Agency I. Forms of Business Organizations: a.

Sole Proprietorship: you are liable for everything on your own: you are responsible for raising capital, if anyone is injured or torts or employees, paying bills, personally liable to creditors i. Agency Law b. General Partnership: more stable than agency; firm- form of business relation that has a temporal dimension, social identity & a separate pool of business assets i. Partnership & Agency Law c. Corporations: most stable i. Corporate & Agency Law II. Business Organization Theory: a. Coase: there are firms b/c of transaction costs; firms come into existence when costs of command & control are less than market transaction costs; firms exist when it is more efficient for a business entity to organize around a command function b. Costs associated with command & control structures (i.e. organization in firms) i. Agency Costs (to the extent that the incentives of the agent differ from the incentives of the principal- Berle & Means believe the market for corporate control in a publicly held corporation will eliminate agency costs 1. Monitoring: costs to ensure agency loyalty & making sure the agent is doing what he is supposed to do 2. Bonding: Costs that agents spend to show owners their reliability; costs of developing mechanisms to make the agent follow the principal’s objectives 3. Residual Loss: costs that are left from differences of interest after monitoring and bonding casts are occurred ii. Agents have less incentive to work as hard for you as you would iii. Resolution: bond their interests to your interests (make them care about the quality of their output) OR oversight III. Section 1 of RS Agency: Agency is a fiduciary relationship that arises from: a. The manifestation of consent by Principal (P) to Agent (A) that A shall act i. On Ps behalf, and ii. Subject to Ps control, and iii. A’s consent so to act b. PAT Triangle: Core of the agency relationship: Agent can bind Principal to a Third party c. Parties cannot disclaim agency by ―formal consent‖ IV. Generally: a. Agency is terminable at will- can be ended at any time by either P or A b. May be able to imply a term V. Jenson Farms v. Cargill: Farmers (T) are suing Cargill (P) on the theory that the local grain operator who failed to pay T is just an agent of P; A was financed by P and they entered into a security agreement where P would loan them money for working capital (Debtor/creditor relationship) a. Focus of inquiry: Level of control- Did P control A? If so liability i. Residual risk bearing: proxy for control; have all the risk of enterprise as opposed to regular lender who only has some risk ii. Need to show they were exerting the wrong kind of control b. Court looked at the following factors and found an agency relationship, holding P liable for contracts made by A acting on Ps behalf: i. Constant recommendations over the phone; right of first refusal on grain; inability to enter into mortgages, purchase stock or pay dividends w/o approval; right of entry onto the premises to do periodic checks and audits; correspondence and criticisms regarding the finances, officers, salaries and inventories; determination that they needed strong paternal guidance; provision of drafts and forms where their name was imprinted; financing all the purchasing of grain & operating expenses; power to discontinue financing the operation; amount of risk incurred by P ii. Typically party bearing the risk is the party in control

1. Risk here: risk of fluctuation of price of grain Agency: Tort Issues I. Vicarious Liability: a master is subject to liability for the torts of his servants committed while acting in the scope of their employment (RS 219-1) a. Employee v. Independent contractor i. A Master-servant relationship exists where the servant has agreed to (1) work on behalf of the master + (2) to be subject to master’s control of the way the job is performed ii. 2 Types of Independent Contractors: not subject to physical control- P cotrols what, not how 1. Agent: one who has agreed to act on behalf of the principal, but not subject to principals control over how the result is accomplished 2. Non-agent: One who operates independently and simply enters into arms length transactions w/others b. P is liable for torts & contracts: if employee (master/servant) done w/in scope of employment i. P is liable for contracts but not torts: If non-employee agent (agent- ind. Contractor) ii. P is NOT liable in agency law: If non agent independent contractor c. P is not liable: if not w/in scope of employee; in agency law (ind. Contractor (nonagent) or nonagent service provider) II. RS 228: conduct of servant is w/in scope of employment, if, but only if, it is actuated at least in part by a purpose to serve the master III. Analysis of Tort liability in Agency Context: a. Is there an agency relationship between P & A? b. Is A P’s servant or independent contractor? IV. Policy: Least cost avoiders wants P to prevent harms in future by internalizing costs V. Gas Station Cases a. Humble Oil: Humble employee negligently injured plaintiff and Humble was sued as P; Humble argued that station was run by an independent contractor so Humble was not liable for the owner or his employee’s negligence i. Inquiry on control: Humble controlled operations of station; owned station itself; products were sold there; operating agreement required station to do anything Humble required ii. Held: Independent contractor who ran the station was Humbles servant so Humble is liable EVEN THOUGH the k repudiated any control over station’s employees b. Sun Oil: Similar to Humble but Sun Oil advised the operation but Barone was not obligated to follow it; B bore the risk of profit/loss i. Held: No right to control; no master/servant relationship, so Sun Oil is not liable for Bs employee’s negligence 1. Does not control daily activities physical control: tells them HOW to do their job, not just WHAT they do c. Humble v. Sun Oil: Important Factors of Control i. Rent: Volume based v. volume-based but max. & min. ii. Utility bills: Humble paid v. ? iii. Reports: As required v. none iv. Hours of operation: Humble Set v. B set v. Subordinates: operator hires in both vi. Appearance: ? v. Sun Oil logos (the type of control Sun is seeking to insure is protecting intellectual propert) vii. Duration of P to Cancel: at will v. 30 day notice viii. Supervision: K requires perform duties as specified (command requirement) v. Sun make recommendations but B is free to ignore VI. Franchise Agreements: Franchiser supplies name, etc. & franchisee enjoys right to profit & runs risk of lossfranchise k does not insulate parties from agency relationship if the K so regulates the activities of the franchise as to vest the franchisor w/control w/in the definition of agency, the relationship exists even if the parties expressly deny it a. Courts construe franchisor liability narrowly- need to show control over the instrumentality that caused the harm

b. Murphy v. Holiday Inn: HI sells logo- licensing relationship off intellectual property—purpose of K was solely standardization i. Facts: P slipped & fell in HI. B owned hotel. HI not liable ii. Control analysis: HI did not have the right to control the methods or detail or doing the work so there was no P-A or M-S relationship. 1. Residual Risk bearer: makes the decisions that control if the business will make more or less money—if not, then you are not the least cost avoider & then no liability 2. No control over the part of the business that generated the injury (daily maintenance) c. Miller v. McDonalds: P buys a burger & bites a stone; K expressly disclaimed agency relationship but that is not enough; P went to the restaurant under the assumption that D owned, controlled & managed it i. Instrumentality that cause the injury: Making a big Mac D controls that (D enforced precise methods & retained power to cancel the K) ii. Right to control test: if the franchise agreement goes beyond setting standards & allocates the right to exercise control over the daily operations of the franchise, there is an agency relationship iii. Apparent Agency (RSA 267): one who represents that another is his servant or other agent & causes a 3rd person justifiably to rely upon the care or skill of such apparent agency is subject to liability to the 3rd person for harm caused by lack of care or skill of the 1 appearing to be an agent as if he were such 1. Problems: has the potential to make every franchisee into servant of franchisor; McDs would open less stores b/c they need the control over them; without the control they will hurt brand image 2. Potential solution: very visible signage so no justifiable reliance- might not be enough- need to allocate costs to injuries that are predictable in the business iv. Issue: Did the putative principal hold the 3rd party out as an agent & did P rely on that holding out? 1. Yes: McDs needs uniformity so public would think they were the owner v. Indemnification clause: says franchisee will pay franchisor for any problems BUT franchisee’s are judgment proof 1. Solution: Contractual means of allocating liability INSURANCE (require franchisee to buy or you buy & charge them) d. Ways to minimize franchisor liability for torts: i. Contractual disclaimer: Make clear that franchisee is IC ii. No holding out as agent: In contract, provide affirmative notice of relationship―independently owned & operated by‖ on everything iii. Indemnification: If vicarious liability, A will pay back P what is paid. 1. So K should say: Franchisee will indemnify franchisor against all claims as a result of them being found as an agent iv. Insurance: Purchase insurance for franchisee VII. Foreseeability Test: test of liability is whether employee’s conduct was foreseeable to the employer (broad) & some kind of general harm relates to employers demands a. Ira Bushey v. US: drydock sank from drunk seaman; no doubt master/servant relationship but the acts of the employee were NOT in the scope of his employment i. Analysis: Court did not care if the actions were motivated by his desire to serve the employer; instead what should the US have foreseen? 1. Foreseeable that sailors coming back and forth from ship would cause damage- arises from specific relationship, not general environment, b/c government insisted they have access to drydock 2. A business cannot disclaim responsibility for accidents which may be said to be characteristic of its activities: a. Risk characteristically attendant upon operation of the ship b. Human nature c. Conduct not so unforeseeable

d. As long as within course of employment ii. RS third rejects foreseeability rule VIII. Intentional Torts- motive/intent of actor can make employer liable; SERIOUS CRIMES are outside the scope or if the use of force is so unexpected a. Manning v. Grimsley: pitcher throws ball at heckler intentionally i. Holding: Where a P seeks to recover damages from an employer resulting from employee’s assault, he must show that the assault was in response to the Ps conduct which was presently interfering w/the employee’s ability to perform his duties successfully. 1. Heckler was interfering w/pitchers ability to pitch the game so team was liability 2. Question is Scope of Employment 3. Pitcher is liable as well IX. Independent Contractors: Contracting party is not liable for negligent acts of IC in the performance of the K unless: a. P retains control (really disguised as M/S relationship) b. P engages an incompetent contractor (ex. No insurance) c. Nuisance per se The activity is very hazardous d. Majestic Realty v. Toti: Demolition of buildings that were not safe enough; was an IC relationship- no control over wrecking ball i. Analysis: this activity is so inherently dangerous activity so the company is liable for the actions of the independent contractor b/c they cannot delegate their liability to another party 1. Holding: Contractor cannot satisfy judgment and so they should have hired someone with insurance Principal’s Liability in Contract I. Rest. 144: a principal is subject to liability upon Ks made by an agent acting w/in his authority if made in proper form and w/the understanding that the principal is a party a. If there is authority P is always liable for the agent II. Types of Authority a. Actual Express Authority: (AEA) P tells A to do x, A does x, so P is liable for consequences to T of x, even if T doesn’t know A is acting for P i. Manifestation of consent from P to A- express delegation of authority is actual authority ii. Not only kind: would slow things down for A; inefficient b. Actual Implied Authority: (AIA): P tells A to do x, but in order to carry out x, A takes other (not explicitly stated) actions (y) in order to do x, so P is bound to T for y this is actual authority (so manifestation of consent) i. Circumstantially proven by what the agent believed- the agent thought he had the authority to do it b/c he thought his authority included that 1. ―P actually intended A to possess authority & includes such powers as are practically necessary to carry out her duties‖ 2. KEY: signal P to A. If it is P to A, then its AEA and AIA. 3. ―actual authority circumstantially proven‖ c. Apparent Authority: (AA): Signal that is received by the 3rd party- think about what the 3rd party heard or believed. An A has authority sufficient to bind the P when the A acts in such a manner that would lead a reasonable prudent person to suppose that the A had the authority he purports to exercise i. KEY: signal received by T 1. T must reasonably believe & rely on the signals- doing so binds P 2. If P authorizes A to make such statements, then P will be liable to T under AA for statements made by A (Ampex) ii. Not actual authority, but holding out- appearances & communications between P & T iii. Agent has the AA to do those things which are usual and proper to the conduct of the business which he is employed to conduct iv. Policy Arguments: 1. Protects T who relies on manifestations of authority that don’t exist but are manifested to her by P





2. Externality: these manifestations create liabilities on Ts and to avoid externality on T, need to make P liable a. P is least cost avoider: can make clear no agency exists d. Inherent Authority: (IA): Actual authority which the P intended the A to possess and includes such powers as are practically necessary to carry out the duties delegated (catchall category) i. Undisclosed Principal: idea is that 3rd party has no reason to believe the A is not authorized to do what he is doing & the P is getting a benefit from the A so they should bear the risk of him acting outside the scope of his authority ii. P is responsible for some acts of A which, while unauthorized, are close to that which the A is authorized to do iii. Where there MAY be IA, there is usually overlap w/other categories (so ct will try to decide case on other categories) iv. Paradigm case: the undisclosed P v. Court looks at As direct & indirect manifestations and determined if T could have reasonably believed that A had the authority to conduct the act in question Mill St. Church v. Hogan: a. Facts: Church asks Bill to paint the building. In past, B has been allowed to hire his brother Sam to help. He needed help so asked S. S broke leg during job. b. Holding: B had Implied Authority to hire S so S was w/in employment of church when he was injured. So S can recover from church because B has AIA to hire him. i. Apparent Authority: Course of prior dealings led S to think B had authority Dweck v. Nasser: anymore? a. Facts: N replaces D and D sues for wrongful termination. Question of authority to settle. b. Implied authority: Set of past dealings between attnys led N’s attny to believe he had the auth. To make the deal c. Courts presumption sets up burden on N to say to T that lawyer does not have authority) i. Concern of where to place burden: 3rd party to confirm or principal to disclose 370 Leasing v. Ampex, p. 23: Salesman accepted K- is it binding? a. Facts: 370 (T) wants damages for Ampex (P) for breach of K to sell computer memories. Joyce (T) at 370 executed the K but Ampex never signed it. Sales rep (A) from Ampex wrote letter confirming K. b. Holding: Sales rep had apparent authority to accept Joyce’s offer on behalf of Ampex (letter can reasonably be interpreted as acceptance). i. No actual implied authority or actual express. 1. Limiting Instructions: Then A does not have ANY type of actual authority a. Here: known in Ampex that only certain people had authority to bind company i. Manifestation of non-consent: P expressly limited people to enter into a K like this ii. Apparent Authority: Only view that matters is Joyce 1. Relevant signals: a. Reasonable for T to assume salesman has authority to bind b. Joyce had asked for A and Ampex could have told her A was not authority but did not c. Nothing in K said A could not sign d. Course of Dealings: A suggested he could act for Ampex 2. Secret limiting instructions: Cannot affect apparent authority b/c not known by Tonly inside Ampex iii. Ampex could have protected itself in K: write in that only certain officers of Ampex had authority to sign on its behalf 1. Better to put burden on Joyce? More effort, Ampex is least cost avoider; Ampex has form K (so can add line for authority) Inherent Agency: a. Watteau v. Fenwick: Humble is Ds manager. Humble had no authority to buy any goods for business except ales and water. This action was brought to recover for cigars and Bovril.

Agent has a duty not to get material benefit from a third party in connection with transactions conducted or actions taken on behalf of the P or through the As use of the Ps position b. Holding: An undisclosed P is liable for acts of an A done on his account if usual or necessary in such transactions. but instead Ds obligation to fully reveal it. Secret Limiting Instructions: He could not have believed he had authority but sellers did not know there was a P so no argument on signals received from P. Acts or omissions by P.i. 1. P sues for spec. which create an appearance of authority in the purported A ii. B/c H did not purport to be acting on Ws behalf. Ratification creates the agency relationship that did no exist at the time of the act i. Agent has a duty to not deal with the P on behalf of an adverse party in relation to a transaction connected with the agency relationship unless there is fair dealing & full disclosure . Secret instructions + undisclosed P 2. b. perf. Affirmation can be express or implied c. H enters into K to sell property but he never told anyone that he was acting as his wife or her agent. a. not purchase. Requires acceptance of the results of the act w/an intent to ratify & with full knowledge of all the material circumstances b. Store said they did not have order and did not know salesman (P did not know A existed. It is not sufficient that AS may have been able to search  ACTUAL KNOWLEDGE is the test. a. VIII. customary course of business? Subjective to ct 1. Holding: It is the duty of the agent. no ratification. least cost avoider IX. Hoddeson v. Koos: Imposter salesman at a furniture store took Ps money & said would deliver furniture. Rationale: T should know who they are contracting with for knowledge if they will be likely to be paid Agency: Fiduciary Duties owed to P by A duty of care. RS 321: Unless otherwise agreed. Ds company is not incorporated. if he wants to avoid personal liability on a K entered into by him on behalf of his P. Curran: Shady fish salesman a. T changed her position in reliance upon the appearance of authority b. agency authority. to disclose that he was acting in a representative capacity & the identity of the P.she thought only rent. T must allege: i. Botticello v. so D cannot be personally liable. a person purporting to make a K with another for a partially disclosed or undisclosed P is a party to the K agent is liable personally c. W would need to ratify otherwise she is not bound by K. Even though W accepted rent. i. To prove agency by estoppel. as to some or all persons. An agent is a fiduciary of her principal: A has FD to act loyally for the Ps benefit in all matters connected with the agency relationship a. so can only succeed on estoppel) i. Ratification: affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. What is normal. But D signed the salmon K with ―inc‖. is given effect as if originally authorized by him (RS 82) a. If it is normal to sell Bovril to pub owners. Atlantic Salmon v. Agency by Estoppel: an agency created by operation of law & established by Ps actions that would reasonably lead a T to conclude that agency exists. Facts: Salmonor and AS are owed money for salmon sold to Ds company. P would have been liable here but they were judgment proof. T reasonably and in good faith acts in reliance on such appearance of authority iii. whereby the act. Not AS duty to seek out the identity of Ds P. i. utmost good faith & loyalty I. either intentional or negligent. Burden is NOT on T: would be more expensive to operate pubs. she did not have FULL knowledge of all material circumstances. they can just sell b/c it is implied in the type of business VII. Stefanovicz: Husband & wife own property as tenants in common. ii. although forbidden by P 1. Store created the risk: had control over sales floor. Holding: you do not automatically create agency relationship by marriage.―should not be required to scrutinize too carefully the mandates of permanent or semi-perm As who do no more than is usually done by As in similar position) ii.

here his employment K prevented him from engaging in this conduct. Hypos: a. P had screened them extensively. Business Opportunity Rule: When a business opportunity arises. not his uniform i. Usurping Business opportunity from Principal (Singer) iii. Sergeant discharged from army before sitting there not an agent but illegal in other ways b. Default rule: parties can choose the rule. Loyalty: RS 388 i. Secret Profits: 1. Facts: Employees only solicited business from clients of former employer. Employees should have invested their own search costs. Ordinary prudent person in same circumstances e. Town & Country: Cleaning company & some employees broke away to start their own company. He had a duty to disclose to GE all the facts & by failing to disclose & receiving secret profits. Harvard gets $ if he is hired solely b/c he is professor there. Someone bought uniform Brits would get money b/c illegal c. ii. From transactions with principal (RS 389) 2. If Harvard professor is hired for expert testimony.could have called old clients and say I’ll do it for less. Military hero goes on leave & gets money from PR money is from something he did. Agents breach FD by acting adversely to the interest of the P by serving or acquiring his own private interests must disclose all facts a. Also.Singer could have bargained with GE before IV. But he did not tell GE he was acting as a broker for other corps. If the P consents. ii. Secret Profit Rule: agent violates his FD is he makes secret profits that take money away from the principal a. ii. Hypos: i. British military did not stop him because it looked like a military truck & Sergeant was seated in passenger seat w/uniform on. Holding: In his FD to GE.this is an advantage that he is not allowed so British can get it 1. Singer is bound to exercise good faith & loyalty to not act adversely to the interests of the co. by serving or acquiring any private interests of his own.want people to invest in the product. a. Grabbing & Leaving (Town & Country) II. Regem: Soldier in Uniform: i. BUT him wearing the uniform as the sole cause of him getting $ and getting dishonestly. 2. he violated his FD. Duty of care: act in good faith as a reasonable person would (RS 379) i. Facts: Singer was a great mechanic for GE. it is not b/c is he a Chicago Bull ii. Reading v. then no breach of duty d. Holding: the mere fact that his service gave him the opportunity for getting $ does not entitle the British to it. Singer: Great mechanic steals customers i. i. Sometimes jobs came in that Singer thought the company could not do. Standard IP concerns. If Mike Jordan opens steakhouse & makes profits b/c of his name. 1) Recap i Set of rules operating under . Facts: Lorry is used to transport illegal materials. Grabbing & Leaving Rule: Violates FD if you steal trade secrets of P.c. Holding. but he gets money is he is an expert III. From use of Position (Reading) ii. So liable for amount of money he made iii. Allocates disclosure burden to A they are allowed to make disclosed profits b. 1. The trade secret was list of Ps customers. so he gave the work to another shop & made money off it. If A must account to P for profits depends on whether the agency afforded him the opportunity to make the profits OR the agents specialness provided him with the opportunity to make money a. General Automotive v. how much did the other place charge. Same if CEO of company and writes book 2.

Intention of parties: i. not just by what the parties title themselves: a. Facts: Chesire was employed as cashier and receptionist. Agreement: Necessary to form a partnership but can be express or implied. PROFITS v. the whole partnership is held laible II. REVENUES is important e. That he is in action on behalf of principal b. Partnership: an association of 2 or more persons to carry on as co-owners of a business for profit (UPA 6-1) a.4: Prima Facie Case of partnership: receiving net profits. Partners are personally liable for the obligations of the partnership (torts. UCC: Receptionist names partner a. Ownership & control of the partnership property & business e. Fenwick v. was not subject to losses (risk).she will not profit or suffer frm the business . can be circumstantially proven b. Rights of the parties on dissolution IV. b. Power of administration & management f.need meeting of the minds to ACT like partners. So residual risk bearing. 1. breaches of FD. not just legal partnership b. Conduct of parties towards 3rd parties g. She requested a raise so her and Fenwick entered into partnership agreement where Fenwick retained control but Chesire would get 20% of the profits ―if business warrants‖ aka discretionary. Partnership in Fact: Actual partnership is formed. All partners are liable as principals iv. Right to share profits c. breach of duty. etc (ii) Restatement Section 160. 383. unless net returns are interest payments. unless they agree otherwise iii. Profit sharing creates presumption of partnership even if they do not intend to be partners b. wages.) (UPA 15) d. and was not held out as a partner. Partnership By Estoppel: Like apparent authority III. Written agreements or statements by parties adjectives to describe the parties & rights and obligations gives to them ii. Agreement was just to provide a method of compensation. 399. All partners share equally in control. Obligation to share losses: focus is whether parties are residual risk bearers d. Ks. A partnership exists in law & determined by the following factors. rent. Agent should reveal (NB: Third party has no obligation to ask) a. Written is not determinative intention controls. Rationale: Essential element for co-ownership was lacking.3: Receiving a share of gross returns (revenues) does not indicate a partnership actual authority. Splitting profit AND know they are splitting it i. Identity of Principal Agent may be liable to Principal (i) Violation of limiting instructions. 7. Four basic facts of partnerships: i. All owners (partners) are also general agents of the partnership ii. UPA 7. i. etc. 400 Principal is liable to third party for agents contracts when there is authority PARTNERSHIP Partnership: Formation I. Two Partnership Theories: a.Agent liable to third party for contract made for principal (i) Agent not liable to third party if Principal is fully disclosed to third party (ii) Agent may be liable on a Contract if Principal is only partially disclosed 1. Chesire had no authority or control. c. All general partners are j& s liable for debts of the business if 1 partner does not something wrong. Holding: No partnership. Can become partners just by acting like partners c.

Creditors can go after each partner for their proportion of obligation ii. Facts: PW-Bahamas had issued audit letter about the bank. Griffith thinks this is a problem: where is the representation coming from? Brochure? Court emphasizes reliance instead Partnership: Fiduciary Duty I. D continue to collect dividends on securities 2. Facts: Gerry leased Salmon a Hotel for 20 yrs. or joint adventurers. pre-signed resignations iv. Profit: mostly to F. Holding: Ds documents show that PW-Bah and PW-US are separately organized so no partnership. Basic Fiduciary Duties: a.5 mil of securities that was to be returned to them through a % of the company’s earnings ii. Control: All F. Ds Control Rights: consult on important matters (unusual for lender). Rights upon dissolution: All F V. Lenders: non-partner lenders have priority as creditors a. Just looking to secure their interests as lenders. not enough to be partnersjust exercising good caution with investment VI. a. They were to bear losses equally. Look to see if D is residual risk bearer: 1. Fiduciary duty: Members of a partnership. A partner cannot. no loans & fixed draw rights by other law firm partners (normal for borrowers). Lenders: (UPA 15) partners are j & personally liable for obligations of partnership v. By Est. RUPA 807a: Partnership creditors get first priority to individual and partnership assets along & individual creditors have first priority to individual assets but second to partnership assets? b. Young v.duty of loyalty) i. He must not compete w/the partnership w/in the scope of the business II. acquire for himself a partnership asset. Ps say they deposited money b/c of that letter. veto on certain investments (unusual). owe a duty of loyalty to each other and must disclose opportunities that arise in order for both to have an equal chance to take advantage of it owe full disclosure a. UPA 40: Loans by PARTNERS to the partnership are subordinated to the loans of creditors other than parties i. Partnership by Estoppel: creates liability to third parties who (justifiably) rely upon representations that partnership exists.instead looks like a franchise iii. Holding: Lenders are not partners. w/o the consent of the other partners. Salmon: (Cardozo. Court looks to totality of relationship: Although excessive control. S was to pay M 40% of profits for the 1st 5 yrs and 50% after that. Partners v. Meinhard v. RUPA 306: partners j&s liable on partnership torts & ks BUT must exhaust business assets before pursuing personal assets c. Jones: i. b/c no evidence the credit was extended on the basis of any representation of a partnership. So partnership creditors get first priority to partnership assets & individual creditors get first priority for individual assets 1. The letterhead of PW-Bahamas just said ―Price Waterhouse. Facts: Ds loan the company $2. S . Collar (min & max) to get 40% of profits for a term until the loan is paid off but option to buy up to get 50% equity interest in firm. such as commissions or purchases on the sale of partnership property b. Salmon entered into agreement w/Meinhard for the RELIANCE. Peyton: Creditors had a lot of control i. ii.‖ Want to recover from PW-US for money that was lost. A partner must account for any profits acquired in a manner injurious to the interest of the partnership.i. inspect books (ok for lender). Ds return on investment: 40% profits. Partnership creditors have second priority to individual assets & individual creditors have 2nd priority to partnership assets (UPA 40h-i) iii. Martin v.. Issue: Do the conditions of the loan turn them into partners? iii. Loss: all F. Also not Part. M was to pay S ½ the money to manage & operate the property. nor may be diverted to his own use a partnership opportunity c. life insurance on main P (ok but excessive).

Holding: S held the lease as a fiduciary for himself & M. there is nothing about intent (no cause provision) & they did not withhold any of his $ or property 1. Other partners ask them if they are leaving and they say no. only had an interest in the partnership. Shaughnessy: Lawyers leave firm & take clients (like Town & Country. but the puntilio of an honor the most sensitive. To be ok: S would have needed to tell M about the lease (or extend as partners). His K says 2/3 to fire. 2. S sued bookkeeper & won. like co-partners. Dissent: this relationship is understood by the assets it has so the partnership is over at the end of the lease III. When lease expired. owe to one another. Putnam husband died and wife decided to get out. Partnership agreements can alter the Fiduciary Duties of partners a. 1.. S entered into a new one w/o M. They then took his files away & voted to fire him with severance. 1. Seems like penalty default rule: Should have bargained for what happened at the end of the lease iv. but they gave him one & he recovered. ii. No right to settlement money. Partnership K: Says you can take cases with you if you pay. EXAM QUESTION: Was that person stealing from S? False. 1. 1. Putnam wants that money. Shoaf bought her ½ interest and assumed all partnership b/c they just told him intent before the 2/3 vote) + Breach of FD (partners just trying to increase $ by firing him) ii. Shoaf: Widow sells interest in gin i.they do not own their interest in each individual asset of the firm a. ―Joint adventurers. A trustee is held to something stricter than the morals of the market place. Contracts alter fiduciary duty: Otherwise it would require a ―for cause‖ requirement. Putnam v. Many forms of conduct permissible in a workday world for those acting at arms length are forbidden to those bound by fiduciary ties. while the enterprise continues. FD of partners to act in good faith: relate to business aspects or property a. sent letters to clients on old firm’s letterhead implying (misleading) they had to move to the new firm. They found out bookkeeper had been embezzling money since Ps husband died. the duty of the finest loyalty. Holding: They would be allowed to talked to clients before disassociating with the firm. L sues for: Breach of K (wrongful expulsion. ABA Rule of contacting clients: need to give a fair chance to compete 2. Holding: They did not breach FD of good faith. 1. Not honesty alone. delaying client list.grabbing & leaving). but also formally dissolved the relationship before resigning. and waiting until the last second to give firm the list of clients they planned on contacting. Rule: Partners own a right to profit & loss of the partnership. Kightlinger & Gray: Alcoholic partner fired i. since this was in the K. is then the standard of behavior.‖ iii.he was stealing from the partnership & partners don’t own anything but partnership interest . ii. but they violated FD by lying. and misleading clients. Firm told them he had no 2nd chance. The basis of the K is that he can be fired in good faith without cause. joint adventurers. Partnership owned the COA. Facts: L was a partner who became an alcoholic.would have sole power to operate the building. Facts: Gin was operated as partnership equally between Cs and Putnams. Note: Partners bargained for this allocation (unlike Meinhart) IV. 1.need to disclose i. Facts: partners decide to leave & start their own firm. Partnership Property I. Undiscovered cause of action is like undiscovered asset owned by the partnership iii. Breached FD by obtainining an unfair advantage over partners iii. Meehan v. so she sold it. no specific interest in undiscovered causes of action. Holding: Ps intent was to convey her interest to S she sold her interest in the profits & losses from the partnership assets & had no remaining right in the source of profit. They had already secured a space. ii. Lawlis v.

What partners own: i. Initial Capital Contribution b. and the act of every partner . Capital Account: i. not stuff 1. Holding: It is unjust to permit recovery of an expense that was incurred individually and not for the benefit of the partnership but for the benefit of 1 partner. F: S & F entered into partnership for a grocery store.D voiced objection . UPA 9(1): every partner is an agent of the partnership for the purpose of its business. Partnership Profits Default rule: Divided evenly by the number of partners (pro-rata) (UPA 1914 18-a. Question: Could P have sold S ½ of the assets of the business? NO. no restriction can be placed on the power to act and Fs actions bind the partnership.b/c 1 partner cannot be a majority & change the status quo. Summers v. Partnership Capital: Running tally of the value of your partnership interest a. UPA 18(e): absent an agreement to the contrary. Dooley: Partner hires a 3rd against the will of the other i. A running balance reflecting each partner’s ownership equity (UPA 1997 401-a) ii. Individual partners own interest in profits & losses. all partners have equal rights in the management and conduct of the business IV. Nabisco Biscuit v. A majority is needed to change the status quo & S cannot be a majority. Allocation of losses decreases capital account iv. UPA 18(b): partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary & proper conduct of his business III. 1. ii. iii. D objected and refused to pay out of partnership funds. b. S told N that he would not be responsible for any additional breach sold to the store. Losses: Follow profit allocation (so pro-rata unless contrary agreement) Partnership: Rights of Partners in Management I. Taking a ―draw‖ (distribution) decreases capital account III. D is not liable b/c S was not acting for the partnership 1. so she cannot convey a share of stuff. Stroud: Partner buys bread. they both retained the right as an agent for the partnership to carry on its business for ordinary matters (usual for grocery store to buy bread) iii. Every partner has authority to act for the partnership II. UPA 1997 s 401-b) a. Allocation of profits increases capital account iii. UPA 18(h): any different arising as to ordinary matters connected w/the partnership business may be decided by a majority of the partners. N is suing S b/c partners are personally liable for the debts of the partnership 2. S hired another. ii. . Third party knows he does not have actual authority iv. Holding: Because there is an even division of partners. Both have actual authority – did not matter that S told N. binds the partnership.No majority votes when only 2 people i. Equipment of the partnership owned by partnership and not individual partners ii. but no act in contravention of any agreement between the partners may be done rightfully w/o the consent of all the partners a. If either could not work. can only convey a proportional interest in the business b. Facts: S & D in a partnership for trash collection. 2 conditions for partnership not being bound to partners acts: 1. . he would pay for a replacement. 18(h): needs majority. Partner can only transfer his personal interest in profits/losses II. and the person with whom he is dealing has knowledge of the fact that he has no authority a.she owns a proportional interest in the revenue & loss generated by the business. you need to bargain or will still get pro rata. unless the partner so acting has in fact no authority to act for the partnership in the particular manner. F later ordered bread. Can contract around it to have different %: Even if you contribute 70%.iv. Partner does not have actual authority 2. How could S revoke Fs authority? Bargain in partnership K b.

so he resigned. & he thought that meant he would still be chairman. but not controllers. ii. sophisticated party ii.need majority to change what is ordinary! c. c. D was behaving badly and was not reasonably practicable to carry on partnership w/him. Under UPA: a. Fid Duty: Claims 1 partner has advantaged himself at the expense of the firm b. P sued for dissolution instead of just dissolving b/c the partnership was for a term. by operation of law. What is ordinary? Grocery store. Office was moved even though Day objected. Termination (30): Partnership ceases entirely at the end of winding up III. Cohen: Bowling alley partners can’t work together i. They said before the merger that no partner would be worse off. (like shareholders) with a few directors having control and constrained by FD (disclosure) d. When a partner willfully commits a breach of the partnership agreement and conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him there can be dissolution. Ways: by act of 1 or more partners. Dissolution (29): Change in partnership relations. but they had disagreements. ASK what is the ordinary partnership activity. Holding: There is not FD to disclose this type of info re: changes in the internal structure of the firm. Facts: Day was a senior partner & DC office was going to merge w/2 other offices. partnership would have to pay iv. iii. then D would have gotten more favorable terms by not having to pay back loan . Trash: hiring help? NO V. How to reconcile Stroud & Summers? i. eg. Dissolution (801): The onset of liquidating of partnership assets & winding up its affairs IV. court order II. Pursuant to an agreement b. FDs are normally concerned w/partners who make secret profits at the expense of the partnership.term was until P paid back out of the profits 1. Summers: partner suing each other for contribution for conduct he knew he did not have the authority for ii. The Right to Dissolve a.did not bargain for it so no right to be the chair + informed. Sidley Austin: Firm chairman replaced in merger a. Dissolution: change in partnership relationship which leads to winding up/liquidation (valuation of assets) a. eg. Partners are owners. It takes a majority to change the status quo iii. Rationale: The firm was run according to the partnership agreement by an Executive Committee & all decisions were made by this committee. Disassociation (601): A partner leaves but the partnership continues. Facts: P & D entered into partnership agreement to operate bowling alley & P loaned business 7k to be repaid out of profits. Breach of K? No. Day was chairman of the office before but not after. ASK: Who is suing? bread. Owen v. who is liable? Under Stroud & 9(1). There was no financial gain for the Ds. i. i. Holding: P made out a cause for dissolution.2. If he did this another way. QUESTION: If Summers employee sued partnership for payment of salary if he did not know that S did not have hiring authority. Stroud: payment to a 3rd party. Day v. The exit of a partner b. They did not have to disclose any changes of firm structure where the concealment does not produce a profit for partners or losses for the firm as a whole. Winding up (37): Orderly liquidation & settlement of partnership affairs c. Under RUPA (not all states have adopted it): a. Partnership agreement CHANGED DEFAULT RULES: too many partners would hurt the businessefficiency mechanism Partnership: Dissolution & Disassociation I.

Prentiss v. Note: Dissolution does not end the partnership. There were delays & café became more expensive than originally thought. repayment of certain amount 2.all partners have rights) BUT b/c it was at-will. Holding: This is a partnership at will so P has the power to dissolve the partnership by express notice to D. Holding: L met his obligations. He made more $ than if they did not bid. Lease was for 30 yrs.right to dissolve at any time (UPA 31-1-b) b. but power to. Lewis: Cafeteria Lease i. D also could have bid. C doesn’t have the right to dissolve b/c he didn’t meet his obligations. Rule: partnership at will may be dissolved by express will of any partner but as a fiduciary. it must be exercised in good faith 1. The other partner is at fault i. but not the right to dissolve. so the implied term is the repayment of the loan V. The partnership continues until ―winding up‖ has completed (the process of shutting down the business post-dissolution) 1. Consequences of Dissolution a. Here: 7k was a loan. unless he fully compensates his co-partner for his share of the prospective business opp 2. Partnership At term: Lasts for the performance of the term a.can fire the other person at your will a. Dissolution is never a problem. Page v. L said he would operate it if C paid the money.partnership at will i. 2. 1. Test for dissolution: a. Collins v. A partner may not dissolve a partnership to gain the benefits of the business for himself. a. No indication that exclusion was done for wrongful purpose of obtaining assets in bad faith but just b/c the partners could not function effectively in the relationship. Dissolution: all partners can agree. L not at fault & expectation for profit. Sheffel: i. at will is default rule c. . Partnership for term: so C had the power. 2 guys exclude the 3rd from meetings b/c they did not get along. and b. Facts: P & D are partners in linen supply business. P wants to terminate the partnership ii. ii.iv. For a few yrs it was unprofitable but then news that airforce is coming so they will start making a profit. Partnership At will: similar to employment. No right to dissolve. 1. Term is concrete: lease. FD argument: (like Salmon. More $ was due that C refused to pay so L did. the dissolution would be wrongful & P would be liable for violation of implied agreement not to exclude D wrongfully from the partnership business opportunity iii. Facts: 3 guys in at will partnership. Holding: 2 guys are allowed to bid on the assets. Tries to argue implied term (until profitable) but that would switch the default rule & make all partnerships as terms & all businesses that never become profitable would be permanent a. GE) If P acted in bad faith & tried to use this info for his own personal gain. Problem when they don’t specify a term but 1 party argues there is an implied term (usually loan document). So C could dissolve but it would be actionable breach VII. Reason: D was not injured by their actions. There is a judicially supervised dissolution sale & 2 guys buy the assets. not private info (airforce) VI. D sued saying he was frozen out of management (UPA 18e. 1. excluding him triggered dissolution. Not like Singer case: This is public. If term is not specified. There are no reasonable expectations of profit. Facts: C & L entered into partnership for operating cafeteria. so C had to put more money in & he sues to get out (judicial dissolution) ii. Page: Linen supply. term comes to an end b. but can have trouble if you use power wrongfully (UPA 31-2) c.

etc. Facts: PS is the owner of Pav-Saver TM & patents for the machine (Dale is inventor). iii. Fix it: court implied this was an add on punitive damages provision a. Limited Partnerships (LPs): hybrid entity that gives benefits of partnership w/limited liability. Words: WHAT?!??!! i. IRS Reg 7701-1 to -3: four factor test to determine if a LLC should be taxed like a corporation was scrapped in favor of new check-a-box regime that allows all unincorporated businesses to choose between taxation as partnership or corporation (2 tier tax structure: first tax. BUT: IRC 7704(a): any enterprise w/publicly traded equity faces 2-tier taxation as C-Corps 1. VIII. so more accurate valuation. limited liability for only certain liabilities c. B/c term is permanent the IP would revert back at end of permanent term? K is ambiguous d. Limited Liability Company (LLCs): Everyone in the company gets limited liability a. They had an agreement w/terms like ―during the term of this agreement‖ & ―patents will be returned to Pav-saver at expiration of agreement. Claims against departing partners: a. 1.terminable only upon mutual approval of the parties. This is an at will partnership: messed up by writing liquidated damages this way? 1. Corporation profits are taxed & when money is given to shareholders it is taxed again . Limited Liability Partnerships (LLPs): Qualified limited liability (law firms.certain partners give control in exchange for limited liability a. Partnership-like taxation for everyone: Flow through taxation profits taxed only once III. Meers physically ousted Dale & became daily manager of business. Limited partners share the profits w/o personal liability for business debts. Exclusive remedy provision IX. real estate holdings. Increase value: Have inside info.‖ Partnership was having trouble & Dale told Meers he wanted out. second tax: when owner gets paid money.may risk losing their LL protection II. The party not wrongfully terminating was allowed to continue & keep the patents. Dissolution of partnership does not effect partners individual liability on partnership debts b. that assets will be allocated according to this agreement b. Liability for only 1 partner who did something wrong to not ruin the others (for specific things like malpractice) b. Dale & Meers formed Pav-Savor Manufacturing C. If anything. for manufacture and sale of PavSaver machines. i. General Partner.. not deception. b. Limit liability w/r/t partnership liabilities arising from negligence. PS unilaterally terminated in breach of K. Holding: The partnership K on it face contemplated a ―permanent‖ partnership. So add this provision as the sole remedy in event of dissolution.2. Invested for oil. malpractice. UPA 38(2): LOOK AT SLIDE e. Advantage comes from info. Pav-Saver v. b. Issue: Should the patents and trademarks been returned to Dale or assigned them a value when determining the value of the partnership assets? c.can’t participate in management beyond voting in major decisions. Meers is sole owner of Vasso. them not bidding would have hurt everyone. Rule: Such a purchase is proper where D was not wrongfully excluded from the previous partnership & where D has not been injured by the purchase of his former partners.personally liable for partnership debts & can bind the partnership in dealings w/third parties c.usually dividend) i. gas. Limited partners are passive investors: do not have control of the business b. Vasso: Inventor loses patent a. Withdrawing partner is still liable for partnership obligations that incurred before departure but no only has control over way business is run Limited Liability you are not personally liable beyond the business I. acctng firms) a. Expire: partnerships don’t expire ii.when business earns the money-profits. They have advantage to outsides who would not bid as high b/c they do not know the true value so they discount it.

Absent contrary agreement. LLC or similar phrases (ULLCA 105) dissolves partnership c. Significant matters require unanimous consent (404c). Diff from default rule of general partnership. CEO or both ii. mere members of the LLC have no duties to the LLC or its members by way of being members (& can bring a derivative suit against managers) b. Designate office & agent for service of process iii. e. Can be structure as board of directors. Agency conflict between managers & owners iii. who worked for D. v. the other contracting party must be put on notice that you are contracting for a LLC (same with agency) i. Duty of care & loyalty ii. File articles of organization in the designated state office (ULLCA 202(a)) i. Pay filing fee & franchise tax b. Withdrawal: member may withdraw & demand payment of his interest upon giving the notice specified in the statute or LLC operating agreement i. Choose & register name: LLC statutes generally require the name of the LLC to include the words ―limited liability company‖. Basic contents in ULLCA 203 ii. merger. Other formation tasks: i. Rationale: D was acting for a partially disclosed principal & thus remains personally liable on the K the principal is liable as well. Facts: Ps contracted w/D to construct a restaurant. Benefits: federal tax advantages 1. Lanham: 1. Waste & Land Inc. dissolution b. Different from pro-rata default rule of partnership b. Usually. What if they looked online and saw LLC? Would get a 3rd party guarantor OR Lanham won’t contract (companies will charge more money) V. Fiduciary Duties of LLCs: Type is dictated by the operating agreement a. Water. each member has equal rights in the management of the LLC (ULLCA 404a1) i. Can pass entity level debt through to members for income tax purposes IV. Profit & Loss sharing: absent contrary agreement. but not the members of the LLC (unless they were agents who didn’t fully disclose) a. Holding: D is personally liable on the K because P did not know they were negotiating with a LLC Notice is necessary for LLC 3. Like corps: interests can be sold 2. admission of new member. profits & losses allocated according to members’ contributions i. Draft operating agreement: the basic K governing the affairs of a LLC and stating the various rights and duties of the members 1. Must be specified in articles of organization c. Management Rights: a. Financial Rights: a. Interests assignable: unless otherwise provided in LLC agreement i. gave Ps his business card but it did not indicate that he worked with an LLC 2. Member-Managed LLCs: like partnership . P liable also: A had authority to act for P LLC is judgment proof c. Manager-managed LLC option is available i.ii. Hold agents liable for Ks for the P: where P is not fully disclosed b. Manager-Managed LLCs (not every member is a manager). Most matters decided by majority vote (404a2) ii. Case similar to: Atlantic salmon (unidentified principal) a. Formation of LLCs: public company i.g. Policy: otherwise would invite fraud b/c the agent of LLC would be allowed to mislead 3rd parties 4. Rule: State statutes providing constructive notice to 3rd parties when an LLC has been incorporated do not extend to agency law to get protections of LLC. Clark.

Nemec v. Breached FD: By not doing the 1 thing that would save the company (letting investors investor) so breach DOC and DOL b. 2. Problem is that convertible debt can be converted to equities. These people negotiate a merger and are interested b/c it will benefit them. Facts: Former execs sold their stock at an alleged undervalued price. 1. The company then merges w/another company and the hares become worth more. Super Majority Provision that needs 75% of board. Facts: P & D sought to form an LLC to get an NHL franchise but they need an arena before deciding. the company sells a business division that would have resulted in a great benefit to retired officers if they remained SH. so award is given to McConnell b/c they would accept it. Blum: 1. Agency conflicts are among owners. Holding: Normally there is a FD not to compete. Rule: Where operating agreement defines & limits scope of Fiduciary Duty. CAN eliminate fiduciary duty ii. Poor drafting: will only be 1 team. Hunt is negotiating but keeps rejecting the deals. McConnell v.1 (NO FD) c. He gets controlling interest in A shares. a. Implied covenant of Good Faith & Fair Dealing. Soon after.‖ i. Hunt Sports Enterprises: NHL team (reminds of Salmon case) 1. Facts: Subsidiary wholly owned by some of the members. May Compete Clause: ―in any other business venture of any nature. Covenant: limited and extraordinary remedy . Fisk Ventures LLC v. Redemption right in the plan so they can buy back the shares at a price reflected. a. including any venture which may be competitive with the business of the company. Retired officers sue.‖ ii. Agreement of management that Class A and B have control over the company but problems how to raise capital and they ran out of cash. etc.they are sophisticated contracting party and show know there might be a change of control. Segal: 1.So tells you FD exists because the K contemplated it c. 7-9 Exculpation Provision: Will not be liable for money damages for breach of FD unless willful break. Kelly: Statute says you cant contract out of implied covenant of good faith & fair dealing e. Delaware LLC Act 18-1101(c): i. Shrader: Corporation i. so he can appoint 2 seats to the board. 7-5 Provision: Managers have to do their jobs b. The board redeems retired officers shares.i. there is no breach analysis by the court i. Retired officers claim: Board of former company breached corp. NO COURT ANALYSIS: clause in K that says no FD except what we put in K iii. Facts: Segal contributed IP to member-managed LLC. They get their shares under EE stock retirement plan. a.All members have a duty of care & loyalty to the LLC c. party must allege: i. Resulting Damage to P iv. Holding: You can rely on your contractual rights. Johnson controls B shares so he appoints 2 seats. BUT look at Section 9. so they bargained for itwhat they want goes beyond implied cov of gf. stock plans implied covenant of good faith & fair dealing in connection w/the redemption of their shares 2. Chancery Split: Fish v. Kelly v.should say ―not related to bringing NHL franchise but can compete for food. Minority claims they are underpaid and they broke Duty by underpaying them a. Breach of that obligation by D iii. A Specific implied K Obligation ii. but here the agreement had a clause that members COULD compete w/the LLC. CANNOT eliminate good faith & fair dealing d.

and the business and affairs of the corporation managed under the direction of its board of directors‖. no secondary market. Management: initiate and execution b.b. remove officers.each have 1 vote i. Officers are agents of the corp default rule that management is appointed by board of directors who are elected by holders of common stock 1. Here. DGCL 141(a) Default DE Rule: ―All corporate powers shall be exercised by or under the authority of. Separate taxpayer iii. Diversifying gets rid of risk d. Policy of gf & fd does not extent to post contractual rebalancing of the economic benefits flowing to contracting parties 3.. Close Corporation: Closely held. NASDAW) ii. conflict between majority & minority SH III. Board of directors: monitoring & approval. looks more like partnerships b. Controlled: majority owner or very large minority SH with effective control of voting rights. Arbitrary: if no one fiction): the corporation is an entity w/separate legal existence from its owners i. So there is a distributive problem. Default: all members of board are elected annually to 1 year terms . delegate authority to subcommittees. Its not acting in bad faith to rely on k provisions that limit advantages to another party c. Veil between investors and corp that liability cant go through: stops at the corp ii.. make business decisions ii. Berle & Means: Produces a condition where the interest of the owner & the ultimate manager may & often do diverge 2. companies benefit does not change if they redeem or do not redeem retirees shares. compensate. Separations of Ownership & Control: i. Limited Liability (MBCA 6. amend bylaws. conflicts between owners & boards of directors ii.‖ i. a shareholder of a corp. Can sue & be sued (otherwise no one will contract with you) b. conflicts/FD between directors & SH i. You want shares to be able to be sold otherwise you won’t buy them iii.. Board of directors liable to SH b/c they elect directors 3. declare & pay dividends. Publicly Held: People can buy shares. Secondary trading markets (NYSE. Some might remain LLCs forever (tax benefits go away when you become corp) II.22(b)): Unless otherwise provided in the articles of incorporation. Lifecycle of a company: LLC or S Corp  C Corp  Acquisition/Backruptcy a. Free Transferability of Shares (as opposed to interests in partnership) i. Basic Attributes of Corporations a. Allows diversification of investments. but not arbitrary b. Similar to DOC analysis The Corporate Form I. Legal Personality (entities w/legal rights. small # of SH actively participating in firm management.organized as a corporation but only a few people own shares of the company.if no LL buying stocks would be too risky c. Dissent: You do not violated cov. Different Types: a. is not personally liable for the acts or debts of the corp. only arbitrary and unreasonable is violation a. Broad power: to appoint.owned by many people & shares are liquid. Enables investors to be passive and management to be risky without threat of liability iii. of GF and FD if you execute a legitimate interest. except. initial offering where selling shares to public for first time. Possesses some constitutional rights ii. Versus diffusely held Company: No one person or group can exert control (no one has more than 51%). initiate and approve extraordinary corp actions.

04) 4. Residual claimants: equal right to participate in distributions of firms earnings & if liquidation. Dividends: no tax is deductible a. outstanding shared. individual directors do not have corp. Want more detailed charter so that there is more control. Preferred stock: equity security where charter gives special right. Share Buyback: Discretionary a. Equity: Shares 1. Rule of Thumb: 1.bylaws cannot go against charter .03.. Corporation as a nexus of contracts????!?!?! 1.less risk b/c legal right to payment of interest and higher claim than SH 1. MBCA 11. Limited right to participate in corp decision making: elect directors. Shareholders entitled to vote on: 1. any other misc. issued shares). misc. can vote iii. purpose (usually ―to engage in any lawful act or activity for which corps may be organized under this title‖. rights of preferred shareholders if anyauthorized shares. communities. Regular repayment of interest (deductible business cost for taxable income) 2. Boards ACT 2.ii. Secured debt b. Debt is more senior & equity is more junior a. Subordinated debt d. Board can amend the charter w/SH approval & vote 1. Shareholders REACT iii. Managers. Includes: Name of company (like LLC). 1 vote per share IV. provisions ii.DGCL 102a3). Ultimate repayment of principal ii. Any amendments to the articles of incorporation & by-laws (MBCS 10. Common Stock: vote to elect directors. address of service of process. Unsecured debt (notes) c. 10. # of common shares. DGCL 154a: Surplus: excess of ―net assets‖ over capital i. DGCL 160a1: share repurchased allowed only to the extent that it would not ―impair‖ the corps capital 4. but between trustees & agents. Hierarchy of Claims on the corporations cash flows: 1. Incorporation Process a. Investor Returns: i. Shareholders: No Ks.03-. not really employees. Shareholders cannot amend iii. Net assets: the amount by which the total assets exceeds total liabilities 3. Election of Directors (MBCS 8. the share equally in firms assets after prior claims satisfied a. authority 2. Etc. such as approval of independent auditors iv. Appreciation (Can sell this) 2. Flexible Capital Structure: The permanent & long term contingent claims on the corps assets & future earnings issues pursuant to formal K instruments called securities 1. less risky thank common stock b/c higher place in liquidation e.20) 3. residiual interest. 3. no authority except as a board. capital structure (classes. bonds e. employees. 99 statute book) i. might get votes. Many ways to package such claims: stocks. Draft Articles of Incorporation (Charter): (p. Debt: Bonds. but shareholders have long term residual interest. Board of Directors: not simply agents. vote major corp decisions no right to periodic payment. DGCL 170a: DE corps can pay dividends out of ―surplus‖ b. payable only when declared by board. so diff relationship so beneficiarity of FD (no K provision) v.all other parties have Ks to protect their rights. Fundamental transactions (mergers. creditors.04) 2.

unjust enrichment. Indemnification. permitting former partners to skirt rules of partnership. Two-Pronged Analysis: Need to meet BOTH? a. Appoint a board 7. Liability for Pre-Incorporation activity of Promoters (?!?!?) i. the promoter remains liable on Ks made for the corp e. so if A does not disclose info concerning her financial interest in a sale to the corp. the corp can become a party to the promoters Ks (but ONLY if it adopts the K) iii. Keep minutes of meetings 4.b. Typical Structure of Bylaws: Stockholder. Injustice: more than creditors inability to collect . Keep separate books 5. or defectively filed. Most headquarters: CA. Issue stock 6. Bylaws fix the operating rules: establish annual meeting date or how meeting date will be fixed d. most do Delaware: lots of precedent & predictable 1. board of directors. Separateness: Separate existence/alter ego/personal control: such a unity of interest and ownership that the separate personalities of the corp & individual (or other corp) no long exist i. scheme to move assets into a liability-free corp while heaping liabilities on an asset-free corp 1.attract corporations by appealing to managers 4. Bylaws are subordinate document: they have to comply w/law & charter (charter does not have to comply w/bylaws). Examples: Failure to: 1. Race to the Top (good): Shareholders prefer to invest in company w/good corporate law so will earn more proceeds in IPO. i. Officers. Hold shareholder meetings 2. Once the articles are filed. or single shareholder corp (not publicly traded) a. Examples: undermining common sense legal rules. then A must give the profit to P ii. Misc. committees. the Promoter (as A) owes a FD to the new corp (as P). Majority of provisions are default provisions & allow you to switch the rule in the charter 2. Where to Incorporate? The laws of the state you incorporate are what governs your business i. More important info goes in charter so shareholders cannot change ii.easier to change 1. If the articles are not filed. Undercapitalization: intentionally undercapitalize the business iii. Race to the bottom (bad): initial managers choose. Under General principles of Agency. Misrepresentation ii. parent corp causing subsidiary to incur liabilities and ensuring its inability to pay. Few mandatory/regulatory rules 3. then NY ii. Piercing the Corporate Veil: Mostly issue in closed corps.good to raise capital Limits of Limited Liability: Piercing the Corporate Veil I. If not where headquartered. Comingling of Funds of Assets. Stock. Meaning: Courts should disregard the corporate form when recognition of it would extend the principle of incorporation beyond its legitimate purposes and would produce injustices or inequitable consequences allows you to reach assets of SH II. Disregard for corporate formalities: Failure to maintain adequate corporate records or comply w/corporate formalities. File w/Secretary of State of Incorporation & Pay Fee c. Hold board meetings 3. Badness: Circumstances must be that adherence to the fiction of separate corporate entities would sanction a fraud (intent to defraud) OR promote Injustice (element of unfairness) (DE doesn’t require 2nd element) corp treating the assets of another as its own ii. Adopt charter or by-laws b.

Piercing the Corp Veil: Family Corporations a. MEC injured implant recipients (tortfeaser) and victims want to pierce thru subsidiary corp to get to BM. to pay creditors.each corp needs to be an ―alter ego‖ of Carlton a. Same officers.if a lot. D is required to have a minimum insurance policy on each cab & he does. Enterprise Liability: In piercing. i. 2. SL sues M and his 5 corporations to get the assets of all companies to satisfy judgment. Possible factors for lack of horizontal separateness: i. Separateness: Number of shares matter. . then how can there be a unity of interests? b.misrepresentation (lies. Ks: Care about Formalities. Undocumented transfers between corps viii. state can change if they want c. Victim is run over by driver.just because it is minimum. Carlton: 1. Facts: Bristol Meyers was parent company for MEC. D is shielded because of limited liability. Centralized accounting iv. Torts: Care about undercapitalization i. Walkovsky v.need to allocate risk) i. PS dissolves & never pays. Corporation is clearly working for the benefit of Carlton. M owned PS & treats assets of businesses as his own bank accounts. Tort v. Corporation would be an ―alter ego‖ of the D. Griffith thinks OK for parents to have some control ii. major supplier of breast implants. where the assets are. single office and same phone line and expense accounts.shuttles personal funds in and out of corp w/o regard to formality and for immediate convenience b. BUT. Cannot pierce the corporate veil to get to Carlton. Facts: K between PS and SL. Holding: Shared control/unity of interest test is met. BM had a lot of control at MEC. Common record keeping iii. there is no injustice a. but may in corporate subsidiaries 1. No Undercapitalization: Liability insurance is anticipating future liability to third parties. Badness: Insufficient i. Services rendered by the employees of 1 corp on behalf of another vii. sneakiness is not enough ii. Publicly traded corps will not be pierced. a. Policy: Should we think about this differently? i. This affects rights of 3rd parties. Payment of wages by 1 corp to another corps employees v. PCV inquiry: whether owner uses control of the corp to further his own rather than the corps business. Pepper Source: 1. Sea Land v. Creditors inability to collect would always pierce veil IV.he is the sole shareholder of all the corps. Contract Piercing: a. shareholders. Facts: D owns Seon Corp. Common employees ii. phone number V. No misrepresentation: no lying here. Injustice: Must be something more besides not allowing creditor to collectless than fraud but need compelling public interest i. so he sues the driver in tort. Lack of Separateness: Sufficient Commingling i.other businesses have creditors 2. you try to get to the owner through the sibling corps a. In re Silicone Breast Implants Products Liability: i. & 9 other corps that own 2 cabs each. Common business name vi. he will be liable for the cops acts upon respondeat superior b. Reverse Pierce: Get from M to his other companies.III.

No Obvious Conflict: P has to be fair & adequately represent interests of SH 3. P &D file consolidated financial statements & tax returns 4. eliminates costs of monitoring other shareholders. So why limited liability w/in parent-sub group? Industries would vanish if unlimited liability w/in group. Benefits do not really apply to outsiders: or to parent subsidiary group 1. S operates undercapitalized 6. shareholder meetings VI. excessive executive compensation 2. Ps attorney gets nothing b/c no benefit iii. separation of ownership & control.focus on misrepresentation (logo on implants & ads). (control. Derivatives Suit: Shareholder brings suit on behalf of the corporation ASK who suffered the alleged harm & who would receive the benefit of any recovery? i.who would get paid as a result of suit indicates if deriv. Standing: 1. Several members of board engaged in insider trading & want them to pay back company. promotes liquidity. 3. Ex. S does not observe basic corp formalities. S receives no business except that given to it by P 8. Costs: leaves losses sometimes. P finances S 5. Needs to be so interwoven that hard to see where 1 entity leaves off and the other begins (why it is so rare) 2. Court allows piercing: Kind of K case. the Ps attorney still recovers a fee from the corp for the benefit conferred 3. Complaint must specify demand or why demand was futile . Injury suffered by corporation first and plaintiff is secondarily injured by being a shareholder 1. BM allowed name on implants to increase confidence in the product & to increase sales.books. P uses S’s property as its own 9. enables diversification. Contemporaneous Ownership: must be a shareholder for the whole duration of the suit (cannot sell shares during the suit) and at the time of the injury (prevents people from buying into the lawsuit) 2. If dismissed. Benefits: Cheaper to shareholder. encourages investment (no one would fund if they would be liable for more than their investment) i.FOLLOW THE MONEY. Daily operations are not kept separate 10. records. Even if action settles w/o payment but w/management changes. 3. Shareholders rights: Vote. Sue: Right to sue & allege the corporation is not doing what they are supposed to b.ii. Someone ripping off company. Factors: whether subsidiary is a mere instrument of parent corp: 1. Recovery: If it goes back to corp & shareholders will enjoy indirectly ii. Holding: Totality of circumstances need to be evaluated to see if subsid is alter ego of parent corp. not nec. fraud). would increase prices (try to cross subsidize other companies).so victims could not negotiate for protection b/c they were misled iii. Ex. hiring bad exec. uncompensated 3rd parties i. P pays the salaries & expenses of S 7. P & S have common directors or officers 2. Creates externalities: solve by having targeted regulation about specific types of risks to make people whole (like cab having insurance) Corporate Accountability Mechanism: Derivative Actions I. would spin off and sell to public where it would be less risky to own b. bad business decision. P&S have common business depts. Render directors accountable to shareholders (but lawyers get paid) 1. predictability. 1. Costs & Benefits of Limited Liability a. Sell. & Sue a. Note: Parent-subsidiary relation alone is NEVER sufficient to hold parent responsible. 2 suits in 1: Against directors for failing to sue on the existing corporate claim & underlying claim of corporation 2.

. Direct Suit: When plaintiff (SH) suffers a personal injury i. Issue: Direct or derivative suit? a.‖ i. Aronson/Levine Demand Futility Test: Plaintiff must: i. P must prove good faith effort to obtain redress from corp a. In DE: if you argue demand futility & lose you can still make the demand f. Agreement a valid exercise of the directors power? 3. Issue: Is the sev. You individually possess it as a right of being a shareholder. Facts: P (shareholder) wants to overturn a reorganization and merger w/FT. Conflict of Interest: majority of the board has a material financial or familial interest ii. so refusal of board cannot be excused for other legal theories in support of the same claim 4.. Claim that D is interfering w/Ps rights & privileges as STOCKHOLDERS 3. he waives his right to contest the independence of the board & the demand will apply for all of Ps stated claims (BJR) i. made by the P to obtain the action he desires from the directors. II. Core Shareholder Right v. P makes demand on board and they denied it.does not arise as a corporate right. Internal Affairs Doctrine: State of incorporation gives its laws to the company incorporated there b. but it is a right of the shareholder. right to elect board) 2. Holdings: a. Eisenberg v. Requirement of Demand on Directors: Prior to filing a derivative suit. it receives protection of BJR unless facts show there is waste or could not be the product of a valid BJ i. Rule: When a P makes a demand.such as domination or control by someone who does have a conflict iii.value of transaction would be paid to shareholders ii. Shareholder thinks price of merger is too low: FOLLOW THE MONEY. The BJR wouldn’t apply: Underlying transaction is not a valid exercise of business judgmentrare. usually self-interest e. Demand Futility Test: 3 situations which demand will be excused: (independence) i. Facts: P claims board breached their fid duty by abdicating their authority. if any. Establish that the directors are interested or dominated. So COA must either state demand has been made OR would be futile b. Demand Requirement: ―allege w/particularity the efforts.someone you hold directly 1. Donald runs the company & had huge severance agreement & P claims that fear of that would limit the board from firing him. or the grounds for not making it. Holding: B/c it is a direct suit. Rights memorialized by the share (such as voting right. Grimes v. P must demand the board brings Ps claim (basically sue itself) derivative actions. If P makes demand made & rejected: they cannot later assert that the demand should have been excused Board is entitled to presumption of business judgment rule UNLESS P can allege facts w/particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption c. Ex.allowed under 141e 1. he does not need to post costs.and hence incapable of passing on a demand. Ex. OR . failure to exercise due care and waste. He claims the plan was to deprive minority stockholders of a vote but corp says it was for tax benefits. Right to vote: DIRECT. NY Law: P would need to post $ to sue if it is a derivative suit i. What could he have done? Make it look like a direct claim d. Directors must retain control over business & affairs of company but they give all control to Donald. No abdication claim: if the independent and informed board makes a decision in good faith. P made demand. 2. i. Direct Claim: no derivative harm to any corporation.c.just penalty in form of severance b. 2. Donald: 1. A Majority of the board is incapable of acting independently for some other reason. Does not take away control. Core Corporate Right ii. Flying Tiger 1.

Substance: Court will apply its own independent BJ in determining whether the motion to dismiss should be granted c. Demand Required: a. Process: Corp. adverse effect on customers ii. action alleging breach of FD. suit for breaches of FD even if corp does not want to (DE) 2.SLC MUST BE INDEPENDENT i.ii. Create a ―reasonable doubt‖ w/particularized facts that the challenged transaction is protected by the business judgment rule (hard to show. Derivative Litigation. Traditional Independence Analysis of SLC: Financial & Economic Control .right to control SH interests lies w/the board 1. indiv. Right to continue deriv. lack of benefit to current directors. Board Sues (good for SH) b. employee moral. waste senior management time. Holding: Not independent. no material injury. If SLC fails this step. Facts: Complaint alleges insider trading (derivative suit.2 professors from Stanford. Facts: Deriv. Ties w/Standard are so substantial that they cause doubt over whether SLC can make an impartial decision. takes suit out of SH hands and into board. INCENTIVE TO NEVER MAKE DEMAND III. 141 c allows board to delegate authority to commitees b. Maldonado: DE Rule forming special litigation committee iii. good faith. Oracle formed SLC to investigate that suggested the suit be dismissed. 2 part test: 1. Derivate Suit: 1. SLC reasons for dismissal: claim appeared w/o merit. SH can bring claim of wrongful dismissal but protected by BJR (unless no business judgment) 2. Reputation. little change of recurrence. Even though only 4 people. Zapata Corp. Demand is excused & 4 yrs into litigation. Time of execs wasted (further harm company_ ii. Demand Chart On SLIDE i. Demand Excused as Futile: P were asking board to literally sue themselves a. has burden (no presumption) of proving independence. decision to dismiss protected by BJR i. bad publicity. Cost of litigation. litigation proceeds 2. Special Litigation Committee: Board may appoint if no demand is made for derivative suit & demand is excused as futile so case is allowed to proceed Committee who has no conflict in challenged transaction to decide whether suit should go forward & court will decide if they should listen to SLC comes at end of year so even insiders could not have known (hockey stick effect).MTD is denied (Note: usually limited where director is accused of wrongdoing) 1.disgorgement of profits) by 4 members of Oracle board. board can dismiss the case. Board dismisses: Shareholder is bound. SLC reasons for dismissal: company would win. the others on the board let it happen (Caremark claim.lacked good faith in board duties) 2. If SLC recommends case be dismissed. In re Oracle Corp.illegal transactions) g. impairment of current directors ability to manage. The SLC didn’t disclose their ties to the company or Stanford. thorough) investigation a. v. cost of litigation relative to chance of success. Demand Futile: proceed ii. Demand req. and a reasonable (objective. Shareholders have independent.looks if there will be detriment to the company and what is in the company’s best interest from the company’s perspective i. board created independent committee w/2 new directors as SLC 1. Even if demand is excused as futile. SLC: Independent investigation. 1. some challenged practices are good for the company. Issue: Whether SLC was independent? Needs to show no material factual question regarding its independence iii.

Limit the number of boards which directors can serve g. Substantial Benefit Rule: Successful P in derivative action can be given attorneys fees against the corp if the corp got substantial benefits from the litigation. Derivative suits can increase corp value: recover compensation for past harms. Require appointment or enhanced duties of a lead independent directors d.or in furtherance of a personal rather than corporate ends (would be NO possible benefit) board of corps have broad discretion to promote the corp and public interest . Ds are public companies ii. prospective Stanford donor. large donor to school & think tank iv. Stewart: procedurally diff from Oracle 1. Goal: Make companies run better (not compensate shareholders). Similar allegations as securities suits iii. Boskin: Stanford professor. deter wrongdoing IV. Lucas: Stanford alum. Requiring a majority or more of the directors to meet existing or enhanced independence requirements b.Personal connections that SLC could not evaluate the accused neutrally (not favorably) a. Corporate Governance Reforms: a. Corporate Benefit Test: corporations can donate corporate funds for a public cause as long as reasonable serve some sort of corporate benefit. Other ppl on board did not trade & make motion to dismiss. even if not financial i.a. New Independence Analysis: Social Nexus. or a particularly close or intimate personal or business affinity (that may exceed closeness) 2. Require that directors attend a certain amount of board. a. Ps lawyers get money 90% of the time b. research funded by Stanford b. Professors: Stanford employees. Facts: Martha engaged in insider trading of another company. Require the board or committees to meet regularly in executive sessions c. Require adoption of 1 or more independent directors to the board e. Brought mainly in federal courts by repeat play law firms (10 firms for 75% of public suit) c. is it not a ―pet charity‖-would be a conflict of interest. governance changes. Traders: i. ―social awkwardness‖ ii. but only when there is a personal financial or family tie. committee and SH meetings h. taught SLC member. SH brought claim against her for breaching duty to the company by getting negative publicity. Derivative Suits Today: a. Clawback provision in the event of a restatement of the companys financial settlements i. Beam v. Usually between 2-5 years NOTE: LOOK AT ALL PROBLEMS_ DID NOT DO YET Corporate Purpose I. Require adoption of policy allowing the retention of board advisors f. Holding: Directors were sufficiently independent in a demand futility case. NO financial conflict of interest: they gave up extra money and only received money as directors b. Romano: Shareholder Ps get money ½ the time. Require adoption of provision allowing major SH to nominate candidates for corps board of directors j. Ellison: Silicon valley titan. even though they are close friends and business relationship w/Martha a.benefits offset the cots i. Ps cite to Oracle: All have interconnected ties b. fellow w/SLC member at think tank iii. Narrows Oracle: Personal connections might be a basis to question. Friendship is not enough to rebut the presumption of independence without more Personal connection needs to call independence into reasonable doubt d. DATA ON SLIDES V. Neither were on board at time of wrongdoing 3.

Detrimental to shareholders: personal interests of board are most important in determining where to donate.a.either let shareholders donate their own money or have government tax more II. Holding: Duty of directors to pay dividends Ford SHOULD have just said he based the decision on a business judgment b/c new plant would have made more $ for SH & they needed to lower prices to defend against competitors a. Yes.philanthropy improves competitive/financial position: growth in donation is positively associated w/future revenue growth for consumer product companies. i. but wanted the profits to be reinvested in the business to build a new plant.protected by BJR a. Duty is ALWAYS TO THE SH 3. (2) who have become duly informed before exercising judgment. Principle Constraint on bad business decisions hostile takeover market c. to the reduction of profits. spread the benefits of the industrial system to the greatest number & that they were making too much profit (so he is looking out for consumers and workers. larger boards donate more iii. Dodge bros. It is a private institution & the corp. not shareholders) b. makes more attractive to potential employees. Threshold Question: Is there a business/corporate purpose? If yes. and does not extend to a change in the end itself. Problem: Dodge just wanted to compete and enter the car market so they didn’t want Ford cars to be lower priced b. (3) who exercise judgment in good faith effort to advance corporate interests . Smith v. benefit is preservation of capitalism (feared communism then) 2. Wasteful if no possible rational justification made indiscriminately ii. Core idea of BJR: Court’s wont 2nd guess good faith decisions made by independent and disinterested directors b. Public policy: encourage corps to give to charities if it does not exceed 1% of surplus 2. Philanthropy Correlated w/Performance? i. i. network. Barlow: Stockholders questioned donation of company to Princeton University. Ford Motor 1. b. Penn Statute PACL 102d (SLIDE) III. larger % of stock CEO has. Corporate Purpose: company is organized for the benefit/profit of stockholders & directors should work towards that end SHAREHOLDER WELFARE MAXIMIZATION  Business decision that does not directly increase $ for SH will be allowed with a business justification. The discretion of directors is to be exercised in the choice of means to attain that end.P. or the nondistribution of profits in order to devote them to other purposes. illegality or a conflict of interest a. No. Common Law: Those who manage a corp. Critique: Forced redistribution problem. people would invest in competitors so market regulates itself d. Dodge v. Facts: Ford did not want to pay divided. If corps give too much. Creates GOOD WILL (court does not analyze) iii. Ford said he wanted to employ more people. Might look like bribery if public official’s org. 3 Justifications for donating to Princeton: 1. tech companies fund education the most ii. and as part of the community it operates (protected by BJR if business purpose) ii. Employee training & skills 3. Holding: Donation is valid b/c not pet charity or personal ends. could not donate unless it would benefit the corp c. Decision made w/valid business judgments: (1) made by financially disinterested directors or officers. the less they donate (agency cost). increased after negative media. then duty of care is insulated by BJR i. 2. Does this actually valuable for corp? 1. Rule: A business is organized & carried for benefit of SHs. owned 10% of shares and they wanted to sell shares to Ford after new dividend policy. Business Judgment Rule: a court will not interfere w/a honest business decision absent a showing of fraud. It was made w/a reasonable belief that it would aid the public welfare & advance interest of P as a private corp.

etc. Wrigley says: lights will hurt the neighborhood and community & people won’t come to games anymore ii. Shlensky v. Ps wanted them instead to sell the shares on the market which they thought would be more profitable. i. So even though they have a negligence argument. X: BJR: boards have a lot more authority to act ii. As long as there is a rational business purpose. D distributed the shares as a dividend. the ct wont interfere. gross negligence II. NOT best business judgment. Why do we have BJR? Even though a lot of professions are hard & have ordinary negligence standard. Try to claim self interest (to get around BJR): board bonuses are based on higher profits of company but only 4/10 bd members so not majority ii. so $8M check from IRS from taxes 1. 1. to the cts --x------*-. self dealing. P says other teams have lights & get more attendance at night games. would get loss in the sale of $26M. BUT: market reacts to reality. or egregious misconduct i. Duty of Care: the care of an ordinarily prudent person in the same or similar circumstances a. BJR allocates burden on P to establish lack of care. BJR: As long as the board makes a business judgment. Holding: b/c no fraud.--------authority of boards i. Ps wanted: Sell the shares then give a cash dividend. illegality or conflict in decision. AMEX a. BJR so court won’t interfere unless fraud. Spectrum: a. Accountability of bds of people would see net earnings whent down i. not accounting concepts d. Issue: Did Ps state a claim or should it be dismissed? c. the court steps back and doesn’t ask what an ordinary person would have done like gross negligence i. Hint of self interest here: Inside directors have incentive but only 4/20 e. NOT reasonable or the best. AMEX did: Dividend in kind.add to SH wealth maximization ii. Accountability decreases when director makes business judgment in good faith b. BJR does not protect fraud. the boards do not capture the benefit of their actions. (this is minority SH asking for declaration of dividend to be a waste of corporation assets and make directors not proceed w/distribution or money damages) b. Wrigley i. It was a nonrecognition event for the corp (tax rule that dividends are not deductible to corp) so shareholders get $4M in DLJ shares 1. 1. Corp. Amex acquired shares of a co. Kamin v. Board rationale: avoided a charge against the earnings b/c they didn’t want to devalue the price of the comp so the market value will attract more earnings a.the can make a mistake. Holding: Not enough that directors made imprudent decision. Facts: P wants a declaration that a dividend in kind (non cash dividend) is a waste of corp assets. Implicit assumption that mkt price of shares follows acting concepts (gross earnings – 26 mill) = net earnings (74 mill). the court will not interfere with the decision of the directors. *: ordinary negligence standard: much more accountability to cts III. Even if it is a wrong decision.analysts would follow. illegal conduct. Facts: Derivative suit against managers who will not schedule lights at the field so they can have night games.cts are not business experts Fiduciary Duties: Duty of Care & Loyalty I. they still lose! iii. Loosely constrained. whose value went down.not an expense and no deductions to profits. as long as they made the decision with a purpose.where other professions charge more to allocate risk. boards cannot price the risk of liability and we do not want them acting in a risk adverse manner . as long as they have a reason (even when quantifiable) ii.more than mistaken judgment needs to be shown.c.

VG: wanted to sell b/c of tax credits and b/c they are not-transferable..not complicated). Fee is up to 5% and there are risks for buyer. Smith v. lockup provision: 1M shares at $38 (termination fee). Issue: Whether the board reached an informed business judgment in agreeing to sell? c. lack of outside experts (but then people would always need to hire i-bankers).so only way to use the asset was sell the corp 1.borrow 900k i. VG did not disclose how he came to $55 or that he proposed it first (no incentive for VG to mislead b/c he had a lot of money in corp) ii. Facts: Class action brought by shareholders.attnys fees.subsequent SH ratification does not relieve directors from duty to make informed decision unless their approval is based on informed decision IV.. This case suggests that DE Supreme Court is going to be more active in policing corporate conduct: Moves BJR closer to middle of spectrum and gross negligence is a lot less than we thought i. Holding: The board did NOT make an informed BJ. 90 day market check where other bids can come in & could accept superior offer & share confidential info w/prospective buters BUT not allowed to solicit bids + termination fee of 1M shares (Note: reasonable term.not unusual). opp. Merger agreement: $551. or transactions where directors get an improper personal benefit 2. approved sale in 2 hours (cash deal. no written summary (Prof says price of $55 is all that mattered. No management buyout b/c conflict. Board did not foreclose the deals so hard to justify gross negligence 1. Company decided to sell itself. Problems: Did not know VG role in forcing the sale. VG was the CEO. Price falls 10%. BUT DGCL 102(b)(7) reverses VG decision: allows corps to limit or eliminate the liability of their directors for breaches of the duty of care by adopting an amendment to the charter (needs SH approval) 1. you loose 100%: pay back 900k b. There was an option that other companies could make an offer but merger agreement said i. your gain is 20%: 200k ii. Leveraged Buyouts: when you use debt to make purchase when your own equity is small 1. you gain 20%. No other bids surfaced: Not b/c of market test provisions (so not board fault) but b/c interest rate on borrowing went up so bidders would need a higher cost of capital Ibankers would have bid if they could ii. law-breaking.courts accept termination fees up to 5% b. didn’t read the agreement & none finalized yet. for a long time and can make quick decisions.board is buyer & seller: BUT could hire special negotiation committee (also VG retiring soon so conflict to sell at high price) ii. had to decide by tomorrow (lots of business deals). Most corps have adopted this: so SH can no longer bring suit for DOC claim 3. price falls 10% you lose 10% f. Leverage comparison: You buy a building. Dissent: these people worked at the comp. As long as it does not limit liability for breach of loyalty or acts or omissions not in good faith or misconduct. Also.experts e. Costs) 2. it costs $1M and you sell a yr later a. Ds signed agreement w/o reading it and it contained provisions diff from what he was authorized to d d. Board approved merger agreement.Only DOC case that wins a. BJR applied but did not protect board from liability for breach of duty of care (were grossly negligent) i. Scenario 2: 0% leverage: price increase 20%. Scenario 1: 90% leverage. Time Pressure 2 hours consideration iii. Ds presentation here lacked substance iii. 141e: directors are protected in relying on good faith reports made by officers 1. Must be in charter f. the whole company needed to be sold to make use of the credits. He met with someone alone to set the price for sale.NOTE: BJR. . Comments: i. Price increase 20%. VanGorkom: FAMOUS for being wrongly decided.

Keep informed of the company b. Courts will heavily scrutinize these transactions & burden is on the director to prove good faith of transaction + inherent fairness 4. 3. 2. Rule: BJR yields to rule of undivided loyalty. Mom died & this is an action against her estate to recover to creditors. Solution for boards: Independent committee. If director makes good decision. the standard is to show entire fairness to the corporation iii. which includes every situation which a trustee chooses to deal w/another in such close relation that possible advantage to the other person might consciously or unconsciously influence the judgment of the trustee a. Francis v.V. even tho no FD VI. Facts: Mom inherited 48% in company when her husband died. if they are grossly negligent B/c she did not use any business decision. they share the gains w/SH so less reason to be risky unless they are sheltered from bad risks iii. Directors will be immune from personal liability if they discover an illegal course of action by objecting and if that is not followed.sons steal from mom i. The company held funds in an implied trust that gave rise to a FD to guard the funds w/good faith & her failure to act caused the loss. Holding: An inattentive & uninterested director can be held personally liable for a corps actions. 1. Directors must: a. BJR allocates burden on P to establishConflict of interest. but the ads served a legitimate & useful corporate purpose & the co received the benefit of it. burden shifts back to board to establish ―fairness‖ of transaction 1. even to 3rd parties. Fairness same as arms-length bargain (compare to the market price w/neutral 3rd party) ii. protects shareholders from each other a. by resigning. vote of disinterested members of board ii. DGCL 144: gives all conflict of interest/DOL situation rules: a K where 1 person is on both sides of the transaction will not be void or voidable solely for that reason (changes the rule) IF one of these is true: . RULE: When a transactions involves a fiduciary duty on both sides. Rule: A director has a FD to support the corps interest over his own conflicting interests and any competing interests render the BJR inapplicable i. The wife singing might have helped her prestige. gross conflict i. Why would SH want a rule like this (ex ante BJR)? Risk aversion. Rule: A director can be personally liable. The Mom did not pay attn to any of her duties as a director ii. Conflict of interest problems look who is on both sides (here husband is buying publicity but seller through his wife as a beneficiary) + interests that would conflict w/interest as a director a. Maintain familiarity with the financial status of the corporation by a regular review of financial statements 2. there is no BJR a. Facts: Dirs. Sometimes even morereasonable means to prevent conduct 3. Her sons were taking out lots of $ (that the company was supposed to hold in trust for their clients) and the co became bankrupt. Beran: Wife sings in company ads 1. Generally monitor corporate affairs c. Duty of Loyalty: conflicts that permeate a self-dealing transaction rebut the BJ presumption that directors act in good faith need to fully disclose material facts & entire fairness (duty owed to corp & SH) a. Here FD was to SH: but corp insolvent so creditors have right to recovery. being sued for negligence & waste for radio ad program that cost $100k and president’s wife is the opera singer in the ad.then people wouldn’t want to be on boards or would prevent profitable decisions. United Jersey Bank. Bayer v. If P establishes conflict. Holding: No breach of FD by directors. Disclosure Requirement: conflict might be ok if interested directors makes full disclosure of all material facts at time of authorization b.

Does an officer/director create a conflict of interest by taking the opp? ii.which should have been offered to the company instead 2. Maybe if corp not in financial position to do so or no interest in it 2. Corporate Opportunity Doctrine: a corporate manager cannot usurp corporate opportunities for his own benefit (individual capacity) unless the corp consents (DOL) i.What is a Corporate Opportunity? Totality of factors 1. b. Opportunity is presented to director in his individual. 122(17) DE Corp Code: allows waiver in charter of corp opportunity 4. a license area. Is the opportunity in the corps line of business? 3. Look to firms practical business expectations.1. he did not breach DOL (even if Pri had already closed the deal with CIS) iii. In re Ebay shareholders Litigation: 1. Holding: The conduct here put the insider Ds in a position of conflict w/their duties to the corp. Broz v. CIS entered into agreements w/Pri to buy CIS.were going out of business. still not ok 3. If he did. Does the corp have an interest or expectancy in the opportunity? a. K or transaction is fair when approved 4.if completely irrational. Rule: A director who wants to seize an opportunity for himself can protect himself by presenting the opportunity to the board. Through a SH vote (but SH do not have to be disinterested like directors) a. Facts: SH filed derivative suit against ebay board for usurping corporate opportunities. BUT b/c B disclosed the opportunity. Formation of a special committee or majority votes of independent/disinterested directors in good faith vote to authorize 2. Facts: B is sole stockholder of RFBC. Holding: No. B was under no duty to consider the uncertain plans of Pri. Lawrence says disinterested shareholders is implied b. Note: Fliegler v. which creates no judicial imposition of liability no formal presentation necessary (but not per se rule if board has no reason to get opp) 1. Goldman Sachs bribed the Ds with a good price on IPOs in exchange for Ebays business. The directors were not free to accept consideration from GS b/c it was intended as an inducement to maintaining the business relationship w/Ebay iv. Is the corp financially able to take the opportunity? 2. LOOK AT ENTIRE DGCL 5. Boards good faith decision not to pursue the opportunity 3. Notes: a. NOT in line of business. When can Fiduciary take an opportunity? 1. i. Power of SH to affirm self-dealing transactions is limited by corp waste doctrine. Issue: Did board breach duty? Did they get the offer from GS b /c of their position and hope that Ebay would give GS their business in future? 3. B asked CIS if they were interested and they said no. 4 Factor Analysis. then he would need to consider every potential future occurrence. Pri wanted Mich 2 but was outbid by RFBC. Cellular Info Systems: looks like Meinhard & Singer a. Is strict statutory construction correct? c. This is not a corporate opportunity to CIS: 1.they were selling their licenses at the time ii. Issue: By outbidding Pri did B breach his DOL to CIS? c. Shifts the burden back & forth b. Opportunity is not essential to the corp d. He was a member of board of CIS.may never be offered it 4. RFBC was asked if they want to acquire Mich 2. Directors that vote have to be disinterested in the transaction c. Self Dealing: receiving something from the subsidiary to the exclusion of and detrimental to the minority shareholders . not corp capacity 5. NOT financial able.

annual dividend $1. Bs had voting rights. Each A stock was convertible to 1 B stock. but 3% also harm do not pro rata distribution b. Shareholder FD problem where the parent company is a shareholder in its subsidiary: Majority/controlling shareholders have a FD to minority SH to consider their interests fairly whenever the corp enters into a K w/the controller ii.As get $200 per share and Bs get 100 per share i. Rule: Unlike a director. v. w/60 days notice to SH for $60 + accrued dividends. Assume Company has $30k: If company liquidates.did they breach FD? 3. A gets 2:1 liquidation preference. Company has 6k only & liquidates: A would get $40 per share & Bs get $20 i. Sinclair Oil Corp. Basic principle: you can exercise the rights of the class of shares that they have but non-disclosure is not allowed . Rule: BJR if no self-dealing: both parent & sub get same benefit (so only DOC) e. and did not enforce a breach of K w/Sinclair Intl (another subsidiary of SO) and Sinven. Class A stocks were convertible into Class B stocks. where class A stockholders would have received more money on them. Annual dividend $3. Zahn v. B Shares: Not callable. The domination by SO over Sinven requires that any transaction between the parent & sub is subjected to intrinsic fairness standard: burden on SO to prove transaction was fair (arms length) 3. Details of the case: & hypos a.made a subsidiary Sinven to explore oil in was a corporate action for the purpose of personal benefit a.if parent & sub get same benefit. Facts: P held class A stocks. A Shares: Callable by corp. SO paid out dividend. Holding: The board was interested (Class B shareholders) so Ps can recover. Interested Director: One who is also a shareholder. SO owns 97% of the stock of Sinven. a. No voting power b. Usurp Corp. Opp.i. Do the Bs (who control the firm by controlling the vote) have an incentive to make the firm redeem the As before liquidating? Noredeeming the 100 As for $60 would cost 6k and leave nothing for the Bs d. This is a suit brought by 3% SH. all the voting power c.20. must exercise his duties w/r/t his FD to all shareholders and may not act for his own benefit b. Facts: Sinclair Oil is holding company.BJR. 2. Violation of FD (self dealing to benefit themselves): Information on the inside that outsiders did not know. Assume 100 A shares & 100 Bs.60.directors had to disclose the info or abstain from profiting on it 4. opps. i. then BJR applies a. SO DID breach duty by not enforcing the K: self-dealing b/c SO got something from that Sinven that minority SH didn’t get He would get 100% benefit or 97% harm. Issue: Holders of A stocks didn’t know that the value of tobacco had risen and D appropriated the value to itself by redeeming the class A stock. Board knew the company had a very valuable asset & intended to liquidate the company by calling A shares and then liquidated so that B shareholders gained on the liquidation 2. usurped Sinvens corp. Rule: Intrinsic fairness if self-dealing 4. but As were also collectible by the corp w/60 days notice. e.there were no opportunities that came to Sinven so SO could not have usurped them (BJR)--. Levien: 1. He claims D forced him to redeem his shares instead of allowing them to participate in the liquidation of the co. a SH is entitled to vote in a manner that is most beneficial to their interests. Bs now have an incentive to redeem As before liquidating: As will get $60 and Bs will get $240. Holding: Excessive dividends were not a breach. Transamerica Corp: (class a/class b stocks) 1.

i. Did not breach DOC for firing w/o cause: concerned about costly litigation by Orvitz (& reputation) iii. no board involved in termination. b. Duty of GF shifts the spectrum on board authority & judicial accountability. Care is conduct.. He was fired after 14 months and got $130 mill b/c his options vested immediately.VII. Ch. did they breach FD by agreeing to no-fault provision?. Board erred in hiring in first place ii. few questions. DE 141 c: allows reliance on experts for BJR ii.. 102b7 want decisions motivated for SH returns 1.cause of action): Directors consciously & intentionally disregarded their responsibilities adopting a ―we don’t care about the risk‖ attititude. Standard is harder for defendants: In real life they would settle b/c no one wants to try it 2. Holding: As long as the board made a rational decision.. Duty of Care: BJR.precluded by companies w/102b7 provision & will lose no matter what b/c court CANNOT GRANT RELIEF for this claim c.this is DOC claim. not a judicial finding that the directors actions are not protected by BJR v. Disney Cases: Compensation seems to be BJR b/c DOC & 12b7. Rationale: the facts only need to give a reason to doubt business judgment protection. imply that the directors knew that they were making material decisions w/o adequate info & w/o adequate deliberation and that they simply did not care if the decisions causes the corp & its SH to suffer injury or loss 1.. Committee process was inadequate: No.. no written draft. that may not have been taken honestly and in good faith to advance the best interests of the company. Problem: DOC suit for MONEY DAMAGES. Conflict: Eisner was a close personal friend of Ovitz who carried out negotiations iii. DOC: Consider all material info reasonably available in making business decisions b.May not be consistent w/best practices but still adequate (BJR operates) 3. Full board did not consider & approve the agreement: No breach of FD b/c boards can delegate to committees (141e) 2. Some Care elements (process) + Loyalty elements (conflict) but neither breached to be actionable on its own iv. they can show lack of good faith .. Court says: only thing we review is process.Complaint allowed to proceed i. were directors not disinterested & independent? 1. all of the alleged facts. if tried.). Will not look at substance (no substantive due care) As long as not gross negligence. Issue: Did board breach FD by extravagant employment k (waste). Duty of Loyalty: Conflict of interest w/fiduciary interest. no more room for judicial intervention Directors act in bad faith when they at for some purpose other than a genuine attempt to advance corp welfare . current pres. Any other rule would make courts super directors (irrationality may be waste. 2000 Suit: Breached DOC: Complaint dismissed for failure to state a claim which relief can be granted.usually lose a. Comp. Put differently. then the BJR applies. Process: short committee meeting. substance does not matter 2. gave Orvitz incentive to do well & stay around b/c they vest based on how long he stayed). to the directors duty to act faithfully & with approp. Loyalty argument: Eisner is only 1 person & no facts to show he was such a dominating factor 3. If it is irrational. He was a friend of Eisner. Duty of Good Faith (NEW STANDARD. final draft different from draft reviewed a. entire fairness. or bad faith) 1. 2003 Suit: Repleaded saying breach of duty of GOOD FAITH (Del. His employment K gave him a big payout for non-fault termination (he could get more money by being fired than fulfilling his K). Facts: Disney hired Orvitz as president. knowing or deliberate indifference. The big $ in compensation package came from options (its not real money so cost corp less accounting. cannot further private interests & SH and corps interests are the highest 1. Gross Neg. spent little time (under 1 hour).

Stone v. even if it had been discovered if there hadn’t been a failure of the corp compliance program IX. DE Courts expand corp. contracts iii. DE Judiciary is stuck between threat of corporate migration & threat of federal preemption ii. Disney shows how corp law works. 2006 Suit: Supreme Court of DE: i. When times are good. thereby demonstrating a conscious disregard for their responsibilities. (2) having implemented such controls. expands. Ritter? VIII. Duty of Care does NOT police substantive board decisions. B/A--------*GF-------J/A d. Holding: No director liability bad outcome is not evidence of bad faith: Directors are no responsible for ensuring the legality of every act by employees. Get out of demand failure to monitor/compliance/oversight b. Law that comes out of Disney: Stone v. intent to violate law. the risk is offset c. fails to act in fact of known duty) 1. 2008 Financial Crisis: collapse of US housing market values of homes were less than the value of the mortgages so people defaulted b/c they could not afford high interest rates a. corps will go away. Directors failed to monitor. There is the threat that if rules are too strict. Back to dichotomy: care & loyalty a. consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention c. they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith‖ 1. Ritter (DE Supreme Ct. Closer to loyalty 2. Notes: i. Facts: employees in bank were operating ponzi scheme that could have easily been uncovered. and failure to do so may render a director liable for losses caused by non compliance w/appropriate legal standards i.1. which the boar concludes is adequate. Good Faith remains: Narrowed from 2003 decision. exists. governance when they fear threat of federal preemption 2. it would COMPEL dismissal but this is failure to monitor‖ ii. Holding: Grossly negligent conduct.will likely shift again iv. Best argument for demand futility the whole board did something wrong (but not most cases) i. governance whenever they want: DE is worries about corps leaving their state if too regulatory (like NJ) they will leave or if too lax. feds will take away corp business 1. does not & cannot constitute a breach of good faith e. corps are more likely to threaten to leave & less risk of fed preemption 3. moves. those are protected by BJR (no such thing as substantive due care) iii. Loyalty is slightly different: Conflict of interest + interpreted broadly enough to include intentional disregard iii. Oversight & Compliance: Every derivative suit is a CAREMARK case: “intentional dereliction/conscious disregard in the fact of a duty to act‖ a. ―Where directors fail to act in the fact of a known duty to act. Duty of Loyalty polices the interests of the board & may be breached when board is acting for some reason other than the corps best interests iv. Diversification: If you own a lot of mortgages. Feds can intervene in corp. 2 Conditions: (1) Directors utterly failed to implement any reporting or info system or controls. 2006) i. Interest rates on mortgages: Variable. Caremark (loyalty)(396): a directors obligation includes a duty to attempt in good faith to assure that a corporate info & reporting system. Securitization: Collection of cash flow rights in a pool & sold off as securities to other investors . but it is NOT its own separate duty with an actionable breach (advancing other interests than corps. Duty of Good faith: operates in the background of both DOC & DOL. ―Intentional dereliction‖ & ―conscious disregard in the fact of a duty to act‖ v. Company has 102b7 provision (if duty of care. w/o more. Duty of Care polices the process the board took when making its decisions ii.after a few yrs they reset at a higher rate b.

less risky investments pay less interest rates In re Citigroup: Seeking to recover from the company its losses arising from exposure to the subprime lending market DISMISSED i. 10Q quarterly. Purpose of securities law: fix the stock market after Depression (state law seemed to be inadequate) a. Created SEC: independent regulatory agency: job is to enforce the securities laws and to promulgate rules that are consistent w/the 33 & 34 acts III. Securities Exchange Act of 1934 (Exchange Act/34 Act): Regulates secondary market activity i. Mortgages are underlying asset in: Mortgage backed securities & Collateralized Debt Obligations Financial institutions hold MBOs and CDOs ii. 8k episodic (significant transaction) IV. Purpose of rules: full disclosure.they made too risky short term returns and saddled risk on SH ii. directly or indirectly. Dismissed b/c did not plead w/sufficient particularity: merely newspaper clipping (narrow construction by paticular facts) nothing to state of mind of directors iii. e. Caremark Claim: Board was SO recklessly & knowingly indifferent that they did not install sufficient compliance procedures to make sure wrongdoing would not occur usually Red Flags to give Ds notice of the problem (LOOK SLIDE) 1. i. Bad business decisions are not red flags Citi & Goldman: Illustrate dichotomy between legal compliance & business risk: it is NOT impossible to bring caremark claim for business risk BUT it is hard to get that super strong standard so needs to be very particularized What to tell clients: Have adequate compliance measures for business risks as well & that business risk is separate from legal risk Accountability Under the Securities Laws: Rule 10b-5 I. Dismissed: Red flag here was Abacus transaction (sold something to client and company bet against it) against. g.10k annual. Securities Act: Transactional disclosure (registration statement filed w/SEC & prospectus distributed to investors) required in connection w/any public sale of securities unless an exemption applies b. it only falls to SH. h. any manipulative or deceptive device or contrivance in contravention of such rules & regulations as the commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. a. Claim: There is motive for GS employees to do illegal stuff b/c they are compensated for generating risk. Red Flags not illegal conduct here. Securities Exchange Act 10b: It shall be unlawful for any person. Homeowners default on mortgages massive losses for financial institutions b/c they thought house prices would keep rising Incentive problem: Loan person does not collect payments.links total compensation of employees to net revenue so if company has losses. f.d. BAD transaction but NOT ILLEGAL iii. by the use of any means or instrumentality of interstate commerce or of the mails. only commission. or of any facility of any national securities exchange— (b) To use or employ.overinvestment in super risky assets is a bad business decision but not illegal 2. 2 Approaches to Disclosures: Reporting Requirements a. Holding: NOT that a business risk can’t give rise to CM Claim In re Goldman Sachs: SHs claim directors breached FD by approving compensation structure (pay for performance. in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered. 2 most important securities laws: a. Note: not self executing (as the commission prescribes) . Ps claim: D breached FD by failing to properly monitor & manage risks the company faced from problems in subprime lending market & for failing to properly disclose citis exposure to the subprime assets ii. Exchange Act: Periodic disclosure: recording obligations for companies that are already public (already registered). or any securities-based swap agreement. prevention of fraud II. not employees) DISMISSED i. Securities Act of 1933 (Securities Act/33 Act): regulates the offering & sale of new securities (IPOs) b.

P must show it raised the price of security. To engage in any act. To employ any device. specific Ps would have sold anyway) 2. the market gives useful info a.not high value but a few with super high settlements: brought as class actions among class of investors who all suffer essentially the same harm (buy & sell during the period of misinformation) VI.Irrationality in markets: in general. but D would try to rebut claim w/evidence that it did not contribute to the Ps loss ii. NOTE: if NO shares are transaction. Neither 10b or 10b-5 say anything about private rights of action. scheme or artifice to defraud. Reliance (traditional element of fraud): Purchaser/seller rely on the statement in entering into the transaction Presumption of reliance (investors rely on the integrity of the market generally & the market reacts to information) public only i. BUT supreme court has allowed them under 10b-f for purchaser or seller of securities (not just holders) iii. these are more important than derivative suits. practice. you relied on fraud. or defraud i. that’s good i. irrational buyers or sellers wont effect the efficient market theory b/c they’ll balance either other out. (efficient capital market hypothesis. if it affects the stock price. In connection with the purchase or sale of any security i. Criticism of FOTMT.but D can rebut (by saying pros are not deceived. or c. Materiality: Substantial likelihood that the disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of info made available i. Causation: P must show that the misstatement caused the harm. then no cause of action (only buyers & sellers have standing ii. Traditional 10b5 Analysis (looks at stock price reaction to news) a. In general. truth entered market despite misstatements. Negligence/making misstatement by accident is not enough. P doesn’t have to prove anything. manipulate. a. but material if omissions to disclose material fact d. by the use of any means or instrumentality of interstate commerce.Professionals adjust their reservation values to new info & will not buy or sell except at prices reflecting new info 5. efficient market.b/c it affected the price & motivation to buy/sell is based ion price. b. If corp issues overly optimistic press release. LOOK AT SLIDES . So long as there is liquidity. 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.must have strong state of mind facts) b. Requires: material public misrep. so if that price incorporates the fraudulent info then relying on the price. Securities Exchange Act Rule 10b-5: It shall be unlawful for any person. efficient capital markets hypothesis a.V. In $$$. only material. Semi-strong: similar to is assumed. or of the mails or of any facility of any national securities exchange. No duty to disclose. Important for class certification purposes ii.caused you to enter the transaction (then D rebuts that the misstatement did not contribute to the loss) if you show stock price effected. Fraud on the Market Theory: any public statement then you’re deemed to have relied on the misstatement. directly or indirectly. Scienter (state of mind): P must show that the D acted with an intent to deceive. Weak: all historical info in the price 4. Strong: all info public & private is compounded b. but maybe recklessness (PSLRArecklessness must approach intentional fraud. tech bubble). How to apply when faced w/uncertain and contingent facts? Probability & magnitude so not all deception is actionable. in the light of the circumstances under which they were made. or course of business which operates or would operate as a fraud or deceit upon any person d. it is material ii. The only problem is w/items that are hard to short (real estate. not misleading. Omissions: you wouldn’t have entered the transaction if the info was disclosed c. Eg.Easterbrook) 1. What about when irrational traders act together? Arbitrageurs can correct it 3.

Fraud on the market theory is not extended to situations where non-public/Private false info is relayed to a small number of investors i. Holding: Mergers can be important in company. Should ordinary investors be able to sue in 10b-5 private right of action? YES i. Facts: Basic is publicly traded co. Ps who sold stock after first denial sued saying they would have held on to the stock or made money on the sale if the info was public.institutional investors wont care ii. 10b-5 is about fraudulent misreps. B began merger negotiations w/Com in 76. a. Levinson: if this was decided differently. Disclosure (not paternalistic withholding) of accurate info is what Congress chose 2. so whether the merger discussions are material depends on the facts. If you had made an inaccurate statement (or a live statement that has become inaccurate) you have a duty to correct it 2. Causation: misstatement held the stock price down 3. Advice to all: IF you say anything. But: Private info can get into the price by volume of the trades OR by the identify of the person placing the trade (serves as a proxy for inside info) so if CEO starts selling stock.simply need intent to mislead 2. v. Ds claim: didn’t want to mess up deal so acting in the best interests of SH BUT 10b-5 doesn’t care if the lie is w/good intentions or not (they SHOULD have just said ―no comment‖) 3. Misrepresentation does not have to be made by the company. so they have flat demand h. 10b-5 class action wouldn’t exist i. 10b-5 analysis: 1. Ps claim that H’s false story artificially raised the market price & Ps paid for the stock when it was artificially high. Issue: Whether non-public misrepresentation can be a basis for a claim under FOTMT. a stockbroker.NO 3. Facts: SF owned 90% of Kirby stock & wanted to get the rest. BUT generally there is no affirmative duty to disclose preliminary merger negotiations f. Basic Inc. West v.people buy b/c it alters their risk & return. i. Public info incorporated into the price. This lie didn’t affect the market. Reliance: presumption iv. protecting the transaction still had the intent. Materiality: it affected the stock price a. Note: securities are perfectly fungible. During 77 and 78 B made 3 public statements denying it was involved in merger negotiations.iii. but non-public info is not. long as the person has standing (bought/sold) 4. DE law permits DE corp to merge w/approval of board and to make payment in case for the shares of the . Deterrents: create private attorneys general. Maybe initially. Note: Corp does not have to be a party to buy/sell stocks. Prudential 1.MISTATEMENT 1. Scienter: Intentional to deceive. Duty) i. Green 1. To compensate them/make them whole g. Santa Fe v. might indicate something to the market & people will follow b. Facts: Hofman.material to reasonable investor. 2. made statements to 11 customers that a company was certain to be acquired in the near future (it was a lie). ECMH implications? e. Holding: No class certification here. Damages: difference between price when SH sold – jump in price when they told the truth 4. There was no significant effect on volume of trading. not state law (breach of fid. transaction is by SH iii. Omitted fact: balance probability it will occur with magnitude if it does 4. if should be accurate 1. but after 8 months and no acquisition shows it was a lie.

merge w/the subsidiary and pay off minority SH w/o SH vote 5. Holding: The behavior wasn’t manipulative or deceptive. Pocket shifting Critique of 10b5 fraud on market action: goes from 1 investor to another i. Proof that person had pre-made plan before getting info ii. managers have misused their positions to the disadvantage of their SH d. Sarbanes Oxley Act. even if action was before . When co loses suit: SH are paying out of SH class.there was no failure to disclose or material misrep. 406: code of ethics for senior financial officers iii. managers have misused their positions to the disadvantage of their SH a. Basic concern that comp. b. Proscribed Transactions: some transactions proscribes that would otherwise be legal i.the money paid to lawyers g.additional expense & outside auditor involvement 2. disclosure & secondary market is regulated by fed law. Insurance: 3rd party insurer pays for liabilities. disclosure ii. Overview: Shareholder Litigation. State law derivative suits i. so basically paying themselves. a.that a squeeze out merger forces them to take less than the securities are worth is a fraudulent device. Board Structure: i. 301: audit committee required w/specific composition VII. They argue the transaction itself was a problem. Affirmative Defenses: i. exculpation. Erickson. DE rule was decided to prevent holdout problem b. If the court ruled. There is a tax on this transfer. 304: claw back of CEO and CFO compensation when financials restated due to misconduct ii. They entered into the transaction before getting inside info Indemnification & Insurance I. 1. SH received $150 for shares. Courts refuse to federalize corporate law under 10b absent congressional intent. DGCL 253: allows parent that holds 90% of shares in a subsidiary to value the minority interest. 404: no loans to company execs b.Shifts the balance: federalized certain aspects of corp law.& audits. State law direct suits i. Securities Lawsuits (10b) i. Internal affairs doctrine: Corporate governance is regulated by state law. previous internal control was state law & DOC/DOL ii. to make sure accounting in firm is ok (controversial). Proof that person was unaware of inside info iii. scheme or artifice to defraud‖ under 10b-5.minority as long as notice is giving to the minority SH so they can contest the value. it would preempt DE corp.Basic concern that comp. The SH could accept or reject and seek appraisal in DE court. insurance & indemnification f. 306: No executive trades when ees cant trade iii. a. Issue: whether low valuation in cash-exchange offer is fraud? NO 3. 407: financial expertise of audit committee members c.overlap between deriv suits & 10b-5 cases e. Breach of FD resulting in harm to SH individually (especially in acquisitions) c. governance. Board procedures: i. 4. 2. Directors protection: BJR. Breach of FD resulting in harm to corp. 404: internal control reports 1. 102b-7 (duty of care).only for claims during period of time.that it is a ―device. Framed around misrepresentations or inadequacies in corp.area left to state law i.

Insurer pays manager when corp. Must indemnify directors/officers if ―successful on the merits or otherwise in defense‖ d. cannot legally indemnify. Premium: actuarial probability of loss over the lifetime of the corp ii.a.circular wealth transfer. Policy Exclusions: 1. Conduct that insurance is available under other policies 3. It only pays to the people when the corp cannot legally indemnify them (deriv. Allows indemnification of expenses.. Directors & Officers Liability Insurance: every public co has this. the bad guy pays the money back in to the company so if indemnification is allowed then no fain for company ii. So no indemnification in deriv suits IV.might work only in case of insolvency (about the people) 2. Arguments is that the insurance B & C gives managers something at the expense of SHs b/c SHs could insure themselves for free by diversifying their stock. 3 aspects of insurance policies: i. A pays deriv suits. Indemnification: company itself pays for liabilities II.also when corp is insolvent & cant pay b/c of bankruptcy laws 1. Expenses.payment from insurer to the corp for indemnifying managers 1. Through pricing .. willful.. Notes: LOOK AT SLIDES i. deriv suits almost never settle for money. Also 10b5 3. Side C: only securities claims will name company as a D a. suit). Allows for the purchase of insurance for conduct that the corp cannot indemnify (bad faith acts & derivative suits) III. B. C. A. E. Reintroduce Deterrence: i.upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corp as authorized by this section e.If it is a derivative suit. judgments & settlements for actions except derivative suits as long as D acted in good faith b. DGCL 145.. may be entitled f. criminal. Side B: Reimbursing iv.. Allows indemnification of expenses incurred when derivatively sued (not settlement or judgment) as long as D acted in good faith i. Problem: insurance subverts deterrence and makes SH litigation look like waste 1. If there is actual wrongdoing. suit or proceeding may be paid by the corp in advance of the final disposition of such action. G. Side A: very few payments under A. It makes them whole/paid if they are the Ds in some lawsuit as a result of their being directors a. Insurance co can charge higher premium to riskier companies which will be an inducement to company to reduce their risk to reduce the premium v. B/c the corp is the P in a derivative suit. A.. the indemnification.granted pursuant to the other subsections of this section shall not be deemed exclusive of any rights to which those seeking indemnification. B. you may indemnify for expenses but not judgments/settlements (so cost of defending) a. insurance co can get out of claim vi. criminal conduct c.incurred by an officer or directors in defending any civil. or investigative action. Deterrence is main reason for SH litigation iii. Reckless. administrative. Conduct is sufficiently self serving or egregious 2.pays losses for which the corp itself is directly liable (securities claims) 1. Corporate Reimbursement for indemnification iii. If deriv suit is successful. But to avoid risk aversion can still indemnify for expenses c. F.the director has to pay back the co for $ they stole but then the corp would be paying itself... DE-GCL 145: Directors & Officers Indemnification & Insurance a. And the problem is that insurance takes a bite out of corp governance b/c the party you are trying to deter doesn’t have to pay any money b. Managers insist on this ii.

But tradeoffs to make insured pay into within-limits settlementscashing in coverage defenses (SLIDES) Disclosure Solution: 1. Strategic pleading: recklessness ii. D knew there was exploration going on the property & that a geologist there would be deposits but kept info to themselves. DO transfers the risk to insurer Insider Trading I. culture & character 2. Rescission (for fraud in the application): weakness of rescission threat given market constraint 1. structure & other policy details b. ii. 1. Amount & structure of coverage and structure of settlements i. iii. Governance: Not (primarily) charter provisions. fraud): Policy language. If Ds disclosed the theory. Insurers try to price to risk a. Insurers basically never rescind b/c then they are unable to sell future policies iii. Common Law (pre-securities law) of insider trading (before SEC took away state legislation) a. Risk of bad faith failure to settle claim. No public records of settlements c.ii. In what proportion Takeaway: Real function of SH litigation is deterrence and does this actually occur in a regime that allows insurance?--> makes SH litigation look like waste 1. especially (1) concealment of identity by the D and (2) failure to disclose significant facts having a dramatic impact on the stock price d. Absence of guidance: i. .―actual‖ fraud determined by ―adjudication‖ 1. Special Circumstances rule: Generally no duty to disclose unless special circumstances. Mandatory disclosure of: a. Effect of settlement demand w/in limits i. Common law insider trading: Goodwin v. Who funds settlement & defense costs ii. Agassiz: i. making insurer liable beyond limits ii. D controls the defense (unlike other insurance where insurer has control over defense) but insurer has veto power over settlement 2. they might be sued by those who acted on it thinking it was correct. 1. maturity (how long as been a public co). limits. volality of stock b. Financial factors: industry. P acted in his own judgment to sell the stock. No duty rule: liability for actual fraud (misrep or fraudulent concealment). iv. Duty to disclose rule: Got info as insiders. Coverage defenses: i. BUT: a. market capitalization. Facts: D (directors of company) bought stocks which P had previously owned (but done through brokers so neither knew identities). gave rise to a duty to disclose to SH before trading with them c. v. not enough to change corp policy Through monitoring: the co comes in Through selective payment of claims: Selective settlement 1.Acts that prevented the P from investigating further b. Exclusions (esp. P & D counsel collusion b. But does pricing deter? Difference between good & bad cos is $100ks. Premium. Holding: There are no facts that place an obligation on the Ds to disclose what they knew.

an investment analyst. SEC v.the trade itself (unless part of phased. Issue: whether an employee at a printer. Materiality: easy for IT. (remanded to see if they would have been misled by the statement) a. violated 10b-5 ii. Facts: D was drilling & found area of high mineral content. was and bought shares of the target. 1. ―In connection w/purchase or sale of any security‖: intent that the device be of a sort that would cause reasonable investors to rely on and cause them to buy/sell securities.2. received material nonpublic info from insiders of a company. Based on inherent fairness of exploiting an informational advantage 2.intentionally misled. who figured out what the target corp.person an insider tells). so directors were not liable. Unless the insiders breached their duty to SH in . Directly. Hardest element: scienter. officer. company issues a statement that they did not find anything. victims are all uninformed traders 3. Tipper/whistleblower: Secrist. There was no expectation by his source that he would keep the info private. Affirmative misrepresentation b. Chiarella v. is being sued for press release (standard 10b-5 violation) & employees sued for insider trading. major SH i. This has been superseded but important that b/c it was an anonymous trade on the open market. Reliance. Issue: was info here material that possessors should have disclosed or refrained from acting on it? Was 4/12 statement misleading? iii. investors get information other ways b.insiders cannot have an advantage 1. Dirks v.INSIDER TRADING helps show scienter b/c they traded & knew it was false 2. Corp. To preserve the opportunity for the co to buy the land w/o driving up prices. employees had to keep the results secret. Tippee: Dirks 2. Directly or indirectly: Outsiders of corporation who come in possession of info some other way (Tippees. Core of 10b-5 is equal access: level the playing field. Texas Gulf Sulfur: i. Holding: Not liable b/c 10b-5 duty to abstain from trading or disclose is based upon a fiduciary relationship between the SH of the company whose shares are traded & the insiders. Rumors started face to face lying II. He disclosed the info to some investors who relied on it by selling shares of the corp. He tried to investigate and told people about it to try to make the info public. ii. On 4/12. agent. was involved in fraud & their stocks were overvalued. not just the possession of inside info. pre-planned process) makes it material c. Ds started making stock purchases. Cons: no pre-existing disclosure duty.ROTMT.director. 10b-5 Insider Trading: Anyone trading for his own account in the securities of a corporation has ―access. that the co. US (OVERRULED) i. 4/16. to information intended to be available only for a corporate purpose and not for the personal benefit of anyone‖ may not take ―advantage of such information knowing it is unavailable to those with whom he is dealing‖ (investing public a. Rule: A tippee assumes a FD to the SH of a company not to trade on material nonpublic info ONLY when the insider tipper has breached his FD to SHs by disclosing the info to the tippee & the tippee knows or should know that there has been a breach FOCUS on HOW THEY GET THE INFO i.price reacts d. made an official announcement of discovery & stock prices went up. D was not an insider of the company. Holding: Dirks did not violate 10b-5. Holding: All stock transactions made by people who know drilling results violated 10b-5. Effective dissemination: you have to wait for info to be disseminated before you can trade so it is in the public and can be incorporated into the price c. then he must either (1) disclose it to the investing public or (2) abstain from trading or recommending the securities while such inside info remains disclosed ii. 1. directly or indirectly. If a would-be trader has material inside info. Pros: reaches all conduct that may be inside trading. Facts: Dirks. Insider trading has to do w/unfairness: they should have had a K w/printer d. that he had no connection with. SEC 1. a.

Facts: Lawyer representing a co that wanted to buy Pillsbury bought stock in Pillbury. Lawyer breached his duty owed to the source of info. not a real tip. fines. any profit realized by him from any purchase & sale. Tipper didn’t breach FD b/c no personal benefit 3.changes where the FD is locates a duty and a fraud ii.. Where temporary fiduciaries (lawyer. Rule 16b of Exchange Act of 1934: Profits from purchase & sale of security w/in 6 months a. Existence of relationship giving access to inside info intended to be available only for a corp purpose 2. No private remedy under 10b-5 unless: P is of class for whose special benefit statute was enacted. O’Hagan i. Bacanovich: broker. This subsection shall now be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase & sale. You will systematically lose against insiders c.disclosing the nonpublic info to Dirks. Two elements to establish 10b5 violation: 1. (he also helped fraud become uncovered) a. Whether the insider personally will benefit directly or indirectly from disclosure iii. ban on future service as officer. then no breach of duty 1. If it was only advice. ii.. Does not provide civil recovery other than entity who owns the information rights f.millions) a. Different from Dirks. criminal prosecution (up to 25 yrs in jail. injunction. b/c he deceived those who trusted him w/access to confidential info 1. monetary penalties. so need to deter b. benefit of activity is high. How to determine when breach of insiders FD? i. SEC Enforcement powers: Disgorgement of profits. Look at purpose of disclosure ii. Example: i. indication of legislative intent to provide remedy. shall inure to and be recoverable by the issuer.liability is premised on a fiduciary-turned-trader’s deception of those who entrusted him with access to the info III. Question: does insider trading even harm anyone? i.. Violating 10b & 10b5. Holding: Layer is guilty of misapprop. director or officer by reason of his relationship to the issuer. or the sale & . of any equity security of such issuer (other than an exempted security). no remedy from state law g.had knowledge of FDA approval. For the purpose of preventing the unfair use of info which may have been obtained by such beneficial owner. Unfairness of allowing corp insider to take advantage of that info by trading w/o disclosing e. High penalty: detection rate is low. he breached no duty when he passed it on. so he sold shares & tipped to others will get in trouble ii. accountant) are given corp.distributional question that insiders will get more ii..handled Waksal and tippee sales: source of info is his job & he called his best clients iii. Waksal: IMclode Insider. US v. It makes the market go up to the event price more quickly.should she know or should have known that B breached his duty? Probably b/c she was a stock broker before 1. SEC did not exceed its rulemaking authority by adopting 14e-3a (proscribes trading on undisclosed info in the tender offer setting even if the absence of a duty to disclose) supposed to prevent fraud trading on material info 2. Martha Stewart: B called her and she sold her shares. It might be ok Short Swing Profits I. info for corporate purposes (like Chiarella) they are expected to keep the nonpublic info confidential ii. or any sale and purchase. If no personal gain. Misappropriation Theory: a person commits fraud when he misappropriates confidential info for securities trading purposes in breach of a duty owed to the source of the info i. irrespective of any intention on the part of such beneficial owner.

involved. Purely FORMAL RULE.2% of cos stock. regardless of we can piggy back on their buys/sells to guess how corp is doing v. 1. other officer who performs a policy making function iii.more than 10% and they want to sell the shares. any VP of the issuer in charge of a principal business unity division or function. If the plan was to sell after 6 months. after that it does. The transaction that takes you over 10% doesn’t count. Foremost-McKesson Inc. principal financial officer. v. he is liable for short swing profits that he makes on all classes of stock. Beneficial owner: has to be both when you purchase AND when you sell 4.. even if net loss) II.form over substance. i. then it wouldn’t be recoverable 2. 16b Technicalities: i. Applies to insiders (officers & directors) + beneficial owners (owners of 10% of class of equity securities. a beneficial owner must account for profits only if he was a BO before the purchase a. You ask BO question going into the relevant transaction c. Beneficial Owner: needs to be 10% SH immediately before the purchase the securities at issue (so not the transaction that crosses 10% threshold) i.but they might be liable under 16b to disgorge the profits 2. Does not include debt securities unless it is convertible into a class of equity security iii. Emerson Electric Co. Requires specified insiders to report their trading in their company’s securities. Going into the transaction which will make you a BO. Equity Securities: also convertible debt iv.. of the security. If someone is an insider then quits still ok. Reason for 10%: they have access to high level people & get info. Intent does not matter: bright-line insider trading rule iv. Facts: Ds got the securities in a bankruptcy.just have to be an insider once w/in 6 month period 3.still liable for profits from first sale 1. during the 6 month period where the sale price was higher than purchase price (highest sale price to lowest buy price to determine overall liability.easy to administrate b. v.owner or any class of equity) All that matters is identity 1. Multiple classes: courts consider classes separately to determine if 10% threshold has been met but once a SH meets 10% req.96% (so that he can dispose of the rest of them w/o 16b liability) ii..does not count as matchable transaction for 16b. Then he disposed of enough shares to bring it down to 9. Holding: In a purchase-sale sequence.purchase. still covered 2. Rule: SH must be a beneficial owner immediately before both transactions (so BO status must exist at both ends of the matching transaction) a. Facts: E acquired 13. regardless of whether he owns 10% of the class generating the short swing profits . Issuers: companies registered under 1934 Act 1. or any transaction or transactions which the commission by rules & regulations may exempt as not comprehended w/in the purpose of this subsection b. Provident Securities Co. Match any purchase w/any sale. principal accounting officer. Holding: The profits derived from the 2nd sale are not recoverable from the corp even though they are part of the plan b/c he had less than 10% during 2nd sale. Issue: Whether a person purchases securities that put his holdings above 10% is a BO at the time of the purchase so that he must account for profits realized on a sale w/in 6 months 3.. for any 1 class of stock. Officers: An issuer’s president. Co w/publicly traded shares or that has $10 mill & 500+ SH ii. There must be a profit ii. Reliance Electric Co. and authorizes the corp to recover from these insiders any profits made on stock transactions in a narrow 6 month period (short swing trading profits) c. Different from 10b-5: i. If 10% owner of class A stock and traded class B still.

1. March 1: buys 100 more debts for $800 each. May 2 buys 110k for $10 (going into transaction 5% owner so not matchable) a. Being a 10% holder of any class of stock makes you liable under 16b for all classes 2. Debts convertible to 100 shares common stock. CEO bought 20% on Jan 1 for $10/share. Convertible security count as equity securities: 5. 1. May 2: buys 50k for $10 (matchable b/c 11% holder before) a. 90k May 2 for $50 still liable b/c CEO (8M) 3. Sells 200k shares May 1 for $50: liable for 40x200k= 8M 2. but lowest prices purchase w/highest priced sales d. 16b generally: bright line rule that is under & over inclusive.not BO). April 1: She is still BO. 2. Liable for 100 debts x $100= 10k v. May 1: Sell all (800k) for $30 1. even with majority. May 1: Made 24 M= lost 40M 2.000 shares *which is 33% of common stock convert to determine BO 2. So no liability iii. Investor w/200k shares. Sells all 200k on Jan. Staggered Boards: makes more difficult for SH. Matching: courts match transaction to generate the most profits. March 1: She is BO.CEO.BO at time of sale). 50k x 40= 2M liability b. April 1: Spent 63 mill. March 1: not matchable. Jan 2: Sells 90k at $50 (Not matchable. So 50k x 50 – (10 x 50k) 3. So 100k x 20= 2M iv. Jan 1: Sells 110k for 50 (Matchable. April 1: Matchable a.face value 1k each. so paid total 5M. April 1. adopt SH resolutions that can ratify board actions or request board take certain actions i. April 1: 700k at $90. 5. Anti-manipulation rule: proscribes insider trades of a certain type & beneficial owner trades of a certain type trades that affect the market Accountability: Voting- SH right to vote I. March 1: Investor buys 110k Class A at $10.any # of shares liable for profit b/c he is an officer so 10% is irrelevant 1. Can only match within classes III. 16b problems p 507: i. Note: Any directors may be removed w/o cause by any SH entitled to vote unless certificate says board is staggered & can only be removed for cause b. Sells 110k May 1 for 50.200k shares. Sells 110k May 1 for $50.owes company b. No profits BUT 16b liability still‖ March 1 transaction matched with May 1 a. May 1: buys 110k for $10 (not matchable b/c not BO before). then does not become BO until after 1st transaction so no liability ii.officers only need to be officer during 1 transaction 4. 3. 1 for $50 (matchable) . resigns and sells remainder liable for 8M. She is not BO when enter into May 1 transaction so no liability 2. 1. Class B stock: 1M shares.not accounting principles. March 2: She buys 50k Class B at $10. 1. May 1 buys 50k for $10 (only 5% so not matchable).supposed to be insider trading but covers insiders who are not real insiders (10%) a.v. May 1: buys 300k for $10 (not matchable b/c not BO) a. March 2: Matchable. Annual election (211): default that this is election of entire board (unitary board election) usually through mail via proxy i. sells all for $50. sells 100 debts at 900 each. 4. adopt amend or repeal bylaws. Liability for May 2 transaction b/c 11% BO. CEO: March 1: buys 100k at $10. Class A stock: 1M shares. to gain control of board of directors have to win 2 elections and might be long time between them . Note: IF non-insider. March 1: Spent 1M. Annual meetings & voting a.000 debts convert to 500.both matchable 3. Investor owns 5k convertible debts (Debt security). April 1. remove directors. Jan 1: sells 200k for $50 (matchable). She paid 1k each. SH vote on elections.

Issue: whether management may look to corp. proxy disclosure statement. staggered board (can put in charter). Fairchild Corp: P brought deriv. Advice. tell agent what to do through proxy card (specify how shares voted or broad discretion).ii. PR firm and proxy soliciting orgs. consents act like votes and can solicit anytime (228a) 1. Both sides are reimbursed .put in charter so SH cannot change b. unless provided fro in bylaws or certificate of incorporation d. no SH action by written consent (in bylaws or charter) i. Problems of Control. Voting & Takeover Protections for incumbent board a. The amounts to be paid are not excessive and the methods of operation is not unfair or illegal c. cannot be used to takeover board ii. SH action by written consent: ability to take SH action w/o calling a meeting. Directors need to freely answer challengers ii. and return envelope i.state statutes usually have min/max notice period & a quorum (prevent a minority faction from acting at a SH meeting w/o presence of majority) requirement for general meetings II. Unitary board: SH has a chance to elect a full board once a year c. Rule: Incumbents may be reimbursed from the treasury as long as it is a reasonable price. Special Meetings: Called by board (or authorized in charter/bylaws). Special election (211d): SH can’t call a special election. Proxy context: may reimbursed for expenses if you win 1. suit to compel return of $20k paid out of corp. holder of at least 10% of votes may demand a meeting in writing usually SH vote on fundamental transactions (211d) 1. MGM: Ps sued MGM & 5/13 members of board. directors have the right to make reasonable & proper expenditures from corp. management sends to SH at corporate expense a voting packing containing an annual report. and improperly used the offices & employees of MGM in proxy solicitation & the goodwill and business contacts of MGM to secure support for the present management a.Proxy Fights: election occurs through proxy system a. elect directors. SH Meeting require a quorum (majority) to act: use proxies (state law guides) b. Proxy Voting: SH appoints a proxy agent to vote his shares at the meeting. Protected: Ability to call special meeting (default rule). Annual meetings: Flexible. proxy card. Rosenfeld v. Issue: Whether unfair means of communications are being employed by present management b. as compared to purely personal power. Can amend the charter. a. treasury for purpose of persuading SH of the correctness of their position & soliciting their support for policies the dirs believe in good faith are in the best interests of the corp. Insurgents win. SH Action by written consent (228): SH can solicit consents even when they can’t call meetings e. Ps charged Ds in connection w/the proxy solicitation contest. To solicit proxies. Holding: In a contest over policy. not illegal or unfair (So corp allowed to pay these expenses for proxy solicitation) 2.revocable with written notice to corporation w/intent to revoke. SH action by written consent i. Vulnerable: annual election of directors. treasury for reasonable expenses of soliciting proxies to defend its position in a bona fide policy contest b. Staggered Board: Elect every 3 yrs some of the board and each person serve 3 yr term. Levin v. Put in certificate of incorp that there can’t be SH action by written consent III. appointing another proxy holder or appearing in person Creates agency relationship i. treasury to reimburse both sides in a proxy contest for their expenses. Holding: NO. Default annual election: more vulnerable to takeover than staggered board (211b) ii. wrongfully committed MGM to pay for services of attorneys.

revoke. but also communications which may indirectly accomplish such a result or constitute a step in a chain of communications designed ultimately to accomplish such a result d. Rationale: want insurgents if they have better ideas but if not then this will be wasteful & will happen all the time ii. Firm will reimburse insurgents ONLY if they win and ONLY if SH ratify the payment if they are challenged i. Rule 14a8g: Bases a company may rely on to exclude a proposal: i. Key elements: (1) Materiality. (2) Culpability. Fed courts have inferred a private cause of action for SH if violation of proxy rules V. 3-Violates proxy rules iv. # of proposals. Corporation may reimburse either party only if the dispute concerns questions of policy. Solicit: not only direct requests to furnish.c. (3) Causation. (3) send someone to a meeting i. 2. 1-Anything a SH is trying to force a company to do is not a proper action for SH under state law 1. 14a3: incumbent directors must provide an annual report before soliciting proxies for annual meeting disclosure requirement to protect SH i. ―No solicitation shall be made by means of any proxy statement containing any statement which at the time and in light of the circumstances which it is made. Anyone who solicits a proxy must provide a written proxy statement BEFORE soliciting the proxy ii. Securities Exchange Act Rule 14a: It shall be unlawful for any person by use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national sec exchange or otherwise. (4) Reliance f. Shareholders under 14a8: (1) own $2k of stock or 1% (lesser of the 2) for 1 year. Company seeking to exclude proposal seek SEC approval in form of no-action letter that says SEC won’t take action if proposal is omitted 1 proposal per company/yr b. Corp may reimburse incumbents whether they win or lose d. Rule: If $ spent for personal power or not best interests of long as not self interested 4. then not allowed 3. (2) proposal 500 words or less (no website for more words). amend charter. A9 (mirrors 10b5): Rule about fraud in connection w/solicitation of proxies i. recklessness. daily business operations. 2 ways to get on board: Takeover or proxy contest IV. A8: SH proposal have to state: identity of SH. No solicitations unless complaint ―proxy statement‖ is provided to solicitees c. Shareholder Proposals: It is the company’s burden to demonstrate it is entitled to exclude a proposal (14a-8g) a. 4-Personal grievance or benefit (can’t be about you getting fired) . is false or misleading w/r/t any material fact or which omits to state any material fact necessary in order to make the statements there not false of misleading‖ ii. in contravention of such rules & regs as the commission may prescribe as necessary or approp in the public interest or for the protection of investors to solicit any proxy in respect of any security registered pursuant to section 12 of this title a. Business decisions are not proper for SH (Iroquois). procedural actions ii. Kind of like BJR for board. or withhold proxies. a7: in a proxy contest. length of supporting statement.Illegal iii.negligence. as opposed to purely personal matters of control (not a big safeguard) b. subject matter of proposal e. 14a: substantive regulations of process of soliciting proxies & communication among SH b. incumbent management must either mail the insurgents proxy materials for it or provide them w/the stockholder list equalizes access i. Levin & Rosenfeld stand for: a. Corp may reimburse only reasonable & proper expenses c.

spends more than 5% + only aksing co. To remove poison pills ii. 7-Relates to the firms ordinary business operations (anything controversial is outside ordinary business ops) 1. and to make copies & extracts from: the corps stock ledger. upon written demand under oath stating the purpose thereof. To create a committee of SH to advise the directors seeking to amend corp. shares iv. 8-Items that have been submitted in the past w/o getting much support c. Pension proposal to retire after 30 yrs regardless of age: may be excluded.setting benefits of employees is ordinary business operations. to study effect. bylaws to establish procedure relating? 2. AIG: P submitted for inclusion in proxy statement a proposal that would amend bylaws to require D to publish names of SH nominated candidates. To require that compensation committee be composed entirely of independent directors w/ its own compensation consultant viii. Holding: D may NOT exclude the proposal. To link director pay to corporate performance vii. To require that directors hold a specified minimum amount of corp. 220c Burden allocation: . Iroquois Brands: P wanted D corp to include in proxy materials a proposal to investigate the question of whether the fois gras that co sells is animal cruelty b/c ducks are force fed a. Issue: fois gras is less than 5% of cos business but is it otherwise important? b. DCGL 220b: Any stockholder. D excluded proposal. no change of control intent. The ethical & social significance of Ps proposal and the fact that it implicates significant levels of sales may be viewed as significantly related to Ds business vi. 6-Matter beyond a power of a firm to effectuate vii. Healthcare: if valid policy objective & arbitrary d. NO LONGER EXISTS: constitutionally challenge. shall. To prevent the same person from being both CEO and chair of the board v. 14a-11: Holder of 3% for at least 3 years and continue to hold through election. They have not met the burden.try to frame as national concern/broad viii. Lovenheim v. SEC REWROTE THE RULE: can be excluded if the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election iii. Proper purpose: reasonably related to such persons interests as a SH (broad) 1. Ex. Shareholder Inspection Rights SH have to be informed in order to vote intelligently a. bylaws to establish a procedure by which certain SH are entitled to include in the corp. To require that a majority of the board and all key committees to be independent directors vi. Ex. Not limited to economic significance: ethical is allowed a. Common SH proposals: i. 1. notice required 1. To require annual election of all directors iii. 5-Relevance: Proposal may be excluded for irrelevance if it relates to operations which account for less than 5% of the issuers total assets and for less than 5% of net earnings and gross sales and is not otherwise significantly related to the issuers business 1. have the right during the usual hours for business to inspect for any proper purpose.v. 14a-8-i8-Relating to an Election: Can be excluded if the proposal relates to an election for membership on the company’s board of directors or analogous governing body i. Rule: SH proposal does NOT relate to an election for exclusion from proxy statement if it seeks to amend corp. not change national policy (look at 6) + great social concern (not 7) 2. AFSCME v. proxy materials by nominees for the board of directors ii. in person or by attny or other agent. independence of management. Issue: 14a-8i8: Allows exclusion if proposal ―relates to an election‖. a list of its stockholders and its other books & records i.

State corporate law leaves function of informing SH largely to the market b. warrants: rights to purchase stock at fixed price and valuable b/c common stock price exceeds exercise price a. faces a situation having a substantial effect on its wellbeing or value. Crane Co.usually contingent on getting certain # of shares (51%). iii. not business of the co. Stock list and meeting minutes available unless company can show no proper purpose d. communication w/fellow SH in connection w/a planned proxy contest (attempt to take control) ii. Tender offers usually made at premium price. Ana said Cranes reasons for inspecting book weren’t purposes related to the business of Ana w/in 1315 of Business Corp Law ii. Grimes v. Proxy Contests: i. Holding: A SH who wants to discuss relevant aspects of tender offer should be granted access to SH list unless it is sought for a reason unfavorable to corp. Provide insurgent w/copy of SH list ii. If SH seeks access to other corp records burden on SH to prove proper purpose (harder. Ana did not prove improper purpose. Anaconda Co. secure prospects for personal business iii.SH Economic interest!) VII. If SH seeks access to SH list burden on corp to show improper purpose (easier to produce the list) i. Pillsbury buy control of company b. DE Standard reasonably related to your interest as a SH (offer to buy shares is related) d. address of each registered SH b. SH litigation: you want to talk to people directly so may file deriv. balance sheet. incumbent manager must either: 1. v.: Tender offer is a business purpose i. Courts have allowed transfer of voting rights when related to otherwise legit corp transaction . Adverse effects in public as result of manufacture Proper (BRING BACK TO INVESTORS to create proper purpose. NY: SH have statutory right to inspect key financial statements. Improper: Attempted to discover proprietary business info for the benefit of a competitor. Shares of common stock of Ana. NY standard Business purpose (offer to purchase goes to ownership of shares. Inspection Purposes: i. suit 1. Books/records: To sell or sue ii. Vote buying: SH can’t sell vote other than as part of transfer of the share. Donald: SH filing deriv suit must allege either that the board rejected his pre-suit demand that the board assert the corps claim or allege w/particularity demand futility c. Public policy issue of things public would want to know improper b. Statute construed broadly in favor of SH whose welfare may be affected a. Shares are tendered in an escrow acct pending completion of the contingencies. Whenever the corp. more costs) i.a. the SH are necessarily affected and the business of corp is involved w/in 1315. Interpreting proper purpose: 1. Ana opposed ths and sent letter to SHs stating identity. SH List: to help voting. Rationale: Inspection of books allows SH to independently evaluate situation 1. ownership buyer thinks they can do something to make co worth more c. SEC 14a-7: In proxy contest. collect info relevant to valuing shares.) i. unless you specifically retain the right to vote. Proper: Investigate alleged corporate mismanagement. Honeywell: protesting manufacture of things for the war a. Crane requested list of SHs claiming they had a FD to present them w/all the info pertinent to the pending offer (Crane owned no Ana stock at this time but they after bought stock to make them the largest SH & requested again. Mail insurgents proxy materials for it 2. Facts: Crane proposed an offer to exchange $100mil in subordinated debentures for up to 5 mil. income statement.

impose no-dividend policy ii. are legal if all SH agree and it does not harm creditors or the public (Clark v. the K is enforceable. Sue BUT no one to sell to I. Rule: Agreements between SH cannot eliminate the directors FD Still allowed to fire w/agreement if director is seriously neglecting their duties III. Sell. SH to accumulate votes and allocate them (ex.power to select board to approve fundamental changes. Separate voting agreement (as shareholders) from employment contract (between individual & corp) d.only for a term II. 1. Pre-committment is a problem: You have FD as director & pre-commitment is unenforceable if it violates FD b. i. They enter into K that C would manage corps & get 25% of earnings as long as he was faithful & competent and he would tell the secret formula to Ds son. not just the ones who votes for them 1.public is not effected so parties can limit their rights (no conflict problem) i. Position of minority shareholder in close corps: No right to demand dividends. Cumulative Voting: SH voting power= # shares x # seats on board every share entitled you to vote for each seat on the board. Holding: Pooling agreement was binding & valid. Rule: Voting agreement are valid but cannot be permanent. so you can pile up votes & put it behind a small number of seats. As long as all SH are party to the K or their waive their rights. Rationale: Directors have a duty to ALL shareholders. deny compensation. Unanimous Consent: If directors are SOLE stockholders. ii. iii. even though arb didn’t have the power to cast the votes. Contrast w/partnership: if partnership. McQuade v. Failure to vote arbitrator way is breach of K. from changing officers. Stoneham: M entered into K w/S &MG that they would keep each other as officers of the corp. Rule: Agreements between all SH to keep each other as directors. the min SH could withdraw & dissolve the ptnrship and if not wrongful. 7 seats on board. Freeze out: isolates minority SH from corporate participation (forces them to sell shares to majority on unfavorable terms) i. salaries or retaining people in their officer except by consent of contracting parties. ii. may to get money unless you get dividend or salary b. D failed to continue C as director & prevented from receiving income 1. substantial majority of SH participate in corp b. Ringling Bros. The K was illegal & void as it precludes the board of directors. Minority rule: Focus on intent: to just rip these people off 1. Facts: Ringling & Haley enter into K that they vote together w/all of their shares. Dodge: C & D are sole SH of 2 corps. there is no objection to enforcing an agreement among them. no ready market for shares. Clark v. c. C owns 25% of both & D owns 75% of both. Election not invalid but Haley’s votes rejected. Controlling SH can act to detriment of minimum SH. v. But there was a falling out and at next election M lost. Ringling: i. Close corps have lots of internal issues: no market to sell interests.Rights: Vote. Majority can remove min from office. so minimum SH is at mercy of majority. If they fail to agree. The controlling SH can work for the corp and pay themselves generous (but not excessive salaries) a.Control in Closely Held Corporations. An election came & they didn’t agree on 5th director and Haley voted the opposite way of arbitrated decision. SH cannot form an agreement to control the decisions traditionally vested in the judgment of directors of a company SH may contract to elect each other as directors if they are the ONLY shareholders (cannot create a duty only to some SH) a. Holding: S & MG duty was to corp & stockholders. Close corps: small $ of SH. Holding: No other SH so K is valid. No right to a job. Find a mechanism to pre-commit the company at the time you enter into K (licensing agreement) ii. is entitled to liquidation of business & payment for proportional share . the issue will be arbitrated an tell them how to vote. at risk of incurring legal liability. each share gets 7 votes) a.Courts impose FD on them like partners c. Dodge) e. How could McQ & Clark gotten what they wanted w/o risking contractual invalidity? i. This allows min.

Illegal Freeze Out. Wilkes v. Stockholders in closely held corp owe each other same FD as partners own to each other (may not act in self interest) iv. Holding: Even if Wolfson had a reason to refuse to declare dividends.: Where charter has a provision to protect minority SH. Issue: Did Wolfson breach FD to other stockholders? YES iii. expedience or self-interest (DOL) a. Why did court do this? Wilkes bought his shares as minority SH and this was foreseeable so he had the option to bargain for a L 1. he recklessly ran serious & unjustified tax penalties. Review: What did Ds do wrong? i. 1. bargain for buy-back option in the event something happens to buy back at high price 2.MINORITY RULE (Facts: Fired + paid no dividend) i. ii. operate it as a nursing home. expedient or self interest in derogation of their duty of loyalty to the other SH 3. Griffith thinks this logic is nuts: They are all responsible b/c they vetoed his proposal to improve property which would have avoided the tax penalty. and vest ownership of the property in a corporation. Smith: Blocked payment of dividends & failed to produce a sound plan for investment of retained earnings iii. Mass SJC Close corp definition (LOOK ON SLIDE) e. The co got tax penalties b/c they didn’t pay dividends. Controlling SH owe FD to minority SH: 80% provision makes them all controlling SH so they all owe FD 2. No one wants a rule that makes it impossible to get into business f. Springside Nursing Home (Mass.He invested on these terms v. This turns at will employment to ―for cause‖ c. Minority may rebut by showing alternative course of action less harmful to the minority 2. They don’t have any b/c no misconduct by Wilkes so they breached their FD to him as minority stockholder 1.ripping him off on purpose COURT IS REWRITING THE CONTRACT a. Atlantic Properties. There was a disagreement w/group & Wolfson. Did Wilkes get more than he bargained for? This is about intent. Inc. If they argue legit purpose by cost saving. Facts: 4 men buy property. We force min SH to K around the default rule b/c the requirement to pay or give jobs would be expensive & these are small businesses. Ct). In articles of incorp & bylaws made that everything needed to be approved by 80% (supermajority provision). Wilkes: cut of W salary & offered low prices for shares ii. Wolfson didn’t want dividends b/c he would have to give 90% to gov b/c he is rich ii. the minority SH have FD to use provision reasonably i. Planning techniques to avoid litigation: 1.d.he could say we can save costs elsewherethis is NOT a rule a court should make. Wilkes had falling out and wasn’t re-elected as director or officer. Controlling group must show legit business purpose for the action b. shareholder agreement . Holding: the controlling group has to demonstrate legitimate business purposes for their actions. May not act out of avarice. Employment agreement. so each owned 25%. Smith v. Wilkes: Create buy-sell K.he wanted to do improvements and they wanted dividends.they ALL held out so case should be dismissed 3. So he pays out of pocket for costs incurred 1.breached duty of good faith & loyalty with his risks. Facts: Wolfson bought land & went in with 3 others. At time of incorporation it was understood that each party would be a directors and manage and operate the corp. Should have had a plan to arbitrate deadlocks b. Issue: Can Wilkes get damages for breach of FD to him by other managers? iii. 2 part test: Nothing like BJR Majority SH cannot act out of avarice. employment K.

Typically seller liquidates and distributes consideration to SH 4. 3 ways to do this: i. So B SH becomes A SH. Gives target co SH a right to vote on the transactions 2. SH Exit Event. the certificate of merger is filed w/the secretary of state. Combined proxy contest/tender offer (TWO STEP): Suitor can solicit proxies to replace the board. where management of two corps bargain over structure. Bought at a premium: structurally ineffective anyway c. it is submitted to SH of acquired co for approval (or both SH if merger) a.Board needs to approve c. Is there a way around this for the SH of the acquiring corp? . Seller co has cash from buyer co and liquidates and gives cash to seller SH. iii. Smith: buy-sell k. Tender Offer: Suitor can appeal to SH wallets by seeking to buy a controlling block of shares at above-market prices. Sale of assets is a taxable event: Tax at the corporate level based on the difference in the depreciated tax book value of the assets sold and the sum of the purchase price and liabilities assumed 2. A successful tender offer gives the bidder a majority equity position and assurance of control. Ways to Buy a Company: a. Taxed when SH get paid: Assuming liquidation based on the difference between the tax basis of the SH stock and the liquidating distribution iii. The Companies & their boards agree to the plan of merger i. dissolution in case of impasse Public Company Control: Takeovers I. Merger: Company A pays w/its own shares. arbitration in case of impasse. Seller. Merger is an operation of law: At closing. After the boards approve the deal. NOTE: Cannot be hostile. Buying Shares: Tender Offer: Conditional offer to purchase w/bidder offering to buy a certain number of shares (usually 51 %) Not binding on bidder unless all conditions are met and usually gives it voting control iii.unlike proxy. Friendly Change of control: Most control changes occur in negotiated or friendly acquisitions. giving it legal effect iii. No involvement of board of directors of target company ONLY FORM THAT CAN BE HOSTILE (where target board may not way transaction) b/c the board cannot prevent SH to sell shares to target company. a suitor can go over the heads of unwilling management and woo the SH directly.2. Buyer company becomes owner of target company b. i. BUT when Corp is publicly held. Agree to sell all of its assets (DGCL 271a) 1. 1 tax: SH on value of their shares (for target co SH) ii. Greenmail: Buying your stocks back from someone else who has your shares (it is a defense) say this is bad practiced and not allowed b/c it is in exchange to make threats go away i. Proxy Contest: BY soliciting their proxies to oust the incumbent board and instill the suitors slate of directors ii. Buy the Stocks/Shares: Buyer company sells shares to SH. 251c: Agreement required by subsection b of this section (merger k) shall be submitted to the SH of each constituent corp at an annual or special meeting for the purpose of acting on the K 2. Buy all the Assets: Buyer company pays the company an amount over the consideration between the 2 companies. Double taxation: 1. on the promise that it will make a tender offer b. just like merger. Avoids buyer assumption of liabilities on seller ii. terms and future management. DGCL 251: Transaction must be approved by SH of BOTH COMPANIES 1. by vote of the board & SH. Takeovers: Best market to make managers want to do well and have high stock price II.Boards negotiate this ii.Monetizes their investment 3. NOTE: CANNOT BE HOSTILE. i. B shares convert into A shares at an agreed upon ratio and B shares are cancelled. Seller co delivers assets to buyer co.

Mathes: i. The Security held by surviving corps SH will not be exchanged or modified c. Facts: Marmont (Motor Products) wants to buy Holland. Hostile Takeovers: NOTE: IF no hostile takeover initiated. Two tier tender offer: Front it basically forced merger to occur ii. DGCL 262: Dissenting SH may get appraisal rights (right to sue that money you got from merger is inadequate). Board said no so he kept buying more shares. Timing: all cash multistep is fastest iii.they have to object to merger a. a. Leveraged Buyouts: private corps acquires all outstanding shares of public corp so it is no longer publicly owns iv. 1. Forward Triangular merger: Where acquiring subsidiary survives c. Cheff v. Reverse Triangular Merger: Where target company survives (subsidiary is merged into target and assets of subsidiary are exchanged for assets of targetso target becomes subsidiary of the parent and SH of target get consideration) i. so the merger is between acquiring subsidiary and target corp iv. 262b Appraisal Market Out Rule: Get appraisal rights in statutory merger b. Legal Consequences of Merger: 1. Issue: Whether purchase was allowed. or combination v. apply BJR a.a. The surviving corps outstanding common stock will not be increased by more than 20% iv. Target SH gets consideration directly from bidder. SH due derivatively to hold board liable for loss from ―improper use of corporate funds‖ to purchase shares of the company. SH of acquiring subsidiary vote: They are the board iii. Appraisal Remedy: Exclusive remedy of minority SH in short form merger III. then it is not. May contain special provisions: Lockup (protect friendly deals from hostile intruders) ii. Voting common stock of the target corp have voting rights on a merger except: a. Triangular mergers: Acquirer forms wholly owned subsidiary where bidder owns 100% shares and then merged w/the target corp= does not assume liabilities of the acquired corp (merger between acquisition subsidiary and target corp) i. DGCL 259: Survivor automatically liable for debts of both corps 2. cash. Holland did not want to change its system of sales & Marmont would do that. Cheapest & easiest b/c leaves both pre-existing corps in tact 3. any other shares. The surviving corps charter is not modified b. Survivor automatically succeeds title to all assets. LOOK AT SLIDE v. not subsid b. To make sure takeover did not happen.SH of subsidiary have right to receive appraisal d. SH of targeting company have to vote ii. . Bidder creates acquisition subsidiary in which bidder owns 100% of shares. Short form merger: parent corp that owns 90% or more of shares of subsidiary corp may merge it into the parent w/o SH vote of either court. BUT b1: Do not get appraisal rights if your shares are market traded of the company has 2k SH or SH not required to vote on the merger c.purpose for perpetuation of control of incumbent directors. So statute restores appraisal remedy if target SH receive consideration anything other than: stock in surviving corp. Notes on Mergers (not sure if we did but helps understandinged i. buyer gets 51% stock and then the back end gets a loser price. BUT b2: DO get appraisal rights if your merger consideration is anything other than shares in the surviving corp or shared in 3rd corp that is exchange traded or has 2k SH with de minimis exception for cash in in lieu of fractional shares 3. Holland used corporate funds to buy stock owned by Motor Products and paid more than market price.

BUT Unocal is getting money from the corp to pay so the shares are worthless 4. maybe even community generally) 5. Issue: The validity of a corps self-tender for its own shares which excludes from participation a SH making a hostile tender offer for the company’s stock iii. B/c they showed reasonable threat to continued existence of Holland.also 2 tied but the back end would be shares. Quality of the securities being offered in the exchange better for first people). What sort of threats? i. he would assure SH approval 2. Threat: Reasonable perception of threat of harm to SH a. Under the circumstances. Board is mostly independent directors who acted in good faith and after reasonable investigation that Mesa’s tender offer was inadequate and coercive. The bids ―effect on the corporate enterprise‖ including: 1. not anything bad. 1. employees. customers. Risk of no consummation 6. Substantive coercion: consideration is grossly inadequate b. Mesa would merge Unocal w/Mesa and b/c he would own 51%.iii. Defensive measure: Greenmail. Unocal’s response: Self tender at $73 to everyone but Mesa. 2 Tier tender offer: creates incentive to tender & back end would be screwed 3. Holding: Corp has burden to show valid business purpose & transaction was fair to all SH including excluded ones. Burden on Board to show business purpose QUESTION IS BOARD’S INTENT b. Structural coercion: back end junk bonds iii.that the defense measure was reasonable in relation to the threat posed to the corp 1. the board had the power & duty to oppose bid that it perceived harmful to the corp. Exclusionary Self Tender. ii. If response if preclusive or coercive (Draconian) fails ii. Mesa Petroleum: i. Nature and timing of offer 3.No longer allowed iv. General rule: Defensive devices permitted as long as the action was motivated by a sincere belief that the action to maintain what the board believes are proper business practices 1. Holding: Burden on board to show reasonable grounds to believe a danger to corporate policy & effectiveness. Impact on other constituencies (creditors. the court invalidates the defensive tactic as a violation of the boards FD . Intermediate Scrutiny (More than BJR but less than entire fairness): recognizes the inherent conflict in takeover defense 2. back end junk bonds. a. 1. so defer to BJ and Ds win. Unocal’s board met to consider the offer and decided to make an exchange offer. Facts: Mesa commenced front loaded tender offer (front end cash. This is allowed as long as entrenchment (perpetuating themselves) is not the SOLE OR PRIMARY MOTIVE 2. the use of corporate funds for such purposes is improper and breaches the DOL. Mesa sued for that and for excluding them from buyout. Unocal Corp. Two-Part Test: Incumbent Board must Show: (1) Threat + (2) Proportionality. Burden on Board: Directors must show they had reasonable grounds for believing that a danger to corp policy and effectiveness existed b/c of another person’s stock ownership good faith + reasonable investigation i. If defensive reaction fails either prong. v. Standard: Good Faith of Reasonable Directors to believe a danger to corp.: If board has acted solely or primarily b/c of the desire to perpetuate themselves in office. Questions of illegality 4. Inadequacy of price offered 2. That they are not solely to perpetuate the board in office b.buyback of shares iv.

R wants to sell company to Forstman (b/c he would let managers stay) but Perelman want his company. vote on your directors. it has no economic value b/c the price you have to pay to get shares is more than they are worth. Extremely effective means to prevent someone from buying shares: Only 1 modern PP triggered for tax purposes 1. Flip in: triggered by actual acquisition of 20% of shares: holder of rights (except acquirer) can buy 2 shares of issuers (target) common stock at ½ price. Defensive Devices to Takeovers: no more exclusionary self tenders makes it impossible for hostile bidder to buy c. Amendments to charter: SH have to approved b.not available to the other buyer.c.when acquiring person takes a stake.and the first buyer will then buy the rest since the best asset sale brings the value of the firm down . They can promise not to in articles of incorp. Crown Jewel Lock Up: When the co agrees to sell the best asset to another buyer. One of the most important defenses i. Poison Pill: Target company issues rights allowing SH (other than bidder) to convert the right (to buy shares) into a large number of common shares if anyone acquires more than a set amount of the targets stock (usually 20-30%). Ways to acquire company that has PP? Buy shares.impairs acquirers capital structure ii. every court found a cognizable threat & rarely found disproportionate d. and makes it more expensive to acquire control of the target.need to show intrinsic fairness IV.dilutes value of target stock owned by acquirer 3. holder of right is entitled to purchase common stock of acquiring company at half price. This dilutes the % of the target owned by the bidder. Revlon Inc. Way to get around it: Once a co makes pill.SH APPROVAL a. Also incentive alignment.and the rights are triggered and exercisable at a different rate and everyone gets a 2 for 1 buy rate 1.problem is conflict of incumbent board. proxy fight. If contest for control is self interested. Dead hand poison pill: Can only be removed by current board of directors (DE SC Disallows this) v. SEC Response to Unocal: No exclusionary tender offers & Fed overrules state law ii. To prevent Perelman from buying the co) pick an acquirer you prefer. to take it over. Note: Between 1985 and 2000.: POISON PILL a. Flip over: if acquisition takes place. but they would get a high buyout so they accept the takeover.board can make unilaterally w/o SH approval. Facts: Battle for control of Revlon. Pac Man: You borrow money and buy the person who is trying to buy you d.FL would have let them stay). When issued. iv. BUT there is a triggering event. Defense against that: staggered board_ you can’t get the board in 1 election. Once triggering/distribution event occurs (announcement of intent to acquire) rights can be traded independent of stock (but no sense to exercise the rights) 2. Pantry Pride. So Staggered board is hard to get 3. Revlon thought his offer was too . SEC Rule 14d-10: All holder’s rule: No one can make a tender offer unless the tender is open to all holders and everyone has to get the same consideration (eliminates 2 tier tender offers) i. Staggered board IN CHARTER. Golden Parachutes: Give officers really expensive termination provision so it is hard for someone to buy them b/c of extra costs. Effect: Dilutes acquiring person to prevent purchase of shares V. No lender would promise the same terms and can’t keep financing.usually allows incumbent board to keep their jobs (also in Revlon. It makes it so expensive for someone to buy from SH so acquirer is forced to negotiate with board who can redeem or remove the poison pill iii. Can be made overnight. White Knight: Merge w/someone you like. Purpose: give the board a veto over the tender offer when they could not have done anything before.If you win. SO PP + Staggered board= can’t be taken over 2. e. board redeems pill and then you launch tender offer 1. turn it into a proxy fight/take over. put your directors on board to redeem poison pill then do tender offer a. (Revlon agrees to sell off one of its finer depts.

not cash deal to monetize. Rule: Once buyout became inevitable. First. Unocal applies (threat): There was a reasonable threat that the SH wouldn’t be informed enough to vote (and this motivated the boards decision. Instead. Pantry raised their bid but Revlon’s directors approved the buyout by Forstman exclusively. Issue: Do Unocal or Revlon apply? c. How may/must a board act when it decides to sell the co a. Facts: Time wanted to merge w/Warner. Holding: i. Authorization permitting management to negotiate the merger or buyout w/third party recognizes company is for sale 2. Once Pantry increased offer. Triggered when: Change of control (Cash or bust of deal). . board must get highest price 1. Time decided to do cash only to avoid SH vote (under triangular merger rule). Paramount came in w/higher bid & to buy the whole company. Revlon & Unocal Duties: i. the directors duty changed from preservation of Revlon as a corporate entity to the maximization of the company’s value at a sale 1. last chance to monetize the investment 2. Time: Means a board CAN just say no if a previous business decision a. How may/must board react when it gets an unsolicited offer VI. So board can’t think about note holders. would lose b/c Time is target of Paramount and they are totally refusing to sell to them. SO BJR does not apply and Ds enjoined. Court focuses on triggering event of special duty: Cash Sale Break up of Co once breakup is a reality. If the Company is for sale- Revlon duties: Strict SH Maximization 1. Time Culture is non-SH constituency 2. Holding: Initial defensive tactics by board were okay b/c they worked for the benefits of the SH. B/c board no longer faces threat to corporate policy & effectiveness. you are SH. Instead of trying to get the highest purchase price. Under Revlon. which even directors embrace. Paramount sued. If applied Revlon. c. Unsolicited hostile bid for Revlon Adopts PP and issues notes Pantry raises bid price Revlon finds white knight (F) Pantry promises to outbid white knight Revlon negotiates crown jewel lock up with white knight b. break up of co was inevitable 2. No need to auction every time: Just a rational process to produce the highest value for its SH. Target abandons Long Term strategy and seeks alternative transactions involving breakup c. the directors allowed other factors other than SH maximization to inform their decisions. only allowed to think about SH ii.some justification to say it got the best price (market check) ii. b.turns shares to dollars and board has special duty to maximize SH wealth ii. Applies when: Corp initiates an active bidding process. not entrenchment) & the response was proportional b/c they didn’t say Paramount could not acquire Time-Warner after merger.a clear breakup i. Reason: This is the last chance SH have to monetize the investment. Perelman sues w/SH claiming that board breached FD to SH by looking out for their own best interests to prevent litigation from note holders by sacrificing interests of SH.low so they created a PP. creditors. Revlon does not apply b/c Time isn’t going to dissolve this is a stock deal. i. they took F to limit their personal liability. i. obtaining the highest price for the benefit of the SH should guide director action b. question of defensive measures becomes moot d. Once the break up of the company has become a reality. Paramount v. If the company is being defended from hostile takeover Unocal duties 1. Also. and still SH 1. Here. selective dealing to fend off a hostile but determined bidder is no longer a proper objective. transaction happens. But in agreeing to the lock up w/F. Issue: There was an injunction to stop k w/F. they were going to do stock for stock exchange (which would require SH approval under NY law). or others except SH 3.

Defensive Devise: Restructured transaction so SH do not get vote at all 3. etc. Ps argue: Paramount was a whole deal. lock up options (20%). Also. no shop/no talk. there will be a controlling SH who will have voting power (to elect directors. Following this transaction. Facts: Paramount wanted to be acquired by Viacom. Para said they could not consider b/c of contract w/Viacom and has preferential negotiations w/Viacom. SO: BOARD OF DIRECTORS OF PARA OWE HIGHER DUTY TO SH FOR STRICT WELFARE MAZIMIZATION iii. b. Not 2 tier structurally coercive like Unocal. When a majority of a corps voting shares are acquired by a single person or entity or by a cohesive group acting together. no shop provisions.1. What should board do when confronted w/a hostile takeover? 3 possibilities . OR Omnipresent specter of entrenchment: someone will control & Time wants to b/c they don’t want to give up their jobs so they make up a reason to legitimize it 2. Viacom gets: Pill redemption. this is a continuing of Time’s business and carrying out a previous business decision 1. Also. Ps say: What is a proportional response to 50% premium bid. cash out to the public SH. Ds argue: Concern that Time SH might elect to go to Paramount in ignorance. QVC: a. merge w/another company. Proportionality: i. If no change of control: More deferential standard (Time. they should educate SH about future value process to reasonably extract highest value i. Once control has shifted. This is a stock for stock transaction (like Time Warner) ii. termination fee 1. Then QVC came in with a bid to acquire Paramount.both cos diffusely held so the control of the corp is not vested in a single entity or group) 3. the proposed sale of control would provide new controlling SH w/the power to alter that vision 5. That means board has to do what is reasonable and in best interests of SH duty to strictly maximize SH welfare. There were poison pills. Market price is the best guess of what the co is going to be worth in the future (not good justification) ii.Not a sale but a change of control (NEW TRIGGER FOR REVLON DUTIES). i. Holding: Revlon Applies.taking away SH vote? Even if it is a threat. Paramount v. Issue: Does Revlon apply? c. only time. Threat is great & afraid SH will make bad decision c. would need to raise 2x as much cash VII.serious publishing house and can’t be eroded by entertainment co. Change of control: A deal that causes a diffusely held co to come under the control of an individual group 1. amend COI. the value of the plan far exceeds the Paramount deal. Threat: a. cause a break up of corp. In the long run. Merger (Acquisition) Agreement: Paramount board stays in control. Time wants to control (remain directors) to keep ―Time Culture‖. there is a significant diminution in the voting power of those who become minority SH 2. Irrespective of present Para’s board vision of long term strategic alliance w/Viacom. so no coercion b. Court says: It is proportionate b/c once they merge Paramount can buy the company. BUT Para doesn’t want Warner. They want to keep the journalistic integrity of Time that is worth more.keep journalistic integrity a. the current Para SH will have no leverage in the future to demand another control premium 6. sell all or substantially all of corp assets) 4.

Balance Sheet: Statement of what the business has at a particular moment. Owners equity: residual interest in the companys assets after debt & obligations II. How may a corp behave when it decides to sell the co? Revlon Accounting Concepts I.court influence (Roberts) i. Used to asses liquidity/solvency.assumes markets do not accurately price shares 2. net income/loss: profit/loss of company over period of time b. Middle/Revlon: Takeover defenses are ok as long as used to get the highest objective value: Pretty much can do anything as long as not in revlon overview a. recognize expenses & liabilities as soon as possible when there is uncertainty about the outcome SEC COMMISSIONER TALK: Troy Paredes I. Business can be very profitable but insolvent (high cash expenses. Listed from most liquid to least liquid (cash. Listed in order when the obligation will come due (accts payable. Assets it holds. SEC administers them as an active agency. Conservatism principle: recognize revenues and assets when they are assured of being received. Cases: Mark. 3 main components: revenue – expenses= net income/loss i. e. inventory. investing. Assets= resources w/probable future economic benefits obtained or controlled by an entity resulted from past transactions or events i. etc. Consumer Protection act.measure of financial heath c. Matching principle: match expenses w/related revenue VI. accrued interest. glossed by Time Warner ii. Should have full power to defend co as much as they want from takeover: Directors know companies better than SH (Lipton).) e. Disclosure: use it to promote transparency a. Assets & liabilities sum to 0 c. Morrison. Add in problems? V. Income Statement: reflects the net income of a business in particular periods and is regularly renewed over a period of time a. Begin w/net income/loss and adjust for: non cash items. land) d. revenue: amount of money received by company thru sales during a prd of time ii. liabilities it owes. difference between the two is the equity that the partners have in the firm (assets = liabilities + owners equity) b. Look to Unocal.1.significant overhaul c. For takeover Ws: How much a corps board behave when it gets an offer to buy the co? i. expenses: money spent or costs incurred in companys efforts to generate revenue iii. Note: DE courts gets involved in certain takeover situations b/c all their revenue comes from taxing out of state companies who file papers in DE so they need to appeal to managers and to people making decisions BUT need to be involved when agency costs where managers may not be maximizing SH value. sales on credit) IV. Net income becomes the equity & retained earnings on the balance sheet III. taxes payable. Liabilities: debt or legal obligation i. Hallburton II. Cash Flow Statement: indicates changes in cash position over a period of time a. Revenues-costs of goods sold= gross margin – fixed costs = operating earnings – taxes & interest = net income c. 5 commissioners appointed from pres w/advice and consent of Senate b. accts receivable. and financing activities b. Total passivity: Board can’t do anything while SH decide whether to sell would maximize takeover and takeover market is incentive mechanism for managers to runt he company as well as they can so shares will be high and takeovers won’t happen (Easterbrook/Fischel) 3. Generally: a. Better when investors can make informed decisions .

Is there express authority in the K? Does this fall w/in implied authority? ii.put up signs e. We are better off when businesses can raise capital. Liability Waiver f. This only operates between franchisee and franchisor. More disclosure can result in less transparency & worse decisions IV. Indemnification & insurance b. but phrase it was suggestions.b. need to work out procedural aspects d. Retro Laundry? i. Move from US GAAP to IFRS cost justified? Value of having international standard. Need to weigh costs/benefits of more disclosure b. Operating manual: tells them what to do. Contract that you are contracting w/franchisee and not franchisor ii. total compensation v.but economic interest not always tied to control interest b. Business forms to franchisee explicitly stating Retro is not involved 1.needs notice II. ceo compensation. They have the right to control their own expenses iii. Does every US issue have to move to IFRS? Larger multinational cos are ready to make the change but smaller public cos don’t need the value NEED TO ADD: PROBLEMS PROBLEMS: I. Limiting instructions that no franchisee can enter into contracts g. Given the money might be ratification.may be overwhelming b. Problem 2: How to deal with deadlock a. Regulators draw lines: function of policy preferences and tradeoffs b. Specific vendors for certain products: only approved vendors who have notice i.more efficient and lower cost d.easier for investors who only need to understand 1 set of accounting standards.helps create jobs III. Avoid 50% (give one 51%). whether co has separate chairman of board and ceo V. Fed Sec laws mandate certain disclosures c. Contractual Disclaimer: this agreement does not create the relationship of P & A between franchisee. more targeted info a. more valuable.drives down costs of capital and preparation but transition may not be easy i. Franchisee is independent contractor.might be better to have shorter. Grant 1 partner tie breaking vote c. Additional facts we need to ask? i. Apparent Authority problem: i. Imdeminification contract iii. i. Q&A: a. Disclose: executive v. Franchise agreement controls the legal structure c. Buyout provision: Who gets to buy. set the price (problem of valuation) . Arbitration provision: Expensive. firms performance. Need to refine the regulatory regime to allow businesses to raise capital more not incorporate into franchise agreement.want to avoid franchise liability in tort a. They will be unable to distinguish what is important and what is not. Commissions should consider impact on investors as disclosure increases. Dodd-Frank a. otherwise might be a binding contract d. Notice to 3rd parties. Provide the forms iv. Over disclosure: Might to too much for investors to work through efficiently a. Did she represent herself as an agent and it was reasonably they relied on this? h. No holding out: Say in K that franchisor cannot say they are your agent ii. Problem 1: Retro Fitness Franchise. not third parties. Some mandatory disclosures may not be warranted VI.

Problem 4: SH Proposal on Mandatory D&O Disclosure a. 351? . Factors that overcome expert advice in DOC claim a. Martin v. Golden rule alternative: Incentive to submit fair price when both parties submit price and whoever has the higher bid gets it e. delineate responsibilities between audit & regulatory committee. Duties and responsibilities of directors a. Peyton IV. Dissolution clause III. Van Gorkom Factors pointing to breach of duty of care VI. Governance Changes: establish regulatory committee and set logistics for implementation of it. Can’t tell directors what to do but can propose bylaws LISTS OF FACTORS FOR EXAM I. regulatory committee collaborates w/compensation committee. Cargill b. Francis VII. Page 208 II. Problem 3: Pfizer Litigation for substantial benefit to SH a. RUPA 404(b)(1) Meinhard v. Piercing the corporate veil: Subsidiary & Parent a. P. Factors of Control a. compensation claw back IV. Precautions allows that do not arise to partnership w/creditor a. Holiday Inn III. Salmon V.i. establish ombudsman (employee work concerns).

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