Introduction

Meinhard v. Salmon Facts: P and D were involved in a joint venture on a piece of property for a set term. When the term was about to end, Gerry purchased the property. Gerry approached D and asked if he wanted to get in on this new venture, and D agreed w/o P's knowledge. When P found out, he sued arguing that the new lease belonged to the joint venture of him and D. D argued it did not because their joint venture was to end when the term of the original lease was over. Issue: Did D have a fiduciary duty to inform P of the new business venture with Gerry, even though P and D's joint venture was ending before the venture with Gerry was to begin? Held: Joint venture created a fiduciary duty. D had a fiduciary duty to inform P of the opportunity to enter into a new business venture even though the new venture was to vest after their joint venture was going to end. Risk Allocation - Non-Controllable Risk = risks such as the economy, interest rates, and leasing markets - Controllable Risk = such as what kind of tenants you allow, building materials, structure of rental agreements - Returns- determines probabilities of loss/gains and determines how much you want to invest Managing Risk - Insurance = pooling risks so each member bears a pro rata share of the losses- easier to predict than losses to particular member - Diversification = participating in numerous ventures, each which involve different levels of risk in order to provide balance - Internal risk allocation = allocate risk to members of a venture who are in a better position to take on that risk (Meinhard = capitalist, therefore would be better choice to take on risk than Salmon, the manager) - External risk allocation = allocating risk to those outside the company - Limited Liability- members only responsible up to the amount of money that they invested, and outside parties must bear any loss Fiduciary Duties = when management authority is delegated to the firm, those who run the firm have fiduciary duties to those who entrusted them with this authority - Meaning of Meinhard v. Salmon - One view (dissent) is that capitalist is only entitled to protections included in the original agreement, and therefore Salmon would not have to disclose any post-venture opportunities

- The majority's view (Cardozo) is that the parties' relationship existed beyond the morals of the marketplace

Basics of the Corporation

The Corporation- an entity, legally recognized as separate and self-governing - Most important characteristic of a corporation is that it is separate - you can earn a profit as a shareholder, earn income by being an employee, and you can control it by being a director (or you can be all of those things) - limited liability or "entity-liability" corp is fully liability for its debts but investors are responsible for none of its debts - you do not have liability for a corporation even if you ARE the corporation - Income, Property, lawsuits are all separate from investors - advantageous to investors who arent going to run the business - Perpetual Existence - Centralized Management- no unanimous votes needed- only majority votes for certain things like changing bylaws - As a private constitution - Allocate rights and responsibilities among the various citizens and officials who participate - Shareholders act as principals and appoint directors to act as agents on their behalf. - Directors delegate responsibilities to officers and employees Categories of Corporations For Profit vs. Non Profit - For Profit is to generate wealth primarily, and non profit can be established for many purposes Public vs. Close - in close corporations, there is no ready market for the corp's securities and there is overlap among some of the participants in how the corp is governed- officers/directors have ownership stakes and are involved in management - in public corporations, there stock is traded on exchanges, and shareholders do not play a role in management - directors/officers DO own stock, but very small compared to close Corporate Actors - Shareholders - contribute capital for common shares - voice their views by voting on directors and approving bylaws/fundamental transactions, litigate claims against corporation and its directors and officers, and exit corporation by selling shares

Directors- elected by the shareholders to be responsible for managing or supervising corporations business; not employees - act on behalf of the corporation, and represent the best interests of the corporation, NOT the shareholders - outside directors have no affiliation with the company, whereas inside directors are both directors and corporate employees Officers- corporate employees such as CEO or CFO - board delegates responsibility to run day-to-day operations to CEO and other officers Stakeholders- other people who have an interest in the company such as creditors, employees, and customers - no fiduciary duty to creditors Securities- corporations raise money by giving these to their investors Debt- holder of debt only expects to receive fixed payments of interest over timeleast risky type of security Equity - Common Shares = greater risk, but greater return - receive dividends once the corporation has paid everyone it owes - play a greater role than other holders of securities - Preferred Shares = have a right to dividends that is greater than common shares, but dividends are NOT guaranteed - risk is greater than debt but less than common shares; have a lower expected return than common stock - Authorized Stock- Article of incorporation specify how many shares of common and preferred stock the corporation is authorized to issue - Issued stock- Of the authorized shares, the corporation can choose to issue all or a portion of those shares - Outstanding Stock- portion of authorized stock that has been sold and remains in hands of stockholders Fiduciary Duties - Duties of Care and Loyalty - Business Judgment rule assumes decisions are: 1) informed 2) serve rational business purpose 3) are disinterested 4) are made independently - Insulates Board's decisions from SH and judicial second guessing Shareholder Meetings - Notice DGCL 222 - written notice of time/place of meeting must be given when shareholders are going to take action at that meeting. Written notice shall be given not less than 10 nor more than 60 days before date of meeting

Schnell v. Chris-Craft Facts: Chris-Craft directors were worried because SH were going to hold a vote at next meeting to replace them. In turn, they wound up moving up the meeting from January to December in order to mess up SH travel plans so they couldn't make it to the meeting and vote. Holding/Reasoning: Directors provided adequate notice (within 60 days) so the TC found for them, even though they also determined that directors moved meeting on purpose to obstruct SH. SC of Del. reversed b/c directors should not be allowed to profit from this inequitable action. Stahl v. Apple Bancorp Facts: board had postponed the meeting in response to a tender offer and proxy contest after its financial advisors had suggested that a higher value could be obtained if the board spent more time searching for alternatives. Holding: boards decision to defer an annual meeting after a record date had been set but before either a meeting date was set or any proxies were solicited did not impede shareholders exercise of franchise under Blasius Industries

Corporate Federalism
States view of Corporate Law McDermott v. Lewis DE corporation is a subsidiary of a Panama corporation (all DE corporation stock owned by the Panama corporation). But Panama corporation has shares owned by the De corporation, so whats happening is that the Bd is electing themselves its a self-perpetuating corporation. In DE, cant have this circular way of electing the Bd. i. Nonetheless, it is a fundamental principle of our law that corporate laws can be evaded by incorporating somewhere else (Panama). Federal View of Corporate Law - If bonds/stocks traded on stock exchange you are covered by securities law - Federal government does not incorporate businesses, but they may be subject to securities law - Securities law is more of a consumer protection law- protecting consumers against the risks of securities - In state law, there is a huge division between bondholders and stockholders - in federal law, they are lumped into one category as consumers Cts Corp v. Dynamics Corp

Corporate Social Responsibility

Who does the corporation serve? Friedman- "Property Model"- corporation exists primarily to generate shareholder wealth, and duties to creditors and employees came second Problems with his view - who would want to live in this kind of society? sounds like everyone would live and die by making a profit - Statutes do not say "you have to maximize profit" Dodd-"Social Instutition"- corporation was seen as an economic institution which has a social service as well as a profit making function BOD as an Owner? - the BOD is a fiduciary, and they must act in the best interest of the people they are supposed to be protecting - Owners can do whatever they want even if it isnt their best interest Shareholders as Owners? - they own their shares and can do what they want with them, but they do not own the company - the only thing they have with regard to the company is to vote - the only way to get rid of the stock is to sell it to someone else, not back to the company Running the company in the interest of Shareholders - Maximize profits for shareholders Dodge v. Ford Motor Co.

- Ford lowers prices of cars to benefit employees/society as a whole with cheaper cars by taking away extra money from shareholders -if he pays them well (more than minimum wage), then he can threaten to fire them if they dont work hard - Is Ford's sole duty to make profit for his shareholders? - Ford saying that he was doing this for the long run of the company - making charitable contributions was good for the long run of the company - judges almost always say now, that decision for timing of when to make profit is not for the courts to decide (wasn't said in this case) - Ford owned 80% of the company, so who does Mr. Ford have to act in the best interests of? - Ford must act as though the shareholders (Ford and Dodge) that don't actually exist. - if Henry Ford owned the corporation then there would be no problem - if shareholders owned the company they would have to take a vote - so the court is saying that there has to be a unanimous vote amongst shareholders Theodora v. Henderson Facts: Henderson had a controlling interest in a corporation called Dawson Inc. He regularly arranged for Dawson to make large charitable contributions to a specific charity. One year, one of the directors suggested that the charitable gift be made to a charitable corporation supported by Henderson's ex-wife (who also owned a chunk of Dawson stock). In response, Henderson reduced the number of directors on the Board of Dawson, and made the gift to his charity anyway. Henderson's ex-wife (through her holding company), sued, challenging the gift as an inappropriate use of corporate funds. Holding: Court found that the donation was not excessive compared to the overall income of the company. The Court looked to the Internal Revenue Code, which said that business donations were limited to 5% of the revenue of the corporation. Since this donation was less than that, it meets the requirement of being reasonable. The Court noted that there were tax benefits to the corporation for making charitable donations. Therefore Court found that there were legitimate reasons to make donations. Due to the Business Judgment Rule, the Court was not going to second guess a business decision unless it was unreasonable, and this seemed reasonable.

Corporation as a political actor

State Regulation First Nat'l Bank of Boston v. Bellotti Facts: The First National Bank of Boston (Petitioner) is prohibited by state statute from spending for the purpose of influencing the vote on any question that does not affect the corporation directly. Petitioner wanted to

publicize a view of a constitutional amendment that would allow state legislation to impose graduated tax on income of individuals. Holding: It is unconstitutional to restrict corporate speech to items that are materially affecting its business. Austin v. Michigan Chamber of Commerce - Can't use money from corp's general treasurey fund (aka SH money), must use a segregated fund Federal Regulation - Federal Election Campaign Act- can't contribute

Organizational Choices (Chart pg. 162)

In General

- Partnerships = most basic business organization

- general- association of two or more persons to carry on as coowners a business for profit; each partner could be held personally liable limited partnership- partnership formed by two or more persons and having one or more general partners and one or more limited partners; LP has no voice in active management

limited liability- general partners in GP or LP can limit their liability to whatever amount they have invested, though they remain liable for tortious conduct which they are responsible - Corporations- legal entity distinct from its owners - Limited Liability Companies- legal entity distinct from its members, who have limited liability and can be taxed as a partnership

Partnership vs. Corporation

- LLC's can be treated as corporation or by partnership - A company must be a corporation in order to have public shares

- losses always cheaper if comibined with profits - startup businesses should partnership taxation so investors could get rid of losses - startup businesses can also be subsidiaries of larger companies that have profits - partnership law is written as company is the same Default Rules - Formation GP = no filing with the state; formed by consent of two or more persons entering into agreement Corporation/LLC/LP = requires formal action with the state; must file articles of incorporation with state - Liability GP = partners could be held jointly and severally liable for partnership obligations whether in contract or in tort LP = general partners face same liability as GP, but limited partners only responsible for amount they invested Corporation = completely separate and responsible for its own debt and liability LLP = general partners can be personally liable only for PARTNERSHIP obligations - Management GP = authority vested in all partners equally, regardless of his capital contribution LP = limited partners may not participate in management without losing protection of limited liability Corporation = centralized in BOD, elected by shareholders, and they delegate day-to-day management to corporate officers LLC = member-managed or manager-managed - Financial Rights GP = shared equally - Continuity of Existence - Transferability of Interests - Mergers Tax Consequences - Partnership vs. Corporation - Corporation = tax-paying entity separate from its shareholders; it pays tax on business income and sh have to pay tax on dividends if issued - Partnership = income and expenses flow through to partners in proportion to their ownership interests - Avoiding Double Taxation

- S Corporation - if corp. is domestic with no more than 100 shareholders (who arent pension plans), it can be an s corporation - Zeroing Out- corp. can pay its shareholders deductible salaries, bonuses, interest and deduct them from corporate level income, making it zero

Agency
Law of agency is entirely common law (check out restatement) and distinguishes from contract law in 3 ways 1. fiduciary duty- agent is required to act in the interest of the principle (employee must work or what is in the interest of the company) 2. asymmetrical- principal owes no duty whatsoever to the agent and agent owes duty to principal 3. consensual- at any moment either party can end the relationship Delegating Authority Forming Agency-Principal Relationship - Consensual relationship between two parties - principal selects the agent who must agree to act on principal's behalf - Agent = "fiduciary"- agent owes duty of care, loyalty, obedience - agent has authoirty to bind principal into legal relationships - Agents can be servants or independent contractor - the more you depend on an control of an agent, the more it is a servant (sells the labor himself) - the more you depend on the agent's expertise, the more it is an independent contractor What happens when agent acts outside his manifestation? - if reasonable 3rd party believes agent had authority and the 3rd party doesn't know about the exception, then principle is bound - agent is then responsible to the principle - system set up to protect 3rd party- they should be able to go by appearances (apparent authority) - only works if the 3rd party believes in it, only if the appearance is valid - BUT there is no rule that an agent can sell the entire company to a person unless actual authority is verified Authority of Corporate Officers - Usually laid out in corporate by-laws Menard v. Dage Facts- Dage-MTI, a small manufacturing company, owned a tract of commercial real estate. Its longtime president, one Arthur Sterling, negotiated and signed a sales agreement to sell the tract to a sophisticated home improvement chain. Dage-MTI's board had made clear to Sterling

that he could not sell without board approval. When Menard made a first offer, Sterling forwarded it to the board - which said no. When Menard made a second offer, Sterling went ahead on his own. He said he had authority. Holding: Apparent authority vests in an agent when a third party reasonably believes the actions of the principal instilled such authority in the agent. BUT, The principle of inherent agency power exists to protect third parties from adverse dealings with an agent. Under inherent agency power, a principal is bound by the acts of an agent if the acts are such that they "usually accompany or are incidental to transactions that the agent is authorized to conduct and the other party reasonably believes that the agent is authorized to do them and has no notice that the agent is not so authorized." Restatement (Second) of Agency 161. The premise of this theory is that business enterprises should suffer the hardships of losses that result from negligent actions of their agents. Menard dealt exclusively with Sterling, the president and a member of the Board. Sterling operated with little Board supervision for more than 20 years, and previously purchased and sold company property without approval of the Board. The court found signing the purchase agreement was within the normal scope of Sterling's duties as president, and sufficient to establish Menard's reasonable belief that Sterling possessed the necessary authority. Although Menard knew the Board rejected the initial offer, it was inadequate to suffice for actual notice that Sterling did not have the authority to sell the property. In addition, the Board failed to take any steps to notify Menard that approval of any sale must come from the entire Board. Thus, "the loss should fall on the party who is most at fault," and under inherent agency power, Dage-MTI is bound by the purchase agreement. Formalities of Board Action Board Action at a Meeting

Capital Structure
Basics of Valuation Financing The Company Equity Securities = authorized shares created when company is formed- if purchased they become issued and authorized and outstanding, if repurchased by company they are not outstanding Common Stock- basic corporate securities; "residual" claim on corporations assets- all income that remains after corp. has satisfied

claims of creditors and preferred stock/debt belongs to common stockholders Preferred Stock- senior to common stock, receives dividends whenever paid to common stock; also has preference on liquidation -- You cannot issue a dividend it will make the company insolvent - insolvent if: 1. company cannot pay debts if dividend is paid 2. balance sheet test- if corp. was liquidated now would they be able to pay debts Debt Securities = corporations liabilities; debt, bonds, etc; Surplus Who determines where money allocated if there is a surplus? - BOD determines it first and foremost, but most will not be made by them because they don't have the time- made by agents - if they pay too much of it to upper level employees, they might discourage employees - Shareholders cannot sue for dividends, but can vote and do have the right to sell to potential shareholder who can use the votes - can sell stock and make it lose value so that new person buys majority of shares and elects new BOD - employees can threaten to quit if they dont receive a bigger share of the profits - Group that has the least ability to get the surplus is the shareholders ( can't quit) - Accounting directed towards helping shareholders determine how much their shares are worth (balance sheet vs. income statement) - balance sheet- valuation of company at a certain date Future Cash flows

Piercing the Corporate Vail

Piercing the corporate veil is allowed whenever necessary to prevent fraud or to achieve equity. Whenever anyone uses control of the corporation to further his own, rather than the corporations business, he will be liable for the corporations acts. Courts traditionally require fraud, illegality, or misrepresentation before they will pierce the corporate veil. Courts also may ignore the corporate existence where the controlling shareholder or shareholders use the corporation as merely their instrumentality or alter ego, where the corporation is undercapitalized, and where the corporation ignores the formalities required by law or commingles its assets with those of a controlling shareholder or shareholders. In addition, courts may refuse to recognize a separate corporate existence when doing so would violate a clearly defined statutory policy. Piercing Policy

- doctrine is the same for closely-held corps and ones with millions of shareholders - doesnt distinguish between tort and contract debts TO show veil piercing: - show corporation has become a mere instrumentality and that the shareholder is the actual actor - have to distinguish between "instrumentalities" and "mere instrumentalities" b/c instrumentalities could be partnerships and LLC's - have to show a fraud or a wrong (usually there is always a wrong or there will not be an action) - tort victims aren't fraud victims - in contract, there is a wrong, and sometimes there is a fraud - Fraud or wrong results in unjust loss for the plaintiff - has to be inequitable in order to pierce veil - fraud (intentionally misrepresented something and injured as a result)

Contract Liability vs. Tort Liability Tort Cases Walkovszky v. Carlton Facts: was severely injured in a taxicab accident, and sues the cab driver, the corporation owning the cab, and the . owned that corporation and 9 others, each corporation had 2 cabs each with the min $10k liability insurance coverage required by state law. alleged that the corporations operated as a single entity & constituted a fraud to the public. a. Court says no reason to pierce the corporate veil. 1. (1) Nothing wrong with one corporation being part of a larger corporate enterprise (i.e. subsidiary). The only issue would be whether there was a disregard of the corporate form, but did not allege this. (2) (Undercapitalization) The state has set minimum insurance requirements & all other cab corporations have taken out the min insurance. If insurance protection is inadequate, the remedy is the legislature. - this corporate organization to circumvent tort liability is permissible, but the judge tries to tell the difference between avoiding tort liability (legal), and evading tort liability (illegal) Radaszewksi v. Telecom Corp Facts: This personal injury suit was brought on behalf of Plaintiff who was injured in an automobile accident by an employee of Contrux, Inc., a subsidiary of Defendant. The district court held that Contrux, Inc. was

under capitalized in the accounting sense. Most of the money contributed to it was in the form of loans and Defendant did not pay for all of the stock that was issued to it. However, Contrux, Inc., had $1,000,000 in basic liability coverage plus $10,000,000 in excess coverage. Unfortunately, Contrux, Inc.s excess liability insurance carrier became insolvent two years after the accident and is now in receivership. Holding: Contrux, Inc. had $1,000,000 in basic liability coverage plus $10,000,000 in excess coverage that was sufficient to satisfy federal financial-responsibility requirements and the second element of the Collet test. Contract Cases Freeman v. Complex Computing Facts: Glazier developed some software for Columbia University. They licensed the software back to a startup, Complex, which was owned by G lazier's friend. Glazier was hired by Complex as an 'independent consultant. Complex didn't have any assets other than the licensing agreement for the software and Glazier's hard work. Complex entered an agreement with Freeman to help market the software. The software was eventually licensed to a company called Thompson. Thompson also hired Glazier. Freeman was not paid for his efforts to market the software. He sued for breach of contract. Since Complex had no assets other than the software they had sold to Thompson, and the expertise of Glazier, who no longer was working there, there was nothing left for Freeman to take if he won his breach of contract claim. - Glazier argued that he was not a shareholder, officer, director, or employee of Complex. How could he possibly be held responsible for their breach of contract? Holding: even though Glazier didn't own any shares in Complex, he was an equitable owner because he exercised considerable authority over Complex. The Court found that in addition to being an equitable owner, there must be a showing that the owner must use that control to commit a fraud or other wrong that resulted in an unjust loss or injury. Since the Trial Court never asked this second question, the case was remanded back to determine if Glazier had committed a wrong. Thebarge v. Darbro

Piercing in Corporate Groups Gardemal v. Westin Hotels Facts: Westin was a parent corporation that owned a number of hotel chains including one in Mexico. Gardemal's husband drowned while at a Westin hotel in Mexico. She sued both the American Westin corporation, as well as the Mexican Westin corporation, in a Texas court. Holding: Gardemal argued that Westin Mexico was functioning as the alter ego of Westin. However the Appellate Court found that Westin maintained a separate corporate identity, and the two companies were not so intermingled that they were alter egos of each other. - Under the alter ego doctrine, a parent corporation can be held liable for the acts of another if the subject corporation is organized or operated as a mere tool or business conduit. - One of the major factors for establishing liability under this doctrine would be if Westin Mexico was undercapitalized, but there was no evidence of that in this case.

Corporate Crimes Environmental Liability

U.S. v. Bestfoods Statute: any owner or operator is responsible for pollution cleanup Ownership - does parent company's share ownership of sub make it the owner? - Supreme Court says no b/c CERCLA operates ordinary corp. law. - stock ownership does not equal asset ownership

Operation - how can you tell if the parent operates the corporation which it doesn't own? SC reinventing piercing the veil by creating something like federal common law and ignoring state corporate law Holding: indirect liability of a parent corporation under CERCLA is to be determined by its control over a subsidiary's facility, rather than the relationship between the corporation and subsidiary.

Shareholder Voting Rights

Basics of Shareholder Voting - Meetings- elect directors; ratify decisions of board; vote on compensation plans - Procedures- can vote either in person or by proxy (signed appointment of an agent to appear and vote for shareholder) - Requirements- one vote one share; elect directors Voting in transactions- have the right to vote on amdendments to articles, mergers, sale of all assets, corporate dissolution - Corporate Combinations - Statutory Merger = when there is a statutory merger, there is no sale- A just ceases to exist and becomes absorbed by B - Triangular Merger - Sale of Assets = assets of A sold to B and A becomes a cash company, and "AB" is now owned by the shareholders of the former B - you can buy all assets or some assets- good for buyer, but not great for creditors- you can choose assets but dont have to choose liabilities - if A has liabilities when they become a cash company, they cant issue a final dividend - Tender Offers = buyer says they want to buy x percent of stock (any number) but wont buy anything if they dont get that exact # (regulated by Williams Act) - tender must be public, and you have to buy more stock pro rata - then if you are offerred what you requested, you must accept - this system does not yield a single corporation - form a holding company, and have that holding company purchase the stock of company A and company B - A and B work as a coordinated enterprise but are not responsible for each other's torts/contracts - smaller company (A) can purchase all stock of larger company and larger company (B) can be a wholly owned subsidiary - this way, if B goes bankrupt then A will still be in business along with C (holding company)

- if you own all the stock, you wont be sued for breach of fidicuary duty because you own all the stock - want to own either a small amount of stock or all of it because if you own a majority then you still have other shareholders to owe a fiduciary duty

Shareholder Information Rights

State ex. Rel Pillsbury v. Honeywell Facts: Petitioner was part of an anti-war group that decided to target Respondent, Honeywell, Inc., for their manufacturing of weaponry that would be used in the Vietnam War. Petitioner decided to purchase shares (for the purpose of this suit, he only owned one share) of Respondent for the purpose of requesting corporate documents, as a shareholder, in order to identify other Respondent shareholders in order to inform them of Respondents involvement. Petitioner made two formal demands for the records that were both denied. Petitioner then filed a writ of mandamus, and he explained his reasons for the inspection. The trial court agreed with Respondent in finding that there was no proper purpose related to his interest as a stockholder Holding: The court held that Petitioners purpose was not proper. The proper purpose has to pertain to investment purposes rather than just simply whenever a stockholder has any grievance with a companys management. The court will not allow an absolute right of inspection.

- SH parallel to voters in a republic rather than owners of property - 25 institutions control 1/3 of the shares, 100 institutions control 1/2 of shares (rapidly trading shares) - example is pension fund, trading shares forever - don't have much of an interest in the intricacies of the company - they are not human beings, they are companies making trades as a fiduciary - Hard for outside observers to distinguish between skill and luck in investing - Interests of the individuals shareholders (whether they be institutions or actual people) aren't necessarily the interests of the company What shareholder's are entitled to know: - time of meeting - NY State law permits you to know who the electors are in the election if the company is public on the NYSE or does business in NY - for public company: financial performance Federal Proxy Solicitation Rules- regulate one SH trying to get a proxy from another SH (getting another SH proxy = getting a vote) 1. Applies only to public traded companies (assets over 10 mill and more than 500 SH) 2. must be statement of how the company is doing, a statement of finances which is signed by auditor and CEO - quarterly statements do not need to be audited 3. there must be filing of a solicitation form, and you have to tell your shareholders certain things - have to share how much stock BOD holds, salaries of top 5 people, which BOD members are part of the company- and have to do the same thing for the new candidates 4. False and misleading statements are banned, and omissions are banned as well - can sue if otherwise, b/c stock price could change if info was disclosed - allowed to make minor misrepresentations but not material ones - What is Material? If a reasonable SH would consider it important in deciding how to vote - if it changed your behavior, you relied on it (common law fraud) - if material misrepresentations are in a disclosure document, you dont have to prove that the documents were even read- even if you didnt read the disclosure, someone who did read it affected the stock price

Shareholder Activisim
Shareholder Democracy

- many shareholder firms control the stock as a fiduciary, they cant do what they would like with it - 2/3 of stock held by institutions ( a small number of them) - Formally, boards are usually self-perpetuating Activist Shareholders - want to divert more of the corporate pie (surplus) to the shareholders - If the stock market is short-sighted, you can make a lot of money by diverting a corporations surplus to its shareholders - for example, you can cut back things like R&D - owners try to decide between short term profitability or long term Theories of Corporation Nexus of COntracts - If a firm is composed of contracts (voluntary agreements), then whatever the contract is is the best- role of government is to enforce the contracts - if the incumbents are making money, then they should be kept around - Dont think agency, think contracts- everyone looks out for themselves - defense of shareholder grounds- if they can get a bigger piece of the pie based on contract, then let it be - Empirical argument - think of this as a network of relations, not as something that is controlled by an owner - Corporations are malleable and dont have clear boundaries- it is up to the observer to determine where the boundaries lie - View shareholders as the least dispensable part - Even though corporations exist only because of statute, it is hard to create the right of 100k small investors to negotiate against as one body against 10k employees Separation of Ownership and Control - Managers not aristocrats Roes Theory/ Political Product Theory - other theories assume that corporate law is the result of process in which most efficient wins out - Historical Accident- if we had stronger banks wed have a weaker stock market but we have both Team Theory Blair/Staudt - Existing power structure was because employees give power to board because employees dont know how to manage - employees hire the managers Is it really shareholder democracy? - votes are for sale, therefore it cant really democracy - shareholders do not really care where a factory is for example, while employees definitely do - shareholder victories in the 80s were because larger institutions were becoming too old and were getting dominated by ones in other countries

14(a)(1)- every connection with another shareholder before a proxy election counts as a solicitation LILCO Case - Person put ad in paper that publicly created company should take over lighting: SEC viewed this as a proxy solicitation Proxy SOlicitation - Only once a year can it be done - has to have been shareholder for at least a year - has to own 2,000$ worth or 1% - You are entitled to a statement which management is allowed to respond to - Proper under SEC rules if it is proper under state law Rosenfeld v. Fairchild- if you disagree with the candidates then you can add your own - There can be a "low-rent campaign" - will be sent out with company's proxy materials Violating Shareholder Rights - How to tell the difference between direct action and derivative action Direct Action = just a regular lawsuit; SH says they have a right which corp. violated and they want a remedy For example: corp. paid dividend to everybody except 1 person. That person has a contract claim for her dividend Class Action example- company lied in SEC disclosure statement- everyone who relied on this statement is allowed to sue - Can't claim stock price going down as an injury b/c shareholders take that risk Derivative action = SH claims that someone injured the company and you the SH sufferred as a consequence to the injury of the company (stock price went down because someone did something bad to company) - very unusual exception- allows a single shareholder to act as the corporation - Example: phone company entered into contract with DNC- they didn't pay the bill and the phone company just decides not to enforce it - a shareholder bringing a suit against the DNC would be a derivative action - Is the claim a claim against the company (direct) or on behalf of the company (derivative)? - Do you expect stock prices to go up? If yes, then derivative - Do you expect to get money from this lawsuit? If yes, then direct. - In Derivative actions Under Delaware law you have to give board a chance to bring lawsuit

- board's decision can be reviewed under business rule which is highly deferential and will only be over-turned in cases of gross negligence - this is likely to be a lawyer driven lawsuit

Board Decision Making/Business Judgment Rule

- Directors must act for what is in the best interest of the corporation- this is the new rule instead of what a reasonable person would do - avoid unreasonable risks - Mangers are agents; directors are not agents but have same or almost same duty of loyalty owed to corporation Duty of Care Problem = stock market is for people who WANT to take risk, and shareholders want risk so they do not want directors who AVOID risk - if the risk turns out to be a loss, and SH file a lawsuit, then it is going to make directors risk-adverse in the future - focus on if the bet should have been made in the first place, not if it was a bad one Duty of loyalty problem = - who would you want on your board? - competent people and honest people- people who you have done business with, not just people who you are friends with - bankers = willing to lend you money; if trustee rule applied then you wouldn't able to have banker on BOD - Conflict of Interest on board - sometimes it is welcomed because company wants to do business with other company - many things, including conflicts of interest and risk taking, are encouraged in private businesses and are illegal in civil service - Civil Service and Trustee Law = don't do business with your friends/relatives - Private = do business with your friends/relatives/people you know so that you can build trust Shlensky v. Wrigley Facts: Defendant is the director of the Chicago National League Ball Club, which is the company that owns the Chicago Cubs. Although every other major league team had installed lights, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood. Plaintiff argued that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during the weekdays because they played at night. Therefore, reasoned Plaintiff, the Cubs would draw more people with weekday night games. Plaintiff asserts that Defendants first concern should be with the shareholders rather than the neighborhood. - Breach of Duty of Care- reasonable BOD would have night games because they would make more money - Rule = directors have to act reasonably, not that they have to act right - sometimes a reasonable decision could end up being the wrong one

- there has to be a SERIOUS breach of duty of care Holding: The court will not overturn Defendants decision to not install lights at the ballpark. The court cited some reasons why the light installation could be detrimental, such as lowering the property value of the park itself, a lack of proof on behalf of Plaintiff that financing would be available for lights and would be certain to be offset by increasing revenues. The court cites precedent that asserts that business decisions should not be disturbed just because a defendant can make a reasonable case that the policy chosen by the company may not be the wisest policy available. Smith v. Van Gorkom Facts: Trans Union had large investment tax credits (ITCs) coupled with accelerated depreciation deductions with no offsetting taxable income. Their short term solution was to acquire companies that would offset the ITCs, but the Chief Financial Officer, Donald Romans, suggested that Trans Union should undergo a leveraged buyout to an entity that could offset the ITCs. The suggestion came without any substantial research, but Romans thought that a $50-60 share price (on stock currently valued at a high of $39 Holding: The Court found that the directors were grossly negligent, because they quickly approved the merger without substantial inquiry or any expert advice. For this reason, the board of directors breached the duty of care that it owed to the corporation's shareholders. As such, the protection of the business judgment rule 3was unavailable. - BOD held personally liable for a bad decision that may not even be all that bad - Issue: should they sell the company? - Share price was 39$ a share, and the offer was $55 a share - Shareholders are in the business of finding out what a stock is worth - Directors are in the business of running a company - Is $55 a good price? SH should be the ones to determine that - Why where they held personally liable? - they did not do a lot of research because 1) $55 was greater than $39 2) don't need to research a lot to see if SH were happy w/ that price - Advising a corporation in the post-Van Gorkom world 1) hire experts: lawyer, and someone who can value the company (investment banker) - Basically Van Gorkom says that you cannot sell your company without getting an opinion from an expert investment banker

Duty of Care/Board Oversight

Courts will not interfere with the business judgment of the Board unless it appears that

the directors have acted or are about to act in bad faith and for a dishonest purpose. More than imprudence or mistaken judgment must be shown. Duty of Care is extremely difficult to endorse.

*** IF the corporation is up for sale the board's fiduciary duty is to get the best price. - Nothing in BJR that says you must think about shareholders when deciding whether to sell company (no fiduciary duty to sell company) Must: act in good faith; act in the best interests of the corporation; act on an informed basis; not be wasteful; not involve self-interest

BJR Broken if there is: - Disloyalty - Gross negligence - Usually only an action for GN, not ordinarly neg. -Waste - something that had no corporate purpose whatsoever (doesn't really mean over-paying like Disney) - Exercising no judgement - Pritchard- not showing up for meeting at all - Inaction (caremark) - If you fail to put into place procedures Francis v. United Jersey Bank, 432 U.S. 814 (1981) Mrs. Pritchard becomes director of P&B after her husband dies. She wasnt involved in day-to-day ops and knew almost nothing about the business, and didnt check anything. Her sons misappropriated millions and corporation went into bankruptcy. a. Directors have a duty to act in good faith as ordinary prudent persons would under similar circumstances in like positions. This standard is a relative concept, depending on the kind of corporation, the directors corporate role, and the particular circumstances. Generally, director should have at least basic understanding of corps business and knowledge about its ongoing activities, which reqs a general monitoring of its affairs and policies (not necessarily detailed inspection of day-to-day affairs). Director has

b.

responsibility to attend board meetings and regularly review financial statements. If there is illegal conduct, there is a duty to object, and possibly take reasonable means to prevent such conduct or resign. Mrs. Pritchard didnt fulfill any of the directors obligations. c. Her failure to act contributed to the continuation of the misappropriation (if she had reviewed the financial statement she would have noticed it), and proximately caused it.

Caremark The Court found that there are two conditions necessary for liability under the standard set by this case (now known as the Caremark Factors):
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The directors utterly failed to implement any reporting or information system or controls; or Having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.

Duty of Loyalty
Duty of loyalty means that the directors must place the interests of the corporation above their own personal gains. Problems arise though b/c directors have other business involvements (causing a conflict of interest), & it is often for this reason that they are placed on the Bd. Self-Dealing Transactions - Insiders permitted self-dealing as long as action is ratified by fair process or it is substantively fair - you can be a board member of one corporation and do business with your other company, making you a ton of money, and it is legal as long is it is clean (you are not charging any more than another person would) - your actions can be permitted by ratification by uninterested shareholders or uninterested BOD after full disclosure Corporate Opportunity - taking a corporate opportunity for director's own benefit is a breach - if director takes opp. for corp. then the director has to hold it in trustall the profits that the director made - you can define what a corporate opportunity is in your articles of incorporation

take

If you worked for a law firm and a friend came to you with a legal issue, is it a corporate opportunity for them? - your duty is to put company's interest ahead of your own if you if you are an agent - if you do legal work, it belongs to your employer If your friend came to you with a business investment opportunity, do you have to tell firm? - if your law firm doesn't then, you dont have to tell them - When are you allowed to act on your own? - see whether the project you want to take on fits into the company's present activity/ established corporate policy

Executive Pay
- Must set aside all personal interests and work for beneficiaries (just like those in public office) - Executives are entitled to ask for however much market can offer - Whats the best way to attract/retain top managers? - Align manegerial interests to corporate interests so there is no stealing Is high pay for CEO's good for company? - Could be good for company because it was good for shareholders - Hostile Takeovers encouraged directors to put SH first - high-paying CEO's need to justify making 10 million dollars a year SH advocates- problem with high CEO salaries is coming out SH money; but CEO not paid by SH, paid by corporate profits - provision- if CEO salary is connected to profit, it can be over 1 million (align CEO with shareholders- larger profit = larger salary) - CEO salaries immediately went up because it was "insulting" to not make maximum - If you pay someone an average salary, then you have admitted that you hired an average CEO - either you fire him, or pay him an above average salary - Stock options - Paying leader a lot more = encourage lower level employees to strive for that - convince people to work for less now, so that you work hard for that one top position in the end Stock Options - when you issue to employees, what the company is receiving in return is the effort/work of employees - When an employee exercises stock option for a profit, the rest of the shareholders lose money

Disney case- you can hire someone and make a complete mistake, give someone a top salary that protects them, and then a year later have them walk away with no consequences

Proxy Fraud Insider Trading

Rule 16: - Insiders = directors, officers, 10% shareholders - May not profit from a trade made within 6 months Whats wrong with insider trading? - One theory: fairness, level playing field etc. - SC rejects this because they are worried about the general rule that in the market ppl are allowed to take advantage of extra information they may have. - Second theory: fiduciary duty - If you trade on positive news, you might be betraying the company secrets - you must have a fiduciary duty to the people you are buying the stock from - Another theory: Trading on bad news could cause directors to purposely make bad decisions for the company; not actionable under state law because you can't prove who you traded with Goodwin v. Agassi - In contract, selective information is permitted - In agency, you must set aside all thoughts of self - Insider is a fiduciary trading against fiduciary- so it is a violation of agency law - Executive is NOT a fiduciary to shareholder though - You don't owe a fiduciary duty to someone you are selling stock to outside the company - you can't profit on a sale or purchase for 6 months if you are a statutory insider LISTEN to 1 hour and 20 minute mark Cady Roberts Case - information must be made public in order for executives to trade Chiarello - he was a printer and read disclosure documents and went and bought stock - level playing field? doesn't matter - fiduciary duty? - he is not an employee of the company - he does have material non-public information, but that is not enough

- no fraud because there is no duty to disclose or keep info confidential - After O' Hagan, Chiarello would have lost because printer broke fiduciary duty to his employer O' Hagan - lawyer traded based on planned merger but he was not the lawyer for the actual merger deal - Distinction between Chiarello? - in this case, if you breach fiduciary duty to anyone in getting this information it is insider trading; but if you didn't it is not insider trading - if you got your information from someone who breached fiduciary duty, then it carries over to you

Example

- Your clients buy stock in a company and say to managrement they will do a hostile takeover unless they do stuff to drive stock prices up - then when management did something they sold their stock and make a profit - if you tell your friends that the stock price is going to go up, is that considered insider trading? - under level playing field- it is but that is not good law - but if there was a fiduciary duty broken, it is insider trading Under corporate law, you must breach a fiduciary duty to someone in order to be liable for insider trading

Board Autonomy
Revlon Pantry Prides CEO approached Revlons CEO and offered a $40-42 per share price for Revlon, or $45 if it had to be a hostile takeover. The CEOs had personal differences, and the court noted this as a potential motivation for Revlon to turn elsewhere. Revlons directors met and decided to adopt a poison pill plan and to repurchase five million of Revlons shares. Pantry Pride countered with a $47.50 price which pushed Revlon to repurchase ten million shares with senior subordinated notes. Pantry Pride continued to increase their bids, and Revlon decided to seek another buyer in Forstmann. Revlon offered $56.25 with the promise to increase the bidding further if another bidding topped that price. Instead, Revlon made an agreement to have Forstmann pay $57.25 per share subject to certain restrictions such as a $25 million cancellation fee for Forstmann and a no-shop provision. Plaintiffs, MacAndrews & Forbes Holdings, Inc., sought to enjoin the agreement because it was not in the best interests of the shareholders. Defendants argued that they needed to also consider the best interests of the noteholders.

Holding: The Delaware Supreme Court affirmed the lower courts decision to enjoin the agreement. Revlons directors owed a fiduciary duty to the shareholders and the corporation, but once it was evident that Revlon would be bought by a third party the directors had a duty solely to the shareholders to get the best price for their shares. Any duty to the noteholders is outweighed by the duty to shareholders. By preventing the auction between Pantry Pride and any other bidders, the directors did not maximize the potential price for shareholders. Paramount v. Time Time decided to seek a merger or acquire a company to expand their enterprise. After researching several options, Time decided to combine with Warner. Time was known for its record of respectable journalism, and Warner was known for its entertainment programming. Time wanted to partner with a company that would ensure that Time would be able to keep their journalistic integrity post-merger. The plan called for Times president to serve as CEO while Warner shareholders would own 62% of Times stock. Time was concerned that other parties may consider this merger as a sale of Time, and therefore Times board enacted several defensive tactics, such as a no-shop clause, that would make them unattractive to a third party. In response to the merger talks, Paramount made a competing offer of $175 per share which was raised at one point to $200. Time was concerned that the journalistic integrity would be in jeopardy under Paramounts ownership, and they believed that shareholders would not understand why Warner was a better s uitor. Paramount then brought this action to prevent the Time-Warner merger, arguing that Time put itself up for sale and under the Revlon holding the directors were required to act solely to maximize the shareholders profit. Plaintiffs also argued that the merger failed the Unocal test because Times directors did not act in a reasonable manner. Holding: The court distinguished the Revlon decision as concerning a company that already was determined to sell itself off to the highest bidder, and therefore the only duty owed at that point was to the shareholders. In this case, Time only looked as if it were for sale as it moved forward on a long-term expansion plan. Various facts, such as Times insistence on ensuring the journalistic independence and its temporary holding of the CEO position, illustrated that the directors were not simply selling off assets. Once it was determined that the directors decision passed the Revlon test, the Unocal test was applied. The directors also passed the higher standard called for in Unocal to directors who are rebuffing a potential buyer. The directors reasonably believed, after researching several companies, that a merger with Warner made the most sense as far as future opportunities and maintaining their journalistic credibility.