 2. b/c when you force corp to buy back from you. Wilkes Rule: Decision [disproportionately (unequal) harming minority] a. especially ture in a CLOSE CORP …b/c of its illiquidity…. (1) Minority stockholder in close corporation brings suit against majority under Donahue for breach of strict good faith duty owed to them by majority and makes prima facie case of disproportionate harm b. purchases life insurance for execs/directors.. This was a designed FREEZE Out…court will reward Wilkes 9. Same proportion…like partnership…. BOTTOM LINE: court exercises business judgment. but where you do not show it.. he must offer same opportunity to minority to sell a ratable number at the same price if you treat yourself differently as a shareholder (even if it is fair dealing and fair price) this is a breach of fiduciary duty….Class A voting stock………. iii. bad faith Now what happens? a. must offer to repurchase from other holders on same basis – Donahue a. a. but no one else. that is. Same price b. 3. 37 . close corps are like partnerships. Employee stock ownership plan (ESOP) – standard method used to give employees a stake in profitability iii. If majority refuses to pay dividends and refuses to employ minority. (2) then burden shifts to Majority: must demonstrate a legitimate business purpose for its actions i. not as big of a problem b/c they can sell shares on public market 2. Why do P’s think this plan is violation of fiduciary duty 1. Nixon Rule: must establish entire fairness and Valid business purpose. there was no valid business purpose. the strict partnership standard of utmost faith and loyalty rather than the less stringent standard of fiduciary duty to public corporation is applied. iv. b/c no repurchase plan exists for class B shareholders 2. price) b.……. he is not reelcted. c. But DO NOT NEED EQUAL TREATMENT i.not to allow minority have same opportunity a. Burden shifts to rodd to prove entirely fair (dealing. they require utmost trust. (3) then burden shifts back to Minority -can rebut legitimate business purpose asserted by demonstrating the same legitimate objective could have been achieved through an alternative course less harmful to minority interest d. you are guilty – Wilkes c. Directors prove that Rodd didn’t rip off company…corp paid fair price for his shares and are in same position as they were before ….Whereas in publicly traded company. so when majority of close corp causes corp to purchase some of his shares. so partnership-type fiduciary duty arises between stockholers i. Standard of duty is good faith and loyalty – fiduciary obligations to minority ii. loyalty. with equal rights and equal pay…Meeting for payments is held where wilkes is not included…..class B non-voting ii.. Donahue and Partnership (higher standard of loyalty): Stockholders in a close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one anther.Relatives . (4) Court must then weigh legitimate business purpose against practicability of less harmful alternative. you are protected. i. EC barton gives stock to two groups….as long as you have LBP.management of close corp manages liquidity of corps shares…. proceeds to survivors-only to Class A shareholders v. so minority has no way to participate in fruits of ownership……. Here. Remedy Under Donahue: Treat the shareholder the same as everyone else (or rescind unequal treatment). e. Why to P’s think this insurance scheme is violation of fiduciary duty 1. Application to case 1. AND the life insurance payments to class A stockholders exceed dividends paid to class B holders!! 2.1.Legimiatae business purpose test .Next annual meeting. disproportionate problem . etc.Emplyees . 1.. b/c not everyone enjoys it by being a shareholder iv. b/c class B stock doesn’t get the same benefit Majority is buying life insurance policies that benefit only themselves…. 8. Application 10 guys agree to start close corp.
And iii.. bonuses. Under Wilkes. ii. hostility of majority to minority 2.directors bear burden of proof a. Suit to compel the payment of dividends to protect other rights belonging directly to shareholders a. evidence of bad faith must constitute a motivating factor proving SUBJECTIVE bad faith to constitute bad faith as a matter of law..and when he was in control there were no other class A stockholders…so he wasn’t trying to provide advantage for himself so when there is a neutral decision maker……fair DEALING …does NOT require equal liquidity rights b. Must have proof of bad faith intent. 1. DELAWARE a. or loans made to majority 4. controlling shareholder/majority has fiduciary duty…and maybe even more so in this context b/c there is no separation of duties in closed corp ii. WHAT are main differences between Wilkes and Nixon? a. Self dealing favoring one shareholder over another iii. exclusion of minority from employment corporation 3. 2. holding: you must treat minority shareholders fairly . court finds as a matter of LAW there was fair dealing b/c of neutral decision maker – the person that established ESOP and life insurance were established by EC barton…. Petition for involuntary dissolution……………OR ……. Factors that help minority show that above two didn’t happen 1. ESOP ii. but still requires valid business purpose for excluding minority from i. But for dividend policy.NOT the majority or the corp…. Zidell i. so any legit reason will suffice…. 5.Zidell CLOSE CORPORATION DIVIDENDS 12. fair dealing – this is the only part contested i. but not necessarily equally (Delaware rule) – OPPOSITE OF Massachusetts above…which requires equality… 1. Delaware rule – must traty minority shareohdlers . Disproportionate liquidity….EC barton out of control…. Made in good faith 2. fairly but not necessarily equally 10. rather than private interests iii. b. court will look at entire fairness…. 2. Those in control of coproate affairs have duty of good faith and fair dealing toward minority 1. Burden of proof a. the business judgment presumptions and majoritarian-directorial bias of the traditional norms still leave the majority with substantial discretion. Zidell Rule: Plaintiff has the burden of proving bad faith on the part of directors in determining the amount of corporate dividends. Reflects legitimate business purpose. 4. First the similarities i. Key man insurance polices 2. i. REJECTS Donahue 11.so class B sharholders sue directors and company for mainitan discrimanotry policy that unfairly favors class A b/c liquidity plan is offered to A but not B vii. procedurally 1. Just as long as it is “entirely fair” it is ok iii.vi. Not much difference between proving entire fairness…. 3. majority may be subject to high income taxes if dividends are paid 5. 6. Stockholders Need not always be treated equally for all purposes… ii. in CLOSED CORP. Now dIFFERENCES i. Rejects special fiduciary obligation to close corp majority i. Rule: In suits to compel payment of dividends.and legitimate business purpose b. Three principal avenues for minority shareholder suits: 13.Derivative suit for breach of fiduciary duty………. desire by majority to acquire minority stock interest as cheap as possible 6.OR 14. 1. high salaries. Shareholder claiming unequal/disproportionae treatment between shareholders ii. Can’t do that under NIXON iii. IF these are NOT motivating causes…then decision si not bad faith as a matter of law – court is looking for SUBJECTIVE motivation 38 . Just like regular corp. duties are discharged IF 1. accumulation by majority of an unreasonably large cash reserve (not paying any dividends) – which can only be explained by bad faith ( 7. can bring direct action…solely based on disproportionate treatment ii.
This is the most likely remedy. Made in good faith 2. 1118): 1.. but forces a court-administered sale. 1) directors guilty of illegal. 17. Petition for Judicial Dissolution Under Speical circumstances . Need for cash to pay large inventory orders iv. fraudulate. wasted. He resigned voluntarily b. In Donahue . P isn’t upset about unfair dealing…. Future needs renovation v. Burden on minority to show above 1.actions that benefit majority at corps expense 39 . REMEDIES OPPRESSION. fraudulent. iv. Arnold fails to meet this duty b/c a. EQUAL treatment IS OK (Zidell – everyone got same dividends. So court concludes…. even if minority thought was low) DISPROPORTIONATE treatment NOT OK ( Donahue – differeing opportunities to sell shares) CLOSE CORPORATION i.that are guilty of illegal. upon filing of petion. so was not disproportionate ii. Dividend: Court could order the corporation to pay a dividend to all shareholders New York Regime (§§ 1104-a. Derivative Recovery: Court could order the majority to disgorge profits or pay damages to the corporation. 3. b. Difference between Donahue and Zidell a. rather than private interests c. Business 2. Buy-Out: Court orders the corporation (or one or more shareholders) to buy out one or more shareholders at a court-appraised price. 4. 2) property or assets are being looted. or oppressive actions” toward the petitioner A) shareholders of close corps entitled to vote Of directors may present a petition of dissolution on one or more of the following grounds i.Disproporiionate treatement is NOT OK. Emery explained low dividend policy as saving needs for company ii. even if minority thought was low) vi. Applies only to closely-held corporations and petitioner must hold 20% to make a claim Gives shareholders direct standing to sue “those in control of the corporation …. c.. 2. NEW YORK MINNESOTA P90 ii.. a. 16. or oppressive actions toward complaingin shareholders ii.15.. Emerys facts i. 1. 2. SELF Dealing . Takeaway points i.. 73/74 unusual iii.rather is concerned that majority is in control of the money and isn’t using it to benefit minority… (low dividends) b. In Zidell . Court holds …. OPPRESSIONtwo main classes 1. P is upset about unfair dealing (self dealing i. So he is stuck arguing bad – faith….1104-a C) directors. Liquidity of rest of shareholders shares (including minority) ii. or diverted for non-corporate purposes iii. Majority is in control of 1. Reflects legitimate business purpose. need to make available for inspection the books Petitioner's Case to Invoke Court Discretion: a. All lead to conclusion that this was a VALID SUBJECTIVE motivation for low dividends v. Possible Court Ordered Remedies 1. Dissolution: Does not necessarily result is end of the business. Arnold can’t argue self-dealing…b/c they were all getting the same dividends. EQUAL treatment IS OK (Zidell – everyone got same dividends. Short term funding for bank loan… vi. 2. when majority is controlling everything…. And didn’t show that he was being forced to sell his stock at an unreasonably low price c.the dividend decision was 1.
investment 1) whether liquidation is only means for petioners to get fair value on their 2) whether liquidation is reaonalbly necessary for protection of rights and interest 2.But leave employment of corp on less than 40 . etc…) b. Uncertainty of price if negotiations fail (court valuation) 6. or we can decide to do it later on. b.. The expectation must have been had when joined the venture.They recive distributions…….Kemp Reasonable Expectations: Conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to a particular enterprise. i. Uncertainty of outcome of 1104-a suit ii.. participation in decision making process (demand business records.They had “reasonable expectatiosn” to get these too ii. a. This allows any other shareholders to purchase the petitioning minorities shares w/in 90 days of filing suit…. it must be at the courts discretion to allow it……b/c at that point. Only question of early buyout is one of price. Economic benefits (dividends not paid. B) if can’t agree on fair price. A) w/in 90 days of bringing petition . Buyout: Statute seems to give controlling shareholders a buyout right only in first 90 days. b. Court can adjust payouts for looting and waste D) court may order stock valuations and provide surcharge on directors upon finding of willful or reckless dissipation or transfer of assets or corporate property Voluntary Buyout (New York Regimes): Purchase of petioners shares.. Two types of Oppressive Conduct……………. they weren’t worried)… c. C) in connection with election to purchase… 1. Late buyout requires court consent and carries risk of fee shifting and surcharges for demonstrated looting. 2) court may require posting of bond. 5. 3. i.. electe to purchase shares owend by the petitioners at their fair value upon terms approved by court iv.pursuant to a petition brought above.2. NEW YORK a. Purchase of petioners shares. other shareholders may. a. in determining whether to proceed w/ involuntary dissolution pursuant to 1. Worst that happens if minority wins is ordering to buy out and then can fight on the correct value for buying out. 1. Early buyout (within 90 days) is a matter of right. this section Court decides whether to grant dissolution. court may determine fair value of petitioners stocks…may award interest iii. Factors Countering voluntary buyout (why court lets it happen after 90 days) Likelihood court will order a buyout (not dissolution) if shareholder wins (giving corp no incentive to buyout now) Court of Appeals in Kemp seems to suggest that buy out should be allowed even after trial and that starts to limit worst case scenario for the oppressive majority. Intended to Favor Quick Buyout i. ii. i. Gardstein and dissin own 20% stock…. friendly terms. 1.. 1…. Eg…causing corp to purchase inflated price supplies from other corp that you have interest in Squeeze out moves …. 1) reasonable expense attorney fees 2. But AFTER 90 day limit. b. i. any other shareholders may. were both (1) reasonable under the circumstances and were (2) central to the petitioner’s decision to join the venture. while remaining shareholders…………They stop receiving distributions (bonuses) that had been issued instead of dividends…. elect to purchase shares owend by the petitioners at their fair value upon terms approved by court ii. a. taking into account the following FACTORS: 1104-a: B) the court. Inc.deprive minority from a. v. minority might be worried that majority will just buy out minority b/c they are worried about litigation problems (whereas at time of initial filing.pursuant to a petition brought above. 2.1118 A) w/in 90 days of petition .1118a iii. Reasonable Expectations: Oppression should be deemed to arise only when the majority conduct substantially defeats expectations that objectively viewed. valuation ---. i. 1. valuation ---. 4. but Court of Appeals (Kemp & Beatley) implies it must always be an alternative to dissolution. a. In Re Kemp & Beatley. or decide to do it later on. chance to participate on board) Relates to fiduciary duty Remedy: Express authority to dissolve (implicit authority to order other equitable remedies) Standard for Court's Discretion to Dissolve a..
.Oppressive conduct…………By i.written agreements (evidence of "reasonable expectations")…………….….. Doesn’t use exact word “oppression”…………Just says “manner unfairly prejudicial.. They were denied “dividends” they expected to get as long time employees b.. Left to the equities. Directors ………. b.shareholders' duty to "act in an honest... Decision to treat shareholder differently…....."those in control of the corporation"…………….By making it the second “or” option………. LONGSTANDING policy… (based on petitioners testimony/credibility) ii.. what were their expectations then?... Remedy: Any equitable remedy (including dissolution. Gimpel v.. This statute is vague.751…pf 224…. They look at “inherent oppression”….Pay dividends/share in profits…Give him some offer for his minority shares 18. So they don’t have to give him employment but must do the following a...751 ) a... harsh or wrongful conduct. 302A.Court wants majority and minority to be able to figure stuff out by themselves first (if there are ok with them buying the other out) 3.” 2.that were normally afforded to employees d. i.“court may grant any equitable relief…. Guaranteed minimum financial information to shareholders ordered to sell iii.Gimpel Inherent Oppression: When shares are inherited... you don’t really know what happens if the shareholder wins.OR may liquidate assets (dissolution)”……………In fact……more geared towards these other remedies (geared away from dissolution)………. Bolstein……………Court approaches “oppression” differently… 2.for no good reason…. Must prove undr 1104a a..in petitioner's capacity as shareholder/director (non-publicly-held) or officer/employee (closely-held) ii.. 302A. Defeat objectively reasonable expectations (known to everyone) c... Design of statute is to create MORE strategic UNCERTAINTY…. Central to petitioners decision to joint the venture ( investment decision) 1.... Petitioner's Case to Invoke Court Discretion: i.pg 224…Definitions b.Judcial intervention.011…..(so neither majority nor minority can take advantage of wording to buy each other out unfairly)……by GIVING more discretion to the court 41 . Denied buyout policy….making out a prima facie case for oppression…denied reasonable expectations a.. Instead of dividends. Standard for Court's Discretion: i. oppressive conduct is burdensome.acted "fraudulently or illegally" or "in a manner unfairly prejudicial"………..relief will permanently relieve basis for the petition e. Court has discretion to order the corporation or any shareholder to buy out any other shareholder on shareholder petition at any stage…………No shareholder can force a buy-out at any stage ii. 2…….. bonues were issued i.. financial condition………….. or a visible departure from the standards of fair dealing..“those in control” 3..1. a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members.whereas new york statute it is not as explicit (court had to read into it to understand they could grant other remedies) a... Same for the majority…. since he was caught embezzeling. and reasonable manner in the operation of the corporation"…………. and then let go… 2.this guy should not have reasonably expected that much. non-public corporations…….toward the petitioner……………."reasonable expectations of all shareholders" (initial or developing)……. you don’t know what will happen and what the court will order. a. Makes “other remedies” more possible (besides dissolution)…..Private corp. Oppression test?. 20% shareholder……. Buy-Outs: i. fair..Shareholders must b. conduct” under 1104a Gardstein and dissin petitioning for dissolution of corp on grounds of “oppressive 2. equitable remedies or dissolution c. Minnesota Regime (§ 302A. How is this different from new york above? 1. But decision in this case to treat him differently… was for a good reason 1. Although oppression can be defined as violating the reasonable expectatison of minority.Or………. with minnesota statute….. Allow access to records.why? see below iv.. but expressly as last resort) d.
Gallagher v. i. Concord Auto Auction. sometimes contingent on some event. so they often want to re-sell the company or other shareholders. is enforceable without fiduciary obligations. shareholders agreements presumably include an implied covenant of good faith and fair dealing. He is fired (20 days before buy back provision would switch from really low price 90K…. sometimes at will. but merely insisting on the agreed price. STONE thinks they decided this WRONG……thinks they should have looked at underlying fiduciary duty Good Faith and Fair Dealing: Like all contracts. buy-back formula whereby if he is terminated. “corp” is setting the price and thereby paying less for the shares.as long as it is not a distortion of the original transaction…firing him for no good reason will be not ok…. Gallagher (dissent) cf. HOWEVER. that pattern may bring liability.to really high full value ….FAILS to illustrate that there are limits on how you can enforce these 1. 21. Powell and Thomas are setting the price on the shares they are buying. 3.see Gallagher dissent above and below) 1. Fiduciary issues arise if: a.. Shareholders may not want to be in the business with strangers (and owe fiduciary duties to them). they corp automatically gets to buy back his shares 3. He had contract. doesn't breach that covenant. Concord Auto. TAKEAWAY point: people can make agreements and as long as they abide by those and no subjective evaluation involed. 42 . A controlling shareholder may want to give shares only to current employees. THE DECISION Was in the interst of the majority shareholders who would benefit by getting his stock back at an extremely undervalued price ii. Gallagher b.b/c i. Guy is at will employee 2.g. Lambert……. he helped write it 2. 20.. Why Shareholders Enter Repurchase Agreements: a. Bohatch.CLOSE CORPORATION SHARE REPURCHASE AGREEMENTS 19. so that can’t be a defense 4. i. So why does Cox lose? a. the fact that these contracts are usually just contracts of adhesion…presented to at-will employees a. TAKEAWAY… a. ii.can only look at WHAT WAS THE DEAL…. v. Pedro. Bohatch. courts will enforce it ii. beyond merely enforcing the contract. Contract law… b. when it is a contract question…. Concord auto suing the estate of cox to force him to sell his shares 2. Concord Auto. to give them incentives to work hard and worry about keeping their jobs. b/c OTHERWISE this is self dealing…… 1. cf.. Lambert……. Gallagher v. e. the majority shares.3MIL).FAILS to illustrate that there are limits on how you can enforce these (can’t fire for wrong reasons…. he helped write it. to the other party's detriment. Gallagher. as an option on property. This is underpaying me ii. Inc. so they are cheating the system iii. is enforceable without fiduciary obligations. DESPITE. Restricting Shareholding to Insiders: i. Purpose of contract was to avoid costly and lengthy litigation on the fiar value issue…so TO DEBATE THAT NOW would defeat the purpose of the contract 3. b. which will go straight to Powell and Thomas. and helps write. Gallagher refuses…. Fiduciary Issues: The contract. There was a fiduciary decision to fire him – CONTRACTUAL DUTY OF GOOD FAITH 1. as an option on property. Liquidity: Close corporation minority shareholders cannot practically sell their shares to outsiders. Rustin 1. death. He aggress to. Pattern of Fiduciary Abuse: If the controlling shareholders use their power to engage in a pattern of oppression.claiming breach of fiduciary duty – unfair price b. Cox is saying I deserve a yearly revaluation before I sell a. Basic Rule: The contract. In this case. Corporate Action Involved: If the controlling shareholder(s) must cause the corporation to exercise rights (or corporate action triggers the shareholders’ contract rights) the corporate action may be subject to fiduciary constraints. Saying this is a breach of fiduciary duty NOT to have this valuation i. Gallagher. That decision was not in interest of eastdil the company (b/c eastdil doesn’t care who owns the stock) 2. Contract Issues: a. and corp seeks to enforce buy back provisoin a.
Close corp exception: Failure of statutory close corp. b. (3)Proximate Causation: The aforeseaid control and breach of duty must proximately cause the injury or unjust loss a.C. Davis……proximate causation of harm 1. not mere majority or complete stock control. wrongful termination (as an employee…for being wrongfully fired…just for personal reasons) 3. an adequately capitalized corp. Can get damages separately a.this will be another form of inadequate (diminished) capital…. 2. Elements of a Claim to Pierce the Corporate Veil a. Consumer’s Co-Op v. Arrow Bar 1.That is what happened here. Despite ECOS difficulties and failure to pay account on time. . Shareholder used its domination to commit a fraud: Corporate insolvency (even anticipated at the time the debt is contracted) is not enough. But IF A WILLING creditor continues to fund business. These things were just incidental 4. Shareholder dominated the Corporation: Actual practical control over corporate actions is not enough (not inequitable). 1. failure to follow a few minor things willl not be bad b. and a.no Contract – court couldn’t force him to sell 2. A corporation is undercapitalized when there is an “obvious inadequacy of capital. when they have the opportunity to NOT do it and have opportunity to monitor financial situation…then this is NOT the fault of the corp controller… can’t pierce veil…. not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind. and if we are measuring after time of incorp…continued monitoring of capitalization…if company starts out well funded and shareholder drains assets out…. Fuller tells (decides with) stroud to continue blasting after complaints have been issued knowing… 43 . They were making a basic effort to be careful c. which are an indication of whether the defendant recognized or disregarded the legal entity. this is NOT double recovery PIERCING THE CORPORATE VEIL INTRO THREE PRONG TEST 1. Plaintiff has to show a pattern of exercising power without regard to the corporate form. to perpetrate the violation of a statutory or other positive legal duty. Plaintiff has to show that the corporate form is being used inequitably (e. draining assets and leaving nothing but a shell a. a. So when olsen approaches banks for loans as himself…this isn’t a huge deal ii. On Top Roofing. does not subsequently be rendered undercapitalized merely b/c the business suffers lossess 2. breach fiduciary duty (as an owner) & b. measured by the nature and magnitude of the corporate undertaking”. and a. Pedr 1. Three Prong Test Contract and Tort: 3. K. Failure to follow corporate formaltieis? a.g. Consumer’s Co-Op v. will. adequacy of capitalization is measured at the time of incorporation a. Difference between this case and other cases….this will be another form of inadequate (diminished) capital……. Olsen 1. Formalities (see below): In looking at the control prong.i. or dishonest and unjust act in contravention of plaintiff’s legal rights. Again. b. look at failure to follow formalities. Pedro v. In contact daily with stroud 2. v. Capitalization (see below): If the capital is illusory or trifling compared with the business to be done and the risks of loss. but complete domination. Western Rock Co. this is ground for denying the separate entity privilege. Inc. They don’t need to do everything a public corp does b. [Measured at time of formation in Consumer’s Co-Op] i. Guy starts corp after corp. HOWEVER i. (2)Fraud in contravention of P’s legal rights: Such control must have been used by the defendant to commit fraud or wrong. or existence of its own. and if we are measuring after time of incorp…continued monitoring of capitalization…if company starts out well funded and shareholder drains assets out…. (1) Control: Control. Olsen 1. consumer continues to extend line of credit ii..BUSTED – this is precisely the sort of activity for which the doctrine of piercing the corporate veil was developed… 5. Must be a pattern of abuse leading to proximate cause of not being able to pay companies liablities i. to obsever usual corporate formalities is not grounds for piercing the veil a. Roofing Center v. by failing to provide enough capital to have a chance of succeeding or by looting assets). Baatz v.
This means that a.doesn’t seem to be a sepearte existence……. Stockholders engaged in fraud or wrongdoing?? 6. proximate causation of harm a. Has ability to withdraw all funds – and DOES…. 1. Contract claims (and the ‘voluntary creditor’ doctrine a. b. K. Courts less likely to pierce veil when creditor is voluntary b/c 1. unlike tort creditors. Western Rock Co. wrongful use of domination a. the controlling shareholder may actually have defrauded (mislead as to material facts. b. 2. and b.But this is Not dispositive iii. Despite the wishes of some professors. Davis 1. Law and Economics Speculation: Courts should be more willing to pierce for tort than contract claims because 1.right during/before lawsuit….C. they have no tort liability insurance BE CAREFUL…. Aftermath of the verdict – uses his control to make sure there is nothing left to take from corporation/ UNDERCAPITILIZATION (he gutted it before the adverse judgment came) i. 1. Don’t look for proximate cause in terms of how the tort was caused….C. 2. Complete domination a. 2. the plaintiffs would have gotten paid PIERCING THE CORPORATE VEIL 4 CONSIDERATIONS…….leaving the corp as an empty shell 3. Contract claimants can protect themselves by investigation. a. so the debtor's other sources of capital are more important.E IS BEHIND IT……. so court more likely to pierce veil…. Has opportunity to check credit of crop. Consumer's Co-op. iv. Had opportunity to ask for personal guarantee of shareholder(s) to recover damages if they don’t come through ii. interact with the controlling shareholder and have actual expectations. Prior. 1. Owners can best insure tort losses and veil piercing encourages that by forcing the stockholder to internalize the insurable cost to society. Voluntary v.Has ability to withdraw all funds – and DOES…. Consumer's Co-op. easier to quantify and predict (easier to show that the capitalization was clearly inadequate). We are looking for proximate cause against Fuller…. and b.right during/before lawsuit…. 5. Whereas in a tort case…if someone is wronged by a tort by the company. that person did not have above two opprotunites. more likely to be incurred consciously in the face of insolvency.3.Attitude beyond “respect for sepearte existence”…. 3. Insurance – often the primary source of capitalization in these tort type cases: a. Contract liabilities are not often insured (and often uninsurable). Father confessor………. Tort OR contract (tort more likely to pierce) 6. Undercapitalization? 8. contract rights or investigation 2. inducing reasonable reliance and causing harm) the plaintiff. which is impossible in tort claims..Fuller admits to having contributed all the mooney. Consensual Relationship Between Creditor and Controlling Shareholder: Contract creditors. BUT for… Fuller’s Depriving Western Rock of the capital that it needed (wrongful use of complete domination) to account for its lawsuits. Roofing (Western Rock is the exception that proves this rule). Thompson Empirical Study: Contract creditors try and succeed more often than tort creditors. In contact daily with stroud b. 2. 4. K. vi. 1. Corporate formalities followed? 1. all the equipdment. the law of veil piercing is not different in contract and tort cases. 3. We are looking for what FULLER did that resulted in the harm of not being able to collect damages from the corp….leaving the corp as an empty shell b. 7. Personal assumption of control (and direct control before) c. 3. involuntary creditor i. their claims may face equitable defenses (waiver and estoppel) that are impossible in tort actions. Tort liabilities are commonly insured (often making the tortfeasor's solvency irrelevant). 4. Roofing. Fuller tells (decides with) stroud to continue blasting after complaints have been issued knowing… 44 . v. every loan………. 2. Tort v. In contact daily with stroud…Stroud never had a day where he thought he could run company completely freely 2. Western rock is running out of $ b.dont’ look at the proximate cuase of the blasting… a. a. v. What is Different in Contract and Tort Cases? 1.. Contract liabilities are deliberately incurred and are thus a.
i. Baatz suing neuroths (to pierce arrow bar’s veil) c. not carrying insurance for it might have been interpreted by the courts as an extreme undercapitalization risk 2. Misrepresentation obviously is fraud (shareholder LIES to creditor) 3. 45 .. they have no tort liability insurance c. Fraud on creditors….. Majority rule……. The fact that you guarantee SOME debts does not mean that you guarantee ALL debts… b. Can go after nueroths personally….having 10 cab companies……. 1. i. Fraud or wrongdoing.. When its tort. b.. you just “underinvest” in such a way that might doom the corporation i.Hard to objectively prove undercaptilization……no evidence that 50. arrow bar Inc. not carrying insurance for it might have been interpreted by the courts as an extreme undercapitalization risk 1.. even though it might owe a few creditors some money c. this one alone will allow piercing 2. you are only liable for the very small amount of that 1 company b/c of your strategic underinvestment…………Although this case held that was ok Especially important in case of involuntary creditor (tort) i. If loans can’t get paid……what can bank do to collect on its loan? i. or other transfers that levave corp unable to pay tis debts iv.which did not exist when arrow bar inc. a. Adequate Capitalization: Public policy presumes that an entity will be capitalized so as to have a reasonable chance to become (or remain) self-supporting.dont’ look at the proximate cuase of the blasting… i. b/c the businesss they were running…. even if arrow bar does i.can’t expand a personal guarantee on a bank note to tort liability a.Usually require affirmative fraud or wrongdoing in addition to piecre veil…. dividesn.even in absence of other factors. BUT for… Fuller’s 1. 8. Inadequte capital (might be single most important factor) a.……. Corp is nothing more than a shelll….Each insured for only 10.. Inadequate Capitalization i. so arrow bar inc doesn’t need insurance. c. b.4. Arrow Bar. IF it HAD existed. so controlling shareholder thinks he’s protected against his debts by the corp shell…also..this will be another form of inadequate (diminished) capital…. Eg…. We are looking for what FULLER did that resulted in the harm of not being able to collect damages from the corp…. What about personal guarantees of loans? a.. Zero capital………. a. no protection 4. The fact that you guarantee SOME debts does not mean that you guarantee ALL debts… 7. Not usually dispositive 1.. 2. Corp doesn’t “re-buy” to continue its operations. Usually when those in control siphon out the assets. 6. Don’t look for proximate cause in terms of how the tort was caused…. So if you 1 company causes tort.. nothing out. d.arrow bar inc….Say something goes wrong causing value of corp to seriously diminish 1. OWNED arrow bar…. Why did council instruct the neurtohs not to get insurance policy? a.Subordinated debt……Anticipated revenue from business………Insurance ii. Arrow Bar ….000 was not enough for b. Insurance as rebutting inference of undercapitalization a..If company einvests no money whatsoever…. incorporated… i. corp provides no protection to woner………. Western rock is running out of $ ii. cort less likely to pierce value if there is insurance ii. Dram shop liability…. Shouldn’t this be a clear sign that they are not taking the “separate identity” thing seriously? i. leaving nothing but an empty corporate shell.there was NO RISK….corps mor likely to pierce veil a.such that the person knowingly and intentionally underinvested to shelter himself and exploit corp 3. the plaintiffs would have gotten paid Baatz v. Depriving Western Rock of the capital that it needed (wrongful use of complete domination) to account for its lawsuits.Taking of excess salries.Each company w/ only 2 cabs as only asset……….000 1. BE CAREFUL…. We are looking for proximate cause against Fuller…. what they were doin Where when starting corporation. 5. ii. wouldn’t ven be proper to get insurance for arrow bar inc.Nothing in.so when nothing is invested in corp.. This is of course also evidence of fraud or wrongdoing iii. Sources of Capital:…Equity investment…. 1. Baatz v. Failre to add new capital………. on the loan…. IF Dram shop liability had existed at the time of incorpoartion.b/c they gave personal guarantees. Siphoning of profits……. Minority rule………. 2.General rule is that court measure this at time of incorporation…but if company starts out well funded and shareholder drains assets out…..
and don’t consult with each other on a daily basis. PARENT SUBSIDIARY 10. Liability of Corporate Parents for Obligations of Corporate Subsidiaries Problems of Double Corporate Personality i. Best Foods. use of control to commit a fraud or wrongdoing that leaves subsidiary unable to pay its debts). iv. Consumer’s Co-Op v. Charter has 3 on board of Cape d. Craig. BUT Dual agents not enough. Bestfoods………. For a finding that a parent will be responsible for its subsidiaries debts…. must be enough control such that Cape exercised no discretion of its own…. Charter’s announced intent to “control” c.. ii. Cape and Charter keep sepearte books. Majority stockholder and dual agents are not enough. High likelihood that people will lose track of their agency roles. Just b/c he was in dual role/conflict of interest doesn’t matter…. Best Foods. or consideration for them not received by corp Shareholders/director meetings not held Shareholders don’t distinguish between corporate and personal property Corp records not maintained b. they really are separate organizations that could clash).owns a.9. c. High likelihood that key individuals will be formal agents of both the parent and the sub.e.Must be a pattern of abuse leading to proximate cause of not being able to pay companies liablities PIERCING THE CORPORATE VEIL a. meaning that there is 1.court more likely to pierce veil 1. 1. District court findings a. Bestfoods (CPC)….Shareholder putting his personal neame on business door… 1. Shareholders taking cash from crops bank account to pay own personal debts…..Cape owns NAAC (north American asbestos) – MAJORITY stockholder b... Cape had disobeyed orders…. Misleading to creditor…. Best Foods. 2. No injuryt…. ii.and remand to find what his exact roles were at the plant…… i. the difference is likely be respected. 1.. Craig. Plant…that is polluting 2. use different financial professionals.must have using that to role effectuate the specific violative acts in question Equity Means Focusing on Things as the Really Are: If it makes sense to talk about a parent and subsidiary disagreeing (i. Eg. Parent corporations can only act through agents. Illustrations i. Dual agency can lend credence to piercing corporate veil. Charter has majority ownership of Cape equating to a “potential” to control e. Ott II……. hostile Cape CEO had remained for 10 years. Paying some corp bills w/ personal checks iii. i. Court of appeals findings 1. ii.usually failre to follow formalities doesn’t injur creditor 1. Craig v. i. Plaintiff needs to show that dual agents manipulated the subsidiary corporation solely in the interests of the parent corporation. complete domination) and used that domination to perpetrate a wrong (2. ii. a. They latch onto Williams. Arrow Bar……. Charter owns Cape…. Bestfoods. Most courts will NOT find failure to get more capital as a reason to pierce veil 4. an Agent working soley for CPC/Bestfoods…. Injury to creditor i. This means Charter did NOT have COMPLETE CONTROL… ii. to obsever usual corporate formalities is not grounds for piercing the veil……They don’t need to do everything a public corp does………They were making a basic effort to be careful 1.owns i. If failure is to hold meetings…. iii. b.. Eg. Same Basic Rule: Plaintiff has to show that the parent didn't respect the subsidiary as a separate entity (1.but working at plant…. iii. Supreme court findings…. Shares never formally issued. When failure to follow formalites actuall injures creditors…. disregarding inconsistent interests of the subsidiary. 46 .. Craig. Lake Asbestos…………”potential control not enough” 1.that won’t directly result in creditor injury c. Olsen………Close corp exception: Failure of statutory close corp. 2. Best Foods. ii. Was he directly instructing people to continue with the polluting…. Baatz v. United States v.”person in conflicted role MUST have directly caused the bad actions” 1. So when olsen approaches banks for loans as himself…this isn’t a huge deal d. iii. A finding of “potential control” is NOT ENOUGH…. Failure to Folow corporate formalities a.
not whether it inequitably harmed someone. subject to equitable constraints. No: Encourages socially inappropriate risk-taking 3. it will not be unduly burdensome for corps to await decision of shareholders before beginning process of integrating assets and personnel b. liabilities of selling don’t necessarily pass ii. 1. 2. No: Pure legal formalism 2. May not have to submit it for vote unless they are selling “substantial” portion of the businesss d. This relies on fact that management will be able to provides shareholders with sufficient. Classically. two businesses combine and merging corporations’ stock is converted into the merged corporation’s stock. Nonconsenting shareholders of acquired corp are forced to give up their shares subject to appraisal rights iii. iii. They can vote but don’t have appraisal rights 2. Elinates voting and appraisal rights that shareholders of the acquiring parent would otherwise have 47 . Does Any of this Make Any Sense? i. Yes: Counters people's natural risk aversion and. MERGERS 1. i. i. Some possible answers 1. Submit proposal to shareholders for majority vote a. e. i. Triangular Merger: Target merges with a subsidiary of the purchaser. 3. Main reason to use this method 1. Target distributes the consideration to its stockholders after paying debts i. selling doesn’t need to transfer all assets 3. Target stockholders either receive purchaser stock or their shares are converted to cash.Acauired corporation merges into acquiring subsidiary iii. The target’s stockholders receive parent stock or other consideration. APPROVAL APPRAISAL RIGHTS Types of Negotiated Transactions a. Acquisitive Merger: Merger in which one corporation (purchaser) is effectively acquiring the other (target). protecting the assets of some pockets from the creditors of others? Why should it make a difference if they take the fiction seriously? ii. What must the selling company do? 1. Nothing happens to the parent’s pre-existing stockholders.d. Permits aquiring company to acquire all shares of another while leaving the acquired corp in existence ii. Bestfoods. Their participation adds value for corps and themselves b. Different from mergers 1. shareholders can make an informed decision to approve or reject the merger a. digestible. The question is then whether the parent is liable by the statute's terms. Forward Subsidiary Merger. Statutory Variations: Statutes can establish liability without regard to corporate fictions. c. Acquiring corp shareholders do not get these rights e. Stock Purchase: Purchaser buys all the stock of the target which essentially becomes a subsidiary of the purchaser. corporations selling assets doesn’t automatically disappear 2. Policy: We are comfortable allowing people and companies to set up separate pockets and assets for liability purposes as long as those are not clearly fraudulent. and unbiased info about pros and cons of merger 2. Reverse subsidiary merger. facilitates beneficial risk-taking. Model is built on assumptions 1. One parent company aquires a corporation and either merges it into one of their subsidiares or merges one of their subsidiaries into the acquired company-Compensation for shareholders of acquired company comes from parent company ii. Classic Merger: Combination of two corporations into one. 2. 1.Aquiring subsidiary merges into the acquired corporation iv. But can be structured to have the same form as a merger iii. Should we allow individuals (let alone corporations) to segregate assets into pockets. Asset Sale: Purchaser contracts with target to buy substantially all of its assets (tangible and intangible) and assume some (or none) of its liabilities.
b/c the appraisal and voting rights are usually only involved with the acquiring (subsidiary) company….the aquiring parent will usurp the rights of the acquiring subsidiary and vote for the merger…. b. also this shuts out the shareholders of the parent corporation f. Short-Form Merger: Parent owning at least 90% of the stock of subsidiary merges with the subsidiary General Rules: a. Shareholders of target corp ALWAYS get voting rights b. Shareholders of acquiring corp DON’T get voting rights unless251(f) Exceptions i. There is an amendment to the certificate of incorporation ii. any outstanding stock of acquiring corp no longer becomes outstanding iii. corp is issuing stock AND shares issued exceed 20% of the shares outstanding of the surviving corporation prior to merger. c. To get appraisal rights, must make a demand under§ 262(a); Stockholders who oppose mergers can generally demand cash for the “fair value” of their shares, as appraised by the Chancery Court. Applies only to stockholders who vote against the merger and hold their shares through the effective date of the merger. i. A)If you are making a demand pursuant to (d) of this section… 1. And didn’t vote in favor of merger 2. You shall be entitled to an appraisal of the “fair value” d. Shareholders of target corp ALWAYS get appraisal rights (if they voted against merger) unless (any will do) 262(b)(1 i. I) their previous stock is publicly traded on NSE AND Ii) their previous stock is held by more than 2000 holders\ ii. OR iii. merger did not require vote of stockholders of the surviving corporation 1. 251(f) above was met iv. AND EVEN IF THIS IS THE CASE, they get appraisal rights if they receive something besides…262b2 1. A) shares of stock of surviving corporation 2. B) shares of stock of any other corporation that are either a. On stock exchange b. More than 2000 holders 3. C) cash in lieu of FRACTIONAL shares (ca’nt just get straight cash for your shares…then you get appraisal) 4. D) any combination of above e. Sharhldrs of acquiring corp ALWAYS get appraisal rights (if they voted against merger) unless (any will do) 262(b)(1 i. I) stock is publicly traded on NSE AND Ii) stock is held by more than 2000 holders ii. OR iii. if merger did not require vote of stockholders of the surviving corporation 1. 251(f) above was met iv. AND EVEN IF THIS IS THE CASE, they get appraisal rights if they receive something besides…262b2 1. A) shares of stock of surviving corporation 2. B) shares of stock of any other corporation that are either a. On stock exchange b. More than 2000 holders 3. C) cash in lieu of FRACTIONAL shares (ca’nt just get straight cash for your shares…then you get appraisal) 4. D) any combination of above
3. Merger Procedure (DGLC § 251) a. Merger Agreement (“Signing”): The boards of both merging corporations approve a contract setting the terms of the
merger. b. Stockholder Vote: The boards of both merging corporations submit the merger to a stockholder vote, absent exception. A majority of total stock outstanding is necessary for approval. (DGCL § 251(c)) i. § 251(f) Exceptions: Shareholders of the surviving corporation may not vote to authorize the merger if: 1. There is no amendment to the certificate of incorporation 2. No shares of surviving corporation stock are issued or those shares issued exceed 20% of the shares outstanding of the surviving corporation prior to merger. ii. NYSE 312.07 versus DGCL § 251(c) 1. Note that 312.07 requires a majority of the stock actually voting to approve the merger, whereas § 251(c) requires absolute majority of all the stock outstanding, making Delaware more demanding in the sense that if people get lazy and don’t vote you can have a problem. c. Merger Occurs (“Closing”): The agreement is consummated and the merger is legally concluded. 4. Asset Purchase and Triangular Merger Procedure (DGLC §§ 251, 271)
a. Same as merger procedure except that the purchaser’s stockholders do not have approval rights. Stock exchange
rules may require approval by purchaser stockholders if the purchaser issues new stock exceeding 20% of total shares outstanding after issuance. b. Seller’s stockholders also DO HAVE approval rights in asset sale i. but do NOT have appraisal rights………. 5. Short Form Merger Procedure (DGCL § 253) a. In cases in which at least 90% of outstanding shares owned--requires only a resolution of the parent board. Stock Exchange rules may require a vote by parent stockholders. b. Appraisal is the only remedy (§ 253(d)(3)).
6. Appraisal Rights (DGCL § 262) a. Do you get appraisal rights?
§ 262(a); Stockholders who oppose mergers can generally demand cash for the “fair value” of their shares, as appraised by the Chancery Court. 1. Applies only to stockholders who vote against the merger and hold their shares through the effective date of the merger.
A)If you are making a demand pursuant to (d) of this section…
And didn’t vote in favor of merger You shall be entitled to an appraisal of the “fair value”
§ 262(b)(1) Exceptions: No appraisal remedy (have to take the price they give you) if 1. Listed on a national security exchange 2. Held by more than 2,000 holders
Is a surviving corporation under § 251(f) (triangular) or asset purchase and thus did not require vote for merger. Lists out who appraisal rights are available to 1) UNLESS
And if merger did not require vote of stockholders of the surviving corporation § 262(b)(2) Exceptions to (b)(1):
a. b. c.
I) stock is publicly traded on NSE Ii) stock is held by more than 2000 holders
If shareholders are to receive something NOT listed under § 262(b)(2) (receive something besides cash, shares, etc..listed pg 63 of statuate supplement) they get appraisal notwithstanding § (b)(1). 2) IF you don’t get any of the following……….you get appraisal rights even if you satisfy (b)(1)
a. b. c. b.
A) shares of stock of surviving corporation B) shares of stock of any other corporation that are either i. On stock exchange ii. More than 2000 holders C) cash OR D) any combination of above
What is the fair value:§ 262(h): Court appraises shares by determining fair value exclusive of any element of value arising from the accomplishment
expectation of the merger or consolidation. It may consider ALL RELEVANT FACTORS.
7. De Facto Merger Doctrine: Grants appraisal rights in transactions with the same effect as merger (e.g. stock-for-stock and
8. Substance Over Form doctrine: When, as part of a transaction between two corporations one corporation dissolves, its
liabilities are assumed by the survivor, its executives and directors take over the management and control of the survivor, and, as consideration for the transfer, its stockholders acquire a majority of the shares of stock of the survivor, then the transaction is no longer simply a purchase of assets or acquisition of property . . . but a merger. We will not blind our eyes to the reality of the transaction. a. Cases finding de facto merger (which are very rare) tend to emphasize two sets of facts: i. Similarity to Classic Merger Courts look for a transaction that looks like a traditional stock-only merger with a single surviving corporation. Farris, Applestein, Irving Bank.
1. Farris v. Glen Alden – pg 601
They can “get out” by “appraisal” – where they ask the courts to intervene, determine the “fair value” of the stock and force the company to pay it to them, regardless of what the actual value the participants got Applestein v. United Board & Carton Corp. a.
a. Saul Epstein exchanges 1250 shares (majority) of Interstate stock for 160,000 (40%) shares of United Stock b. By this “exchange of stock,” United now owns Interstate b/c epstien owned a majority of Interstate
c. What standard/TEST will the courts use in determining that substance has overtaken form? i. Stockholders should not be forced into a merger if the result is fundamentally different than what they bargained for in obtaining their original shares. Otherwise, corps could use clever labeling to screw their stock holders over d. FACTORS TO CONSIDER
i. ii. iii. iv. v.
Transfer of assets Assumption of liabilities Pooling Dissolution of target company Combination of management
e. ramification: Appraisal rights are granted ii. Disguised Acquisition Courts also look for structure that portrays the acquired as the acquirer to avoid
giving shareholders of the acquired corporation voting rights. Farris, Applestein, Irving Bank. i. Delaware Doctrine (Independent Significance) – minority rule: Sale of assets and merger statute deserve equal respect and are independent and since it is authorized by statute the court should not interfere. Therefore, the sale of assets transaction, which looks like a merger, shall go forward as a sale of asset transaction and no appraisal/voting rights shall be afforded. Delaware court thinks there is no sprit to the statute, no overall policy
iii. Hariton v. Arco Electronics, Inc. 1. Arrco sells assets to Loral in exchange for loral stock, after which the Loral stock would be distributed to arco shareholders and arco would dissolve 2. Therefore a corporation may create a resulting effect that would be illegal under other statutes by selling instead of merging 1. The sale of corporate assets statute was followed correctly so the provisions of the merger statutes are of no relevance 2. DELAWARE LAW §271: No right of appraisal for sale of corporate assets, so hariton knew when he bought arco stock that they could sell their assets for stock in another corporation….So you can accomplish a de facto merger w/o giving your shareholders appraisal rights ( as an acquiring corporation)
9. California Approach a. The California Code attempts to specific changes so fundamental as to require voting and appraisal right for shareholders, calling them “reorganizations.” Form does not matter. i. VotingIf a corporation issues new shares amounting to 20% or less of shares outstanding before the transaction, its shareholders do not vote. Otherwise they do (even if they own shares of a parent corporation that is not directly purchasing or merger). ii. AppraisalAppraisal rights follow voting rights, but exclude shares listed on a stock exchange unless at least 5% of the class demands appraisal.
b. Start w/ §181..reorganization …….(b) “exchange reorganization” – yes
c. Should be voting rights. . .. §1201(a) d. Appraisal rights…look to §1300 i. what does Applestein need to do to demand appraisal rights 1. §1300(b)(1) Must get 5% or more of the other minority shares to agree…unless of course he owns 5% which he could do it on his own
Freezeouts Definion: Those in control eliminate equity ownership of the non-controlling shareholders By forcing insiders to sell their shares…………….Result : exclusive ownership by majority……..SEVERAL WAYS TO ACCOMPLISH THIS: 1. Two step acquisition a. 1. big corp buys most of shares of little corp in tender offer from little corp shareholdrs (90%) b. 2. big corp causes little corp to merge into big corp - - - - Minority shareholders are entirely disinvested during second step…..they are required to take cash (rather than acquire stock in the target) 2. Merger of long term affiliates – Weinburger…one corp has controlling, but not sole interst, in another corp for a long time and now decides to eliminate minority interst (parent-subsidiary – just cash out minority shares….instead of giving stock) 3. Going private ii. Techinuqes 1. 1. “cash out”………Minority shareholders paid cash – most common 2. 2. short form mereger… corp owns a larege percentage of anotehrs stock, subsidiary may be merged into parent w/o a
iii. f. g.
Whats wrong w/ freezeouts?............Possible harms Even if they get fair price…there are transaction costs………&………..“fairness” hard to measure Monetary Differences between Appriasal and normal Fiduciary Breach: Appraisal measures the “intrinsic” value of the corporation’s business as of the date of the merger Remedies for fiduciary breach can be either 1. Damages: Same as appraisal
Recissory Damages………. misrepresentation. Weinberger (current DE law). Rescissiory Damages: Recessiory damages must be determined based on the present value of the organization. Suit for breach of fiduciary duty can be a class action. Inc. majority of minority approves (weinburger)………. If satisfied that elimination of public ownership is in furtherance of a business purpose. discussion…Signal used confidential UOP data to prepare the feasibility study….e. iii. when D has rebutted above three points Remedies: Weinberger: If the controlling shareholder fails to demonstrate entire fairness.Just said “we’ll pay 21”…. Although multiple actions can be consolidated. injunction All Relevant Factors: All relevant factors should be considered when appraising shares..3) adequate disclosure i. b. j. The controlling shareholder is presumed to have acted in its personal interest but may defend itself by demonstrating that the transaction was entirely fair. The underlying assumption in an appraisal valuation is that the dissenting shareholders would be willing to maintain their investment position had the merger not occurred. D carries burden of showing adequate disclosure………. 2. the court must be satisfied that the freeze out was for the advancement of a legitimate corporate purpose. the court should then proceed to determine if the transaction was fair by examining the totality of the circumstances. Weinberger v. Usually get equal to what they would have got with appraisal…Usually CAN’T get an ii. Remedys: a.to show that 24 would have been ok. Appraisal is an individual action. ii. HOSTILE • TAKEOVERS TENDER OFFERS • TENDER OFFER – offer to stockholders of publicly owned corp. Appraised Value: Fair value of the shares at the time the merger occurred. bidder can take control of corp over BOD and management opposision How do tender offers work? o selecting a target……usually choose an “undervalued” company whose real value is not reflected by market price due to 51 . UOP. Normal remedy is “quasi-appraisal” (i. serious problems with fair dealing. Demonstrating fairness: Plaintiff in a suit challenging a cash-out merger must allege specific acts of fraud. distinct from the controlling shareholder’s personal interest. 3. iii.Documents / feasibility study never disclosed Burden of Proof…….End of ii.Signal NEVER negociated w/ UOPs board……. that is. Fairness: Freeze out merger treated like any interested-fiduciary transaction. regardless of whether the price paid was fair when paid. 1) Instrinsic fairness test 1) fair price………2) fair dealing (procedures)……….. each plaintiff must actually bring suit (a lawyer with a representative plaintiff cannot purport to represent them). class action suit rather than pursuing individual appraisal action Two Views of the Cause of Action to Contest a Cash-Out Merger with a Controlling Shareholder: i.3 “arms length process” between minority and majority i. Basically. i. Recissory Damages (Accounting): Profits actually realized by the fiduciary from the breach. possible remedies are (not sure if these are categorized correctly) a. not just unfair price) c.. 10. Procedural fairness……. damages for cashing out the minority below “fair price”). Appraisal rights must be preserved at the time of the transaction. Procedural Differences between Appriasal and normal Fiduciary Breach: i. Business Purpose (no longer required – Singer overruled by Weingbruger)-Controlling shareholder must demonstrate that the decision to cash out the minority reflected an interest of the organization.2. 2. RAMIFICAITON: The Weinberger Approach……Courts begin to encourage dissasitisfied minority shareholders to challenge cash-out mergers via a cost-spreading. 1. what the stockholders would have if the merger was rescinded. Stockholders tricked into voting for a merger or accepting the offered cash have lost their chance at appraisal rights by the time they discover the wrong. ii..Business Purpose Test (not used in Wienberger): Because the danger of abuse of fiduciary duty is especially great in a freeze-out merger. 1.Only work done was a hurriedly prepared banker fairness letter Fair price………. Shifts to P to prove “unfair” when……1. yet never disclosed the study or the 24 dollar price.. 2.Should have been closer to 24 than 21 Disclosure……. i. a.. Massachusetts Law: …. Accounting remedies (disgorgement) also available if necessary to prevent unjust enrichment (i. or other items of misconduct to demonstrate the unfairness of the merger terms to the minority.Generally – on D to prove it was fair a. k.Where would I be at had the merger not occurred? l.h. Defendant bears burden of proof on proving valid business purpose. to exchange their shares for cash or securities at a price above the quoted market price o Used in hostile takeovers – acquisition of publicly held company over opposition of management why do they work? • All of the other methods require consent of BOD and managmenet • tender offers need not be approved by BOD…bidder just offers to each individual stockholder…and if a majority tenders their shares.e..
assets worth more in liquidation than market proce c.Has no assets or ongoing business except that at last moment it recives from the bidder.reasons pg 509……But b/c sharesholders many times are • • • Passive…. bidder acquirees controlling interst via a tender offer • 2. so it is more coercive.Usually all.and shareholders less likely to approve these. you may be screwed by just having an appraisal right at that point Emanuels: Pros and Cons of takeovers: 539 o o o o o Pros…….Effective pressue …there is always implicit threat of back end merger • Pressure on shareholder to get the higher price while you can….b/c good mangers in good industry have nothing to worry about • forces focus on short term….why? 1. make a tender offer seeking to buy sufficient shares to gain control o Front-end loaded tender offer In cashing out minority shareholders….b/c of you hold out and bidder gets 95% and effectuates a short term merger. Control Transactions as Monitoring Device: Officers who are worried about their job security might manage Pre offer defensive techniques (shark repellants) Potential acquirer who wants control but doesn’t have consent of BOD can • 1.And ………. bidder will at least recoup some of tis costs Financing…….2 step process • 1.. consideration in step 1 is much greater than in step 2 (the cash they’d get from the merger). (bidder thinks he could turn stuff around) b.” o better.o a.. usually purchases small % of comps shares….. launch a proxy fight seeking authority to vote sufficient shares to gain control • Usually require Shareholder approval – b/c defenses will be an amendment to bylaws…. b/c shareholders who don’t accept at step 1 will be forced to accept less • 2.Use of shell corporation…….Doesn’t discipline……. inefficient managmetne. but at least wanta majority of outstanding shares…b/c why pay a premium if you are not going to get control? Stated minimum……….Usually offer is contingueent on some minimum number of shares Pressure to tender Threat of back-end merger………. generally (could probably be infused w/ next couple sections…. the funds needed to carry out the share purchase…... conglomerate…pg 483 pre-offer transactions……. can buy the shares at price lower than tender offer 2.Financing Contingencies………………Regulatory Contingencies………….There is danger they could accept a crappy offer in these situations When they get a proxy seeking their approval of a merger Supermajority Provision – require a super majority rather than regular to approve merger or sale of assets Poison pill plans 52 .. Emanuels on Hostile Takeovers.will defer capital spending to boost short term earnings……increases debt Hostile Acquisitions – power point slides Fiduciary Issues in Takeover Defense o Complex Consideration………………. rather than those of the corporation and its shareholders.Business Disruption…………….Removes wrongdoers and iffecient managers………Discipline to managers to perform better if hostile takeover looms Cons……. if target defeats takeover attempt or if a “white knight” comes along to buy at a higher price.508 • • • Personal Incentives to Resist: Officers of big companies get paid more money and attention. cashes out minority shares through merger In a Front-end loaded tender offer situation..board may be acting primarily in its own interests.once bidder has selected a target.Ill-informed…. Personal Incentives to Facilitate: Officers who help the acquiror might be well-treated afterwards.. b/c takeovers sometimes result in a lot more money o But still they are often approved….Varied Shareholder Interests and Time Horizons Necessary Role of the Board: • Centralized Provision of Expertise & Information……………………Centralized Management of Auctioning/Bargaining Fiduciary Conflicts in Control Transactions: OMNIPRESENT SPECTOR .then it gets merged into target Public announcement Number of share…….
.Lock ups…….Target gives 3rd party a “lock up”……….As in Revlon .Procedural requirement for above two points Independent directosr.Not merely to perpetuate/entrench their own power….Allows shareholder to buy at half price from unmergerd bidder (sale of assets...crown jewels Benefit to stockholders…………….o see below “call plans” flip over…. …..Must have reasonable belief there is danger to corporate welfare…. leaving target company w/ lots of debt o Proportionality Requirement – “reasonable in relation to threat posed” :…. BOD must make special showing to qualify for protection of BJR when enacting defensive maneuvers o 4 things to obtain BJR…when enacting anti-takeover measures Reasonable grouns for belief in corporate objectives…….. court grants protection ……Unocal…….Must be at least SOME benefit to stockholders… • Eg………. or is it trying to prevent ALL types of takeover.“modified BJR” …….Procedural Aspect of above two points Can’t just brand an offer “inadequate”….b/c there is high probability that BOD will be self interested. working to protect corp.Where buyer intends to use credit / junk bonds to finance. • Preclusive – prevents hostile bidder from succeeding no matter what the bidder does • Forclosing of ALL takeovers…If a poison pill plan makes it so no reasonable bidder ever want to take over… • Coercive – crams down a management offered alternative on targets shareholders o Lower management bid….middle ground ……. NOT just their own jobs Can’t be “preclusive” or “coercive” Unitrin…..also Filp in provisions…. Dangers considered • Change of business practices……..Belief that bidder will change stuff………Or liquidate corporation • Coercive tactics….If BOD could use power to vote out hostile bid . • Finding wite night…….. not just ones posing threat Good faith and reasonable investigation – procedural consideration….Selling off your best asset at a ridiculously low price to a third party to make deal less attractive.“crown jewels” option – offer to white knight to buy one of targets most attractive businesses at below-market price…does’nt require shareholder approval b/c not “substantially all the assets” but makes target less attractive to other bidder • Share manipulation o Sale to friendly party o Share repurchase… • Pac man defense o Make a tender offer for the bidder • State anti-takeover stattues Judicial reponse – usually bidder will ask courts to allow takeover to happen • Delaware law…. b/c it screws your attempt to take over………Forces them to talk to BOD Post offer techniques • Defensive lawsuits………..is the BOD looking out for stockholder interest Reasonable response…….. see next section. rather than concerned for stockholders...Breach of fiduciary duty.must have research to back it Also..coerces on front end b/c of fear of eunfavorable back-end cash-out merger • Excessive debt.. etc..Two tier front loaded offer…. even if it is higher than their alternative bid o Waste of assets……….Lend credence for first tow points if there were disinterested directors that made the decision Once obtained BJR.Moran How regulation works in Delaware…examining above in more detail o Reasonable Basis for fear:….) Put plan……Allows ahreholser to buy at specified price (so they won’t get undervalued in second step of front end loaded tender offer) o Practical UPSHOT of the pill…. can’t just approve a defensive mechanism w/o some expert analysis and whatnot o o • 53 .Allows a shareholder to acquire shares of the merged bidder at half pice..Based on above…... can’t enact a takeover defense that better protects the company’s creidotrs against risk of default but deprives stockholders of highest price for their shares o Investigation……..people considering taking over DON’T buy past the critical %.If unfair or coercive to corps stockholders • Eg………Attempt while stock price is unusually depressed…….
e. attempting to entrench its power) a.. they offered to sell the shares back to Unocal at a premium. 1. but having independent directors increases likelihood that you can prove 1.so it is reasonable… c. Overreaching c. (1) Incumbents have the burden of proving they acted in good faith after reasonable investigation.. even if NOT a majority of the independent directors approve a defensive action. Burden of proof on target board of directors because of the “omnipresent specter that a board may be acting primarily in its own interests. ers' desire to stay in office or some other iii. THEN Court will apply BJR to BOD’s decision 54 . they still get presumption o Who is an “independent director”…….So don’t get presumption Consequences if requirements not met Court doesn’t automatically strike down the action.ENTIRE fairness HOSTILE TAKEOVERS UNOCAL EXAMPLE 1.. (2) The defensive measure must be reasonable in relation to the threat posed. Fraud b.” We researched and determined… a. rather than those of the corporation and its shareholders. so Unocal can avoid being taken over… iv. 1) legitimate threat b. Application to case: Evidence? a.BUT……….Existence of other significant business or stockholding relationship with the corp makes director insider. but before getting complete control and before completing the hostile takeover.4 others had business relationships………. even if he is not employee • See Revlon (case next section)…………. Procedural . not just rely on internal.2. As long as there is not evidence that the REAL MOTIVE was… 1. Reasonable in relation to the threat 1. Its response reasonable in relation to threat: was not "Draconian" (inequitable): i.. not dispositive though Doesn’t allow per-se BJR. Not primarily motivated by board memb ii. It reasonably (i. If a shareholder establishes that the board acted for that purpose. 2) that our action was the best action to deal with threat ii. Unocal Rule: A board action for the purpose of defending against a challenge to its control is inherently conflicted and subject to an "intermediate" standard of review (not BJR). Substantive 2. It is coercive iii. Some other breach of fiducariy duty a. and i. MESA had acquired a lot. potential self-motivated directors Significance of Independent directors…………………. b/c this is not looking out for corps/shareholders best interest 2. Self-perpetuation (on the part of the board. Being uninformed b. and 3 in Delaware. OR 3. Lack of good faith d. 1. Test is both procedural and substantive… i.2 others were significant stockholders……... carefully and in good faith) determined it faced a threat to corporate policy or effectiveness.o Also.. the board must prove that a. Court wouldn’t apply BJR here. 4 insider and vote is 5-4 for the transaction w/ only 1 independent director approving. Excuding MESA is what will allow the shareholders to GET a FAIR VALUE…countering threat above…. a.14 directors on target board………6 were employees – so only six are “technically” insiders………. let outside/disinterested directors meet by themselves. court still gives credence • so if 5 independetn. but will treat decision as any other selfdealing transaction…. d. Greenmails – MESA had done this before and taken a payoff to stop through the use of greenmail 1. MESA is offering low value ii.
b. so you can’t.After you decide to sell.Board “just says no” or “refuses to undo some preivous measure” 3.. 1) enjoin or reverse tranaction unless “best reasonably available price” was obtained b. abandon any long-term plan dependent on maintaining the “team”) (opposite of Unocal where it was trying to defend against takeover). they Negociated a leveraged buyout with Forstman instead of considering Pantry’s offer…. “Level playing field” rule…as soon as corp starts to consider sellling i. (2) Proportionate to the stockholder benefit sought.. and insiders cannot favor one bidder (white ii. b/c there are reasonable response to legitiimte threat 2. i. When used? a. Inc. must be reasonbel . If the board favors one bidder over others. Court is likely to a. TRIGGERS “enhanced scrutiny” Court will look for…………………. v. knight) over another (original hostile raider) “all would-be bidders must be treated equally. you become an auctioneer. (1) Based on informed determination of an immediate benefit to stockholders. When NOT used?.HOSTILE 1. 1. 3... 2. it limits the goal of its business judgments to maximizing immediate shareholder value.Substantive defects 2. If they do take measures. the “omnipresent specter” arises...Time 2. 1.court applies “enhanced scrutiny” in these situations to the steps that BOD takes a. 2.These are for situations where company has announced decision to sell….. as they do here. The Revlon case . active bidding process – corp initiates bidding process…puts itsle on market b. The board must then prove its decision was: a. Later. 55 . seeks alternative transaction involving breakup of company c.. after they realize they have to sell.. sale or change of control…when control would go to one person or entity 4. Inc. abandonment of long –term strategy. 2) strike down defenseive measures that materially lessen interest of other bidders 3.. Revlon usese defensive maneuvers………These are ok.Procedural defects……………….Revlon.. McAndrews and Forbes Holdings.e. favor a white knight (Forstman) over original raider (Pantry Pride 1. – in response to bid. Illustrates how defensive measures enacted that would otherwise be valid (if trying to maintain independence) are INVALID if used to favor one bidder over another …AFTER decision to sell has been made (self initiated bidding process…. Delaware law and the decision to sell the company…. a.as opposed to “putting corp in play” below) 1. TAKEOVERS DECISION TO SELL OR BREAK UP Reverse Unocal: When the board decides to sell control or “break up” the company (i..
d. Managemtn interested…. Time. Inc….gave frostman confidential info that it didn’t share w/ pantry 4. c.pg 524 4. 1. The decision to commit the corporation to a control transaction or not is within the board's business judgment.…………Corp merges w/ company…. b/c forstman said they would be kinder to Revlons creditors…. Time c.NOT the same as a decision to sell (above) b. Taking an action that might “put the company in play” i. So as soon as Revlon realized they had to sell. OFFER BY CONTROLLING SHAREHOLDER. ii. The timeframe of any direct return on the stockholders' investment (immediate profit v. b/c these wer based on reasonable fear of pantry and that it would ruin corps effectiveness iv. time restructures merger w/ warner to be asset acquisition so shareholders don’t have chance to approve. Auction – duty shift 1. long-term profit) is within the board's business judgment. point…. Time. but b. Where corporation takes action that might have the effect of making corp attractive to bidders / vulnerable to hostile takeovers……. Duty violated 1. After paramount offer. 2.gave Frostman “crown jewels” option a. The board's response to the threat of a low offer is not limited to offering information and/or a better alternative. Might be ok to accept a lower than normal offer here b/c this shareholder could hypothetically block another offer Board’s right to “just say No” -Paramount Communications Inc.. Lock ups – locked up deal for one bidder (forstman) over the another (pantry) 1.Eg…paramount comm.. It can refuse to allow a tender offer to proceed (leaving the stockholders to replace the board if they disagree). 3. asset depletion 5. but to stifle it iii. Bids by third parties and shareholder preference make no difference. BUT in this case.3.they won’t be illegal as long if they had EXPANDED cmpetition a. Reasons for doing this? a. Forstman was ALREADY A BIDDER.gave high cancellation/break-up fee if Revlon backed out (which would screw over any other would be acquirer) – sort of like crown jewel. to buy two Revlon subsidiares for way below price IF another bidder (pantry pride) got to 40% shares… 2. CREDITORS don’t matter though…stockholders should be BODS #1 concern 3. HOSTILE TAKEOVERS ii. iii. Injunciton denied i. Time. Facts i. NOT to get better price. bidding had essentially stopped (on pantrys side) when Revlon gave Forstman the lockup options…. Revlon only applies if the board first makes that decision. Time. The board entitled to the business judgment rule in deciding between different permissible defensive tactics and combinations of tactics. v. they should have reaized their duty shifted v. Here. b.Refinign Revlon and Unocal a. right to say NO 2. BOD’s role changes from defender to “AUCTIONEER” a. Business Judgment of the Board Within Reasonable Range: i. …. 2.wher mangemnet is one of competing bidders. But as SOON as you announce to sell (or break up company by selling assets or pieces). so at this ii. V.gave frostman “no shop” provision a. Although price was still good. Goal? Getting BEST stock PRICE for holders 2. c. etc……b/c board feels warner merger is better…they can do this! e. Denies 2 claims 56 . court had No problem w/ revlons original defensive manuvers. so lock up was not used to induce more competition. Time. bidder…to increase shareholder value Eg…there is only one bidder and a lock up is the ONLY way to get another b. the lockups STIFLED COMPETITION. wouldn’t deal w/ any other would be acquirer (pantry pride) 3. Early defensive manuevres 1.see below But then they realize they will have to sell at least part of the company. 4.
even though Warner would be controlling at end. HERE. there was NO controlling shareholder 2. so this is NOT an active bidding process/seeking to sell company type deal b.see substantive coercion below)) even the board has better long term vision than stockholders i. plans are effectively moot. v.Board can “just say no” ii.Paramount Communications Inc. Revlon argument i. a. corp seeks alternatives to sell itself or break up company g. Break Up: A plan to break up the enterprise also moots business plans.. second prong – “reasonableness? 1.1. also. First prong .QVC suing paramount to enjoin defensive measures (and merger agreemtn) between paramount and viacom ii. board is in better shape if it just carries forward with originally announced transaction than if it tries to enact new measures 1. Unocal calim f. Time’s decision to acquire warner doesn’t trigger “level playing field” b/c these duties…only arise when 1. 2. Significance of case i. time had reason to believe that merging w/ paramount would be bad in long term ii. SALE of Control (as opposed to break up ) . No violation of Unocal principals…this is a DEFENSIVE move (restructuring the merger so stockholders can’t approve it (asset buy) so they can merge w/ Warner as a defense to Paramounts attempt – b/c if they DON’t restructure.no controlling shareholder a. then the stockholders might vote against Warner (they would be confused and interpret the high price from paramount as the way to go. time was just looking to acquire Warner. This is reasonable even though it creates debt iii. Time restructured merger into an asset acquisition of warner b/c of the threatening offer from paramount a. QVC… What is difference between this and Time-Warner. Revlon claim 2. 1. 1. i. So court granted more deference b/c the Time-Warner deal was on the table before paramount made its offer a. 2. Change of Control: If an identifiable person or group takes control. doesn’t gie control to an individuall…not a sale of control (see QVC case below) 2. in response to bid offer. Whereas paramount is PUBLICLY controlled…. i. in time – warner.Redstone… 3. Or 3. 57 . this is a transfer of control from PUBLIC to PRIVATE (individual) which triggers “enhanced scrutiny” Facts…. So ALHTOUGH NOT A BREAKUP. SALE OF CONTROL Triggering Revlon: The question is whether the transaction causes a fundamental change in the corporate enterprise that both requires the directors to focus only on maximizing stockholder value and justifies higher scrutiny of their decisions. the current board’s strategic b. Court might not have found reasonable a high leveraged buyout of warners assets in response to paramount’s offer if it wasn’t on deal before HOSTILE TAKEOVERS 2. there is a controlling shareholder of Viacom…. corp initates active bidding process to sell itself a.. So court will apply BJR h.danger to “corporate policy and effectiveness” 1. where there was a merger but NOT a change of control 1.
If target is merging with another company already publicly held (as opposed to a controlled company (by an individual)).Limits paramouns opportunity to sell or merge w/ other companmy i.. 2.. FormThe company issues to all of its shareholders “rights.. trigger LEVEL PLAYING FIELD….open ended liability to paramount d.can just get them on credit iv. Redstone..Even after paramount makes original deal w/ Viacom. Paramount shareholders get non-voting Viacom stake – carappy ii.9% of paramount stock if any actions triggering terminating fee occur… ii.. ix. Transfers for control usually come with a price – “Control Premium”…compensates minority for loss of voting power………HOWEVER. 58 .. Deal fails enhanced scrutiny a. No shop provisions……. QVC 1.Instead of buying shares.just like Revlon.Viacom doesn’t have to pay cash for shares…. Lock-ups and other protective measures 1. Viacom has a controlling shareholder . 1. BOD ignores it based on little things (Even though deal w/ Viacom has some of these same “little thing” problems)………b/c w/ Viacom …paramounts chairman remains in power.. Termination fee priviosn………Viacom gets a huge amount of $ if parmount backs out c. but also when control would pass from public to a single individual or single entity b. The company reserves the right to cancel the “rights” for a nominal price any time before they are triggered. Viacom demands that paramount take measures to make it hard for paroumtn to abandon deal or sell to someonese sels a. Time. Court strikes it down 1. paramount decies to enact a defensive merger to avoid a hostile takeover (by QVC)…. but doesn’t….. Procedural defects…….. Substantive CoercionThe board can validly worry that allowing stockholders to make an uncoerced decision might harm stockholders’ interests because they might be confused into deciding incorrectly. Revlon.Rather than selling the “company” board can also make a decision to sell “control” to an invidiual or group…. board still has power (b/c of QVCs offer) to change.. Redstone i. Lock-up stock option i. Whenver board proposes a transaction that will result in a “shift of control” from the public to a particular individual or small entity. 1. Allows Viacom right to purchase at fixed price 19. can just make paramount pay the difference between current market price and fixed value…no cap. Significance of Paramount v. 2.paramount v. Deal w/ Viacom……After unsuccessful attempt to merge w/ time. scrutiny is triggered iii.Ignores bad parts of Viacom deal…gave insufficient attention b. Qvc bid… i. Which means control goes out of publics hands into redstones hands c.Rational for triggering enhanced scrutiny i. Not just when entire company up for sale. Opportunity Loss The board can validly grant rights to an early bidder that inhibit the board from shopping the company.b/c Paramount is not just going to avoid a QVC takeover…but are definitely considering breaking up/transferring control/putting themselves “on market” a.. whereas he would not w/ QVC (this is NOT proper purpose) vi. No cash………. Qvc comes in and offers more than 1 billion more than Viacom ii. 2) necessary to comply w/ fiducariy duties b. “put” right….a defensive merger w/ Viacom v. Can’t even respond two unsolicited offers UNLESS 1..” If anyone acquires more than __% of the company’s stock. Substantive defects………Result was “not reasonable”…….. Friendly merger into non-controlled public company 529. QVC iv.. 1) offer is not subject to financing continuence 2. enhanced scrutiny not triggered… viii. “sale of control” also triggers “enhanced scrutiny” . HOSTILE TAKEOVERS POISON PILL PLANS as a GENERAL RESPONSE MORAN 3. this would’nt happen w/ the Viacom deal… minority gets screwd…so BOD’s duty is to prevent htem from getting screwed – their actions are monitored here 2. With 2 unusual features… iii.. Cognizable Threats 1. vii. the “rights” are triggered and each shareholder except for the acquiror may buy many share for a nominal price.
Here we will apply Unocal standard….haven’t really entrenched themselves…… • Unitrin Case .BOD has right to use poison bill even if not responding to specific threat a. What they have done so far is pretty mild…. 4. i. What is P’s problem with this? i.. worried generally about the “takeover climate of the times” enact a GENERAL anti-takeover provision in the form of a poison pill 1.CURRENT VERSION OF UNOCAL TEST. a proxy contest is waged to replace the board and if you do that then the new board withdraws the pill and then person who acquires company goes forward OR you can negotiate with the current board which is what the poison pill is intended to induce. How does court respond? i. NOT a response to a specific threat ii. Application b. As long as they are using it to protect shareholders…. Upshot: No one ever deliberately triggers a poison pill. There is nothing in §157 that says it can only be used for financing… ii. Household International. The board shouldn’t be allowed to use it to prevent a tender offer to the shareholdesrs… b..-. but Unocal governs both the decision to adopt one and its actual use in the face of a proposed acquisition…. LawUnder Moran poison pills are permitted by statute and equity.a. 1. BOD. §157 of DGCL…. SubstanceImposes a prohibitive cost on a hostile tender offer.seemingly allows them to do this within poison pill provision a. we will apply BJR a. Moran v. What does court say about Board’s authority to do this? 1.financing……NOT for defensive purposes… ii. In the real world. 5. The underlying THRUST of §157 is that it is to be used to Raise capital….and NOT keep themselves in office. o FACTS 59 . AND iii.says BOD can issue securities…. BOD in this case is NOT using it to prevent tender offer 2.
math was wrong. did not tend to force stockholders to accept the board’s alternative) and not preclusive (i. o 2.e. AND o 3) Substantive coercion = risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management’s representations of intrinsic value This would be the one the board was worried about REASONABLE RESPNOSE? • Poison Pill and Share Repurchase o Chancery court held that the pill was enough and the repurchase plan would prevent ALL attempts to displace the board so it was not o (isn’t this preclusive?NO. Only "draconian" defensive measures that have the effect of • precluding o chancery court thought this would give the BOD an automatic veto over any offer…. Unitrin: Court cannot presume that major shareholders who sit on the board will vote their shares against their economic interests. see why below) k…. Proportionate: Board shows the defense was in the “range of reasonableness” In Search of the Omnipresent Specter i.bOD can use Business judgment to enact an additional plan b/c IT IS still w/in range of reasonable responses… will be considered unreasonable conduct of the board.. antitrust law violations…. Not Draconian: Defense was not coercive (i. that there was a threat to corporate policy or effectiveness. The trial court found that the offer represented a threat of "substantial coercion". and based on the Unocal v. Limits of Deal Protections i Friendly Mergers a. 60 . This court OVERTUNRS this…. o But what about the pill being enough? This was a relatively minor threat…why do you need share repurchase too? Even if the pill is enough….when I actually paid attention o 6. REASONABLE THREAT? • Board recognizes 2 bad things: o 1. • Is it o Mathematically impossible o Or o Realistically unattainable… o For (BOD) to change in latest election • This will lend credence to findings of above b. so it was ok…. o 2) Structural coercion = risk that disparate treatment of non-tendering shareholders might distort holders’ tender decisions. the poison pill was reasonable but the repurchase was not reasonable . o NOT A VALID threat…. who held 23% of the shares.but on REVIEW Courts holding • The Supreme Court found that the lower court erred in applying the Unocal standard. did not think the price offered was adequate and so initiated a poison pill and offered a buyback to increase their holdings to 28% of the total shares.b/c not a real threat…they are not really responding to this threat Under Unitrin.Or………Preclusive… • Then we don’t need to ask about proportionality…. Unitrin Version of Unocal: Board shows 1st point • When they take action that is ………Coercive…….o American General Corp tendered an offer for a controlling block of shares of Unitrin. The issue before the Supreme Court of Delaware was whether the repurchasing was a reasonable reaction to American General's threat. EVULATING UNDER UNOCAL……not under Revlon…. The Board of Directors of Unitrin.it is per se unreasonable… nd 2 point………Importance of elections….e. • So the repurchase was neither preclusive or coercive. ii.. DE law recognized three categories of threats to corp policy and effectiveness for purposes of Unocal’s first prong:…THESE Are ALL REASONABLE THREATS to which you can take action against o 1) Opportunity loss = where a hostile offer might deprive target shareholders of the opportunity to select a superior alternate offered by target management or another bidder.. after good faith investigation. Threat: Reasonable belief. i. Mesa Petroleum test. a valid threat…. IMPROTANCE OF Unitrin…. low price YES. did not effectively foreclose a proxy contest to remove the board) iii.
Omnicare……………./// court goes onto say the entire contract is invalid b/c doesn’t have fiduciary out clause… • Reasonable response would have been to allow a fiduciary out clause saying that if a better deal came along. Reasonable Response to threat posed….. Omnicare. voting guarantees Major two share holders (also on board) agree to unconditionally vote all shares in favor of Gensis merger o 1. but has provisions in merger contract with Genesis saying o 1. shareholders of NCS. agreement between genesis and ncs MUST be put to a shareholder vote. which locks up stockholder approval and does not contain a "fiduciary out" provision. NCS healthcare.. per se rule would apply regardless of (1) the circumstances leading up to the agreement and (2) the fact Omnicare inc.Genissi originally makes bid for NCS………. is per se invalid when a later significant topping bid emerges. this bright-line. they could get out of Genesis and better their shareholder alue….3 and three combine to make it so Genisis is guranteed to win the vote… • Omnicare is challenging these three provisions • Why doesn’t Revlon apply here?. there would be no change of control here……..they would lose the only viable deal for their shareholders • 2. Court finds its preclusive.b/c the deal is being forced down the shareholders throat.Permitted by 251©..2. the contract PREVENTS THEM FROM satisfying their fiduciary duty: looking for a better option for the other minority shareholders….precedent in delaware… A merger agreement entered into after a market search. • BOD is under affirmative duty to protect minority shareholders interest o …. • Can’t field any other offers b/c • BUT THAT’S NOT ALL..not a REAL VOTE • Even if they get a vote (it won’t be a real vote.and b/c TWO majority shareholders are on BOD and have contractual duty to vote FOR the transaction. With no possibility of fiduciary out. o 2. suing NCS to enjoin merger Facts……. o b/c we weren’t sure fi there was anyting else at that point….NO FIDUCIARY OUT is PER SE invalid when later better bid emerges o Dissent's Restatement of Omnicare Rule – this STATEMENT Is the narrowest possible statement of holding…. regardless if the BOD recommends it to the shareholders……. you can take it………..Genisis said they wouldn’t bid / would withdraw final offer if NCS didn’t accept the offer w/in 24 hours. v. Valid threat? o Yes. before any prospect of a topping bid has emerged. 2nd….Omnicare makes competing bid much better • BOD recommends to take Omnicare bid. As we have noted.Not present here o 3.. Inc. Coercive or preclusive? Court findsd it coercive…..ONLY if you find its not preclusive or coercive would you then seek to ask if the response was “proportional” ….within “range of reasonableness” Don’t even get to this question b/c they found it both coercive and preclusive o o 61 .is it….so this will be reviewed under BJR… but still will exam provisions under enhanced scrutiny Unocal Analysis • 1. valid threat to NCS…. NO fiduciary out clause Usually there is a clause that says: If someone else comes along w/ a clearly superior offer.2 step inquiry… o 1st…. o These are two competing companies trying to take over each other and the board is favoring one of them!!! o b/c as in Revlon.. b/c the majority shareholders arge going to lock it up for Genisis...
..that the board's primary purpose was to impede the effectiveness of a stockholder vote.so bod must prove 1... Attempts to insulate the board against elections are highly suspect.Preclusive or coercive? • MM companies o o o Is this action preclusive? Defintion: Make it practically impossible for shareholders (or anyone one) to displace the board • So this action is NOT preclusive…. Board can try to demonstrate a compelling purpose (no one ever has) Scnell v. they win MM shareholders suing BOD to enjoin them from adding two directors to the board MM was attempting to take control by either expaninding BOD by adding 4 more directors or nominating 2 directors Unocal applies b/c action is defensive….. Schnell. • Bod argues that their goal was to protect aginst a merger with Alliance.b/c just means they have to wait a year to change it if they want Within range of “reasonable responses”? o Look to BLASIUS test…. Why do they care about the date change? • b/c they want time to talk with other people and engage in a proxy fight board could legally make this decision to change meeting date…. 62 . Chirs Craft Industries o Facts: Board changed bylaws to change the date of the annual shareholder meeting Schnell and other shareholdes suing board challenging the borad’s decision to change the shareholders annual meeitnd date. Judicial Control of the Board's Advantages in Elections o Blasius and MM Companies problem: Discretion of board to block hostile takeovers under Unocal and Moran is premised on the stockholders' ultimate power to replace the board. which would give them 2 out of 4.. Proportioanl response? • 2 step analysis?. meeting and proxy mechanics. o Solution: Board's powers are exercised subject to fiduciary duties owed directly to the stockholders to use them for the proper purpose (facilitating shareholder decision).. • Better weather. etc… o Court basically doesn’t buy these reasons…so view it as attempt to keep power…BAD.211…. agenda. vote counting) o Danger: Board's powers to control elections can also be used to influence results (and perpetuate itself in office). and then the other two board members might risign.. alleging it was doen to keep control of the board. • Specifically they were worried b/c MM was likely going to fill the two opening spots with their own people. giving them 2 3 2.but MUST be a proper purpose Proper purpose? • It is NOT a proper purpose to prevent shareholders from displacing the board making the decision o by setting meeting earlier so as to avoid proxy fight Evaluating Board’s purported reasons. VALID threat. o Purpose: Shareholders act collectively. so ONCE P satisfies burden of proving improper purpose....HOSTILE TAKEOVER • VOTE INTERFERENCE • • Control of Board's Advantages in Elections o General Rule: The board has the power and duty to organize elections. requiring a "secretary of state" to disseminate information and supervise the process (nominations. o Blasius and MM Companies rule: A stockholder can make out a case for breach of fiduciary duty by proving an improper motive ...
MM was advancing towards getting more control….so then BOD would just have to show compelling justification APPLICATION TO THIS CASE…Action doesn’t have to prevent them from getting majority control to be illegitimate… o Although MM might not have acquired a majority…. If P can prove that the primary purpose (subjective intent) of a BOD action is to interfere w/ “the effectiveness” of a shareholder vote ( shareholder franchise )(voting rights) 2.• • 1. no one has ever shown this… • So Actually NO REAL DEFENSE… BLASISU ONLY applies with respect to franchise (voting rights)….. 63 .. Then BODs only affirmative defense is a “compelling justification” • To date.the BODs action still interefered w/ “the effectiveness” of a vote….
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