Shareholder Claims:

- Need to meet requirements of FRCP 23.1 for standing in derivative suits

o Must be SH at time of suit
o Must be SH at time of alleged wrongdoing
o Must fairly represent the class
o Muster either make demand to the Board to take action or show demand futility
- If JDX similar to DE, subject to universal demand rule and should argue demand futility
instead of making a demand
o In order to show Demand Futility under Levine, SH must
Rebut the presumption of disinterest and indep among the directors and
If they don’t fulfill first prong, must rebut BJR presumption by showing
gross negligence or some evidence of bad faith by Directors
- For claims where the violation of duty of care or loyalty is demonstrated:
o SH will be able to demonstrate demand futility if they have rebutted the
presumption of indep and distinterest
- For 10-b5 claims
o SHs must be buyers or sellers of the stock in order to have standing
SH will be able to fulfill this requirement if they are all currently potential
sellers of stock in light of acquisition
- Unocal Proportionality Rule
o Any decisions made in good faith by indep and disinterested board are subject to
BJR

Court will not second guess their business decisions unless there is
evidence of bad faith, gross negligence, or an uninformed board of
directors
 Kamin v Amex
 There are circumstances that allow SH to overcome BJR presumpstion
 When BD adopts poison pill in response to hostile takeover, they
must have reasonable fear of the threat and the posion pill must
be reasonable in relation to the threat posed (Unocal)
- Shareholder Voting Rights (Schnell)
o Moving of SH meeting serves to disenfranchise

Schnell Rule: if accelerating an annual meeting serves to make a proxy
battle or SH vote ineffective, the BD decision loses BJR and are liable
o Rebuttal if there was a reasonably necessary move in order to make a decision
before takeover bid
- Contractual Violation of Unocal Proportionality
o SH can argue violation if there was an unreasonable response to takeover bid
o Ex. entering multimillion dollar K that was awarded uncompetitively and had a
suspect purpose is a strong argument that the second prong of Unocal not met
 Response was not reasonable relative to the threat posed
- K Violation of BD Duty of Care
o BD decisions typically subject to BJR but there are exceptions where there is
evidence of bad faith or gross negligence
 Ex. uncompetitive award of K, personal relationships between parties
could be seen as bad faith especially if purpose of K is suspect
o If court is convinced of gross negligence or bad faith on the part of ∆, they wil
instead apply the entire fairness standard under Cede
 BD will then have to demo that the transaction was entirely fair
- K Violation of BD Duty of Loyalty
o DGCL: when director enters into a self dealing transaction, the act is valid
provided that:
 Adequate disclosure to uninterested Directors or SHs
 Majority of Directors or SHS approved the transaction or
 The transaction was entirely fair
- K Invalid b/c no SH Vote
o SH can argue that decision to enter into K is invalid bc required a SH vote
 DGCL: SH vote is required for any major decision or sale by the
corporation
 Argument to be made that Multimillion $$ K is a major transaction
that requires an SH vote, could be characterized as major
acquisition of services
 Court can downplay magnitude of transaction and say is doesn’t require
SH b/c not a merger
- Violation of SEC 10b-5
o Elements for claim
 Fraudulent statement or omission Of a material fact
 Material info if it would cause a reasonable investor to change
their investment decisions w/ consideration of the magnitude and
probability of an event (Basic Inc.)
 Ex. valuation of shares could be interpreted as material info
 In connnection with the purchase or sale of security
  Made with scienter
 Mental state embracing intent to deceive
 Ex. calming down SH in light of hostile takeover bid
 Reliance
 Presumption under the Fraud on the Market Theory
o Assumes that SH rely on fraudulent statements since the
effects of the fraud are reflected in the marketplace
 Basic Inc.
 Causation
 Requires showing of proximate cause
Ex misrepresentation causing SH not to tender shares and caused
them damage
 And damages
 Ex. if share value is less than they would have been worth if they
had tendered
 ∆ can be liable for damages to SH under the disgorgement
measure of damages
o Agency Principles
 Express authorization to make specific statements to SH → had actual
authority as an agent and assigns liability
- Mergers invalid b/c no SH vote
o DGCL: merger is one of the transactions that requires a SH vote
 If no SH approval, SH can argue that the merger was invalid
 Issue if there is a stock for stock exchange rather than actual
merger
o No de facto merger doctrine
 If not a merger, SH could still argue it was a substantial
transaction affecting the SH rights and affects control of the
company
o SH can then invalidate transaction as requiring SH vote if it
was not obtained
 No appraisal rights for SH when there is a stock for stock exchange
- Directors that Sold Stock may have violated 10b-5 per Texas Gulf ruling
o Anyone with material info (defined by magnitude, probability, and importance
assigned to it by person with info) is required to:
 Abstain from trading or
  Disclose the info
 Ex. if no disclosure of deal negotiation, it is a material fact with
great magnitude bc it would change the identity and control of
the company
o If ∆ did not disclose or abstain from voting, then they
violated 10b-5
- Violation of Revlon Duties
o Revlon: When corp is for sale, BD/Control SH have duty to obtain the best value
for the shares of all SH → duties triggered when there is a sale and no continuity
 Ex. if BD members sell their stock at higher price and tell SH they have to
trade theirs at lower value → violation
 Redeeming of poison pill, takes away some of the SH existing rights
o Is there info in the facts indicating continuity in the new corp after merger or
that SH will be given any particular voting rights?
o If there is continuity, then court will apply ∆ to BJF deference per Unitrin