Gorton v. Doty (Idaho 1937) -Facts: Ms.

Doty, teacher, volunteered her car for the purpose of furnishing additional transportation, designating coach as driver instead of herself (asked if had enough cars, upon being told needed one more Doty lets coach use hers if he drives it, calling it a "loan"); son gets hurt in accident and gets judgment against Doty, she appeals denial of mistrial -Issue: Was coach an agent of Ms. Doty for purposes of transporting football team? -Rule: RS 3d 1.01 Agency- manifestation of consent from both parties that one will act (1) on behalf of the other and (2) subject to other's control [manifestation of consent that the agent act (1) on principal's behalf (2) subject to principal's control, and (3) agent's consent to so act] -three principal forms: (1) principal/agent, (2) master/servant, or (3) employer(or proprietor)/independent contractor -agency doesn't require contract or consideration, RS Agency 16 -ownership alone raises presumption that driver is owner's agent, e.g., Willi v. Schaefer Hitchcock Co. [control is defining feature of agency and partnership law] -Majority Analysis: (1) subject to principal's control established through requiring coach to drive (2) acting on behalf of b/c her purpose was to furnish additional transport and could have driven herself, but instead had coach drive on her behalf -not loan b/c nothing said of loaning or borrowing car, merely that if coach drove he could use it -"mulcting" allegation unsupported by evidence, counterpoint that "prudent automobile owners" wouldn't have acted like Ms. Doty did also improper but not cause for complaint b/c only made in response to mulcting allegation -mistrial denied, "prudent automobile owners" read to jury but told to disregard -Dissent Analysis: -agency more than mere passive permission, but request, instruction or command -requiring coach to drive was mere precaution, not command -read record as a loan, kindly gesture -coach was gratuitous bailee, not agent, b/c for his own use, not of Doty's account -prejudiced by "prudent automobile owners" language and also prejudiced by statement that Doty wouldn't personally pay b/c she had insurance, though both instructed to be disregarded Majority and Dissent disagree as to (1) what presumption using other's car creates, and (2) importance of a contractual relationship Maybe court is playing distributive justice and allocating risk to insured party, encourage insurance policies covering third-party drivers Mill Street Church v. Hogan (Ky. 1990) Facts: Elders hire Bill Hogan to paint church, decide Petty could be hired to assist, Sam previously hired to assist but no longer church member; during meeting Hogan and Waggoner discussed possibility of hiring Petty but Hogan told Petty difficult to reach w/o other discussion; Bill hires brother Sam, who falls and requires surgery; church paid Bill and Sam for their work but denies that Bill had implied or apparent authority to hire Sam Issue: Did Bill have implied or apparent authority to hire Sam as subagent?

[What is the scope of Bill's agency?] Rule: -implied authority: "actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties" -look at agent's understanding of his authority, reasonable belief based on present or past conduct that principal wished him to act in certain way -nature of job another factor -apparent authority: "the authority the agent is held out by the principal as possessing ... a matter of appearances on which third parties come to rely" Analysis: (1) church allowed Sam to be hired in the past (2) no mention made to Bill of a different arrangement this time (3) possible other helper difficult to reach (4) unreasonable to believe Bill able to complete job w/o hiring a helper; therefore implied authority present also unfair since Sam believed Bill allowed to hired him as in the past and relied on Bill's representation (relevant to apparent, but to implied as well?) Dweck v. Nasser (Del.Ch. 2008) Facts: Dweck 30% shareholder of Kids Intl. and fired after discovered running competing companies; litigation slow so Wachtel hired by Dweck, and Wachtel reaches out to Shiboleth, Nasser's friend and long-time counsel, despite Heyman being attorney of record; Nasser then declines to sign agreement reached by Wachtel Rule: (1) actual authority- expressly granted; also attorney of record presumed to have authority to settle (but that was Heyman, not Shiboleth) (2) implied authority- derived from actual to (a) do what's "necessary, usual and proper to" carry out express authority (b) act how agent reasonably believes principal manifested based on principal's objectives and other facts (RS 3d 2.01) (3) apparent authority- "power as a principals holds his agent out as possessing or permits him to exercise under such circumstances as to preclude a denial of its existence" Analysis: (1) actual- "do what you want or what you understand" "you can talk in my name"; despite agreement containing "non-negotiable" terms he is bound b/c said he would "blindly" sign (2) implied- previous twenty years where he had been given authority to settle cases and Shiboleth's actions in the current case; "evidence of acquiescence w/ knowledge of the agent's acts ... acquiescence may be shown by evidence of the agent's course of dealing for so long" that it's assumed (3) apparent- Dweck's husband and brothers told Shiboleth and Heyman that she didn't intend to read the agreement and would sign it when told to do so Three-Seventy Leasing Corp. v. Ampex Corp. (5th Cir. 1976) Facts: 370's only employee Joyce purchases computer parts for lease, discussed buying memory from his friend, Ampex salesman Kays, to lease to EDS; Kays and boss Mueller meet and submit document w/ price and payment terms, signed by Joyce but not Ampex, interpreted by court as offer to buy, not sell; Mueller sends office memo stating Ampex awarded agreement to sell memory and Kays sent letter confirming delivery dates; Kays letter interpreted as accepance

Issue: Was Kays and Mueller's scope of authority broad enough to complete contract? Rule: apparent authority- would lead reasonably prudent person to suppose that agent had the authority to do "usual and proper" for business which he's employed Analysis: Kays employed as a salesman, so reasonable for third parties to presume he had selling authority, which Ampex never dispelled (Mueller sends document w/ signature block, though unsigned; Joyce's request to deal just w/ Kays accepted); never communicated to Joyce that neither Kays nor Mueller had ultimate selling authority Watteau v. Fenwick (Eng. 1892) Facts: Humble manages bar in his name silently owned by Fenwick, Humble had authority to buy beer but not cigars, Fenwick sued for cost of cigars given only on Humble's credit Rule: "principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations," even if there hasn't been a holding out of authority Analysis: within typical authority for manager to accept cigars; bad policy to let silent owners escape liability RS 2d Agency 8A: inherent agency power- "not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent" RS 2d Agency 194: principal liable for agent if actions "done on his account, if usual or necessary in such transactions, although forbidden by the principal" RS 3d Agency 2.06 Liability of Undisclosed Principal: (1) undisclosed principal liable to third party justifiably induced to detrimentally change position by agent if principal has notice of actions and potential to induce position change, yet doesn't reasonably act - (since Fenwick unaware, case would come out differently under 2.06?) (2) undisclosed principal can't reduce agent's authority to less than that third party would reasonably believe agent to have if principal was disclosed - (maybe Fenwick still would be liable because if Watteau knew of principal still would reasonably have believed Humble had authority to buy cigars?) Classic situations of inherent authority: (1) undisclosed principals and (2) agent exceeds authority Botticello v. Stefanovicz (Conn. 1979) Facts: Mary and Walter Stefanovicz own farm as tenants in common, Walter sells lease w/ buy option to plaintiff in 1966, who makes improvements and tries to exercise six years later; trial court finds for P, D's appeal that Mary never party to sale; trial court finds Walter acted as Mary's agent, court disagrees Rule: agency is fiduciary relationship from consent manifested by one person for other to (1) act on his behalf (2) subject to his control, and (3) agent consents to so act -P has burden of proving agency relationship by preponderance, which isn't proven by marital status alone or joint ownership Ratification is (1) "affirmance by a person of a prior act which did not bind him but (2) which was done or professedly done on his account" and requires " RS 2d Agency 82; requires "acceptance of the results of the act with an intent to ratify, and (3) with full knowledge of all the material circumstances" Analysis: insufficient proof of agency:

Humble Oil set working hours.50 to older man in suit acting as if he were a salesman. furnished location and equipment and advertising Issue: Was Schneider's franchise agreement and circumstances reflect masterservant or principal-agent relationship? Rule: What agreement calls itself is not important. or other indicative manifestations has 'held out' the person to be his agent" Analysis: express and implied authority definitely not present.(1)Walter handling business aspects isn't necessarily a delegation of authority (2) although Mary and Walter discussed sale and Mary remarked 75k or less than 85k wasn't enough isn't equivalent to agreement to sell for that amount (3) most importantly. typically unless some kind of change in circumstances Has to accept benefits at a time when she has the opportunity to decline Hoddeson v. Koos Bros. conduct. required him to perform other duties by Humble Oil. . seeks damages from store as principal Issue: Is store liable for acts of an unknown criminal imposter posing as its agent? Rule: bases of agency: (1) express or real authority (2) implied authority. (NJ 1957) Facts: Lady goes to store to buy furniture. 1949) Facts: Martin and two daughters injured by Love's rolling car left w/ parking brake unengaged for repair at Schneider's gas station w/ Manis only employee. v. not by agent alone -duty to customer is beyond "removal of banana peels from the aisles" but goes to "reasonable surveillance and supervision" and "reasonable care and vigilance" to protect customers from imposters -forcing customers to verify that the salesman is legitimate is "patently impracticable" and not within "ordinary prudence and circumspection" -their manifestations were its poor security measures? no proof that they had actual knowledge -no holding out of imposter as agent. and spending money for the family is Walter being generous husband When ratified usually binds both principal and third-party to the whole contract (room for argument to extend ratification to other transactions or sever parts of the contract). gives 168. strictly controlled financial control land supervision. accepting payments could be due to Walter acting on his 1/2 interest or her ratifying a lease but not a sale. Schneider has franchise agreement w/ Humble Oil purporting no master-servant relationship."principal by words. apparent authority must be created by principal's manifestations. "question is ordinarily one of fact" Analysis: Consider irrelevant that fact that Schneider was called the "boss" and no one considered Humble as the employer -b/c agreement provided for Schneider to perform duties as Humble required and Humble set the hours and controlled most business aspects."proper. customarily incidental and reasonably appropriate to the exercise of the authority granted" and (3) apparent authority. estoppel authority due to store's negligence Humble Oil Co. before the sale Walter never signed anything as Mary's agent until 1966 Ratification: (1) no intent by Mary to ratify (2) nor knowledge of all material circumstances and (3) Walter never purported to act on Mary's behalf. franchise agreement gives Schneider 3/4 rebate on utility bills. Martin (Tex.

-distinguished from dealer arrangements b/c the dealer controls and owns the stock and isn't obligated to perform duties as his boss saw fit, didn't get paid part of his operating expenses or control his working hours Hoover v. Sun Oil Co. (Del. 1965) Facts: Barone operates service station, employee Smilyk negligently starts fire in plaintiff's car where being filled w/ gas; station and equipment owned by Sun Oil, rental partially determined by gas purchased but w/ price floor and ceiling; Barone allowed to sell competing products but not allowed to mix Sun products w/ non-Sun products; uniforms had Sun logo but owned by Barone; Sun sales rep offered advice but wasn't required or obligated; Barone set working hours Issue: Was Barone's relationship w/ Sun master-servant or principal-agent? Rule: Service station relationships not developed w/ regard to traditional agency law, so confusing to attempt to classify -"test to be applied is that of whether the oil company has retained the right to control the details of the day-to-day operation ... control or influence over results alone veing viewed as insufficient" Analysis: Though people rely on representation of Sun products nationwide to come to the specific store, Sun's "no control over the details of Barone's day-to-day operation" makes it independent contractor; influence over Sun products merely b/c both have mutual interest in selling Sun products RS 2d 220(2) gives factors to be considered in evaluating what kind of relationship is present Humble- may give orders; Sun Oil could give recommendations Humble- owns property and stock; Sun Oil- owns property but not stock, could sell other products Humble- terminable at will; Sun Oil- 30 day notice Humble- volume-based rent; Sun Oil- volume-based but w/ cap and floor However, both Humble and Sun Oil had many similarities (core part of business, in the business, (d) moderate (c) local custom? vs. appearance relevant) Paradox: want to give up control to lessen tort liability, but wants control to ensure business is run right to protect its money Murphy v. Holiday Inns, Inc. (Va. 1975) Facts: Murphy slips and falls on water from air conditioner at Holiday Inn operated by Betsy-Lin, franchise agreement provides that franchisee pays initial sum of 5k, makes monthly payment per room but doesn't dictate how day to day operations are run; Issue: What kind of relationship between Holiday Inn and Betsy-Lin was present? Rule: Actual agency is a consensual relationship not negated by formal "consent" -"it is the element of continuous subjection to the will of the principal which distinguishes the agent from other fiduciaries and the agency from other agreements" -for agency relationship "critical test is the nature and extent of the control agreed upon" Analysis: franchisor supplies knowledge and brand and regulates activity for standardization, while the franchisee has right to profit and risk of loss -franchisee has no right to control day-to-day operation, no control over daily maintenance

-no power to control business expenses, room rates, share of profits, hire or fire employees, or supervising and training employees [terminable at will is a way to control operators without courts saying there's control- hard to see who is exerting control through these carefully drafted contracts, to see who really has the economic power] Miller v. McDonald's Corp. (Ore. App. 1997) Facts: plaintiff bites into sapphire in Big Mac, restaurant owned and operated by 3K, license agreement prescribes facility layout, inventory and operation control, food preperation, bookkeeping, required compliance w/ McD's policies including operating hours, similar to other McD's, some McD's are company-run and others are franchisor-run; agreement said not an agency relationship and not responsible for PI claims resulting from its operation; P went to restaurant assuming that McD owned and operated it and only signal otherwise was sign near front counter Issue: What kind of relationship was entered into between McD's and 3K? Rule: to be vicariously liable McD has to have right to control method under which 3K performed its obligations -agency exists if "franchise agreement goes beyond the stage of setting standards, and allocates to the franchisor the right to exercise control over the daily operations of the franchise" Apparent agency: RS 2d 267- representing one as his servant or agent, causing third-party to rely upon apparent agent's care or skill, and principal is then liable for lack of skill or care of its apparent agent -apparent agency creates an agency where it wouldn't otherwise exist, while apparent authority creates expanded authority of an already existing agency -most cases have found existence of apparent agency a jury issue -crucial issue is if principal held third-party out as an agent and if P relied on the holding out Analysis: McD's didn't "simply set standards that 3K had to meet" but forced "precise methods"; retained power to cancel and sent inspectors: retained control at least for food preparation -shouldn't have to prove that the other restaurants P went to that caused her to rely on those experiences were operated by McD themselves; precisely the point of the McD "system" to ensure that one couldn't tell the differences between the restaurants Ira Bushey v. United States (2d Cir. 1968) Facts: drunk Coast Guard sailor returning from shore leave opens valves that sank drydock and ship partially; Gov/Bushey contract provided that work be performed so as not to interfere w/ personnel, personnel have access to vessel at all times and personnel won't interfere w/ contractor's work; Government challenges liability as Seaman Lane not acting within scope of employment Issue: Was Lane's drunken opening of valves done while in the scope of employment as a seaman? Rule: RS 2d 228(1)- conduct within employment scope iff "it is actuated, at least in part, by a purpose to serve the master" -often broadly construed (drunkenly getting sailor out of bed by attacking with fist) Analysis: Cannot be extended this far- returning to ship was to serve master, but not opening of valves

-expanding liability will not lead to more efficient resource allocation (won't lead government to take steps to prevent the accident nor likely to screen its sailors more carefully) -just b/c government better able to pay for damages isn't good reason to make them pay -However, "business enterprise cannot justly disclaim responsibility for accidents ... characteristic of its activities": seaman are foreseeably going to get drunk and cause trouble walking up a ship -liable if damages relate to seafaring activity, not personal life: -NOT liable for: shooting wife's lover onboard, burning down a bar -"lacks sharp contours" but imposing liability for this foreseeability is "question of expediency, of fair judgment" Clover v. Snowbird (Utah 1991)- Court rejected Bushey argument that liability based not on whether employee was attempting to serve employer, but whether conduct was foreseeable -Reckless skier employed at a resort was going to work and not deviating substantially enough to constitute "total abandonment of his employment"; Utah Supreme Court required more than conduct that was not foreseeable, but to the point of totally abandoning his job duties RS 2d Agency 228: "not within scope of employment if it is ... too little actuated by a purpose to serve the master" Manning v. Grimsley (1d Cir. 1981) Facts: Heckler annoys pitcher in bullpen, who looks directly at group of hecklers in the stand, then later pitcher throws 80 mph ball through wire mesh fence hitting heckler even though facing 90 degrees other way; Orioles challenge respondeat superior liability Issue: Was pitcher's conduct within scope of employment? Rule: In Mass. employee's assault must be "in response to plaintiff's conduct which was presently interfering with the employee's ability to perform his duties successfully" Miller v. Federated Dept. Store -Miller: janitor slaps customer who says "if you would say 'excuse me,' people could get out of your way"- though annoyed or insulted, didn't justify employer liability Analysis: Considers this case "obviously distinguishable" from Miller, fans rattling the pitcher will definitely get in the way of him successfully performing his duties -not "mere retaliation for past annoyance" but was "presently interfering" with his job duties RS 2d Agency 231: even "consciously criminal or tortious" acts (but not "serious crimes") can be within scope of employment -exclusion of "serious crimes" is outdate hornbook law RS 2d Agency 228(2): "use of force is not unexpectable by the master" then within employment scope -i.e. bouncer using excessive force in ejecting patron from a bar Lyon v. Cary (DC Circuit 1986)- outside edge of VL: Lyon waiting for television delivery, came with mattress but wanted it taken upstairs first, deliverer demanded cash and not check and money upfront; Lyon beaten severely and issue of agency given to the jury, motivated partly by policy? Could analyze Lyon three ways: (1) go for direct claim, saying he knew about Cary's violent tendencies

not a simple escalation -Comment C Examples: employee w/ duty to set prices conspires w/ competitors to fix prices -Employee has duty to make statements to customers to induce them to buy. another Conoco-brand store in Texas refuses toilet paper to Hispanics and call them racial slurs and another Conoco-brand store also slurred them. court looks to its disclaimer anyway. Worth. place and purpose of the act (2) similarity to acts which the servant is authorized to perform (3) whether act commonly performed by servants (4) extent of departure from normal methods (5) whether master would reasonably expect act would be performed Analysis: -Conoco-brand stores: though what agreement states itself as is supposed to be irrelevant. albeit ill-advised. and arose out of the transaction RS 3d Agency 7. which requires (1) consent to (2) act on its behalf and (3) subject to its control -Master-Servant: RS 219: master liable for torts of servants acting within scope of employment. makes intentional misrepresentations Arguello v. similar activity towards blacks in Conoco-brand store in Ft. Conoco (5d Cir.customer service supervisor says nothing they can do because the store was only a franchise -district court finds insufficient control of daily operations for agency relationship -PMA's establish business and customer service standards enforced by biyearly inspections (though focused on product displays and labeling) and give power to de-brand a station Issue: Were employees at Conoco stores acting within their scope of employment or agency? Rule: -Principal-Agent: §1981 discrimination actions against defendants for a thirdparty's actions require agency relationship. 2000) Facts: employee in Conoco-owned store in Fort Worth racially abuses Hispanic customers. of which the court lists five factors: (1) time. beating or having a bad attitude was employee's way of completing a transaction. comment c: in determining whether employee's tort is within employment scope. and request to present ID shows purpose of interaction was to "complete the sale of gas and other store items" . review of record otherwise doesn't show agency existed b/c (a) no "participation in the daily operations of the branded stores" (b) no "participat[ion] in making personnel decisions" -Conoco-owned stores: (1) occurred during working hours inside of employment premises. look at the foreseeability of the conduct in the situation (3) VL under Manning/Conoco: stretch to find purpose of serving the master.(2) VL under Friendly's Bushey analysis: most courts moved away from this. as is whether tort is criminal. nature of tort is relevant.07.manager confirms inappropriate behavior and does nothing except transferring to another store and only when threatened by protest. employee's intentionally criminal conduct may be so serious and such a departure from conduct that it's outside of scope.

and she received the same salary (15/wk) except for possible 20%/yr. but this is matter of fact for the jury's consideration. store items. bonus of net profits. or debt liability. 1945) Facts: Cheshire employed as cashier until new agreement entered into establishing a partnership w/ no capital investment.Cardozo . and completion of CC purchases typical of clerks (3) skipped (4) "self-evident that Smith did not utilize the normal methods" but just because she was intentionally tortious doesn't automatically equal outside employment scope (5) no evidence one way or the other in the record. control. but this element isn't dispositive (3) no share in the losses. Salmon (N.(2) sale of gas.Y. Supreme Court rules entering into agreement and labeling themselves partners not overcome by conduct of the parties of surrounding circumstances Issue: Was Chesire a partner or an employee? Rule: In determining whether partnership exists. intercom use.J. and risk of loss -Uniform Partnership Act: -Chesire lacked the essential element of co-ownership -Profit-sharing was part of her compensation as an employee Meinhard v. (4) no ownership or control. but represented as partners to no one else (8) same rights upon dissolution as she had when an employee (presumably none?) -Most important elements were intent. control. (5) no control of business's management (6) language used excludes Chesire from most ordinary rights of partners (7) though filed partnership tax returns and held out as partners to the unemployment board. management. which can be outweighed by the other factors -Court "reject the presumption that b/c Smith behaved in an unacceptable manner that she was obviously outside the scope of her employment" -absence of some factors outweighed by the presence of the others -also important that Conoco never disputed that the incidents occurred Fenwick v. without altering the rights from Chesire's role as an employee (2) Chesire had right to share in profits. 1928). look to several elements: (1) parties' intent (2) right to share in profits (3) obligation to share in losses (4) ownership and control of the partnership property and business (5) community of power in administration (6) language of the agreement (7) conduct of the parties toward third persons (8) rights of the parties on dissolution -Uniform Partnership Act in NJ: "two or more persons to carry on as co-owners a business for profit" -profit-sharing prima facie evidence of partnership but not if received as wages Analysis: "She got nothing by the agreement but a new scale of wages" (1) agreement made as attempt to compromise financial needs of Fenwick and Chesire. Unemployment Compensation Commission (N.

then 1/2. strictly held to high standard of honesty and honor [today this not really the rule. one of most valuable properties in the world by the time initial lease expired. entered joint venture w/ lender Meinhard to convert into office building. Salmon doesn't inform Meinhard of new lease w/ Gerry and Meinhard demands lease be included as an asset of the joint venture and court awarded first 1/4. but here the nexus is very strong (enlargement of the same property subject to the venture) -Not exactly half b/c Salmon was the leader. particular to the one lease . if he knew it was a partnership or joint venture Gerry would have approached Meinhard also -Salmon should have warned Meinhard of his plans. new lease 7x square feet and rental value] -Today called an "partnership opportunity case" (in law firm cases. towards end of lease Gerry's husband had plans for Salmon to develop it and other tracts.Facts: Salmon leased Hotel Bristol from Gerry for 20 years until May 1922. or require right of first refusal?] Andrews Dissent: Doesn't think drastic principles of utmost fiduciary duty applicable here -Considers scope of the venture limited to definite project and time. "coadventurers" subject to fiduciary duties which rested heavier on Salmon as manager. still coadventurers and not competitors -Fiduciary duty depends on nexus between their relationship and any new project. despite its value -Salmon as exclusive director of the lease had a duty to disclose and without saying anything else there is not an impossible assumption that the status quo would be maintained -As "managing coadventurer" this duty to disclose was utmost -No matter if they had a falling out. but he excluded him from any chance to compete and "enjoy the opportunity for benefit" which Salmon stole due to his more visible role in the partnership -Unsure what Meinhard's involvement might have amounted to or what its value was. so Salmon gets half plus a share [Cardozo's analysis unclear: enough to disclose opportunity. fiduciary duty owed between partners very different and a Cardozo-style standard could be counter-productive in business contexts] Analysis: Gerry approached Salmon alone b/c he thought Salmon was the sole owner of the lease. of the lease [Salmon and Meinhard go from close friends to no contact. losses shared equally and Salmon had sole management and operating control. early on had losses but then provided rich returns. but the "price of its denial" is Meinhard allowed to extend the trust at his option. extendable to 80 years and signed in January 1922. agreement provided Meinhard pay half of alteration costs in exchange for 40% of net profits in first five years and 50% thereafter. poach clients and attorneys) Issue: Did Salmon owe a duty as co-partner to Meinhard to inform and include him in the new lease? Rule: "Joint adventurers" owe to each other a "duty of the finest loyalty" extending beyond that of arm's length partners. Salmon owned other property around the area and Meinhard's investment was almost all he had. disagreement about allocating losses around 1905. fiduciary duties owed by management to shareholders is very great but largely due to non-reciprocity and power imbalance.

poach Cohen and give thirty days notice. 1990) Facts: Lawlis joins K&G as a partner in 1972 being paid according to his "units". 1989) Facts: Senior partners Meehan and Boyle leave Parker Coulter to start their own firm MBC. competing with. or acting tortiously against the partnership. not waive the three month notice -Parker Coulter claims MBC breached duties by (1) improperly handling cases for their own benefit (2) secreting competing w/ partnership. agreement provided that retiring partner could. preparing client lists. could have been explained by merit and workload. insist that poaching clients are breaches. if unable to keep them be more open to their needs Be Meaner: contact clients earlier.-If lease had contained renewal option. judge rules MBC owed partnership agreement money and Parker Coulter owed fees incurred on cases MBC removed to their own firm." logistical arrangements like executing lease. parties sue each other for breaching partnership agreement. not necessarily manipulation (2) fiduciaries may compete w/ their partnership if they don't "otherwise act in violation of their fiduciary duties. take files out of office. violated ABA Ethics guidelines by excluding partners from presenting Parker Coulter services as an alternative to MBC Lawlis v. all while preparing to leave by meeting w/ clients and referring attorneys. seeking treatment for couple ." remove cases that came to Parker Coulter through that partner's "personal effort or connection" which was 103 of 142 cases removed (from 350 total contingent fee cases). associate Schaefer told to delay resolving cases until 1985 instead of 1984. Be Nicer: tried to keep them in the firm.MBC wants money owed under partnership agreement and Parker Coulter want tortious interference damages. one of the guidelines is presenting clients a choice between representation Analysis: (1) just b/c Boyle spoke of improper activity doesn't show that the activity actually occurred. delayed giving partners their client lists until he had authorization from majority of clients. three times Meehan denied that he had plans to leave. became senior in 1975 and became alcoholic in 1982. Shaughnessy (Mass. tried to evade rumors of leaving. not acting for purely private gain -partners have obligation to "render on demand true and full information of all things affecting the partnership to any partner" -ABA Ethics Committee has standards for attorneys changing professional association. for a "fair charge. and obtaining financing were permissible (3) secrecy among themselves for obtaining consent and communications w/ clients garnered an unfair advantage. not three months as required (later waived). and (3) unfairly acquiring consent to withdraw cases to MBC Rule: partners owe each other fiduciary duty of "utmost faith and loyalty" and must consider partners' welfare. holding partners to positivist standards of trust and loyalty Meehan v. Kightlinger & Gray (Ind. one couldn't force the other to renew or to extend the terms of partnership into the renewal period Revised Uniform Partnership Act of 1994 Sec 404 imposes mostly negative constraints on fiduciary duty (refrain from acting adversely to. also acting in one's own interest isn't necessarily a violation) -Cardozo likely would have expected a higher threshold.

partner tells Lawlis in 1986 Finance Committee recommended severing relationship w/ Lawlis except for nominal one unit to retain senior partner status and keep insurance. also Lawlis acted as senior partner by refusing to sign proposed addendum and had vote -Lawlis's claim that partnership sought to increase profits per partner by removing him and lowering lawyer to partner ratio wasn't in bad faith b/c it previously had tried to help his counseling -after Lawlis failed to fulfill the first agreement partners did give him second chance and gave him eight months to find other employment while drawing income -didn't violate good faith b/c Lawlis's conduct threatened partnership business. Lawlis refuses new addendum and expelled by senior partners Rule: dissolution occurs w/o violating partnership agreement when it's "bona fide in accordance w/ such a power conferred by the agreement". which executed w/ a doctor a "Program Outline" providing requirements for continued employment. Day resigns b/c he feels merger was misrepresented by claiming no partner would be put into a worse position. and meeting of minds that he would continue as senior partner. after which Lawlis never consumed alcohol. similar to controversial political speech by in Holman v. Coie. name not removed from letterhead though placed at bottom of list.years after until disclosing it. Day wanted to remain chairman of DC office w/ authority to control office space expansion Rule: partners have duty to make full and fair disclosure to other partners of all info which may have value to the partnership. craft the partnership agreement carefully] Day v. -Indiana doesn't required good faith and fair dealing for at will employment relationships. upon learning of it expressed approval on condition that terms would be approved by the partners. still drew partnership profits. including provision that "there is no second chance". but for partners expulsion must be "bona fide" or in "good faith" not for bad faith or a "predatory purpose" -fiduciary relationship relating to "bona fide" and "good faith" concern the business aspects or property of the partnership and prohibit fiduciaries from taking personal advantage of these subjects Analysis: Partner telling Lawlis of future action and removal of files didn't qualify as dissolution. not on executive committee so unaware of potential merger with Liebman firm. after which K&G imposes additional treatment requirements. removes his office files two days later. courts primarily concerned w/ partners making secret profits at partnership's expense basic fiduciary duties: (1) partner must account for profit acquired in manner injurious to partnership's interests (2) cannot acquire for himself partnership assets or divert for his own use their opportunities w/o other partners' consent. and just b/c they gave him six months rather than nothing doesn't change this initial intent of the agreement -act in "good faith" regardless of motivation if wrongful withholding of money isn't involved [if you scared of being held to Cardozo-style fiduciary duties. and (3) not compete w/ partnership within business scope . Sidley Austin (DC Dist. find nothing wrong w/ "guillotine method" of involuntary severance for sake of convenience. 1984 Lawlis resumes alcoholism. DC office combined into the Liebman DC office over Day's objection. 1975) Facts: Day senior partner from 1963 to 1972.

unless under dissociation clause of previous agreement (continuation agreement) -partnership law allows partner to make any agreement they choose. lower court finds joint venture and awards 4340 to Kovacik Rule: General rule that absent contrary agreement there is presumption that partners and joint adventurers intended to share profits in same proportion as losses. since not dealing w/ profits or loss. non-executive committee members didn't have information that Day didn't -bruised ego doesn't constitute a cause of action.when partner retires there is a dissolution of the firm and new partnership emerges. Cohen (Cal.Analysis: not a misrepresentation b/c Day not deprived of any legal right. D steals money partnership in receivership sold off and loan repaid Issue: Does evidence warrant dissolution decree? Rule: Trifling grievances involving no permanent mischief doesn't authorize dissolution decree -but equity courts may so order if disputes of such nature and extent that all confidence and cooperation destroyed or a party's misbehavior materially hinders proper conduct of the business UPA §32: conduct that will "affect prejudicially the carrying on of the business" "wilfully or persistently commits a breach of the partnership agreement" or conduct "not reasonably practicable to carry on the business in partnership" or "other circumstances render a dissolution equitable" -D objects to repayment of loan on the court's terms and wants to follow agreement's understanding of repayment. 1957) Facts: Kovacik advances 10k and convinces Reed to help him remodel kitchens as job superintendent and estimator in return for 1/2 share of profits. if Day desired to remain chairman should have specified that provision be included in the agreement. the authority to control chairmanship was held by executive committee which was included in his partnership agreements -failing to reveal information concerning internal structure isn't recognized. but business disputes arose between them which lowered its profits. court finds parties disagreed on just about every aspect of the partnership and D had acted in ways necessary to dissolve partnership by court decree. regardless of unequal capital contributions -usually applied when each party contributes capital in form of tangible property . Kovacik demands money from Reed after money is lost. Owen provides 6987 to be considered a loan repaid out of business as soon as reasonably possible. 1941) Facts: Owen and Cohen verbally agreed to become partners in bowling alley w/o any definite time period on Jan 1940. just follow contract law Owen v. but can't follow partnership when D's own conduct prevents its continuing -Needed to seek court decree because contravened agreement to dissolve on his own -Court decree's purpose for one to buy out the other to avoid an inefficient fire sale Kovacik v. D tried to dominate the business and humiliate P publicly. Reed (Cal. risk he assumed when joining the partnership UPA. no discussion of losses. bowling alley opens in March and operated at profit until end of June.

fair b/c 100% of money investment and 100% of labor inv. Trigger events A.arguing over losses when you only predict profits can be deemed unnecessarily fractious -Protect some party. some wouldn't -Penalty default. Disability C. money man gets back something while laborer gets nothing -"upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only services" UPA 18(a). don't contract around even though you should). so most likely that these specific parties also would have -saves transaction costs and doesn't have to think as hard -many parties would care about equity.g.-when one party contributes skill or labor.g. non-repeat player -Possible rules: (1) All capital losses borne by capital partner alone (Kovacik) -advantage b/c capital partner more able to bear the loss -disadvantage b/c service partner may walk away untouched while other party loses -incentive problem: service partner may not care as much if not liable for loss.rule that most contracting parties would want most of the time. order of liabilities repaid upon dissolution is: (1) non-partner creditors (2) partner liabilities (not capital or profits) (3) partner capital (4) partner profits Default Rules -Majoritarian default (what most people would agree on ex ante).partners share profits equally after capital contributions and liabilities are repaid -contrary to Kovacik (case treats non-contributing partner better than UPA. "sticky" defaults. over-optimism. Will of any partner . often they are the person that came up w/ the idea and more control over whether it fails (2) Sharing of capital losses in accordance w/ sharing of profits (statute) (3) Buyout agreements I.e.absent contrary agreement. lost -but for partial losers. Death B.not necessarily what parties would have bargained. doesn't share moneyman's loss) 40(b). can have inequitable effect -policy concern to deter certain behaviors the court doesn't like -sometimes one party has information the other party doesn't -Address some cognitive bias (e. neither party liable to the other for loss sustained -for complete losers.

Book value B. 5x earnings) D. Method of payment A. prevents outsiders from joining and retains status quo -doesn't provide liquidity to seller -Provisions requiring the entity to purchase the interest upon a triggering event -Protect selling shareholder by providing liquidity -Important in both corp. Price A. if there is no obligation III. so decide early on -Formula: usually clear and bright-line. but formula may not be accurate -usually some measure of cash flow.. Protection against debts of partnership VI.g. Cash B. First mover sets price to buy or sell B. Obligation to buy vs. don't risk too much involuntary change -protect non-selling shareholders -very important in corp. so more important to plan -partnerships are owned by the managers. Procedure for offering either to buy or sell A. while corporations aren't 3 Types of Agreements: -Restrictions on transfer -can't sell shares w/o the permission of the corporation or the other shareholders -try to have stable direction and management. First mover forces others to set price -Partners have right to dissolve and right to refuse new partners. Relation to duration (e. Set price each year E. Consequences of refusal i. Option A.g. LLC's don't. Firm B. Other investors C. but often not close to the fair market value -Appraisal: expensive and subjective.II. where no restriction on selling -Grant entity or other investor the right. Formula (e. and partnership context Setting the Price: -Book Value: usually clear and bright-line. Appraisal C. to purchase if a triggering event -protect non-selling shareholders.may argue on who is the appraiser. lower price in first five years) IV. If there is obligation ii. plus some multiplier to determine PV of future cash flows . Installments (w/ interest?) V. but not obligation.

De Escamilla (Cal. not reasonably practicable" -Buy-out formula from the partnership agreement: "retiring general partner's capital account plus an amount equal to the average of the prior three years' profits and gains actually paid to the general partner.5%) in apartment complex. only official when declared by the court -Nordale's conduct made it impracticable to continue partnership w/ him and contravened partnership agreement -Estate claims "capital account" is ambiguous. but don't know in advance how much it will be worth -sometimes price isn't actually set. organized in early 1943 as limited partnership w/ de Escamilla as general partner and Russell and Andrews as limited partners. 1943 and Holzman appointed estate's trustee... even overruling Escamilla's aversion to peppers and egg plant. shall purchase the interest of the retiring or resigning general partner" -UPA §32: court authorized to dissolve partnership when (2) partner becomes .. all three were involved in picking crops . so partner's rights and liabilities are subject to the contract -buyout provisions can be less than its actual value Analysis: filing of complaint was not itself a dissolution. or otherwise so conducts himself in matters .7k -Partnerships result from contract. 1948) Facts: Hacienda Farms... G&S file complaint and Nordale then dies. R&A "always conferred and agreed" to what crops were planted. makes bad business proposals. 1984) Facts: general partners G&S (51%) and Nordale (25. or as agreed upon by the general partners. Limited. so need fallback in case re-estimation doesn't happen G&S Investments v. G&S seeks dissolution and buyout of Nordale's interest.. merely leading up to it.5k while FMV was +76. determining that watermelons and string beans should be planted. Belman (Ariz. Nordale's estate wants to liquidate b/c would receive more than if bought out by G&S Rule: partnership's agreement: "upon death . incapable of performing his part of the partnership contract (3) guilty of such conduct as tends to affect prejudicially the carrying on of the business (4) willfully or persistently commits a breach of the partnership agreement. but accountant later recants and says it's cost basis -rest of agreement in "cost basis/capital account" language and not FMV language Holzman v...-may relate to duration -Set price by year: clear price. surviving or remaining general partners may continue the partnership business" and "remaining general partner . company goes bankrupt in Dec. provided said agreed sum does not exceed the calculated sum in dollars" -buy-out provision didn't include real estate investment -capital account was -44. Nordale starts using cocaine and damaging business. -Holzman asserts Russell and Andrews liable to creditors as general partners by having control in the business. scares off tenants and squats in complex apartment.

based upon the limited partner's conduct that the limited partner is a general partner" -merely consulting w/ and advising general partners w/ respect to limited partnership's business is not taking part in its control Mt. name and address of registered agent. usually Secretary of State -MBCA §2.limited partner not liable for limited partnership unless (1) also a general partner or (2) exercises limited partner rights and powers and also takes part in control of the business -but liable only to persons transacting business w/ the limited partnership and who "reasonably believe. # of shares authorized.-R&A ask Escamilla to resign.. name.limited partner disregarding limited partnership form to the extent he becomes substantially same as general partner has unlimited liability regardless of plaintiff's knowledge of his role -Plaintiff knowledge sufficient. D&O indemnification and liability limitation. in addition to the exercise of his rights and powers as a limited partner. affairs governed by bylaws -difficulty ensues when incorporation is defective (i. Vernon Sav.limited partner may still have unlimited liability even when exercising less than general partner's power if plaintiff knew he was acting as more than a limited partner -Corporations characterized by 6 attributes: (1) formal creation prescribed by state law -file articles of incorporation (charter) w/ state of incorporation. he takes part in the control of the business" Analysis: Clear that R&A both exercised control: -controlled types of crops planted.Md. particularly illuminating". (but erosion of ultra vires doctrine) -initial board of directors holds organizational meeting adopting bylaws and appointing officers -most corp. promoter liability) (2) legal personality (3) separation of ownership and control (4) freely alienable ownership interests (5) indefinite duration . Escamilla couldn't withdraw w/o a limited partner Rule: Civil Code §2483. unless. Partridge Associates (D. though.02 requires corp. and the two had power to withdraw all the money -required Escamilla to resign as manager Revised Uniform Limited Partnership Act: §303(a). and name and address of the incorporator -charter must include any classes of shares.could control finances by refusing to sign the checks.e. & Loan v. and replaced by Miller -checks drawn by 2 of 3 partner's signatures. some against Escamilla's wishes -"manner of withdrawing money . 1987)-No plaintiff knowledge necessary. and statement of purpose in Del."limited partner shall not become liable as a general partner.

so as to take advantage of his own unfair vacillations" Analysis: Camcraft shouldn't be permitted to escape performance by raising issue as to character of the organization unless its substantial rights are affected -doesn't violate contract that SG was incorporated in Cayman instead of Texas b/c assignments allowed in the contract -estoppel ruling based on Bowman's letter . boat for 1. then sells land to the corp.e. enters Letter of Agreement w/ Camcraft to a 156 ft. would you still have paid the same amount anyway?) Principal/Agent Sales. but can't misrepresent -Even if fraudulent misrepresentations. Bowman signs acceptance -Camcraft then defaults.. unless otherwise agreed -promotes fair dealing and openness -not based on actual damages Promoter/Corporation Sales.No fiduciary duties nor duty to disclose initial purchase price. so can be compelled to disgorge undisclosed profits -i. end? at sale? depends on Southern-Gulf Marine Co v. providing for delivery date. must sue on behalf of corp. authority for Camcraft to begin buying components. Camcraft. question as to extent of damages (i.. -but if Art sells Paula and Paula is the one who forms the corp. and sells all its shares to Paula.) courts split whether fiduciary duty owed to person he sells shares to after few days (Old Dominion) -problematic if held for more than a few days. citizen -Camcraft allowed to assign its interest -Southern-Gulf pres. Barrett writes letter to Bowman that SG was a Cayman corp. 1982) Facts: Southern-Gulf Marine Co. not US. -promoter owes fiduciary duty to corp. -Camcraft pres. and stated that final contract to be formed later -condition that Southern-Gulf was U.S.Individual shareholders can't sue personally.35M. (La.'s) agent -if promoter has retained interest in corp. more like arms-length transaction unless Art acts as Paula's (not the corp.(6) limited liability "Promoter": term of art for a person identifying a business opportunity and puts together a deal by forming a corporation as the vehicle for investment by others Third-Party Sales. complicates due diligence -when does promoter's fiduciary duty to corp. not yet incorporated. Art forms corp.e. and profits from sale (sells land to his own corp. asserts no liability b/c SG not a corporation at time of contract Rule: -One who contracts w/ who he acknowledges and treats as a corporation is estopped from denying its corporate existence -"one cannot be permitted to play fast and loose.RS 2d Agency 388: agent profiting while transacting on behalf of principal must disgorge profits to principal. Inc.

on contract law or through best efforts argument (should have incentive to actually form the corp. cab owned by Seon Cab Corp. inequitable to hold innocent. applies to commercial acts and negligence -agency rules determine when liability extends beyond corporation's assets -if corp. buy extra phone lines. though. etc. for his own personal use. undercapitalized -too obvious that this was meant to avoid the inevitable damages that cars will create -legislature intended for 10k as a floor. coffers than to buy separate office space. Carlton (N. 1966) Facts: Carlton's taxi fleet owned by many corporations. is used for the stockholder's personal. but no personal liability -(2) Not shown that Carlton manipulated corp.) Options for Bowman: -Post bond -Demand progress payments -Discontinue production if not formed by certain date -Demand adequately capitalized corporation -Retain indemnification of Barrett personally Walkovszky v. is a part of larger corporation which actually conducts the business.Y. the larger corporation is liable -if corp. purposes. runs someone over -(1) all corp. in their individual capacities or shuttling personal funds "w/o regard to formality and to suit their immediate convenience" -just b/c legislatively required insurance is inadequate doesn't mean judicial expansion of agency is appropriate -complaint of too-low coverage sounds more like fraud (which it isn't) than respondeat -(1) enterprise liability. each owning one or two cabs. . alleged to be operated as single entity so other corporations should be liable -(2) multiple corporate structure is allegedly unlawful attempt to defraud potential victims. so stockholders should also be personally liable Rule: incorporation supposed to limit liability.-Should be clearer whether Barrett's liability is to end upon incorporation -Barrett could probably sue personally on the contract b/c signed it individually -Barrett could also be sued. and even if he did. passive stockholders liable Dissent: corporations intentionally setup w/ minimal coverage and funds drained. not corporate. but not without limits -will "pierce the corporate veil" to prevent fraud or inequity. individual is liable Analysis: No evidence that Carlton used the corporations for his personal use. expecting bigger companies to take out more insurance Enterprise liability: when multiple corporations really all ran as one corporation -might be useless if all corporations equally broke -easier to get than veil-piercing (so just buy more insurance) -easier to keep minutes and keep fingers out of corp.

same expense accounts.Respondeat superior: agency should be different than veil-piercing (but Walkovszky mixes them) -based on control Piercing corporate veil: when corporations used for personal ends -might be useless if individual has all money tied up in other corporations (then look to enterprise liability) -in many jurisdictions. creditors -otherwise owners liable to risk large judgments from many sources -otherwise would have to evaluate other shareholders -promotes free transferability of shares (4) allows specialization of management Bad b/c (1) tort victims. formalities can be absent. although some consumer contracts don't really have a choice Sea-land Services. w/o increasing exposure to torts. bylaws. or other agreements -all corp. can act risky knowing their exposure is capped -this risk externalized onto the public -tort victims perhaps worse b/c can't do credit checks on their tortfeasors. and corporation can operate for the passive investor's personal ends w/o the investor controlling or even realizing this) Limited liability good b/c (1) makes passive investment rational -otherwise they'd want more control over their liability (2) lessens monitoring costs (3) allows owners to diversify. "little but Marchese's playthings" -never held a single corporate meeting -adds Tie-Net. creditors can be shortchanged by undercapitalized corporations -more torts b/c corp. increasing capital. but in veil-piercing doesn't necessarily require passive investors to have control (their money can still be commingled. v Pepper Source (7th Cir. ran out of same office and phone line. Inc. lack of formalities by itself insufficient Difference b/t respondeat superior and veil-piercing: passive investors protected under respondeat superior b/c don't assert control. though only half-owned by Marchese -no minutes ever taken at Tie-Net meetings -none of the companies ever passed articles of incorporation. 1991) Facts: Sealand ships peppers for PS and PS doesn't pay freight bill. all "alter egos" of one another and Marchese manipulated them for his own personal use -Marchese sole shareholder in the businesses.corporate entity disregarded and limited liability pierced when: . from which Marchese and other corp. borrowed interest-free at will and used to pay Marchese's personal expenses Rule: Van Dorn. default judgment entered but PS dissolved with no assets -Sealand sues owner Marchese and five of his businesses b/c corp.

something akin to fraud or deception or the existence of a compelling public interest must be present" -promote injustice examples: -holding land adversely to corp. shipped after first installment. and other Archbishops all controlled by central catholic church as a "conduit of their ideas. used for years by corp. simply an unsatisfied judgment is too permissive -on remand "injustice" proven by blatant tax fraud. unjust enrichment). Bernard for 175. alleging that Switzerland. Sheffield (Cal. Pope. sanction a fraud or promote injustice" Factors considered in applying doctrine: (a) Commingling of funds and other assets (b) Holding out by one entity that it's liable for the other's debts . Vatican. but that there is such a unity of interest of interest and ownership" that separateness ceases to exist. but second prong more problematic -some wrong beyond creditor's inability to collect. from Switzerland monastery. which one is "dominating force" Analysis: Facts show first prong clearly met. 1971) Facts: Sheffield purchases St. payable in $20 installments. also told $60 nonrefundable -"alter ego" theory : Sheffield sues Roman Catholic Archbishop in SF. mocking adverse possession rules. and affairs" -SF Archbishop answers that they had no knowledge of or participation in transaction and was legally distinct from Switzerland Archbishop Rule: "Alter Ego" principle or "piercing the corporate veil" requires (1) "Must be made to appear that the corporation is not only influenced and governed by that person [or other entity]. and (2) "Adherence to the fiction of the separate existence of the corporation would. under the particular circumstances. SF.(1) "such unity of interest and ownership" there's no separation b/t corporation and individual (or other corporation) -Determined by four factors: (a) failure to maintain adequate corporate records or comply w/ corporate formalities (b) commingling of funds or assets (c) undercapitalization (d) one corporation treating the assets of another corporation as its own (2) circumstances are that allowing separate corporate existence would allow fraud or injustice -can be either fraud (intentional wrongdoing) or promotion of injustice -to disregard corporate entity "some element of unfairness. that bill would be paid while knowing funds wouldn't be there Roman Catholic Archbishop of SF v. Sheffield agrees to pay 125 freight charge -after making three installments does not receive the dog but refused unless Sheffield paid entire price plus fees for delivering dog to airline. property. Sealand's unsatisfied judgment is not sufficient to rise to the level of the examples (i. owned only by oneself and wife -stiffing seller on equip. business.e. spending corporate assets and assuring Sealand rep.

not the Pope. Bristol name used in all sales materials to doctors and in the packaging -Bristol never received dividends from MEC's increased sales. w/ both Bristol and MEC conducting due diligence about polyurethane hazards -MEC's board made of a Bristol pres. MEC advised by Bristol's counsel. Bristol VP. maintained MEC's cash. breast implant supplier originally incorporated in Wisconsin. couldn't be outvoted by other two and former MEC pres. -two other breast implant makers purchased under MEC's name but negotiated and paid for by Bristol. and MEC's president. corp. wants summary judgment in its favor -Bristol does due diligence about MEC's capsular contracture. but the issue is whether SF Archbishop. and gel bleeding and buys it.(c) Identical equitable ownership in the two entities (d) Use of the same offices and employees (e) Use of one as a mere shell or conduit for the affairs of the other Analysis: -Sheffield doesn't contest Church's claim of no business relationship w/ the other Archbishop -Unity of Interest prong: Sheffield argues that Swiss Archbishop controlled by pope. controlled employment and wages of top executives. but Bristol pres. is responsible for the Swiss Archbishop -alter ego theory makes parent liable for subsidiary. products liability) or indirectly (corporate veil pierced. making MEC a Del.(1) parent not liable for subsidiary's debts (2) public parent wants to keep subsidiary private or position it for public offering w/o affecting parent's shareholders BUT: must be careful not to be liable directly (negligence. w/ one stating he never had a board meeting or call but instead. respondeat superior. key execs' stock options in Bristol stock and employees participated in Bristol's pension plans -Bristol subsidiary distributed MEC's implants. instead of division within one corp. not subsidiaries liable to each other -there is no respondeat superior between subagents -doesn't address corporate formalities -Promote Injustice prong: plaintiff being unable to collect from Swiss Archbishop insufficient to pierce veil -"purpose of the doctrine is not to protect every unsatisfied creditor" but to protect "conduct amounting to bad faith makes it inequitable" Reasons for parent/subsidiary corp. didn't recall that MEC had a board. rupture. Bristol performed MEC's audits and quality review and scripted its customer service lines. 1995) Facts: Bristol is sole shareholder of Medical Engineering Corp. had a designated Bristol contact -Bristol had authority over MEC's budget. MEC prepared its own Wisconsin tax forms and Bristol purchased $2 billion insurance for MEC. . helped MEC w/ marketing and research.. and approved its capital costs. enterprise liability) In re Silicone Gel Breast Implants Products Liability Litigation (Ala.. and claims it isn't directly or indirectly chargeable for breast implant cases.

inequitable b/c Bristol put its name on MEC's products. Union Properties. as sole general partner means no individuals liable for the debts Frigidaire Sales Corp. v. and many jurisdictions only require this prong in contract cases and not tort cases -tort victims are forced to deal w/ the corporate form while contract victims could insist that subsidiary make the principal also liable -even in jurisdictions requiring this prong. inducing consumers to believe it vouched for MEC. "unity of interest" prong shown -"fraud or promotion of injustice" prong: -Delaware don't necessarily require it. so can't now deny its 324A responsibility -Tax shelters show tax losses even though economically successful -limited partnerships (until 1986) would "pass-through" losses to investor's tax returns even though having limited liability -limited partnership w/ corp. expected and required to assert control over its subsidiary.Bristol sells MEC's urology division and executes 57. as parent corp. or (c) harm suffered b/c of reliance of the other or third person upon the undertaking Analysis: Most of the factors satisfied by the evidence. here Bristol gave MEC a leg up] Rule: Limited liability is rule. but MEC's assets may be insufficient to pay off liability -Direct liability (negligent undertaking): Bristol held itself out as supporting the product and issued press releases stating that the implants were safe. MEC's only other asset is indemnity insurance [opposite of many veil-piercing where parent siphons from subsidiary. 1977) . not exception. is liable for physical harm from his negligence if: (a) negligence increases risk of harm (b) undertaken to perform duty owed to the third person. but when subsidiary is so controlled to be its "alter ego" or "mere instrumentality" the corporate form is disregarded in interest of justice -factors relevant to "a showing of substantial dominion": -common directors or officers -common business departments -consolidated financial statements and tax returns -parent finances the subsidiary -parent caused subsidiary's incorporation -subsidiary operates w/ grossly inadequate capital -parent pays subsidiary's salaries and other expenses -parent gives subsidiary all its business -parent uses subsidiary's property as its own -daily operation of parent and subsidiary not kept separate -subsidiary doesn't observe basic corporate formalities. Inc.5M demand note to MEC. like separate books and records and holding shareholder and board meetings -Direct Liability (negligent undertaking): -RS 2d Torts 324A: rendering services necessary to the protection of a third person or his things. (Wash.

mechanism needed to hold directors accountable and temper their desire to profit personally from their trust. but would "conscientiously keep the affairs of the corporation separate from their personal affairs" Cohen v. 1949) Facts: stockholder w/ . but anytime corp. and shareholders of Union Properties. expense. but can't vote on the one who represents them in derivative suit -Constitution doesn't require SH to proceed w/o state imposing "standards of responsibility. doesn't indemnify.hence derivative suit -equity first requires demand for corp.Facts: Frigidaire enters K w/ Commercial Investors.01% ownership shares sues on behalf of corp. as sole general partner -Uniform Limited Partnership Act removes limited liability of limited partner who "takes part in the control of the business" Analysis: Minimum capitalization problems not specific to limited partnerships w/ corporate general partners. wasting over 100M through mismanagement and fraud -demand refused so derivative action brought. here 125k Issue: Must fed.S. Frigidaire seeks judgment from Mannon and Baxter Issue: Do limited partners incur general liability for limited partnership's debts simply b/c they are officers. personal capacity. (U. Beneficial Industrial Loan Corp. alleging managers and directors enriched themselves at corp. has a creditor -don't impose general liability on limited partners. "piercing-the-corporateveil" doctrine enough -Mannon and Baxter never acted in any direct. court in diversity case apply statute imposing reasonable expenses and attorney's fees on unsuccessful plaintiff and requiring security? Rule: As management vested w/ other's money and corporate laws lax. thereby exercising day-to-day control of Commercial -after Commerical breaches. liability and accountability" to "protect the interests he elects himself to represent" -reasonable-ness of security makes it not violation of Due Process Clause -not unreasonable to use financial interest as measure of good faith . directors. to vindicate its own rights. a limited partnership w/ Mannon and Baxter as limited partners and also officers. directors. or shareholders? Rule: In Wash. -warranted NJ's security statute Analysis: -SH's can vote on directors. the only general partner of Commercial -Mannon and Baxter controlled Union. -more often brought by smaller SH's b/c less lost by hassling the corp. diversity case -NJ statute requires less than 5% owners must post bond for attorney's fees in case he loses so corp. legal for parties to form limited partnership w/ corp. but when it's inevitably refused derivative suit emerged -however this also provided abuse opportunities ("strike suits") by SH's seeking to gain personally w/o concern for the detriment to their negligible shares in the corp.

Flying Tiger reorganizes his shares from one owning an operating company to one owning a holding company that owns the operating company -NY law requires P to post security in derivative suits -Eisenberg claims his suit is direct and not derivative Rule: If injury is to the corp. affairs Analysis: Gordon fails to distinguish b/t derivative and direct class actions... (2d Cir. but b/c D's interfered w/ P's rights as stockholders by excluding them from proper participation in the corp. can pay their legal fees -If D's lose at trial. Knolls: derivative b/c doesn't challenge acts on behalf of corp. suit is derivative. and through it. Elliman: (1) "whether the object of the lawsuit is to recover upon a chose in action belonging directly to the stockholders.. Inc. 1971) Facts: Eisenberg sues on behalf of all stockholders to enjoin merger which allegedly deprives him of voting rights. settle -P's attorneys usually the drivers -Court sometimes awards individual recovery (Lynch v. Flying Tiger Line. or the SH's individually. corp.. "in its favor" -Not on behalf of corporations but on behalf of its shareholders as a class -NY: direct/derivative law is Eisenberg -Delaware: used to have "special injury" test for direct/derivative: "separate and distinct from that suffered by other SH's. and (2) Benefit prong: who would receive the benefit of remedy. or (2) whether it is to compel corporate acts under a duty owed to the corp. but if injury is to P as stockholder individually and not corp. Patterson: wronged SH owned all of the corp. to its stockholders -Lazar v." -Now they have two-pronged standard: (1) Injury prong: who suffered the alleged harm. then it's direct -Gordon v. or to assert majority control. that the wrongdoers didn't own) Direct and Derivative Suits Direct: -brought by shareholder in his own name -cause of action belonging to the shareholder in his or her individual capacity -arises from an injury directly to the shareholder . such as the right to vote.. or the SH's individually -If derivative action against D's settled. the corp. finds this case similar to Lazar -NY legislature responds to Gordon by saying suit derivative only if to procure a judgment to corp. or a wrong involving a contractual right of a SH. which exists independently of any right of the corp. the corp. this liability unusual and goes beyond normal conception of "costs" Eisenberg v. besides insurance they pay damages and may have to pay legal fees as well -Incentive for managers to have corp.-Can't call this procedural b/c creates new liability which didn't exist before.

. Consequently. are usually dismissed quickly Primary Corporate Actors Shareholders.passive investors w/o management powers • Vote on: -board of directors -mergers and other fundamental transactions -NOT daily operations -matters that management presents to them (usually b/c director-interested transactions. noting that the power of courts to direct the management of a corporation's affairs should be "exercised with restraint" (quoting Gordon v. and per share recoveries small Thompson & Thomas. cures any future claim the shareholders might have) • Put recommendations up for vote • Can amend bylaws • Can sue • Can sell shares Directors. shareholder derivative actions infringe upon the managerial discretion of corporate boards.e.many are not strike suits. Elliman) Business judgment rule: . etc) • Outside: no other relationship w/ the corporation -distinction doesn't mean independent/disinterested -often require buy-in.oversee the day-to-day operations • Inside: directors otherwise employed. litigation under control of board of directors (2) Shareholder may have interests diverse from those of corporation -shareholder's lawyers often real party in interest (3) Therefore board of directors should have some say Marx v. we have historically been reluctant to permit shareholder derivative suits. changes rights to prefer common SE's over preferred (preferred has class action) Derivative: -brought by a shareholder on corporation's behalf -cause of action belongs to the corporation as an entity -arises out of an injury done to the corporation as an entity -quintessential case is attempting to compel corporation to sue a manager for fraud Roberta Romano. also compensated through stock options Officers: • a Derivative suits a mechanism of managerial accountability -potential for bias: directors can't be expected to sue themselves (1) Cause of action belongs to corporation -like all assets. corp.-i.. Akers: -"By their very nature. ones not providing relief to the corp. typically senior executives (CEO.financial recoveries in only half of settled suits.

to exercise the same degree of care as the shareholder himself (aspirational goal) -but in reality.should be made by the board of directors" The Task (1) "Preserving the discretion of directors to manage a corporation w/o undue interference" -Marx Versus (2) "Permitting shareholders to bring claims on behalf of the corporation when it is evident that directors will wrongfully refuse to bring such claims" -Marx • Needed: a filter to separate cases in which the board is disabled by conflicts of interest from making an independent decision in good faith (this middle ground explored in Zapata) . then all we have really is a shift in the locus of authority from A to B" (Kenneth Arrow) -presumption that. Kemper Financial Services. or -(2) whether or not a quorum.. in good faith after reasonable investigation. improper motive or personal interest" "The Demand" -typically a letter from shareholder to the board of directors -must request the board bring suit on the alleged cause of action -must be sufficiently specific as to apprise the board of the nature of the alleged cause of action and to evaluate its merits -RMBCA 7.Kamen v..-Policy: "If every decision of A is to be reviewed by B. Thus. that suit is not in best interests of corporation..44:Two alternatives for internal corporate review of the demand: -(1) if the disinterested D's constitute a quorum. While its decision to do the latter is subject only to the deferential BJR standard of review.e. the board of director's decision to do the formed ends the shareholder's control of the suit.including the decision to initiate litigation. precludes SH from bringing suit within 90 days after demand unless corp.. 500 US 90 (1991): "the purpose of requiring a pre-complaint demand is to protect D's prerogative to take over the litigation or to oppose it. the O's and D's acted in good faith and in the best interests of the corporation (presumption that they satisfied the duty of care) -requires D's to exercise the care and judgment of a reasonably prudent person under like circumstances -i.. the demand may be reviewed by the board of directors. may appoint by majority vote a committee of two or more independent D's -If either determines. variances from this standard often insulated by the presumption of the business judgment rule -Bayer v. in most jurisdictions. and further. Beran: -"Only in extraordinary circumstances are directors held liable for negligence in the absence of fraud. would suffer irreparable injury as a result (universal demand requirement) -RMBCA 7. in carrying out their duty of care.. then court shall dismiss the complaint . in theory. the demand requirement implements the basic principle of corporate governance that the decisions of a corporation.42: requires written demand on the board in all cases.

or -by approving less advantageous offer guilty of "breach of their duties of due care and diligence to the corporation" -directors just "passively rubber-stamp[ed] the decisions of the active managers" (3) challenged transaction so egregious on its face that couldn't have been product of sound business judgment -requires particular. and no particular allegation of failing to deliberate or exercise business judgment -as to directors demand excused b/c directors always self-interested when voting on their own compensation. as opposed to corporate benefit . 1979) Facts: GTE responds to bribery from other companies by investigating itself.Marx v. complains against 4 of 15 board members -second-tier inquiry of committee's decision to drop suit and insulate under BJR -committee investigated by getting audit firm. allegations [latter two have quite high standards] -Delaware has disjunctive two-pronged test: -if director interest established. or (2) board failed to inform themselves to a degree reasonably necessary. reviewing prior work and testimony of corp officers and work papers by law firm Issue: Does BJR apply to 3-person committee acting on behalf of the full board? Rule: Courts poor judges of proper business judgment -Decisions of SLC shielded only if they have disinterested independence . Akers (N. not conclusory. demand excused w/o applying BJR -evaluate valid exercise of business judgment by looking at procedural (informed decision) and substantive (terms of the transaction) due care -At least 11 states have universal demand requirement Analysis: Delaware standard too subjective and confusing -dismissed as to executives b/c only three of the eighteen directors being executives isn't a majority.Barr provides three bases demand futility. and finding improprieties. boards from harassment from strike suits (3) discourage strike suits for personal gain. which w/o any other evidence aren't excessive on its face) [debate whether demand futility exception is appropriate] Auerbach v. create special litigation committee after shareholder initiates derivative suit. which finds no violations of due care and SH's wouldn't be served by continuing claim and corp.Y. must plead w/ particularity either (1) majority of directors are interested in the challenged transaction. however the complaint's allegations are too conclusory (just states numbers. governance disputes by allowing directors chance to cure (2) protecting corp. resources would be waster -first-tier inquiry of bribery to customers. 1996) Facts: shareholder claims IBM director's improperly raised compensation for 15 outside directors of 18 member board and for executives Rule: Three purposes for the demand requirement: (1) relieve courts from internal corp.Y. Bennett (N.

Rogers: SH's can't invade discretionary field of director's judgment and sue on corp.. language supports SH's right to initiate lawsuit. v. may fall under demand futility exception -What is the SH's authority to continue in spite of the board's disapproval? Analysis: This case distinguished from Sohland and demand refusal cases b/c not a demand refusal case -Different issue here b/c examining not whether decision to refuse was wrongful but whether board has power to decide at all whether it can dismiss -Demand cases should fall somewhere b/t Sohland's expanded absolute right and McKee's restricted right to continue -Automatically putting derivative suit's control in SH might not serve corp. amount of ` scrutiny inversely related to the showing by corp. BJR not a source of power itself -BJR only implicated after decisions are made. would serve interest of that person at potential expense of all other SH's -But when. 1981) Facts: SH initiates derivative suit alleging breach of fiduciary duty. Maldonado (Del. board creates investigation committee. independent right to continue suit as an absolute rule (majority says erroneously) -McKee v.-BJR applies where some directors charged w/ misconduct if remaining decision-making directors are disinterested and independent Analysis: Undisputed that board members were independent and disinterested in the transactions -Board of directors only ones w/ power to direct investigation. law -Vice Chancellor states BJR irrelevant to question of committee authority to compel dismissal -director's powers flow from Del. behalf when managing body refuses (but can't refuse if it would breach fiduciary duty) -(2) If not demand made." and outside scope of review (2) procedural safeguards can be examined -require showing that chosen investigative methods are in good faith. conflicting w/ other court's interpretation of Del. board decision to dismiss claim respected unless wrongfully refused -Attacking board's decision falls under BJR -Sohland v. and after it determines Company's best interest is served by dismissal. so most prudent thing for them to delegate to special committee (1) substantive decision of the SLC requires "weighing and balancing of legal. Zapata moves to dismiss -Vice Chancellor finds board doesn't have power to terminate derivative suit.. commercial. promotional. if at all. ethical. Baker: refused demand case. no bearing on whether it can be made in the first place Rule: (1) If demand refused. but not absolute right to continue to control it -in that case board supported individual SH's derivative case even though it refused to proceed on the claim themselves -holding later expanded into broader rule that SH has individual. representatives -here insufficient proof by P offered showing that the procedures were not sufficient or appropriate or a good-faith pursuit Zapata Corp. interests best. can committee dismiss? . law.

then stop.. Ch. (4) Demand refused? -No. SH just sues -If derivative... SH sues under special litigation cases -Yes. Marx analysis Q4 -Yes.. 2003) . then ask.. then depending on jurisdiction (universal demand. demand refused. good faith. might do so when unfavorable facts come out and prematurely terminate legitimate claims (1) Direct or Derivative? -If direct. Derivative Litigation (Del. and reasonable investigation. interest in dismissal against nonfrivolous lawsuit -in addition to corp.. but in demand futility cases inappropriate to strip board the option to effectively make a "postrefusal" in corp. to take over good faith derivatives and allowing them to dispose of frivolous ones -BJR in excused demand cases too permissive towards the board -unsure about committee members dismissing suits against fellow directors -Therefore. then ask. best interest. best interests -weigh compelling corp..-Understandable in demand refusal cases to let SH control litigation. may consider matters of law and public policy -Court may be more interventionist when demand is excused b/c (1) more likely directors have conflict (2) demand only excused when already something wrong w/ the board (3) if committee can dismiss suit during litigation. then ask. BOD sues -Yes. Court of Chancery's independent discretion will determine whether it will respect a committee power's motion to dismiss a derivative suit -evaluating business judgment a difficult task but one that the Chancery Court can do -Court will apply two-step test: (1) committee must prove independence. and (2) apply Court's independent business judgment to whether motion should be granted -this is the key in balancing legit claims and corp. (5) Was demand wrongfully refused? [Almost always end up here] -No. (3) Demand made? -No. no suit -Yes. (2) Demand required? -No. demand futility). then ask. interest -situations may arise when SH unwilling to let go of litigation at the expense of the greater corp. and should give board option to do so (potential for abuse by individual SH) -delegation of board authority to independent committee not necessarily tainted even if majority of board members are tainted -But must find balance b/t allowing corp.. SH sues In re Oracle Corp.

so heaps on more doubt -If SLC didn't uncover these deep ties its investigative ability is called into question. and if they did uncover them and didn't disclose SLC was being misleading -Vice Chancellor expresses shock at departure of SLC's Report from the actual picture -perhaps would have changed the analysis if disclosed? . produces 1110 page report concluding P's claims shouldn't be pursued and that D's couldn't have possessed material. senior fellows in same institute) -but SLC asserts they're not dominated and controlled b/c can't be fired by D's.CEO Ellison (holds 25% of voting shares). for any substantial reason.: "independence turns on whether a director is. some for Grundfest's research. Oracle faced no nollapse -D's had ties to Stanford (gave donations. 2001 (after alleged wrongdoing). due to their SLC decisions -claim law has focused on economic ties. paid only as directors (which they were willing to return).. 2000.. Grundfest and Garcia-Molina joined Oct 15. non-public information that Oracle wouldn't meet guidance -much of quarterly earnings come in right at the end. dropping stock price 21% in a day. ultimately focus on impartiality and objectivity" Analysis: "dominion and control" shouldn't dictate independence inquiry (i. speeches. in Feb. two brothers w/o financial ties to one another) -humans are controlled by other motivations than money -SLC's decision to proceed w/ claim would cause waves and probably be accompanied by recommendation to step down pending the lawsuit -SLC hasn't met burden for summary judgment requiring no material factual question on its independence b/c of its significant Stanford ties -Boskin: accusing fellow professor or former teacher of insider trading difficult to do impartially and objectively -Lucas: unbelievable that one didn't know or appreciate his large contribution to Stanford -Ellison: worth tens of billions of dollars. -SH's allege trading D's breached duty of loyalty by trading on inside information -also allege non-trading directors was so indifferent to gap b/t guidance and reality it constituted subjective bad faith -SLC formed w/ 2 Stanford professors. one was professor and taught Grundfest. and D's had no ties to them or their advisors -Grundfest's due diligence finds Ellison's and Henley's stories plausible -SLC conducts extensive investigation. CFO Henley. executive committee chair. 2001 Oracle claims it will meet guidance from Dec. but cuts earnings and license revenue growth on March 1.e. so personal ties can't preclude independence Rule: -Parfi Holding AB v. and chairman of the compensation committee. Inc. Mirror Image Internet.Facts: SH's alleges insider trading against 4 directors. nor by Stanford (b/c of tenure). 2001) and Henley 7%. but not for quarter in question -Ellison sold only 2% of stock (related to options held for nine years expiring Aug. incapable of making a decision with only the best interests of the corporation in mind .

depressionnow communism) -NJ statute allows donations w/o SH notice or approval if less than 1% of equity -corporate charters can be altered by legislature's discretion -early Zabriskie case: railroad line couldn't be extended w/o vital change by unanimous consent -reserved power allows alterations in public interest of charter. then board of directors donate 1500 to Princeton University. (WWII. -president testifies that contribution was: (1) sound investment.. standing alone. valves. Co. but doesn't affect contractual rights b/t corp. stockholders question the decision so corp. for water and gas industries. benefit -in 20th century much of wealth and possibility to contribute has moved from individual to corp. P has burden of proving director isn't independent (Marx) -Martha Stewart case: "relationship must be of a bias-producing nature . furthering their interest in cultivating properly trained personnel -others state capitalism depends on independent knowledge centers and educational institutions for good government -SH's challenge that: (1) certificate of incorporation nor common law doesn't authorize contribution (2) NJ statute authorizing donations unconstitutionally applied b/c after corp. Fuqua) -Pre-suit and during suit independence analysis different b/c: (1) diametrically opposed burdens (2) discovery helping to reveal conflicts (shouldn't this push to make pre-suit burden easier?) (3) reason exists for excusing demand (so presumption of independence no longer deserved) A."above reproach" (Lewis v. had both public and private purpose. so this social burden has shifted to the corp. mere personal friendship or a mere outside business relationship. (2) public expects corp. (3) donations create favorable environment for business operations (4) corp.J.. 1953) Facts: company makes fire hydrants. over the years has contributed to local community and colleges. and SH's and among SH's themselves . SLC has burden of proving its independence by a yardstick "like Caesar's wife". Barlow (N. so more allowed to donate. Smith Mfg. formation Rule: Originally corp. but in 19th century evolved into just private purpose where common law was that corporate managers couldn't donate w/o corp. v. seeks declaratory judgment.-Subsequent courts have keyed on lack of disclosure as reason case turned out this way -During pre-suit demand-excusal context. are insufficient" to raise a reasonable doubt -Once pre-suit demand excused.P. to act philanthropically and gives goodwill when they do so.

after complaining of new dividend policy and being turned by Ford to sell him their shares. Ford Motor Co. but will meddle into their dividend. (Mich. decision approved by directors and majority SH's -post-Zabriskie cases have said public interest and be promoted by invoking reserved power even if contractual rights are affected -advance national interest and interest of taxpayers who would have to make up difference if corporations couldn't donate -these interests outweigh the alteration of pre-existing SH rights -Most of time courts will defer under BJR if amount is reasonable -Can't be in furtherance of personal ends (no pet charities) -Have to provide connection to some legitimate business purpose -very easy to do (no Henry Ford tangents). profits soared to 60M for three years and cumulative total by 1916 of 174M -yearly dividends from 1911 of 1. from 1M to 4M to 10M -used to double wages overnight and hire social workers to improve sobriety and industry -in 1916 Ford announces no more special dividend but reinvestment -Dodge brothers form own competing car company in 1913. 1919) Facts: company started in 1903 w/ 150k investment.3M dividend -business plans and strategy hard to be picked apart.Analysis: Zabriskie didn't public policy for single SH to restrain corp. Ford 58% majority and Dodge brothers 10% minority not on board. but cash balances are more transparent. and no apparent need for all that . Ford thinks corp. in CA doesn't even require any "specific corporate benefit" Dodge v. and equity courts won't interfere unless clear fraud. best interests Rule: -Hunter v. or when refusal to declare dividend when it can is such an abuse of discretion to constitute fraud or breach of good faith Analysis: w/ such huge profits it's the practice to declare larger dividends -in these circumstances. refusal appears an arbitrary refusal -directors required to justify their facially imprudent decision -plan to lower price (as low as 80) would significantly lower profits and shareholder value -Mr.3M and enjoin new smelting plant -P's claim reinvestment goes against corp. they sue -court agrees w/ Dodges and order 19. misappropriation. is too big and too profitable and is seeking to philanthropically redistribute this wealth to the greater public at the expense of the shareholders -there's a difference b/t incidental donations and a general purpose and plan -general purpose is profits: discretion of directors to achieve this purpose but no discretion to change the purpose itself -"judges are not business experts": won't go into their business decision to expand a new smelting plant. increased to 2M investment in 1908 -as price went down from 900 to 440 to 360.2M plus special dividends. Roberts: directors alone have power to set dividends. upholding order to pay 19.

instead of selling and claiming capital gains deduction of 25M directors vote to disburse shares to the SH's -no claim of fraud. 1968) Facts: minority stockholder of Cubs appeals dismissal of complaint seeking installation of lights in Wrigley Field and scheduling of night games -night games supposedly have higher attendance. best interests -patrons might consider the state of the neighborhood -neighborhood value also affects stadium's property value -unclear whether the costs involved would really make night games profitable -just b/c all other teams have night games doesn't mean it's right (many are losing money) -motives alleged show no fraud. collusive.Y. bad faith. illegality. self-dealing. or destructive of SH's rightsmere errors in judgment insufficient -Liebman v..money w/o distribution. American Express Company (N.courts shouldn't resolve corp. policy and business management and only question director's judgment when fraud is shown -Helfman: court w/o authority to substitute its judgment for the director's. fraudulent. loses 25M in value. ordered to be paid b/c don't want the cash otherwise diverted to "operating" costs and donations -shareholder primacy norm -this is really a minority shareholder oppression case -might have turned out differently if these minority SH's weren't being squeezed out Shlensky v. over half of all MLB games at night -operating losses from direct baseball operations last four years -Cubs refuse to install lights b/c "baseball is a 'daytime sport'" and surrounding neighborhood -allege other directors acquiesce in this mismanagement -compares to Dodge v. hence greater revenue and income -every other MLB team has night games. Auto Strop Co. Lorillard: director's powers unquestioned unless illegally or unconscientiously executed. Ford Rule: Davis v. didn't want to realize loss on the income statement -fact that earnings turn on profits doesn't necessarily mean this was attempt to overstate earnings to earn higher compensation . or conflict of interest -no damages alleged Kamin v.: won't interfere w/ dividend discretion unless bad faith Analysis: simply pointing out a better option isn't a cause of action -more than imprudence or mistaken judgment required -"neglect" of duties more than ordinary negligence for bad decisions w/o malor nonfeasance -fully realized what they were doing. 1976) Facts: Amex acquires 30M in DLJ stock. or oppressive conduct Rule: Leslie v. Louisville Gas & Electric Co. Wrigley (Ill. their authority to conduct business is absolute if within the law Analysis: Unconvinced that Wrigley's and director's motives are contrary to corp.

states he would be willing to sell shares at 55. neither Van Gorkom not board actually sees deal before signing -Terms allowed 90 days to receive but not solicit offers. then meets w/ takeover specialist Pritzker discussing price of 55 based on its feasibility as a manageable LBO price. on Sep 18 takes 1M option but needs approval in three days -Senior Management disapproves of deal. but Van Gorkom convinces directors to approve deal after 20 min. Trans Union stock price at 37. in good faith and in honest belief that their actions were in best interests of the company. Aronson v.[maybe pegging compensation towards stock price is better than short-term profits. he'd only let them accept other deals if given 1. Van Gorkom (Del. and directors relied on them in blind.C. stock price less manipulable and better indicator of performance?] Smith v.75M share option at 38. not good faith -Margin b/t 38 and 55 price doesn't mean it had to be fair. 1985) Facts: Trans Union's CEO Van Gorkom briefly discusses possibility of LBO at 50 or 60. 141(a): presumption that directors acted an informed basis. but drops out when Trans Union refuses to rescind deal w/ Pritzer Rule: business judgment rule of 8 Del.25 b/c had large cash flows but little net income unable to use ITC's -Meets w/ Pritzer on Sep 13 to discuss cash-out merger. Lewis -attacking party must rebut this presumption by showing: (1) directors didn't have all material information reasonably available to them (2) directors made unintelligent or unadvised judgment -Directors have duty to act in informed and deliberate manner in considering whether to submit mergers for SH's approval -can't abdicate this duty by leaving SH's alone to decide -141(e): Directors fully protected in relying in good faith on reports by officers Analysis: thinks gross negligence best standard for deciding whether director's decision was informed -Directors were grossly negligent by: (1) inadequately informing themselves to Van Gorkom's role in forcing sale and choosing price -relied entirely on Van Gorkom's 20 min presentation -no written summary of the terms reviewed -given no documentation to support 55 price (2) uninformed to the company's intrinsic value (3) approving sale upon two hours notice absent emergency or crisis -Directors can't say they were relying on Van Gorkom's report b/c his oral statements don't rise to meet the standard of "report. couldn't furnish proprietary information." even though report generally liberally construed. presentation. framed 55 price not as highest price negotiable but a fair one -Board's acceptance claimed contingent on (1) reservation to accept better offer (2) right to share proprietary information w/ bidders -GE considers bidding.Van Gorkom uninformed about the statements he was making. no investigation was done to justify this price -undervalued b/c of inability to use ITC's .

they knew company like back of their hand -Criticism of the case is that it promotes form over substance: if 55 was actually fair why make the SH's pay for procedures to show that it was fair? -maybe tint of self-dealing b/c Van Gorkom nearing retirement trying to get out of the company -Post-Van Gorkom: corporate uproar caused Delaware to change legislation to allow in certificate of incorporation provision limiting director's personal liability besides breach of loyalty..price thus reflects just the estimated PV of the share's future dividend stream -someone buying controlling block gets ability to elect entire board of directors and can change corporate management and policies. 1981) Facts: Lillian Pritchard inherits 48% interest in reinsurance broker Pritchard & Baird. -Similar fact pattern to Van Gorkom case of board inattention. 20 conduct wasn't any better. (3) later well advised. not allowed to actively solicit or give out proprietary information -Relying on director's long experience unconvincing based on court's findings -Relying on legal advice that they might get sued if not following through w/ deal unconvincing: so deep into the wrongful conduct they were probably getting sued whatever they did -Director's post-Sep. Inc. knowingly violations of law. or self-dealing Cinerama. Inc. (5) no indication that more money possible from anyone else (even if locked up. on board. (2) CEO better informed than anyone else. Technicolor. and structure of transaction (2) disclosure to and approval by directors (3) disclosure to and approval by SH's -found for directors b/c (1) CEO bargained hard. (2) loyalty. v. Jr. sons William and Charles. Jr. (4) negotiations led to high price w/ over 100% premium and compared to other transactions. except this CEO bargains hard to get price up from 15 to 20 to 23 from stock price of 11 -factors considered in a Van Gorkom entire fairness analysis are: (1) timing. making it more valuable] -"Market test" doesn't cure. and (3) due care (Cinerama) Francis v.-gaining majority control has some value besides the share of a noncontrolling share [stocks consist of two rights: (1) economic and (2) voting -single share gives owner negligible control over the company . doesn't make the price reasonable b/c not designed to allow others fair access. management dominated by Charles. negotiation. good faith. not that big of an obstacle) -One way companies can protect themselves is hiring outside investment bankers to issue opinions to the price's fairness -On can view the business judgment rule either as a different substantive standard (Van Gorkom) or a rebuttable presumption of (1) good faith. much less a cure: deal arguably worse Dissent: thinks majority overlooked and discounted board's significant experience and ability to make decisions on the fly. . initiation.J. United Jersey Bank (N.

but to corp. has illegal course of action. Jr. nature of misappropriated funds. but this can lead to duty to inquire further. bankruptcy trustee then sues Mrs.brothers "loan" themselves 12M from client's trusts by the time company goes bankrupt and mother then dies. directors may have to seek counsel. even though corp. and duty to object if corp. and even threaten to sue -Directors should at least rudimentarily understand the corporation's business -therefore lack of knowledge not a defense -directors should either learn or quit -doesn't require detailed inspection. though husband warned her Charles.) . and if they refuse. directors' duty normally doesn't extend beyond SH's to third parties -Directors voting for or concurring in illegal actions liable to the SH's -concurrence presumed by being present at meetings w/o dissenting or objecting promptly after adjournment and trying to persuade other directors otherwise Analysis: Reinsurance industry. was greedy. large size. and would expect Mrs. and financial condition of Pritchard & Baird all indicate unqualified trust and confidence expected by reinsurers and ceding companies to the brokers. like banks have duties to its depositor creditors and when they hold funds of others in trust -in other corp. and trust of creditors -Pritchard should have read annual statements and would have found out the misappropriations -breached duty of basic knowledge and supervision and protecting clients against policies and practices.334 problem: Delaware has made clear in the problem's situation. Pritchard's estate -Mrs. and reasonably attempting to detect and prevent illegal conduct of D's and O's -sons acted so bad even moderately firm objection should have sufficed -though most directly caused by sons' conduct. Pritchard to ensure no misconduct occurred -resembled a bank by its financial nature. her conduct was substantial factor b/c she was the only other director and no evidence it would have happened anyway had she intervened -SEC requires disclosure for directors that don't attend at least 75% of meetings -p. Pritchard inactive in the business and not knowledgeable of corporate affairs. and its SH's. but general monitoring -Generally don't require fiduciary to creditors when solvent. when the creditors are owed the duty by the corp. take reasonable means to prevent illegal conduct. she didn't pay attention to her director duties -Drank heavily after husband died and never tried to be effective director Issue: Fiduciary duty to non-SH creditors? Extent of that duty? Rule: NJ statute imposes on directors duty to discharge their duties in good faith and w/ prudent diligence and care (negligence language) -NY tailors degree of care to (1) type of organization. (2) its size. some corp. a duty to resign -Sometimes besides mere objection and resignation. is on verge of bankruptcy the duty still runs to the shareholder (as opposed to straight insolvency. and (3) financial resources -Can be protected by relying on other's opinions.

1944) Facts: Celanese Corp. viewed "with jealousy". 2006) .Inc. Beran (N. no formal action done by board except ratification of extension -radio show uses CEO's soprano wife frequently. she suggested the artists and conductor. and directors or officers -20th century changed to make it so if (1) disinterested majority of directors ratified and (2) K not unfair. manufactures "celanese" which it considers different than rayon.Bayer v. v. no radio advertising done before. and it served the useful corporate purpose of advancing its product -product gained popularity. w/ cost of 1M a year. this practice had served corp. but she was not specially featured and product was premiere target of the program Rule: Business judgment rule has many reasons: (1) encourage freedom of action on part of directors (2) discourage interference w/ exercise of their free and independent judgment -absent fraud. then courts held it valid -Bayer takes it a step further so that even if not officially ratified by disinterested majority. -many important board decisions made informally. improper motive. Inc. wasn't inefficiently produced -board ratified individual directors' actions.Y. or personal interest. when FTC forces them to use rayon in the product name. transactions tending to produce conflict of interest are examined scrupulously [maybe here tint of In re Oracle structural bias] -General rule that directors acting separately and not collectively as a board can't bind corp. Benihana. still valid if contract was fair Benihana of Tokyo. -collective procedures necessary to ensure sufficient deliberation -directors are SH's agents and given no power by law to act except as a board Analysis: If CEO's wife wasn't involved. (Del. well so far -19th century used to be that corp. this would have been summarily dismissed -even though she was involved. express ratification of radio renewal along w/ taking benefits of the program implicitly ratified the earlier radio advertising -formal requirements not being followed aren't fatal. directors liable for negligence in only extraordinary cases -Rule of undivided loyalty: deals w/ all situations where trustee deals w/ another that advantage to the other might even unconsciously influence the decisionmaking -dealings of director w/ his corp. could freely void K's b/t corp. not collectively as a board -directors initiate radio campaign informally though after few years of consideration after consulting radio and advertising experts. directors work very closely w/ one another and customarily acted this way in other transactions. consider radio campaign to distinguish their product. she received less than the other singers and didn't get special feature ahead of the company -radio advertising not purposed on advancing wife's career or interests.

Facts: Rocky Aoki owns 100% of BOT until insider trading conviction forces him to transfer stocks to trust controlled by three children (Kevin Aoki BOT board director) and Dornbush (attorney and BOT director), when Aoki cuts children out of his will in place of new wife, directors consider ways to lessen her control, at same time Benihana needs capital infusion to improve aging restaurants -BOT owns 51% of common stock (1 vote, 3M shares) and 2% of Class A stock (.1 vote and 6M) -executive committee (including Abdo) meets w/ Morgan Joseph, who discusses alternatives -Morgan Joseph later meets w/ full board and recommends convertible preferred, gives directors "confidential" summary of 20M preferred w/ 6% dividend, 20% conversion premium, and 1-2 seats to the buyer; terms chosen by looking at comparable issuances and modeling -Abdo, director, officer, and owner of 30% of BFC, negotiates w/ Joseph two 10M issues, BFC getting one seat and one more if no dividends 2Q in row, refusal rights on new voting securities, 5% dividend, and right to redeem after 10 years, and immediate voting rights; would dilute BOT's voting rights from 50.9% to 42.5% to 36.5%; Joseph's most important points satisfied -Abdo notifies some board members and later whole board, stating he was BFC's rep. (but not explicitly informing he was the negotiator) -Board approves sale to Abdo's BFC over Aoki's objections -Three other financing options rejected as inferior Rule: Del. 144- safe harbor for interested transactions if: (1) material facts as to director's relationship disclosed to board and the disinterested directors in good faith authorize the transaction, even if majority not a quorom (2) SH's authorize the transactions (3) contract is fair to the corp. -Corporate actions can't be taken solely or primarily for entrenchment, Williams v. Geier [specifically rejects old common law rule] Analysis: Though Abdo never specifically said he was the negotiator, can be assumed that they knew or that directors understood he was BFC's rep in the transactions -didn't breach duty of loyalty by having access to "confidential" term sheet before his negotiations b/c the terms were not really confidential and they got what they wanted anyway -primary purpose of transaction wasn't entrenchment but to obtain the best financing possible -Preemptive rights claim and the breach of duty in dilution were direct claims -Self-dealing and unfair terms claims were derivative -demand would have been futile b/c majority of board either interested or independent Common Stock Control: Vote Control: Reserved BoD seat Yes No Debt No No Normal Preferred No No Benihan preferred Yes Yes

Control: No No No Yes Preemptive rights Return: Fixed No Yes Yes Yes* Return: Growth Yes No No Yes** Downside No protection Most Some Some Protection protection protection protection *Amount of preference not guaranteed, but must be paid before common dividend (can be cumulative) **Have to convert first, paying conversion premium -Directors and officers often have conflicted interest w/ SH's when they have options b/c their compensation will favor capital appreciations over dividends -prefers repurchase to dividends (distributes money to SH's while not lowering stock price) Broz v. Cellular Information Systems, Inc. (Del. 1996) Facts: Broz solely owns RFBC, a cellular service provider corp. in Midwest, Broz also director for CIS, also a cellular service provider, negotiates purchase of service license for RFBC in Michigan -CIS not considered by license seller's broker as viable buyer b/c they just emerged from bankruptcy, had just sold off 15, then 4 more licenses, w/ none remaining in the Midwest -Broz meets w/ CEO and two directors who all said CIS aware of Michigan-2 license and not interested in or capable of purchasing the license; all directors later testify that, if asked, would have said the same thing -PriCellular gives tender offer for CIS shares while Broz's license negotiations ongoing and itself enters option to buy Michigan-2 license for 6.7M, defeasible by someone offering 500k more -Broz buys license for 7.2M, defeating option, nine days before PriCellular acquires CIS -trial court rules PriCellular's interest came to merge w/ CIS's, so Broz was required to consider their prospective, post-acquisition plans in determining whether to forego opportunity Rule: Corporate Opportunity Doctrine: if corporate officer or director comes across business opportunity (1) corp. financially able to undertake (2) in corp.'s line of business and of practical advantage to it (3) corp. has interest or reasonable expectancy of interest (4) and, by taking opportunity, his self-interest conflicts w/ the corp. THEN: not permitted to seize opportunity for himself, Guth v. Loft, Inc. -must analyze situation ex ante to determine possible opportunity rightfully belonging to corp. -can proceed himself if one of the above factors absent -presenting to board provides "safe harbor" -but "safe harbor" not required if not a corporate opportunity in the first place Analysis: -Broz aware of opportunity individually and not through his corporate capacity -this absence of any misappropriation of company's proprietary information lessens burden -not dispositive, but seems to act as a very significant fifth factor

(1) CIS not financially capable of exploiting the opportunity, precarious financial position (2) Clearly within corp.'s line of business [but arguably not, given (3)'s distinction of selling and buying] (3) Unclear CIS had interest or expectancy b/c their business was shifting, in process of selling, not buying, cellular licenses (4) No conflict b/c no duties created conflicting w/ his CIS duties and fully performed his obligations to CIS by informing the board of the transaction -competed w/ outside entity PriCellular, which was not the corp. he owed duty to -Lack of formal presentation to board not fatal -no requirement where no interest, ability, or expectancy -transaction can be okay w/o "safe harbor" if one of Guth factors absent -Not under any duty to consider PriCellular's interest b/c plan to merge was "contingent and uncertain" -right of directors and officers to engage in personal, non-corp. affairs would be strangled if required to consider all potentialities -this would create uncertainty and economic inefficiency -Difficult situation when director owes fiduciary duty to two competing corp. in same line of business -maybe best to disclose obligation to both corp. and completely remove himself from further deliberation on the matter -Broz can't just remove RFBC completely and let CIS take the opportunity unopposed -if RFBC would have had minority shareholders, they could have sued In re eBay, Inc. Shareholders Litigation (Del. 2004) Facts: shareholders file derivative suit alleging "spinning" (offering lucrative IPO's to favored clients) by eBay's investment banking advisor Goldman Sachs to 5 eBay insiders, including CEO Omidyar, who owned 23% of corp. and largest SH, allowing them to profit millions -Goldman was eBay's lead underwriter for their IPO, secondary offering, and PayPal acquisition -At the same time Goldman gave Omidyar shares in at least 40 IPO's -eBay's 1999 10-K: 949M total assets, 554M in equity and debt securities, 181M short-term Rule: Corporate opportunity doctrine -RS 2d Agency 388: "unless otherwise agreed, an agent who makes a profit in connection w/ transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal" -if agent acts w/o principal's knowledge and receives something in connection w/ or b/c of transaction done for the principal, agent has duty to pay to principal even if otherwise acted perfectly fairly and violates no duty of loyalty Analysis: -eBay obviously financially able to exploit the opportunity -eBay in business of investing b/c integral to eBay's business and cash management strategy -over half of its assets were in securities -eBay never given an opportunity to determine for itself whether it had any potential interest

1971) Facts: Sinclair organizes Sinven for Venezuelan oil operations. Chanchellor holds this means its relationship must meet test of intrinsic fairness -minority SH owning other 3% alleges Sinclair depletes Sinven by paying excessive dividends during period when Sinclair needed cash (108M dividends and 70M earnings from 1960-66) -alleges corporate opportunity claim that Sinclair deprived Sinven of expansion opportunities. but not up to insiders to choose that for themselves -Obvious that these transactions can create a conflict of interest (akin to bribery) -Doesn't mean that insiders lose chance to act on all investment opportunities -offered as financial inducements for future business and rewards for past business. Levien (Del. b/c D's and O's have active management role in the company while SH's are usually only passive investors -but sometimes wholly owned. nominates all board members. and all of its SH's therein. majority-controlled." but "Court must balance all factors. an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency" -Normally directors and officers have fiduciary duties to corp. and due to this domination Sinclair owed Sinven a fiduciary duty. liable as agents held to account for profits made in connection w/ profits for principal -IPO's were consideration by Goldman for giving them their principal eBay's business -Corporate opportunity factor-test. and not SH's. and . In Beam ex rel. giving them to other subsidiaries instead -alleges breach of contract w/ Sinclair wholly owned subsidiary by paying Sinven late and not purchasing minimum amount of crude Rule: -Intrinsic fairness test involves (1) high degree of fairness and (2) burden on Sinclair to prove it -applied in parent/subsidiary situations where -parent controls transactions and terms. v. or even minoritycontrolled SH's can assert great influence over the operation of the corp. Inc. owning 97%. including other SH's Sinclair Oil Corp. -in that case fiduciary duty is owed to the corp. Martha Stewart Living Omnimedia. practical experience and ability to pursue" and the intent to profit from the activity -narrower "line of business" prong than in eBay case -RS 2d Agency 387: "unless otherwise agreed.-IPO's may be risky.on both sides of the transaction. not as a typical broker offering personal investment advice -undermined by D's positions as directors steering their company's business to Goldman -Alternatively." -"line of business" factor depends on: "fundamental knowledge. v Stewart: -"no single factor is dispositive.

and however hard SH tries to insulate corp. their powers are in trust.'s stock. difficult to protect against minority SH fiduciary duty suits (M&A possibility?) -"Par value" is minimum amount corp. that corp. and "surplus" is additional value -surplus can be distributed to SH's. which they fail to do -Pepper v. Litton: directors and dominant stockholders are fiduciaries. but capital cannot (held in trust for creditors' benefit) -170: board can pay dividends if paid out of surplus . though not required in all cases of a dominated board -Business judgment rule: directors' judgment presumed sound if attributable to "any rational business purpose" -Corporate opportunity doctrine Analysis: -Chancellor erred in applying intrinsic fairness and not business judgment rule for dividends: -not self-dealing b/c dividends paid to all SH's -motives immaterial unless both (1) shown to be improper and (2) amounted to waste -Oil opportunities around world taken by Sinclair and not Sinven not improper b/c never came to Sinven -how Sinclair allocates its expansion among subsidiaries is subject to business judgment rule -Breach of contract was self-dealing b/c Sinclair benefitted from breach at minority Sinven SH's loss -therefore intrinsic fairness test correct for contract claim: Sinclair must prove that causing Sinven not to enforce contract was intrinsically fair. from himself. is inevitably dominated by that SH. and (2) inherently fair from viewpoint of corp. and their dealings w/ the corp.-self-dealing occurs: parent benefits to the exclusion and detriment of subsidiary's minority SH's -dividend declarations can be subjected to the intrinsic fairness test. had to receive when it sold stock (set in charter) -Stock sold by issuer for less than par value was called "watered stock" -notion of par value as a trust fund for creditors -SH who bought watered stock was liable to creditors of the firm for amount underwater -Par value came to be an arbitrary figure having no relation to price or intrinsic value -low par or no par stocks were issued having $1 or less par value -in Delaware can have no par value but still must set some amount of legal par -DGCL 154: "capital" is aggregate par value for SH's equity. and those interested therein -When SH owns large percentage of corp. and since managers realize that P can fire or promote them. subjected to rigorous scrutiny -for challenged transactions they must show (1) transacted in good faith.

but captured none of the upside potential. dividends can be paid out of its net profits for the fiscal year in which the dividend is paid or the preceding fiscal year ("nimble dividends") Delaware statutes: Cumulative dividends: 170 and 151(c) Convertible stock: 151(a) and 151(e) Callable stock: 151(c) Zahn v. Class A stock has 3.60. and liquidation value of 106. when economy is bad or company is growing and needed quick cash Class A's preferences facilitated raising of capital. for $60 -Class B vested w/ voting rights. pocketing proceeds as Class B SH's [Class A more protected from downside risk. dividend of 6. it occupies a fiduciary relation toward the minority. A and B share remaining dividends. v. or any other corp. Class B shares for less riskadverse investors -potential conflict of fiduciary duty b/t Class A and Class B: can't maximize both tranches at the same time.damages are what A's would have had done given full disclosure] [general rule that fiduciary duty runs greatest to the most junior stock] . upon liquidation Class A receives two times as much as Class B -Class A convertible into Class B stock. has the Class A stocks called for 80. all Class A stocks callable upon 60 days' notice.80 per share w/o allowing SH participation in asset liquidation (in which case they would have gotten $240) -preferred stocks have par value 100. SH's would have converted instead of calling [court turns this into a disclosure case. not SH's -when voting as a SH. then liquidates tobacco stock. therefore controlling the majority of the board and its affairs -Axton-Fisher's biggest asset was leaf tobacco worth 6. Transamerica Corporation (3d Cir. trustee representing all SH's interests. Bogert: "majority has the right to control. action. depending on the price] Rule: SCOTUS Southern Pacific Co. as much so as the corporation itself or its officers and directors" -directors can't declare or withhold dividends.-if no surplus. one side will be against a call. but when it does so. Transamerica knew that market conditions actually made it worth 20M -complaint alleges that Transamerica sells Class A stock. can consider one's own personal benefit -when voting as a director. but Class A had equal rights b/c 4 straight quarterly dividends unpaid -Transamerica builds up about 80% of Class B and 67% of Class A stock. sues majority SH Transamerica for forcing redemption of stock for 80. for personal profit Analysis: right to call stock reserved to directors.20 dividend and Class B has 1. 1947) Facts: minority SH of Axton-Fisher Tobacco Company.80 (60 call price plus 20. so can't use director vote for own personal benefit at SH's expense -Transamerica was basically Axton-Fisher's puppeteer -no reason to liquidate assets after Class A redemption -if there had been full disclosure.3M.20 accrued dividends).

board has duty to fully and fairly disclose all material facts -Duty of care: Van Gorkom. Shareholders Litigation (Del. purchasing property from USAC for 800. but when they are informed the ratification serves to extinguish the due care claim -Duty of loyalty: either (1) interested directors or (2) controlling SH's (typically parent-subsidiary) . so instead transfers to USAC.000 shares of Agau stock Rule: Gottlieb v. 1976) Facts: John Lawrence. including (2) material facts disclosed to voting SH's.: SH ratification (even if less than unanimous) of an "interested transaction" shifts the burden to the objecting SH to show terms so unequal amounts to waste of corp.Fliegler v. also approved by the full board -majority of disinterested SH's also approve the transaction -complaint alleges nondisclosure.469 Waste shares per WTI share -acquisition unanimously approved by WTI's board (minus four Waste directors) after three hour presentation by investment bankers. Lawrence (Del. corp. Waste owns 22% of WTI stock. and SH's in good faith approve the transaction (also safe harbor if disinterested board approves or transaction is fair) Analysis: Gottlieb rule doesn't shift burden of proof here b/c the majority of votes for ratification were made by interested SH's. assets -144(a): three ways to give safe harbor for interested transactions. elects four WTI directors. the opportunity was lucrative and the price was well-justified -144 not meant to fill in deficiencies of disclosure (that goes against basic agency principles). president of gold and silver corporation Agau. Inc. Heyden Chemical Corp. and WTI's attorneys. breach of duties of care and loyalty Rule: Duty of disclosure. 1995) Facts: Waste and WTI both in waste-management. but meant to protect directors from corporations opportunistically or arbitrarily voiding K's w/ the director In re Wheelabrator Technologies. and only about one-third of disinterested SH's voted -therefore departure from objective fairness test isn't warranted [court basically inserts "disinterested" into the statute 144(a)(2)] -Defendants say 144(a)(2) doesn't require ratifying SH's to be disinterested or independent -but this isn't meant to sanction unfairness or removing transaction from judicial scrutiny -statute not to provide "broad immunity" but "merely removes an 'interested director' cloud" -But transaction still intrinsically fair.574 WTI shares and . individually acquires antimony properties under 60k lease -offered to transfer to Agau but board declines.majority vote of SH's can cure failure of board to reach an informed business decision -if SH's aren't informed then SH ratification is ineffective (Van Gorkom). formed just for this purpose and majority owned by defendants. reviewing the agreement. also giving Agau option to purchase -Agau later exercises option. and acquires another 33% of WTI stock for .

w/ directors having burden of proving transaction's fairness -"majority of the minority" SH vote shifts burden to P's -controlling shareholder necessary to invoke entire fairness analysis -reasons that controlling interested SH justifies "need for the exacting judicial scrutiny and procedural protection afforded by entire fairness" -potential to manipulate process -controlling SH's presence might influence even fully informed vote [Ratification: (1) Duty of Care. BJR attaches to protect decisions of D's and O's -if P meets this burden. fully informed SH's ratification cured the defect -Duty of loyalty: no evidence besides 22% ownership that Waste exercised de jure or de facto control -therefore BJR applied. 1993): P has burden of producing evidence rebutting presumption that directors acted with good faith. Lewis) -Cede & Co. (Del. and due care -if P fails to meet this evidentiary burden. loyalty. assets (2) entire fairness review.shifts burden of proof. Inc.kills the claim (2) Duty of Loyalty (Interested Director). Technicolor. so can't decide this issue yet Good Faith -Good faith required for directors in numerous situations: -to be entitled to legal expense indemnification (DGCL 145) -full protection for reliance on corporate books or officer reports (DGCL 141(e)) -partial insulation for related party transactions (DGCL 144(a)(1)-(2)) -BJR presumes directors act in good faith (e. not entire fairness analysis -parties unheard.three hours consideration sufficient b/c -investment bankers and outside counsel attended meeting. burden shifts to directors to prove "entire fairness" of the transaction -that case created proposition that good faith was freestanding fiduciary duty . so reasonable that directors already had substantial working knowledge to draw upon in considering the transaction -Duty of care: even if there had been lack of due care. making presentations and answering the board's questions -proxy statement described in detail the various factors the board considered -Waste and WTI had close business relationship. v.shifts burden of proof and ups standard to waste (BJR) (3) Duty of Loyalty (Controlling SH).g.(1) SH ratification under 144(a)(2) invokes BJR and objecting SH has burden to show waste of corp. Aronson v. but standard is entire fairness -Sliding scale justified by arranging according to degree of control and therefore abuse potential] -If interested transaction or Analysis: Disclosure.

but those negotiations fell through -legal counsel for Disney advises them that no cause existed.5M a year for unaccrued bonuses. 7. 4. and 5. instead of sending Ovitz letter that he wasn't welcome at Disney. board then unanimously names Ovitz president -within few months Ovitz doesn't fit well w/ other executives. with two tranches of options: -one million options each at end of years 3. but Eisner thinks otherwise -received 20-25M per year from CAA. Ovitz thinks he will run Disney together w/ Eisner. meriting downside protection and upside opportunity -executive compensation consultant determined that OEA would provide Ovitz w/ approximately 24. including NFT.1M per year -Eisner tells Ovitz that options reduced from single grant of 5M options to the two tranches. 2006) Facts: When Disney's president dies and CEO Eisner undergoes quadruple bypass. and approving severance payment to Ovitz -allege Ovitz violated due care and loyalty by negotiating and accepting NFT provision Rule: -De facto officer is one who actually assumes the office via election or appointment and discharges his duties. immediate vesting of first tranche of options and 10M cash out for second trance -though Ovitz's salary would be very high for corporate officers and draw criticism. friend of Eisner for 25 years and powerful partner in prestigious Hollywood agency -when negotiating employment. and that Ovitz would join only as president. Eisner tells Ovitz two days later. he would receive no-fault payment. still lower than he could receive from a private company. Ovitz gets 130M severance after serving only 14 months -SH's file suit against the directors and Ovitz -allege directors violated due care and good faith by approving OEA. but for some reason hasn't yet assumed the de jure title -DGCL empowers board to delegate power to a committee for decisions including compensation -Bad faith involves three categories: . subject to further negotiation within the contract's terms and conditions. not co-CEO. Ovitz accepts and later signs a letter agreement (OLA) -compensation committee approves employment agreement. and refused to give it up unless given downside protection -draft of Ovitz's employment agreement (OEA) provided for five-year contract modeled on previous contracts. Disney looks to find replacement in Michael Ovitz.In re The Walt Disney Co. and excessive expenses and gift-giving -Eisner favors a "trade" w/ Sony since Ovitz had connections there and Disney wouldn't have to pay the severance package. he gave up remaining compensation and could be enjoined from working for competitors -if Disney terminated w/o fault of Ovitz. w/ guaranteed value at least 50M -two million options upon renewal -proposed OEA meant to protect both parties from premature termination: -if Ovitz walked away. lying. Chancellor rejects claims of malfeasance. Derivative Litigation (Del. consisting of his remaining salary.

including NFT payments in each of the five years. intentionally fails to discharge known duty to act -but attempting to categorically define entire universe of bad faith is unwise -Waste claim requires P to show transaction was so one-sided that no business man of ordinary. sound judgment would conclude corp. and entered into minutes -committee met twice. a conscious disregard for one's responsibilities") -difference b/t good faith and due care important b/c violations of good faith are nonexculpable and non-indemnifiable. first approving OEA's terms except for options (which were approved at later meeting). including options -reasonable that early termination would produce high severance.(1) subjective bad faith. 102(b)(7)(ii) -some in between standard needed for violations not involving duty of loyalty but that is worse than gross negligence ("simple inattention or failure to be informed") -i.e. fiduciary intentionally acts w/ purpose other than corp. without more. received adequate compensation -only arises in unconscionable cases of irrational squandering or giving away -corollary to BJR protecting all decisions "attributable to any rational business purpose" Analysis: -Just b/c Ovitz was reimbursed for expenses and given proprietary information before becoming president doesn't mean he was a de facto officer owing fiduciary duties -Ovitz's actions before assuming office were just preparation activities -Claim that full board was required to approve OEA rebutted by DGCL -Due care analysis: compare "best case" scenario w/ what actually happened (1) Approving OEA -what should have happened was committee members given spreadsheet of all possibilities and consequences. considered a "term sheet" -members knew potential 90M in options from previous calculations made in previous option grants to other executives and factoring in the 50M up-front bonus Ovitz demanded as down-side protection from walking away from 150-200M in CAA commissions (since signing bonuses contrary to Disney policy. b/c less had been earned in salary to make up for the 150-200M that Ovitz had foregone (2) Approving hiring of Ovitz ." board was still adequately informed of the potential magnitude of the compensation package. instead packaged as backend options) -despite reality not living up to "best practices.fiduciary conduct motivated by actual intent to harm (2) lack of due care. cannot constitute bad faith (3) in between first two ("intentional dereliction of duty. intends to violate applicable positive law.fiduciary action taken solely by reason of gross negligence and w/o any malevolent intent -gross negligence (including failure to inform oneself of material facts).'s best interests.

rather than full board. Eisner's options were pretty much limited to firing Ovitz -Payment of contractual obligation cannot constitute waste. Harris Associates L.P. so unconvincing that mutual funds can be captive to the investment adviser and its high fees.investment advisers of registered investment companies have fiduciary duty w/ respect to compensation -Gartenberg v. had power to approve Ovitz pay package -Waste argument "does not come close" -Three possibilities for bad faith: (1) Subjective bad faith.8% next 2billion. roughly the same as other funds of similar size and investment goals -Oakmark has grown more than comparable pools -P's allege market is inappropriate benchmark b/c competition ineffective in setting prices and if markets are to be compared it should be compared to institutional clients. pay was 1% of first 2billion. .obvious (2) Gross negligence.would just be driven away -fiduciary duty isn't rate regulation: fully disclose and play no tricks. motivated by Ovitz's need for compensation for walking away from CAA -There is no "substantive due care" in the BJR. but no compensation cap .75% anything over 5billion.-many discussions had been held to find a top executive.rejected (this is just due care breach) (3) "Intentional dereliction of duty. (7th Cir. and violates 36(b) only by charging a fee so disproportionately large it bears no reasonable relationship to the services and couldn't have been the result of arm'slength bargaining Analysis: Holding down costs is essential to competition. conscious disregard for one's responsibilities" -Still technically open question whether good faith is freestanding fiduciary duty -how can violation of good faith not violate due care or loyalty? Jones v. . and . 2008) Facts: Mutual fund company Oakmark's SH's sue adviser Harris Associates for excessive fees. unless contractual obligation is itself waste -creating "irrational incentive" for Ovitz to leave falls far short of waste.9% of next billion. and Eisner made the board aware of Ovitz's abilities and the lucrative opportunities he would have to be lured away from -therefore directors were fully informed of material facts -Good faith: chancery court determines actions didn't rise to the level of bad faith -Eisner had authority to fire Ovitz w/o full board's approval b/c of Disney bylaws -No cause for Ovitz's termination found by Chancellor and Disney's legal counsel and committee in good faith relied on this report. which may be functional equivalent of waste or bad faith Key Holdings: -"Best practices" not required by the BJR -Committee. Merrill Lynch: fee must be within range of what would have been negotiated in arm's-length transaction in the surrounding circumstances. only procedural safeguards on decision-making -irrationality is the outer limit of BJR. who pay less Rule: Investment Company Act 36(b).

so that potential conflicts of interest and abuse is tempered -Definition of "interested person" later opened up and fiduciary duty attached to adviser pay -SEC wanted a "reasonableness" standard in place of old waste review for evaluating adviser compensation. including adviser's cost of providing service." fees charged by similar funds shouldn't be used as the principal consideration -shouldn't be compared to institutional pension funds b/c less involved trading -this standard favored by the SEC and other circuits besides seventh Analysis: Arm's-length bargaining absent from mutual fund industry b/c funds often cannot easily sever its relationship w/ the adviser -Gartenberg correct in its basic formulation of what §36(b) requires -Adopts SCOTUS's test for interested transactions in Pepper v. where compensation committee sets pay for executives -businessmen can make unreasonable judgments. but a judge's business judgment is worse -Car makers don't have price regulated even though only a dozen of them. 8000 different mutual funds should be sufficient to ensure price competition is efficient -unsophisticated investors can piggyback off the competitive pressures from the more sophisticated investors in their fund -hedge funds have all sophisticated investors. and volume of orders -since competition can be "virtually non-existent. economies of scale. though adviser can't play tricks or not disclose.-expressly disapproves of Gartenberg test -differences b/t institutional and retail rates explained by more active trading advisers do -similar to public corp. 2010) Facts: -Investment Company Act restricts no more than 60% of directors have interest in adviser. wasn't subject to a cap -Gartenberg said cap was anything beyond the range of arm's-length transaction in the situation -all facts must be considered. v.S. Litton: "the essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain" -Investment Company Act modifies this test by shifting burden of proof from fiduciary (un-ratified interested transactions) to the objecting party (Jones) Stone v. 36(b) fiduciary duty was a compromise Rule: conflict between Gartenberg and lower court -lower court holds that. 2006) . Ritter (Del. Harris (U. and they pay even more than Oakmark Posner dissent: directors voting on CEO pay often biased b/c CEO's themselves and competition insufficient to solve problem b/c all large entities have similar incentive structure Jones.

: boards and officers can assume integrity of employees. some things might still go wrong Securities Act of 1933. Blasband. and market manipulation -§4 creates SEC -§13 requires 10K's.for demand futility." like "an utter failure to attempt to assure a reasonable information and reporting system" will establish lack of good faith -though don't need to act w/ suspicion. short-swing profits by insiders. but state regulations began as early as the 1800's ("blue-sky laws"focused not only on disclosure. and failed to monitor or oversee its operations -Board seems to have actually done quite a few things to keep themselves informed -Bad result isn't same thing as bad faith. but not a freestanding fiduciary duty by itself -therefore good faith not only a part of loyalty. Allis-Chalmers: "absent cause for suspicion. but can play into cases where there is no conflict of interest implicating the duty of loyalty Analysis: Directors failed to implement any reporting system or controls. "truth in securities" act) -§5 registration Securities Exchange Act of 1934-deals w/ insider trading. Deriv. and 8-K's -§14 Williams Act governs proxies and tender offers -§9 prohibits manipulation of security prices -§10 antifraud provision prohibits manipulative and deceptive devices -Rules -Forms -SEC informal lawmaking -SEC no-action letters . but not good faith or loyalty -Graham v.e.Facts: allege Caremark claim against directors. particularized factual allegations must create a reasonable doubt that board could have properly exercised its independent and disinterested business judgment -§102(b)(7): directors exculpable for breach of duty of care. but can't must ensure that information and reporting systems are reasonably designed to give accurate information to allow them to make informed judgments -only a "sustained or systematic failure." there's no duty to ferret out wrongdoing they have no reason to suspect exists -In re Caremark Int'l Inc. but merits of the investment itself: not too speculative or immoral) -rejects merit approach in favor of disclosure approach (i. and tender offers -viewed '29 crash as a result of fraud. deals w/ primary markets. proxy solicitations. 10Q's. need to have reliable means of ensuring that suspicion will reach them when necessary and aren't blind to potential misconduct -Good faith is necessary part of loyalty.impetus was stock market crash 1929. AmSouth pays 40M in fines and 10M in civil penalties for employee failures to file SAR's and regulators issue cease and desist order to improve AmSouth's compliance and anti-money-laundering program Rule: Rales v. abuse. Litig.

which say "shares" and "securities" on the back. -courts don't apply "solely" part literally. Glynn (4th Cir. SEC staff might disagree w/ one another -Case law -private litigation -SEC enforcement actions -SEC -5 commissioners appointed by president and confirmed by Senate. evidence of indebtedness. solely from the efforts of others. Robinson also serves as treasurer and executive committee -Robinson sues under federal securities laws after learning that Glynn lied about CAMA. notes. 2003) Facts: GeoPhone owner Glynn develops cell phone system called CAMA. only 3 of which from one party (usually president's). and Glynn lies to Robinson saying that it does work -Robinson receives 1/5 of GeoPhone's shares. first say it's not a security.E. contact Robinson to raise capital. advises Commission as to new rules. §2(1) of Securities Act -§2: security must be defined in the list "unless the context otherwise requires" -context clause can be used to give courts wiggle room for new. confusing devices Robinson v. bonds. most people only deal w/ the staff -interpretative guidance to private parties. then try to settle on the best terms -fraud cases much easier for plaintiffs under federal securities laws than state common law -security defined by list including stock. investment contracts.J. S. v. W. saying he comes under the statute b/c his investment was either an "investment contract" or "stock" Rule: §10b-5 claim requires fraud in connection w/ security purchase -"Investment contract" is an investment of money in a common enterprise with expectation of profit. look instead to "economic reality" of the investment -active/passive investor: is he "unable to exercise meaningful control over his investment"? -"Stock" refers to narrow set of instruments w/ common name and characteristics -this label applies only when the instrument is called "stock" and bears its usual characteristics (1) right to receive dividends contingent upon apportionment of profits (2) negotiability (3) ability to be pledged or hypothecated . registration only necessary if it's a security -if sued for failing to register a security. who has no telecommunications experience and agrees to give 1M to perform field test of CAMA. and says can't be transferred w/o being properly registered under securities laws -2 of the 7 board members to be appointed by Robinson and he has own board seat. Howey Co.C.-but especially in proxy situations. and investigates and prosecutes possible violations of securities laws -Business lawyers often run afoul of securities laws b/c they don't realize what they are dealing with is actually a security. then say it's covered by one of the exemptions. and any instrument commonly known as a security. according to letter of intent Robinson pledges to invest up to 25M if field test works.

and limited partnerships. SEC v. sends him production information but the oil wells deliberately overproduced and sealed for 338 days by Gas Commission and Doran forced to pay on note he was personally liable for. etc. so can't make broader ruling as to all of them -Securities Act prohibits sale of securities unless they're registered w/ the SEC. in determining courts look at four factors: (1) number of offerees and their relationship to each other and the issuer -most important and problematic factor. (5th Cir. then contact Doran to invest in PMC for 125k. -requires access to both information and investor sophistication. 1977) Facts: Petroleum Management Corp. refusal power over unusual indebtedness -Robinson exercised too much control to be a passive "investment contract" -Economic reality guides its true nature. Ralston Purina Co. not whether it's a good investment -registration requires extensive financial and business information -b/c of cost involved. not the labels the parties attached to it -Don't have the features typical of stocks (share of profits not in proportion to number of shares. not purchasers -one offeree's knowledge can't substitute for another's lack of knowledge -Applicability of §4(2) depends on whether the class of persons affected need Act's protection. not freely negotiable. businesses try to sell securities w/o registering them -some either partially or totally exempt from registration requirement by being either an exempt transaction or an exempt security. sophistication can't replace info -all offerees must have had available the information in a registration statement .exemption for private placement transactions. ability to select consultants.) -LLC's are hard to classify b/c hybrid of corp. but not dispositive -number of offerees. which then turns on the knowledge of the offerees. general partnerships. Doran tries to refund his investment by claiming rescission for violation of Securities Act Rule: §4(2).. exempted transactions more common b/c more specialized Doran v. §5 requires: (1) security can't be offered for sale through mails or other means of interstate commerce unless registration statement filed w/ the SEC (2) securities can't be sold until registration statement has become effective (3) prospectus (disclosure document) must be delivered to purchaser before a sale -SEC only asks whether there are disclosures accurate.(4) voting rights in proportion to number of shares (5) capacity to appreciate in value Analysis: Indicia of control not just on paper but also in reality: 3 seats. (PMC) organized as limited partnership to drill oil. Petroleum Management Corp. contacts four people to invest who decline.

so can bring in officers. but the relationship question is still unresolved: -Did investor have access to information plus an ability to understand that information? -some relationships can provide access. experts. causation. ability depends on investor's background or economic bargaining power -Regulation D (rules 501-506) relied on by those that try to use §4(2)'s imprecise language -if no more than 1M raised. only some investors relied on or received misrepresentations -But federal laws make it much easier: -private parties can be plaintiffs. and injury -limited to amount of loss. include original issuer. D offerings if held for 1 yr and resold in limited volumes -Before Securities Act. brokers. may sell to unlimited number w/o registration -if no more than 5M raised. so reasonable investigation rebuts . or dealer" -but §2(11): underwriter is someone who buys security "with a view to" reselling it -court might even invalidate entire issue's exemption. scienter. as under §10(b) -implied private rights under certain Securities Act provisions -§11 principal express clause for fraud in security sale through registration statement -no privity requirement. directors. reliance. D provides protection to issuers using "reasonable care" to ensure buyers are planning to hold stock themselves by reasonable inquiry into their plans and disclosing that the stock is subject to resale restrictions -§144 allows buyers to resell Reg. underwriter. plays role as an important deterrent. so buyer must find another exemption to resell -can rely on §4(1) if not "an issuer. state common law fraud rules were more stringent: must prove misrepresentation of a material fact. and others -Due diligence usually the only viable defense to a §11 claim -standard of liability is essentially negligence. banks.-relationship b/t issuer and offeree more important when issuer relies on effective access to the relevant information instead of disclosure of it (2) number of units offered (3) size of the offering (4) manner of the offering Analysis: First factor is present as to number of offerees (only 8 offerees). wealthy buyers) -generally exempt only initial sale. if she resells shares to a large number of people -Reg. may sell to 35 buyers w/o registration -if more than 5M raised.e. may sell to 35 buyers who pass various sophistication tests -mostly can't widely advertise. and must file notice of sale w/ SEC shortly after sale -limits don't apply to accredited investors (i.

or appraiser. the underwriters. main remedy is rescission -§12(a)(2) imposes private civil liability on offerors of securities in interstate commerce. but w/ facts having an important bearing upon the nature or condition of the issuing corp. Marwick. except the issuer. or underwriters' attorneys Drinker. informed decision -not concerned w/ minor inaccuracies or errors of no interest to him. -experts could be auditors Peat. and (6) which defendant knew or should have known of the untrue statement -reliance not required -only deals w/ material misrepresentations or omissions connected to public offerings. and the auditors -increase in bowling lanes spur rise in sales from 800k in 1956 to over 9M in 1960 -raise 1.-§12(a)(1) imposes strict liability on sellers. BarChris's attorneys Perkins.D. controller). EBIT. not secondary market transactions or private placements -§20 gives power for SEC to initiate civil suit or refer to AG for criminal charges Escott v. Daniels. 1968) Facts: buyers of convertible debt of bowling alley constructor sues under §11 the signers of the registration statement (the directors. contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. assets. EPS. Biddle & Reath Rule: §11 requires false statement or omission to be "material" for there to be liability -SEC regulations define "material" as information "an average prudent investor ought reasonably to be informed before purchasing" -enough information to make an intelligent.N. or its business -§11(a): "in case any part of the registration statement. engineer. w/ prima facie case consisting of 6 elements: (1) sale of a security (2) through instruments of interstate commerce or the mails (3) by means of a prospectus or oral communication (4) containing an untrue statement or omission of a material fact (5) by a defendant who offered or sold the security.Y. when such part became effective. (S. or any person whose profession gives authority to his statement.68B in public equity offering in 1959. BarChris tries to raise more capital in May but ends up just filing bankruptcy and defaulting on the debentures -registration statement overstated sales. any [innocent] person acquiring such security" may sue: (1) everyone who signed the registration statement (issuer itself signs the statement) (2) every person who was a director of the issuer (4) every accountant. and consensually been named as preparing or certifying part of the registration statement (5) every underwriter w/ respect to such security -§11(b)(3): no one. shall be liable if they satisfy that: . BarChris Construction Corp. etc. followed by issue of the debentures -by 1962 industry collapses.

don't need to reasonably investigate just subject to negative standard. after reasonable investigation. Marwick -credibility issue: withheld info from Grant. trusted auditors Peat. Marwick's authority was expertised -just b/c lawyers prepared the whole statement doesn't make it all expertised -Peat. not 1961. still should have known that the expertised portion of the prospectus was incorrect. even if he hadn't." "thoroughly familiar w/ BarChris's financial affairs. Marwick b/c they were the auditors for his bank .(A) for unexpertised. reasonably believed statements were true (B) as expert. which was noted as unaudited Vitolo and Pugliese: president and vice-president. reasonably believed that the expert's statements were true or the registration statement unfairly represented his statement. Ballard and Peat. making him liable for the its final form -didn't participate in management. for not expertised portions must reasonably investigate and have reasonable grounds to believe it] §11(c): "reasonable investigation" evaluated by "prudent man in the management of his own property" [what is reasonable depends on the defendant. before joining board obtained Dun & Bradstreet financial reports and inquired of BarChris's banks. still responsible for them as board members -were present at board meetings. after reasonable investigation. or that it unfairly represented the expert's statement [for expertised portions. but 1961 information was -Only portions of registration statement made on Peat." contends he didn't know what registration statements should contain b/c never dealt w/ them before and relied solely on Grant. but can't just rely on clients b/c they lie to you] Analysis: Much of the misstatements in the prospectus were material -1960 information seem too small a misstatement to be material. specialized expertise. "limited education" who dealt w/ construction -though probably didn't read disclosures. surely knew about some which he failed to investigate -should have known as a lawyer that reasonable investigation was required Auslander: outside director. whether inside or outside. CPA and "an intelligent man. house counsel attending routine legal matters -though may not have known of all the inaccuracies. knew that their own loans to the company were unpaid and depended on the financing proceeds to be paid -therefore couldn't have reasonably believed the registration statement was wholly true. or (C) for expertised. Marwick only dealt w/ 1960 data. becomes director shortly before registration statement's amendments filed. blind reliance isn't excused Birnbaum: lawyer. no reasonable grounds to believe that statements weren't an untrue or material omission. Ballard. and no showing that any investigation was made to clarify what they didn't understand Kircher: treasurer and CFO.

a falsely reported accounts receivable -further inquiry was necessary. and 8-K -Exchange Act covers registering class of securities. Marwick. just check of matters easily verifiable -liable for everything except audited 1960 figures Peat. 10-Q. 10-K. who was not yet a CPA and was handling his first case as a senior accountant -Berardi should have realized that Capitol Lanes existed.-signed registration statement w/o realizing what it was -as to expertised portion by Peat. regularly provides disclosures so more info is duplicative -Most important implied private right of action is Exchange Act §10(b): (1) unlawful for any person. would have taken the time to gather all material facts before signing on Grant: drafter of registration statements and also a director -honestly believed everything was true. protected by reliance -as to non-expertised portion. Securities Act covers particular offerings -registering class of securities under Exchange Act triggers other requirements. and certain anti-fraud provisions -Before modern integrated disclosure system. Marwick wasn't responsible for all the figures -just b/c Auslander was a new director doesn't mean he's excused: even new directors. if prudent. then Regulation S-K has substantive disclosure requirements -two types of information: information about the transaction and information about the issuer -Form S-1. not protected b/c should have read prospectus carefully. (3) any manipulative or deceptive device in (4) contravention of rules the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors . basic registration statement form. relied on unverified oral statements. fell short of professional accounting standards Underwriters: all relied on lead underwriter Drexel. overlap existed in the disclosures required by the Exchange Act and the Securities Act -inefficient b/c efficient markets hypothesis says all publicly available info instantly adjusts price -first look to various forms eligible. requires both -Form S-3 only requires transaction info: large and seasoned issuers. Marwick: auditing expert for the 1960 figures. which would have shown that Peat.'s register w/ SEC by filing initial Form 10. (2) to use in connection w/ sale of any registered security. like proxy rules under §14. through interstate commerce or mail. tender offer rules of §13 and §14. who delegate due diligence to their lawyers -All publicly traded companies must file Exchange Act reports -covered corp. most of work performed by Berardi. but should have found out all the errors in the data given to him by his client that didn't need an audit to discover -cut-and-pasted statements for debentures were inaccurate as financial position had changed -nothing like an audit is required.

in the light of the circumstances under which they were made. Inc. not misleading. including closely-held corp. Inc. saying statement was "so incomplete as to mislead.S. but no duty to say anything. confidentiality. or course of business which operate or would operate as a fraud or deceit upon any person. Combustion Engineering deterred from takeover bids b/c of antitrust concerns but rekindled after regulatory action allowed it -Basic publicly denies merger rumors three times. but made material after company issues flat rejection of any discussion whatsoever Rule: Judicial application and legislative acquiescence has removed any doubt that 10b-5 constitutes a private right of action -includes requirements like "manipulative or deceptive practices. 1988) Facts: Basic was chemical refractory manufacturer for steel industries. scheme.always advise "no comment"] [confusion between duty to disclose and materiality of information required to be disclosed] -Setting materiality standard too low would cause directors to flood investors w/ irrelevant info -Materiality: substantial likelihood that disclosure of omitted fact would be viewed by reasonable investor as significantly altering the "total mix" of information made available. duty to disclose. and standard of materiality [conflict b/t purpose of disclosure and conflicting purpose of confidentiality for sensitive transactions] [duty to speak truthfully and completely. or of the mails or of any facility of any national securities exchange (a) to employ any device. v." -Rehnquist: 10b-5 now "a judicial oak which has grown from little more than a legislative acorn" Basic Inc.-§10(b) applies to any security. Northway. Inc. later asks NYSE to suspend trading issue release stating another company had approached it w/ merger talks -One day later board accepts $46 per share offer -SH's who sell before deal announced sue over allegedly misleading statements -trial court holds that negotiations weren't destined w/ reasonable certainty to become a merger agreement in principle -appeals court reverses on "fraud-on-the-market" theory." connected to purchase or sale. scienter. and government securities -Rule 10b-5: "unlawful for any person. (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made. by the use of any means or instrumentality of interstate commerce." rejecting lower court's finding that preliminary merger talks were immaterial. Heublein. or artifice to defraud. Levinson (U. info can be withheld or even misrepresented w/o being material . which generally aren't subject to Exchange Act.: until "agreement-in-principle" as to price and structure of the transaction. TSC Industries. directly or indirectly. -But Greenfield v. or (c) to engage in any act. in connection with the purchase or sale of any security. practice. v.

instructions to investment bankers or M&A counsel. bright-line rule -Materiality depends upon balancing probability of an event w/ its anticipated magnitude. so for buyouts materiality occurs earlier despite its tiny probability. shielding from added problems -provides usable. there are other ways of showing causal connection besides reliance -modern securities market different from original face-to-face fraud cases. SEC v. many mergers talks collapse -helps preserve confidentiality of merger discussions. but the accuracy and completeness of the disclosure -ease of application isn't a good reason to compromise the Securities Acts' purpose -Therefore reject Greenfield's disallowance of preliminary merger discussions from materiality that don't have agreement-in-principle as to price and structure .-don't want investors to be overwhelmed w/ information. thinks it confuses duty w/ materiality] [implicit requirement of efficient markets. otherwise would have trouble proving each party's subjective pricing of the information by each individual investor. so misleading statements defraud the purchaser who relies on price even if he didn't directly rely on the misstatement -eases reliance requirement for class actions. is an agent for the buyer that makes valuations for him -investors rely on the integrity of the market price [Krawiec doesn't like fraud on the market analysis b/c lying about something doesn't make it material. as today the market. through market professionals. achieving high standard of business ethics and not assume investors were simplistic and incapable of filtering necessary information for themselves -here not concerned w/ the timing. Texas Gulf Sulphur Co. entities and potential premiums over market value -nothing short of closing transaction is sufficient by itself to render discussions material -"[M]ateriality depends on the significance the reasonable investor would place on the withheld or misrepresented information" -Fraud on the market theory: market prices are based on available material information.if markets aren't efficient than price won't properly reflect publicly available material information] Analysis: -None of Greenfield's rationales actually explains any less significant informational value -purpose of Securities Acts was to replace full disclosure for caveat emptor. difficult evidentiary burden w/o this fraud on the market presumption of reliance -really just fancy justification allowing class actions to proceed w/o evidentiary obstacle -though fraud on the market theory eases long-required reliance element. and actual negotiations -magnitude factors include size of the two corp. including board resolutions. -merger discussions depend on the particular facts -probability factors look to factors of indicia of interest.

Prudential Securities. that market makers knew what was really going on. showing that market may not have been misled -thinks that in the end innocent investors will pay off speculators and lawyers West v. and his customers thought they were receiving inside information -Oral frauds aren't allowed as class b/c details differ from victim to victim and may be statement-specific -When class is certified. Inc. either a lie or insider trading -is Hofman liable to his customers or to everyone buying Jefferson stock during that period? Rule: Basic. also questions whether this was actually in connection with the purchase or sale of securities -some included in the class who purchased after the misstatement was made but disbelieved it -price rose significantly during period. investor's reliance on public material misrepresentations can be presumed for 10b-5 purposes -could rebut presumption by showing.-B/c most publicly available information reflected in market price. sold for unrelated reasons White dissent: Adds reasons why investor may not have relied: decided months ago to sell. substitute stocks are widely available -rises from gullible purchasers negated by larger investors who short it back to the status quo . opposed to the fraud on the market theory -Judges aren't business experts. i. high risk of catastrophic loss and personal liability on managers often leads corp. (7th Cir. shorts the stock before misrepresentations made. 2002) Facts: stockbroker Hofman for seven months tells eleven customers that Jefferson Savings Bancorp is definitely getting acquired soon. later merger news neutralized earlier denials before investors sold.. many investors buy stock b/c they believe market price is inaccurate -so many members and 14 month period so long should weigh against fraud on the market -no evidence that misstatements made to manipulate stock prices. so they shouldn't interpret statutes based on economic theories they don't understand -skeptical that individuals really rely on the integrity of the market price -in fact.fraud on the market: investor's reliance on public material misrepresentations are assumed for 10b-5 purposes b/c market price reflects most publicly available information Analysis: but Hofman didn't release information to the public. to pay inflated settlements that don't serve SH's best interests -therefore certify class w/ caution -Non-public information shouldn't affect prices: public announcements wouldn't move prices if the markets already knew the information -just b/c you have a conflicting expert doesn't mean you get a jury trial on the merits -Demand by itself wasn't shown to be the only possible cause of upward price movement -demand for stock is perfectly elastic.e.

West narrows the class by using the same theory -After revisions to Securities Acts in '70's and '80's. §253 "short-form merger" statute allowing parent owning at least 90% to merge w/o consent or approval of minority SH's. merger terms offered $150 -minority SH's object to merger but file in federal court to invalidate merger or get fair value. saying misrepresentation or nondisclosure isn't necessary to a 10b-5 action: the rule reaches breaches of fiduciary duty by majority against minority w/o such misrepresentation or nondisclosure Rule: §10(b).S. Hochfelder Secondary Liability and Scope of Interpretation: no implied private right of action against those who aid and abet Rule 10b-5 violations. given notice ten days after effective date. but still must include some deceit element. First Interstate Bank -but inferring 1934 legislative intent is "awkward task..unlawful to use manipulative or deceptive device in contravention of SEC rules -no indication in §10(b) that Congress intended to include conduct besides manipulation. v. Pleva. Manor Drug Stores Scienter: liability for misleading statement requires intent or recklessness. but dissatisfied SH's can petition Chancery Court for payment of fair value based on court-appointed appraiser -independent appraiser Morgan Stanley values stock at $125. and not stretched to include simple violations of fiduciary duty . Blue Chip Stamps v. Inc. Lipkind. not technically and restrictively. tries to get 100% by using Del. Central Bank v. Ernst & Ernst v. Green (U. also claiming that appraisal fraudulently stated low value to induce minority SH's to give up the excess value to the controlling SH (Santa Fe) -complaint alleges merger solely purposed to eliminate minority and fraudulently low valuation -lower court says short-form merger doesn't require business purpose or prior notice -as to fraud." Lampf. disclosing information just once is sufficient) Rule 10b-5 elements: Standing: P's must have actually purchased or sold securities.e. if full and fair disclosure made the inquiry is over -but appeals court disagrees w/ lower court. Prupis & Petigrow Santa Fe Industries. later increases to 95%. scope of conduct controlled by text of the statute and inference of how 1934 Congress would have addressed the issue using express causes of action as the primary model (not common law methods). claiming stock worth at least $772. becomes very clear that the law has built-in the efficient market hypothesis (i.[how much credit should be given to economic theory?] -One stockbroker's lie causing long-term price rise is inconsistent with efficient markets -Basic expands the class by using fraud-on-the-market. 1977) Facts: Santa Fe acquires 60% stock of Kirby Lumber Corp. deceit -§10(b) read flexibly.

so just give them that -allowing cause of action here would dangerously expand §10(b)'s reach to include other merger forms (long-form. practices meant to mislead investors by artificially affecting market activity -Shouldn't' create implied federal cause of action where matter traditionally relegated to state law -Corporations are creatures of state law. not by extending §10(b) -Federal/state balance: -States: shareholder liability. saying problems were behind them and covered by reserves -complaint alleges that call option purchased in reliance on market price created by misstatements declined in value -district court holds option traders lack standing under §10(b) and Rule 10b-5. Manor Drug Stores -1934 Act's purpose was protection of actual participants in securities markets -P's need not be in privity with D's. and investors invest on understanding that state law controls unless federal law expressly governs) -may be need for federal fiduciary law. D/O fiduciary duties. though only second type is alleged here . Beneficial Corp. 1988) Facts: Beneficial Corp. so allowing Rule 10b-5 to displace state law improper -Breach of fiduciary duty w/o fraud not a violation of Rule 10b-5 Analysis: Transaction was neither manipulative nor deceptive. serves purpose b/c limits class to P's who dealt w/ security Analysis: B/c options responsive to stock price changes. but must be legislatively done. CEO Caspersen and CFO Halvorsen lie about severe losses in insurance division to lessen decline in their stock and options. (3d Cir. periodic disclosure by public companies. corporate governance.-manipulation deals generally w/ wash sales. SH rights/duties -Federal: transactional disclosure. option holders vulnerable to insider trading and affirmative misrepresentations. Blue Chip Stamps v. not fairness of the transaction terms -cause of action traditionally relegated to state law? yes (appraisal). liquidation) and other types of fiduciary self-dealing -federalism: allowing cause of action here could also interfere w/ state corporate law (corporations created by state law. no duty to them -option price depends on changes in underlying stock price and information affecting the price Rule: §10(b) prohibits manipulative or deceptive device in contravention of SEC rules in connection with purchase or sale of any security -Standing requirement: P's must be buyer or seller of a security. fraud i/c/w securities transactions Deutschman v. or rigged prices. and so didn't violate §10(b) or Rule 10b-5 -private cause of action shouldn't be implied when not necessary to fulfill legislative intent -statute meant to promote full and fair disclosure. matched order. tender offer.

employees of certain service providers) -don't have fiduciary or confidential relationship. but no such relation w/ individual SH's [old majority rule: D's and O's can trade w/ SH's w/o disclosing material information "special circumstances" rule (or special facts doctrine): duty to disclose might be imposed when there were special circumstances. lands in famished country. sabotage -efficiency vs. Oliver -by late 1930's. duty to disclose? -why arrive first? b/c first merchant was smarter. Strong v. even temporarily. wouldn't have sold if he knew about geologist Rule: Directors have position of trust in relation to corporation. Rampede "minority" rule: insiders have duty to fully disclose material information when buying shares from SH's. can be used as a hedge -therefore Deutschman has standing to sue under §10(b) for affirmative misrepresentations -Under state law. fiduciary duty not owed to option holders. Hogan -Easier to sue for disclosure under federal law. Simons v. but still come into contact w/ confidential or inside information -tippees (receive inside info from insiders or misappropriators) Goodwin v. consultants) -misappropriators (family members. incur higher costs. fairness Types of Insiders -true insiders (directors and officers) -temporary insiders (outside counsel. faster ships. Agassiz (Mass.-calling option holders "gamblers" doesn't merit diff. treatment. bankers. most importantly concealment of defendant's identity and failure to disclose information having dramatic impact on price. -geologist theorizes that copper exists on company land and directors purchase options on adjoining land through related company and secretly purchase Cliff Mining shares -directors had material knowledge that Goodwin didn't have and didn't it disclose to him -plaintiff only knew after hearing in newspaper. special circumstance or minority rule followed in majority of states] -Unique knowledge of directors require full attention to fair dealing when directly buying or selling stock -fiduciary duties can't be so strict that no one can fulfill them -but directors personally seeking out SH's to sell him shares w/o disclosure is closely scrutinized Analysis: Buying or selling shares on impersonal exchange is too difficult to actually go out and track down the opposite party to make disclosures -No fraud is found in the allegations . assume more risk. better access to info. knowing many merchants follow behind him. Oliver v. 1933) Facts: In May 1926 Cliff Mining Company directors and officers Agassiz and MacNaughton buy 700 shares of Cliff Mining from Goodwin. lawyers. so disclosure as a state fiduciary duty is largely died Cicero example: merchant.

or artifice to defraud. Texas Gulf Sulphur Co. or (3) to engage in any act. possibly an expectation" -premature disclosure may have caused suits from those thinking the theory was correct -directors made no misrepresentations and no facts required them to disclose theory -plaintiff was sophisticated investor -Disclosure wouldn't have harmed Cliff Mining Co. 1969) Facts: TGS discovers high mineral content in drilling hole in Canada but company requires keeping drilling results secret so they can buy land options -but from 1963-64 employees began buying shares and call options -after story comes out in newspaper TGS issues press release next day April 12 trying to stem rumors of the discovery. then after press release jumps to 58 Rule: Rule 10b-5. scheme. but eventually disclose discovery five days later -stock price jumps from 18 to 30 at press release. "at most a hope.-theory was only nebulous. not misleading. practice. directly or indirectly. (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made. just another mining company owned by the directors -Where is the word "insider" in Rule 10b-5? Securities and Exchange Commission v."unlawful for any person. Basic . and would violate agency principles -must wait until official release can be reasonably expected to appear over the media of widest circulation in order to ensure equal playing field -Materiality: duty to disclose or abstain only arises in "those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if [the extraordinary situation is] disclosed" -basic test is whether a reasonable man would attach importance in determining his choice of action in the transaction in question -encompasses any fact which might affect the value of securities -major factor is conduct of insiders [-Modern materiality test: whether there is a substantial likelihood that a reasonable investor would consider the omitted fact important in deciding whether to buy or sell securities -Re contingent facts: probability/magnitude balancing.. or course of business which operates or would operate as a fraud or deceit upon any person" -based on justifiable expectation that all investors trading on impersonal exchanges have relatively equal access to material information -anyone w/ direct or indirect access to info intended for corporate purpose may not take advantage of information by trading w/ uninformed investors -must either disclose to investing public or abstain from trading -"disclose or abstain" rule often just abstain: disclosure often not allowed by corp. in the light of the circumstances under which they were made. or of any facility of any national securities exchange. or of the mails. (2d Cir. by the use of any means or instrumentality of interstate commerce. (1) to employ any device.

tells WSJ and some of his clients -As stock price falls from 26 to 15 in two weeks. WSJ publishes -Dirks investigated by SEC but only censured due to his role in exposing the fraud Rule: In re Cady. company response.S. 1980): printing company worker held not liable under §10(b) and Rule 10b-5 b/c duty to abstain only arises from relationship of trust b/t SH's and employees. not simply those who directly transact w/ corp. but visual evaluation as well -Trial court wrongly based corp. (2) reliance. officer of broker-dealer firm.'s -purpose is to protect investing public at large. conduct of insiders] -Purchaser or seller only required for private plaintiff's standing. while Dirks decreases it for tippees -Chiarella v. liability for April 12 press release on facts known to the D's. 1983) Facts: Dirks. Burger's "misappropriation" dissent later appears in Hagan Dirks v. Analysis: People were liable not only who traded on chemical assay. profitability -argument that long-term investors helped at short-term investors expense (can't time market) -For §10(b) private actions.-Factors: nature of the information. United States (U. trading stops. plaintiff must prove (1) material misrepresentation or omission in connection w/ purchase or sale of a security. SEC files charges.S. Securities & Exchange Commission (U. informed from former Equity Funding officer Secrist that Equity Funding is involved in fraudulent practices -Dirks uncovers evidence of fraud from interviewing employees. and (4) causation -Texas Gulf Sulphur raises liability for insiders. Roberts & Co. doesn't have to be corp. (3) scienter. market response. defendant's 10b-5 liability -"in connection with" can be attributed to the victim's reliance. losses -insider trading can be used as an incentive for executives to improve company's value -shouldn't be allowed when executive's actions unrelated to corp. shouldn't allow people to profit off of corp.: individuals other than insiders can be obligated to disclose or abstain -purpose of securities laws to stop "use of inside information for personal purposes" -Chiarella: two elements establishing Rule 10b-5 violation: (1) relationship affording access to inside info intended only for a corporate purpose . not corp. not what a reasonable investor would have thought -unclear that investors were actually taken in by the "gloomy or incomplete" press release -Open market transactions difficult to analyze b/c markets impersonal and influenced by many factors -Alignment of interests: if insider trading is allowed.

appeals court says 10b-5 liability can't be based on "misappropriation theory" Rule: traditional insider trading theory. O'Hagan (U. but motivated by desire to expose the fraud -therefore no derivative liability -Can be difficult to prove a personal benefit in connect with a disclosure -now Regulation FD creates non-insider-based restriction on selective disclosure: if public corp. in some situations. nor misappropriation of information -Secrist didn't violate Cady duty to Equity Funding SH's b/c he didn't receive any personal benefit by revealing the fraud. which is "deceptive device" b/c breaches relationship of trust b/t SH's and insiders -traditional theory applies to both permanent and temporary insiders -insider takes advantage of uninformed SH's .10(b) and 10b-5 violated when insider trades on material. discloses info to market professionals or securities holders. and (2) the tippee knows or should know that there has been a breach Analysis: Dirks was a stranger to Equity Funding and didn't take actions inducing SH's to repose trust or confidence in him. would impose general duty on all market participants -only some people. Cady -if no personal benefit to insider. buys many out-of-the-money call options and shares w/ funds embezzled from other clients' accounts. 1997) Facts: O'Hagan is partner in firm representing Grand Met in tender offer for Pillsbury. no breach by him and no derivative breach by tippee -Tippee assumes fiduciary duty to SH's not to do insider trading only when: (1) insider has breached his fiduciary duty to the SH's by disclosing the info to the tippee. cannot trade on nonpublic material information -law doesn't require equal information among all traders all the time -analyst's job is to try and get a leg up -Santa Fe Industries: not all fiduciary duty breaches connected to securities comes within 10(b) -must be "manipulation or deception" involved -so insider liable for insider trading only when he fails to disclose and trades. must disclose simultaneously (if intentional) or promptly afterwards United States v.(2) unfairness of allowing an insider to take advantage of that info w/o disclosure -duty to disclose doesn't arise from "mere possession of nonpublic market information" -no duty to disclose where trading person wasn't a fiduciary -otherwise. no expectation of confidence. making "secret profits" -Tippee's duty is derivative from the insider's duty -arises from his participation after the fact in the insider's breach of fiduciary duty -what makes it a breach is not the nature of the info but the way it was received from insider -purpose of the disclosure crucial. nonpublic information.S.

but when Dodge engages in merger talks w/ Reliance. no constructive insiders -SoL of two years. this is based on fiduciary relationship b/t fiduciary and source of info -misappropriators deceive principal by secretly converting his info for personal gain -full disclosure negates wrongdoing under misappropriation theory -but still possible liability under state law breach of duty of loyalty -deception consummated when securities bought or sold. director. or sibling -Trading on the basis of nonpublic info vs. Emerson wants to get out . directors. and must be officer. providing 3 situations where person has fiduciary duty for purposes of the misappropriation theory: (1) person agrees to keep info confidential. no misappropriation liability. any profits they makes within six-month period from buying and selling firm's stock -smaller group of insiders than under Rule 10b-5 -no tipping liability. (2) two people having pattern of sharing confidences such that recipient knows or reasonably should know that speaker expects recipient to maintain info's confidentiality. v. not when info received -protects securities markets from abuses by those owing duty to source.e.2% of Dodge for 63/share.S. one is deemed to have traded "on the basis of" material nonpublic info if aware of info at the time of the trade -Securities Act contains prophylactic §16(b): officers. Chestman: chain of insiders giving inside info to relatives and friends. parent. or other duty -US v.-"misappropriation theory": fiduciary duty owed to source of the information. and (3) person receives or obtains material nonpublic info from a spouse. Trading while in possession of such info (i. but not to corp. under this theory the fiduciary's self-serving use of the info defrauds the principal of the exclusive use of the information -instead of fiduciary relationship b/t insider and purchaser or seller. usually is broader than the core activity -way around difficult problem of proving breach of duty of confidentiality. 1972) Facts: Emerson acquires 13. SH's -Exchange Act's purpose is to insure honest securities markets and promote investor confidence -§14(e) of the Exchange Act: similar to §10(b) except deals w/ tender offers. b/c its mission is to prevent. (U. or 10% owner at both purchase and sale -easily administered but underbroad as well as overbroad Reliance Electric Co. can be brought by SH within 60 days if demand refused. Emerson Electric Co. subject to narrow exceptions. knew the info but was going to sell anyway for medical bills) -SEC Rule 10b5-1 effectively makes this not matter. but familial relationship alone didn't create a fiduciary relationship -SEC responds w/ Rule 10b5-2. child. and 10% SH's must pay to the corp. not securities transactions -doesn't require breach of a fiduciary duty for liability Analysis: Shouldn't treat lawyers differently depending on whether they work for bidder or target firm -Rule 14(e)-3(a) is a "means reasonably designed to prevent" fraudulent trading -prophylactic measures.

25M debentures to SH's. than divesting less than all your shares -purchase to get to 10% isn't matched. falling under 10%. 1976) Facts: Provident decides to liquidate by selling off assets.-upon general counsel's advice. alleged part of a predetermined plan to circumvent §16(b) Rule: §16(b).96% at 68/share. Provident enters contract w/ underwriters to sell debentures on Oct. but selling to go below 10% is matched §16(b) . Emerson sells down to 9.S. then on Oct.25M cash and 49. immediately convertible into more than 10% of Foremost's outstanding common stock -closes asset sale on October 15. not "immediately after" -if meant to deter abuse by influential SH's. 21. should be strict both ways Foremost-McKesson. at least not more favorably. should match sales that bring investor below 10% b/c "before". on Oct. divesting all of your shares shouldn't be treated differently. 28 sells rest of the debentures to the underwriters Issue: Does "at the time of purchase" in §16(b) mean "before" or "immediately after" the purchase? Rule: §16(b) Analysis: Before the purchase -Congress thought all short-swing trading by insiders vulnerable to abuse b/c of their close involvement -but trading w/ mere SH's viewed as abuse-prone only when size of their holdings afforded potential for access to corp.75M in Foremost convertible debt. 24 Provident distributes 7. v. but appeals court affirms lower court holding that statute satisfied if purchaser became 10% owner by buying -only second sale at issue.corp. may recover profits by owner of more than 10% within six-month period if held more than 10% at both purchase and sale -statute's arbitrary and sweeping coverage deemed necessary to insure optimum prophylactic -easy administration. Provident Securities Company (U. so should also be allowed to game around the 10% requirement by selling in bits -Narrow interpretation meant to compensate for the broad statutory language? (allows gaming) -Form over substance: if §16(b) is to be applied strictly. cuts down on speculative abuses by reducing difficulties in proof -objective standard ignores intent of the insider or existence of actual speculation -but also underbroad: no liability if not an "insider" or sells more than six months later -10% owners can just sell little bits off until holdings are less than 10% Analysis: Can permissibly game around the six month requirement by waiting. Inc. agrees w/ Foremost that Provident will give 2/3 of its assets for 4. then sells rest at 69 -Emerson first claims not liable at all b/c not 10% owner at time of sale. information -don't want to unduly restrict SH transactions -By same logic.

" determined by looking at three factors. power but not the requirement to indemnify . (U. employee. but still has inside info after appointment -can't resign just in order to commit insider trading. customer. Kern County Land CO. derivative suits. including companies w/ stock traded on national exchange and companies w/ assets of at least 10M and 500 or more SH's -Officers: officers w/ policy-making functions (Rule 16a-1(f)) -can't pair w/ trades before appointment. not necessarily the company's total stock -applies only to equity securities. only w/ judicial approval (rare that there will be judicial approval if bad faith found) -both (a) and (b) require good faith and actions "reasonably believed to be in or not opposed to the best interests of the corporation" -permissive statutes. Occidental Petroleum Corp. but certain transactions are not sales. like "unconventional transactions. why not allow them to indemnify directly? -can circumvent even more by writing their own policy -Value of right to reimbursement depends on how favorable the current board is to the individual and the firm's cash flow position -§145(a) allows indemnification for judgment and expenses of third party suits. unless waits out the six months -Deputization: if X's employee serves as a director for Y. 1973) (1) whether transaction is volitional (2) whether transaction is one over which beneficial owner has any influence. and if liable to the corp.S. accountable for profits from sales on all classes -but different classes of stock not fungible w/ each other -Litigation: much of it fueled by lawyers. (b) for derivative suits only allow indemnification for expenses. -but still must be matched within six months -Unconventional transactions: Exchange Act defines "sale" very broadly (every disposition for value). but can pair w/ trades after appointment (Rule 16a-2) -don't get inside info before appointment. in order to claim attorney's fees -Matching stock: courts match sales w/ purchases however they want. including convertible debt but not other kinds of debt -Rule 10b-5 applies to all securities. not following FIFO but matching lowest purchase w/ highest sale to achieve highest profit -courts interpret statute to maximize gains for the corp. competitor) -Risk of liability may be small. v. and (3) whether beneficial owner had access to confidential info about transaction or issuer -Several different situation that might give rise to D&O liability (torts. but potential personal liability is huge to the individual -If allowed to buy insurance to get around good faith. not SH's.-Issuers: applies only to companies registering their stock under '34 Act. X may be liable for profits on Y's stock within six-month period -Stock classes and convertible debentures: under statute to hold 10% of any class of statute. not just equities and convertibles -once 10% holder for one class.

(2) D is promised indemnification (3) D is insured against liability -But can't indemnify against intentional misconduct. all suits settled and dismissed w/o prejudice after Conticommodity pays 35M to suitors w/o any contribution by Waltuch -Waltuch pays 1. Inc. has power to indemnify for all expenses but must have acted "in good faith" -"indemnification rights may be broader than those set out in the statute. §174 unlawful dividends. to officers and directors (unsure how this affects (e)) -§145(g) allows corp.. but Conti responds that this bylaw violates §145(a)'s requirement of "good faith" -Waltuch claims §145(f) permits indemnification outside confines of §145(a)'s good faith -Waltuch also claims §145(c) requires indemnification b/c he was successful Rule: -§145(a): corp. to get liability insurance -method of getting around "good faith" requirement -§145(f) doesn't restrict defendant's other right to indemnification -allows written agreements going beyond the statute -confusion addressed in Waltuch -Three options w/ the same effect (defendant pays nothing personally): (1) D not liable to corp. agreement. at common law corporate employees were indemnifiable but not directors -but today all states have statutes allowing some director indemnification Waltuch v. entitled under any bylaw. violations of duty of loyalty or good faith. vote of stockholders or disinterested directors or otherwise" -"other rights" must not go beyond the scope of the statute .. but they cannot be inconsistent with 'scope' of the corporation power" -§145(f): indemnification shouldn't "be deemed exclusive of any other rights. 1996) Facts: Silver trader Waltuch sued by angry silver speculators alleging fraud and market misconduct. but denied exculpation by charter provision -102(b)(7) only applies to people acting as a director if both director and officer -102(b)(7) is an affirmative defense.2M for legal expenses and another 1M defending a CFTC enforcement action -Waltuch claims indemnification required by Conti's articles of incorporation not requiring good faith. or transactions where they received improper personal benefit -applies only to directors -officers also subject to duty of care. (2d Cir.-§145(c): defendant must be reimbursed if successful -not permissive -(a) or (b) for unsuccessful defendant -§145(e) allows advancement of expenses if defendant agrees to repay if unsuccessful -Sarbanes-Oxley prohibits loans by corp. Conticommodity Services.

of cost and expenses if defendant agrees in writing to repay if later determined not entitled to indemnification by the agreement -Citadel files §16(b) claim against Roven Rule: §145(e) allows corp. Roven. to advance costs of defending a suit -Corp. even if sure to be owed back later -Citadel not required to advance unreasonable expenses. -§145(c): indemnification required if defendant "successful on the merits or otherwise" -indemnification mandated when defendant "is vindicated". not it's about corporate governance -proxy fights gave way to tender offers. however achieved Analysis: §145(a)'s "good faith" requirement limits the scope of indemnification powers -if legislature intended augmenting of powers beyond §145(a)'s scope. 1992) Facts: Citadel is holding company of S&L's. Inc. v. Roven was director holding 9. so protected from defending absurd or unrelated proceedings Proxy Fights -Corp.broadly equates to "success" -moral vindication not required. Roven (Del. -in Hibbert. but as defenses were mounted against tender offers proxy fights came back as a way to supplement larger tender offer efforts . merely dismissal w/o settlement payment.these rights can't exceed the "scope" of the statute. Citadel Holding Corp.-indemnification rights can't be inconsistent w/ §145. obligations under both the statute and agreement subject to a reasonableness requirement Analysis: Agreement doesn't condition advancement upon actual right to indemnification -required to provide all expenses initially.8% of its stock and enters indemnity agreement purporting to provide reimburse for "any expense or liability" -but agreement doesn't cover §16(b) short-swing profit accounting -agreement requires advance payment by corp. holds annual meeting to elect directors and vote on important matters -most investors in public firms don't own enough shares to make it worthwhile to get informed and go to the SH's meeting to vote -therefore usually depend on the proxies -SH meetings usually quiet unless insurgents are trying to control firm by electing own directors or other matters of basic strategy or up for vote -proxy fights used to be over social responsibility. would have expressly done so like it did with §145(g) concerning D&O insurance -Conti's payment doesn't change the fact that Waltuch's claim was dismissed w/o him contributing towards any settlement Citadel Holding Corporation v. Hollywood Park. bylaw indemnifying both plaintiff and defendant directors consistent w/ §145(a) b/c provision didn't distinguish b/t plaintiffs and defendants . Hibbert v.

but not insurgents. people not seeking proxy power and don't solicit any consent. communications which may indirectly accomplish such a result or constitute a step in a chain of communications designed ultimately to accomplish such a result" Long Island Lighting Co.e. alleging that their ads constituted a proxy solicitation -must provide an annual report: large pamphlet. abstention. or authorization. 10 or fewer. revocation. any proxy ... so big potential for mistakes -must accompany or precede distribution of the proxy statement -three-year package of audited financial statements -brief description of business done -identity of directors and executive officers.. SEC has passed many exemptions to whittle it down -i.. in respect of any security .-Allowing incumbents. revoke or withhold proxies. by use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise.. registered pursuant to Section 12 of this title" -what is a "solicitation"? -includes not only "direct requests to furnish. Barbash (2d. etc. but Rule 14a-2 says SH doesn't fall under filing requirement if it doesn't solicit proxies for itself -Rules require those soliciting proxies to furnish each SH a "proxy statement" disclosing info and also file it w/ the SEC. but also . more extensive for contested meetings . public statements of how SH intends to vote and why. v.. Cir. to solicit . 1985) -after seemingly broad jurisdiction w/ possible First Amendment implications and other issues.. indicating principal business or occupation -two years' quarterly range of market prices of an dividends on common equity -the annual report to security holders is not deemed to be filed and part of the proxy statement for liability.. -anyone who "solicits" a proxy must provide a written proxy statement BEFORE soliciting proxy -free writing generally permitted thereafter -§14(a) of 1934 Act prohibits solicitation in violation of SEC rules -"Solicitation" construed broadly. -an environmentalist group ran newspaper and radio ads critical of the defendant electrical utility's management and incumbent managers sued the environmentalists. to solicit proxies w/ corporate funds is cause for concern -but also shouldn't allow all 1-share owners to deplete corporate assets -not allowing any funding of proxy solicitations w/ corporate assets might leave SH's uninformed -expense of proxies diminishing w/ technological advances -§14(a): "It shall be unlawful for any person. in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Y. funds spent by old board for soliciting proxies and 28k remaining expenses reimbursed to old board by new board for reasonable fees -payment of 127k to new board approved by 16 to 1 shareholder vote -lower court finds group differences were policy-based not personal-based (executive employment contract main point of contention) -challenging SH concedes the charges were fair and reasonable but alleges that they weren't legal charges to be reimbursed Rule: Management can tap corporate treasury for "reasonable expenses" of soliciting proxies to defend its position in a "bona fide policy contest" . each group has distinct management philosophies Rule: SH's should be "fully and truthfully informed as to the merits of the contentions of those soliciting" -Injunctive power shouldn't be exercised to "unduly influence a SH's [proxy] decision" -question is whether illegal or unfair means of communication are being used to solicit proxies Analysis: Even if present management has succeeded. Fairchild Engine & Airline Corp. Rule 14a-7 causes management to either give SH list to the insurgents or mail the insurgent's solicitations themselves -will usually mail themselves b/c often want to keep the list confidential -Proxy fights lost cost-effectiveness b/c tender offers more economical -spending money on proxy fight is expensive and only captures profit in proportion to their ownership -most of the benefit goes to free-riders -hard to get proxies. but it's required as an incentive to managers to take over mismanaged corporations Levin v. (S. 1967) Facts: Levin group and O'Brien group vie for control of MGM through proxy solicitation. Levin complains that O'Brien group used corp.Y. resources to help solicit proxies.N. 1955) Facts: 106k of corp.251M total assets and 185M gross income in 1966] -didn't violate any statute or SEC rule or regulation Rosenfeld v. seeking injunctive relief and 2. (N. Inc. and proxy solicitation firms and used other corp. Metro-Goldwyn-Mayer. especially for larger corporations -no guarantee that spending money will result in a proxy victory -to profit off of management changes better to buy up majority in a tender offer -why incur large risk when you have to share the increased value w/ other SH's? -more capital required to buy out company than to solicit proxies -Asymmetrical reimbursement rule for proxy solicitation is slanted towards winning incumbents.5M payment to MGM.-For insurgent groups soliciting proxies. whether to keep them depends on the SH's -Means used not found to be "illegal or unfair" -use of MGM funds and retention of proxy firms were all disclosed in the proxy statement -125k above and beyond amounts normally spent in proxy solicitations weren't excessive [-maybe b/c MGM so big. funds to pay for lawyers. public relations firm.D.

funds for proxy solicitations if: (1) expenses are reasonable -disclosure statements to SH's -telephone solicitations -in person visits to major SH's (wining and dining. burden on directors to show reasonable -believes burden should be on the directors to prove their expenses were reasonable and related to the informing the SH's -for unanimous SH approval. private advantage. or unfair or unreasonable expenses [Can use corp." corp. and believed to be in best interests Dissent: Not all of the solicitation costs were incurred to inform the SH's but to entertain and transport SH's. money for personal purpose. funds to defend control against insurgents w/ ample funds -For a contest over policy. SH's only meant to ratify reimbursement to the new board not the old board -when directors use corp.-proxy solicitation necessary to secure a quorum and to inform SH's -must use corp. so might offer an additional grounds to sue on] Analysis: Reimbursement allowed as fair. directors have the "right to make reasonable and proper expenditures" to persuade taxpayers for policies which they believe in good faith to be in the corp. private jet to bring to headquarters) -reasonableness can depend on size: larger investors might require closer contact (2) contest involves "policy" questions and not a "purely personal power contest" -but how to distinguish? -policy and personnel usually spill into one another -will always be able to make up some kind of policy dispute For insurgents: (3) must be successful (4) SH's must ratify the payment -if enough proxies to win director seats. action may be adjudged wrongful in a derivative suit if no corporate purpose -impossible sometimes to distinguish policy and personal motivations -even a purely personal power contest will claim some color of policy dispute Typical Annual Meeting -Nominating committee of the incumbent board of directors nominates a slate of directors to be elected at the next annual meeting -Incumbent board identifies other issue to be put to vote (some required by law) . reasonable. not a "purely personal power contest. policies not in corp. funds for individual gain.'s best interests. policy-based. doesn't matter if action doesn't have a corporate purpose (b/c no one will file a derivative suit) -but for only majority approval. probably will have enough to ratify payment -just requires more disclosures.'s best interest -but can't use corp.

-etc. and abstain boxes required for each matter other than election of directors -for and withhold authority boxes for election of directors so that a SH may withhold authority to vote for individual directors -proxies may be revoked and if more than one proxy is given. to vote no against merger) -SH appoints a proxy (aka proxy agent) to vote his/her shares at the meeting -Appointment effected by means of a proxy (aka proxy card) -can specify how shares to be voted or give agent discretion -revocable -proxy card requirements (mostly Rule 14a-4) -must identify each matter to be voted upon -may give discretionary authority to vote in the proxies discretion on other matters that may come before the meeting. against. etc. federal courts may use any available remedy to make good the wrong done -the power to enforce implies the power to make effective the right of recovery. actions through deceptive or inadequate disclosures -promote SH's free voting rights -purpose of §14(a) to protect investors implies judicial relief should be available to accomplish it -Deceptive proxy solicitation claims are usually derivative b/c damage inflicted on the corp. which implies the power to use any of the procedures or actions normally available to the litigant. also alleges self-dealing and breach of fiduciary duties Rule: Private parties have a right under §27 to bring direct or derivative suits for violations of §14(a) -§14(a) meant to prevent authorizing corp.) . Case Co. 1964) Facts: SH claims that merger was influenced by misleading proxy statement violating §14(a) but trial court says only remedy under §27.e. v. J.I. rather than directly on the SH -Proxy solicitations must explain to SH's the real nature of the issues for which proxy authority is sought -remedies can be adjusted to grant necessary relief -when legal rights are invaded and federal statute provides a general right to sue. Independence Shares Corp. management solicits shareholder votes (typically w/ aid of proxy solicitor) -A shareholder (aka the insurgent) solicits votes in opposition to the incumbent board of directors -electoral contests: insurgent runs a slate of directors in opposition to slate nominated by incumbent board -issue contests: SH solicits votes against some proposal (i. Borak (U.S.-At company expense: management prepares proxy statement and card. Analysis: Holding that these claims aren't within §14(a) would basically deny private relief -shouldn't be limited to declaratory relief b/c road is uphill enough for victims of deceptive proxy statements (security for expenses statutes. but not elections to office for which a bona fide nominee is not named -for. Deckert v.

S. was an "essential link in the accomplishment of the transaction" -this objective test of (1) material misstatement and (2) proxy solicitation being "essential link" eliminates impracticalities of inquiring into the hypothetical acts of potentially millions of votes and avoids unfairness of appeals court's fairness test [but Virginia Bankshares. (U. so shouldn't pile on by forcing them to rebut fairness -Causation: materiality of misstatements alone implies that it would be important to reasonable SH's -serves purpose similar to causation of ensuring cause of actions can't be had for trivial or unrelated defects -materiality is enough of a causal relationship. Sandberg (U. b/c of allegedly misleading proxy solicitation -TRO not sought so now suing under §27 to set aside merger b/c misleading proxy statement violated §14(a) and Rule 14a-9 by stating the board of directors recommended the merger w/o disclosing that the board was nominated and controlled by majority SH Mergenthaler -Mergenthaler Auto-Lite's majority SH and American Manufac. 1970) Facts: SH's of Electric Auto-Lite sue to enjoin SH vote on merger w/ Mergenthaler and American Manufacturing Co. don't have to further prove that it actually had a decisive effect on the voting -just have to prove that the proxy solicitation. 1991): causation can't be established in situations where management controls sufficient votes already w/o needing minority votes] . Electric Auto-Lite Co. Mergenthaler's controlling SH -lower court finds that the proxy statement contained material omission and the securing of 317000 votes needed for Mergenthaler's 54% to get 2/3 majority was caused by the omission -appeals court reverses on question of causation -if defendants can show that sufficient vote would have been secured w/o the misleading statement then no relief is owed -hard to show common-law element of reliance for hundreds of thousands of votes. v.-similar to anti-trust treble damages in that private actions is big deterrent weapon -SEC reviews over 2000 proxy statements a year and doesn't have time to independently verify all the representations made in the statements -Courts must alertly provide remedies necessary to effect the legislative purpose -remand to trial court to determine causation of proxy statement to the merger Mills v.S. so determine causation instead by looking at fairness of the terms Rule: Borak policy of "fair corporate suffrage" to promote "free exercise of voting rights of SH's" by fairly and fully disclosing reasons for proxy solicitation -SH's would be bypassed if judicial fairness appraisal can be substituted for an informed SH vote -would insulate even outrageous misrepresentation as long as it didn't relate to the deal's terms -private action should be broad enough to serve as a "necessary supplement to [SEC] action" -smaller SH's already burdened enough in litigation. Inc. not the specific defect in it.

which would have put costs of appeal on defendants instead of the plaintiffs. which includes fairness of term -forms of relief may include damages. notably where plaintiff successfully sues on behalf of a class and benefits others in the same class as himself (prevent freeriders) -lack of a monetary award doesn't preclude a fee award. remanded to trial court for determination -appeals court should have affirmed summary judgment on liability." Borak -same factors for determining relief for similar fraud or illegality. Cal. relief.D. chancellor can still award fees -some courts even extend to cases of "substantial benefit on the members of an ascertainable class" that isn't capable of monetary expression -"substantial" benefit is more than technical. so now the P's should be reimbursed -plaintiffs conferred a substantial benefit by exposing misstatements -Borak establishes a cause of action. Bartz (N. rights or affect an essential SH right -charge fees to corporation to spread costs among all SH's sharing the benefit Analysis: Already established misstatements were material and an essential link. so Mills doesn't really serve their interests -mostly helps attorneys get more fees -Publicly traded stocks may be less deserving of judicial protection b/c investors can sell shares easier than closely held corporations where objecting SH may be unable to "talk with his feet" Seinfeld v. so defendants liable -as to the relief. setting aside merger. or other equitable relief. depending on the equities of the case -unscramble the wrongful transaction only if in the best interest of the SH's as a whole -money damages only to extent they can be shown. and fees -Expected sanction= nominal sanction * probability of conviction -SEC has limited resources (low probability). corrects or prevents an abuse that would prejudice corp. so must have high nominal sanction to compensate -Investors rarely read proxy statements. though if there is "commingling of the assets and operations" damages can be extrapolated from the merger's terms -Legal fees: absence of provision for attorneys' fees under §14(a) doesn't preclude award in these cases -American rule that attorneys' fees not ordinarily recoverable as costs -but exceptions have emerged. 2002) Facts: Cisco SH sues corp. and stating compensation as 32k plus stock options was misleading . Mills talks about causation. and directors under §14(a) of 34 Act and Rule 14a-9 for raising outside director options from 20k to 30k shares upon joining board and from 10k to 15k shares annually -alleges negligent proxy statement preparation b/c Black-Scholes calculation of a 1M option value at time of proxy statement wasn't included.-Relief: "be alert to provide such remedies as are necessary to make effective the congressional purpose.

-statement that options had no value unless stock rose was incorrect b/c either issued in the money or had implicit value upon grant that could be realized by selling during the option period [-but aren't there restrictions preventing directors from selling options instead of exercising them?] Rule: §14(a). discrimination.e. v. -Causation doesn't require showing disclosure would have cause the reasonable SH to change vote -only needs to show that it "would have assumed actual significance in [his] deliberations" or "substantial likelihood that the disclosure.unlawful to solicit proxies in violation of SEC rules -Rule 14a-9 prohibits proxy solicitations using "false or misleading declaration of material fact" or "an omission of material fact that makes any portion of the statement false or misleading" -"Material" if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. environment. Northway. but it's better than just writing a letter. but the same "materiality" standard was used -plaintiff also tries to cite Ninth Circuit calling Black-Scholes a reliable valuation method. Inc. viewed by the reasonable investor as having significantly altered the 'total mix' of the information made available" Analysis: Persuasive that four courts have previously held that Black-Scholes valuations aren't material -plaintiff claims cases are distinguishable b/c based on state duty of candor. etc. AFSCME) and state and local employees (i.. CALPERs) -individual activists (aka Lovenheim) -charities -Current issues of SH proposals generally fall into two categories -CSR corporate social responsibility (global human rights. and it's a way to suggest to management how SH's feel about issues -Likely proponents of SH proposals: -hedge and private equity funds (proposals to make company more profitable) -pension funds: union (i. not payment for services (IRS regulations require option valuation at time of grant but SEC regulations do not) [-but in 2006 SEC passed regulation requiring treatment of options as expenses in financial reports of registered companies] -therefore Black-Scholes valuations not material Shareholder Proposals -Rule 14a-8 allows qualifying SH's to put a proposal before their fellow SH's -can have proxies solicited in favor of them in the company's proxy statement -expense thus borne by the company -requesting a report seems unproductive.e.) -governance (more important in the wake of the recent economic crisis ) -average votes for governance proposals are 24% and 7% for social proposals -Responses: .." TSC Industries. Inc. but that was a tax case dealing w/ a loan.

not timeliness or ownership/format) -substantive reasons: -improper under law of issuer's domicile -person grievance/special interest -management functions -substantially implemented -and others -not really a bright-line rules -include w/ opposing statement (board recommends to vote against) -negotiate w/ proponent (wide range of possible compromises) -adopt proposal as submitted Process of excluding: -management files a notice of intent to exclude w/ the SEC accompanied by an opinion of counsel if any of the stated reasons rely on legal issues -under Rule 14a-8(f). the proponent will be ineligible to use the rule for the following two years -Per Rule 14a-8(i)(12) a proposal can be excluded if it (or a substantially similar one) was submitted: (1) once during the preceding 5 years and got less than 3% of the vote (2) twice in the preceding 5 years and got less than 6% of the vote the last time it was submitted (3) 3 times in the preceding 5 years and got less than 10% of the vote the last time it was submitted . management must notify the SH-proponent of remediable deficiencies in the proposal and provide an opportunity for them to be cured -a copy of the firm's notice and statement must also be sent to the proponent -Staff level action: -staff determines can be excluded: issue a no-action letter -staff determines should be included: notify the issuer of possible enforcement action if the proposal is excluded -intermediate position: proposal not includible in present form. but can be cured -Review: -commission -court -Eligibility: -Rule 14a-8(b)(1): proponent must have owned at least 1% or 2k (whichever is less) of the issuer's securities for at least one year prior to the date -Rule 14a-8(c): only one proposal per corporation per year -no limit on how many companies a proponent can submit proposals to 14a-8(h) if the proponent fails to show up at the meeting to present the proposal in person.-attempt to exclude on procedural or substantive grounds (must have specific reason to exclude that is valid under Rule 14a-8) -procedural standards: -proponent doesn't meet ownership/format guidelines -proposal not timely -issuer must provide proponent w/ opportunity to cure most errors within 14 days after submission (relating to format.

. (D."if any security holder of an issuer notifies the issuer of his intention to present a proposal for action at a forthcoming meeting of the issuer's security holders. DGCL 141(a)) -Also want SH's to have input. the issuer shall set forth the proposal in its proxy statement and identify it in its form of proxy and provide means by which security holders [presenting a proposal may present in the proxy statement a statement of not more than 500 words in support of the proposal]" -but Rule 14a-8(i)(5): issuer may omit a proposal and its supporting statement "if the proposal relates to operations which account for less than 5% of the issuer's total assets at the end of its most recent fiscal year. 6M in annual profits.D. and is not otherwise significantly related to the issuer's business" -use of "otherwise" in the exception ambiguously implies that rule's drafter might have intended to include other noneconomic tests of significance -look to history of SH proposal rule to clarify this ambiguity -prior to 1983 the exception didn't contain an objective economic significance test -for Arab economic boycott of Israel. a 3k loss on sales. Ltd.-Precatory (i.C. and 78M in assets -pate de foies gras accounts for 79k in sales. and for less than 5% of its net earnings and gross sales for its most recent fiscal year. nonbinding) phrasing -Why? -Primary reason: some proposals that are excludable if phrased as a requirement must be included if phrased as a request -Rule 14a-8(i)(1): "If the proposal is not a proper subject of action for shareholders under the laws of the jurisdiction of the company's organization" -it must be an action which it is proper for SH's to initiate (i.g. and 34k in related assets -one element of a TRO is likelihood of prevailing on the merits Rule: Rule 14a-8.e. but not necessarily to run the company -What happens if precatory proposal passes and board refuses to act? -BJR (unless board acts recklessly or in self-interest) -but board often won't ignore proposals getting enough votes (don't want to upset SH's) Lovenheim v.e. AFSCME) -look to state law to decide that question (e. SEC stated that exception shouldn't be solely based on the proposal's economics "if a significant relationship to the issuer's business is demonstrated on the face of the resolution or supporting statement" -"significant relationship" not limited to economic significance Analysis: Pate de foie gras obviously makes up less than 5% of operations -but plaintiff argues his proposal is "significantly related to the issuer's business" b/c it has "ethical or social significance" and thus not eligible for the Rule 14a-8(i)(5) exception . CA v. 1985) Facts: 200-share holder sues to force Iroquois to include his proposal to examine if its pate de foie gras suppliers force-feed geese and what to do about it -Iroquois has annual revenues of 141M. Iroquois Brands.

(2d Cir.-says humane animal treatment is a foundation of western culture and cites various state and federal animal protection laws. corp. AIG. also supported by interest groups -given the ethical and social significance and the implication of significant level of sales (???) plaintiff has likelihood of prevailing on the merits of whether proposal is "otherwise significantly related" [-Potential for abuse by crazy interest groups (i.corp. required to include the proposal in its proxy statement unless one of the thirteen exclusions apply -Rule 14a-8(i)(8) "town meeting rule".D. D.Y.N. and then fed.C. which is denied Rule: -Rule 14a-8(a): SH proposals are recommendations or requirements that the company and/or board take some action. or even intermediate positions saying that certain revisions would force inclusion -in theory losing side can ask actual Commissioners to review. 2006) Facts: AFSCME is one of the largest public service employee unions and its pension plan holds 27k shares of AIG stock -AFSCME submits SH proposal for inclusion in proxy statement to amend bylaws to require publishing of name of SH-nominated director candidates together w/ board-nominated ones -SEC's Division of Corporation Finance (office handling investor disclosure matters and no-action letters) issues AIG no-action letter stating it could exclude the proposal -after proposal is excluded. AT&T white supremacist story) -must not just be a significant issue. may exclude a SH proposal "if the proposal relates to an election for membership on the company's board of directors or analogous governing body" -"relates to an election" is the difficult part: a particular election or elections generally? -guided by agency interpretations at the time the regulation was implemented -to follow a changed interpretation requires the agency to offer sufficient reasons for the change -agency interpretations of statutes don't warrant deference. which submitting SH's intend to present at the next SH meeting -If SH meets eligibility and procedural requirements. appeals court -but management will typically acquiesce if on the losing side -losing SH can seek an injunction in federal district court (as in Lovenheim) AFSCME v.e. but do warrant deference for regulation interpretation -1976 SEC statement clearly reflects that exception limited to proposals opposing solicitations dealing w/ identified board . to compel inclusion. but significantly related to issuer's business -what is test for "significantly related"? affects share value?] -No-action letters mean that the staff won't recommend SEC enforcement actions -can also send letters saying SEC may bring enforcement. AFSCME brings suit in S. Inc.

not things like cumulative voting and general director requirements which merely increase the likelihood of election contests -in 1990... amend or repeal bylaws shall be in the SH's entitled to vote . however. (c) SH's can't cumulate their director votes.. but in doing so it has a "duty to explain its departure from prior norms" -Congress has vested SEC w/ authority to set regulations. Rule 14a-8(i)(8) amended to "if the proposal relates to a nomination of an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election" -but SEC will revisit in 2008 CA.seats. not inconsistent w/ law or w/ the certificate of incorporation. and its rights or power or the rights or powers of its stockholders. shall not divest the SH's . amend and repeal bylaws . AFSCME Employees Pension Plan (Del. directors. relating to the business of the corporation.. nor limit their power to adopt. 2007. confer the power to adopt. amend or repeal bylaws. and (d) election and expenses incurred after bylaw is adopted -CA's present bylaws didn't specifically address reimbursement of proxy expenses -decision to reimburse previously subject to board discretion.. officers or employees"] -sounds like board and SH have equal power to adopt. The fact that such power has been so conferred upon the directors ... the power to adopt. interpretation changes to include general procedures to nominate and elect Analysis: newer conflicting SEC interpretation doesn't merit deference b/c SEC hasn't provided any reasons for its changed position -SEC has discretion to alter its interpretations of its own regulations. (b) one of more SH-nominated candidates wins a seat.. any corporation may. so even if there are good reasons for excluding proposals.. the conduct of its affairs. amend or repeal bylaws upon the directors. subject to law and fiduciary duties -CA claims allowed to exclude proposal under Rule 14a-8(i)(1) and (2) Rule: -Rule 14a-8(i)(1): may exclude proposal from proxy statement if "not a proper subject for action by the SH's under the laws of the jurisdiction of the company's organization" -Rule 14a-8(i)(2): may exclude proposal if it "would cause the company to violate any state law to which it is subject" -§109(a): "After a corporation has received any payment for any of its stock. v. provided. Inc. in its certificate of incorporation." [§109(b): "bylaws may contain any provision. 2008) Facts: CA's SH AFSCME sues CA to include proposed bylaw amendment in proxy materials for 2008 annual meeting providing reimbursement of reasonable expenses to nominate director candidates if (a) fewer than 50% of seats are contested. of any power. it's not the court's role to do so and it can only follow the regulations -SEC proposes new Rule 14a-11 in 2003 that would in some situations allow SH's to put their nominees on the company's proxy statement and ballot -but never acted on the proposal -SH activists like AFSCME try to adopt bylaws allowing SH's to nominate directors and to elect by majority vote rather than the traditional plurality -in Nov.

§242(b)(1).e.e.-but §141(a): "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors. SH group nominating directors to misappropriate strategic information for a competitor . QVC Network. v. Inc. Paramount Communications. funds must similarly be used to reimburse travel costs -requiring expenditure of corporate funds doesn't by itself make a bylaw improper -this bylaw's purpose is to "promote integrity of the election process" by encouraging nomination of non-management board candidates through financial incentive of reimbursement -CA argues that bylaw would violate common law principles -will certainly limit board's ability to exercise fiduciary duties in some situations -i. effectively swallowing up §109(a) -almost all bylaws would change the rules and procedures binding the corp. unanimous board attendance and approval for any action -whether "bylaw is process-related must necessarily be determined in light of its context and purpose" [declines to create bright-line standard of what is or isn't procedural] -Even if bylaw is procedural. -doesn't matter whether this limitation by contract (voluntarily imposed on board) or SH bylaw (involuntarily imposed) -but can limit by amending the certificate of incorporation (but requires board to present to SH's for vote. except as may be otherwise provided in this chapter or in its certificate of incorporation. swallowing up §141(a) -Well-established that bylaws don't affect specific substantive business decisions. HQ's are undeniably procedural. board and SH's -only limit the scope of SH actions to the extent it will "improperly intrude upon the directors' power to manage corporation's business and affairs under §141(a)" -CA argues that bylaw requiring reimbursement goes beyond procedure to impose a substantive requirement to use corp. Inc. bylaws fixing number of seats." -SH's don't have similar statute providing broad management power: SH's can't directly manage w/o specific authorization by statute or certificate of incorporation -therefore SH power to change bylaws limited by the board's management powers of §141(a) -otherwise SH's could effectively run company w/ bylaws. yet corp. requiring meeting for board action. funds -but hypothetical requirement that board meetings must take place in corp. which is unlikely here) Analysis: CA tries to overread §141(a) to make impermissible any bylaw that limits the board's power in any way. it cannot limit the board's exercise of their fiduciary duties -"no shop" provision of a merger agreement invalid b/c requires board to act in a way that limits the exercise of their fiduciary duties. requirements for a quorum. but the procedures by which those decisions are made -i.

-giving board discretion over amount (via determining what is "reasonable") not enough: fiduciary duty may require the board to sometimes deny expenses in full -If SH's really want this bylaw. and to make copies and extracts from: (1) the corporation's stock ledger. to mail solicitations -but would rather get SH list to target larger SH's -b/c it's valuable to insurgents. Anaconda's management objects and tells SH's offer not in corp. and its other books and records. shall. not in corp.. v. a list of its SH's. Crane required to file registration statement w/ SEC detailing offer's material facts . have the right during the usual hours for business to inspect for any proper purpose. so sue under state law to compel -DGCL §220(b): "Any stockholder. doesn't have to do any soliciting for you. but only reimbursed if they win and SH's ratify -"Ordinary business" and "major strategic decisions" are separate grounds for exclusion -if not relating to "ordinary business" can still say "otherwise significantly related" (Lovenheim) Shareholder Inspection Rights -SH's wishing to correct perceived mismanagement can attempt to solicit proxies for their proposals -corp. or (2) seek new legislation from Delaware General Assembly [(3) could enact bylaw w/ the requisite fiduciary out (board allowed to decline carrying out task if it would violate their fiduciary duties) -standard might be BJR. so must solicit yourself -can force corp. use intrinsic fairness analysis instead] -Easier to include proposals if framed as a bylaw amendment -State/federal law tension: -if state law gives SH right to elect directors. but burden could shift to directors attempting to decline action -if court makes preliminary determination of self-interest (b/c reimbursement denied for entrenchment. but federal rules don't impair rights under state law.. Anaconda Co.'s best interests. corp. doesn't matter if federal law doesn't give access to the proxy materials -can spend own money to solicit proxies. their only options are: (1) amending the certificate of incorporation. management tries to resist efforts to obtain SH lists -federal proxy rules don't require handing over list (Rule 14a-7 gives corp. in person or by attorney or other agent. upon written demand under oath stating the purpose thereof. 1976) Facts: Crane offers to exchange up to 100M in debt for up to 5M Anaconda shares. (N. -plus a limited right w/ relation to subsidiary records Crane Co. not just submitting proposals. must include proposal in proxy statement if no Rule 14a-8 exceptions apply -but if seeking to elect directors.Y. option). best interests).

Anaconda refuses again but offers to mail itself -lower court finds Crane's purpose of furthering its tender offer improper to allow SH list release. (Minn. or SH's best interests -manner of communication should be within SH's judgment -Crane's refusal to allow Anaconda to mail b/c too expensive and unproductive is proper -selectively and directly approaching target SH's is much more effective -right to inspect SH list is frequently litigated. State ex rel. and haven't sold SH list in last 5 years [apply NY law b/c: (1) §14 only applies to companies registered under the 34 Act (2) may want things like minutes of meetings] Analysis: SH's should be allowed to inspect SH list to inform them directly of its exchange offer and solicit tender offers unless sought for purposes contrary to corp. buys 100 shares of stock in order to convince company to stop bomb production -submits formal demands for SH ledger and corporate records and Honeywell refuses -plaintiff contends business records necessary for accuracy Rule: -DGCL §220: any SH upon written demand has the right to inspect "for any proper purpose" the stock ledger. and then Crane makes formal written demand to produce stock book for inspection under §1315 and common-law right to inspect corporate records (also claim only motivated by Anaconda business). and management refuses -next month 2. requests Anaconda SH list to distribute prospectus. Inc. Honeywell. SH list. -but SH's necessarily affected whenever they face situation w/ potentially substantial effect on value or well-being -doesn't matter that petitioning SH's are the cause of the potentially substantial effect -right inherent in ownership of share and meant to protect its interest [but is Crane protecting its interest by hurting the interests of other SH's?] -statute should be liberally construed to benefit affected SH or corp. owning no Anaconda stock. 1971) Facts: After plaintiff learns that Honeywell produces Vietnam munitions. appeals court reverses b/c matter was of general interest to all Anaconda SH's Rule: NY §1315 of Business Corporation Law allows any NY resident owning at least 5% of corp. making it Anaconda's largest SH. illustrating its importance.-Crane. Pillsbury .35M shares are tendered to Crane. tender offers are also the primary method of acquiring corporations -Defendants claim convincing SH's to sell their shares doesn't involve the business of the corp. and other books and records -"proper purpose" is "reasonably related to such person's interest as a stockholder" . claiming Anaconda had fiduciary duty to present SH's w/ all info relating to pending tender offer. for at least six months to examine record of SH's -may be refused if no affidavit attached stating inspection desired for "a purpose which is in the interest" of business of the corp.

corporate secrets could be lost -but on the other hand. Ford) -Pillsbury probably too stubborn to advance a business purpose -social cause cases: Dodge v. 1991) Facts: AT&T beneficial owner of 100 shares of NCR stock. Business records: perhaps stronger grounds for demanding SH lists than business records b/c SH lists are probably more easily available and contain less sensitive business information -inspecting business records: bigger potential for abuse.-for stock ledger or SH list. Ford. to establish improper purpose -Where "stockholding is only colorable. burden of proof is on corp. Smith. or solely for the purpose of maintaining proceedings of this kind.P. board rejects tender . begins tender offer for all of the stock and NCR mails offer to all SH's under Rule 14d-5. Pillsbury -moral: frame social cause in economic terms to establish a business purpose SH lists vs. worse if falls into wrong hands. Lovenheim. is run right -Poison pills: typically provide that upon some trigger event. SH's wanting to check company's books want to see corp. A.frequently a SH attempting to cross some ownership threshold (often 20%) by buying more stockother SH's can buy more shares at a steep discount to (1) dilute shares and (2) discourage tender offer by lowering share value -makes poison pills so unattractive that they have to redeem the pill first -in tender offers usually made directly to the SH's -collective action problem of people wanting to get out just to avoid being screwed on the back end -poison pills put directors back in the driver's seat -theory is that SH's get a better deal by forcing takeover firms go through the directors -must be careful ex ante how to design and ex post over fiduciary duties b/c potential for self-interest and entrenchment -well-designed poison pills could prevent anyone from ever taking over management -usually put in the charter Sadler v NCR Corporation (2d Cir." the person isn't really a "person interested" entitled to inspection rights [-can't just buy stock for the voting rights and management access w/o the economic portion] Analysis: "Proper purpose" must concern investment return -Inspection involves concerned owners checking on what is partly their property -but for larger companies this inspection right can turn into a weapon -allowing all the SH's to comb through records would hamper not only recordkeeping but the carrying on of the business -Plaintiff only interested in owning stock to challenge Vietnam policy. not for any economic benefit from dividends or price appreciation -plaintiff must show at least some effect of his cause on long-term wellbeing or share value -Claiming broad social purpose can force inclusion in proxy materials but can also stop getting SH list -maybe Pillsbury would have turned out differently had he claimed more economic substance instead of pure social issues (like Dodge v.

(Del. while a NOBO list can take 10 days and "plays no central role in a proxy contest. possession or also those readily capable of being compiled -liberal construing -but some cases hold NOBO lists are different than CEDE lists in that CEDE lists can be easily generated by computer." §1315(a) -Given liberal construing in favor of SH. NY law amended to provide that "corp." Bohrer v. shall not be required to obtain information about beneficial owners not in its possession. as long as there is a legitimate argument that it is closer to a tender offer or something having an effect on stock price instead of a mass marketing campaign or bleeding heart social cause (Pillsbury) Common Stock as a Bundle of Rights -Economic rights -receive dividends when and as declared by the board -residual claim on assets in liquidation -Voting rights -elect directors -approve some extraordinary matters -Classes of stock give different mixes of economic and voting rights . Gillette Co. alleging improper purpose and §1315 interferes w/ interstate commerce Rule: NY §1315 of Business Corporation Law allows any NY resident owning at least 5% in record for at least six months to examine record of SH's -may be refused if no affidavit attached stating inspection desired for "a purpose which is in the interest" of business of the corp. NOBO lists are still "relatively simple mechanical" tasks -functions are also similar. would take a substantial interference w/ interstate commerce to invalidate right to SH list -After Sadler.'s duty to show improper purpose or bad faith -Despite NOBO/CEDE list differences.) -Access to SH lists is a recognized exception to the internal affairs doctrine (internal affairs governed by incorporation state. -"facilitate communication among SH's on issues respecting corporate affairs" to "place SH's on an equal footing w/ management in obtaining access to SH's. and haven't sold SH list in last 5 years -statute should be liberally construed in favor of the SH. AT&T responds by soliciting SH's to replace directors -AT&T requests NOBO (non-objecting beneficial owner) and CEDE (street name put in custody of depository firm) lists -NCR board refuses. facilitating direct communication w/ SH's -take broader view of §1315 than Delaware. International Banknote -doesn't specify whether §1315 applies to NOBO lists in corp.an agreement AT&T makes to act as Sadler's "agent" doesn't prevent right to invoke §1315 -corp. so has all the access it needs -Given established SH list exception to internal affairs doctrine. external affairs governed by place of business state) Analysis: Liberal construing in favor of SH." RB Associates v.offer and decline to redeem poison pill. at least w/ respect to NOBO lists -NCR already has votes of those NOBO's who decline to vote b/c of lack of solicitation. Crane Co.

but Class B shares don't get dividends or liquidation -in 6/1968. 88k Class A shares sold to promoters for $3. liquidation) can be limited or even removed -Right to vote must only be proportionate to shares owned. not total investment -classes often w/ different shares and dollar investment per vote. and want to protect/enhance job . 1971) Facts: Blackhawk's articles of incorporation authorize 3M Class A shares w/ $1 par value and 500k Class B shares w/o par value. 1.-but having too disparate voting rights may create adverse incentives for those holding a lot of voting rights and little economic rights to use their voting rights to benefit them in a private manner while damaging the corp. so Class B represented 29% of voting shares Rule: -Ill. or -distribution of assets -only restriction over these rights imposed by law is that voting rights can't be limited but the economic rights (dividends. and divided -"proprietary" means a property right. entrenchment and self-dealing) -"power without having to pay for it" could be bad: w/o getting economic benefits SH's won't care if their actions hurt the corp. -but also can be used in ways that benefit the company -giving votes can attract talented managers by providing an assurance that the company won't be mismanaged -might also be used for start-up companies that don't have a lot of cash -some people see the good in allowing SH's who just want a voice and no money Stroh v.40 and 500k Class B shares sold for 1/4 cent each -500k Class A shares registered for sale at $4. this case just on the high end -No evidence of fraud or overreaching or public policy concerns. Blackhawk Holding Corp. so must represent some economic interest or interest in the property or assets of corp. -proprietary rights conferred by virtue of ownership of a thing must consist of participation in: -control of the corporation. (Ill. removing these while leaving only voting rights is not "stock" in the usual sense -May want control b/c expect to be employed by corp. no Class B shares offered b/c already all sold -each Class A and B shares gets one vote. or -surplus or profits.24M Class A shares outstanding.'s constitution guaranteed SH's right to vote based on number of shares owned: nonvoting shares prohibited -shares can be divided into classes w/ if special rights stated in articles of incorporation. and articles can't limit any class' voting power -may issue shares having preference over other classes over dividends or liquidation proceeds -"Shares" means units into which proprietary interests in a corp.e.'s economic well-being (i. which would be other matters Dissent: thinks economic rights are the primary rights of stock ownership.

only reasonable to buy voting shares if SH can get enough votes to make a difference -if favorable tender bid predicted. w/ cumulative voting in that SH's can't cumulate all their votes into one seat -Cumulative voting: mechanism by which minority gets to elect some directors -directors are elected all at once -each SH gets number of votes= # of board vacancies * # of shares owned -may cast all votes for one (or more) member of the BOD -someone w/ less than 50% can still be guaranteed board seat -formula for number of shares necessary to elected desired number of directors: -(# of directors desired)*(# of shares outstanding)/(# of directors being elected + 1)+1 Courts concerned that SH agreements will inhibit board's ability to discharge its fiduciary duties -minority preemptive rights -triggering events -employment usually considered part of the bundle of rights in the investment.. "may limit or deny voting rights or may provide special voting rights as to any class or classes or series of shares" [-Midstream recapitalizations can be coercive -if only some SH's take advantage of offer to buy additional shares at discount. women vote together to elect 5 directors when individually would only have enough to elect 2 each -get into fight before 1946 meeting so unable to decide on fifth director to elect . their wealth increases at the expense of the nonparticipating SH's -if given choice b/t buying normal shares or noneconomic voting shares. Ch. whose arbitrating shall be binding -John revitalizes corp. should disfavor voting shares b/c they would allow management to help entrench themselves. 1947) Facts: Ringling family owns all 1000 shares in corp.-Barnum & Bailey Combined Shows v. along w/ control -liquidity -mandatory minimum board seat. giving bank one seat on board and John gets three and Haley-Edith get three -Haley and Edith want to control board so come up w/ voting agreement -at first 3 SH meetings to elect 7 directors. 315 each by Edith Ringling and Aubrey Haley and 370 by John Ringling. cumulative voting -buy-sell agreements Control in Closely Held Corporations Ringling Bros. women contract to vote together and resolve disputes by arbitration through Karl Loos.-After Blackhawk. w/ 100M secured by voting trust. revises constitution to state corp. preventing SH's getting more value from tender] -Straight voting: mechanism favoring larger SH's -directors elected one at a time -for each board seat election each SH gets one vote for each share owned -majority SH can elect every director -diff. Ill. Ringling (Del.

or upon judicial mandate if the parties require it McQuade v. Mrs. Haley's husband just votes for his two candidates -Vice Chancellor rules agreement a valid "stock pooling agreement" and arbitrator's disobeyed directions made willing party an implied agent holding irrevocable proxy for recalcitrant party Rule: Delaware law established that one cannot irrevocably separate voting power from ownership. funds McQuade is fired as treasurer and director Rule: SH's can't by agreement control directors' exercise of judgment to elect officers and fix salaries -directors cannot abrogate their independent judgment by agreements as SH's -no agreement may "contravene any express charter or statutory provision or contemplate any fraud. Curtis -directors can't "remain passive or mechanical to the will and word" of the agreement . 1934) Facts: Majority owner of NY Nationals Stoneham owns 1166 shares.-Haley sends husband to vote and Mrs. four other directors on 7-member board controlled by Stoneham -the three agree to use best efforts to continue the three as directors and officers at fixed salaries as long as they keep owning stock -after challenging Stoneham's use of corp. Ringling desires. only to each other -therefore arbitrator couldn't enforce agreement himself. Haley's votes should not be counted -election shouldn't be invalid. Ringling wants adjournment to decide fifth director and Loos supports it but Haley's husband votes against it along w/ John. McGraw and McQuade own 70 shares each." Manson v. oppression or wrong against other SH's or other illegal object. only Haley's votes ignored -John and Ringling get three directors each they voted for -have no idea what to do about seventh director so leave blank for next SH meeting to fill. but this was not bargained for -not improper to protect a legal voting agreement w/ reasonable provisions to ensure concerted action -Various other transfers of voting rights besides voting trusts have been upheld by courts -how someone votes or for what motivations doesn't matter as long as no duty to SH's violated -If Mrs. vesting in the trustee the right to vote -Chancery Court may reject votes of registered SH where voting is in violation of another person's rights Analysis: Arbitrator only necessary as a means to force joint action -Loos had no personal interest here and the women weren't bound to him. Stoneham (NY. only by one of the women -would be more convenient if they had bargained to create powers to vote for one another. chairman still declares adjournment but continues w/ the vote -instead of voting w/ Ringling for fifth director as directed by Loos. can also transfer stock to a "Voting Trustee" for ten years. except by an agreement complying w/ §18 -§18: pledgor of stock can vote unless pledgee is empowered to vote thereon.

but they inevitably will be subject to some amount of sway from majority SH's -absolute control obviously isn't good (entrenchment). but not to McQuade as employee -SH's can combine to elect directors.'s making medicine. but shouldn't strike down agreements that don't harm anybody -McQuade's broad statements limited to that case's facts -damage suffered or threatened is the better test .Analysis: Directors owed corp.'s do this anyway so don't want to make waves -directors can't disregard best interests of corp.Y. GCL §27 -McQuade might suggest that any slight variation from this doctrine is invalid -would be a simple test. as a city magistrate.Y. Dodge (N. only to extent of election and pay of certain officers -the purpose was legitimate and didn't contravene any express charter or statute Clark v. which are valid -employee agreements are also common in close corp. shall be managed by its board of directors.'s as way to guarantee investment return -but SH's can't control directors' judgment to elect officers and fix salaries -SH's duties not towards McQuade individually. and SH's a duty as trustee. should be allowed to take advantage of their rights to fullest extent -majority SH's often unite through voting trusts. both Clark and Dodge serve as directors and officers in the corp. but only to the corp. -not required to treat McQuade fairly if counter to public policy of directors managing the hiring -Other grounds for the defendants: McQuade. and minority SH's. policy is efficient -Directors here weren't restricted in their powers. 1936) Facts: Clark owns 25% and Dodge 75% of two corp.'s but only Clark plays active role in the businesses and Dodge controls the other directors -Dodge agrees that Dodge vote his shares for Clark to continue in management and control and receive 1/4 of net income as long as he stays "faithful. efficient and competent" to manage the corp. was prohibited by law from engaging in other businesses or professions Dissent: SH's together owning majority of stock should be allowed to do anything a single majority owner can do -single majority owners effectively have advantage over group owners b/c they don't require an agreement to make sure all their stock is voted the same way -should treat these two situations equally by recognizing this control agreement -court is ignoring reality that directors are already under majority SH control: stopping explicit control agreements won't prevent implicit control agreements -many close corp. but some level of continuity in corp." N.. and in exchange Clark gives secret formula for the medicine to Dodge's son -Dodge fails to vote to keep Clark as director and manager Issue: Is the contract illegal against public policy? Rule: "The business of a corp.

duty to mitigate) -parties (mergers.. and (2) before provision adopted. but articles may modify this duty -Issues present in employment contracts: -duration -number of year. guarantee by majority SH) -"Pooling" agreements like in McQuade and Clark v. etc.. not SH's. then what? -termination for cause (by whom? what is cause?) -effect of illness. no SH's are left out of the agreement and there would be no disagreeing SH to challenge it in court anyway -therefore nothing wrong w/ enforcing these agreements Analysis: No attempt to sterilize board as in McQuade. stock options. Galler v. which is important aspect of managing -b/c directors. some by statute -SH's already have power to elect directors. not as SH's -directors can't agree to unduly restrict their independent judgment -but modern view is that these agreements are enforceable for close corp.g. or other governing body -§141(a): directors manage the corp. etc. all shares sold only to those w/ notice -in Del. -compensation -salary -adjustments (e. inflation) -bonuses. vacation -outside activities -competition and trade secrets -consequences of termination (liquidated damages. board. incapacity. pooling just allows them to combine it -more difficulty w/ agreements to elect officers -SH's taking away from board hiring authority. §142(b) says officers chosen according to by-laws.. -benefits -travel and other expenses -perquisites -duties and status -job description -other duties -amount of time. these agreements actually made among the group as directors. as long as signed by all SH's. Dodge are commonplace -agreements to elect themselves or others as directors are generally upheld. and all contract terms were legal and not harmful -any invasion on board's powers are negligible -no harm to anybody -§620 now allows agreements to restrict board's management powers if (1) all incorporators or holders of record authorize it.-where directors are the sole SH's. control hiring. Galler -Voting trusts .

Landau .) -infinite variety available -additional flexibility by option of LLP's and LLLP's -Involuntary dissolution by court order can operate as a bail-out for SH's who failed to negotiate effective control or buy-sell agreements Wilkes v. Inc. -"SH's in close corp. corp." Cardullo v. then not reelected as director -no indication that removal of Wilkes was for misconduct or neglect of duties. these trusts involve election of directors. to elect close corp. agreed that all parties would be directors and actively manage and would receive equal compensation as long as they helped operate the business -job duties split up and the four begin receiving regular payments from the corp. who is elected a director but no other office -Quinn buys up portion of the other three's interests. (Mass. not officers -any employment agreement must be made as an ancillary agreement ` -generally must be made public -States generally allow corp. who votes all the shares in accordance w/ trust-establishing document -often used in groups that must memorialize their understanding b/c of distrust -as SH's don't normally hire employees. veil -but close corp. must not have more than 30 SH's. but Wilkes' hard bargaining to force Quinn to pay higher price antagonizes Wilkes from the group -Wilkes gives notice to others that he intends to sell for appraisal value -at next directors' meeting Wilkes removed as salaried officer. and buy-sell agreements should be enough if they are drafted carefully enough -LLC's can confer control through the "regulations" or "operating agreement" or other name to the members (like partnership) or to managers (like corp. owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. -one investor Pipkin sells interest to Connor. Springside Nursing Home.-SH's turn shares over to a trustee." Donahue -standard of duty b/t partners is of "utmost good faith and loyalty. Rodd Electrotype Co. §342(1) -§351: articles may provide that SH's manage the business instead of the board -close corp." Donahue v. status -in Del. formalities to avoid piercing of the corp. forming a corp.'s must discharge their management and SH responsibilities in conformity w/ this strict good faith standard. 1976) Facts: Wilkes acquires option to buy former hospital building and shares w/ three others. but he was removed b/c of personal tension Rule: "Stockholders in the corp. status isn't necessary to protect interest: adaptations to the articles and bylaws and ancillary agreements like voting agreements. to avoid the personal liability of partnerships -at the time of incorporation. employment agreements. doesn't require as many corp..

need to contract for it -fuzzy middle ground b/t corporate and employment law (w/ some contract law thrown in) -employment agreement is major reason a minority SH contributes capital -hard to raise capital w/o this guarantee -Wilkes could also have been decided on implied contract grounds. earnings primarily distributed through salaries. interested director transactions (fiduciary duties of directors). no legitimate business purpose based on personal tension [personal aspect which affects business. forcing participants in close corp. real duty of loyalty analysis is different -intermediate-level fiduciary duty: not as strict as BJR. action -controlling group in corp. so basically forcing them to sell for less than fair value -One way of freezing out minority SH's is depriving them of corp. presents opportunities for majority SH's to freeze-out minority SH's -no ready market for close corp. and retirement -denying employment to minority SH's "especially pernicious" b/c loses most of the return on his investment -Must balance asserted business purpose w/ less harmful alternatives -easy to apply Donahue's good faith standard to these cases -but not tempering w/ majority's right to "selfish ownership" would limit legitimate corp. decisions -implies there is a zone within which controlling SH's or directors can personally benefit at the minority's expense -employment guarantee often a basic reason for minority investors to contribute capital -close corp. must have discretion to establish the business policy -there is a zone that majority SH's can be selfish. but also not identical to partnership duty -could be viewed as just a default rule. but must balance against fiduciary duty -Here. by itself. employment -this technique successful b/c courts reluctant to interfere w/ internal corp. who don't usually think about contingencies to contract carefully or else have a default fiduciary duty imposed on them .Analysis: Close corp. SH fiduciary duties (Sinven) -casebook authors don't like opinion b/c effect on informational form and good lawyering -lawyers should have drafted a buy-sell agreement and an employment contract -Wilkes court says balancing of legitimate business purpose w/ less harmful alternatives is a loyalty test -but seems like watered-down version. bonuses. shares. probably not "legitimate business purpose"] -duty of utmost good faith and loyalty required acknowledging the SH's understanding courts don't care about creditors until in the zone of insolvency -if creditors want protection.

is more protective and Del. buyout provisions. and other voting agreements) -Mass. Blackwell goes opposite direction -investors in close corp.'s have more protection b/c of ability to bargain (articles. articles and bylaws contain 80% provision giving each SH a veto for any corporate action. has incentive to characterize as salary -contrast w/ public corp. Atlantic Properties. not always easy to realize this increase in value -if organized as partnership. would have been a lawful exercise of his rights as a SH [SH's. Wolfson antagonizes rest of the group by refusing to vote for any dividends. but a substantial choice: stricter standards and less flexibility (partnerships).-some people say law shouldn't just offer a choice. Inc. dividends not being paid should add to the share value. -Smith v. especially minority SH's. so SH's in close corp. Wolfson and three partners split 350k investment in realty. claims withholding of dividends for property improvements but lower court finds no plan by Wolfson to actually follow through w/ these renovations [80% b/c some courts hostile to more facially-obvious unanimity provision] Issue: To what extent can SH exercise his veto power w/o violating his fiduciary duty? Rule: Close corporations similar to partnerships. typically don't owe fiduciary duties unless in special or egregious cases] -in Del.'s. corp. and not any power to control positive acts. is more dangerous than general SH's: power to destroy w/ no power to create . expediency. bylaws. voting trusts. less protective of minority investors in close corp.'s owe one another "substantially the same fiduciary duty" -SH's must act w/ "utmost good faith and loyalty" and not "avarice. but other courts have come out differently -b/c salaries and deductible and dividends aren't. either by allowing some dividends or giving business reason for refusing. but since there isn't a public market to sell shares.: -don't care if dividends being paid or not b/c you can just sell -for close corp. or self-interest" -Donahue case recognizes that sometimes provisions in articles or bylaws can turn minority SH's into ad hoc controlling SH's. Nixon v. had been warned many times that it was adverse to the business yet continued refusing -ignored risks in a way that was "inconsistent w/ any reasonable interpretation of 'utmost good faith and loyalty'" -had Wolfson been reasonable. Atlantic's version of SH's w/ only controlling negative rights. (Mass. or less strict standards and more flexibility (close corp.. reversing the usual roles Analysis: Wolfson was unreasonable in refusing to vote for dividends. 1981) Facts: Dr. resulting in multiple IRS §531 penalties for unreasonable accumulation of corporate earnings.) -cutting of job duties along w/ no paying of dividends deprived Wilkes of any return on his investment -Wilkes views this as most important factor. employment agreements. Wilkes would have to be bought out and couldn't have been frozen-out Smith v.

's purchasing their own stock must disclose to sellers all material information.'s Nixon would find this a reason why close corp. Inc. notices Duff's merger announcement. (7th Cir. Chiarella -in fact. so not used as grounds for decision] -Duff board was in merger negotiations while Jordan was searching for a new job to move away from his mother -Jordan notifies Duff that he will resign but waits until end of year to receive extra book value -before cashing check. merger increased book value from 23k to 452k -Duff refuses to take back the check and return the check -later merger is abandoned b/c of regulatory restrictions and later management buys w/ LBO Rule: Arms-length transactions don't require disclosure of material information. not just Wolfson. later allows Jordan to purchase about 1% of shares outstanding at book value -agreement required Jordan to sell back stock at book value upon death or termination -Jordan later learns of resolution which allows fired employee to keep stock for five years [probably invalid resolution. was voting in their own self-interest. Duff and Phelps. so maybe reasonable to divorce the stock value from any employment decisions -but unlikely that firms and employees would prefer to keep stock and job separate -stock designed to increase employee loyalty by increasing the compensation package -so Jordan-Duff employment relationship probably didn't contemplate a noduty clause -Duff didn't force Jordan out. minority investors don't merit protection -Ramseyer disagrees w/ case: -normally don't impose fiduciary duties on SH's. SEC. so all parties were therefore equally responsible and expense should have been imposed on the corp. as a whole -Klein thinks Wolfson lost b/c he looked like a bad and stubborn person Jordan v. Michaels v. funds: could also have reinvested in the corp. but instead allowed him to stay long enough to get extra book value -merger talks were material b/c Jordan might not have moved anyway . material information is developed by investment firms for the purpose of trading on it -but close corp.-Del. Dirks v. but here a special case where they look like controlling SH's -dividends weren't the only way to use the corp. -all parties. Michaels -"special facts" doctrine based on principle that insiders in closely held firms can't buy from outsiders w/o informing them of new events substantially affecting stock value Analysis: -Don't want people staying just for the stock appreciation. 1987) Facts: credit rating agency Duff & Phelps hires Jordan as securities analyst.

but some couples would put up w/ mother-in-law for financial gain -submitting of a bid could imply that others would follow Posner Dissent: agreement didn't confer any job rights and agreement didn't create any duty to disclose -information is a valuable commodity. he would have stayed on throughout the failed mergers until the successful LBO? -difficult. protected by employer's self-interest in preserving business reputation -good will is one of corp. further inquiry is required -Employment at will and shareholder agreement left "nothing to the judicial imagination" -contrary to majority. and its value is decreased if forced to share it -Fiduciary relationship alone doesn't require disclosure of material information to SH's. Posner thinks opportunistic firing would be permissible -no requirement for Duff to retain Jordan as SH made him a "shareholder at will" -"No duty to give SH's information that they have no right to benefit from" -SH agreement effectively an option to Duff. who was terminable at will -but being at-will doesn't really mean for any reason -implied term in every contract is that neither party will try to take opportunistic advantage of the other (purpose of contracts is to discourage opportunistic behavior among contracting parties and to obviate costly self-protective measures) -opportunistic discharge is a breach of contract even if employment is at will -but admittedly hard to prove in less obvious cases (perhaps this is why so prevalent) -Liability is a question for the jury on remand -Damages even though merger fell through -misrepresentation is still material even if later events makes it not so (overstatement is still wrong even if profits miraculously go up) -one bidder willing to pay 50M shows that others would be willing to also -Causation is bigger problem: can Jordan prove that.-Dissent argues no need to disclose b/c it would have been useless to Jordan. upon learning of the merger. which denies Jordan right to profit from information Duff chooses to not disclose -Jordan.'s most important assets that attracts talented employees -Jordan gambled that he would stay long enough to profit from growth -parties can protect their interests well enough through contracting w/o judicial interference -Market constraints against exploiting employee SH's doesn't imply an assumption of contractual duties -unnecessary to impose a legal obligation to not do something that goes against its best interest -employment at will better b/c of the uncertainty and cost of enforcing contractual obligations -Employment at will is voluntary. actually it cut against that conclusion . not contractual. as the majority claims -no contractual provisions that protected Jordan's job. like other employees.

then P transfers to S the consideration used in the merger w/ T in exchange for all S shares -S and T proceed w/ a typical statutory merger (board approval. even if it's a de facto merger -Statutory merger less complicated than asset purchases -less transaction costs in tracking down all parties to contracts w/ the target corp. but not all do: -short-form merger (parent already owns 90% of target) -not considered a fundamental change -target corp. file appropriate paperwork. -only one filing is necessary -But there's a cost -some of the target corp. merger (parent's voting stock not increased >20% and articles unchanged) -might not technically be a merger (asset purchase) -After board approval (and SH approval if required).'s assets and liabilities are undesirable. but parent must take them -SH approval is required -SH's also get appraisal rights. file paperwork) -T distributes consideration to its SH's and dissolves . and target corp. -small-scale. doesn't give dissenter's rights for asset purchases. which might be a cash drain -could be offset by selling stock to other investors -but high transaction costs in registering these issuances -appraisal value might also be higher than proceeds from new issuances -Triangular merger: -P creates subsidiary S. SH vote. to pay the value of shares as judicially determined through appraisal -Del. the at-will part of the relationship should trump -if really a stockholding relationship. or non-dilutive.-Is stockholding contingent on employment or is employment contingent on stockholding? -if really an employment relationship. so has some bargaining power in deciding when to quit and sell his stock -"disclose or abstain" rule applies whenever investor has a fair chance to respond Wilkes-like duty -disclose or abstain rule doesn't apply when SH can't use any of the information he receives -Some mergers require SH approval.'s assets and liabilities are lumped into parent company's books -Appraisal or dissenter's rights -force corp. SH's still have to approve in Del. its fiduciary duty part of the relationship should trump -Posner says 10b-5 irrelevant here b/c in this case its purpose of giving investors a fair chance to respond is absent from Jordan's case: he couldn't negotiate for different price or refuse to sell -but Easterbrook views Jordan as having more of a say in staying employed.

eliminates dissenter's rights for publicly traded corp. not necessarily dissolved (unlike statutory merger) -Tender Offer: -offer to buy shares directly from SH's (often dependent on acquiring certain number of shares) -Most common reasons for avoiding statutory merger: -tax considerations drive much of the different structures -avoiding appraisal rights or SH approval -dissenter's rights vary by states: some only for statutory mergers. even if value doesn't change (or even goes up) -now just a historical relic: modern investors don't really care about the nature of the investment. make transactions more difficult b/c less certain bargaining process -Asset Purchase vs. -P only assumes T's known liabilities -various areas of law (CERCLA. others not even for all statutory mergers -shouldn't be forced into a fundamentally different investment. prior SH approval should limit the degree of unfairness -De facto merger doctrine: -SH asks court to treat transaction as if it were a merger even though structured differently -doctrine of independent legal significance: . liability.-Triangular vs.) determine who assumes contingent liabilities -contingent liabilities. b/c can investors can easily shift their money into the investment they want -but other policy for dissenter's rights: protect investors from unfair transaction -but other mechanisms could substitute: fiduciary duty. but no SH approval for P's SH's (buyer).'s liabilities -Asset Purchase: -boards of P and T must approve -SH approval only by T's SH's (seller).'s expense -meant to protect SH's from losing value in forced transactions -some don't think costs of dissenter's rights are worth the benefits -Del.'s ("market out") -investors can sell their shares more easily -therefore doesn't matter if investment fundamentally changes. Statutory Merger: -asset purchases have more flexibility. etc. but not known liabilities. just the bottom line return -hold-up problem of opportunistic investors seeking payoffs at corp. Del. freedom -P SH's don't get a vote in asset purchases -target corp. others for anything that's effectively a merger. derivative suit -also. Statutory Merger: -triangular better for eliminating P's SH's appraisal rights or SH approval requirement -subsidiary structure better for insulating parent corp. prod. from target corp.

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