Corporations 10/7/10 Voting Agreements and Voting Trusts proxies MBCA 7.

7.22 revocable irrevocable must be coupled with an interest Blount v. Taft (pg. 362) issue: can you amend this shareholder's agreement with a simple majority vote? court: doesn't enforce (unanimous consent) here because there was a problem (the bylaws provided for a majority vote) shareholders' agreements almost always require unanimous consent Duggin: this was a shareholder's agreement, but the court doesn't go with it (on account of poor drafting) Shareholder Agreements MBCA 7.32 (b)(1): unanimous and included in articles, bylaws or separate agreement signed by all shareholders at time and made known to corporation (b)(3): valid for 10 years unless otherwise specified (c):requires conspicuous notation on stock certificate (of existence of shareholders agreement) (d): limits availability to close corporations (not publicly-traded companies) (e): shifts in fiduciary responsibility (f) no personal liability (piercing-corporate-veil-type) for shareholders even if effect of agreement is to create a partnership DGCL 350 fewer specifics may be by shareholders holding a majority of stock similar shift in fiduciary responsibility Gearing v. Kelly (pg. 366) Filling Directorial Vacancies MBCA - directors serve until next shareholders meeting to fill a vacancy... 8.10(a) shareholders, board of directors (majority, if no quorum exists) 8.07(a) resignation at any time 8.05(d)&(e) McQuade v. Stoneham court invalidated entire contract because it didn't include a severability provision Clark v. Dodge Plaintiff: Clark (25% stock ownership) Defendant: Dodge (75% stock ownership) (relating to two corporate defendents New Jersey corporations based in New York that manufacture medicinal preparations by secret formula) Written Agreement desire of Dodge that Clark should continue in the efficient management and control of the business of Bell and Co. so long as he should remain faithful, efficient, and competent to manage and control said business

Clark should not be sole custodian of a specified formula, but should share his knowledge and the method of manufacture with a son of Dodge Dodge during his life shall receive Galler v. Galler (pg. 376) (brothers in a close corporation) Plaintiff: Emma and her husband, Benjamin (owns 110 shares) Defendant: Isadore and wife, Rose (owns 110 shares) Shareholder's Agreement (to protect the surviving spouses) in 1955, during his brother's illness, Isadore asked the accountant to have the shareholder's agreement put in final form in order to protect Benjamin's wife power of attorney: Benjamin allowed Emma to vote on his 104 shares 1956: Benjamin created a trust (which covered the 104 shares) naming his wife as trustee stock was reissued in her name after she agreed to permit defendant's son to become president for 1 year and that she would not interfere with the business during that year when Emma refused to modify the agreement and sought enforcement of its terms, defendants refused and this suit followed defendants had decided prior to Benjamin's death that they would not honor the agreement, but never disclosed their intention to plaintiff or her husband Dividend: plaintiff has received her proportionate share of the dividend Court: absence of an objecting minority interest and an absence of public detriment general rule that the owners of the majority of the stock of a corporation have the right to select the agents for the management of the corporation Restrictions on Transfers Introduction - Rules that limit your use of property: eminent domain, zoning, St. Louis Union Trust Co. v. Merrill Lynch (pg. 386) Stock Transfer Restrictions Use control selection of business associates provide certainty in estate planning (guaranteed market) Relevant Statutes: MBCA 6.27' DGCL 202 Two-Part Test of Validity Comply with formal requirements . General types Purchase Options (inc. first refusal) Consent Restraints Buy-Sell Agreements (most common) Advantages (1-4) Key issues: funding and price Price: fixed, book, appraisal, predetermined formula Funding: often by life insurance policies (payable to the company) or other reserves Prior Approval/Consent Transfer Prohibition (disfavored)

Preemptive Rights Right to acquire proportional share of increase in corporation's capital stock (new issuance) States use opt-out or opt-in approach MBCA 6.30 is an opt-in provision (i.e. default is NO preemptive rights) Voting and Quorum Requirements: Supermajority Requirements

10/14/10 ABSENT 10/19/10 Administrative Matters: Mid-term 10/21-11/2 (available in class and on TWEN) Upcoming Classes: 10/21: Text 445-450, 454-474 10/26: no class 10/28: Pizza & Movie Night: The Smartest Guys in the Room Hypothetical: Negotiating Teams Questions What needs to be done to form the corporation (consult statute books MBCA)? Shareholder Agreement(s) MBCA 7.32 Location/State of Incorporation Articles of Incorporation (when they are filed, the corporation comes to life) Purpose Clause Exculpatory Provision MBCA 2.02(b)(4) Indemnification of Directors (requiring the buying of insurance) Sale of Shares Right of 1st Refusal Stock Restriction MBCA 6.27 conspicuously noted Buy-Sell Agreement (ex: triggered by death) you need both funding for the buy-back and to set a price (fixed or by formula/appraisal) Preemptive Rights in MBCA the default is no preemptive rights Voting Cumulative Voting Supermajorities Voting Agreement (or Voting Trust) Election of Officers (to guarantee employment) Organizational Meeting (including Board of Directors, By-Laws, Adoption of Promoters' Contracts, etc.) What do you each recommend re: governance structure and governing documents and their basic contents? Compensation (Salary), Dividends Can you agree on any mutually beneficial devices/provisions to accomplish the objectives expressed above?

Controlling Shareholders Fiduciary Duty (because they have control of election of directors because they own enough stock) ex: Parent-Subsidiary Relationship courts focus on unique harm to minority note on sale of control (Perlman case, pg. 425): you can't purchase control shares for purpose of looting or buying an officer position Overview of Federal Securities Laws Key Federal Statutes Securities Act of 1933 disclosure, issuance, registration Securities & Exchange Act of 1934 SEC, market regulation, proxy solicitation, tender offers, insider trading Sarbanes-Oxley Act of 2002 corporate responsibility and finance reforms Other Notable Statutes Public Utility Holding Company Act of 1935 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisors Act of 1940 Dodd-Frank Wall Street Reform and Consumer Protection Act Financial Reporting by Public Companies Section 12(g) of 1934 Act (REGISTRATION) requires registration with SEC of any company with total assets of $10 million and a class of equity securities with at least 500 shareholders of record Section 13 of 1934 Act (PERIODIC DISCLOSURE AND FILING REQUIREMENTS) audited financial statements (Form 10-K) unaudited quarterly financial reports (Form 10-Q) reports of material events affecting the company whenever they occur (now, real time) note: these materials are publicly available on EDGAR (www.SEC.gov/edgar) The Registration Process Going Public Why go public (IPO)? Grow your company (IPOs are often very successful) A large, ready market to trade shares Money to pay cash salary Raise your visibility (reputational value) Access to capital Underwriting Firm commitment (underwriter buys shares to resell and bears risk) Best efforts (underwriter helps company find buyers company bears the risk) Registration Exemptions Companies that do not wish to go public seek to avoid registration requirements when making new securities offerings Available exemptions include (note: don't need to know for exam) Intrastate offerings Private offerings to a limited number of persons or institutions who are sophisticated investors

 Small offerings (not high dollar amounts) Accredited investor offerings State Blue Sky Laws Lecture 10/21/10 Federal Proxy Rules Securities Exchange Act of 1934 14 Exchange Act Rules 14a-8 (shareholder proposals) 14a-9 (prohibition against proxy fraudfalse or misleading statements or omissions of material facts) Sample Proxy Statement (Microsoft) Note: Shareholder Proposals (ex: social issues, corporate governance Lovenheim v. Iroquois Brands, Ltd. (pg. 455) Overview: shareholder proposal (relating to foie gras) is excluded from the proxy materials Rule 14a-8 Exceptions: see answers under Question 9 (pg. 557 supplement) example: (c)(5) proposal is not otherwise significantly related to the issuer's business Reasons for pursuing a shareholder proposal: contact more people easily (no shareholder listing, printing/mailing expenses), publicity, force management to take a position note: corporate gadflys (pests) Medical Committee for Human Rights v. SEC (Dow's napalm production) CA, Inc. v. AFSCME Employees Pension Plan (pg. 458) overview: proposal involves reimbursement of proxy expenses for shareholders who nominate candidates in a contested election of directors Exception 14a-8(i)(1): improper under state law Two Questions Question 1: role of the bylaws (court: bylaw can't intrude on perogative of the board) Question 2: board must be free to act as the directors determine is in the best interest of the company Court: in this big corporation, you can't impose these limits on a board Federal Proxy Regulation: 14 of 1934 Act Definition of Proxy Solicitation Liability for False/Misleading Info Key Concepts: Mandatory disclosure prescribed form and scope for proxies Major Issues Under 14a-9 Application companies registered under 12 of Shareholder Proposals - 14a-8

Policy Evolution Procedure Proper Proposal - 13 reasons for exclusion by management Three different categories Inconsistent with centralized management subject not proper not significantly related ordinary business operations dividend amount Interfere with management's proxy solicitation related to nomination or election to office conflict with management proposal duplicative recidivist Illegal, deceptive, or confused violation of law personal grievance beyond corporation's power to effectuate moot SEC No-Action Letter Process note: these do NOT bind the Commission (these responses are staff interpretations rather than formal Commission action thus, they have limited precedential weight)