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Biz Orgs Outline

Business law is a largely statutory concept.

Business Itself
Businesses are seen as separate entities, viewed as an individual person, separate
from its owners.
Owners shareholders (SH)
Managers Board of Directors (Board)
Employees Officers
Owners Members
Managers Members
- Agency law has to do with one person acting on behalf of another person (business/fictitious
person [must have the authority to act for that person])
- Every corporation formed is a C-Corporation, unless it is a Professional Corporation, or unless
you elect to become an S-Corporation, or unless you are a Non-Profit Corporation.
^ Main Elements of a Business Entity
Exit Strategy

1. Double Taxation (seen mostly in C-corps), OR
2. Pass Through Taxation- no tax at business level, only owners pay tax on
income received (seen in P.C., LLC, proprietorships, LLP, partnerships)
Limited Liability- liability to amount invested
Unlimited Liability- not limited to amount invested if business¶ assets do not
suffice for adverse judgments. Can go after personal assets. (sole proprietorship)
Capitalization(ability to raise capital)
C-corps are most flexible.
Sole proprietorships, partnerships, LLCs are least flexible.
Exit Strategy
Relates to how long business will last and transferability.
Corporations have perpetual existence.

Agency is the fiduciary relation which results from the manifestation of consent by one
person [the principal] to another [the agent] that the agent shall act on the principal¶s
behalf and subject to the principal¶s control, and consent by the agent so to act.
1. Fiduciary Relationship, based on 2. Consent
Elements of Ôgency
1. Manifest Assent
Express or Implied
2. Control by principal over agent¶s actions. Actions of agent must be on
principal¶s behalf.
A. Gay Jensen Farms Co. V. Cargill, Inc.
Generally, a lender-borrower relationship foes not form an agency relationship. In this case,
however, it does. There was consent and control.
Duties a Principal owes to an Ôgent
1. Compensation to agent when reasonably expected.
#1Unless there is an agreement to the contrary a principal must reasonably
compensate agent for work done.Exceptions: Minor Acts, Family
Relationship. Any breach by principal may result in a lien by agent against
2. Principal reimburses agents expenses incurred in furtherance of agency
#2 Entitled to reimbursement for expenses incurred (reasonably) in
furtherance of the agency.
3. Indemnity
#3 Reasonable indemnification against loss by agent incurred in
furtherance of the agency (If reasonable, of course)
4. Duty To Take Care
#4 Usually arises in employer-employee relationships. Duty cannot be
delegated. Has to do with control over employee.
5. Good Faith and Fair Dealing
Ôgent¶s Duties
1. Duty to account for money/profits/property received of principal.
2. Duty of full disclosure.
#2 Duty to disclose all relevant facts having to do with dealings
reasonably affecting the interests of the principal.
3. Duty of loyalty.
#3 Must keep principal¶s foremost interest in mind. Must keep principal¶s
interest above all others including your own. Highest fiduciary duty.
Exceptions: No duty to keep criminal behavior secret.
4. Duty to obey.
Meinhard v. Salmon (Cardozo)
Any act of the agent to the extent that the agent acted w/in the authority of the agencywill bind the
-Actual Authority (express or implied)

-Apparent Authority - Gives agent power, not right, to act when actual authority is
lacking, but agent has reasonable belief that he has authority to act on behalf of the

Actual Authority Apparent Authority

Agent 3rd Party Perception

[icarious iability (establish agency relationship)
1. Agent must be acting within authority given to agent.
2. Principal must have some degree of control over agent.
Butler v. McDonald¶s Corp.
General Partnership
-An association of two or more persons to carry on as co-owners in a business for profit.
People may enter into a partnership w/o even knowing it.
-Rights and Responsibilities
Equal rights to manage the partnership
Personal liability
Pass through taxation
Right to exit the partnership at any time
Uniform Partnership Act of 1914 (adopted by all 50 States)
Revised Uniform Partnership Act of 1997 (not adopted by all 50 States)
Martin v. Peyton
Investors only held enough rights to protect their investment. Although the investors had veto
power, they had no rights which would allow them to initiate transactions.
Affirmative control vs. ««««««««
Peed v. Peed
Whether you have a partnership depends on a lot of factors. The fact that onepartner owns certain
property in the business, or provides the capital, while the other performs certain services, does not
mean that they are not co-owners of the business.
Simply by being a partner in a business, that partner has the apparent authority to bind the
partnership w/ regard to acting in the scope of the business.
Every partner is an agent of the partnership.
Tort Liability?
Wrongful acts by a partner in the ordinary course of business will subject the
partnership to liability, vicariously.
Course of business means ³in the ordinary scope of employment.´
Frolic vs. detour
Joint liability (contract claims)
Joint and several liability (tort claims)

Can you waive your fiduciary duties under a partnership?

UPA silent
RUPA 103(b)
Summers v. Dooley
What happens when partners disagree?

When the activity done by one partner is adverse to the requests of the other partner and that
activity is not in the scope of the partnership¶s business then it would be manifestly unjust to
permit recovery of an expense which was incurred individually and not for the benefit of the
partnership, but rather for the benefit of one partner.
National Biscuit Co. Inc. v. Stroud
When you leave the partnership your fiduciary duties cease at that time.
Element of good faith exists while a partner is in the process of dissociating itself
from the partnership.
Dissolution vs. Dissociation
Page v. Page
Partnership For Term OR Partnership At Will?
Whether one or the other the other there still has to be good faith in the
termination of the partnership.
imited Partnerships
- Must file documents w/ Sec. of State.
- Must contain at least one general partner and at least one limited partner.
- General partner active/has unlimited liability
- Limited partner passive/has limited liability
- RUPA 304/UPA silent on provision RUPA 304
- What does ³substantial control´ mean?
- Has to do with limited partner taking management type role or making management
imited iability Partnerships
Lewis v. Rosenfeld
imited iability Companies
Cross b/w a corp. and a partnership.
Owners are called ³members´
Members have some liability as SH in a corp. or limited partners in an LLP
Members are shielded from vicarious liability from other members who they did not
supervise or take part in.
Management (two types)
Equal management b/w all the members (Member Managed LLC)
Manager Managed LLC
Members can take part in management and still have limited liability shield.
Members have right to bind LLC
Members owe fiduciary duty to LLC and other members
LLC can be made up of one person
Operation of LLC is generally covered by an operating agreement. This is not required.
Only submission of certificate creating LLC to Sec. of State is required.
Elf Atochem NA, Inc. v. Jaffari
Harbison v. Strickland
Even though members have freedom of K, the members may not K away certain
rights. Cannot ignore rights imposed by statute. In this case the parties attempted
to K away (or around) fiduciary duties.
Creature of statute

Comes into existence by filing of a document (articles of incorporation [GA], charter,

º primary players in organization
Incorporators- one who files articles; anyone of legal age; can dissolve corporation before
business begins; generally administrative role. NO liability associated w/ this role.
Promoters- person who is trying to start the business; doing most of the leg work to
gather the substance of the business before incorporation.
Major issues arising out of promoters¶ pre-incorporation activities:
1. Personal liability of the promoters for their acts.
2. Determining when corporate liability attaches to pre-incorporation activities.
3. Liabilities of the corp. to investors for fraudulent promoters¶ activities.
Things to be considered in pre-inc. Ks:
1. is K made in promoter¶s own name? (100% liability for K)
2. is K made by promoter in name of corp. yet to be formed?
3. is promoter signing K on behalf of corp. w/ knowledge of both parties to a corp. yet to
be formed?
Court can look at the K made in one of three ways (based on the intent of the parties):
1. revocable offer to corp. by either party before corp. is formed.
2. irrevocable offer.
3. look at it as a present K b/w promoter and corp. that when corp. is formed the K will
be assigned to the corp. and release the promoter.
When promoter is released from its obligations it is called a ³novation.´ Promoter must
be expressly released by the corporation in order to escape personal liability for the K.
O¶Rorke v. Geary
- 5 theories have been advanced as to how the liability of the corporation on the promoters¶ Ks
can arise:
1. Ratification (post-incorporation), OR Courts use these two interchangably
2. Adoption (pre-incorporation), OR
3. Acceptance of a continuing offer, OR
4. Formation of a new K, OR
5. Novation
These can be express (ex: corp. minutes) or implied (ex: corp. avails itself to the benefits
of the K)
- Promoters are technically not agents of the corp. b/c corp. is not yet formed as of yet.
- Before the corp. is formed the promoter owes no fiduciary duty to corp. But promoters owe
fiduciary duty to co-promoters.

- What about promoter¶s potential fiduciary duty to potential future SHs?

Old Dominion Copper Mining & Smelting Co. v. Lewishon
No fiduciary duty owed to future SHs if corporate identity (both co-promoters at this time) before
incorporation acquiesces to whatever dealings promoters act upon.
If no aquiescence, then liability to future SHs once corporation is formed.
Caveat: Illegal Ks/dealings
Protections of SHs from personal, unlimited liability if the business turns out not to be properly
Pocahontas Fuel Co. v. Tarboro Cotton Factory (Defective Incorporation)
De jure corp.- one who as filed, paid all fees, done everything right. Good against
entire world and State.

De facto corp.- corp. made in good faith although you did not meet all the
requirements. Good against the entire world except the State in which it exists.
(Technically been abolished by statute. MBCÔ º.04) 3 ñequirements
Corp. by Estoppel- when other parties have dealt with you as if you were a
corporation. Other party is estopped from denying they were dealing with a corp.
because they dealt with the entity as if they were a corp.
Cranson v. IBM Corp.
Corporate Finance
- Corp. needs capital
Comes from borrowing (debt)
Investment by owners (equity)
- Debt & Equity= capital structure (debt:equity ratio)
- Creditors (holders of debt) absolute right to repayment/get paid first
- Investors No absolute right to repayment/get paid last
- Types of Debt
Bonds (secured) or Debenture (unsecured)
- Types of Investment
Common (holders are last to be paid)
Preferred (next to get paid)
Creditors are first to get paid.
- Debt has priority over equity.
- Common and preferred have no right to a distribution (i.e. dividend), but preferred has a
right to a distribution before common.
- Cumulative dividend right vs. non-cumulative dividend right
[oting preference
Generally only common shareholders retain voting rights.
Preferred may want to convert to common if it can be determined that the value of the
corp. is increasing. (look into this)
- Redemption rights- used when a company is not doing well.
- A corp. has almost absolute discretion to accept any type of consideration for their shares.
- Corp¶s cannot issue stock for less than its par value. Otherwise it is called watered stock. If this
is done it makes SHs personally liable for corporate debt.
- Articles of incorporation should contain information for issuing shares and rights retained by
the shares.
- Authorized shares (has nothing to do w/ ownership value) is how many shares a corp. may
issue. However, the shares issued represent the total ownership interest. Use the issued and
outstanding shares to determine ownership interest in the corp.
- Primary reason why corp. doesn¶t issue all shares at once is b/c they have to get SH approval
b/f more shares can be authorized.
- Stock Repurchases- when a corp. repurchases its own stock (treasury shares) those shares are
still considered outstanding, but not issued. The issued & outstanding stock still out there
represents 100% of the ownership interest. These repurchased shares can be re-issued by the
corporation at a later time.
- A person¶s ownership interest becomes diluted when their ownership % goes down, and other
owners¶ goes up. How does someone protect against this?

Preemptive rights (get def. for this)

CL- assumed unless otherwise agreed upon.
Statutory- must be set forth in articles of incorporation, otherwise you do not have
- Par value- corp. must set this or state that there is no par value. Par value has nothing to do with
the value of the shares. It is the minimum amount at which a corp. may sell shares w/o it
becoming watered stock.
- There must be net profits and the corp. must be solvent to issue a dividend. A distribution, on
the other hand, happens during a liquidation.
- There is liability for both issuing watered stock and under-capitalization.
- If the corp. is adequately capitalized then there is no reason to look to SHs to hold them liable. -
- It is capitalization which gives a corp. limited liability status.
- Best capitalization structure is one of debt and equity.
Piercing the Corporate [eil (determined on a case by case basis)
Creditors use this mechanism to hold SHs responsible for corporate debt if the corp. is
insolvent. Will hold the SHs personally liable.
SHs do not have absolute limited liability.
Could voluntarily guarantee debts of corp.
Could execute doc. that makes SH responsible. Not true piercing the corporate veil
SH uses wrong name in signing for the corp.
True piercing the corp. veil: there has to««««««..
1. if SH has exerted excessive control of the corp., using it as merely an
instrument for personal use, then he may become liable.
2. corp. and SHs have such unity as b/w themselves that they are looked at as
mere alter egos of themselves.
3. Courts tend to look at these factors:
Whether the corp. failed to maintain adequate records.
Comingling of funds or assets
Whether one corp. is treating the assets of another corp. as their own.
4. other factors: no election of officers; issuing of stock; etc.
5. one other important thing courts take into account is that it is virtually pointless
to have many of these factors w/ small business run by one or two people.
Minton v. Cavaney
As attorneys, you have to be wary of how much accommodation you provide to corp.¶s.
To pierce the corporate veil:
1. determine if corp. is liable, and if cannot collect corp¶s assets
2. attempt to pierce the corporate veil and go after SHs.
Ôdequate capitalization
Courts will generally pierce the corporate veil when the capitalization is relatively
small compared to the foreseeable risk involved in the business.
Walkovszky v. Carlton
Cabs were adequately capitalized w/ insurance per statute.
However, if a corp. is under-capitalized the court will not decide on this factor alone in
determining whether to pierce the corporate veil.

19 different factors:
(1) commingling of funds and other assets of the corporation with those of the individual
(2) diversion of the corporation's funds or assets to noncorporate uses (to the personal
uses of the corporation's shareholders);
(3) failure to maintain the corporate formalities necessary for the issuance of or
subscription to the corporation's stock, such as formal approval of the stock issue by the
board of directors;
(4) an individual shareholder representing to persons outside the corporation that he or
she is personally liable for the debts or other obligations of the corporation;
(5) failure to maintain corporate minutes or adequate corporate records;
(6) identical equitable ownership in two entities;
(7) identity of the directors and officers of two entities who are responsible for
supervision and management (a partnership or sole proprietorship and a corporation
owned and managed by the same parties);
(8) failure to adequately capitalize a corporation for the reasonable risks of the corporate
(9) absence of separately held corporate assets;
(10) use of a corporation as a mere shell or conduit to operate a single venture or some
particular aspect of the business of an individual or another corporation;
(11) sole ownership of all the stock by one individual or members of a single family;
(12) use of the same office or business location by the corporation and its individual
(13) employment of the same employees or attorney by the corporation and its
(14) concealment or misrepresentation of the identity of the ownership, management or
financial interests in the corporation, and concealment of personal business activities of
the shareholders (sole shareholders do not reveal the association with a corporation,
which makes loans to them without adequate security);
(15) disregard of legal formalities and failure to maintain proper arm's length
relationships among related entities;
(16) use of a corporate entity as a conduit to procure labor, services or merchandise for
another person or entity;
(17) diversion of corporate assets from the corporation by or to a stockholder or other
person or entity to the detriment of creditors, or the manipulation of assets and liabilities
between entities to concentrate the assets in one and the liabilities in another;
(18) contracting by the corporation with another person with the intent to avoid risk of
nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge
for illegal transactions;
(19) the formation and use of the corporation to assume the existing liabilities of another
person or entity.
You can incorporate yourself solely for purposes of obtaining limited liability for
yourself, unless you are trying to perpetuate a fraud, or evade a K.
Reverse Piercing- when SH goes after the corp. by piercing the corporate veil.
Equitable Subordination (only seen in a bankruptcy action)
Costello v. Fazio
Ñltra [ires- when a corp. acted beyond its purpose or its powers necessary to carry out the
reasons of its formation.
Wiswall v. The Greenville and Raleigh Plank Road Company
Cross v. Midtown Club, Inc.
Ultra vires is generally not available today b/c most businesses have in their articles that
this business is being set up for ³any lawful business purpose.´ Gives the corp. a wide

Corporate ñesponsibility
What is a corp¶s responsibility w/ regard to its SHs?
A.P. Smith Manfg. Co. v. Barlow
Charitable contributions (statutory)
If give money away must receive some benefit from it. Not necessarily money, could be good
Adams v. Smith
No benefit to corp.
Dodge v. Ford Motor Co.
Management of Corporations
Board of Directors (managers of corp.)
Charlestown Boot and Shoe Co. v. Dunsmore
MBCÔ 8.01
Only duties owed by Board are fiduciary duties. The Board has the sole discretion to manage the
business in any way they see fit, as long as it is w/in its fiduciary duties.
No director is an agent.
Only majority of Board may bind the corp.
Auer v. Dressel
President (agents/employees) must comply with the bylaws. President has no discretion w/ regard
to these bylaws.
SHs of a particular class have the rights to vote for/remove directors of the corp. authorized by
their class of stock.
Board appoints officers, not SHs.
SHs do, however, have the right to be appointed officers by the directors.
- Quorum- # of directors who must be present to act on behalf of corp. This is usually a
majority. (ex. 6 of 10 must be present. Then majority of quorum voting can bind the
corp., i.e. 4 of the 6) ³Once a quorum, always a quorum.´ However, quorum busting is
permissible. MBCÔ 8.º4(c)
- Board meetings can be held in person or over the phone.
- Actions of Board can be made w/o a meeting, however, there must be unanimous,
written consent by the Board to bind the corp.
- Board may delegate certain duties to a committee, but it depends on how broad that
scope of delegation is.
- Board is not required to have committees, unless it is a publicly traded company. Under
- Sarbaines-Oxley: must have independent audit committee.
Campbell v. Loew¶s Inc.
Voting by proxy: may be likened to an absentee ballot in a political election, but there are some
critical differences. A proxy is an appointment by a SH of a third person (often the secretary of the
corporation) to act as the SH¶s agent in casting the vote in a designated manner. This is an agency
relationship, and agency law will control the actions of a proxy hold.
SHs can revoke the proxy by showing up to vote or by expressly revoking proxy agreement.
Board¶s Fiduciary Duties to SHs (Duties of Care, Good Faith, oyalty)
Duty of Care
- Measured by the Business Judgment Rule (MBCÔ 8.31)
Not concerned w/ decisions of Board. Concerned w/ how Board came
to that decision. The ñule does not protect decisions which are not
business related or irrational decisions.
- Director may not act negligently
- Measured by what other people in the same or similar circumstances would do.
- Must act in corp¶s best interest.

- Inside vs Outside Directors

Inside held to higher standard.
- If you have a special skill as a director you are held to that special skill¶s
standard. (i.e. lawyer, accountant)
- Duty of care requires certain responsibilities
Need to attend meetings
Need to know the inter-workings of the business
Familiarity w/ financial matters.
- Directors can be held liable for
Malfeasance, OR
Nonfeasance (the rule will not protect nonfeasance, but an active, well
informed decision by a director not to act is protected by the rule)
- Other directors of SHs may rebut the business judgment rule of they can show
the director breached their fiduciary duties. However, other directors or SHs must
prove, in addition to negligence, that the director¶s action contributed to the loss.
Bates v. Dresser (nonfeasance)
Outside directors reasonably relied on bank auditors and Coleman (bookkeeper/thief)
Inside director (Dresser) held to a higher standard b/c he had information which would alert
reasonable person that someone was stealing from the bank. Held liable for his nonfeasance.
Shlensky v. Wrigley
Unless fraud or illegality court will not overturn.
Directors, even those of corps that are losing money, don¶t have to follow the lead of other corps
in the field.
For courts to intervene there must be some clear dereliction of duty on the part of specific
directors. Mere failure to follow the crowd is not such a dereliction.
Smith v. van Gorkom
Directors did not use acceptable method in determining LBO price for stock. Not protected by
- Fiduciary relationship can apply to controlling SHs
Duty of oyalty
- Courts will look at how the decision was made AND the decision itself (process and
- Seeks to prevent the director or officer from acting in an adverse way towards the
company or receiving a benefit that other SHs would not normally have. (conflict of
interest [different motives or incentives])
- Old Rule: self-dealing transx were automatically void
- Through statute today self dealing transx are voidable
- Test
1. (Pl¶s Burden) whether there was full disclosure prior to the vote, and do not
have a conflict, the process is deemed to be fair.
2. (Shift burden to Df. [df. has conflict of interest]) must show how the substance
of the transx was fair.
Globe Wollen Co. v. Utica Gas and Electric Co.
Process fair
Substance not fair
Must have both
Gilder v. PGA Tour, Inc.
Didn¶t meet the process prong.
Didn¶t have enough disinterested parties (players) to have a vote under PGA bylaws.

Don¶t even get to substance prong.

- Analysis of Substance Prong
What is the value received?
Who received the benefit?

CL- If not full disclosure, even if K is fair, the K is voidable.

Statutory- If K is fair, K can be upheld even w/o full disclosure.
MBCA 8.61(b)

CL vs. Statute
Court¶s Analysis
(Modern View)2.
Marciano v. Nakash
If the substance is intrinsically fair, then lack of full disclosure will not void the transx.
The question remains, was there a vote?
Corporate Opportunities
1. Determine if opportunity is a corporate opportunity.
2. Determine if corporation wanted to or was able to take advantage of the opportunity.
- Determining a corporate opportunity:
1. Interest/Expectancy Test
2. Line of Business Test (Guth v. Loft, Inc.)
3. Fairness Test
Competition & the Duty of oyalty
Lincoln Stores, Inc. v. Grant
No absolute prohibition to competing w/ corporation to which you owe a fiduciary duty, but must
be done with good faith.
Duane Jones Co., Inc. v. Burke
Executive Compensation
Must be rational relation b/w compensation and employment duties. Must look at what
circumstances went into the compensation. Determine if it is waste.
Shareholder¶s ñights
Election of directors
Filling vacancies on the Board
Amendments to bylaws and articles
Votes on major structural changes (mergers, liquidations, asset sales)
MBCÔ: º.07, 7.0º, 7.03, 7.04, 7.º0, 7.º1, 7.ºº, 7.º8, 7.30, 7.31, 7.3º, 7.40-7.47, 8.08,
8.09, 8.10, missing one, 9.31, 9.º3, 10.03, 10.º0, 11.04, 1º.0º, 13.0º, 14.0º, 16.0º, 16.º0
- Straight Voting
- Cumulative Voting
Allows minority SHs to have some say in matters of corp.

1. Must provide for it in Articles of Incorporation.

2. Notice to SHs and corporation.
- Weighted Voting
- Class Voting
- Contingent Voting
Lacos Land Co. v. Arden Group, Inc.
President of company threatened to not vote on things which may be beneficial for the company
unless the SHs voted to authorize a certain class of shares to be issued for him.
Violates fiduciary duty.
- Annual Meeting
No particular purpose required 7.01(a)
Court ordered meeting 7.03
Special meeting (must have particular purpose) 7.0º

SHs Meeting
Must have a quorum to vote (usually stated in bylaws)
Once a quorum is met, it cannot be busted for that meeting, unlike
board of directors meetings where a director can leave, busting a
Traditional Rule MBCÔ
Majority of shares Plurality may pass the
must vote for the motion
motion for it to pass.
Record Owner vs. Beneficial Owner
Corp. is only required to deal w/ record owners.
Record date- anyone who was a record SH as of a certain date is
entitled to vote or to a dividend.
Schnell v. Chris-Craft Industries, Inc.
- Documentation (appointment form)
- Authority authorizing someone¶s vote
- Person (MBCÔ)
- Appointment form must be in writing
Limited to 11 months b/c want to limit proxies from one annual meeting to
the next.
Revocable at any time.
Things which will terminate proxy
Only one kind of irrevocable proxy:
Proxy coupled w/ an interest. MBCÔ 7.ºº (no clear definition)
Proxy Contests (3 situations)
1. challenge to replace directors
2. want to push a certain transx through

3. want to effect policy change

- Board usually succeeds in proxy solicitations b/c corp. pays for solicitation. Corp. has
the resources to succeed in this very expensive venture.
Rosenfeld v. Fairchild Engine and Airplane Corp.
Corp allowed reimbursement of both parties b/c it was a board of directors change. Usually
wouldn¶t happen w/ policy change.
Court said both had the right to seek reimbursement. It¶s up to the corp.¶s reasonable discretion.
Closely Held Corporations
- Small # of SHs
- Not publicly traded (no ready market)
- Substantial majority of SHs participating in management, direction, and operations of
the corp.
- Controlling SH
Close control
Pass through tax benefits
Limited liability
*Control over who actually owns the corp.
Transfer restrictions on sale of shares
Illiquidity/ no exit strategy
Majority controls the minority (exploitation possibility)
Mostly S-Corporations
Not all S-Corps are closely held
- C-Corporations
Every corp. starts off as this
Double taxation
- S-Corporation
Not every corp. can be an S-Corp
Must be domestic corp.
May not have more than 100 SHs
SHs can only be individuals
Can only have one class of stock
All SHs have to sign consent to become S-Corp, and this decision has to be made
at a certain time of the year.
- Closely held corps resemble a partnership
- Fiduciary duties
Donahue v. Rodd Electrotype Co. of NE, Inc.
Minority SH was refused same price for his shares that was given for majority SH¶s shares.
Cannot treat minority SHs different from majority SH in a closely held corp.
- Ways to protect yourself when going in on a closely held corp.
Get voting rights
But-Sell agreement
Meiselman v. Meiselman
SHs in closely held corps are usually employees too and derive their livelihood form these
What are the rights and expectations of the shareholders? (reasonable expectations)
SHs in closely held corps owe the utmost duty to your partners.

Akin to duty by partners in a partnership (higher duty)

Missing Monday, March º, º009

McQuade v. Stoneham
SH agreements may not interfere w/ duties of directors.
Clark v. Dodge
Because of the features of a closely held corp. you can infringe on the duties b/w SH and directors.
Only 2 SHs who were also directors/officers
Duties of Controlling SH
- Don¶t have to own 51% or more.
- De Facto control (working control) can be significantly less than 50%.
- Controlling SH by virtue of their control owe a fiduciary duty to minority SHs.
- Most issues come up w/ duty of loyalty.
Did controllers SH get some benefit at the expense of (or to the exclusion of) the
minority SH? ³self-dealing´
- Was the price fair?
Sinclair Oil Corp. v. Levien
Parent-subsidiary relationship.
Sinclair- majority ownership (97%)
Minority ownership (3%)
Business judgment rule? OR intrinsic fairness standard?
Burden on Sinclair to prove, subject to careful judicial scrutiny, that its transx w/ Sinven is
objectively fair.
Applies when there is self-dealing on part of controlling SH. (fiduciary duty as controlling SH)
If no self-dealing, then use business judgment rule.
Court says distributions of dividends were given out proportional to SH interest.
Do not use intrinsic fairness standard. Use business judgment rule.
Zahn v. Transamerica
Controlling SH must treat each class of stock fairly and cannot take actions to
enhance the value of one class at the expense of another.
Loss of opportunity to convert due to failure to disclose. Directors cannot modify
the call b/c the call grants right/benefit which cannot be taken away.
Purpose of SH actions matter.
Jones v. H.F. Ahmanson & Co.
Transfer of Corporate Control
Zetlin v. Hanson Holdings, Inc.
Controlling SHs can sell their shares at a premium only if there is good faith and fair dealing.
Duty of loyalty.
Gerdes v. Reynolds
Pearlman v. Feldman
Securities aw
Securities Act of 1933 (governs issuance)
Securities Exchange Act of 1934 (governs subsequent trading of that stock)
Section 10b unlawful for any person to use the mails or facilities of interstate
commerce: ³to use or employ in connection with the purchase or sale of any
security«..any manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission (SEC) may prescribe as
necessary or appropriate in the public interest or for the protection of investors.´

Rule 10b-5 (self-executing)

Guards against fraudulent exchanges, conduct which operates as fraud,
material misstatements and omissions occurring in connection w/ a
³purchase or sale´ of a security.
Materiality (first element of 10b-5)
TSC Industries, Inc. v. Northway, Inc.
An omitted fact that is material if there is a substantial likelihood that a reasonable SH
would consider it important in deciding how to vote.
Don¶t want the standard to be too broad or too narrow. Too broad invites settlements.
Too narrow doesn¶t give adequate protection.
Reasonable investor would attach importance to a certain fact in making his decision to
purchase his shares.
When does a fact become material?
Basic Inc. v. Levinson
Must be judged on a case by case basis. Totality of the circumstances.
³In connection with purchase or sale´
Requirement standing (2nd element under 10b-5)
Used to limit the pool of potential claimants to those investors who
bought or sold on the basis of material omissions or misstatements.
Blue Chip Stamps v. Manor Drug Stores
Small v. Fritz Companies
Exception to the ³in connection with´ rule.
Forebearance to refrain from action.
Scienter (3rd element in 10b-5 claim)
Ernst & Ernst v. Hochfelder
Accounting firm auditing investment co. who was perpetuating a ponzi scheme.
Accounting firm did not discover ponzi scheme and investors sued claiming scienter
saying the accounting firm was negligent.
Court says no. there must be some element of intent to deceive.
Negligence is not enough to meet a 10b-5 claim.
Deception Requirement (4th element of 10b-5 claim)
Santa Fe v. Green
³short form merger´ merger by statute
Independent appraiser of shares gave deflated price.
Minority SHs were upset b/c they believed price was substantially higher.
Elements of 10b-5 and 14a are the same.
1. Misstatement or omission (material)
Would a reasonable investor consider the information important to his
decisions concerning his shares.
2. Standing (in connection with purchase or sale)
Exception may be forbearance [to refrain from action] when you would
have otherwise acted.
3. Scienter (state of mind)
4. Deception
5. Loss Causation
Loss Causation
Pl. must show link b/w elements 1-4 and the Pl¶s loss.
³But for´ causation

Misstatement or omission must have been a substantial factor in producing the

loss Pl. suffered. (Pl¶s burden)
Mills v. Electric Auto-Lite Company
Deceived minority SHs to get their votes so corp. could go through w/ the merger. This
deception caused them to lose an opportunity to choose what to do w/ their votes.
Virginia Bankshares, Inc. v. Sandberg
No Causation
Reliance (materially misleading statements or omissions create a presumption of reliance)
Standards are different b/w omission and misstatement
Misstatement Pl. must prove that he heard or saw, directly or indirectly, the offending
misstatement, and that it play a significant part in his decision.
Omission courts assume reliance if a reasonable investor would haveconsidered the
information important enough to include in making his decision.
The reliance must be reasonable.
In re Donald Trump
³bespeaks caution´ doctrine
Past performance does not guarantee future results.
Cautionary statements included in the document may render the challenged
predictive statements or opinions immaterial as a matter of law.
Cannot be vague or in the boilerplate language.
Must be substantive and tailored to the specific projections, estimates or
opinions in the prospectus.
Fraud on the Market Theory
Generally independent of misstatement/omissions reliance standards.
*use supplement¶s definition and explanation.
Insider Trading
- Trading in securities while in possession of material, non-public information
- An insider only violates this prohibition if his trading activities breached some sort of
fiduciary duty, either owed to the person with he traded or a duty owed to the source of
the insider information.
- CL- Generally no duty to disclose information. Only obligation at CL was that if you
made a representation it had to be true.
- Section 16 of the 1934 Act is the only rule that specifically prohibits insider trading. SL
regulation. The section requires certain insiders to report their trading in their company¶s
securities, and authorizes the corporation to recover from these insiders any profits made
on stock transactions in a narrow six-month period.
Section 16(b) limits the rule to officers of the corporation and transx w/in a 6 month
period, and it did not reach others with inside information.
Laidlaw v. Organ (1817)
No fraud b/c Organ said nothing. Did not make a misrepresentation. Had no duty to speak. CL
- Insider trading law evolved around the question of to whom do you owe a duty. If you
owe a fiduciary duty to some entity, then if you act on your own behalf with regard to
insider information you hold then you have a duty to speak.
Goodwin v. Agassiz (1933)
Director bought shares from ³impersonal´ SH on information they obtained from a non-public
mineral survey. This information was material to the business. Transx was not face to face. No
privity, relation or immediate connection with selling SH.
Rule for Disclosure
1. non-public info
2. officer
3. face to face transx

Others who are afforded this inside information: attorneys, publishers, printers.

He gave a really long definition here.

Diamond v. Oreamuno
Injury has to be to the corporation for a derivative suit to be brought.
General proposition: person who acquires special knowledge or information by virtue of a
confidential or fiduciary relationship with another is not free to exploit that knowledge or
information for his own personal benefits but must account to his principal for any profits derived
Broader principle, inherent in the nature of the fiduciary relationship, that prohibits a trustee or
agent from extracting secret profits for his position of trust.
Court said no monetary injury, but there may be an injury to the company in maintaining its
reputation of integrity, an image of probity for its management, and in insuring the continued
public acceptance and marketability of its stock.
Freeman v. Decio
ñe-read and add notes.
Disclose or Ôbstain ñule
Cady, Roberts & Co.
Insiders must disclose material facts which are known to them by virtue of their position but
which are not known to person with whom they deal and which, it known would affect their
investment judgment. Failure to disclose in these circumstances constitutes a violation of the anti-
fraud provisions. If, on the other hand, disclosure prior to effecting a purchase or sale would be
improper or unrealistic under the circumstance.
Extended the reach of Section 16(b) to
1. those with the existence of a relationship giving access, directly or indirectly to
information intended to be available only for a corporate purpose and not for the personal
benefit of anyone, AND
2. the inherent unfairness involved where a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing.
Constructive Insiders
SEC v. Texas Gulf Sulphur Co.
Information becomes material on November 12th because that is when the insiders
bought stock. Makes it look material. This is the day when they thought that the
oil was a big enough probability to buy.
Insiders do not have to disclose predictions or guesses, but do need to disclose basic facts. A good
test for materiality is whether a reasonable man would attach importance in determining his choice
of action in the transaction in question. To determine materiality under 10b-5 balance the
probability that the event will occur and the anticipated magnitude of the event.
Before insiders may act upon material information, such information must have been effectively
disclosed in a manner sufficient to insure its availability to the investment public.
Chiarella v. U.S.
Tender offer
Bidder Attorneys Printer Printer Employee
Employee traded in stock of bidder¶s target and was convicted for insider
S.Ct.: No duty could arise from employee¶s relationship with the sellers of the target
company¶s securities, for employee had no prior dealings with them. He was not their
agent, he was not a fiduciary, he was not a person in whom the sellers had placed their
trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only
through impersonal market transx. Here the employee of the printer had no agency
relationship with the source.

U.S. v. O¶Hagan
Same facts as above, but an attorney, not related to the tender offer but in the
same firm, traded in the stock of the target.
A person (any person) commits fraud under 10b-5 when he misappropriates clearly confidential
information and breaches a duty owed to the source of the information. Here there was an agency
relationship between himself and the source.
U.S. v. Kim
Whether it was a violation of 10b-5 for a member of a club to violate confidences
which he pledged to keep.
The relationship between defendant and the club members was not characterized by any measure
of superiority, control, or dominance. It was not the functional equivalent of a fiduciary
relationship. While the rules of the club may have forbidden defendant's actions, the federal
securities laws--at least in this instance--did not.
³Tippee iability´
- Arises when an insider passes inside information to another person knowing that other
person will trade on that information.
- Tipper- person passing the info
- Tippee- person receiving the info
1. An insider who trades is liable, OR
2. An insider who tips (rather than trades) is liable if he intends to benefit from the
disclosure, OR
3. An outsider who trades is liable, OR
4. An outsider who tips (rather than trades) is liable if he intends to benefit from the
- Other duties have to be present with these as well:
Duty to disclose must be present.
Dirks v. SEC
Whistle blower received info from an insider of corporate fraud. Told investors in the company
that the stock was not worth what the company said it was worth. These investors sold their shares
as a result of receiving this info. All the whistle blower was doing was exposing the fraud, but
SEC censured him for insider trading anyway.
Court says absent some personal gain, there has been no breach of duty to stockholders. And
absent a breach with the insider, there is no derivative breach.
- Ex: Riding up on an elevator you overhear insider info on a merger. You trade on it. No
tippee liability. No insider trading b/c 10b-5 doesn¶t cover negligence.
Spousal ñelationships and Insider Trading
The spousal relationship does not by itself create a relationship upon which to base a
misappropriation claim under Rule 10b-5. SEC Rule 10b-5-2 alters this by presuming
that the necessary fiduciary relationship does exist with respect to spouses.
SEC v. Yun
Ñse vs. Possession
SEC v. Alder
There is no 10b-5 violation if there is no causal connection between the nonpublic info you
possess and your trading. (rebuttable presumption) If you can show your trading is part of some
preexisting plan then you can rebut the presumption of insider trading. Mere possession of inside
information is not a per se violation of inside information.

Insider Trading Flow Chart


Insider Outsider

Officer Those w/ Misappropriator Tipee

Director Special
10% SH Access
(Attorneys, Did You Violate Who is the
Accountants, a Duty to the Insider
16b 10b-5 Brokers) Source of the Tipper?

1. P/S or 1. Is Info Benefit to

S/P w/in Material Tipper?
6 months? and Non-
Public? Tipper Violation
Just for Disclosing
2. Shares Other Info.
Must be Elements
Registered of 10b-5
or Traded Tipee Liability
on a Nat¶l only if he
Exchange Trades.

Violation Violation

Mergers & Ôcquisitions

3 primary ways you can acquire a corporation:
1. Merger
2. Sale of Assets
3. Tender Offer
- All involve some form of consideration (usually takes the form of securities,
cash, or a combination of the two)
- Horizontal- merger b/w two corporations which are in the same business.
- Vertical- merger b/w two corporations which are not similar, but which are
connected in some way, i.e. they need each other to operate.
- Conglomerate Combination- merger b/w corporations which have little or
nothing to do with each other.
- A ³Plan of Merger´ details the merger and the consideration to be received.
- Can be structured in several ways:
1. Statutory or Straight Merger (most basic type)
2. Straight Triangular Merger

3. Reverse Triangular Merger

4. Short Form Merger
- Statutory Merger
A survives, B disappears. B¶s shareholders are left, and receive consideration from A in
shares of A, cash (freeze-out merger), or a combination of both.
Whatever liabilities B had, A assumes them.

A and B merge into a new corp. (C). C survives and A and B disappear. C assumes the
liabilities of A and B.
A and B¶s SHs are left and receive either, shares in C, cash, or a combination of the two.
Triangular Mergers
A (Parent) B

A¶s Subsidiary
A owns 100% of the subsidiary. A may not want to merge with B directly b/c they might
not want to take on some obligation of B. B merges with A¶s subsidiary.
1.c Mergers and Ôcquisitions
a.c Corporate Combinations: 4 main ways in which 2 corps can get together
i.c Merger: A is absorbed into B and disappears as a separate entity. B then issues
its shares or pays cash to A SH.
ii.c Consolidation: This is recognized by DE but not recognized by MA. A and B
corp combine into C²a new corp²and A and B disappear. C is what
distinguishes consolidation from a merger. Same rules apply to consolidation as
iii.c Sale and Purchase of Ôssets: A buys all the assets of B. A would then issue
stock or pay cash to B for the assets. B then usually liquidates.
iv.c Sale and Purchase of Shares: A acquires control of B though stock purchases
from SH either through the open market or by means of a tender offer. This is
subject to federal securities regulation.
b.c Corporate Divisons: spins off, split offs, etc can divide assets to all or some of the SHs.
c.c Mergers:
i.c Statutory Merger (ong Form): A absorbs B, B disappears, and A becomes
surviving corp. Surviving corp steps into the shoes of the acquired corp when
merger document filed in the state. By operation of law, the survivor becomes the
owner of all assets and is subject to all liabilities and is substituted in pending
litigation. Acquired corp¶s SH can get cash, have their converted or get other
1.c Process:
a.c BOD Ôpproval: Each BOD initiates merger by adopting a plan of
merger. The plan outlines the terms and conditions and the

i.c Fiduciary Protection: Directors are bound by their duties

so if conflict of interest, then merger is subject to review as
self-dealing transaction.
b.c Shareholder Ôpproval: After the BOD adopts, the plan of merger
must be submitted to each set of SH for approval. Must have a
majority of all outstanding shares.
c.c If the SH don¶t like it, then they have appraisal rights
d.c Merger in effect ³certificate of merger´ filed in the state.
ii.c Short Form Merger (sub into parent): Parent owns 90% or more of sub
1.c No voting rights: Neither set of SH gets voting rights. From the
acquirer¶s point of view, this is not an organic change b/c they already
own 90%. From sub¶s point of view, it¶s a waste of money b/c it¶s a done
2.c Only approval of Parent¶s BOD is required
3.c Only sub¶s SH get appraisal rights
iii.c Triangular Merger: A sets up wholly owned sub--B. A capitalizes B with its
shares. B enters into merger plan with C under which B will be the surviving
corp. C merges into B and C¶s shareholders receive the assets A used to capitalize
B. After the merger, A continues as sole shareholder of B.
1.c ñeasons for triangular merger v. ordinary two-party merger:
a.c Parent doesn¶t want to absorb the Target b/c it doesn¶t want to
acquire its liabilities or may plan to sell it in the future.
b.c Instead, parent wants it to be a wholly owned subsidiary and thus
retain Ks, morale, customer relations, etc.
c.c A¶s shareholders are cut out of a vote and appraisal rights.
2.c ñeasons for triangular merger v. purchase of assets:
a.c Greater flexibility in types of consideration P may pay for assets
without jeopardizing tax-free status.
iv.c ñeverse Triangular Merger: Only difference is that sub merges into target.
d.c Sale of Ôssets: A sale of assets occurs when there is a sale of substantially all of a
corporation¶s assets not in the regular course of business. §12.01 and §12.02.
i.c Ôpproval:
1.c BOD: Both BODs must approve
2.c SH: No approval needed from SH of the buying corporation.
3.c Ôñ: Under MA, get appraisal rights but not in DE.
ii.c ³Substantially all´ Look to the producing assets (income as well as value). If its
above 80% of productive assets, then à to be substantially all.
Substantially all sometimes means either quantitatively or qualitatively
substantially all. The percentage of assets transferred is significant but not
determinative. It is relevant to ask whether a transaction is out of the ordinary and
substantially affects the existence and purpose of the corporation -  

iii.c Court also looks to fairness of the transaction before bypassing a vote of target
iv.c Not in regular course of business: Thus, companies that are regularly in the
course of selling assets are not required to give SH vote.

v.c For example, a real estate developer whose regular course of business is buying
up and selling land will not pass the second prong of this test.
Gimbel v. The Signal Companies, Inc. (ADD MORE HERE)
Is the sale in the ³ordinary course of business?´
If it is then the sale does not require SH approval, no matter how big of a sale,
Must look at the sale to see if the asset sold was quantitatively substantial to the operation of the
business. If it is, then you have to seek SH approval. Must also look to see if the sale is
qualitatively substantial.
Ôppriasal ñights
Creature of Statute
SHs have generally the rights to appraisal of shares in which they have an interest.
Statutes usually have elaborate procedures which SHs must follow in order for a dissenter
to have appraisal rights.
MBCÔ 13.01, 13.0º
If there are so many dissenters that the corporation cannot pay them the appraisal value of
their shares all at one time the corporation has an out. It can make those dissenting SHs
creditors of the corporation. In the event of a liquidation the creditors will be paid first.
Procedure for Exercise of Appraisal Rights
13.º0- 13.º6
Farris v. Glen Alden Corp. (PA case)
List¶s assets were sold to Glen Alden for shares of Glen Alden and the assumption of List¶s
liabilities by Glen Alden. List then dissolved. Glen Alden becomes List-Alden. Shares of Glen
Alden went to List SHs. Glen Alden said this was an asset sale. Was structured like a merger.
Court says you cannot look at just the sale of the assets, you must look at the totality of the
circumstances to determine what the transx really is. This was a ³de facto merger.´ Dissenters are
entitled to an appraisal.
Hariton v. Arco Electronics, Inc. (DE case)
Almost identical facts. The court allowed the transx. The only distinction b/w the two cases is that
they were in different states with different statutes.
- In order to show unfairness in a merger transx you as a SH must show that those
facilitating the merger had some duty to you and whether they breached that duty.
BJñ is only a defense for a claim of violation of the duty of care.
Sterling v. Mayflower Hotel Corp. (not an asset sale)
i.c Merger of Parent and Subsidiary
 : B/c there is self-dealing (parent is
majority stockholder of sub) the parent will have the burden of proving that the transaction is
entirely fair. The minority SH should receive the substantial equivalent of what it had before. This
was fair to the SHs of the minority corporation
1.c Court puts little value in liquidation value of assets, as it is a going concern.
2.c Court defers to judgment of the BOD, but will look to fairness.
3.c Courts more likely to defer in stock deals than cash deals, due to participation.
4.c DE says that appraisal rights are exclusive. You cannot go into court and challenge the
fairness. But then in Singer, they allowed the SHs to sue rather than exercising appraisal
rights, so they are not exclusive. Then there was a development of cases expanding this
nonexclusivity. You can go to court to have the court determine if it was a breach of
fiduciary duty. BUT you have to do one or the other- can¶t hedge your bets. Can¶t say I
am going to get the appraisal remedy for half my shares and go to court for the other half
º prong test
1. Must be full disclosure of the transx/conflict of interest to the interested

º. Was what the SHs received fair compared to what the SHs would have
received on the open market.
Weinberger v. UOP, Inc.
i. X  : Signal owned a maj of UOP and thus owed them a fiduciary duty. 21 a
share was agreed upon for the cash-out merger. Signal never told them that they had a feasibility
report that showed that anything up to 24 would be a good investment and that they would have
paid 24.
1.c This is a cash out merger/freeze out transaction
2.c This is a conflict of interest case and directors have burden of showing that it is a fair
3.c This is unfair because they should have told them they would pay as much as $24 a share.
This is a Globe Woolen problem (because of their relationship there is a higher duty of
4.c Fairness has 2 parts: fair dealing and fair price- you need them both and in this case you did
not have fair dealing because you did not have candor
5.c DE says that appraisal remedy is exclusive in the absence of fraud or illegality. Most states
have adopted this rule. But what is illegal? In Rabkin, DE court in 1985 said that self dealing
is illegal, so exclusivity may not be as exclusive as it sounds b/c you can get into court by
alleging self dealing
6.c MA §13.02(d) deals with this and says self dealing does not qualify as illegal. It is an attempt
to narrow the view of when you can go to court. This is not the law as it is in most states
Rabkin v. Philip A. Hunt Chemical Corp.
In Weinberger the court defined fair dealing as embracing ³questions of when the transx was
timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the
approvals of the directors and the SHs were obtained.´
³Specific acts of fraud, misrepresentation, or other items of misconduct´ must be carefully
examined in accord with our views expressed both here and in Weinberg.

2.c Federal and State Takeover and TO aws

a.c The Williams Ôct: designed to level playing field in takeovers and not allow secret
controlled transactions
i.c Section 13(d) The Early Warning Provision: Anytime anyone acquires 5% of
stock of a Section 12 company must within 10 business days of crossing this
threshold file a 13D with the SEC.
1.c ³Any à  who,
    . . . the 
   Ã of any
equity security of a class which is registered pursuant to § 12 [of the ¶34
Act] . . . is . . . the beneficial owner of > 5% of such class shall, w/in 10
days after such acquisition . . . file with the SEC, a statement [Schedule
2.c Groups²A ³Ã ´ is broadly defined to have ³
   ô in
Rule 13d-5(b)(1) when ³two or more persons agree to act together for the
purpose of acquiring, holding, voting or disposing of equity securities of
an issuer . . . as of the date of such agreement.´
3.c ³
   ô is defined under Rule 13d-3(a) as the power,
either directly or indirectly, either alone or shared, to either   the shares
or  the shares.
4.c Schedule 13D
a.c May file as a group or individual.
b.c Big issue is Item 4²Purpose of Transaction.

c.c ³Kitchen Sink´ disclosure not likely valid, unless honestly might
do everything.
5.c Ramifications for Violating § 13(d)
a.c T has implied private right of action against the acquirer, but the
remedy is almost always limited to filing an amendment.
b.c SEC may bring an enforcement action, which may include
disgorgement of profits as a remedy. May also have criminal
6.c There is a 10 day window²you can creep up to five percent and then
continue to acquire stock without disclosure within that ten day period.
The critique is that the window defeats the purpose of the act b/c acquirers
can acquire so much more than 5% before disclosure is made.
7.c Once filed, 13D has continuous updating requirements. If there are
material (>1%) changes (you intend to acquire more or your intentions
change), then you must update that information with the SEC.
8.c Can exceed the 5% threshold in a share repurchase without any action.
9.c EXCEPTIONS TO § 13(d):
a.c De minimis exception for purchases that do not exceed 2% of the
class of stock in prior 12 months under § 13(d)(6)(B).
b.c § 13(d)(5) allows passive investors to file a § 13(g) if acquired
stock in ³ordinary course of business´ and ³not acquired for the
purpose of and do not have the effect of changing or influencing
the control of the issuer.´ Usually applies to institutional investors.
c.c § 13(g) applies to ³owners´ not ³acquirers.´
d.c § 13(g) requires only person¶s identity, residence, citizenship, # of
shares, and nature of interest.
ii.c Section 13(e) Gives SEC power to make rules regarding share repurchases.
1.c 13(e) talks about when a company purchases its own shares²if a
company is going to buy back enough of its share to no longer be a public
company, then the company has to disclose this so that SH know they
have lost their information rights.
2.c 13(e)-4: all rules that apply to 3rd party TOs, then also apply to
iii.c The Tender Offer Provisions 14(d), 14(e), and 14(f):
1.c R14(d) ³It shall be unlawful for any person . . . to make a tender offer for .
. . any class of any equity security which is registered pursuant to § 12 [of
the ¶34 Act] . . . if, after consummation thereof, such person would . . . be
the beneficial owner of > 5% of such class, unless    copies of the
offer . . . are
  published or sent or given to security holders such
person has filed with the SEC a statement [Schedule TO] . . . .´
a.c Basic ñequirements: If you have a tender offer, you cannot
commence it until you have filed a Schedule TO with the SEC, T,
and exchanges²who you are, what your intentions are, etc. This
way investors who are subject to a TO can decide.
b.c SHs can withdraw their shares (revoke their tenders) at anytime
while the TO is open.

c.c Ôll holder¶s rule: The tender offer must be open to all SH of the
same class and not exclude any SH from tendering. Response to
d.c Best Price ñule: If you change the terms of the offer, everybody
who tenders under a single tender offer gets the same highest price.
e.c Pro rata ñule: if tender offer is oversubscribed, all SHs get pro
rata acceptance.
f.c imited to 3rd party offers (not repurchases).
2.c R14(e):
a.c Prohibits material misstatements, omissions, and fraudulent
practices in connection with TOs.
b.c Gives SEC power to regulate TOs
i.c Ôpplies to TO, not only ones R1º corporations.
1.c Needs interstate commerce tie as with 10b-5.
c.c 14e-1: TO Open for º0 days: The TO must be open for a
minimum of 20 days business days. If any change is made in the
terms, another 10 period is extended.
d.c 14e-º: Target Management must ñespond: If your company is
the subject of a tender offer management has to react to it within
10 days: (1) support; (2) oppose; or (3) take no position. Must also
explain why.
e.c 14e-3: Insider Trading ñule: Prohibits the knowing possession of
material non-public information about a tender offer and trading on
it. There doesn¶t seem to have to be a duty or deception.
f.c 14e-^: While a TO is open, you cannot purchase any other shares
in any manner.
g.c Limited to 3rd party offers (not repurchases).
3.c R14(f):
a.c Anytime there is an arrangement to turn over control of
management in a public corp., it must be disclosed. Remember,
sale of control cases of public company trigger this.

Derivative Actions and Indemnification of Officers and Directors

Direct Law Suits
Derivative Suits
Injury must be to the corporation not to a SH. The corporation just chooses not to
pursue the claim. Any damages recovered must go to the corporate treasury.
The harm is usually perpetuated by those who are in control of the corporation.

SH bringing derivative suit must satisfy certain requirements:

1. contemporaneous and continuous ownership of their shares at the time
of the harm.
2. the facts alleged have to be verified in a verified complaint.
3. the SH must post some sort of bond.
4. there must be some prior demand. (Demand Rule)
Contemporaneous and Continuous Ownership

During the pendency of the suit the SH must remain a SH.

1. Continuing wrongs
A wrong that has been perpetuated year after year even
before you became a SH.
2. Double derivative actions
Owner of shares of a parent corp. but wrong occurred at
subsidiary. So long as you were a SH of the parent at the
time of the wrong, you may maintain a derivative action
against the subsidiary who commits a wrong.
3. Where stock was acquired by operation of law. (i.e.
inheritance, divorce)
4. Undisclosed wrongs (not an official exception but some cases
have mentioned it)
Verification of Facts
Plaintiff has to have personal knowledge of the facts of the case and must
verify the facts of the complaint
SH Must Post a Bond
Covers the corporation¶s expenses if you lose or if you withdraw the suit.
Demand Requirement
SH must first make a demand on the corp. for the corp. to remedy the
situation or file a claim.
Demand is excused b/c directors are involved in the wrongdoing. Demand
is futile in this situation.
If the corp. does an investigation in response to the demand and finds no
wrongdoing, then it is very difficult to get around the Business Judgment
Rule to continue the derivative suit.
If corp. sits on the demand and takes too long to do an investigation the
plaintiff can go back to the court and argue the demand is futile, and then
possibly continue with the derivative suit.
Most companies carry Director & Officer Insurance
The MBCÔ (8.^º) provides for mandatory indemnification for directors who are
³wholly´ successful in defense of any action to which they are parties
because they were directors. Nevertheless, permissive indemnification may be
allowed by the MBCÔ (8.^1). This section allows indemnification where, among
other things, a director is acting as such in good faith and with the reasonable
belief that his conduct was in the best interests of the corporation.