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I. AGENCY............................................................................................................................................................3 INTRODUCTION .................................................................................................................................................3 AUTHORITY.....................................................................................................................................................3 AGENTS DUTY OF LOYALTY.............................................................................................................................4 AN INTRODUCTION TO FINANCIAL STATEMENTS....................................................................................................4 II. PARTNERSHIP .............................................................................................................................................5 PARTNERSHIP FORMATION UPA 6, 7..............................................................................................................5 Formation by Contract............................................................................................................................5 Formation by Estoppel............................................................................................................................5 Implied Pships.........................................................................................................................................6 NATURE OF A PARTNERSHIP...............................................................................................................................6 MANAGEMENT UPA 18, 19, 20.................................................................................................................6 DISTRIBUTIONS ................................................................................................................................................7 AUTHORITY UPA 9 ......................................................................................................................................7 LIABILITY UPA 13, 14, 15 .......................................................................................................................7 PARTNERSHIP PROPERTY AND INTERESTS UPA 24-30 .....................................................................................7 PARTNERS DUTY OF LOYALTY UPA 20, 21..................................................................................................7 PSHIP DISSOLUTION UPA 29.........................................................................................................................8 III. THE CORPORATE FORM.........................................................................................................................8 INCORPORATION ..............................................................................................................................................8 ORGANIZATION NYBCL 201, 401-403, 601 ................................................................................................9 PREINCORPORATION TRANSACTIONS....................................................................................................................9 DEFECTIVE INCORPORATION NYBCL 403.....................................................................................................10 ULTRA VIRES NYBCL 202, 203...............................................................................................................10 OBJECTIVE OF THE CORPORATION.....................................................................................................................11 IV. CORPORATE STRUCTURE.....................................................................................................................11 LIMITED LIABILITY.........................................................................................................................................11 Piercing the corporate veil: ..................................................................................................................11 EQUITABLE SUBORDINATION: ..........................................................................................................................13 CORPORATE ENTITY AND CONTRACT INTERPRETATION.........................................................................................13 V. DISTRIBUTION TO SHAREHOLDERS..................................................................................................13 INTRO TO FINANCIAL STATEMENTS....................................................................................................................13 LEGAL CAPITAL NYBCL 503, 504, 506.................................................................................................13 AUTHORIZED AND ISSUED NYBCL 501, 622...............................................................................................14 CORPORATE FINANCE NYBCL 502, 518....................................................................................................14 WATERED STOCK...........................................................................................................................................14 DIVIDENDS NYBCL 102(A)(2), 102(A)(8), 102(A)(13), 501, 717, 801(B)(10), 801(B)(11), 804...15 DIRECTOR & SHAREHOLDER LIABILITY, NYBCL 719, 720,..........................................................................15 REPURCHASE BY A CORPORATION OF ITS OWN STOCK NYBCL 513, 515.........................................................15 VI. CORPORATE STRUCTURE.....................................................................................................................15 PUBLICLY-HELD CORPORATIONS.......................................................................................................................15 ALLOCATION OF POWER NYBCL 706...........................................................................................................16 LEGAL STRUCTURE OF MANAGEMENT NYBCL 701, 712................................................................................16 BOARD FORMALITIES NYBCL 707, 708, 709, 710, 711...............................................................................16 OFFICER AUTHORITY NYBCL 715...............................................................................................................16 SHAREHOLDER FORMALITIES NYBCL 602, 604, 605, 606, 607, 608, 614, 615, 616......................................16 VII. SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING......................................16 INFORMATION RIGHTS NYBCL 624.............................................................................................................16
REPORTING REQUIREMENTS.............................................................................................................................16 PROXY RULES 34 ACT 14(A) 14(B) 14(C) RULES 14A-1, 14A-2, 14A-3, 14A-6, 14A-9, (SKIM 14A-4 AND 14A-5) AND SCHEDULE 14A ....................................................................................................................................16 PRIVATE ACTIONS UNDER THE PROXY RULES ...................................................................................................16 SHAREHOLDER PROPOSALS 34 ACT RULE 14A-8 ..............................................................................................16 PROXY CONTESTS NYBCL 609...................................................................................................................17 VIII. CLOSE CORPORATIONS.....................................................................................................................17 INTRODUCTION TO CLOSE CORPORATIONS..........................................................................................................17 VOTING AGREEMENTS NYBCL 609, 620..................................................................................................17 VOTING TRUSTS NYBCL 621.....................................................................................................................17 CLASSIFIED STOCK NYBCL 402, 703........................................................................................................17 AGREEMENTS DEALING WITH BOARD DISCRETION NYBCL 620.......................................................................17 SUPERMAJORITY VOTING/QUORUM NYBCL 616, 709...................................................................................17 SHAREHOLDERS FIDUCIARY OBLIGATIONS TO CLOSE CORPORATIONS.....................................................................17 RESTRICTIONS ON SHARE TRANSFER.................................................................................................................17 DISSOLUTION NYBCL 1002, 1104, 1111...............................................................................................17 DISSOLUTION FOR OPPRESSION NYBCL 1140-A, 1118................................................................................18 ARBITRATION NYBCL 620(B)....................................................................................................................18 FIDUCIARY DUTIES OF BOARD MEMBERS .......................................................................................18 IX. DUTY OF CARE AND DUTY TO ACT IN GOOD FAITH..................................................................18 BASIC STANDARD OF CARE NYBCL 717(A), 720.......................................................................................18 BUSINESS JUDGMENT RULE..............................................................................................................................18 DUTY TO ENSURE THAT CORP HAS EFFECTIVE INTERNAL CONTROLS.....................................................................18 LIABILITY SHIELD NYBCL 402(B)..............................................................................................................18 GOOD FAITH; DUTY TO ACT LAWFULLY ..........................................................................................................19 DIRECTORS AND OFFICERS LIABILITY INSURANCE (SKIM NYBCL 721-726)......................................................19 X. DUTY OF LOYALTY...................................................................................................................................19 SELF-INTERESTED TRANSACTIONS NYBCL 713..............................................................................................19 STATUTORY APPROACHES................................................................................................................................20 COMPENSATION, WASTE AND SHAREHOLDER RATIFICATION NYBCL 515(D), 713(E).......................................20 USE OF CORPORATE ASSETS, COMPETITION WITH THE CORPORATION, THE CORPORATE OPPORTUNITY DOCTRINE.......20 DUTIES OF CONTROLLING SHAREHOLDERS.........................................................................................................20 SALE OF CONTROL.........................................................................................................................................21 XI. SHAREHOLDER SUITS............................................................................................................................21 INTRODUCTION NYBCL 626(B)...................................................................................................................21 NATURE OF DERIVATIVE SUIT..........................................................................................................................21 INDIVIDUAL (PRO RATA) RECOVERY..................................................................................................................22 CONTEMPORANEOUS OWNERSHIP NYBCL 626(B)..........................................................................................22 DEMAND ON THE BOARD AND TERMINATION OF DERIVATIVE ACTIONS ON THE RECOMMENDATION OF THE BOARD OR COMMITTEE NYBCL 626........................................................................................................................22 INDEMNIFICATION...........................................................................................................................................22 XII. INSIDER TRADING..................................................................................................................................22 COMMON LAW BACKGROUND..........................................................................................................................22 RULE 10B-5..................................................................................................................................................22 ELEMENTS OF 10B-5......................................................................................................................................23 LIABILITY FOR SHORT-SWING TRADING...............................................................................................................23 COMMON LAW REVISITED...............................................................................................................................23 XIII. CORPORATE COMBINATIONS..........................................................................................................23 SALE OF SUBSTANTIALLY ALL THE ASSETS NYBCL 909...............................................................................23
APPRAISAL REMEDY NYBCL 623................................................................................................................23 STATUTORY MERGERS....................................................................................................................................23 Classical Mergers NYBCL 901-906, 910 ..........................................................................................23 Small Scale Mergers .............................................................................................................................23 Short Form Mergers..............................................................................................................................23 DEFACTO MERGER NYBCL 913.................................................................................................................23 TRIANGULAR MERGERS AND SHARE EXCHANGES NYBCL 913..........................................................................23 FREEZEOUTS..................................................................................................................................................23 GOING PRIVATE.............................................................................................................................................23 XIV. TENDER OFFERS NYBCL 912...........................................................................................................24
I. AGENCY
Introduction
1. Governs relations between the Principal and the Agent. A Sole Proprietorship : a business org. owned by a single individual, no special legal form. Owner has unlimited personal liability. 2. Problems: i. between agent and principal / ii. between third party and principal based on agents conduct iii. between third party and principal over liability for agents tort. 3. CREATING & PROVING IT: i. Person asserting that there is a agency relationship has to prove it ii. Can exist w/o intent. Must have 1. Agreement between parties that the agent will undertake some act on behalf of the principal 2. Understanding that the principal is in control. iii. Creation by Agreement iv. BY Ratification: when the principal accepts the benefits of the agents act v. Agency by estoppel: when a 3rd party believes that there is a relationship because of the principals actions.
Authority
4. Actual Authorityexpressly conferred by principal or implied by acts 5. Apparent Authority: manifested from principal to 3rd party. Or if an agent does what agents customarily do, even if the agent wasnt expressly authorized, the principal is bound. 6. Authority by Estoppel: when 3rd party detrimentally relies on authority that principal made him believe, principal is estopped from denying agents authority 7. Scopr: agents acts must be w/in agents auth. 8. principal may ratify after the act. Cant contract OUT of being an agent/principal if the acts say you are.
Morris Oil v. Rainbow Trucking: Principal is liable to 3rd P for agents debts incurred in the normal course of business. (Even if the K between principal and agent tries to deny the relationship.)
II. PARTNERSHIP
If the contract contemplates an association of 2 or more persons to carry on as COOWNERS a business for profit, a partnership there is (-yoda) More complex than a sole proprietorship, uses principles of agency law UPA usually applies to joint ventures, but they are usually formed just for 1 transaction. Formation By K or not Management Every partner manages receives information, has a vote (default, can change by agreement) Profit Distribution Pro Rata by membership and equal sharing in the losses Transfer Right to profit and right to manage can only be done with consent of all partners Liability Joint & several. Each partner is liable for all debts of the partnership Duties Facts must trigger the duty (cardozo in Meinhard) If youre involved in numerous ventures, you have to disclose and be sure not to compete
CONTRACT ESTOPPEL One who holds herself out to b a partner, or who expressly or impliedly consents to representations that she is such a partner, is liable to any 3rd P who extends credit ot the pship in good faith reliance on the representation Ex) I tell George Soros that Warren Buffet is my partner. Warren isnt, but he knows that im dropping his name, he
doesnt warn George. So now Warren is liable for Georges loan, but cant have any other rights in my business. If I was in a pship with Lindsay lohan and I was doing this, Warren would become an agent of our pship and go out and bind me to his deal with Rupert Murdoch. But if LL didnt know, and didnt consent to me using Warrens name in the first place, shes not liable to Rupert for Warrens deal. IMPLIED PSHIPS A loan, not a pship agreement: Martin v. Peyton (NY 1927) Peyton and other Ds had loaned to KNK, a securities firm. They said they were not partners but had lots of profit sharing rights for their loan. KNKs creditors came after Ds saying they were liable as partners in KNK. Court said it was a loan, not a pship. Owner v. Lendor: A lendor might have a guanrnteed return, but less control Owner has huge upside potential + control, but no guarantee. The key is CONTROL. If a player has control, it looks more like equity.
Nature of a Partnership
Its both an entity and an aggregate of the partners interests. Ex of how its an aggregate: J+S liability, pship itself isnt taxed. Ex of how its an entity: capacity to be sued. pship can own property. RUPA states that its an entity, UPA doesnt. UPA 24 - you have 3 things as a partner: rights in the partnership property, interest in the partnership, right to participate in management. These are bundled, cant transfer the management rights separately.
b. All decisions in ORDINARY MATTER CONNECTED TO PSHIP must be decided by majority UPA18 i. Ex) Hiring an employee Summers v. Dooley (Idaho 1971) c. anything controverting an existing agreement needs consent of all partners. UPA 18h d. liability between partners, each parter is liable only to the extent of his involvement in the pship.
Distributions
c. Distribution is equal, subject to any agreement (UPA 18a)
Authority UPA 9
d. Partnership may be liable if third parties think youre acting for the partnership might not be in your agreement, but if people think theyre dealing with the partnership and you act like you are. ( can be just acting like other normal businesses do, not necessarily how your firm acts.)
l. Meinhard v. Salmon NY 1928) Cardozo on duty of loyalty: it was triggered because the D had an existing lease as part of a joint venture with the P, when he took a new lease for himself separate from the JV, it was related to the old deal and should have been disclosed
Incorporation
State law governs corp law.
Preincorporation Transactions
d. A promoter brings and idea to a business by getting everyone together. Promoters liability: promoter is personally liable on a 9
K he makes on a corps behalf before incorporation. He is still liable for that K after formation. 1. EXCEPTION: Person K-ing w/ the promoter knew that the corp. was not in existence and still agreed to enter into the K and looked solely to the corp. for performance of the K. (express or implied agreement) Courts vary on whether an implied K will be found and whether the corp. may be held liable (after its formation) along w/ the promoter (joint and several liability). e. Substribers are solicited, nad pre-incorporation subsctiption agreements are irrevocable unless all subscribers agree to a revocation. f. Debt holder has a fixed claim on the corp g. An owner has no fixed claim
t. fraud or injustice u. Alter ego theory where the corp is the alter ego of individual shareholders. disregard of corporate requirements (money commingled with individuals and the corp, required meetings not held, rcords not maintined. 1. when a parent and a subsidiary operate as a single economic entity they are not separate corporate persons. Kodak Case: Fletcher v. Atex. 2nd cir. 1995.
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2. NOT alter ego: Using the same cash management system, seeking approval from the parent, having overlapping Board members, calling itself a Kodak company is just NOT enough. v. Undercapitalization: piercing can happen where the Co. has too little capital for its liabilities, debts + risk 1. Liability Insurance as evidence of undercapitalization: a. Cant sue shareholders unless you allege that the co. is operated for PERSONAL rather then corporate purposes. Being part of a larger corporate enterprise is OK b. Walkovsky v. Carlton (NY 1966): taxi hit plaintiff, taxi industry split ownership of the cars into several corporations. P sued 10 corporations that Carlton was a shareholder of. Fanto: the Legal persons dont really reflect the business. In reality, there were 10 or 20 cabs in a business, conducted together, but they were divided into 10 different businesses. Theory 1: Sue the firm because of actions of agent of the firm Theory 2: Sue the shareholders - when something indicates that they are the same as the firm (personhood is not respected) Theory 3: Sue the other firms because they were artificially separated to avoid liability. The individual mini-corporations had barely enough capital + insurance to cover. w. Contract liability for piercing the veil: 1. Two-Prong Test to pierce the veil: (sealand v. pepper source 7th Cir. 1991) a. Must be unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. i. Must articulate 4 factors in a complaint: 1. Failure to maintain corporate records 2. Finances co-mingles 3. Individual firm is undercapitalized. 4. 1 corp treating the assets of the other as their own. b. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. i. Must plead that someone would be unjustly enriched NOT enough to say that a creditor will go unpaid.
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Equitable Subordination:
x. a. when a loan is deemed equity and moved down the distribution chain (becoming LESS senior just recharacterizes how money is put in the firm.) y. An equitable alternative to piercing the veil. z. Awarded when there has been bad faith by the SH/creditor toward other corporate creditors or mismanagement. Or undercapitalization. aa. When the corporations SHs are also lenders (and the corp is insolvent) the SHs loans are pushed to the bottom, its not really ordering the SHs to pay the debts back, its just allowing the nonSH creditors to be paid first bb. when a loan is deemed equity and moved down the distribution chain (becoming LESS senior just recharacterizes how money is put in the firm.)
V. DISTRIBUTION TO SHAREHOLDERS
Intro to Financial Statements
a. Dont include non-tangible assets (human capital, reputation, etc) Net Income = Revenue Expenses
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Stated capital is under Liabilities on a balance sheet, they also have the assets from the cash they gained by selling shares, but they also are liable for it. e. Legal Capital how to capitalize the firm: issue shares, get $ in return, shareholders have a claim to it. Equity claim is part legal and part surplus. A share is designated with a par value, then par value x # of shares is the legal capital, the rest is surplous. If you hve no par stock the board can move everything to surplus. Legal capital, once defined, cant be touched. If its touched, it means the firm is in trouble, its assets are shrinking so that the claims (the value) shrink as well. Often, what happens is : the capital is affected, you cant infringe on it, youre in bankruptcy.
Watered Stock
i. stock in exchange for overvalued property (like, watering your cattle before going to the weigh-in at the auction) j. holder of the stock paid less than par, so they are liable to the company or the creditors --- p1261
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Dividends NYBCL 102(a)(2), 102(a)(8), 102(a)(13), 501, 717, 801(b)(10), 801(b)(11), 804
k. Dividend- Payment of the dividend comes from surplus- the equity account gets bigger. Can buy back shares only out of surplus as well.
Director & Shareholder Liability, NYBCL 719, 720, Repurchase by a Corporation of its own stock NYBCL 513, 515
l. Its mechanical, how you capitalize and how you take $ out. Dividends have to be across the board, repurchase can be selective (unless its a tender offer) they both have to come out of surplius (we had a case where a Co. reevaluated its assets and said we have these assets which are worth more than the book says now (book was using original $$ cost.)
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Allocation of Power NYBCL 706 Legal Structure of Management NYBCL 701, 712 Board Formalities NYBCL 707, 708, 709, 710, 711 Officer Authority NYBCL 715 Shareholder Formalities NYBCL 602, 604, 605, 606, 607, 608, 614, 615, 616
Reporting Requirements Proxy Rules 34 Act 14(a) 14(b) 14(c) Rules 14a-1, 14a-2, 14a-3, 14a-6, 14a-9, (skim 14a-4 and 14a-5) and Schedule 14A
a. Proxy statement the information given to public shareholders when a vote is required fo them When they ask for your vote, they have to give you a proxy statement company says give me your vote, and ill cast it for you. In a contest, youll get 2 proxy statements.
around on policy, etc. or maybe its institutional shareholders that recommend that they get rid of the poison pill. Whatever it is, its pressure on the board.
Voting Agreements NYBCL 609, 620 Voting Trusts NYBCL 621 Classified Stock NYBCL 402, 703 Agreements Dealing with Board Discretion NYBCL 620 Supermajority Voting/quorum NYBCL 616, 709 Shareholders Fiduciary Obligations to Close Corporations
a. Managers are shareholders- in that way, theyre like partnerships. What happens when the sameperson is a SH, Officer, Director. ? problems occur when there is a falling out with one party who is no longer a manager, is only a shareholder. $ doesnt come from dividends, comes from salary. How does law accommodate this setting? Shareholders have duty to aone another in this setting, naj. Shareholders have parternship like dutues toward the minority shareholder 620 of NYBCL says board doesnt dominate, SH can be in control. Proxy by contract can be irrevocable
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1104 allows for dissolution in the case of deadlock. One alternative is to petition for dissolution because of oppression, nad the controlling shareholder can say, dont dissolve, ill buy all their shares.
Business Judgment Rule Duty to Ensure that Corp has Effective Internal Controls Liability Shield NYBCL 402(b)
a. DE102b7 after smith v. van gorken, states also relieved directors from liability. Even if they violate the duty of caer, they act not with negligence but gross negligence often you cant recover damages from that breach. Absolved from Liabiltiy- when can directors invoke the proivision in the certificate that relieves them from liaibltiy? Want to make sure that complaint is fully explored , a court wont just dismiss because relief cant be granted. This is a little 18
b.
abstract, but it basically says that the suit will go forward and part of the litigation will consider the effect of the provision. It will only be dismissed if its specifically just a duty of care violation. So everyone knows that and will allege all sorts of things. c.
X. DUTY OF LOYALTY
Self-interested Transactions NYBCL 713
a. Duty of Loyalty 717 talks about it it, but the development is really from CL. b. dorector or officer engages in a transactrion with the firm self interested transaction. c. When director is on one side of transaction conflict duty to avoid conflicts. d. Courts do nto defer to decisions. a. Fairness analysis more instrusive examination of transaction, i. who has the burden?
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1. If plaintiffs make the pleading burden defendants have burden to show the transactions was fair toe the firm. ii. NY 713- transaction is not void or voidable simply because its self- onterested, but you have to show fairness. b. Then the issue is is there any way for the interested party to shift the burden off of itself? i. Disinterested directors did it or disinterested shareholder approved it full disclosure of conflict and all relevant information. ii. DE takes different position but were not being tested on DE. 1. In DE: if disintereeested directors did it business judgment rule. 2. if disinterested SHs approved it must show waste. in executive compensation Delaware is special fanto wants us to know just that part of deleware law.
Statutory Approaches Compensation, Waste and Shareholder Ratification NYBCL 515(d), 713(e) Use of Corporate Assets, Competition with the Corporation, The Corporate Opportunity Doctrine
a. Corporate opportunity - NE harbor case. If its an opportunity, you have to disclose and give it to the firm.
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b. When is the controlling shareholder involved? When he wants to purchase some remaining interest in the firm. Then its a fairness analysis. i. The law says that you can set up an independent negotiation ii. Han case- was the committee independent in substance and in how it acted? If so, the burden shifts they are hard on those committees .rare that they are independat enough to shift the burden.
Sale of Control
a. Sale of Control deals with CS selling a controlling share to someone else and getting a premium for it. Cant sell it and take advantage of an unusual opportunity of the firm or sell it to someone else who will loot the firm.
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Individual (pro rata) Recovery Contemporaneous Ownership NYBCL 626(b) Demand on the Board and Termination of Derivative Actions on the Recommendation of the Board or Committee NYBCL 626 Indemnification
Rule 10b-5
b. Classic insider situation cant trade unless you disclose, and cant trade after you disclose until the information has been dispersed (texas case) ousiter theory not only to insiders hve the duty, outsiders have the dduty under the misappropriations theory not to trade on information that they take improperly from someone withom they have a confidential relationship. O- Hagan case- info about a tender offer was only material because somoen was abou to do a tender offer. Having other s do the trading: Dirks, Chiarella. Tipper tippee : is it material information? If so, is it misappropriation or the classical insider theory?
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Triangular Mergers and Share Exchanges NYBCL 913 Freezeouts Going Private
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thats the extent of your risk. Investors who are distant from management dont have to worry that theyre responsible for more. Piercing the Corporate Veil. rarely used. When might you look to the shareholder and disregard the corporate form? If corp is a legal person, if it doesnt function as a person,( lack of capital, funds go in & out w/o record) you might pierce it. Also, equitable reasons to pierce? A creditor might be allowed to look to the shareholder only when the firm doesn have enough $$ (taxicab case--) Legal Capital how to capitalize the firm: issue shares, get $ in return, shareholders have a claim to it. Equity claim is part legal and part surplus. A share is designated with a par value, then par value x # of shares is the legal capital, the rest is surplous. If you hve no par stock the board can move everything to surplus. Legal capital, once defined, cant be touched. If its touched, it means the firm is in trouble, its assets are shrinking so that the claims (the value) shrink as well. Often, what happens is : the capital is affected, you cant infringe on it, youre in bankruptcy. Dividend- Payment of the dividend comes from surplus- the equity account gets bigger. Can buy back shares only out of surplus as well. Its mechanical, how you capitalize and how you take $ out. Dividends have to be across the board, repurchase can be selective (unless its a tender offer) they both have to come out of surplius (we had a case where a Co. reevaluated its assets and said we have these assets which are worth more than the book says now (book was using original $$ cost.) Governance- Shareholders (elected@ meeting) Board (appointed @ meeting) Officers Shareholder votes on board by plurality (not maj.) typically management puts up a slate of directors. Proxy process allows other names to come forward. Bylaws may allow nominations in another way, but a proxy fight is the way to take control of a board. Put up your own slate and try to get the most votes. Variations the structure of power runs the other way in reality, the officers have more power and the directors are really just there once a month. SH power is their vote. Blesias cases a board cant interfere with a shareholders rights (these are more often involved in a takeoerattempt where the management tries to play around with election rules to avoid takeover--- adding board seats, delaying election, -- BUT FOR a compelling justification, you cant infringe on shareholders voting right. Its their only real power. Court scrutinized that area for actions that are infringement). Inspection right demand to see balance sheet, can get access to contest management maybe a shareholder list, but the main access for a public firm is the federal regulators.
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Proxy statement the information given to public shareholders when a vote is required fo them When they ask for your vote, they have to give you a proxy statement company says give me your vote, and ill cast it for you. In a contest, youll get 2 proxy statements. Shareholder proposals - look at what he highlighted (14a8) those are the grounds to exclude proposals. The current issue is can shareholders put names of people on the proxy statement the proposals are mostly used to push companies around on policy, etc. or maybe its institutional shareholders that recommend that they get rid of the poison pill. Whatever it is, its pressure on the board. Private Suit- if you get a materially misleading proxy statement , you can sue Mills case _ VA bank case define materiality and also when you can or cant sue. Proxy was an essential link in the transaction. Proxy contests are very expensive, but its within the directors discretion to spend the money to defend themselves. The money isnt just sending out the statement but planning and persuading shareholders. CLOSE CORPORATIONS privately held. Look at accommodations of small firm setting and some of the basics of the corporate form Managers are shareholders- in that way, theyre like partnerships. What happens when the sameperson is a SH, Officer, Director. ? problems occur when there is a falling out with one party who is no longer a manager, is only a shareholder. $ doesnt come from dividends, comes from salary. How does law accommodate this setting? Shareholders have duty to aone another in this setting, naj. Shareholders have parternship like dutues toward the minority shareholder 620 of NYBCL says board doesnt dominate, SH can be in control. Proxy by contract can be irrevocable Transfer Restrictions might want to restrict it, keep it in the family, etc. law allows restrictions on transfers Dissolution corporate form is a creation of the state, so state wont let it die, but a close corp or partnership its a choice, so you can have afalling out and dissolve. NYBCL 1104 allows for dissolution in the case of deadlock. One alternative is to petition for dissolution because of oppression, nad the controlling shareholder can say, dont dissolve, ill buy all their shares. FIDUCIARY DUTIES OF BOARD MEMBERS these are in the law, but fanto says theyre primarily creatures of equity, where the duties developed from decisions by equitable courts. Duty of Care- Do whats necessary to make a proper decision gather information, monitor, deliberate, ask for information from experts, then 26
make a business decision THEN if those are met,the court wont scrutinize your decision. seems to be procedural also, (2 part) duty to set up monitoring systems know that supervisory system is in place caremart case. DE102b7 after smith v. van gorken, states also relieved directors from liability. Even if they violate the duty of caer, they act not with negligence but gross negligence often you cant recover damages from that breach. Duty to act in good faith- statutes that absolve you from liability fron duty of case oblications did not absolve you from duty of good faith. Courts have a hard time defining it. Disney case (supplement) bad faith means youre not paying attention to your job, willfully not doing it or being spiteful, making a decision just to thwart people. If you see director action that not self-interested but just nasty, willful neglect of duty, Duty to act lawfully also a case on that, no court will absolve them from liability or 402b says NOT absolved from violatiosn of the law. Insurance- Directors have it. Absolved from Liabiltiy- when can directors invoke the proivision in the certificate that relieves them from liaibltiy? Want to make sure that complaint is fully explored , a court wont just dismiss because relief cant be granted. This is a little abstract, but it basically says that the suit will go forward and part of the litigation will consider the effect of the provision. It will only be dismissed if its specifically just a duty of care violation. So everyone knows that and will allege all sorts of things. Duty of Loyalty 717 talks about it it, but the development is really from CL. dorector or officer engages in a transactrion with the firm self interested transaction. When director is on one side of transaction conflict duty to avoid conflicts. Courts do nto defer to decisions. Fairness analysis more instrusive examination of transaction, who has the burden? If plaintiffs make the pleading burden defendants have burden to show the transactions was fair toe the firm. NY 713- transaction is not void or voidable simply because its self- onterested, but you have to show fairness. Then the issue is is there any way for the interested party to shift the burden off of itself? Disinterested directors did it or disinterested shareholder approved it full disclosure of conflict and all relevant information. DE takes different position but were not being tested on DE. In DE: if disintereeested directors did it business judgment rule. if disinterested SHs approved it must show waste. in executive compensation Delaware is special fanto wants us to know just that part of deleware law.
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Corporate opportunity - NE harbor case. If its an opportunity, you have to disclose and give it to the firm. Controlling Shareholders DE is just like NY: anytime oyu have a controlling SH doing a transaction with the firm he controls, the analysis is fairness. DE wont lower the standard for controlling SHs even if disinterested directors approved it, that just shifts the burden, but its still a fairness analysis. When is the controlling shareholder involved? When he wants to purchase some remaining interest in the firm. Then its a fairness analysis. The law says that you can set up an independent negotiation Han case- was the committee independent in substance and in how it acted? If so, the burden shifts they are hard on those committees .rare that they are independat enough to shift the burden. Controlling shareholders are fiduciaries. Sale of Control deals with CS selling a controlling share to someone else and getting a premium for it. Cant sell it and take advantage of an unusual opportunity of the firm or sell it to someone else who will loot the firm. Derivative suit: Have to go to the board to make demands. But its futile ! theyre al linteresetd . NY- be particular in the complaint and establish a reasonable doubt. Delaware you need enhanced pleading. Often, directors, if they are all involved, concede the futility but appoint an independent litigation ncommittee that recommends the suit be dismissed. What deference does the at committee get? NY is fairly deferential if the committee made a good business judgment. DE courts are not as deferential, we may do that, but we may just use our own judgment to decide if dismissal is appropriate. Insider Trading- 3 general things: federal cause of action aimed at officeres, Ds, controlling SHs - duty not to trade, nad if you do trade, disclose. SHs has to show materiality and reliance. Plead the loss, that lack of material information shared the loss. Companies are also liable for lying to the public. SH suits are sometime saimed at the Co, not the insiders. The SEC generally beings suits on the insiders. Against insiders, its insider trading, against a CO, its accurate speaking their misrepresentation had to cause your loss. Classic insider situation cant trade unless you disclose, and cant trade after you disclose until the information has been dispersed (texas case) ousiter theory not only to insiders hve the duty, outsiders have the dduty under the misappropriations theory not to trade on information that they take improperly from someone withom they have a confidential relationship. O- Hagan case- info about a tender offer was only material because somoen was abou to do a tender offer. Having other s do the trading: Dirks, Chiarella. Tipper tippee : is it material information? If so, is it misappropriation or the classical insider theory?
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MERGERS know mechanics Asset Sale Triangular Mergers Short form mergers 900s and 910 Always ask: 1) what are technicalities associated with it? 2) Who has votes? 3) Who has appraisal rights? Jurusprudence on Asset Sale- whats sale of all or substantially all the assets ? its wuantitiative / qualitative. De Facto Merger is just PA saying the law says x but well call it something else. DE says that if you structure it one way, the voting and appraisal IS as you structured it. Wont reshuffle nad apply the law like PA. Fiduciary development if its a controlling SH in a merger fairness inquiry. There are ways aroundit, maybe a tender offer followd by a short form merger, there is no fairness inquiry. Solomon case , Alaska. Tender Offers development of the fiduciary duty. (wont ask any detail about the Williams act ) our focus on tender offer is all about how does the board behave. Generally what to boards to? Defend themselves. Court says : You can put up defenses, but we wont defer to you. Ask: did you see a threat? Did you respond to threat? Courts allow pretty significant responses if a Co. doesnt want to be sold. When you decide to sell, you have to focus on the shareholder value. Nothing else. Is this fairness? If you see a takeover ask if there was coercion . intermediate unocal standard .
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