CORPORATIONS OUTLINE SPRING 2012

I.

INTRO TO CORPORATE LAW

a. Smith v. Barlow: has to do with ultra vires rules; Corporation 1. This case held that if a statute allows a certain activity, the Corp should be able to perform that activity; public policy supports the statute of corporate charitable donation; although this was an UV activity, it was allowed by the court because it DOES NOT NEED SPECIFIC AUTHORITY in its incorporation papers ii. Ultra vires: some activity prescribed that is outside of the specific enumerated activities of a corporation 1. TODAY, UV activities are VALID as long as: (1) they follow legislation, and (2) it follows agreement in good faith 2. UV activities will render the Os and Ds liable to the Corp if the UV activity results in a loss

DGCL 101(b) Incorporators; how corp formed; purposes (b) Corp may be incorporated under this chapter to conduct or promote any lawful business or purposes, except as otherwise may be provided by the Constitution or other law of this State DGCL 122 Specific Powers of a Corp Every corp under this chapter shall have the power to: (1) have perpetual succession by its corporate name unless a limited duration is given (2) sue and be sued in all courts or in judicial, administrative, arbitrative proceedings (3) have a corporate seal (4) make ANY AND ALL types of property transactions, real or personal (5) appoint officers and agents and to pay them suitable compensation (6) adopt, amend, repeal bylaws (7) wind up and dissolve as prescribed in this chapter (8) conduct business, have offices, and exercise its powers within OR without this State (9) make charitable donations (10) be an incorporator, promoter, or manager of another corporation of any type or kind (11) participate with others in joint ventures or associations of any kind (12) transact lawful business which the BOD shall find to be in aid of governmental authority (13) make contracts, borrow money, grant mortgages, grant guarantees, issue notes, bonds, obligations, pledge encumbrances (14) lend money for corporate purposes and invest and reinvest funds (15) pay pensions and establish profit sharing plans, stock options, stock purchases, bonuses (16) provide insurance for its benefit on the life of any of the Ds, Os, or employees, or on the life of any SH for the purpose of acquiring back the stock at death (17) renounce, in its COI or by action of its BOD, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, business opportunities, specified classes of categories of business opportunities that are presented to the corp or one or more of its Os, Ds, or SHs

II.

AGENCY LAW
a. Three Elements of Agency Law: agency is the fiduciary relationship that arises when one person (a P) (1) manifests assent to another person (an A) that the A shall act on the Ps behalf and (2) subject to the Ps control, and (3) the A manifests assent or otherwise consents so to act b. FIRST, determine whether Employee or Not? i. RESPONDEAT SUPERIOR: If the A was an employee of the P, the P is liable for the torts committed by the employee within the scope of that employees employment 1

c.

d.

e.

f.

1. To determine if an A was an employee, we must assess whether the P had the right to exert control over the manner and the means by which the agent performed his duty (fact-intensive inquiry) 2. Factors: a. Extent of control that the A and P have agreed that the P may exercise over the details of the work b. Whether A is engaged in distinct occupation or business c. Whether type of work done by A is done typically under Ps direction or without supervision d. Skill required in As occupation e. Whether the A or the P supplies the tools required for work and the place in which to perform it f. Length of time during which A is engaged by a P g. Whether the A is paid by the job or by the time worked h. Whether P and A believe they are creating an employment relationship i. Whether the P is or is not a business EMPLOYEES vs. INDEPENDENT CONTRACTORS (non-employee agents) i. Generally, Ps are NOT LIABLE for the torts of their ICs UNLESS the tort arises out of an area over which the P exercised control or falls into one of the exceptions Intentional Torts i. Typically, Ps are NOT liable for the intentional torts of their employees ii. Negligence if it is within the scope of the employment, the P will usually be held liable; he can THEN sue the employee to recover from them iii. Intentional Tort 1. If it doesnt have any intention of serving the employer, then P is NOT LIABLE 2. If it DOES intend to serve the employer in any way, P will be LIABLE INDEPENDENT CONTRACTORS i. RULE: when a fact pattern involves an IC or a non-employee agent, if the tort occurs in an area over which the P exercises some control, the P might still be liable, however, if the tort occurs in an area over which the P DOES NOT exercise control, then there is no liability, unless the activity falls within an exception 1. Exceptions: a. Inherently dangerous activities (include any activity which is likely to cause harm or damage unless precautions are taken) b. Non-delegable duties (ex: a landlord or attorney, cannot hire an A to perform the tasks and this will NOT discharge or transfer the Ps responsibility or liability) c. Negligent hiring (P is negligent in hiring the IC) APPARENT AGENCY i. AA arises in situations which the person committing the tort is NOT an employee, or perhaps not even the A of the P, but circumstances which led the injured 3P to reasonably believe that an employment or agency relationship existed between the P and the alleged A and that those circumstances existed because of some action or inaction (manifestation) on the part of the P, then the P may still be liable, even if no employment relationship existed ii. 3 Elements of Apparent Agency: 1. reasonable belief by 3P that the alleged A is the A of the P 2. some action or inaction by the P to create that reasonable belief on the part of the 3P 3. and some showing that the 3Ps injury could have been avoided had the alleged P exercised control over the alleged A 2

g. AGENCY and CONTRACTS i. Actual authority: exists where the P communicates to agent about the activities in which the A may engage and the obligations the agent may undertake 1. Actual Express Authority: Ps explicit instructions to do something 2. Actual Implied Authority: must examine Ps explicit instructions and ask what else might be reasonably included in these instructions to accomplish the job a. Mill Street Church brother had implied actual authority to hire a helper to carry out his duties of painting the church; court looked at course of dealing; Hogan had hired people in the past to paint, so it was REASONABLE for the A (Hogan) to believe that the P wanted him to hire a partner) Mill Street Standards for determining Implied Agency: 1. past similar practices 2. nature of task 3. past dealing 4. past dealing reliance 5. acknowledgement by paying the brother b. NOTE: the A has the burden of proving authority ii. Apparent Authority: it is about what the 3P reasonably believes the P has authorized the A to do (in Mill Street Church, the brother who gets hurt obviously believes that his brother, the A, has the apparent authority to hire him to work) 1. Three Seventy Leasing: an A has the apparent authority sufficient to bind the P when the P acts in such a manner as would lead a reasonably prudent person to suppose that the A had the authority he purports to exercise (here, Mueller created a reasonable belief, through his conduct, that the A had the power to execute the sale 2. Inherent Agency Power: the power of the A which is governed by the P-A relationship, in which the 3P has reason to believe that the A has authority to do one thing based on their ability and right to do another, closely related thing a. Watteau v. Fenwick: A was authorized ONLY to buy mineral water and ales but he agrees to buy cigars from the . Principal was held liable because the seller, , had every right to believe that the A had authority to buy cigars This case involved an undisclosed principal; seller did not know there was a P and sued him once he found out about him; because an UDP cannot have made any manifestation to the 3), there can be no apparent authority with an UDP; law will sometimes hold an UDP liable for certain unauthorized transactions of his A when the 3P has made a detrimental change in position, if the P had notice of the As conduct and that it might induce 3Ps to change their positions, and that the P did not take reasonable steps to notify the 3Ps of the facts iii. Ratification: authority that is granted after the K has been made; A enters into agreement on behalf of the P without any authority (actual or apparent) 1. Elements of Ratification: a. Did the P, through word or deed, manifest his asset to (affirmance) the agreement? b. Given the situation, will the law give effect to that assent? 2. Affirmance: may be express or implied iv. Dweck v. Nasser: 3

1. An agent was hired to settle a case, and the court held that this K would be enforced because the A had all THREE types of authority: a. Apparent authority met because P let everyone know that A was taking care of his settlement; Ps actions created reasonable beliefs in the minds of the 3Ps b. Actual express authority met because P told him to take care of settling the case c. Implied actual authority met because of course of dealing, 20 years of settling cases understanding that he, the A, was the one settling the case h. Agency Statutes: Restatement (Second) of Agency 1 Agency: agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act 2 Master, servant; IC (1) master is a P who has control or right to control the conduct of the other in performance of service (2) servant is an employee (3) IC is a person who contracts with another but WHO IS NOT CONTROLLED by the other, NOR subject to the others right to control with respect to the physical conduct in the performance of the undertaking 3 General Agent; Special Agent (1) general agent is authorized to conduct a series of services (2) special agent is an agent authorized to conduct a single transaction; no continuity of service 4 Disclosed P; Partially Disclosed P; Undisclosed P (1) P is disclosed if at the time of the transaction conducted by the A, the other party has notice that the A is acting for the P and KNOWS the Ps identity (2) P is partially disclosed P if the 3P has notice that the A is or may be acting for a P and DOES NOT know the Ps identity (3) P is undisclosed if the 3P has NO NOTICE that the A is acting for the P 7 Authority Authority is the power of the A to affect the legal relations of the P by acts done in accordance with the Ps manifestations of consent to him 8 Apparent Authority Power to affect the legal relations of another person by transactions with 3Ps, professedly as an A for the other, arising from and in accordance with the Ps manifestations to such 3Ps 8A Inherent Agency Power Power of an agent not derived from authority, but solely from the agency relation and exists for the protection of 3Ps (Watteau v. Fenwick) 8B Estoppel from Relief (1) a P who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless liable because 3Ps have detrimentally relied on the belief that the transaction was entered into for him IF: (a) he intentionally or carelessly caused such belief, or (b) knowing that the 3Ps might change their position, P did not take reasonable steps to notify 4

them of the facts * this section deals with the detrimental change in position by a 3P due to the action or inaction of the P 13 Agent as a Fiduciary Agent is a fiduciary with respect to matters within the scope of his agency 26 Creation of Authority Authority can be created by written or spoken words (actual express authority), or other conduct of the P (actual implied authority) 27 Creation of Apparent Authority: General Rule Apparent authority to do an act is created as to a 3P by written or spoken words or any other conduct of the P which, reasonably interpreted, causes the 3P to believe that the P consents to have the act done on his behalf by the person purporting to act for him 35 Incidental Authority (Mill Street Church) Authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it 82 Ratification Affirmance by a person of a prior act, which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him 83 Affirmance Either: (a) a manifestation of an lection by one on whose account an unauthorized act has been done to treat the act as authorized; or (b) conduct by him justifiable only if there were such an election 144 General Rule Disclosed or partially disclosed P is subject to liability upon Ks made by an A acting within his authority if made in proper form and with the understanding that the P is a party 159 Apparent Authority Disc or Part Disc P is subject to liability upon Ks made by an A acting within his apparent authority if made in proper form and with the understanding that the apparent P is a party. Unauthorized acts will be binding if they are apparently authorized. 160 Violation of Secret Instructions A Disc or Part Discl P who authorizes an agent to make a K, but imposes limits or incidental terms intended not to be revealed, is subject to liability upon the K made in violation of such limitations with a 3P who has NO NOTICE OF THEM 161 Unauthorized Acts of General Agent Acts of a general agent will be binding upon the P, even if they are not authorized by the P, if the 3P reasonably believes the agent is authorized to do them and has NO NOTICE that the A is not authorized (Watteau case: 3P wins over the P because he had reason to believe that the A could buy cigars just like he buys mineral water; alternatively, if the 3P had known that the A explicitly could not buy cigars, 3P would have had a weaker case) 194 Acts of General Agents 5

General A for an undisclosed P authorized to conduct transactions subjects his P to liability for acts done on his account, if usual or necessary in such transactions, although P forbids them (again, see Watteau) 195 Undisclosed Principal and Manager Appearing to be Owner An Undiscl P who entrusts an A with the management of his business is subject to liability to 3Ps with whom the agent enters transactions usual in such businesses and on the Ps account, although contrary to the directions of the P 388 unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a DUTY to give such profit to the principal Restatement (Third) of Agency Chapter 1 Intro Matters 1.01 Agency Defined (1) one person (P) manifests assent to another (A) (2) that the A shall act on the Ps behalf and subject to the Ps control, (3) and the A manifests assent or otherwise consents so to act 1.03 Manifestation Person manifests assent or intention through written or spoke words or other conduct Chapter 2 Principles of Attribution 2.01 Actual Authority A, at the time of taking action that is binding for the P, A reasonably believes, in accordance with the Ps manifestations to the A, that the P wishes the A so to act 2.02 Scope of Actual Authority (1) A has actual authority by manifestation of the P (2) As interpretation is reasonable if it reflects any meaning known by the A (subjective), OR as a reasonable person in the As position would interpret the manifestations in light of the context, including factual inquiries (3) OBJECTIVELY VIEWED STANDARD 2.03 Apparent Authority 3P reasonably believes, based on manifestations of the P, that the A has power to enter into transactions which are binding upon the P 2.06 Liability of Undisclosed P (1) UDP will be liable to a 3P who is induced to make a detrimental change in position by an A acting on the Ps behalf and without actual authority if the P, having notice of the As conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts (2) Secret instructions or limitations on authority given by the P to the A will not save the P from liability; P will still be liable if a 3P reasonably believes the A to have the full authority Chapter 3 Creation and Termination of Authority and Agency Relationships 3.01 Creation of Actual Authority 6

Ps manifestation to an A that, as reasonably understood by the A, expresses the Ps assent that the A may take action on his behalf 3.02 Formal Requirements If a K is needed, the P will not be bound, UNLESS the 3P suffered a detrimental change in position 3.03 Creation of Apparent Authority 3P reasonably believes A can act for P, and that reasonable belief is traceable to manifestations of the P III. Agency Cntd. In TORT AND CONTRACT LAW a. Servant Versus Independent Contractor i. Under respondeat superior, a MASTER is liable for the torts of its servant (employee) ii. Master-servant relationship: 1. Servant (employee) has agree to work on behalf of the master, AND 2. To be subject to the masters control or right to control the physical conduct of the servant (how the job is done) iii. 2 Types of Independent Contractors: 1. agent-type ICs: one who has agreed to act on behalf of another, the P, but NOT subject to the Ps control over HOW the result is accomplished (physical conduct) 2. Non-agent ICs: one who operates independently and simply enters into arms length transactions with others b. Humble Oil v. Martin i. Love left her car at Humble Oil to get it repaid, but it rolled off the premises and ran into a man and his children who were walking; owner, Humble, is sued! ii. Humble has exerted enough substantial control over the business that the negligence of servant S and servant M will allow Humble to be held liable iii. Rule: substantial control over the physical conduct will make master LIABLE! c. Hoover v. Sun Oil Company i. Sun Oil leased out a premises and the products to Barone to run a gas station; Barone did his own thing and followed just a few recommended guidelines; Sun Oil DID NOT EXERT substantial control over the day-to-day operations; that was Barones responsability 1. s car gets burnt because of the negligence of one of Barones employees, so they go after the deep pockets, Sun Oil ii. HELD: substantial control factor NOT MET, Sun Oil had no control over the day to day operations of the station so they are NOT liable d. Murphy v. Holiday Inns i. Facts: there was a franchise K between BL and Holiday Inn, which allowed BL to use the name, style, and brand of Holiday Inn and told her that she was to run the business under a very BROAD system of guidelines, but the K NEVER gave any substantial control to Holiday Inn 1. Patron slipped and fell, and so they sued Holiday Inn, claiming that there was a M-S or a P-A relationship ii. Held: the provisions in the franchise K DID NOT constitute control within the definition of agency, so there was no P-A relationship or M-S relationship, so Holiday Inn would NOT be liable for the acts of this Independent Contractor, BL e. Master-Servant Relationship

Restatement (Second) of Agency 7

219 When Master Is Liable for Torts of His Servants (1) master is liable for torts of servants committed while acting within the scope of their employment (2) master is NOT liable for the torts of servants ACTING OUTSIDE the scope of employment, UNLESS: (a) the master intended the conduct or the consequences, or (b) master was negligent or reckless, or (c) the conduct violated a non-delegable duty of the master, or (d) the servant purported to act or to speak on behalf of the P and there was reliance by a 3P (apparent authority), or he was aided in accomplishing the tort by the existence of the agency relationship 220 Definition of Servant (1) servant is a person employed to perform services for another and who with respect to the physical conduct in the performance of the services is subject to the others control or right to control (2) in determining whether someone is an IC or a Servant, we consider the following: (a) extent of control, by the agreement, the M may exercise over the details of the work (b) whether or not the one employed is engaged in a distinct occupation or business (c) whether in the locality the work is usually done under the direction of the employer or by a specialist without supervision (d) the skill required for the occupation (e) whether the employer or the workman supplied the instrumentalities, tools, and the place of work for the person doing the work (f) length of time for which the person is employed (g) method of payment, whether by time or by the job (h) whether or not the work is part of the regular business of the employer (i) whether or not the parties believe they are creating the M-S relationship; and (j) whether the P is or is not a business! f. Respondeat Superior Restatement (Third) of Agency 2.04 Respondeat Superior an employer is subject to liability for torts committed by employees while acting within the scope of their employment 2.05 Estoppel to Deny Existence of Agency Relationship a P will be liable to a 3P as a party to a transaction purportedly done by the actor on the Ps account where a 3P is justifiably induced to make a detrimental change in position because the transaction is believed to be on the persons account, if: (1) the P intentionally or recklessly caused such belief, or (2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts g. Vandemark v. McDonalds i. Incident where , employee of McDonalds, was injured during an attempted robbery; pointed to the franchise agreement to try to prove that there was a P-A relationship ii. Held: the franchise K gave NO CONTROL to McDonalds over the security measures of the restaurant; McDonalds NOT LIABLE! Tort Liability and Apparent Agency a. Franchise i. Franchise Agreement K which binds parties together in a business relationship, usually the franchisor allows franchisee to license the name, use, and plan of the franchisor for the benefit of getting the profits 8

IV.

V.

VI.

b. Miller v. McDonalds i. bites into a jewel in a Big Mac and breaks teeth, then sues McDonalds as she argues that there was an apparent agency ii. Analysis: 1. Court held no actual authority because no real right to control a. Actual authority is most likely met because the franchise K talks about how to handle the machinery and food 2. Apparent authority probably met because of the perception of 3P a. Seems like a reasonable 3P would associate the restaurant with McDonalds rather than with the A b. Analyze whether there is apparent authority Tort Liability for Independent Contractors a. Majestic Realty v. Toti i. Majestic has a building in a tight urban area of NJ and the Parking Authority had the building next to it; parking authority hires an IC to demolish the building where a parking garage would be built, and Majestics building is damaged; ii. Held: Parking Authority is liable iii. RULES: 1. Where a person engage an IC to do work, that person is NOT liable for the negligent acts of the K in the performance of the K, UNLESS: (EXCEPTIONS) a. The landowner retains control over the manner and means of the doing of the work which is the subject of the K b. where he engages an incompetent contractor; or c. where, AS IN THIS CASE, and as a general rule, the activity constitutes a nuisance per se iv. nuisance per se: something that is inherently dangerous, there is a grave risk of danger ONLY if it is negligently done v. ultra-hazardous: serious risk of harm which CANNOT be eliminated by any means of proper care and which is NOT a matter of common usage; liability is absolute where work by an IC is ultra-hazardous PARTNERSHIPS a. What is a Partnership? i. Fenwick v. Unemployment 1. Facts: P was an employee for a salon and wanted a higher salary so her and the manager/owner executed a K upon which stated that she would receive a higher salary based on an increased profit by the company; agreement also stated that owner would et 80%, P would get 20%; owner was responsible for ALL debts; owner controlled ALL managerial decisions a. P stops working there, files for unemployment and she is denied as UCC says that she is actually a partner and not an employee eligible for unemployment 2. HELD: NO, she is NOT a partner, she was an employee and is eligible for unemployment 3. Court looks to MANY KEY FACTORS TO DETERMINE WHETHER A PARTNERSHIP EXISTS: a. Intention of the parties: which is evidential but NOT conclusive; here there was evidence of the ability of the P to get increased pay b. Right to share in profits: this happened in this case but not even c. Obligation to share in losses: absent from the K because owner is liable for debts and losses d. Ownership and control of the company: here P has no control 9

e. Community of power in administration: here the P has NONE f. Conduct of the parties towards 3Ps: this DOES NOT EXIST here as they NEVER held themselves out to 3Ps as partners g. Rights of the parties on dissolution: rights of the P were exactly the same is if she quit her employment b. Uniform Partnership Act of 1914 Uniform Partnership Act of 1917 6 Partnership Defined (1) partnership is an association of two or more persons to carry on as co-owners a business for profit 7 Rules for Determining the Existence of a Partnership in determining whether a partnership exists, these rules shall apply: (1) persons who are not partners to each other are not partners as to 3Ps (2) joint holding in property does not of itself establish a partnership (3) sharing of gross returns DOES NOT establish partnership (4) receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but that inference shall not be made if such profits were received in payment: (a) as a debt by installments or otherwise (b) as wages of an employee or rent to a LL (c) as an annuity to a widow or representative of a deceased partner (d) as interest on a loan, though the amount of payment vary with the profits of a business (e) as the consideration for the sale of a goodwill of a business c. Partners Compare to Lenders i. Martin v. Peyton 1. Facts: the Ds loan money to a brokerage firm in return for 40% of the profits; the business goes bad and the creditors come after the Ds and say they are partners 2. HELD: they are NOT partners... this was just still a loan, NOT a partnership 3. RULE: loans made to a company or to others MAY create a partnership relationship... in this case, the guys loan money to friends who work in a firm, and the K has these Indenture Provisions which allow the D to be kept advised of the firms dealings, inspect the books, and veto business that he thinks isnt good, and creates a mortgage of collateral for safeguarding the loan d. Partnership vs. Contract i. Southex v. RIBA 1. Facts: a. Sherman was in an agreement with RIBA to put on exhibition shows; 5545 sharing of profits, mutual control over designated business operations; Sherman indemnified RIBA for all show-related losses; no sharing of losses; no corporate property contributions from either b. Sherman ends up leaving and assigns its role to Southex, who ends up shitting the bed, and RIBA leaves and appoints a new partner and Southex sues! 2. HELD: Southex sues for wrongful dissolution of the partnership but this WAS NOT A PARTNERSHIP under the totality of the circumstances test e. Uniform Partnership Act of 1914 UNIFORM PARTNERSHIP ACT OF 1914 10

9 Partner Agent of Partnership as to Partnership Business (1) Every partner is an agent of the partnership and their acts will bind the partnership as long as the act is done in carrying on the usual way of the business of the partnership, UNLESS he has NO AUTHORITY to act that way and the 3P he is dealing with knows that he does not have the authority to act that way (2) an act of a partner which is NOT apparently for the carrying on of the usual business DOES NOT bind the partnership unless authorized by the other partners (3) unless authorized by the other partners, one or more but less than all of the partners CANNOT: (a) assign partnership property in trust for creditors (b) dispose of the good will of the business (c) do any other act which will mess with the business (d) confess a judgment (e) submit a partnership claim or liability to arbitration or reference 11 Partnership Bound by Admission of Partner admissions of a partner about the affairs of the partnership within the scope of his authority is binding as evidence against the partnership 12 Partnership Charged with Knowledge of or Notice to Partner if one partners has knowledge or notice and could have or should have communicated it to another partner, the other partner will be believed to have that knowledge 13 Partnership Bound by Partners Wrongful Act any wrongful act or omission of a partner while acting in the capacity of the partnership, to any person who is not a partner, or any penalty is incurred, the partnership is liable to the same extent as the acting partner 14 Partnership Bound by Partners Breach of Trust partnership is bound to make good the loss: (a) where one partner acting in the capacity of the partnership receives money or property of a 3P and misapplies it; and (b) where the partnership in the course of its business receives money or property of a 3P and misapplies in while it is still in the custody of the partnership 15 Nature of Partners Liability all partners are liable: (a) jointly and severally for EVERYTHING listed in sections 13 and 14 (b) jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract 17 Liability of Incoming Partner a new partner becomes liable for the obligations of the old partners as if hed been there when the old liabilities incurred, only he is responsible to the extent of the partnership property in existence at the time he comes in 18 Rule Determining Rights and Duties of Partners (a) Each partner shall be repaid his contributions and shall share equally in profits, and shall share in losses in proportion to contributed capital (b) partnership must indemnify every partner in respect of payments made by him in the ordinary and proper conduct of its business (c)partner who makes or advances payment beyond the amount of capital he agreed to contribute shall receive interest (d) partner shall receive interest on capital contributed by him only from the date when repayment should be made (e) all partners have equal rights in management and conduct of business (f) no partner is ENTITLED to remuneration for acting in the partnership business 11

(g) no person can become a partner without the consent of ALL partners (h) any differences arising as to ordinary matters of business may be decided by a MAJORITY; any act in contravention of any agreement between the partners may be done ONLY BY UNANIMOUS CONSENT of the partners *** Important stuff 19 Partnership Books all partners have at all times a right to inspect and copy the books 20 Duty of Partners to Render Information partners shall render on demand true and full information about the affairs of the business to any partner or any legal representative of a deceased partner or a partner under legal disability 21 Partner Accountable As a Fiduciary (1) partners owe fair and open accounting to all other partners for any and all profits made in connection with the partnership (2) this section also applies to the representatives of decedent partners f. Dissolution of a Partnership Uniform Partnership Act of 1914 29 Dissolution Defined change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business 30 Partnership NOT TERMINATED by Dissolution on dissolution the partnership is NOT terminated, but continues until the winding up of the partnership affairs is completed 31 Causes of Dissolution (1) Without violation of the agreement between the partners: (a) by termination of the definite term or undertaking specified in the agreement; (b) by the express will of any partner when no definite term is defined in the agreement (c) by the express will of all the partners who have not assigned their interests (d) by the expulsion of any partner from the business bona fide in accordance with some prescribed power in the agreement (2) in contravention of the agreement, by the express will of any partner at any time (3) by any event which makes it unlawful for the business to continue (4) by the death of any partner (5) by the bankruptcy of any partner or the partnership (6) by decree of court under section 32 32 Dissolution by Decree of Court (1) On application by or for a partner, the court shall decree a dissolution whenever: (a) a partner is a lunatic or of unsound mind (b) partner is incapable of performing his services (c) partner is guilty of something which affects prejudicially the carrying on of the business (d) partner commits a breach of the agreement and it is not reasonable for him to remain a partner (e) business of the partnership may only be carried on at a loss (f) other circumstances render the dissolution equitable g. NEW STUFF Partnership Act of 1997 12

Uniform Partnership Act of 1997 202 Formation of Partnership (a) two or more persons carrying on business for profit whether or not they intend to create a partnership! Partnership is created! (b) can be done under a statute or regulation of the jurisdiction (c) Factors to determine whether a partnership or not: (1) joint tenancy and joint property rights DO NOT by itself establish partnership, even if there is a sharing of profits (2) sharing of gross returns DOES NOT by itself establish a partnership (3) a person who receives a share of profits of a business is PRESUMED to be a partner in the business UNLESS the profits were received in payment: (i) of a debt (ii) for services as an independent contractor or for wages or compensation to an employee (iii) of rent (iv) of an annuity (v) of interest or other charge on a loan (vi) for the sale of the goodwill of a business or other property h. Duties During and After Termination of Agency i. Town & Country House & Home 1. Workers CANNOT steal trade secrets (like a client list) while they work at the Ps company, then go form their own company 2. Trade secrets are not allowed to be stolen and the new company has to stop soliciting the old existing clients of the P company 3. Former employees MAY NOT target a competing business exclusively at their former employers established customers! FIDUCIARY OBLIGATIONS OF PARTNERS a. Meinhard v. Salmon a joint adventurers seizure of a joint ventures business opportunity breaches his duty of loyalty to the other joint adventurer the punctilio of an honor the most sensitive i. Facts: M was the money guy and S was the manager; this was a general partnership 1. S entered into a new contract of the same nature and activity as the joint venture (building development) but he didnt inform the M about it 2. The K was done between the two but there was STILL A DUTY of loyalty to disclose to M the business opportunity available amidst this business activity b. Uniform Partnership Act (1997) General Standards of Partners Conduct

VII.

Uniform Partnership Act of 1997 404 GENERAL STANDARDS OF PARTNERS CONDUCT (a) only fiduciary duty a partner owes to the partnership and other partners is the duty of loyalty and the duty of care (b) duty of loyalty: (1) to account to the partnership and hold as trustee for it any property or profits or benefits for all partners or that derived from a use by the partner of partnership property (c) duty of care: refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law (d) good faith and fair dealing must be exerted by partners (e) a partner DOES NOT violate a duty or obligation under this Act or any partnership agreement merely because he is trying to further his own interest 13

(f) partner may lend money or transact business with partnership and other partners will have rights as to each loan or transaction as if they are not partners c. Rash v. JVIC i. Rash hired JVIC to manage its OK division of the plant and an agreement was signed; JVIC also owned and ran scaffolding companies and as it managed Rashs OK division, it would self-deal its own scaffolding companies to the Rash OK division ii. An employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the companys business d. Sandvick v. LaCrosse i. Facts: Ps and Ds have leases on these oil and gas lands and the Ds secretly go behind the Ps back and buy these TOP LEASES which will pick up when the original leases expire; P sues as the Ds never informed her about the purchasing of the top leases ii. HELD: Ds breached their duty of good faith and fair dealing to the Ps by not telling them about the top leases; this was a joint venture (inherently governed by the rules of partnerships_ iii. * for a business enterprise to constitute a JOINT VENTURE, these elements must be met: 1. contribution by the parties of money, time, property, skill, but they need not be of equal or of the same nature 2. proprietary interest and right of mutual control over the engaged property 3. express or implied agreement for sharing of profits and/or losses 4. express or implied K showing a joint venture was formed iv. Courts relevant findings in this case regarding a Joint Venture: 1. Checking account named joint venture account 2. Leases were purchased from the parties credits in the JV account 3. Title to the leases was held in Empire Oils name 4. Parties intent was to sell the leases 5. There was testimony that the parties planned to share profits v. THUS, court finds that this WAS a JV, and that the TOP LEASES were essentially extensions of the lease and were inherently related to the transaction at issue and to NOT inform the Ps was a breach of the duty of loyalty Opting OUT of Fiduciary Duties a. Peretta v. Prometheus an INTERESTED general partner MAY NOT participate in a ratification election of all partners i. California Statute: a GENERAL PARTNER approving a self-interested transaction has (1) burden of proving that the transaction is just and reasonable as to the limited partners of the controlled party; OR (2) approval or consent by majority of ALL DISINTERESTED LIMITED PARTNERS ii. Facts: 1. Dealt with a ratification vote of a merger and the partnership entities were going to receive a very low amount of money for their partnership shares; there was self-dealing involved by one of the general partners as the other company was run by his daughter (he is an interested party) 2. Ps argue that the interest parties SHOULD NOT BE ALLOWED TO VOTE iii. HELD: 1. Any partnership agreement provision that allows an INTERESTED PARTY to count its votes in a ratification election is manifestly unreasonable! b. Differences between General and Limited Partners 14

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IX.

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i. Limited Partnership have the same limited liability as partners in LLCs would have; very limited liability, they received protection from liability as if this were an LLC; BUT, they are NOT ALLOWED TO PARTICIPATE IN THE MANAGEMENT of the firm ii. General Partnership general partners have UNLIMITED LIABILITY and they are NOT afforded the protection of the LLC c. Meehan v. Shaughnessy one sided solicitations to a partnerships clients breaches the duty of good faith and fair dealing i. Facts: MB worked for a firm and they began to get unhappy about their treatment; they conspire to leave this firm and start a new one and so they take several steps: 1. Recruiting agents, sending letters to current clients at the current firm and TELLING them they need to switch over, external planning, etc. 2. P sues and argues that D breached fiduciary duties of partnership by (i) improperly handling cases for their own benefit and not for the benefit of the partnership; (ii) by secretly competing with the partnership; and (iii) by unfairly acquiring from clients the proper consent to withdraw cases ii. HELD: fiduciaries MAY plan to compete with the entity to which they owe allegiance provided that in the course of such arrangements they DO NOT otherwise breach their fiduciary duties 1. A partner has an OBLIGATION to render on demand true and full information of all things affecting the partnership to any partner - 20 UPA (1914) d. Lawlis v. Knightlinger & Gray involuntary expulsion from a partnership without bad faith DOES NOT give rise to damages for wrongful dissolution i. Facts: P was a drunk bum and was placed on probation at his firm, which he completed and came back to the firm 1. There was a no cause for expulsion clause in the partnership agreement, and the other senior partners exerted this power and expelled the P because he was a drunk ass 2. P sues for damages for dissolution in contravention of the partnership agreement ii. HELD: if an expulsion was in accordance with the partnership agreement and it followed all the guidelines of the K, and there was no predatory purpose, and it was freely negotiated and entered into, and it was in good faith, the expulsion will be PROPER! FIDUCIARY OBLIGATIONS OF LLCS a. McConnell v. Hunt if an operating agreement permits competition, LLC members may engage in a competing venture i. Facts: main purpose of LLC was to attract an NHL team to Columbus, OH; there was an offer for a lease on land on which the arena would be built, H passes on the lease and M takes it! 1. M sues for a declaratory judgment to establish that M has sole rights in the NHL franchise, relying upon 3.3 of their LLC agreement which allowed any party to compete in any venture they wanted to, even if it was competitive to the LLC ii. RULE: an operating K of an LLC may LIMIT or DEFINE the scope of the fiduciary duties imposed upon its members PARTNERSHIP MANAGEMENT AND DISSOLUTION a. NaBisCo v. Stroud an objecting partner is STILL responsible for the debt resulting from his partners bread purchases i. Facts: S and F were general partners; S tells F he will no longer be liable for the bread purchases made by F; F keeps ordering bread and NaBisCo sues S for nonpayment ii. HELD: this is a general partnership, and since there was no K limiting Fs powers, S is liable for the actions of F and thus is liable for the bread products; this WOULD HAVE CAME OUT DIFFERENTLY had their been a majority of partners (there were only two) 15

b. Summers v. Dooley a partner is NOT liable for expenses incurred by another partners unilateral decision to hire an additional employee--> NO partner is responsible for expenses incurred without the majority approval of an expense which DOES NOT BENEFIT the partnership in whole i. Summers hired an additional worker for HIS OWN BENEFIT, and Dooley objected to this ii. HELD: it is manifestly unjust to permit recovery of an expense which was incurred individually and not for the benefit of the partnership but rather for the benefit of one partner c. Day v. Sidley & Austin i. Facts: 1. Day claims D breached fiduciary duty and committed fraud when the proposed merger made the P lose his Chair title and became a co-chair in the Washington DC office after the merger 2. HELD: the partnership agreement never stated anything about him retaining his title and position a. The essence of a breach of a fiduciary duty between partners is that one partner has advantaged himself at the expense of another partner or the firm (here, there was no such gain or advantage and it is a losing argument... P was just sour that he lost his fancy title) d. DISSOLUTION Continued... i. Uniform Partnership Act of 1917 DISSOLUTION 33 General Effect of Dissolution on Authority of Partner: dissolution terminates all authority of ANY partner to act for the partnership 34 Right of Partner to Contribution from Co-Partners After Dissolution where a partnership is dissolved, each partner is liable to co-partners for his share of any liability created by any partner acting for the partnership, UNLESS the acting partner acted in bad faith or with knowledge of the dissolution or death of a partner (which dissolves the partnership) 36 Effect of Dissolution on Partners Existing Liability (1) dissolution does not discharge existing liability of any partner (2) to get out of partnership liability, there must be (i) a dissolution, and (ii) the partnership creditor must make an agreement with the partner leaving and the partner staying to free the partner leaving from his liability 37 Right to Wind Up any partner who has not wrongfully dissolved the partnership or a nonbankrupt representative of the last surviving partner, may obtain winding up by the court 40 Distribution of Property Upon Dissolution the following rules will apply, subject to any agreement to the contrary: (a) assets of the partnership are the partnership property, and the capital contributions (b) liabilities of the partnership shall rank in order of payment, as follows: (I) to creditors other than partners (II) to partners other than for capital and profits (III) to partners in respect of capital (IV) to partners in respect of profits e. Uniform Partnership Act of 1997 DISSOCIATION 16

601 Events Causing Dissociation partners expulsion pursuant to partnership agreement; by unanimous vote of other partners, or by judicial decree, or by death 602 Wrongful Dissociation partner can dissociate rightfully or wrongfully at any time but will face damages and will lose all decision making powers (see, 603) 701 Purchase of Dissociated Partners Interests When a partner dissociates, his interest in the partnership can be purchased at a buyout price which is the amount that would have been distributable on the date of dissociation at the greater of liquidation price or the price they would have sold at if the business were a going concern f. Dissolution and Winding Up as per the Uniform Partnership Act of 1997 see Article 8, the 800s of the Act g. Pav-Saver Corp v. Vasso i. Facts: partnership agreement stated that the partner who wrongfully terminates the partnership agreement owes the other for damages and the other can continue to use the marks and trademarks of the other party and can still run the business! 1. P agreement tried to protect the parties against dissolution and stated that the partnership could only end by mutual consent ii. HELD: upon wrongful dissolution, the other partner RETAINS the use of a former partners assets and trademarks 1. In a wrongful dissolution, DESPITE what a partnership agreement may read, the partner who wrongfully breaches the agreement will owe the other damages, may have his interests in the partnership purchased back, and will NOT RETAIN HIS ASSETS and interest and right partner can continue to run the business h. What happens to the GOOD PARTNER when the other Wrongfully Breaches? i. 38 of the Uniform Partnership Act of 1917 38 Rights of Partners to Application of Partnership Property (2)(b) and Pav-Saver: the GOOD partner gets to remain in the business and by the same name, may retain the partnership property, may have to pay BAD partner for his interest, and can retain the rights and assets belonging to the partnership i. Kovacik v. Reed i. Facts: K invested all the $$$ in his partnership with R, but R performed all the SERVICES for the partnership (he GAVE NO $$$)... Partnership loses money and K demands that R pay for half of the losses! ii. HELD: investor of $$$ is NOT ENTITLED to recover lost capital from a JOINT PARTNER who had invested PURELY LABOR iii. RULE: if you invest PURELY LABOR, and NO MONEY, you will NOT be liable to other partners for their monetary losses, as you have not invested money yourself... essentially K is not liable to R for LABOR LOST, and R is not liable to K for $$$ lost THE NATURE OF THE CORPORATION a. Promoters and the Corporate Entity i. Promoter person who identifies a business opportunity, puts together a deal, forming a corporation as the vehicle for investment by other people 1. Promoters are under a fiduciary obligation to a corporation, akin to an agentprincipal relationship 17

XI.

ii. Southern-Gulf Marine v. Camcraft a promoter will always be liable for the Ks they enter into for a corporation if the corporation is YET to exist; AND any detrimental reliance by a counterparty to a contract will estop the breaching party from arguing that the K was NOT valid due to the other party not being a valid corporation 1. Facts: P contracts to buy a huge vessel from D; D, in the K, says that they are a corporation incorporated in Texas (lie, they were not even incorporated except in the Cayman Islands); price for vessel greatly appreciates in value and so C breaches and states that the corporation is incorporated in Cayman Islands (trying to dip out of the K) 2. HELD: D, corp will be liable to the P, and the promoter is liable initially; does not matter if corporation is not incorporated in state stated in K b. General DGCL Corporation Statutes 101 Creation of Corporation (see page 1) 102 Contents of Certificate of Incorporation (a) certificate shall set forth (1) name of the corporation which must have one of the words: association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate, or limited (2) address of the corporations registered office in this state (3) nature of the business to be conducted (can put VERY BROAD GENERAL statement) (4) information about classes of stock, total number of shares, par values, designations, powers, preferences, rights, qualifications, limitations, and restrictions of those shares (5) name and mailing address of the incorporator or incorporators (6) names of directors until the first annual meeting of SHs Yablon Note: 102(4) every corporation must have common stock (must always have common stock, but you have other types of restricted stock (b) Certificate may ALSO have these things (4) IMPORTANT: provisions requiring for any corporate action, the vote of a LARGER PORTION of the stock or any class of voters, than is required by this chapter normally (7) IMPORTANT: provisions eliminating or limiting the personal liability of a director to the corporation or its shareholders for damages for breach of fiduciary duty as a director (see 102(b)(7) for more details) 106 Commencement of Corporate Existence Upon filing with the Secretary of State of the certificate of incorporation, the incorporator or incorporators who signed the certificate and their successors shall, from the date of filing, be and constitute a body corporate 107 Powers of Incorporators if the incorporators did not name the BOD in the CofI, they shall manage the affairs of the corporation and may do whatever is necessary and proper to perfect the organization of the corporation 108 First Meeting of Incorporators or the Board they meet to propose bylaws, election of directors and to schedule first annual meeting of shareholders 109 Bylaws (a) after they have received payment for any stock, the power to adopt, amend, or repeal bylaws shall be in the SHs entitled to vote, or in the case of a nonstock corporation, in its members entitled to vote; if directors have this power, that fact SHALL NOT divest SHs the right to vote, amend, repeal bylaws 18

(b) bylaws may contain ANY provision not inconsistent with law or with the CofI, relating to the business of the corporation and its affairs, and the rights and powers of its stockholders, directors, officers, and employers c. Typical Steps Once you have Certificate of Incorporation i. File with Secretary of State ii. If you want to be secretive, use incorporators (lawyers) iii. Incorporators have a meeting iv. They elect directors v. Directors have meeting vi. Directors appoint officers: CEO, CFO, etc.: vii. BOD write up bylaws viii. Board must then issue shares if they are authorized ix. SHs pay money for shares x. BOOM d. The Corporate Entity and Limited Liability of Corporations i. Walkovsky v. Carlton 1. Facts: P was hit by cap that was part of parent company, and it was ONE of 10 corporations formed and owned by the D; D did this because a state statute said that if a corporation had only two cabs it would only have to get the minimum insurance policy 2. P argued that the 10 corps were a single entity and that the D should be personally liable for her injuries 3. HELD: D is NOT personally liable for his corporations as he was NOT doing business in his individual capacity and that rather the corporate form may NOT be disregarded merely because the assets of the corporation together with the insurance policy is insufficient to assure him the relief sought! ii. Sea-Land Services v. Pepper Source 1. Facts: P ships peppers to D; D skips out on bill; P sues by the D corp had been dissolved and actually had NO assets at the time of the sale; P goes after Ds sole shareholder and tries to pierce the corporate veil 2. VAN DORN TEST: the veil of corporate liability will be pierced when the P proves: a. 1. that there is a unity of interest between the individual and the corporation, AND b. 2. that circumstances were such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice 3. HELD: P satisfies the FIRST part of the Van Dorn test as the D commingled funds; failed to maintain adequate corporate records; undercapitalization; and treated the assets of the corporation as his own... but, didnt meet the SECOND part of the test... this court held that P failed to meet this burden in this court! iii. Roman Catholic Archbishop v. Sheffield subsidiaries controlled by the same parent are NOT alter egos 1. Facts: P tries to sue Church in SanFran for a breach by a Swiss monastery for failing to provide a dog the P bought from the monastery... P attempts to use the alter-ego argument to say that the SanFran Church is an alter-ego of the Swiss monastery and thus should be held liable.. 2. RULE: the alter-ego theory makes a parent liable for the actions of a subsidiary which it controls but it does NOT mean that where a parent controls several subsidiaries that each subsidiary becomes liable for the actions of ALL OTHER SUBSIDIARIES 19

a. Simply stated SUBSIDIARIES OF THE SAME PARENT COMPANY ARE NOT LIABLE FOR OTHER SUBSIDIARIES OWNED AND CONTROLLED BY THE SAME PARENT COMPANY 3. In Re Silicone Gel Breast Implants parent corporation IS LIABLE for its subsidiarys torts if the parent controlled the subsidiary as its alter ego! a. Facts: Parent controlled almost EVERYTHING of the subsidiary and is thus found liable for the defective breast implants manufactured by the subsidiary! b. HELD: if the subsidiary exists as an instrumentality of the parent, the parent will be liable c. Totality of the Circumstances Test: if a corporation is so controlled as to be the alter ego or mere instrumentality of its parent/SH, the corporate form may be PIERCED; consider these factors: P and S have common directors or officers P and S have common business departments P and S file consolidated financial statements and tax returns P finances the S P caused the incorporation of the S The S operates with GROSSLY inadequate capital The P pays the salaries and expenses of the S The S receives only business given to it by the P The P uses the Ss property as its own The operations of the two companies are NOT kept separate The D does not observe the basis corporate formalities 4. Frigidaire Sales Corporation v. Union Properties, Inc limited PARTNERS are NOT liable for a Limited Partnerships debts! a. Facts: General partner to a partnership was the D corporation, so it had its own form of limited liability; officers of D corp were limited partners of the partnership; as officers of the D corp, they are NOT personally liable for the debts of the corporation (they are essentially employees) Limited partners (officers) incur personal debts with the P, and the P goes after the larger general partner... b. HELD: P cannot go after large general partner corporation for the debts of limited partners (the officers) e. LIMITED PARTNERSHIPS i. Holzman v. DeEscamilla limited partners who exact significant control and in every way act like general partners will be held to be general partners for purposes of liability and bankrupt creditors! 1. DE was a GENERAL PARTNER in a business of farming and selling crops; the other TWO partners were limited partners but they were acting in EVERY WAY like general partners and were exacting a lot of control over the operations and hiring and firing of the company 2. HELD: the creditors of the bankrupt company CAN GO AFTER the limited partners who exacted significant enough amount of control as to deem them general partners! f. Piercing the LLC Veil i. Kaycee Land and Livestock v. Flahive court MAY pierce the veil of an LLC if equitable and just 20

XII.

1. Facts: P has a claim against the D, who is a managing member of the LLC that has breached a K with the P; WY state law states that the corporate veil can be pierced, but does that mean that the LLC veil can be pierced? 2. HELD: LLCs are NOT to be treated differently than corps; if the members and officers of an LLC fail to treat it as a separate entity as contemplated by statute, they should not enjoy immunity from individual liability for the LLCs acts that cause damage to 3Ps a. Every state that has enacted LLC piercing legislature has chosen to follow corporate law standards and not developed some separate LLC standard THE ROLE AND PURPOSE OF THE CORPORATION

Delaware General Corporation Law 141(a) BOD (a) the business and affairs of every corporation under this chapter shall be managed by or under the direction of the BOD, except as may be otherwise provided in this chapter or in its certificate of incorporation a. Dodge v. Ford i. Facts: P sues D Ford for not giving out special dividends. D is making a whole lot of money and has been giving out dividends upon dividends, and then one year stops and tells SHs that rather than handing out dividends, he plans to use the money to give to the public for humanitarian purposes. ii. HELD: court holds that a corporation HAS TO GIVE OUT DIVIDENDS althought a corporations directors have a broad discretion when they make a product and earn a profit to either give dividends OR retain them and use them for purposes of reinvestment... directors CANNOT without dividends and reduce profits from the SHs in order to benefit the public 1. Cannot benefit public, loyalty is in the profits and distributing profits to SHs! iii. RULE: a corporation is a business, not a charity, and it is the primary duty of the management and BOD to maximize shareholder wealth! b. Shlensky v. Wrigley officers and directors decisions are protected by the BUSINESS JUDGMENT RULE i. Facts: D owned Wrigley Field and the Cubs, and while every other team was installing lights and playing night games, Wrigley decided not to 1. SHs were getting angry because the Cubs were operating at a loss and were foregoing profits by not deciding to have night games 2. SHs sue for loss of future profits and say that the management is acting arbitrary and capricious, wasteful, and negligent in failing to exercise reasonable care and prudence in the management of the corporate affairs 3. Wrigley did this because he didnt want to upset the locals with the lights and loud games ii. HELD: a Court CANNOT judge the decisions of a corporate BOD when there is NO showing of fraud, illegality, or conflict of interest in making their decisions 1. Failure to follow the crowd is NOT a dereliction of duties iii. Reasons: 1. Wrigley argued that property value would go down around the stadium -> Court bought this argument FIDUCIARY DUTIES OF OFFICERS, DIRECTORS, AND OTHER INSIDERS a. Obligations of Control: Duty of Care i. Kamin v. AmEx decisions of officers and the BOD are protected by the BROAD Business Judgment Rule! 21

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1. Facts: AmEx has the choice of either taking a $26M capital loss on some stock they own (which would, in turn, really hurt their net income and their statement which goes out to the public) OR they could give the depreciated stock to current SHs as a dividend in kind (which would not hurt their net income, but would rather come out of their Retained Earnings) a. AmEx does the dividend in kind and the SHs commence a derivative action and state that if AmEx sold at a loss, they could have offset capital gain and would have saved $8M in tax liabilities!!! 2. HELD: a. The BJR protects the management of AmEx as they are allowed to exercise their honest and broad business judgement on the information before them, and to act within their corporate powers 3. RULE: a. The court WILL NOT interfere with the actions of management or the BOD UNLESS a clear case is made out by fraud, oppression, arbitrary action, conflict of interest, or breach of trust! ii. Smith v. Van Gorkum the BJR PRESUMES all decisions made by a companys directors and management are INFORMED decisions! 1. Facts: TransUnion wasnt making enough taxable income to make use of these valuable tax credits they possessed; VG was the CEO of the company; he had the strategy of buying out a larger company that made a lot of income and he discussed his plans with management a. VG hurriedly discussed the plans with the BOD without really explaining the numbers involved and the BOD approved the LBO, on a very UNIFORMED basis 2. HELD: VG and the BOD was NOT protected by the BJR as the presumption was validly rebutted by the opposing party 3. Reasoning: a. the BJR shields directors and officers of a corporation from liability ONLY if: there is NO private interest in the outcome (no self-dealing) the decision was a FULLY INFORMED DECISION; and management must HONESTLY believe that their judgment was in the best interests of the corporation b. HERE, the broad presumption afforded by the BJR was rebutted as the decision was proven to be one that was unintelligent and unadvised; Gross Negligence: this is the proper standard a proponent must prove to rebut a business judgment decision is unintelligent and unadvised and uninformed! iii. Main Justifications and Policies for the BJR 1. Encourages risk taking; without the BJR, directors may be frozen out of fear of breaching duties 2. Avoids judicial meddling; judges are not business experts 3. Statutes reflect that corporate management should be left to the BOD 4. Encourages directors to serve and face limited liability without fear of being judged 5. SHs freely pick managers and they gamble, so they should not receive some type of insurance for their investment; they can always just go sell the stock because corporate stock is freely transferable 22

iv. Reliance Corollary directors are entitled to rely on information and advice from other directors, competent professionals, and outside professionals 1. To claim this reliance, directors must become AT LEAST familiar with the information and advice, and must have REASONABLY believed that it merited confidence v. Delaware and Personal Liability of Management 102(b)(7) Contents of Certificate of Incorporation This is a provision limiting or eliminating personal liability of a director to the corporation or its SHs for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director - for any breach of duty of loyalty to shareholders - for acts not in good faith or involve intentional misconduct - under 174 of this title; or - for any transaction from which the director derived an improper personal benefit vi. Cinerama v. Technicolor 1. Facts: similar to VG case in that the CEO made the deal with a party and then presented it to the board quickly, without adequate information given to them and without a market check; but here, CEO did a very thorough due diligence, had bargained hard, and had hired experts; this however did NOT protect the board! 2. HELD: Board still found liable for breach of fiduciary duty for being uninformed vii. Francis v. United Jersey Bank 1. Facts: Ms. P is being sued by the trustee of the bankrupt company to which she was a director; as a director, she really never did much, and would usually stick her head in the sand; while she wasnt being diligent in discharging her duties as director, her sons and husband were taking out exorbitant loans against the company, essentially stealing the funds and misappropriating these loan funds 2. HELD: the B Trustee CAN go after the wife as she was a director, and she had a duty to keep apprised of the financial activities of the firm, and has a duty to consult when needed; had she been keeping apprised of the company, she would have noticed the malfeasances of her husband and sons and could have done something 3. RULE: a director will be held personally liable in the capacity of her director position if she is negligent in staying current with a sense of ordinary care of how the business and the finances are being managed a. She was GROSSLY NEGLIGENT in discharging her directorial duties viii. Duties Continued: 1. If a director can no longer perform their duties, then you must relinquish your position 2. Note: people with more experience, or an advanced degree, are held to a HIGHER reasonable professional standard! b. The Obligation of Good Faith COMPENSATION i. In re Walt Disney Co. directors who make informed decisions without bad faith WILL NOT be held personally liable for their business judgments 1. Facts: CEO of Disney dies and they hire Ovitz from CAA, Ovitz negotiated a huge compensation package and a VERY EXHORBITANT severance package, which the compensation committee APPROVES, although the whole board did not vote 2. HELD: 23

a. The compensation and severance package was UPHELD b. P did not alleged that the Board made an IMPROPER business decision, just that they made a slightly uniformed and imprudent decision (should have VALUATED the options at certain stock prices) 3. RULE: As long as the BOD takes necessary steps to be somewhat informed, the court WILL NOT scrutinize the Business Judgment c. COMMITTEES and THEIR POWERS 141(c) Allows for the designation of committee to make decisions and have the power of all the BOD; the Board can give all of its powers to a committee d. Types of Bad Faith i. Subjective bad faith: fiduciary misconduct motivated by an ACTUAL intent to do harm to the corporation (most egregious) ii. Intentional dereliction of duty: conscious disregard for ones responsibilities (middle ground) iii. Gross Negligence: very weak argument, GF without more cannot constitute bad faith e. Jones v. Harris Associates i. Judges will NOT come in and are NOT fee regulators; this is left up to the market and free competition to decide f. Jones v. Harris Associates II (SCOTUS) i. RULE: to face liability under 36(b), an investment advisor must charge a fee that is so disproportionately large that it bears NO reasonable relationship to the services rendered and could not have been the product of arms length bargaining COMPLIANCE a. In re Caremark Directors NEED NOT ferret out wrongdoing at EVERY level of the business i. Generally, a Board must have reasonable mechanisms set in place in order to not be held liable; for example, there is a duty to attempt in good faith to assure that a corporate information and reporting system is intact, failure to have something like this set in place may render a director liable for losses caused by non-compliance with legal standards ii. HOLDING: in this case, the Ps did not establish prima facie: 1. that the directors knew or 2. should have known that violations of law were occurring and, in either event 3. that the directors took no steps in a good faith effort to prevent or remedy the problems 4. and that such failure proximately resulted in the losses complained of... iii. RULE: although directors have a duty to monitor a corporations ongoing operations, they are NOT liable for wrongdoings of which they had no real or constructive knowledge iv. RULE and REASONING: 1. the level of detail that is appropriate for the requisite information system is a question of business judgment. The settlement was FAIR and reasonable in part because the directors satisfied their duty to assure that adequate information flows to the board... absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply from assuming the integrity of employees and the honesty of their dealings on the companys behalf OVERSIGHT

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a. Stone v. Ritter when a BOD establishes adequate information and reporting systems and delegates monitoring compliance and receiving periodic reports, absent a showing of BAD FAITH, they WILL NOT be held personally liable i. Held: the BOD established information and reporting systems and those systems did allow for the proper monitoring by directors, in compliance with applicable banking laws 1. By delegating the task of monitoring compliance and receiving periodic reports on which to oversee compliance, the BOD did adequately monitor compliance b. Assessing BOD liability where BOD is UNAWARE of employee misconduct that results in the corporation being held liable: only a sustained or systematic failure of the board to exercise oversight such as an utter failure to attempt to assure a reasonable information and reporting system exists will establish the lack of good faith that is a necessary condition to liability c. Breach of Good Faith conscious disregard for his duties i. Burden is on the P to prove bad faith; cant prove not good faith; has to be an active bad faith The Requirement of Demand of the Directors a. Types of Shareholder Actions: i. DIRECT ACTIONS 1. SH makes a claim in her own name against the corporation or the BOD, the wrong must have impacted the SH directly 2. Examples of Direct Actions: suit to compel payment of dividends, enjoin an activity that is ultra vires, security fraud, protect SH rights, suit where SH has been denied rights, SH-Employee suits ii. DERIVATIVE ACTIONS 1. Complained of wrong has damaged the corporation and as a result of the harm to the corporation, the SH is hurt 2. Essentially the SH is asserting TWO CLAIMS: (1) sues the corporation and (2) sues the 3P responsible for the corporations harm... essentially tells the corporation that they need to sue that bad 3P 3. Examples of Derivative Actions: director has violated duty of care to the corporation, officer has misappropriated a corporate opportunity and the corporation has failed to take action against her, claim that a 3P has breached a K with the corporation and the corporation has failed to take action against the 3P, claim that senior managements salaries are excessive, and a suit to prevent unfair and preclusive management practices iii. Differences Between Derivative Suits and Direct Actions 1. Only SHs can bring derivative suits (not creditors) 2. Any remedy in a derivative suit goes to the corporation, not to the SH bringing the lawsuit 3. Direct action only provides a remedy to the SH who personally brings the suit 4. In a derivative suit, the corporation is REQUIRED to pay for the SHs attorneys fees, PROVIDED that the SH wins 5. Many more procedural hurdles in a derivative suit than in a direct action a. Contemporaneous ownership, ownership percentages, bonds for unsuccessful suits, etc. iv. THE DEMAND REQUIREMENT IN DERIVATIVE SUITS 1. Most states require that the SH approach the BOD and DEMAND that the BOD pursue litigation before the SH is allowed to bring a derivative suit in the name of the corporation 2. However, if demand is made on the BOD and the BOD determines NOT to bring the suit, then that decision is usually protected by the BJR 25

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a. THUS, Ps usually seek to avoid making a formal demand on the BOD b. There are even times when the Demand Requirement is EXCUSED 3. Demand is EXCUSED when asking the BOD to bring suit would be futile. a. FIRST, one must show that there is reasonable doubt that the majority of the directors are disinterested AND independent; P could also try to show that there is reasonable doubt that the challenged transaction was a valid exercise of business judgment v. Demand is FUTILE In Delaware if: 1. A majority of the BOD has a material financial or familial interest in the transaction 2. Majority of the BOD is incapable of acting independently for some other reason such as domination or control, or 3. The underlying transaction is NOT the product of a valid exercise of business judgment b. Grimes v. Donald a SH generally must DEMAND the BOD bring an action before he or she brings a derivative suit i. Facts: P files a derivative claim ii. RULE: Demand of the BOD is REQUIRED unless P can prove that making a demand would be FUTILE! (see above for explanations) The Role of SPECIAL COMMITTEES a. Special Litigation Committees: committee of disinterested BOD members and some outsiders that evaluate potential lawsuits; the idea is that even if the BOD is not in a position to evaluate the litigation from an unbiased perspective, it can still appoint a committee of unbiased members to evaluate whether the litigation is in the best interests of the corporation. i. Based upon the recommendation of the special litigation committee, the BOD can still move to dismiss a derivative action, and assuming that the special litigation committee is disinterested, that dismissal would be subject to protection by the BJR ii. Shareholder can attack the decision of the Special Litigation Committee: b. Grounds Upon Which a SH Can Attack Decision of Special Litigation Committee: i. Decision was procedurally defective (improper or ineffective method to investigate the litigation); NOTE: usually the SLCs judgment is protected by the BJR ii. SLC failed to act independently, in good faith, and with a reasonable investigation... cases have STRICTLY construed the requirement that SLCs have disinterested directors, and even a tangential connection between members of an SLC and tother other directors has been found sufficient to invalidate the recommendation of an SLC NOTE: NY is more deferential to SLCs where other states might require stricter scrutiny (financial interests???) iii. Delaware has an additional requirement that the court exercise its own Business Judgment in evaluating the decision to dismiss c. Aeurbach v. Bennett i. Facts: BOD made an SLC to determine if litigation would be proper... they decided that the BOD did not violate the relevant laws related to the possible litigation and that it would NOT be in the corporations best interest to proceed with a lawsuit ii. HELD: there was NO evidence provided that raised a triable issue of fact as to the good faith examination by the SLC of the basis of the derivative SHs suit... P has the burden of proving a lack of good faith by the SLC in its investigation... The SLCs investigation and its decision are shielded by the BJR d. Zapata Corp v. Maldonado i. HELD: where a P fails the Demand Requirement, and offers NO PROOF as to his claim of futility the SLCs decision to dismiss the Ps derivative action (as long as they are a 26

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committee of disinterested parties whose investigation was reasonable) will be PROTECTED by the BJR e. In Re Oracle i. Facts: P wants to file a derivative suit for insider trading against 4 officers and the BOD sets up an SLC to investigate whether they should sue the officers... the SLC has two Stanford Professors placed on the Board who the court deemed to NOT be disinterested parties 1. Elison is a contributor to Stanford, Lucas was a contributor to Stanford, Stanford Alum, other Director was a Stanford Professor who knew one of the SLC members ii. HELD: court decides that the SLC is not entirely disinterested as the traditional test for conflict of interest is whether there is any pecuniary or familial relationship between the board member and the situation or transaction at issue 1. RULE: friendships, relationships, social norms, can be considered to determine whether there exists a conflict of interest or not iii. NOTE: Delaware SLC has its own prong of the test to determine whether a decision by an SLC was a reasonable investigation by disinterested parties: Delaware courts have the power and discretion to overrule the decisions made by a board by using their very own BJR (in the minds of the court!) DUTY OF LOYALTY BY DIRECTORS a. Duty of Loyalty: requires that Os and Ds put the interests of the corporation ahead of their own personal interest; Duty of Loyalty is implicated in situations involving: i. Conflict of interest ii. Elements of a Conflict of Interest: 1. Conflict of interest exists when the Directors knows that at the time he is asked to take action regarding a transaction he or a person related to him (1) is a party to the transaction or (2) has a beneficial interest in the transaction; and then he exercises his influence to the detriment of the corporation iii. Typical Conflict of Interest ANALYSIS: 1. Is there a conflict of interest? (direct or indirect) a. if NO then there is no conflict of interest issue b. if YES then one must determine whether the transaction has be cleansed if YES, transaction is cleansed, then the transaction is protected and may proceed (transaction is cleansed by a vote of the disinterested directors, most likely protected by the BJR) if NO, transaction NOT cleansed, then the transaction is voidable by the corporation, and the directors who violated their fiduciary duty of loyalty may be subject to damages iv. CLEANSING a Transaction: 1. A transaction is properly cleansed if: a. Transaction is approved by a vote of a majority of the fully informed, disinterested directors; or b. The transaction is ratified by the informed shareholders (some states require that the SHs be disinterested parties) c. The transaction is shown to have been intrinsically fair to the corporation (in general, intrinsic fairness relates to the price and the terms of the deal) b. Delawares Take on Interested Directors and Quorum 27

DGCL - 144 Interested Directors and Quorum Transaction is cleansed if: (a) approved by a vote of a majority of the fully informed, disinterested directors; or (b) ratified by the majority of the informed shareholders; or (c) the transaction is proven to be intrinsically fair to the corporation (price and the terms of the deal) c. Bayer v. Beran rule requiring directors undivided loyalty avoid possibility of fraud and the temptation of self interest i. Facts: P alleges that radio advertising by corporation was for the benefit of the Presidents and Directors wife; P alleges a breach of fiduciary duty of loyalty as this was not done for the betterment of the corporation but was rather self-dealing ii. HELD: court held for the director because: 1. No evidence that another singer would have been a better fit 2. No claim that the compensation for the wife was outlandish 3. Although the Director was an interested party, the other disinterested parties voted for the wife iii. NOTE: this was a potential conflict of interest, and thus, the legal standard shifts to the D to show the intrinsic fairness: 1. Wife was paid less than rest of performers 2. BOD ratified the decision to hire the wife (BJR protection) d. Benihana v. Benihana i. Facts: BFC wants to buy out Benihana and the deal was partially negotiated by Abdo, who was the principle owner of BFC but was ALSO on the BOD of Benihana... 1. A files a derivative suit arguing that the BOD breached duty of loyalty by allowing Abdo to negotiate the deal from both sides (self-dealing) ii. HELD: Safe Harbor Rule of 144 the majority of the FULLY INFORMED and DISINTERESTED members of the BOD knew about the conflict of interest, yet they still approved the acquisition THE CORPORATE OPPORTUNITY DOCTRINE a subset of the duty of loyalty a. Corporate Opportunity Doctrine: a fiduciary of the corporation may NOT take, for personal gain, an opportunity like a business venture or a new opportunity or discovery, in which the firm has a property right, and use it for his or her advantage without first offering it to the corporation b. What is a Corporate Opportunity??? i. Interest: something in which the corporation has a preexisting contractual right ii. Expectancy: something to which the corporation did not necessarily have a legal right, but, given the other contractual dealings of the company, there was a reasonably expectancy that the opportunity would be offered to the corporation iii. Necessity: something that the corporation needs in order to stay in business c. LINE OF BUSINESS TEST i. To determine whether something is a Corporate Opportunity, use this test: 1. A corporate opportunity would include activities as to which the corporation has fundamental knowledge, practical experience, and ability to pursue, which logically and naturally... are adaptable to its business, taking into account the corporations financial position, reasonable needs and aspirations for expansion... 2. Gist: if the opportunity falls within the corporations line of business or its prospective business, it should be deemed a corporate opportunity (consider where the business is now and where it is headed in the future) ii. Common DEFENSES to Whether Something is a Corporate Opportunity: 28

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1. Incapacity defense: corporation is not able to take advantage of this opportunity because of restrictions, lack of resources, or not practical 2. Source Defense: arises when an opportunity is presented to someone not because of their corporate position, but because of their personal skills; essentially the opportunity is presented ONLY to the individual and not the corporation iii. Requirement of Offering the Corporate Opportunity to the Corporation 1. At any time a corporate opportunity exists, a person bound by the doctrine who wishes to take advantage of this opportunity MUST FULLY DISCLOSE THE OPPORTUNITY AND HIS OR HER INTEREST IN THE OPPORTUNITY to the BOD... the BOD then has what amounts to a Right of First Refusal. iv. Proper STEPS in Corporate Opportunity Analysis: 1. FIRST, determine whether this is a corporate opportunity or not a. If NO, then there is a NO breach of fiduciary duty b. If YES, then we need to determine whether the opportunity was disclosed properly to the BOD If NO, and the party takes the opportunity for themself, this is a breach of the duty of loyalty If YES, duty is properly disclosed, and the opportunity is properly rejected by the BOD, then there is NO breach of duty of loyalty (if full disclosure to BOD is made, and the BOD votes to permit the fiduciary to take the opportunity, this creates a safe harbor for the party) 1. NOTE: if BOD does NOT properly reject the opportunity and the fiduciary takes the opportunity for herself, then there is a breach of duty of loyalty...NOTE this breach can be cleansed by an informed vote of the SHs or by showing fairness! d. Broz v. Cellular Directors must put a corporations interests before their own i. HELD: a director or officer must analyze the situation ex ante to determine whether the opportunity is one rightfully belonging to the corporation... if the director or officer believes, based on one of the factors, that the corporation is NOT entitled to the opportunity, then he may take it for himself... however, presenting the opportunity to the BOD helps to create a safe harbor for the directors ii. Reasoning: Broz approached the BOD of CIS and they REJECTED the corporate opportunity... Broz gave good notice and the BOD turned down the opportunity, THUS, he was protected in taking the opportunity! e. In re eBay Shareholders Litigation officers and directors MAY NOT usurp a corporate investment opportunity! i. Facts: Goldman Sachs came in and offered lucrative IP shares to inside directors and officers at eBay rather than to SHs; Inside Directors and Officers took the offer and used it to make big money ii. HELD: Breach of Duty of Loyalty on the parts of the Directors and Officers as this was an unfair usurpation of a corporate opportunity.. this was a situation akin to receiving a commission or a profit that was divested SOLELY to the directors and officers... DOMINANT SHAREHOLDERS a. General Rule: SHs acting as SHs have NO obligation to one another b. Exception: when a SH is a majority SH, he is considered to have control, and in these cases, that SH has an obligation to minority shareholders in certain DUTY OF LOYALTY transactions i. Then: when a dominant SH exists, one must ask whether the transaction in question involves a situation in which the dominant SH has a conflict or in which the dominant SH 29

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is receiving a benefit at the expense of the minority SHs or that the minority SHs do not receive ii. If SO, if a fully informed MAJORITY OF THE MINORITY DO NOT approve the transaction, the dominant SH will probably need to show that the transaction was FAIR to the corporation either through intrinsic fairness or in the case of a merger, entire fairness iii. If the fully informed majority of the minority SHs have APPROVED the transaction, then the burden shifts to the minority SHs to show that the transaction was not fair to the corporation c. Notes: i. if more than one SH is acting in concert, then their group may be considered a dominant SH ii. if a dominant SH benefits to the detriment of the minority (this is a conflict) then the BJR WOULD NOT apply d. Some transactions which may or may NOT fall within dominant SH analysis: i. Large dividends pro rata ii. Contracts with a conflict of interest (intrinsic fairness test) iii. Selling company to an outside 3P would be subject to the BJR e. Delaware i. Ratification occurs when the BOD or a committee of the BOD, in GOOD FAITH, authorizes the transaction by an affirmative vote of the majority of disinterested directors; however, in dominant SH cases, the BOD is almost NEVER disinterested f. Entire Fairness vs. Intrinsic Fairness i. Intrinsic fairness: involves the substance of the transaction; the price and terms of the transaction have to be fair to the corp and to the minority SHs ii. Entire fairness: involves the substance of the transaction as well as the process and procedure by which it was accomplished and both must be shown to be fair; entire fairness is invoked when the dominant SH is involved AND the complained of transaction is a merger g. Sinclair Oil a transaction between a parent and its subsidiary must be intrinsically fair! i. Facts: Sinclair owned 97% of Sinven; Levien was a minority SH of Sinven; Sinclair caused Sinven to pay out excessive dividends Sinclair created a Sub to coordinate Sinclairs foreign operations, then caused Sinven to contract to sell crude oil to this Sub at specified rates and quantites Sub failed to live up to the K and Levien and other minority SHs brought derivative action requiring Sinclair to account for damages sustained by Sinven, for the K breach and the excessive dividends ii. HELD: parent was SELF DEALING to the detriment of the minority SHs, in this situation, transactions will be tested by their intrinsic fairness if there is evidence of breach of the parents fiduciary duty coupled with self dealing 1. The excessive dividends must be proved to be unreasonable by the P under the BJR the dividends INVOKE the BJR 2. In the contracting with its own SUB, Sinclair had self dealing thus, burden shifts to the D, Sinclair, who FAILED to prove that the deal was intrinsically fair h. Zahn v. Transamerica a SH voting as a Director must vote in all SHs Best Interests i. The majority has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors. Court then seemed to hold that the controlling group violated this fiduciary responsibility by causing the corporation to exercise its right to redeem certain minority SHs for what turned out to be a very low price compared with the corporations assets Ratification 30

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a. Fliegler v. Lawrence interested SHs cannot ratify their own transactions with their corporation, but transaction need not be voided if it passes the IFT i. Case involved a directors attempt to sell land to his corporation through a corporation that he formed ii. Transaction in which Interested Directors want to exercise an option to trade some of their stock for another corp, this was passed onto the SHs to vote on it; the majority of the approval votes were from the directors and only 1/3 of disinterested SHs iii. ISSUE: if officers, directors, and SHs of a corporation hold a significant interest in a second corporation that the first corp acquired, must the Ds show the intrinsic fairness of the transaction iv. RULE: if interested self dealing and the majority of the minority ratify the transaction, burden shifts to the dissenting SHs to prove the intrinsic unfairness of the transaction b. In re Wheelabrator i. Merger between WM and W, SHs bring action claiming breach of duty of care and loyalty; court found neither, in its holding the court carefully laid out the burden shifting in ratification 1. Where fully informed disinterested SHs approve the transaction, the BJR applies 2. Where the transaction involves the corporation and a controlling dominant SH, the transaction must pass the entire fairness test and burden is on D 3. Where the transaction still involves a dominant SH, deal is contingent upon a majority of the minority vote, that is achieved and 144 still does not apply and neither does the BJR rule, however, the burden is on the P to prove the deal is not entirely fair ii. RULES: if there is self dealing by a BOD member, and the minority of fully informed SHs ratifies, then BJR applies 1. If there is a controlling SH, then the best you can do is the IFT and a vote of a majority of the minority will shift the burden on the P to disprove intrinsic fairness PROBLEMS OF CONTROL a. Shareholder Ownership Rights i. Common Stock: typically has the right to vote AND the right to receive dividends; also represents a claim on assets remaining after creditors get to them ii. Two main types of rights: 1. Economic rights proportional right to dividends with regard to total issued and outstanding shares 2. Voting rights: typically elect directors, fundamental changes to the corp, or SH resolutions iii. Cumulative Voting: allows a minority SH the opportunity to have representation on the board; it is an effort to increase representation on the board b. Levin v. Metro Goldwyn Mayer corporate management may use corporate assets to provide shareholders with information that is relevant to vote i. Facts: insurgent group is trying to go after the incumbent group to overthrow their management ii. Issues: May an incumbent board and management use corporate funds to finance the expenses associated with providing SHs with information about their positions? iii. HELD: YES, incumbent management can commit corporate funds to pay for proxy solicitation as long as it is a policy dispute, and as long as the expenses are fair and reasonable c. Rosenfeld v. Fairchild Engine and Airplane absent a claim that proxy fight expenses were excessive, a company may reimburse the parties for their costs 31

i. In a contest over POLICY, as compare to a personal contest, BOD have the right to make reasonable and fair expenses in the defense of their management positions, in making proxy solicitations if they are reasonable and done in GOOD FAITH ii. If good faith, INCUMBENTS will be reimbursed whether they win or lose iii. INSURGENTS will be reimbursed ONLY IF THEY WIN d. Relevant Delaware Provisions 141 BOD and Powers (a) BOD manages (b) BOD shall consist of one or more members; shall be fixed by the CoI; a majority of the total number of directors shall constitute quorum for the transaction of business unless the CoI or the Bylaws require a supermajority provision; unless the CoI provides otherwise, the Bylaws MAY provided that a number LESS THAN the majority shall constitute a quorum, in which no case shall be less than 1/3 of the total number of directors voting is by majority or if in the CoI, supermajority! (k) any director or the entire board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; EXCEPT WHERE: - unless there is a classified board see 141(d) - unless there is cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such directors removal would be sufficient to elect such director if then cumulatively voted at an election of the entire BOD 142 Officers and Term (b) officers shall be chosen and hold offices for terms as prescribed by the bylaws or the BOD and shall hold office until voted out or resignation or removal 211 Meetings of Shareholders (b) elections take place at the meeting and election votes can be cast by proxies if SHs do not attend (d) special SH meetings may be called by the BOD as may be authorized by the CoI or the Bylaws 212 Voting rights of SHs and Proxies (a) unless otherwise provided in the COI, each SH shall be entitled to 1 vote for each share of stock held by the SH; if the COI provides for more or less than 1 vote for any share, that is fine too (b) SHs can give their votes to proxy, and can tell them how to vote or to use their discretion! 214 Cumulative Voting COI can provide that elections of directors are done by cumulative voting; Ex: A has 6 shares, B has 3 shares, and C has 1 share 3 seats for BOD, rather than A voting 6 votes for 1, 2, and 3 on the BOD, A has 18 votes, B has 9 votes, and C has 3 votes B can vote 9 for one of the seats and effectively get his guy on the seat! 216 Quorum: can be no less than 1/3 and is usually the majority plus 1 e. For vacancies and newly created directorships, see 223(a) f. SHs can consent to an action without having a formal meeting as long as there is a majority of the voting SHs - 228(a) g. Amending the COI - 242 h. Merger rules - 251(b) and (c) i. Sale, lease or exchange of assets must be approved by the majority of the outstanding shares entitled to vote - 271 32

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j. Dissolution - 275 PROXIES a. Private Actions for Proxy Rule Violations i. JI Case Co. v. Borak proxy materials containing false and misleading statements give rise to a Private Right of Action 1. RULE: private parties have a right under 27 to bring suit for violation of 14 of the Act; the purpose of 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in a proxy statement ii. Securities Fraud: private right of action has particular elements: 1. duty to disclose 2. breach 3. omission of material fact or misrepresentation 4. reliance 5. causation 6. damages 7. NOTE: an OMITTED FACT is MATERIAL if it is something which would reasonably affect a reasonable SH in making their decision iii. Mills v. Electric AutoLite a P must show MATERIALITY and RELATIONSHIP to establish a claim for a misstatement or Omissioner under SEC Act 14(a) -> Use BORAK for materiality 1. Facts: BOD recommends a merger to the minority shareholders; the BOD and the company was controlled by the acquiring company (conflict of interest and self dealing); BOD does not disclose that they are an interested party and the P sues for violation of proxy materials because they omitted a MATERIAL FACT!!! 2. HELD: Ps causation CAN BE MET by showing that the misstatements or omissions within the proxy materials are material, it simply follows that the omission or misstatements would have an impact on the ultimate vote; however, damages should only be awarded if PROVEN 3. RULE: all that is required is to show that the misstatement or omission is material! Proving of actual reliance is EXCUSED if the misstatements or omissions are material enough iv. Seinfeld v. Bartz a proxy statements omission or misstatement of the value of the directors stock options is NOT material!!! 1. HELD: this is NOT material information; there was no substantial likelihood that the disclosure of omitted facts would have been viewed by the reasonable investor as having significantly altered the total mix of information NOT MATERIAL SHAREHOLDER PROPOSALS a. Rule 14a-8 allows SHs to submit certain proposals to their fellow SHs for a vote by having these proposals placed on the companys proxy statement to the SHs, and have the company bear the expenses i. Procedural Requirements Which Must Be Met: 1. SH making the proposal must hold at least $2000 in market value of the companys stock or 1% of the companys voting stock, and have held it for the 12 months preceding the proposal 2. SH may not submit more than one proposal for each SH meeting 3. 500 words or less 4. submitted to the company at least 120 days before the companys proxy statement is to be released 33

5. either the SH or the SHs qualified rep must attend the meeting ii. Substantive Requirements Which Must Be Met: 1. Topic of the proposal must be a proper subject for actions by SHs under state law in the state which the organization is organized 2. Proposal may not, if implemented, cause the company to violate any law 3. Proposal may NOT address a personal grievance or special interest not applicable to other SHs 4. If it relates to companys operations, must involve at least 5% of the companys assets, net earnings, or gross sales, OR the operations must otherwise be significantly related to the companys business (significant relationship to the companys business is demonstrated on the face of the resolution or in the supporting material) 5. Proposal must not violate the Proxy Rules (no material misstatements) 6. Proposal may NOT be beyond the companys power to implement (like a vote requiring that the world adopt a universal currency) 7. Proposal may NOT address management functions such as the companys ordinary business operations; 8. Proposal may NOT relate to specific amounts of cash or stock dividends 9. The proposal may not directly conflict with one of the companys own proposals, being submitted at the same meeting 10. If the same proposal was submitted within the last 5 years and did not receive the required % of votes, it may be excluded by the corporation b. Lovenheim v. Iroquois Brands SHs may include significantly related materials with a companys proxy statement i. Facts: L wanted to include information in the upcoming proxy statement about how the company force-fed geese as part of their pate de fois gras production process Iroquois denied Ls request ii. HELD: even though the pate production only comprised of less than 5% of Iroquois business, the court still found for the P because the issue of force feeding geese is sufficiently related to Is business so as to give the SH the right to voice his concerns L would suffer irreparable harm if the proxies went out without the information he requested iii. RULE: courts MAY be willing to allow SHs the right to voice their environmental/social concerns on the proxy statements, if those concerns are otherwise SIGNIFICANTLY RELATED TO THE CORPS BUSINESS! (doesnt only have to be economic significance) c. AFSCME v. AIG, Inc. NY Law prohibits corporations from excluding SH proposals to change director election bylaws from the corps proxy statements i. NEW YORK CASE ii. Facts: large union SH in AIG submitted a SH proposal that the companys bylaws be amended to allow large SHs to submit their own slate of BOD candidates; if the proposed amendment were enacted, the names and short disclosure statements of any such SH slate would to be included for FREE in managements proxy materials 1. AIG asserted that this rule-change proposal related to an election making the proposal excludable under 14a-8(i)(8) 2. HELD: Second Circuit found against AIG and held that (i) the SECs prior statements about the meaning of 14a-8(i)(8) were ambiguous, and (ii) in light of the ambiguity, the rule should be interpreted to apply only to attempts to nominate, elect, or defeat particular candidates (stating it was is a substantive in nature exclusion and not a procedural) and that the SH proposal was procedural in nature so it was allowed! 34

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3. SEC quickly fired back and amended (i)(8) to make it clear that the exclusion applies not only to a nomination or election to the board, but also to a procedure for such nomination or election, so now, any SH group that proposes to change the procedural rules for elections will have to pay for the printing and disseminating its OWN proxy materials detailing the proposed change, rather than free-riding on managements materials SHAREHOLDER INSPECTION RIGHTS a. Examples of Proper Purpose: i. An effort to gain control of the corporation ii. An effort to gain a SH list for someone else trying to gain control of the corp iii. An effort to investigate an alleged corporate mismanagement or malfeasance iv. An effort to gather information to assess the value of ones shares v. An effort to communicate with other SHs in connection with a proxy fight or a SH proposal b. Examples of Improper Purpose i. Finding potential customers for a personal business venture ii. Persuading the corporation to adopt ones social or political concerns, without any economic benefit iii. Instituting a strike suit iv. Seeking proprietary information such as trade secrets or other IP v. Seeking information to aid a competitor of the corporation c. Rule 14a-7: firm can choose either to mail your material and bill you for the costs or to give you the SH list instead; most incumbent managements choose to mail the material themselves and keep the list confidential; there is nothing in the federal proxy rules requiring the corporation to give you the SH list, thus, battles for the SH list are fought under state laws, as the cases in this section illustrate d. Rule 14a-9: deals with false or misleading statements (omitting to state any material fact counts as well)

219 RIGHT TO THE SHAREHOLDER LIST (a) names, addresses, and number of shares; DO NOT NEED TO HAVE EMAIL ADDRESSES; such list shall be open to the examination of any SH for any purpose germane to the meeting for a period of at least 10 days prior to the meeting; has to make available the SH list to SHs 10 days prior to a SH meeting *Suppose you submit the request for the SH list, company says, we will get back to you shortly, if they stall, you can GO TO THE COURT OF CHANCERY and ask them to compel the corporation to permit examination of the SH list (b) Burden of Proof: is on the corporation to prove that the examination of the SH list is for a purpose NOT GERMANE to the meeting 220 Inspection of the BOOKS and RECORDS SHAREHOLDER has the burden of showing the proper purpose for inspecting the books and corporate records e. Crane v. Anaconda a Corporation must grant a request for access to a SH list to enable a tender-offer discussion i. Facts: Crane is a non-SH, and it wants to solicit tender offers to As SHs Crane demanded that A submit to it a list of its SHs, and when A refused, Crane claimed that A 35

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had a fiduciary duty to its SHs to inform them of Cranes offer and that it was entitled to the list because the request was made regarding the business of the corporation as per NYBCL 1315 ii. HELD: court held that A was required to submit to Crane a list of the SHs because Crane wanted to obtain the list regarding the business of the corporation (As business); during a takeover attempt, the SH welfare is involved, and it is in the SHs best interest to learn of this lucrative tender offer iii. RULE: a qualified SH may inspect corporations stock register to ascertain the identity of fellow stockholders for the avowed purpose of informing them directly of its tender offer and soliciting tenders of stock; and that SHs pending tender offer involving over one-fifth of the corporations commons stock was NOT a purpose other than the business of the corporation f. State Ex Rel Pillsbury v. Honeywell company MAY DENY access to a SH who purchased stock SOLELY to access corporate books and records i. Facts: Pillsbury wanted Honeywell to stop producing ammunition for the Vietnam war, so he purchased 100 shares of stock for the purpose of demanding a SH list to voice his opinions on their unethical business practices ii. HELD: a SH has the right to inspect corporate records and SH lists ONLY if he has a proper purpose germane to his economic interest as a SH here, Pillsbury did not have a proper purpose that relates directly to concerns he has over the investment represented by his shares this was merely personal and had no bona-fide interest in the welfare of the corporation g. Sadler v. NCR New York Law entitles SHs to SH and NOBO lists i. Facts: AT&T wants to do a hostile takeover tender offer of NCR and in order to do that they have to oust the current BOD of NCR and has to do that by special meeting 1. NCR is incorporated in MD by has offices in NY and performs operations there 2. CEDE List identifies brokerage firms and other record owners who bought shares and they are put in the custody of depository firms such as Depository Trust 3. NOBO List non objecting beneficial owners, contains the names of those owning beneficial interests in shares of a corporation who have given consent to the disclosure of their identities ii. AT&T and Sadler sue, relying on 1315 of the NYBCL which states that residents owning shares of a foreign corporation can obtain a list of SHs 1. Sadler meets the requirements of the law and AT&T essentially uses Sadler as an acting agent on its behalf to get the list iii. RULE: agency relationship can be used in order to meet the requirements of the statute, the rationale being that absent bad faith, it should not matter PROBLEMS OF CONTROL a. PROXY FIGHTS i. Shareholder Proposals 1. CA, Inc. v. AFSCME Employees Pension Plan a. RULE: a SH proposal will NOT be included in the proxy statement if it violates Delaware Law in Delaware here this proposal would have included a mandatory reimbursement of election expenses in circumstances that a proper application of fiduciary principles would preclude SHAREHOLDER VOTING CONTROL a. Devices for Control 36

XXVIII.

i. Most control devices are designed to prove a SH or a group of SHs with sufficient votes to determine or to impact certain important decisions in a corporation. Some of the most common devices include: 1. 218 - Voting trusts: device whereby two or more SHs place their shares in trust, the trust has a trustee who is responsible for voting the shares; the advantage of a voting trust is that there is little question about enforcement 2. Vote pooling agreements: no trustee; SHs do NOT relinquish control over their shares; a vote pooling agreement is an agreement between or among two or more SHs which states that the parties shares will be voted in a certain wait 3. SH agreements: agreements 4. Irrevocable proxies ii. Important: SHs may agree to exercise control to determine who will be directors, but not to determine how those directors will vote b. LIMITS ON CONTROL ARRANGEMENTS i. SHs may NOT agree on how directors will vote as directors or what actions those individuals will take as directors or what actions those individuals will take as directors 1. Exceptions to SH Agreements: SHs may agree to act a certain way as directors if ALL the SHs have entered into the agreement (SH unanimity exception); in some states and in closely held corporations, if no SHs object, and the terms of the agreement are reasonable it will be upheld c. BLACK LETTER RULES: i. SHs can agree about HOW they will vote as SHs ii. SHs CANNOT agree how they will vote AS directors (with fiduciary duties) UNLESS 1. The agreement is signed by ALL SHs OR 2. In some states, when the minority SHs who have not agreed do not or cannot object, AND the agreement is reasonable d. Stroh v. Blackhawk Holding Corp. shares may represent a proprietary interest even if they do not entitle the holder to dividends or other property i. RULE: corps can strip away the right of a certain class of stocks to profits and dividends but CANNOT strip away the right to vote (VOTING is a requirement in the act in 14) e. DGCL 151(a) provides that corps may issue various classes or series of stock, which classes or series may have such voting powers, full or limited, or not voting powers, as shall be stated and expressed in the COI CONTROL IN CLOSELY HELD CORPORATIONS a. Ringling Bros.-Barnum & Bailey Combined Shows SHs may make binding agreements on how to vote their stocks i. DGCL gives 2 or more SHs the right to transfer their voting rights to a trustee, who has fiduciary duties to the respective SHs ii. In DE, pooling agreements are valid, the point is that, the agreement did not violate 18 and has been put in as 218(c) an agreement by SHs, the shares may be voted as provided for in the agreement, you can agree to vote in conjunction with other SHs b. McQuade v. Stoneham SH agreements MAY NOT restrict a boards authority i. Facts: the parties are SHs and they agree to elect themselves to the BOD, and to employ M as treasurer, and to keep him there at a certain salary ii. HELD: M gets kicked off the board and then argues that the agreement said to keep him on iii. RULE: agreements can get SHs to vote for directors, but agreements will NOT be enforced if they abrogate the decisions of BOD members SHs may NOT agree to place limitations on the power of directors to manage the business of the corporation.. 37

BOD must have freedom to express its own business judgment (they have a duty of loyalty to the corporation) c. Clark v. Dodge SH agreements regarding officers employment MAY be enforceable if they are the ONLY SHs in the agreement! i. RULE: different from McQuade because here the parties to the agreement are the ONLY shareholders and because it is in NY and they permit it! d. Relevant DE Provisions 102(b)(1) Contents of COI (b)(1) COI may also contain any or all of the following matters: - provisions creating, limiting, defining, and regulating the powers of the corporation and all its members if such provisions are not contrary to the laws of this state 218 - Voting trusts: device whereby two or more SHs place their shares in trust, the trust has a trustee who is responsible for voting the shares; the advantage of a voting trust is that there is little question about enforcement XXIX. ABUSE OF CONTROL a. Freeze out: occurs when the majority SH or block of SHs earns a return at the expense of the other SHs b. Typical elements of a Freeze out: i. Corp does not pay dividends so that none of the corps profits are distributed to its SHs and ii. The only corporate funds which are PAID OUT are paid in the form of salary to those SHs who are also employees and iii. The FROZEN OUT SH is prevented from holding a paying position iv. And as a result, the minority SH does not receive any of these corporate funds, which are distributed as salary and are unable to profit in any way from their investment in the corporation c. Fiduciary Duties in Freeze Outs i. It is the fiduciary duty of a dominant SH, be aware that in Delaware, in freeze out scenarios there is a fiduciary duty involved ii. Massachusetts applies a partnership like approach to closely held corporations iii. Shareholders in closely held corporations owe each other a duty of good faith d. Wilkes v. Springside a close corporations SHs need a legitimate business purpose to terminate another SHs agreement MASSACHUSETTS RULE i. HELD: MA holds that closely held corps are like partnerships and that the majority during the freeze out owes a fiduciary duty to the utmost good faith and loyalty court says there should be a balancing and the D has the burden of showing that they had a legitimate business purpose, and even if there is a legitimate business purpose, the minority SH will have the chance to show that this objective could have been acheieved through an alternative course of action less harmful to the minoritys interest (BALANCING APPROACH) e. Ingle v. Glamore Motor Sales share ownership is NOT a guarantee of continued employment absent an agreement providing lifetime employment NEW YORK RULE i. Facts: P was an at will employee and he acquires 22 shares, an option to purchase 18, out of 100 shares (G owned the difference) the at will employment K said that hed have to sell them back if terminated to the company P sues for breach of fiduciary duty and arges that he is NOT an at will employee but is rather a minority SH who is owed a duty ii. HELD: at will agreement uphold because he is not a typical minority SH because his interest in shares arises out of the employment K 38

XXX.

iii. RULE: a minority SH in a close corporation, by that status alone, who contractually agrees to sell back his stocks upon termination of his employment for any reason, acquires no right from the corporation or majority SHs against at will discharge f. Smith v. Atlantic Properties a minority SH may act in a manner that breaches his fiduciary duty to the other SHs TAXES FOR NO DIVIDENDS i. Facts: out of 4 SHs, one put in this 80% clause for approval, essentially giving him veto power; he votes for no dividends and the others warn him that tax penalties will be assessed to the detriment of the company and they WERE ASSESSED! ii. HELD: SHs in closely held corporations have a duty of loyalty (MA law) and the D recklessly ran serious and unjustified risks of precisely the penalties eventually assessed, risks that were NOT IN GOOD FAITH or LOYALTY! g. Jordan v. Duff and Phelps a former employee may recover damages for increased stock value after selling stock back in a closely-held corporation i. RULE: closely held corporations buying back their own stock, like knowledgable insiders of closely held firms buying from outsiders, have a fiduciary duty to disclose material facts h. Nemec v. Shrader i. Buy back case DISSOLUTION a. Brodie v. Jordan i. HELD: P is not entitled to a forced buyout of her shares by the majority, courts have broad equitable powers to fashion remedies for breaches of FD in a close corporation but a forced buyout would place P in a significantly better position than she would have enjoyed absent from wrongdoing, as well as exceeded her reasonable expectation of having her shares bought out b. Alaska Properties v. Coppock a SH may NOT require a company to purchase its stock for FV if the company has not done so for others i. RULE: absent a statutory right of appraisal, a SH is NOT entitled to an equitable remedy where the corporation purchases their shares when the SH has issues regarding the directors allocation of company resources ii. RULE: 4 Situations in which a P can compel the close corporation to purchase her shares: 1. Provision in the bylaws 2. Petition for involuntary dissolution of corporation 3. Change in corporate structure such as a merger 4. Statutory right of appraisal iii. None of the above applied here c. Meiselman v. Meiselman i. RULE allows a court to order dissolution where such relief is REASONABLY NECESSARY for the protection of the rights and interests of the complaining SH d. Haley v. Talcott a contractual dissolution mechanism must offer and adequate separation of interests e. Securities Exchange Act of 1936 RULE 10b-5

RULE 10b-5 EMPLOYMENT OF MANIPULATIVE AND DECEPTIVE DEVICES

XXXI.

TRANSFER OF CONTROL a. Frandsen v. Jensen-Sundquist mergers DO NOT trigger the right-of-first refusal upon sale provided in a SH agreement 39

b.

c.

d.

e.

i. Facts: 1. P owned 8% of the D company, and in his rights he had the right of first refusal (which allowed him to first have the option purchase majoritys block shares before anyone else); D wants to merge but they cant sell their shares without going through the P so instead they decide to sell off assets of the company through a bank they own; court holds that this was not a sale of shares so the P does NOT have the right of first refusal ii. Issue: Did the D breach or tortiously interfere with the agreement between the P and the D that provided him the right of first refusal on the sale of majority shares? iii. HELD: NO the agreement was NOT breached because there was no sale of shares, the court interpreted the K literally and the K referred to the sale of majoritys SHARES, not the assets of the K; 1. Essentially, the assets change hands, but the shares do not Zetlin v. Hanson i. Facts: P is a minority shareholder and the Ds are the majority shareholders; Ds sell their controlling shares to a bidder who pays a large premium for each share; the P argues that they should receive the same type of treatment for their minority shares ii. RULE: minority shareholders are entitled to protection against abuse from majority shareholders, BUT THEY CANNOT inhibit the legitimate interests of the other stockholders 1. The premium is the added amount a majority shareholder can charge to allow one to but the privilege of obtaining controlling shares Perlman v. Feldman i. Facts: 1. There was a steel shortage during the Korean War and Feldmann and his family were the majority owners of the Newport Steel Corporation, and they exploited the high demand for steel by selling their majority shares to people who would purchase steel output through the majority owners; the controlling shareholders decided to sell their stake to steel consumers; the majority sellers were paid a HUGE PREMIUM for their shares and the minority shareholders SUED on the ground that the majority shareholders had improperly derived Newport of the opportunity to continue its fruitful business ii. Holding: the majority controlling shareholders of Newport improperly appropriated for themselves benefits that might have accrued to the corporation iii. Reasoning: controlling shareholders breach the fiduciary duty when the siphon off for personal gain corporate advantages to be derived from a favorable market situation. Any premium that steel consumers would have paid the Newport business for steel was essentially directed through the controlling shareholders in the form of a control premium (NOT FAIR!) What is a Control Block of Shares? i. in Essex v. Yates, Yates was the controlling shareholder and was the incumbent and thus had inertia on his side; a challenger to his control would have to essential usurp control, a hefty task ii. where there is an incumbent management team and BOD that does not have a significant % of the voting shares, an outsider who acquires a large but less than substantial share may not have enough to exert any control over the incumbent Restrictions on Transfer of Securities

DGCL 202 Restriction on transfer of securities and ownership of securities 40

(a) written restriction or restrictions on the transfer or on the amount of the corporations securities that may be owned by any person or group of persons may be enforced against the holder of the restricted securities or any successor of them; unless noted conspicuously, they are ineffective except against those with actual knowledge (b) restrictions may be imposed by the certificate of incorporation or by the bylaws or by agreement of stockholders or by agreement between holders and the corp; they are NOT retroactively effective (c) restrictions are permitted if they: (1) (5) give reasons for why and how restrictions can be placed on transfer of securities XXXII. MERGERS, ACQUISITIONS, and TAKEOVERS a. Intro: i. Merger: two companies form and one survices ii. Consolidation: new company is formed b. Types: i. Statutory merger: combination in accordance with applicable state law ii. Sale of assets: assets of one company are purchased by other iii. Sale of stock: one company buys other companys stock c. Important factors during merger or acquisition: i. Do shareholders get to vote? ii. Are dissenting shareholders entitled to appraisal rights? iii. How are liabilities of the target company treated? iv. What are the tax consequences of the transaction? d. Voting i. The transaction usually represents a fundamental transaction for the target company so the shareholders have a right to have a voice in such transactions e. Appraisal Rights i. Entitle minority dissenting shareholders to have the FV of their interest in the firm determined by a court f. Statutory Merger i. Transaction must be approved, follow the law g. Delaware Statutory Merger 251

251 Merger or Consolidation of Domestic Corporations (a) merger can happen as long as it complies with this section (c) after board adoption, the plan of merger must be submitted to the shareholders of each corporation for separate approval * MAJORITY of outstanding shares is all that is needed in order to complete a merger! DGCL 271 Sale of Assets Shareholders MUST approve sale of all or substantially all assets to be those qualitatively vital to the existence and purpose of the corporation and this also includes assets under 50% of the companys value h. THE DE FACTO MERGER DOCTRINE: i. Involves focusing on the substance of the transaction, rather than the form ii. It is applied when a company manipulates the form of a transaction as to avoid a result which would have applied had the transaction been done by the books iii. RULE: if the transaction has the substantive effect of a merger, then the shareholders of the companies involved in the transaction are entitled to the same statutory protections that they would have received had there been a merger by the books 41

iv. Farris v. Glen Alden - when a shareholder is faced with a transaction that so fundamentally changes the corporate character of a corporation and the interest of the P as a shareholder therein, that to refuse him the rights and remedies of a dissenting shareholder would in reality force him to give up his stock in one corp and against his will accept shares in another v. Farris v. Glen Alden 1. Facts: a. List purchased 39% of the stock of GA and the two corporations went into a reorganization agreement under which GA would purchase assets of List and take over Lists liabilities and List would eventually be dissolved; Farris, shareholder of GA dissented and filed suit and said that the proposed agreement DID NOT conform to the statutory requirements of a merger; GA said it was not a merger but was rather a sale of assets 2. HELD: court looks to substance over form, finds that the practical effect of this reorganization is a merger and that under PA law, a shareholder of a corp which is planning on merging has a right to dissent and has appraisal rights, but has no such rights in a sale of assets 3. Reasoning and Analysis: a. If the agreement is performed, P will become a shareholder in a larger corporation which is different and he will have a smaller % of ownership and the market value of his shares will decrease b. RULE: if it smells like a merger, it must be done BY THE BOOK! i. Delaware REJECTS the De Facto Merger Doctrine i. Hariton v. Arco Electronics Delaware Case 1. Facts: A agrees to sell all of its assets to L in return for Ls shares; As SHs then approved the dissolution of the company; and A then liquidates and distributes to its SHs all the Loral stock it receives for the asset sale... same result as if A merged with L, however, under Delaware law a company that sells all its assets does not get appraisal rights and a SH that dissolves and distributes its assets does NOT get appraisal rights 2. Rule: Delaware rejects the De Facto Merger Doctrine; the statute for the sale of assets and the statute for a merger are independent and separate from one another; if an asset sale meets the legal requirements of such sale, the fact that it might look like a de facto merger should NOT invalidate it any more than an otherwise legal merger should be invalidated because it is a de facto asset sale; to create otherwise would be to create unnecessary uncertainty in litigation (sometimes called The Equal Dignity Rule) j. FREEZE OUT MERGERS i. Process by which a majority shareholder may force the minority shareholder to sell their stock in a merger with an entity owned by the majority shareholder, usually a wholly owned subsidiary of the majority shareholder (taking the company private) in order to gain 100% control ii. Standard for reviewing freeze out mergers: ENTIRE FAIRNESS STANDARD: 1. Whether an independent committee was appointed to negotiate on behalf of the minority shareholders 2. Whether that company was really independent and bargained strongly 3. Whether the price paid to the minority shareholders was fair or if it was rather a minority discount 4. Whether a thorough and complete fairness opinion was prepared; and 5. Whether the transaction was approved by a majority of the minority shareholders iii. Fair Price and Fair Dealing 42

1. Weinberger v. UOP minority shareholders NOT informed, thus the freeze out merger was INVALID a. Facts: Signal comes in and acquires UOP, but not the whole thing... they acquire 50.5% of UOP; Signal has been running UOP for a while now; Signal gets 50.5% of UOPs profits; There are still 49.5% of UOPs shares left, and Signal wants to purchase these and make UOP a subsidiary The plan was for Signal to create a wholly owned subsidiary and then merge that subsidiary with UOP, and UOP SHs will get paid off. Majority SHs owe a duty of loyalty to the Minority Shareholders DE Common Law requires that majority SHs owe a duty of loyalty to minority SHs, particularly where minority SHs are forced to sell in a merger! Majority offers Minority $21/share b. Essentially a freeze out merger and cash out merger, and the P challenges the merger as they say they werent fully informed 2. Making a Minority SH Claim for Breach of Fiduciary Duty a. (1) P must first allege fraud, misrepresentation, other misconduct, to demonstrate the unfairness of the terms to the minority b. (2) THEN, P invokes the fairness rule and the burden of proof will be on the majority shareholder to show by a preponderance of the evidence that the transaction is FAIR c. (3) HOWEVER, if the action was approved by a majority of the minority, the burden shifts back onto P to prove that the transaction was inherently unfair to the minority and the entire fairness of fair price and fair dealing will be analyzed d. fair dealing encompasses the duty of candor (Complete Candor) and one possessing superior knowledge may NOT mislead any stockholder by use of corporate info to which the latter is not privy COMPLETENESS, not just mere adequacy, is required and mandated! 3. Fair price is now determined under 262 and is based on ALL RELEVANT FACTORS, thus overruling, the weighted average of old Delaware law a. Delaware Block is the old valuation method no longer exclusively controlling proceeding valuations, Court takes the more liberal approach to subjectively use any technique or methods commonly used in the financial community subject to DGCL 262(h) b. in Delaware you do not need a corporate purpose 4. Coggins v. New England Patriots frozen out minority shareholders are entitled to damages if there is no corporate objective for a merger a. Facts: MA court first applies business purpose test (purpose CANNOT solely be to rid the minority shareholders) and then evaluates the fairness of the transaction under the entire fairness test Court found that the Ds failed to demonstrate that the merger served any valid corporate objective; D, controlling shareholder, wanted the control of the company in order to transfer a personal loan he used to purchase stock onto the corporation; could not do this unless he was the sole shareholder; the decision of the 43

merger had not benefit to the corporation so he had to pay damages! b. CLASS NOTES: there were voting and non-voting shares, and Sullivan acquires all voting shares and wants to get even the minority non-voting shares; essentially he needs to do a freeze out merger Coggins is one of the nonvoting shareholder Massachusetts has a proper purpose requirement for a merger 5. Rabkin v. Phillip A. Hunt a. Gist: delaying a merger to avoid paying a contractual price MAY give rise to liability to minority shareholders. While an appraisal is an appropriate remedy in many instances, it is NOT THE ONLY REMEDY. In cases of fraud, self-dealing, manipulation, and the like, any remedy that will make the aggrieved SH whole may be considered. In the context of a cash-out merger, timing, structure, negotiation, and disclosure are ALL factors to be taken into account in ruling upon the fairness of the transaction b. Rescissory Damages: damages measured by the FV of the stock at the time of judgment... large amount DGCL 262 Appraisal Rights SUMMARY OF 262 * there are some types of corporations whose dissenting shareholders are NOT entitled to appraisal rights * significant procedural requirements in connection with the perfection of appraisal rights: - continuous record ownership from the date of the demand of appraisal rights through the effective date of the merger - not voting in favor of the merger or consenting to it in writing - delivery of a written demand for appraisal prior to the taking of the stockholder vote on the merger - filing of a petition with the Delaware Court of Chancery within 120 days of the effective date - service of copy of such petition on the corporation * must PERFECT your appraisal rights, then the court will have a hearing for those who have PERFECTED * court will then appraise and determine the FV of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, as well as calculating interest * DE court DOES NOT apply MINORITY DISCOUNT! k. HOSTILE ACQUISITIONS AND TAKEOVERS i. Hostile Acquisition: process of excluding the BOD from an effort to acquire control of a company 1. Three Hostile Acquisition Methods: a. Tender offers: offer to by all shares b. Direct share purchases: direct purchases with limited number of shareholders c. Proxy contests: involved a battle for control of the Board through the shareholder voting process ii. Unocal Corp v. Mesa BJR is NOT applied to a boards defensive action because of the possibility of self interest in that the BOD may be acting in the interest of keeping their job 1. CLASS NOTES: a. TWO-TIER Tender Offer; $54/share (CASH) for 37%.. this would give him 50% + 1, then the other 49% he will go after through a merger and 44

will offer them $54/share in Junk Bonds; he will enact a freeze our merger against the minority shareholders 2. Facts: court held that the selective self tender offer was reasonable in relation to the threat posed a. Self tender offer to avoid T. Boones tender offer, the BOD offers to buy their own shares at $72/share.... b. What really happens is the deal gets completely stifled by the self tender offer 3. RULE: when a SH challenges the boards defensive tactics, the burden is on the BOD to prove that 4. The burden is on the BOARD being taken over to show that there was a threat 5. Unocal Test: (2 Prongs) a. Dominant purpose: board must reasonably perceive the bidders action as a threat to corporate policy - a threshold dominant-purpose inquiry into the boards investigation; (better explained: director had reason to believe that a danger of takeover existed; burden is MET by showing good faith and reasonable investigation, also helps to have approval of majority of outside directors when investment banker says the price is unreasonable, that is good enough) AND b. Proportionality: any defensive measure the board adopts must be reasonable in relation the to threat posed (better explained: analysis by the board can include: inadequacy of price, nature of offer, impact on constituents, and the BOD may consider SH interests at stake) iii. Other Defense Tactics - p 232 of Acing 1. Poison Pill the concept involves creating a device which multiplies and enhances the rights of shareholders so that a person who did acquire the company would find that the increased shareholder rights made the takeover so expensive that it would NOT be feasible; the idea is that the acquirer could not swallow the target company without taking the poison pill and that the pill would destroy the acquisition 2. Greenmail 3. White Knight 4. Share Repurchases 5. Staggered Board 6. Shark Repellent 7. Golden Parachute 8. Pac- Man Defense l. THE REVLON RULE i. Revlon 1. In many hostile takeover situations, a company attempts to find a White Knight, a company by which the target company would prefer to be acquired by. The target usually makes a deal with the White Knight to thwart the efforts of the hostile bidder 2. BUT, courts have held that such actions are no longer DEFENSIVE and are subject to a different level of scrutiny 3. Revlon Rule: a. As long as a target company is fighting off a takeover, then the Unocal test is the proper test to evaluate its actions; BUT . . . b. As soon as the Board of the target company is aware that the breakup of the firm is imminent; OR THAT . . . 45

c. A change in control is imminent (even if the break up of the firm is not); THEN . . . d. The BODs SOLE RESPONSIBILITY is to maximize the VALUE which is received by the shareholders in the transaction 4. The Revlon Rule is all about VALUE to shareholders (doesnt always mean the highest dollar value) a. Thus, the Board MAY NOT make the deal with the White Knight rather than the hostile bidder if the deal with the White Knight fails to maximize shareholder value ii. Paramount Communications v. Time Incorporated in a corporate sale, a BOD must OPTIMIZE the price for its shareholders and treat competing bidders equally 1. RULES: a. Where a BODs merger agreement and defensive tactics to ward off an unwanted takeover have a basis in bona fide strategic business planning, not in questions of corporate control, the court will not interfere with the boards business judgment b. BOTH parts of the Unocal test must be satisfied before the BJR can insulate the defensive actions of a BOD 2. Facts: a. T enters into agreement to merge with Warner; P initiates a hostile takeover attempt by offering all cash, all shares offer requiring that T terminates their merger agreement with Warner b. Ts BOD rejects the hostile bid, finding the share premium to be insufficient for control of the company and because they believe the overall merger with Warner was better l/t plan for the company... c. P, along with SHs, seek an injunction to block the T-W merger, alleged that Ts BOD had violated the BJR 3. Issue: must BOTH parts of the Unocal test be satisfied before the BJR can insulate the defensive actions of a BOD? 4. HELD YES, the court held in Unocal that defensive measures taken to avoid a hostile takeover that (1) the BODs main concern is the protection of SHs and that (2) the adopted plan cannot be disproportional to the perceived threat associated with the takeover. a. Court must evaluate the reasonableness of defensive actions, like an evaluation of the importance of the corporate objective threatened, alternative methods of protecting that objective b. SO, T reasonably determined that Ps all cash, all share offer posed the threat of conveying inadequate value for what the BOD had deemed to be the present value of its shares c. RULE: the BOD is NOT required to abandon a L/T corporate plan in exchange for a S/T shareholder profit unless there is no basis to sustain the L/T corporate strategy 5. CONCLUSION Ts defensive actions were proportionate and the BJR allows for their defensive actions to stand! iii. Paramount Communications v. QVC 1. Facts: Paramount (D) entered into agreement with Viacom (D) whereby Paramount would merge with and into Viacom. Merger agreement contained defensive provisions designed to make it more difficult for a potential competing bid to succeed a. Nonetheless, QVC proposed a merger to acquire Paramount 46

b. Viacom and QVC go into a bidding war for Paramount, with QVC offering the highest amount for a proposed merger... Paramount BOD turns down the more lucrative QVC offer in favor of Viacom, in the stated belief that the Viacom transaction would be better in the long run than QVCs deal. c. QVC and certain SHs of Paramount seek relief against Paramount d. Court of Chancery grants preliminary injunction, finding that Paramounts BOD violated their fiduciary duties by favoring the P-V merger, over the more valuable, unsolicited offer of QVC 2. Issue: will BODs conduct be subjected to enhanced scrutiny for reasonableness where it involves the approval of a transaction resulting in a sale of control and the adoption of defensive measures in response to a threat to corporate control? 3. HELD YES a. RULE: the conduct of BOD will be subjected to enhanced scrutiny for reasonableness where it involves the approval of a transaction resulting in a sale of control and the adoption of defensive measures in response to a threat to corporate control 4. Reasoning: in the sale of control context, the BOD must attain ONE PRIMARY GOAL to get the best value reasonably available to the SHs, and they must exercise their fiduciary duties to further that end. a. Thus, the QVC bid presented the chance for significantly greater value for the SHs and enhanced negotiating leverage for the BOD... rather than seizing this opportunity, the BOD chose to wall themselves off from material information which was reasonably available and to hide behind these defensive tactics as a rationalization for refusing to negotiate with QVC 5. * The P-V deal would have placed the original Paramount SHs in a very bad place! m. Extension of the Unocal/Revlon Framework to Negotiated Acquisitions i. Omnicare, Inc. v. NCS Healthcare, Inc. defensive devices in a merger must be reasonably related to a perceived threat AND non-negotiable defense draconian, preclusive, and coercive 1. Facts: a. P sought to acquire D; G had made a competing bid for the D, that the Ds BOD had originally recommended, but that the Ds BOD withdrew its recommendation and instead recommended that SHs accept the Ps offer, which was worth more than twice the Gs offer However, the agreement between G and the D contained a provision that the agreement be placed before the Ds SHs for a vote, even if the BOD no longer recommended it.. Pursuant to voting agreements, two D SHs who held a majority of the voting power agreed unconditionally to vote all their shares in favor of the Genesis merger, thus assuring that the Genesis transaction would prevail; P sues and challenges these defensive measures that were part of the G transaction 2. More Detailed Fact Pattern a. As Ds economic condition improved, an Ad Hoc Committee of Ds creditors (post-bankruptcy) contacted G and G expressed interest in bidding on the D... after G steadily increased their offers 47

3.

4.

5. 6.

7.

b. G sought an agreement that would required, pursuant to 251 of DGCL, D to submit the merger to its SHs regardless of whether the NCS BOD recommended the merger; an agreement for the two majority SHs to vote in favor of the merger; and omission of any effective fiduciary out clause from the agreement.. c. The P swoops in and makes a huge offer to buy up all the debt and give Ds SHs much more value for their shares... the offer was conditioned upon satisfactory completion of due diligence... d. D used Ps offer as leverage to negotiate with Genesis e. Genesis gave in but conditioned its offer on approval the next day; Ds board approved the merger with G... G really got the good deal out of this, getting in their provisions that guaranteed the deal would be approved... f. P files suit to enjoin the merger and then launched a tender offer fro all of Ds stock at a value of more than twice the FMV of the shares to be paid in the G transaction.. g. Months later, the Ds BOD withdrew its recommendation to merge with G and instead that the SHs should approve the transaction with the P because of its amazing value Chancery Court Ruled that the voting agreements with the 2 majority SHs, combined with the provision requiring a SH vote regardless of Board Recommendation constituted defensive measures, but found that, under the enhanced judicial scrutiny standard of Unocal, these measures were reasonable... ISSUE: Are lock-up deal protection devices, which when operating in concert are coercive and preclusive, invalid and unenforceable in the absence of a fiduciary out clause? HELD YES, they are bad! Reasoning: a. Because the G transaction did not result in a change of control, the transaction would be reviewed under the BJR... under this standard, Chancery Court held that the Ds BOD did NOT breach its duty of care in approving the transaction b. HOWEVER, we need to use the enhanced scrutiny test because of the inherent potential conflict of interest between a BODs interest in protecting a merger transaction it has approved and the SHs right to approve that same transaction TEST: Defensive Measure Designed to Protect a Merger Agreement: a. First, have to determine whether these measure are not preclusive or coercive (in this case, the measures were BOTH preclusive and coercive) b. Second, are the measures proportional or in the range of reasonableness?

48


102(4), 18 102(b)(7), 23 141(c), 24 14a-8(i)(8), 34

1
10b-5, 39 141(d), 32

A
ABUSE OF CONTROL, 38 Acts of General Agents, 6 Actual authority, 3, 6 Actual express authority, 4 advanced degree, 23 Aeurbach v. Bennett, 26 affirmance, 3, 5 AFSCME v. AIG, Inc., 34 AGENCY and CONTRACTS, 3 Agency Defined, 6 AGENCY LAW, 1 Agency Statutes, 4 Agent as a Fiduciary, 5 agent-type ICs, 7 Alaska Properties v. Coppock, 39 alter-ego theory, 20 APPARENT AGENCY, 2, 9 Apparent Authority, 3, 4, 5, 6, 9 Appraisal Rights, 41, 44 Authority, 4

CLEANSING a Transaction, 27 CLOSELY HELD CORPORATIONS, 37 Coggins v. New England Patriots, 43 COMMITTEES, 24 common stock, 18, 31 Community of power in administration, 10 COMPENSATION, 23 COMPLIANCE, 24 Conduct of the parties towards 3Ps, 10 Conflict of Interest, 27 Conflict of Interest ANALYSIS, 27 Consolidation:, 41 Contents of COI, 38 CONTROL, 31 Control Block of Shares, 40 controlling shareholders, 40 Corporate Opportunity, 28 Corporate Opportunity Analysis, 29 CORPORATE OPPORTUNITY DOCTRINE, 28 Crane v. Anaconda, 35 Creation of Authority, 5 Creation of Corporation, 18 creditors of the bankrupt company, 20 Cumulative Voting, 31, 32

D
Day v. Sidley & Austin, 16 DE Common Law, 43 DE FACTO MERGER DOCTRINE, 41 Defense Tactics, 45 DEFENSES to Whether Something is a Corporate Opportunity, 29 Defensive Measure Designed to Protect a Merger Agreement, 48 Delaware Block, 43 Delaware Dominant Shareholders, 30 Delaware Freezeout, 38 Delaware REJECTS the De Facto Merger Doctrine, 42 Delaware SLC, 27 Delaware Statutory Merger, 41 Demand is EXCUSED, 26 Demand is FUTILE In Delaware if, 26 Demand of the Directors, 25 Demand Requirement, 27 DEMAND REQUIREMENT IN DERIVATIVE SUITS, 25 DERIVATIVE ACTIONS, 25 Derivative Suits and Direct Actions, 25 DETERMINE WHETHER A PARTNERSHIP EXISTS, 9 Determining the Existence of a Partnership, 10 Devices for Control, 36 DGCL, 18 DGCL 101(b), 1 DGCL 122, 1 DGCL 151(a), 37 Differences Between Derivative Suits and Direct Actions, 25 Differences between General and Limited Partners, 15 DIRECT ACTIONS, 25 Disclosed P, 4 DISSOLUTION, 16, 39 Dissolution by Decree of Court, 12 Dissolution Defined, 12 Dissolution of a Partnership, 12 DIVIDENDS, 21 Dodge v. Ford, 21 Dominant purpose, 45 DOMINANT SHAREHOLDERS, 29

B
Bad Faith, 24 Bayer v. Beran, 28 Benihana v. Benihana, 28 best value, 47 BLACK LETTER RULES, 37 BOD, 21 BOD and Powers, 32 Bound by Admission of Partner, 11 Bound by Partners Breach of Trust, 11 Bound by Partners Wrongful Act, 11 Breach of Good Faith, 25 Brodie v. Jordan, 39 Broz v. Cellular, 29 BUSINESS JUDGMENT RULE, 21, 22 business purpose test, 43 buying back their own stock, 39 Bylaws, 18

C
CA, Inc. v. AFSCME Employees Pension Plan, 36 Causes of Dissolution, 12 CEDE List, 36 Certificate of Incorporation, 18, 23 Cinerama v. Technicolor, 23 Clark v. Dodge, 38 classified board, 32 cleansed, 27

49

Duties During and After Termination of Agency, 13 duty of care, 13 duty of loyalty, 13, 27 Duty of Partners to Render Information, 12 Dweck v. Nasser, 3

GROSSLY NEGLIGENT, 23 Grounds Upon Which a SH Can Attack Decision of Special Litigation Committee, 26

H
Haley v. Talcott, 39 Hariton v. Arco Electronics Delaware Case, 42 Holzman v. DeEscamilla, 20 Hoover v. Sun Oil Company, 7 Hostile Acquisition, 44 Hostile Acquisition Methods, 44 Humble Oil v. Martin, 7

E
economic interest, 36 Economic rights, 31 election, 34 Elements of a Conflict of Interest, 27 elements of a Freeze out, 38 Elements of Agency Law, 1 Elements of Apparent Agency, 2 Elements of Ratification, 3 enhanced judicial scrutiny, 48 enhanced scrutiny, 47 entire fairness, 30 ENTIRE FAIRNESS STANDARD, 42 entire fairness test, 43 Entire Fairness vs. Intrinsic Fairness, 30 Essex v. Yates, 40 Estoppel from Relief, 4 Estoppel to Deny Existence of Agency Relationship, 8 EXCEPTIONS, 9 Exceptions to SH Agreements, 37 Expectancy, 28 expenses incurred by another partner, 16 expulsion from a partnership, 15

I
Implied actual authority, 4 Implied Authority, 3 Improper Purpose, 35 In re Caremark, 24 In re eBay Shareholders Litigation, 29 In Re Oracle, 27 In Re Silicone Gel Breast Implants, 20 In re Walt Disney Co, 23 In re Wheelabrator, 31 Incapacity defense, 29 Incidental Authority, 5 Incoming Partner, 11 Incorporators, 1 Indenture Provisions, 10 INDEPENDENT CONTRACTORS, 2, 7 Ingle v. Glamore Motor Sales, 38 Inherent Agency Power, 3, 4 Inspection of the BOOKS and RECORDS, 35 instrumentality of the parent, 20 Intention of the parties, 9 Intentional dereliction of duty, 24 Intentional Torts, 2 Interest, 28 Interested Directors and Quorum, 28 interested party, 14 interested SHs, 31 intrinsic fairness, 28, 30 intrinsically fair, 27

F
factors during merger or acquisition, 41 Factors to determine whether a partnership or not, 13 Fair Price and Fair Dealing, 42 Farris v. Glen Alden, 42 fee regulators, 24 Fenwick v. Unemployment, 9 Fiduciary Duties in Freeze Outs, 38 FIDUCIARY DUTIES OF OFFICERS, DIRECTORS, AND OTHER INSIDERS, 21 FIDUCIARY OBLIGATIONS OF LLCS, 15 FIDUCIARY OBLIGATIONS OF PARTNERS, 13 Fliegler v. Lawrence, 31 Formation of Partnership, 13 Franchise, 8 Francis v. United Jersey Bank, 23 Frandsen v. Jensen-Sundquist, 39 fraud, illegality, or conflict of interest, 21 freely transferable, 23 Freeze out, 38 FREEZE OUT MERGERS, 42 Frigidaire Sales Corporation v. Union Properties, Inc, 20 FUTILE, 26

J
JI Case Co. v. Borak, 33 JOINT VENTURE, 14 Jones v. Harris Associates, 24 Jones v. Harris Associates II (SCOTUS), 24 Jordan v. Duff and Phelps, 39 Justifications and Policies for the BJR, 22

K
Kamin v. AmEx, 22 Kaycee Land and Livestock v. Flahive, 21 Knowledge of or Notice to Partner, 11 Kovacik v. Reed, 17

G
General Agent, 4 General Partnership, 15, 16 GENERAL STANDARDS OF PARTNERS CONDUCT, 13 Golden Parachute, 45 GOOD PARTNER, 17 Greenmail, 45 Grimes v. Donald, 26 Gross Negligence, 22

L
Lawlis v. Knightlinger & Gray, 15 legitimate business purpose, 38 Levin v. Metro Goldwyn Mayer, 31

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Liability of Management, 23 Liability of Undisclosed P, 6 limited PARTNERS, 20 Limited Partnership, 15 LIMITS ON CONTROL ARRANGEMENTS, 37 line of business, 28 LINE OF BUSINESS TEST, 28 Lovenheim v. Iroquois Brands, 34

P
Pac- Man Defense, 45 Paramount Communications v. QVC, 46 Paramount Communications v. Time Incorporated, 46 parent liable for the actions of a subsidiary, 20 Partially Disclosed P, 4 Partner Accountable As a Fiduciary, 12 Partners Compare to Lenders, 10 Partnership Books, 12 Partnership Business, 11 Partnership Defined, 10 PARTNERSHIP MANAGEMENT AND DISSOLUTION, 15 Partnership vs. Contract, 10 PARTNERSHIPS, 9 Pav-Saver Corp v. Vasso, 17 Peretta v. Prometheus, 14 Perlman v. Feldman, 40 Piercing the LLC Veil, 21 Poison Pill, 45 Policies for the BJR, 22 pooling agreements, 37 prima facie evidence, 10 Principles of Attribution, 6 Procedural Requirements, 33 procedural rules, 35 Promoter, 17 Proper Purpose, 35 Proportionality, 45 Proxies, 32, 33 Proxy contests, 44 PROXY FIGHTS, 36 punctilio of an honor the most sensitive, 13 Purchase of Dissociated Partners Interests, 17

M
MA law, 39 Majestic Realty v. Toti, 9 manifestation, 2, 6 Martin v. Peyton, 10 Massachusetts Freezeout, 38 Massachusetts has a proper purpose requirement, 44 MASSACHUSETTS RULE, 38 Master, servant, 4 Master-servant relationship, 7 MATERIAL FACT, 33 McConnell v. Hunt, 15 McQuade v. Stoneham, 37 Meehan v. Shaughnessy, 15 Meetings of Shareholders, 32 Meinhard v. Salmon, 13 Meiselman v. Meiselman, 39 Merger, 41 Mill Street Church, 3 Miller v. McDonalds, 9 Mills v. Electric AutoLite, 33 minority of fully informed SHs ratifies, 31 Minority SH Claim for Breach of Fiduciary Duty, 43 minority SH in a close corporation, 39 minority shareholders, 40 more experience, 23 Murphy v. Holiday Inns, 7

Q
Quorum, 32

N
NaBisCo v. Stroud, 15 Nature of Partners Liability, 11 Necessity, 28 Negligence, 2 Negotiated Acquisitions, 47 Nemec v. Shrader, 39 NEW YORK, 34 New York Law, 36 NEW YORK RULE, 38 no cause for expulsion clause, 15 NOBO List, 36 Non-agent ICs, 7 non-employee agents, 2 nuisance per se, 9

R
Rabkin v. Phillip A. Hunt, 44 Rash v. JVIC, 14 Ratification, 3, 5, 31 reasonable professional standard, 23 Reliance Corollary, 23 reporting systems, 25 Rescissory Damages, 44 RESPONDEAT SUPERIOR, 1, 7, 8 Restatement (Second) of Agency, 4, 7 Restatement (Third) of Agency, 6 Restriction on transfer of securities and ownership of securities, 40 Restrictions on Transfer of Securities, 40 Revlon, 45 REVLON RULE, 45 right of appraisal, 39 Right to share in profits, 9 right-of-first refusal, 39 Rights and Duties of Partners, 11 Rights of the parties on dissolution, 10 Ringling Bros.-Barnum & Bailey Combined Shows, 37 Roman Catholic Archbishop v. Sheffield, 19 Rosenfeld v. Fairchild Engine and Airplane , 31 RULE 10b-5, 39 Rule 14a-7, 35

O
Obligation to share in losses, 9 Offering the Corporate Opportunity to the Corporation, 29 OMITTED FACT, 33 Omnicare, Inc. v. NCS Healthcare, Inc, 47 Opting OUT of Fiduciary Duties, 14 OVERSIGHT, 25 Ownership and control of the company, 9

51

Rule 14a-9, 35

T S
Tender offers, 44 Three Seventy Leasing, 3 TORT, 7 Tort Liability for Independent Contractors, 9 Totality of the Circumstances Test, 20 Town & Country House & Home, 13 Trade secrets, 13 transaction between a parent and its subsidiary, 30 TRANSFER OF CONTROL, 39 TWO-TIER Tender Offer, 44

Sadler v. NCR, 36 Safe Harbor Rule of 144, 28 Sale of assets, 41 Sale of stock, 41 Sandvick v. LaCrosse, 14 Sea-Land Services v. Pepper Source, 19 Secret Instructions, 5 Securities Fraud, 33 Seinfeld v. Bartz, 33 Self tender offer, 45 Servant, 8 Servant Versus Independent Contractor, 7 SH agreements, 37 share purchases, 44 Share Repurchases, 45 SHAREHOLDER INSPECTION RIGHTS, 35 SHAREHOLDER LIST, 35 Shareholder Ownership Rights, 31 SHAREHOLDER PROPOSALS, 33, 36 SHAREHOLDER VOTING CONTROL, 36 Shark Repellent, 45 Shlensky v. Wrigley, 21 Sinclair Oil, 30 single entity, 19 SLC, 27 Smith v. Atlantic Properties, 39 Smith v. Barlow, 1 Smith v. Van Gorkum, 22 Source Defense, 29 Southern-Gulf Marine v. Camcraft, 18 Southex v. RIBA, 10 Special Agent, 4 SPECIAL COMMITTEES, 26 Special Litigation Committees, 26 Specific Powers of a Corp, 1 Staggered Board, 45 State Ex Rel Pillsbury v. Honeywell, 36 Statutory merger, 41 Steps Once you have Certificate of Incorporation, 19 Stone v. Ritter, 25 Stroh v. Blackhawk Holding Corp, 37 Subjective bad faith, 24 substance over form, 42 substantial control, 7 Substantive Requirements, 34 Summers v. Dooley, 16 supermajority provision, 32 suspect deception, 24 systematic failure, 25

U
ultra vires, 1 ultra-hazardous, 9 Unauthorized Acts of General Agent, 5 unauthorized transactions, 3 Undisclosed P, 4 undisclosed principal, 3, 6 Uniform Partnership Act of 1914, 10 unintelligent and unadvised, 22 Unocal Corp v. Mesa, 44 Unocal Test, 45

V
VAN DORN TEST, 19 Vandemark v. McDonalds, 8 Vote pooling agreements, 37 Voting rights, 31 Voting rights of SHs, 32 Voting trusts, 37, 38

W
Walkovsky v. Carlton, 19 Watteau v. Fenwick, 3 Weinberger v. UOP, 43 White Knight, 45 Wilkes v. Springside, 38 Wind Up, 16 Wrongful Dissociation, 17

Z
Zahn v. Transamerica, 30 Zapata Corp v. Maldonado, 26 Zetlin v. Hanson, 40

52