Bridgeman BIZ MINE w Comments

8/2/2019 Bridgeman BIZ MINE w Comments

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Biz Orgs Outline Bridgeman Fall 2011

Business Organizations

Exam

Open Book - 3 or 4 essay questions

o Potential claim or question - whether there is a claim or not

Would the claim likely succeed?

Are there any defenses?

Must SHOW YOUR WORK! Demonstrate why a particular outcome is likely

o Know the cases & statutes, don't need the names (but preferred) - but use them for Gold!o Jurisdiction - have a good idea of j-d, but might put some "case of first impression" questions in there where it is more of

a survey

Course Review

Broad Themes

1. Three Basic Kinds of Disputes

o Principal/Agento Owner/Ownero Owners/3rd Parties

2. What happens when one person is given control of the assets of another person?

o Fiduciary Duties - Care, Good Faith, & Loyalty

3. Planning Perspective - helping someone start a business, what kind of business form is good for a particular need?o General Partnership - small business, people know one another well

Do you want everyone to have a vote?

Do you want to make it easy to break up the firm?o Corporations

Do you need to raise a lot of $?

Do you need limited liability?o Closely-Held Corporations - kind of a blend between the pros/cons of corporations & partnerships

Hard to sell stock, so centralized authority can create problems for minority SH.

Del law not so influential here and the MBCA and other state law is more prevalent (NY) a lot more variation.o LLCs - hybrid

4. State Law v. Federal Law - how does these broad areas fit together?

o State - internal governanceo Federal - disclosure issues

5. Type of Rules - default or mandatory?o When do you have default rules, how are they adjusted, and how do courts address them?o Statutory law, Common law, Contracts, Corporate Charter & Bylaws

6. Policy - what do we want this area of law to accomplish?o Efficiencyo Predictabilityo Fairness to the Partieso Good for Society

INTRODUCTION

Relational Contract - not as definite as a discrete K (all terms contained), people are attempting to put together very long term

business arrangements/ relationships between the parties

Commonly, parties decide on a governance mechanism to resolve problems when they arise instead - ex. Board of

Directors, majority vote Business organizations is not a law of prohibitions, but a law ofenablingrules ("default rules")

State is providing "off-the-rack" rules that may need adjustments

Way to benefit client is not to get a bigger piece of the pie, but to expand the pie so your client can feasibly get

more. One way is to lower "transaction" costs & structure a better deal.

Strategies to determine "off-the-rack" rules:

Tailored Default - figure out what the business people would've wanted when they drafted the agreement

Majoritarian Default - fill gaps in agreement w/ terms that most people would've chosen (majority of

rule/outcomes)

Penalty Default - fill gaps w/ terms that one or both of the parties didn't want = penalty for not being more specific

in writing


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PARTNERSHIP LAW - Intro to Partnerships & Traditional Noncorporate Business Associations

Introduction

#1 - General Partnership- association of two or more persons to carry on as co-owners a businessforprofit; imputed by

law (amalgam of common law & equity doctrines)o No writing or gov't action required, only "mutual manifestation of consent" = commonly imputed by law

"Off the rack" partnership rules that are ideal for small, intimate businesses w/ mutual trust &

competence (save time & $$$)o Partners split management & profits/losses of enterprise equally

o Partnership may only terminate association w/ another partner by dissolving association & cashing outexpelled partner = every partner gets a vote

Ordinary decisions made by majority vote, but extraordinarydecision or changes in partnership

agreement require unanimity (These rules can be modified by private ordering p. 52)o All partners arejoint & severally liable for the others - unlike a shareholder in a corporationo Fiduciary duty to act "fairly & honestly" w/ other partners - agency relationship imposed b/c each partner has

great authority to bind the other partners

-------------o Very basic business entity that can be created in a very informal way

o What does it mean to be "engaged in a business" together?

Ex. One person has a business & calls a friend to perform a discrete service, promises 10% of profit. Not

partners b/c not co-owners, friend has no management/control.

Partnerships do split profits, but management capabilityis key

o Really emphasizes equality of partners - default rules are relationship reinforcing & equality based(UPA 401-02)

o Easier to dissolve than other business models (ex. Corporations)o Each partner is an agent for the business & one another - ability to bind the partnership

Defining Characteristics of GenPar: 1. Equal sharing of ownership & management functions, 2. Individual partners

adaptability to changed circumstances favored over firms continuity & adaptability, 3. unlimted personal liability, 4.

fiduciary duty (act fairly and honestly in combined forces in pursuit of common good)

#2 - Joint Venture p.53 - associates join together to exploit a particular opportunity connotes a less permanent and

less complete merging of assest and interest than GenParo Less complete & permanent merger than full general partnershipo Joint venturers are not agents of each other & are allowed to be more self-interested

Ex. Two corporations united for a single purpose, like a joint research venture, but desire to maintain

their individual identities as wello A lot like partnerships & courts basically apply the same rules, but they're not identical

Short-term general partnership to obtain a particular objective/business opportunity = LIMITED SCOPE

o No merger of individual interests

Way to limit the scope of fiduciary duties in all other areas than that specifically worked on in the joint

venture

o Affects Agency & Authority Law - what is a reasonable belief when dealing with a joint venturer? 3rd party has to

do more to double check if the agent has authority to bind the joint venture. And JV partners may have greater

room to prefer their own interest than fiduD allows to GenPars.

#3 - Limited Partnership - business association composed of one or more general partners & one or more limited

partners (formed by filing of certificate of limited partnership w/Secretary of State)o Limited partners have no management authority or agency - General Partners run the showo Limited partners are not personally liable for business, general partners are liable

GenPars may withdraw @ will, limited partners may not, however unlike GenPars such withdrawal does

not automatically trigger dissolution/liquidation of Pship. Decision rule same Ps

Separation of ownership/management functions

Limited Liability for limited partners/GenPars are jointly & severally liable for firms obligationso Hybrid between a partnership & a corporation

Limited Partners - passive investors only face risk in terms of their investment, but not liable for legal

harms caused by partnership's actions (aside from loss of stock value)

General Partners - control over the operations, but also personal liability for the harms

o Ex. Family business - Parents run the business & children invest in the business, but don't have any management

say b/c not ready yet.


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Limited Liability Partnership - LLC partners personally liable for LLC debts that cannot be satisfied out of the business

assets (UPA 1997 306, 1001 & ULPA 2001 102(9), 404(c)o Principals in professional firms thought that it was unfair that corporate executives were not personally liable

(no vicarious liability), but they were

Trend is to protect General Partners fully from personal liability - like shareholders in a corporationo Business that looks a lot like a partnership, but investors & partners only risk what they put in = no joint & several

liability for any partnero Governance structure of the firm is the same as a General Partnership, but w/o partners' liability

CASES:

Byker - Accountant (plaintiff; B) & real estate agent (defendant; M) join skills to go into biz together. Agree to: engage in

ongoing biz enterprise, raise investment funds, share equally in the profits, losses, &expenses of the enterprise. Ct: What kind

of biz relationship did B & M have?Partnership, if the parties associate to carry on as co-owners of a business for profit, they

will be deemed to have formed a partnership relationship, regardless of theirsubjective intentto form a partnershipo Partnership - [UPA 202(a)] - association of two or more persons to carry on as co-owners a business for profit forms a

partnership, whether or not the persons intended to form a partnership.

NOT interested in the parties' subjective intent or understanding of the label attached to their business

association

Course of conduct acted as an "umbrella partnership" for discrete investments

Parol Evidence rule matters & the written agreement is strong evidence for H, but not decisive under Partnership lawo Partnershiplaw is concerned w/ the acts & conduct of the parties over time to determine "co-ownership", not just their

K agreements (as in Contract law)

When the controversy is between 2 parties, stricter proof of intent to create a partnership is required

UPA 401b (Loss Sharing Default Rule) - each partner is entitled to an equal share of the partnership profits & chargeable w/ a

share of the partnership losses in proportion to the partner's share of the profits - default rule links profit & loss ratios

BUT where the parties contribute asymmetrically (one invests $ and the other labor), neither party is liable to the

other for contribution for any loss b/c both parties have already suffered a loss

Services & capital are considered equivalent in terms of start-up capital

Labor should not have to sustain a "double loss" -partner who entered labor/services already lost their time and

effort, they shouldn't have to also pay 1/2 $ debts

o KovacikRule for asymmetrical contributions -If the capital partner can't get all of their contribution back, service

partner does NOTmake up the difference = exception to general default loss-sharing ruleo UPA 401h - a partner is not entitled to remuneration for services performed for the partnership, except for reasonable

compensation for services rendered in winding up the business of the partnership Default rule that partners can K around, but law is pretty straight forward that partners are not paid for their

services above & beyond profits.

Labor is never paid upon dissolution, but it does not pay debts either.

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FIDUCIARY DUTIES

Meinhard v. Salmon (Partner as Fiduciary - Common Law Duty of Loyalty) - Salmon (S) partnered with Meinhard (M) to lease a

building (20 yrs.) from LG to put in shops & offices. After original 20 yr. lease was up, S signed a new lease w/ EG w/ many

renovation obligations & big $ outlay - S personally guaranteed performance of the lease & new building. S didn't tell M about

the new deal or lease w/ EG - kept all the negotiations to himself. Court: Did S breach a fiduciary duty to M by appropriating a

lease renewal for himself rather than informing M? Yes,Joint Venturers owe one another the "finest loyalty" = stricter than

"marketplace morals"

o Joint-venture relationship, but fiduciary duty of loyalty is the same as for partnerships = HARDCORE LOYALTY

S had a duty to give M an opportunity to compete for the second lease b/c M's contribution to the joint venture

helped induce the renewal opportunity - S could've warned M of EG's offer & called "open season" on the project

o Why does Cardozo find a fiduciary breach?

Exclusion of chance to compete that stemmed from the joint venture -S new lease has a close enough subject

matter relationship to old JV lease

Managing venturer, w/ exclusive power, has an even higher dutyof disclosure b/c greater access to more

information - M is in a more vulnerable position

As long as JV still exists, S has duty to disclose & can't take lease for himself

-------------o Hypotheticals

1. Suppose S did give M opportunity to compete & S outbid him. Is this a breach of loyalty? Depends on duty:

disclose or share?


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2. Did Cardozo overstep by imposing a duty after the JV ended? No, the JV provided S with the opportunity to sign a

new lease in the first place.

3. What if EG offered S an opportunity to invest in an office building in San Francisco? Too far removed from JV or

anything to do with venture, so no breach.o Question: How would this case be decided under the revised UPA?

UPA 404(b) - General Standards of Partners' Conduct: Partner's duty of loyalty is limited to specific

acts/omissions, unless explicitly agreed otherwise (and "reasonable"), but cannot be waived entirely

Parties can alter the unwavering duty of loyalty under the UPA if the parties are specific in their agreement

& they're not manifestly unreasonable = the revised statute allows parties to carve out an exception to theloyalty duties.

Vigneau (Self-Dealing - acting on both sides of the deal) - V invested w/ JM, another Storch EE & head of operations, in real estate

development biz (HCA). V held 22% cut of HCA & worked as S's architect in charge of HCA job - kept circular relationship secret from

S. Court: Is V entitled to his cashed out partnership interest in Storch even if V was self-dealing in other partnerships? Yes, V

violated his fiduciary duty to the defendant by self-dealing in the HCA & G Assoc. projects & by concealing from the defendant those

actions, but he is still entitled to cashed out partnership share.

o Prohibition against self-dealing (acting as both vendor & purchaser) is "prophylactic" in nature to deter conduct harmful

to any partnership

Withhold information: duty of candor & "full disclosure" in partnership matters

When disloyal P has "dual responsibilities" & serves interests adverse to his original partnership, injury to the

partnership is non-determinative that S actually profited off of V's self-dealing

o Consequence of violating fiduciary duty is that original partnership is entitled to recoverthe "secret profit" that the

disloyal partner realized

Disloyal partnerIS entitled to reimbursement for his vested interest/capital contributions Courts may be willing to give a self-dealer their capital contribution back, butcourt has discretion & will prevent

self-dealer from actually profiting off of their disloyalty

Covalt (Management of Partnership's Business Affairs - Equal Voting) - C & H, corporate officers & shareholders in CSI, agreed to

form partnership to buy real estate & build office/warehouse; CSI rents from H&C, renews on oral agreement to rent increase. C

demands that H increase the rent charged to CSI, H declines. Court: Did the trial court err by ruling that H breached a fiduciary duty

of fairness to his former partner (C) by failing to negotiate and obtain an increase in the rent from CSI? No, an act concerning the

partnership business may not be compelled by the co-partner - remedy is dissolution of partnership.

o All partners have equal rights in the management & conduct of the business of the partnership, unless expressly agreed

otherwise. Neither partner had the right to impose his will concerning the operation of the partnership on the other. Fact that a proposal may benefit the partnership does not mandate acceptance by all partners

If the partners are equally divided by majority vote, those who forbid change must win out = keep status quo

Starr (Partnership Agreement & Fiduciary Duties?) - IS, attorney, joined new firm over his own reservations about his rainmaking

ability; quickly left new firm. Court: Did the founding partners @ FS violate their fiduciary duties & the implied covenant of good

faith in their partnership agreement w/ IS? Yes, FS violated fiduciary duties & the implied covenant of good faith & fair dealing.

o Self-dealing is not legally punishable in every context, case-by-case analysis to determine the harm caused, if any

Party accused of self-dealing has burden to prove otherwise - FPs were self dealing b/c allocating $ to

themselves & had direct effect on IS' compensation

Business Judgment Rule - can the allegedly violating partner can demonstrate a legitimate business purpose for

his action?

o Possible that a partner has engaged in self-dealing, but partner can attempt to prove the fairness of his actions & to

prove that his actions didn't result in harm to the partnership = quasi-defense

One partner probably had to take charge of deciding the pay for the business, but the "self-dealer" must be

transparent& must act fairly(and prove this)

Ferguson (Partners' Fiduciary Duty of Care - Bad Management) - FW contacted Wi to help finance building venture when it ran low

on cash - sold Wi 1/4 interest. FW venture failed b/c couldn't find construction financing, dismantled & sold buildings to pay debt.

Court: Was FW's operation of the joint venture a breach of fiduciary duty to Wi? No, bad management is not a breach of fiduciary

duty, only breach of trust/loyalty.

o Old Rule -As a matter of law, negligence in management of a GP or JV does NOT create a cause of action for one

partner against another partnero UPA 404(c) (1994) - partners do have a duty of care to each other, but requires gross negligence or worse to bring a suit

for breach of duty of care (ex. bad management)


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INTRO TO CORPORATIONS

Corporate Form & Roles

Board of Directors - set corporate policy & exercise statutory corporate "power"

o Attributes/Responsibilities

"Control Rights"

Select officers of the corporation

Initiate changes in corporation papers

Dole out dividends to shareholders Own stock to keep personal stake in business

Do not share residual profits of corporation

Do not have individual agency to act on corporation behalf - collectively act as Principal

o Courts give board great deference - business judgment rule

o Publicly-traded (PT) corporations need mix ofinternal (corp. officer) & external (volunteer) board members

o DGCL 141(a) day to day business & affairs of every corporation shall be managed by board of directors except

as otherwise specified in Articles of Incorporation.

-----------o Articles of Incorporation ("Constitution")

Set major framework of corporation governance

Hard to amend - need Board to initiate & shareholder vote

Publicly accessible document

o Bylaws ("Statutes")

More detailed & specific

Easier to amend

Not necessarily publicly accessible

DGCL 109 - shareholders can vote on amendments to bylaws, but Board also has unilateral authority to

block.

Officers/Management- execute corporate policy & exercise statutory corporate powerso Attributes/Responsibilities

Agents of Board of Directors

In charge of day-to-day decision making

Duties designated by corporation's bylaws

Own stock to keep personal stake in businesso President/CEO is the "fulcrum of corporate governance"

Really the officers who know what is going on in the company b/c deal with issues day-to-day

o Top-level officers are often directors as well

Shareholders - infuse capital & vote on directors. "Vote, Sell, & Sue"

o Attributes/Responsibilities

"Residual Claim Rights"------paid after creditors 3rd

party

Corporate risk-bearers & residual claimants (claim to $ if dissolution)

Purchase shares, but risk limited to losing share price = no personal liability for corporate misdeeds

Vote to elect Board of Directors

Annual Meeting - corporate law requirement

Special Shareholder Meeting - hard to call w/o being named on charter

Written Consent (in lieu of meeting) - vote by proxy instead of physically showing up for the

meeting. DGCL 228

Dependent on Articles - Boards usually cut back on this power to limit SH participation

Limited management rights

No ability to initiate changes to bylaws, articles, or corporation policy -power is "permissive, confirmatory,"

can only make recommendations

Shareholders can make recommendations & vote (not seen as encroaching on Board of Directors'

power), but can't initiate changes to bylaws or articles of incorporation

Vote on fundamental corporate actions (initiated by the Board) - amending Articles/bylaws, mergers,

dissolution, etc.

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o Shares - fungible ownership units that entitle the holder to a pro rata share of the firm's profits & net assets upon

dissolution (or more likely, on sale to another)

Common Stock- normal shares that combine both residual claimant status & voting rights. Identical rights,

preferences, & voting rights.

Preferred Stock- special shares that grant a dividend first over common shares , but usually don't have voting

rights = highly dependent on individual K

o Dividends - payment of corporation's profits, initiated by the Board of Directors.o Shareholder Derivative Suit - shareholders may have standing to sue the Board of Directors on behalf of the

corporation itself.o Proxy - substitute for actual, in-person SH voting. 1) Actual substitute for in-person vote; 2) Person voting in-

person on your behalf.

Not possible to hold 5 million SH in one meeting room

Average SH probably doesn't care about voting anyway

Very common in large corporations

**************

What are the advantages of starting a corporation over a partnership?o Limited liability for shareholders - only lose the value of their share

o Easier to raise capital using stock - allows general public to participate & infuse $

Free transferability - can't bring on new partners @ will, but corporate stock can be traded @ will to anyone w/o

others approval.

Convenient Exit Right - don't like the way the business is going, sell your shares & leave

o Corporations are indefinite & harder to break up than partnerships - encourages investment

o Important separation of ownership & control - shareholders have residual claims, but don't have management

capabilitieso Centralized management structure b/c not feasible to have millions of "owners" making day-to-day decisions - vested in

Board of Directors & Management(DGCL 141(a))

o Corporation is legally more than the sum of its parts - legal fiction of a "person" w/ same rights as a person

Why is Delaware's role so significant in corporate law?

o DE has 50%+ US public corporations & ranks 49th in population

Internal Affairs Doctrine - apply the law of the State of incorporation to matters/questions of corporate

governanceo DE corporate law is well-defined & predictable

Courts have built up huge body of precedent Judges are former members of corporate bar = experts

o Race to the Bottom ("sell-out" to management) v.Race to the Top (economic, "market efficiency" argument)

Economists argue that SHs wouldn't buy into pro-management company, so DE can't be all that bad

Voting Schemes

o Straight Voting - shareholder entitled to cast votes equal to their number of shares for Board of Directors candidates.

(default rule)o Cumulative Voting - shareholder can cast total number of votes equal to the number of shares multiplied by the number

of positions to be filled.

Guarantees minority SH voting clout b/c ensures that a particular candidate may get on the board -put all your

shares behind 1 candidate, not diluting your voting

Equation: Shares Voting * Number of Directors Possible for Client/(Number of directors to be elected +1) =

SX/(D+1)

o Classified Voting - create different classes of shares w/ different voting rights

HYPO: 4 director BD. Seats 1 & 2 only voted on by Class A shares. Seats 3 & 4 only voted on by Class B shares.

Possible to have a majority of shares in a Class w/o having a majority of total shares in the company

o Preferred Shares w/ Special Voting Rights - preferred shares get many more votes/share. Incentive to buy more

expensive, preferred stock.

Liquidation Preference - get investment back first at dissolution, before common stock holders

o Staggered Board Voting - only 1/3 of board is elected in one particular year

Keep continuity/institutional memory (experienced board members)

Prevent sudden coup (new majority wants to takeover entire board) ability to influence entire board

Very common defensive measure included in Articles of Inc.

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Hoschett p.172 (Fundamental Shareholder Rights:Annual Meeting & Voting) Hoschett owned .12% stock & TSI did not ever hold a

shareholder meeting. Court: Does a written consent filling vacancies on a corporate board excuse a corporation from holding a

mandatory SH meeting? NO, the mandatory requirement that an annual SH meeting be held is not satisfied by written consent to

elect a new board or re-elect an old one =TSI ordered to hold annual SH meeting.

o May be efficient to allow 228 consent writings to stand in for meetings, as defendant argues, BUT annual meeting is one

of "very fewmandatoryfeatures of DE corporation law."

Point of meeting is to afford SH opportunity to bring matters before the entire SH board

o Court: possible to install directors w/ written consent power, but written consent power doesn't supersede mandatory

annual meeting (so directors only serve until next annual meeting) -DGCL since amended by DE Legislature to allowwritten consent to stand-in, ifunanimous

Written Consent Board composed of space-fillers that need to be properly elected or removed at the next annual

meeting

o Efficiencyv.Open Governance - Chancellor balances practicality/efficiency of consent provision against advantages of

actually holding a meeting

SH open discourse

SH can make proposal to amend other corporate papers @ meeting

Written consents put dissenting SH at a disadvantage b/c cant marshal others to their views

Adlerstein (Removing Directors) - A, former chair & founder/CEO of SM Corp., sued 3 BD members (W,M,R) for ousting him from

company. Court: 1) Was the BD meeting properly convened? Yes, bylaws do not require advanced notice or advance agenda before

meeting. 2) Did the BD's secret plan breach their fiduciary duty to A, as the controlling director & SH, and invalidate the R deal? Yes,

A was entitled to know ahead of time of R plan, hatched w/ purposeful intent of destroying A's voting control over SM Corp. Had A

known, he could've exercised his lawful right to remove BD member to stop plan. = "actions of BD must be undone."o DGCL 225 - purpose is to provide a quick method of review of corp. elections to prevent corporate immobilization by

controversies over proper officers

o Del. Corp. law requires BD to conduct their affairs "in a manner that satisfies minimum standards of fairness"

A was both SH & Director, so notice derives from his joint roles, not from his SH role only - secrecy+ something A

could do about preventing the coup

Controlling SH at unlawful disadvantage when not informed about BD intent to remove him as CEO - controlling

SH has no opportunity to use his controlling SH power to alter the BD & escape the coup =Fiduciary Breach of

LoyaltyoBoard of Directors issues stock to R, Aremoved as CEO by the Board of Directors & removed as Board Chair by the

shareholders (really just R w/ majority voting rights & executing written consent)

Shareholders remove Board members, Board removes CEO************

Common Law- BD had vested right to continue in office until term, only removed for cause.

ModernDGCL 141(k) - SH may remove Director with or w/o cause = last resort

Exceptions

Staggered BD members/director cannot be removed by SH w/o cause

Cumulative Voting BD - if a SH has enough shares to guarantee a director a board seat, this is the number

of shares to trigger the "for cause" removal of a director

Preserving the balance of power among the SHs -if a director elected by a minority could simply be

removed afterward, not really a minority protection then

c. Class Voting - majority of particular class of voters can remove w/o cause, but not entire SH body.

Limits of "for cause" removal in DE: Campbell v. Loew's Inc. - removing a director "for cause" is not an easy task

b/c so many substantive & procedural elements to overcome

Substantive

Scheme of Harassment of corporation's employees

Obstructing the business of the corporation

Policy disagreements do notsupport a for cause removal

Procedural

BD members need notice of specific charges

BD members need opportunity to meet accusations/defend at corporation's expense

Centaur (Changing DGCL Default Rules - Interaction of Articles & Bylaws BOD restraints by SH) - C, investment partnership, holds 16%

share in N, pharmaceutical & metal company. C files w/ SEC, claims N stock is undervalued & N must sell off assets - attempt to take

over N. N shareholders previously amended Articles of Incorporation to require 80% supermajority to amend articles or "similar


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provisions" in the bylaws. Court: Does C need 50%+ or 80% supermajority to amend N bylaws? N's Articles of Incorporation &

bylaws are NOTambiguous & they both require an 80% supermajority for amendment.oDGCL 216 - if Articles nor Bylaws don't set a % of votes necessary for election of director, defaults to plurality of the votes

present (50%+) SH must be explicit (clear & unambiguous) if they wish to impose a supermajority requirement for voting, to

overcome hard presumption of 50%+, "bare majority," default rule

High vote requirement protects minority shareholders against squeeze-out techniques employed by insurgents

commanding a bare majority, but provisions also give minority SH a veto on the will of the majority =

disenfranchising majorityoDGCL 109(b) -If Articles & bylaw contradict, Articles hold & Bylaw is null & void

******oWhy is C worried about amending the bylaws? Why not acquire 51% shares & elect a whole new board of directors?

N has a staggered board, set up to prevent coups, so C can only replace 1/3 directors in one election (DGCL

141(k)) and needs "cause" to remove outside of elections - C can't get a majority quickly w/ a regular electionoCourt is protecting the vote ofALL shareholders - don't disenfranchise the majority& trying to protect the SH franchise

overall

If the Court found any ambiguity in the Articles or bylaws in this case, C would've probably won on default rule w/

50%+ voteoWhen planning corporation, option to set forth governance rules in Articles or the bylaws - a lot easier to change the rules

if placed in the bylaws = flexibilityv.surpriseoCorporate charters and by-laws are contracts among the shareholders of a corporation and the general rules of contract

interpretation are held to apply.

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SECURITIES & REGULATIONS -Area where Federal Law intersects w/ State Corporate Law

Security - a fungible, negotiable instrument representing financial value. Classic kind of "security" is a share of stock in a

corporation.

Securities Exchange Commission (SEC) - Federal agency tasked w/ regulating securities markets

o Focus on disclosure requirements to fully inform investors - risk factors, salaries, conflicts of interests, etc.

"Blue Sky" Laws - State laws in 1920s & '30s attempting to address securities fraud issues, but after the

Great Depression they weren't considered sufficient

Periodic Reporting Requirement - public companies must file quarterly & annual reports

Significant disclosures required if companies offer stock to the publico SEC provided a new mechanisms to go afterfraud

Key Securities Issues

o Cost: Extremely helpful to shareholders & well-working market to have abundant information, but very expensive

for smaller corporations to comply with (need to hire lawyers, accountants, insurers, etc.) - big issue is whether

an exemption applies

o Identification: Is the financial transaction involved really a security in the first place?

You must Disclose when you are selling securities/ investment contract you are selling to passive investor who does

not have control. What makes investment K=you are making $ primarily off the efforts of othersdistinction b/t

control of your investment or having someone else control for you. But we can only police if there is info on the

market. Exception when you are too small.

Economic Backdrop to Disclosure Rules

o Efficient Market Hypothesis: disclosure scheme based on the idea that markets are relatively efficient.

Therefore, the stock price will absorb the disclosure information, and the stock owners can benefit from the

distribution of this information for very low transaction cost.

Market efficiency - the amount of time it would/does take new information to incorporate/absorb into the

stock price

Buying stock is not like buying a house or car, you're buying an intangible - no way to tell the value of a

stock or "kick the tires" of the stock on your own (+) very expensive to do research on your own

Info is king you can invest w/out feeling like you are missing anything

And you cannot do any better by investigatingo Ex. Stock Market Crash of 1987 - no obvious piece of information to point to as the cause of the drastic drop

"Bursting Bubbles" show flaws in the way the market is incorporating information


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o Why does this matter? Market incorporates Federally mandated disclosure information, so determines what

regulations the government should promulgate

People are more willing to invest in a more predictable, efficient market

Our market is a "semi-strong form" efficient market=public info is incorporated, private "insider" info is often not

SH benefit from disclosure b/c experts incorporate massive amounts of info into their trading, which affects the

overall stock price = indirect benefit from information

Strong Market- there is nothing that is not accounted for so the price reflects all information available (not the case)

Proxy SolicitationsoSEC Rules are attempting to make sure that SH know what they're voting on - technical specifications of print, layout of

proxy card, notice, etc.oSEC Rule 14(a)(8): permits a shareholder to force management to include the shareholders materials in their proxy

solicitation

Proxy solicitations are not cheap, so Rule makes corporation pay for your distribution of proposal

materials to other SHs

Limits right to "qualified shareholders" - SH w/ significant investment in company & who have a stake in

the outcome of the vote

If proposal infringes on the authority of the board, management may keep that proposal out = interferes

with BD power under 141(a)

Federal SEC Rules leave the same balance of power in place between BD & SH

Precatory Language -SH, however, can use precatory language to frame the proxy as a

recommendation/requestof the BD, not as an encroachment on the BD's statutory powero BD can simply ignore SH requests, but probably at their own peril b/c they lose many votes in the

next electiono Ordinary Business Exception to allow management to exclude SH proposal from ever being sent to other SHs

Cracker Barrel Case - SH attempt to pass precatory proposal to disallow company from discriminating against

gays in hiring.

SEC passes "no-action letter," tells CB that they will not prosecute (1992), but SEC changes its mind 6 years

later (1998) and says they will come after them.

Social Issues Exception (exception to the exception) - SEC determines that it will take social issues into account

when determining ordinary business exception.

SECs position has changed over the years SEC recognizes that some social issues could exist and analyzes

on a case by case basis

What counts as "significant"? Vague rule that is hard to rely on when planning But SHs do care about social issues, and paying attention to SH is good for the company's profits

To protect SH get the info out there and make it available! Remedieso Remedies against bad trade

o Or let investors decide what is good or bad tradeif you want to trade on our markets

you need to give information.

o Economic RelevanceException - Lovenheim Caseo Management is one of the things that you buy when you buy stock and that manager is reflected in the price you paid

for the stock and DIR should not be held responsible for breach of care if not on purpose. May serve or change the way

we try to police these managers. Current info avaolabel is also skill of mgrs

**********

Edwards (Is this transaction a "security" covered by SEC?) - Charles Edwards founded a co. that sold pay telephones & then leased

them back from the purchasers for a fixed monthly fee. After Edwards filed for bankruptcy, the SEC sued him for selling securities

(considering the telephones to be investments on the part of the purchasers & therefore securities) in violation of the reg & anti-

fraud provisions of the fed SEC laws. Court: Does the Securities Exchange Act's (1934) term "investment K" include an investment

scheme in which the promoter promises a fixed return or the investor is entitled to a particular rate of return? Is the D liable under

Federal SEC law (not worried about State fraud laws)? Yes, an investment scheme promising a fixed rate of return can be an

"investment K" and thus a "security" subject to fed securities laws.o "Investment Contract" Test (Howey Test) - whether the scheme involves an:

Investment of money in a common enterprise

With expectation of profits (financial returns) to come solely from the efforts of others oCE is trying to remove investment from SEC regulation by arguing that the investment is not a security

Court doesn't buy E's argument & wants to prevent securities scams, so Court carves out "exception" for fixed

rate returns =doesn't matter whether the return on investment isfixedorvariable, there is still an "investment"

subject to theHowey Test


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B Notes: D says hey this is a K secure & unlike security which is something you dive right into. Bad B says bad argument b/c when

you think about a bond they have set amounts too. Condo not security b/c not relying on others to make prof.

You are entering into a K but rely on effort s of others. But if you went into investment condo w/buddies this might be IK if co.

managed it for you. Consequences of issuing securityin gen it reqs regr & prospectus but there are lots of exceptions that keep

you from having to register. Pg. 207 exemptions to registering/cant go pub & must Inc. inST.

FEDs say if you want to issue securities other than in local market you will have to put info out there. Sts do their own.

Ralston-Purina (Exemption from SEC RegistrationPub offer or Key EEs?) W/o complying w/ the registration reqs of the

Securities Act of 1933, a pet & animal feed corp offered shares of its stock to a # of its "key EEs." These EEs were not shown to havehad access to the kind of info which registration under the Act would disclose. Court: Was the offering of shares to "key EEs"

exempt from SEC Act b/c not a "public offering"? No, transactions were not exempted under 4(1) of the Act as non-public

transactions b/c offer is considered "public" if employees still feasibly require SEC protections due to their lack of info. Key EE= DIR,

OFF, MGR

Purpose of the SEC statute is to protect buyers who wouldn't have access to important info - uses SEC purpose to figure

out if an offer is public. Power Relationship b/t SH & DIR=State Regulated & FED LAW= forcing disclosure SEC

The # of offerees involved is not determinative of whether an offering is "public" under SEC laws

IfEEs to whom corp offered its common stock do not have knowledge obviating the need for SEC protection,

corp is required to register the "public offering"

oSheer #s are evidence, but test for a "public offering" is not a quantitative issue - looking to whether the offerees need SEC

protection b/c they lack access to important information

No issue about whether a security is involved, but the level of disclosure that is required - is this an offering "to

the public" or not? Yes, b/c employees still need SEC protection/lack info.

If offering was only to Purina high-level executives w/ access to info, this would be a "private offering," w/o need

to register under SEC

oHYPO: Under Purina, Gold makes an offering of stock in his corporation to everyone on the left side of the classroom. Is

this a "public offering"? Yes, b/c the students in the class still need SEC protection b/c no way to know important

information about Gold's corp.

o** ISSUE is this pub offer her b/c if so then SEC reqs registration/prospectus. So we are worried about info.o1934 Act Diff from 1933 Act in that 1933 Act governs issue with securities. 1934 governs proxies among security holder

(power to vote for another) way to try to deal w/collective action problem & forces info.

Lovenheim "Foie Gras Case" (Governance Proposals - Proxy Solicitations & Precatory Suggestion) - SH, Peter Lovenheim, sought a

preliminary injunction against Defendant, Iroquois Brands, Ltd., in order to insert a proposal to determine whether a supplier of pate

de fois gras force-fed the geese in order to enlarge their livers. Court. May a company refuse a SH proposal for a proxy statement ifthe proposal concerned less than 5% of the business sales, & the proposal was not economically based? No, precedent

demonstrated thatRule 14a-8(c)(5) would only omit proposals that were 1) less than the minimum 5% of sales and2) not

significantly related to the business. D does not want to include b/c sales less than 5%.oEconomic Relevance Test - Rule 14a-8(c)(5) only allows BD to omit SH proposals, under this exception, that are:

Less than aminimum of 5% sales; &

Not significantly relatedto the business.

- In this case, thefois gras issue was significant to its business regardless that it did not comprise greater than 5% of sales.

(interesting thing is if proposed company has to approve or deny & if deny then report to SEC.

- He is trying to propose this at a meeting - SH do not control co. & are passive this is issue here. DIRs run company. But, he is

trying to pressure them: By proposing SH vote via proxy to get them to vote for forming a committee to study the Goose tactic.

- Precatory Suggestion I propose this; are you with me in suggesting it? This is w/in SH power. Proxy for votes to make a

suggestion to DIRs that they change. Even if all SH agree the DIR would not have to listen. But i f they do not listen the SH may

vote them out at next meeting.

- If he ordered them/mechanically if he words it as order then DIRs will refuse to include in Proxy material. So he has to

word it so as to avoid the DIRs from cutting off his communi to other SH via annual proxy. (is allowing these proxy statements

a nuisance corp are already sending them + 500wdo Stat Book 998 $2000 or 1% counts as a qualified SH and must hold stock for at least 1 year.

CA, Inc. (B-235/S-990)(Persuasive Shareholder Communications/Not Precatory b/c amendment proposal to Bylaws SH can do only

for procedural) - AFSCME, CA, Inc. SH, submitted a SH proposalto amend CA's bylaws (proxy) to require that CA reimburse the

reasonable expenses incurred by a dissident nominating a rival slate of DIRs, provided that at least one nominee from the dissident

slate was victorious. Court: May BD exclude SH bylaw proposal by proxy under SEC Rule 14a-8(i)(SEC Act 1934) b/c illegal b/c

violates DIR FD under Del war? Yes, SH have right to propose & adopt bylaws, but SH proposal can't violate DE law. So here we

have conflict b/t SH amending & BD running company!!!


11/37

o Court makes distinction b/tprocedural& substantive changes to bylaws. They would have paid for one that pass.

Court determines that proposal (dealing w/ amending bylaws) was proper for SH b/c bylaws are intended only as

procedural means to run the business. SH, however, can't introduce substantive bylaws b/c would encroach on

BD's power. When theses recommendations win DIRs often follow them to avoid being booted. Institutional SH.

109 - allows SH to amend bylaws (to the extent that they conflict to DIR powers or AOI will be limited)

SH can put in to limit BOD but only as to process oriented things.) Here process b/c deals w/election DIR

141(a) - BD has authority over business of corporation (fyi. DIR can amend bylaws as well)

oProcedural bylaw proposed by AFSCME is overbroad & implicates substantive provisions that could prevent the BD from

carrying out its fiduciary duties. If you ask company to include an order in proxy- corp could exclude b/c 141a (SHcannot bind DRI unless says otherwise in AOI) & State law.

Question: what happens if the SH tie the BD's hands & prevent BD from doing something in the future that they

have a fiduciary to do? After case Del. Legis comes in and changes law to allow for this refund.

**** More Clearly: The CT held that the proposed bylaw is a proper subject for unilateral SH action b/c itrelates to the process of electing DIRs. However, the CT also held that the proposed bylaw as drafted isinvalid under Del. law b/c mandating the reimbursement of proxy expenses prevents DIRs from fully

discharging their fiduciary duties as they would be unable to deny reimbursement in situations where, intheir discretion, it is not warranted.

Pfizer Style Claim:Essentially as mechanism to be a middle ground b/t majority vote plan & plurality (more votes than anyone else -

default) in which if an incumbent DIR fails to receive the required vote for re-election (must resign), then AOI say w/in 90 days

following cert of the SH vote the Corp Governance Committee will act to determine whether to accept the DIRs resignation & will

submit such recommendation for prompt consideration by the board & will act on the Committees recommendation. Committee &

BOD may consider any factor they deem relevant in deciding to accept the DIRs resignation.

Kistefos (SH Majority Voting Bylaw v. Board Discretion) - P submitted a SH proposal to management to be voted on at the upcoming

SH meeting (the proposal was a tougher majority vote proposal than the Pfizer scheme the company had in place). The board opted

to exclude the proposal as inconsistent w/ the corps AOI & under state law. P sought an expedited hearing in order to address the

issue before the SH vote. What did Chancellor Chandler do? He refused to rule on the merits, allowing the vote to take place. If the

proposal failed, it would moot the issue. If it passed, the company could implement it.

Key is: They have Pfizer plan but propose to one up it by introducing a plan that would allow them to say that you failed to receive

majority vote therefore you cannot be on the BOD & if position held will immediately expire. Court: K's proposal should be

presented for a stockholder vote at T's annual meeting in the same manner as any other proposal.o

Court balanced Delaware corporations' interest in maintaining control over the annual meeting processv.SH interest inpreserving a meaningful opportunity to have their proposals considered by the electorate

oNewSEC Rule 14(a)-11 (2010 new rule in response to SH rights movement)- SH who own 1-5% of stock they can actually

nominate new DIRs and insist that company put own proxy selection at companies expense. Allow SH to place own

candidate. SH can still solicit themselves but they have to pay and follow disclosure reqs

Minimum 3% shares for 3 years - not intended for small-time SHs, but institutional SHs

Seems to democratize corporate voting, but most of the large SHs are other corporationsso voting may not

practically change much.

Previously, relatively difficult for a SH to get directors on the ballot b/c needed to work through the BD & get

information out to other shareholders with BD assistance

14a-8 cannot bind FD hand of DIRs here this immediate kill would not allow DIRs to make choices

Conservative Caucus v. Chevron (Access to Corporate Records - DGCL 220 "Proper Purpose") - CC (SHs) request corporation's

shareholder list & seek support for a resolution that Chevron terminate all biz in Angola unless the gov. "abandons the communistsystem." Chevron thinks they are just harassing SH. Court: Shareholder's proper purpose was to communicate w/ other SH about the

economic risks of doing biz in Angola.oSEC Rule 14(a)(7)-ordinary business proposal, SH can ask for assistance from corporation at their own expense, and still

allows management to keep proxy out. (CC only owned 30 shares so really this was political)(Here SH paid for proxy)

Possible way under fed law to get a SH list (this was a precatory suggestions as well like Lovenheim)

Ct:Proper Purpose Test As long as SH (must be a SH to even ask) has stated a proper purpose, any other

tangential purpose is irrelevant. (Not proper=Political, Harassing, Just causing drama but only need one proper)oBurdens of Proof - Corporation seeking to avoid a SH request for stock list has the burden to prove that SH is not

motivated by a proper purpose. Why is the burden of proof on Chevron in this case? Because DGCL favors providing SH

list by minimal burden of proof


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CC followed rules set out under DGCL 220 to request SH list, burden is on corp to show improper

purpose =relatively easy to get names of other SHs tofostercommunication

If SH wants corporation's internal documents, burden is on the SH =tougher burden to get access to

corporation's internal recordsoIf SH is only requesting SH list (stock ledger), hard for the corporation to show an "improper purpose"

May also be used as a litigation tool to gain access to corporate records if discovery is bogged down or improper

Westland Police & Fire Retirement System Del. 220: A recent Del. SC decision has significant implications for corps w/ majority

voting standards where incumbent DIRs fail to receive the req level of support & tender their resignations to the board ofDIRs.The decision, City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., provides SH w/a roadmap for inspecting

a corporations books & records after a BOD refuses to accept the DIRs resignations. D- Axcelis Technologies, Inc. (Axcelis)

followed the plurality voting provisions of Del. statutory law, under which a DIR may be elected upon receiving a plurality of votes

cast. See 8 Del. C. 216(3). Importantly, the Axcelis board of DIRs also had adopted a plurality plus governance policy, which

provided that any nominee in an uncontested election receiving a greater # of votes withheld than votes for his or her election

would be reqd to submit a letter of resig for consideration by the board ofDIRs. All 3 DIRs seeking reelection at the 2008 annual

meeting received less than a majority of the votes cast & in accordance with the plurality plus governance policy tendered their

resignations. The BD, however, decided not to accept the tendered resignations. Ct says show me evidenceno fishing expedition

Rule: The Court acknowledged that plaintiffs stated purpose for its Section 220 demandthe investigation of possible wrongdoing

or mismanagementwas a proper purpose, but held that plaintiff failed to present any evidence to suggest a credible basis from

which a court could infer possible mismanagement or wrongdoing that would warrant further investigation. MBCA 16.02

BUSINESS JUDGMENT RULE & DIRECTOR'S DUTIES

Business Judgment Rule - significant judicial presumption that corp DIR have acted in accordance w/ their fiduciary duties of

care, loyalty, and good faith to collective SH & corps = broad discretion given to corporate executives- TO OVERCOME P MUST

STATE FACT THAT WITH PARTICULARITY THAT WOULD CALL INTO ? WHETHER DIR ACTING IN BEST INTEREST OF CORP.

particularly they were acting in their own interest as opposed to corp. If it appears that DIRs are acting in their own benefit

then they no longer get the presumption.oRule that applies in litigation & very difficult to rebut

oTool courts use to avoid hindsight-bias in business decisions

Why do we have the business judgment rule?

Judicial efficiency - courts do law, not business experts

Deter frivolous lawsuits - shifts burden onto challengers, make sure suit is legit

"Business Judgment" is not black & white - hard to second guess a decision where reasonable minds canlegitimately differ

Hindsight Bias -past decision seems obvious nowbut wasn't so obvious then

Centralized management efficiency - if courts step in all the time, authority is shifted to SHs & courts

Risk-taking is desirable - business is an area where innovation is necessary, overcautious board is detrimental to

corporation as well

********

Shlensky(***Business Judgment Rule/Discretion to Determine General Business PolC) - P, William Shlensky, filed a derivative action

against D DIR, Phillip Wrigley, to force the installation of lights @ Wrigley Field for night Chicago Cubs baseball games. Problem here

for SH where not the majority & that someone else does, so have complete control. Although every other major league team had

installed lights, D did not install them at Wrigley Field b/c he was concerned that night baseball would be detrimental to the

surrounding neighborhood. Court: A court will not interfere with an honest business judgment absent a showing of fraud, illegality

or conflict of interest. Wrigley cited neighborhood concern Ps said whoa you worry about SHs!oBusiness Judgment Rule - judicial presumption that corporate directors have acted in accordance w/ their fiduciary duties

of care, loyalty, and good faith to collective shareholders & corporation = broad discretion given to corporate executives

(presumes DIRs are acting in best interest of corp, unless P can plead facts w/some particularity otherwise.

Court takes a strict view of the business judgment rule - no evidence of fraud, illegality, or conflict of interest, so

not going to overturn decision of executive

May be valid business reasons to protect the neighborhood, plaintiffs didn't prove W wrong (carry their burden)

Dodge v. Ford (Limit of Business Judgment Rule? -Executive Discretion to Consider Non-SH Interests) - Plaintiff SH, Dodge brothers,

brought an action against Ford Motor to force Ford to pay a more substantial dividend, & to stop Ford from hiring more EEs instead

of issuing dividends. Court: BJ Rule does not extend to the reduction of profits or the non-distribution of profits among stockholders


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in order to benefit the public, making the profits of the stockholders incidental to SH value. Court requires Ford BD to declare an

extra dividend of $19 million.As to price of car BJR but as to charity NOT BJR.Poor Judge.Freak of Nature Case --oThe purpose of a corp is to make a profit for the shareholders, but a court will not interfere with decisions that come

under the bizJ of directors. P claiming that Ford not paying dividends(@ all) to ANYBODY even when profit.

Because this company was in business for profit, Ford could not turn it into a charity.oExample of Biz J Rule, but unique b/c Court forced a dividend - dividends are normally business judgments themselves oCourt was willing to force dividend b/c Ford testimony that he was intentionally screwing Dodge Bros. by limiting Ford's

profits - semi-charitable institution now, but court forces to act like profit-making corporation

oNothing res corp to pay out profits in dividends even though this is kinda what Ct is saying (Fords testimony killed him)2 issues: He just sounded like he was hostile to profits probably could have phrased differently & won

Why are you cutting prices! Ford wants to spread wealth (better volume is better)

Why are you hiring people! Ford wants to expand plant (cut price more bought so more volume)

------------

DUTY OF LOYALTY & CORPORATE OPPORTUNITIES

Corporate Waste - an expenditure of corporate funds or a disposition of corporate assets for which no consideration is received in

exchange & for no business purpose. Narrow exception to the business judgment rule.oIrrational expenditure of $

oWonderful opportunity for the corporation which the BD rejects w/o explanationoVery difficult claim to bring b/c otherwise would gut business judgment rule

oOLD TEST WAS GUTH: Was it in line of business or if was did the corp have money to do it.

Northeast Harbor Golf Club (Corporate Opportunity Doctrine MBCA) - long-time DIR of golf course bought land adjacent to course &

the BD, after waffling for years over whether to purchase & develop the same parcel of land, objected. Court: Did the DIR usurp a

business opportunity from the golf club that she directed? No. The proper standard by which to judge a corporate opportunity is the

ALI test. Here Guth not applied (Oregan, Mass. & Maine adopted these persuasive ALI rules here)

oALI Corporate Opportunity Standard (law scholars)- provides a clear procedure whereby a corp officer may insulate

herself through prompt & complete disclosure form the possibility of a legal challenge = "vaccination"

Corporate opportunity (ALI) - opportunity that is 1) closely related to a business in which the corporation is

engaged or 2) one that accrues to the fiduciary as a result of her position w/in the corporation. Meinhard v.

Salmon-punctilio of a honor most sensitive (Cardozo). Meinhard was Pship. FD

The fiduciary must make a full disclosure prior to taking advantage of any corporate opportunity .oVarious Corporate Opportunity Analyses

Line of Business Test(DE)GUTH was interpreted by Del. Safe harbor if disclose, whether liable will

depend of factors above (#1) & one the corp could afford.Durfee Case "Fairness" Test Ct looked at this test & then said stupid test b/c TOTC to determine if "fair"

for director to take corp opportunity. What the fuck does this mean so gut this test.

ALI Approach - much more rule based, heavily emphasizes disclosure & Defines what counts as a

"corporate opportunity"

Imposes disclosure requirements on directors

Costs

Officer may miss business opportunity b/c mandates BD disclosure = slow

Disincentive to encouraging entrepreneurship & taking advantage of outside opportunities.

Benefits

Predictable

Heavily Incentivizes disclosure

Broz(Del Approach to Corp Opportunity Doctrine) Broz (B) owns RFBC & sits on BD of CIS, both phone companies. B devotes vast

majority of his energy to RFBC, simply sits on BD of CIS, which was fully aware of B's involvement in RFBC. B interested in purchasing

a cellular license for his personal business (RFBC), but license wasn't offered to CIS b/c offeror thought CIS wasn't financially capable.

PC (purchaser of CIS) claims B had a fiduciary duty to CIS and, as such, was reqd to look out for PC as the prospective buyer of CIS

when purchasing the cell license. Court: Did B violate a fiduciary duty to CIS (and successor PC) buy winning the bid on a contested

phone license for B's personal company, RFBC? NO (Key diff from NE Golf b/c he told 1st

rather than after) Ct would have preferred

he disclose in formal setting but upper ct said not reqd here and that fact he told cuts against bad faith. A little unclear in Del

whether this disclosure must be formal*** NE Harbor: Guth in MBCA was in line of biz & corp can afford..then ok. BUT HERE Del

said that in addition to line of biz + disclosure they add 2 more. BIG diff is this now a balancing test.IN NE Harbor was blk/wt.

oNew Guth Test = TOTC test (not so hard on DIRs but not so hard as ALI which force disclosure no matter what)

MayNOTtake opportunity if: Safe Harbor is Disclose but do not have to do it.

Corp. is financially able to exploit the opportunity


14/37

Opportunity is within the corp.'s line of business

Corp. has an Interest or Expectancy in the Opportunity (smthg like in their plans)

Corp. fiduciary would breach his duty by taking the opportunity as his own (at odds w/corp)

MAY take opportunity if:

Opportunity is presented to officer/director in individual capacity

Opportunity is not essential to corporation

Corp. doesn't have interest/expect opportunity

Officer/Director hasn't wrongfully used corp. resources to take the opportunity personally

oCase ApplicationOpportunity wasn't ever presented to B in his role as director of CIS - not offered to CIS at all

CIS lacked financial capability to take opportunity

CIS is moving away from similar business opportunities - divesting themselves of similar cell licenses

Parties knew that B was in similar business & court is not concerned w/ conflict b/c B didn't work for PC

Presentation to Board provides a powerful defense, but not an absolute requirement = divergence from

ALI approach- you mustpresent to boardDel-HERE is safety net but not dispositive.

8.7 MBCA Business Opp. a. is safe harbor if you present & they reject youre ok (but does not say what

is corp opp etc.but meat comes in under commentcorp opp stuff is hard/hem & haw

-----------------

COMMON LAW & DIRECTOR CONFLICTING INTEREST STATUTES

Conflicting Interest Transaction - where a director seeks to transact business with the corporation

Corporate Opportunity - where a director (fiduciary) seeks to take an opportunity from the corporation. (usurping)

*******

Globe Woolen (Common Law Conflicting Interest Statute) - GW sues UG for stopped delivery of electricity; UG says JM K'd unfair

terms w/ GW to provide E too cheap b/c JM is on both BDs. JM brought G's proposed K to BD of UG, presented "opportunity," but

abstained from vote. Market price of E provided to GW worth $69,000, but given K, UG actually owed GW $. Court: May UG elect

to void K with GW b/c inequitable & b/c JW was on both sides? Yes, the K is voidable at UG election b/c "unfair" to make UG pay

GW for E that is clearly undervalued & hostage to a one-sided K. CONTRACT VOIDED.oHistorical Common Law Rule: If director has conflicting interest, per se void b/c can't act as a loyal fiduciary. "Can't serve

two masters at the same time." = likely that outcome could be manipulated & not possible to be completely

impartial/neutralself dealing were voidable or void trans never happened as a matter of law.

A trustee may abstain from objection if K "fair," but has a legal duty to act if deal is "oppressive"

"Refusal to vote does not nullify an influence & predominance exerted w/o a vote."

Example of an Entire Fairness Analysis = close scrutiny & burden on director to prove fairness

oEntire Fairness Test (Modern) - Conflicted DIR has the burden of showing that the transaction was entirely fair to the

corporation = process leading up to the transaction & the substance of the K (he must show good deal then all is well)

Possible that having a DIR or officer on both sides can be fair, but a high risk that it's not = Entire Fairness

Standard is court's response

Why did the rule change? DGCL 144

Full disclosure gives others the opportunity to take subsequent risks into account

May be necessary to proceed - ex. only 1 supplier for specialty part

Economy became more complex b/c interrelated

oHYPO: Suppose that JM didn't know that he was going to change the way he produced wool? Probably doesn't matter b/c

JM still getting an unfair advantage over UG & JM must've known about the risk to UG

Court is concerned with ex postfairness & huge losses of gas company as well as ex ante unfairness of

bargaining process

Sinclair Oil(Conflict of Interest Transactions w/ a Controlling SH or "Parent" Corp.) - Sinclair Oil (S) owns 97% stock in Sinclair

Venezuela (Sinven; SV) & seats almost all members of SV BD - undisputed that S owes SV a fiduciary duty b/c of "domination" of

subsidiary. Issue 1: SV paid out huge dividends to SH, in excess of profits, arguably b/c S needed $, which hampered SV's expansion

effort. Issue 2: S caused SV to K w/ Int'l & agree to sell all of SV's crude to Int'l at specified prices. Int'l then breached the K by failing

to buy on time or at specified prices, but S stopped SV from pursuing payment from Int'l. Court: 1) Does the intrinsic fairness or

business judgment rule apply to dividends? Business Judgment; 2)Was SV contract with Int'l self-dealing by S? Yes, clearly S' act of

K'ing w/ dominated subsidiary was self-dealing. Parent is on both side of transaction here. Normally suits against DIR but focus on

parent here b/c DIR all work for the parent. Not self-dealing b/c both Party & SHs getting same benefit here not just parent.

Self-Dealing Test: if transaction involves a controlling parent on both sides & parent has received a benefit to the

exclusion of, and detriment to, the subsidiary's minority SH. If parent reaps no benefit from the subsidiary, then no self-

dealing = business judgment rule applies (Del. Can issue dividend out of profit or surplus to single class of SH)


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Normally SH are not fiduciaries, but dominating SH is a fiduciary

Case Application - In this case, S (parent) didn't get any benefit that didn't also accrue to SV (subsidiary) =

Business Judgment (BJ) rule applies

Clear instance of self-dealing, so Entire Fairness standard applies. - S is getting benefit from subsidiary Int'l to the

exclusion of SV shareholders

Special Rule - if SH dominates BD of subsidiary, put transaction to vote of minority SHs. (Citron)

Still a risk of retaliation by majority, so does not restore business judgment rule but shifts burden of proof

to minority to show unfairness

Example of court using self-dealing & fiduciary duties to protect minority SH from a dominating/controlling SH

Shapiro(Transaction with Controlling SH - Conflicting Interest Statute) - SH derivative suit by Greenfield (G) against Charles Shapiro

(S), operating officer for College Park Woods, Inc. (CP). Joint venture of S & J create numerous legal entities, ultimately CP ends up

w/ no mgmt or voting rights in new partnership, but is completely shielded from liability for any failures - attempt to attract new

investors w/ limited risks. Court: 1) Did S & J partnership usurp a corporate opportunity from CP? No, b/c not a "corporate

opportunity" that was taken, simply an interested director transaction. 2)Was there a vote of "uninterested directors"? Unsure, not

enough info from trial; remand. Can a trans be cleansed by a vote of disinterested DIRs

1.Conflicting Interests statutes updated to align w/ realization that a director's conflicting interests are not per se detrimenta

to his duties to corporation

Safe Harbor of Disclosure: Director may 1) fully inform BD and/or SH of his conflicting interest & allow

opportunity for ratification or; 2) Non-disclosed transaction may still be valid if "fair & reasonable to

corporation"

Ct remanded to see if transaction might have been cleansed by independent DIR (sister) to see if she is controlled by Sin

2.Interested Director Analysis - 1) is the director able to exercise independent judgment (JUDGMENT ABILITY) & 2) what is

the influence of the relationship on the director (RELATIONSHIP STATUS)?

Directors only required to avoid self-interested transactions that come at the cost of the corporation

When a director does not personally benefit from a transaction, but has a relationship to a party involved in

the transaction and, if the director's independent judgment is reasonably expected to be compromised,

director is an "interested party" = REASONABLENESS standardoInterested Director Analysis doesn't only rely on STATUS of relationship to director, but director's ability to exercise

INDEPENDENT judgment = would director be a neutral decision maker?

DGCL 144 - no conflicting interest transaction shall be void or voidable solely by reason of the conflict if the

transaction is 1) authorized by a majority of disinterested directors; 2) approved in good faith by the SH; 3) fair to

the corporation at the time authorized. No status-based disqualification based on family relationships, but director inter-relationships do matter in

conflict of interest cases.

Courts, however, have supplemented w/ additional conflicting interests that are not expressly defined in

DGCL 144

In Self Dealing you lose BJR but may win if you can show indi DIR approved or even if on both sides deal was good for Corp!

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Tracey Collins & Don Bridges:

CORPORATE DIRECTORS' DUTY OF CARE

Van Gorkom (Corporate Director's Duty of Care & Candor in Decisionmaking) - Trans Union (TU) was a publicly-traded, diversified

holding company that made its money on railcar leasing. VG, president of TU, unhappy w/ plan to keep acquiring other bizs to keep

TU's income up, met w/ Senior Mgmt. (SMgmt.) of TU & discussed options. VG unilaterally decided to meet with J. Pritzker (JP), a

well-known corporate takeover specialist & friend, to propose leveraged buy-out @ $55/share - VG acted w/o SMgmt. OK, tells one

TU staffer that ran some # to keep quiet. VG called a special SMgmt. & BD meeting - SMgmt. rejects plan, tells VG price proposed is

too low, R vociferously objects to merger as an "inside job" & a "lock-up"- probably want to keep their jobs. Court: Deal rushed over

a weekend meeting*** Leveraged buyout company takes on debt to buy then pay with co profits

oIs the business judgment rule applicable to the special meeting called by VG? NO

Business Judgment rule only protects INFORMED business judgments - did the directors inform themselves,

prior to making a business decision, of all material information reasonably available to them

Director's informed decision making derives from fiduciary duty - affirmative duty to protect interests of

other people's money by being informed

Under the business judgment rule, liability is predicated on GROSS NEGLIGENCE = also proper standard for

assessing whether BD made an "informed decision"

DGCL 141(e) - "Directors are fully protected in relying in good faith on reports made by officers." this

case b/c VG didn't give a "report"


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BD was completely uninformed of TU's intrinsic value good faithoAre any of TU's defenses appealing? NO, TU BD was grossly negligent in failing to act w/ informed reasonable deliberation

in approving JP merger.

BJ Rule "pierced" if mgmt. doesn't give BD an opportunity to make a reasoned decision

3.Did SH ratification cure BD of their lack of an informed decision? NO, only a majority ofINFORMED SH may ratify BD's

actions & TU SH were not fully or properly informed = BD breached fiduciary duty of candor to SH

Corporate directors owe fiduciary duty of "complete candor" w/ all material facts to SH

************

oLeading decision on corporate BD duty of care -plaintiff can get around business judgment, but must be gross negligence& only attack procedure of BD's decisionmaking, not substance

Two Fiduciary Breaches: 1)Duty of Care for Uninformed Decisionmaking (Bad PROCESS); 2)Duty of Candor for

failing to disclose material facts to SH before vote

Entire Fairness is often an available defense for BD to show that conduct was fair, even after business judgment

rule is breached

oModern SH Ratification of Board's decisions (Gantler v. Stephens):

SH votes do not extinguish the duty of care claim, BUT they may restore the business judgment ruleoHow do we know the directors have full satisfied their duty to be fully informed? Hard line to draw

Joy v. North - Corporate directors are NOT liable in negligence for breach of corporate duties = business judgment rule

oWhy is the Business Judgment Rule good?

SH voluntarily buy stock & take risks to make $ - invest somewhere else if you don't like risk

Business decisions are quick & ex post litigation doesn't work to accurately recreate -fear of hindsight bias

Point of a business is to take risks & be rewarded w/ $ - risks are in SH's interests (if personally liable will be too

cautious)oHuge losses are SH fault for not diversifying their holdings, "courts need not bend over backwards" to give SH special

protection who fail to protect themselves - SH "shouldn't put all their eggs in one basket"

oBusiness Judgment Rule is inapplicable when:

Business purpose for decision is lacking

Conflict of Interest

Corporate waste - "egregious no-win decision" for corporation

Obvious failure or lack of any management

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DIRECTOR EXCULPATORY PROVISIONS & DUTY OF GOOD FAITH -DGCL 102(b)(7)

Reaction toVan Gorkom Decision - surprised a lot of people in DE, uproar among corporate lawyers & boards of directors,destabilized BD duty of care law

Changed the Director & Officer (D&O) Insurance Market b/c made more expensive b/c director liability for their

decisions was put into flux

Lobbying by Corporate interests & Insurance companies got DE Legislature to pass DGCL 102(b)(7)

DGCL 102(b)(7) (Director Exculpation for Breach of Duty of Care) - limits or eliminates director's damages liability

for a fiduciary breach of duty of care, if put into Articles of Corporation.

Does NOT overrule Van Gorkom

Directors "not protected for acts or omissions not in good faith" - but what is "good faith"?

Most public companies now have an exculpatory provision in their charters

Can't exculpate the duty of loyaltyOR knowing violations of law

ONLY limits the risk of paying monetary damages to mitigate some uncertain personal liability risk to directors -

injunctions still possible for duty of care breach

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Malpiede p. st. 212 (Statutory Duty of Care Exculpation Provisions -Application of DGCL 102(b)(7)) - SH brought breach of

fiduciary duty & due care claims against corps BOD following a merger - BD agreed to a deal, but other parties offered more $ .

Court: Stockholders' claims were based solely on duty of care, & thus were properly dismissed once corps charter provision (DGCL

102(b)(7)) was invoked. (Diff from Van Gork b/c co here had lengthy sales process)(here they are saying you tied your hands to price)

But they adopted a exculpatoryclause in AOI that basically hold the DIRs harmless for breach of FD of Due Care. So limited in that

will not hold harmless for self-dealing etc. But duty of care is killed as long not self-benefit. You want RISK so need Rule.

Malpiede is useful b/c it gets rid of due care claim at the outset of litigation, but doesn't cover claims that are 1)

based in loyalty; or 2) when loyalty & care are intertwined =falls into different precedent

Defendants might FAIL to show that transaction was entirely fair, so TC deems it "unfair" & TC must make a

finding of what fiduciary duties have been violated (Emerald Partners)

Fiduciary Duty of Good Faith is now very important b/c ofDGCL 102(b)(7) - puts "good faith" into statute


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Caremark (Duty ofGood Faith in 102(b)(7)- Directors' Oversight Responsibilities) - Caremark International, Inc., provides health

care services to patients who are often referred to them by a Dr. Since the biz is reliant on referrals, there is a temptation by cos

such as Caremark to kickbck physicians. A FED law was passed to prevent such a kickbacks; Ps initiated this suit that year, alleging

that the BOD breached their duty of care by failing to put in place adequate internal control systems. This in turn was said to enable

the companys EEs to commit criminal offences, resulting in fines & penalties. Court: Did the BOD exercise an appropriate level of

attention (duty of care) to the possibility of ARPL violations? Yes, no evidence that the DIRs knew that there were ARPL violations, &

there was no systemic or sustained failure to exercise oversight - lenient settlement approved. Why did BJR not apply: b/c the DIR

did not know about this, you have to know in order to make judgment? You do not get BJR for non-action. Here P saying youfailed to act in making decision so no BJR. Failure to monitor ct says diff claim.

Ct said that 1. ) liability may result in BOD decision that results in a loss b/c decision was ill advised or negligent or 2.) from a

unconsidered failure of the BOD to act in circumstances in which due attention would arguably have prevented the loss.

As to 1. )(Act) will usually be subject to review under the DIR protective BJR assuming decisions was product of

process that was either deliberately considered in good faith or otherwise rational.(BJR = Process) Act in GF to

inform self, case over on Duty of Care.

As to 2.) (Fail to Act) inattention causes loss that is not from decision, but from unconsidered

inaction. "Absent cause for suspicion, there is no duty upon the DIRs to install & operate a corp system of espionage

to ferret out wrongdoing which they have no reason to suspect exists." (Graham v. Allis-Chalmers Mfg. Co., A 2d 125

(Del 1963))

Breach of "Good Faith" Test(stemming from a breach of Duty of Care)

Knew or should have known that EE were violating the law;

Declined to make a good faith effort to prevent the violation; &

the lack of action was the proximate cause of damages.

Breach of duty of care is more difficult to prove than a breach of the duty of loyalty. "A DIRs obligation includes a

duty to attempt, in good faith, to assure that corporate information & a reporting system, which the board concludes

is adequate, exists"

Central issue is: Whether to approve settlement. Ct lowered L fees . As this within the exculpatory clause? SH bring

derivative suit on behalf of co. Why bring suit if no money to get----b/c gets tons of work for lawyers b/c they get

attorneys fees. Caremark do not win failure to monitor case but ct says could have one we will not give BJR when no act

********

Expandedvision of the duty of oversight

Different Liability under Duty of Care

Van Gorkom - lack of care in making a decision

Caremark - unconsidered inaction/lack of oversight as a violation of duty of care -failure to monitor = the Board is

asleep

Now a duty on the Board to implement a reporting system to find out about significant problems, but the details of the

reporting system fall under the business judgment rule

If a plaintiff succeeds under the Caremark test, plaintiff has shown a lack of good faith (Stone v. Ritter)

Matters b/c DGCL 102(b)(7) only exculpates for breach of due care, NOT good faith or loyalty

Distinguishes good faith from loyalty

Showing a breach of the fiduciary duty of good faith is a way to bring a FD loyalty case - violation of good faith is a

way of showing disloyalty

Brehm v. Eisner"Disney Case"(DEL. Role & Nature of Substantive Review - Duty of Due Care, Good Faith, & Waste) - Ovitz (O), friend

of Disney CEO Eisner, was hired as Pres. despite his lack of experience running a corp - did have experience & connections in

entertainment industry. O's employment K gives O big severance pay if his Presidency was terminated for anything other than "good

cause" (gross negligence, malfeasance, or O's voluntary resignation). New BOD approve "non-fault" termination of O = O gets his

huge severance package. SH Argument - WASTE, b/c $140 compensation is "shocking" for 14 mos. work. Court: Does Disney BOD

decision to award O a lucrative EMP K w/ lucrative severance, & the new Board's approval of a "non-fault" termination of O's EMP,

constitute waste or a protected business judgment? Business Judgment, mere SH disagreement w/ BD decision grounds for

liability. The P want this to be like Van Gorkan (expert or process)-so no Excup or BJR protection

SH Argument #1 - BD violated its procedural duty of care in approving O's EMP agreement. No, BD relied in good

faith on their expert's opinions (DGCL 141(e)), no due care violation.

SH Argument #2 - OBD committed a substantive duty of due care breach & waste. No, no such thing as

"substantive duty of due care" violation = business judgment rule.

Waste Test - an exchange that is so one-sided that no business person of ordinary, sound judgment could

conclude that the corporation has received adequate consideration - transaction serves no corporate purpose &

is, in essence, a "gift"


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BJR absolves if any reasonable business basis for decision & the decision is made in good faith - waste is

"outer limit" of business judgment ("Unconscionable case where directors irrationally squander or give

away corporate assets.")

No such thing as "substantive duty of due care" - courts don't measure, weigh, or quantify directors' judgments

= duty of due care is PROCEDURAL only..makes no sense to ct b/c due care is process??? Caremark.

3. SH Argument #3 - NBD committed waste in giving O a "non-fault" termination. O should've been fired for cause (gross

negligence, malfeasance, voluntary resignation). No, BD had arguable grounds for the decision they made.

No gross negligence or malfeasance in O's performance - although O's presidency was disappointing, no gross

negligence or "cause" alleged******

o Case is an example of how Corporate Waste doctrine works & how hard it is for plaintiffs to claim - "shock the

conscience" standard

"Waste" is a test of irrationality, not simply bad judgment- Del cases do not lay out (FD-Loyalty/care)

Duty of Care is concerned w/ process of BD, not the substance of their decision (must show corporate waste),

BUTwaste is only area where court will look at BD's substantive decisiono Is the court right to say that a substantive due care claim is not available? Yes, to preserve the teeth of the business

judgment rule & keep from hindsight evaluations

In re Walt Disney(Del.Breach of Fiduciary Duty of What Good Faith Is) - Same facts as Brehm v. Eisner. SH amended their

complaint - BD approved O's contract w/o informing themselves of the full magnitude of possible severance payout to O = breach of

duty of due care. Court: Is intentional dereliction of duty, a conscious disregard for one's responsibilities, the correct standard for

bad faith corporate fiduciary conduct? Yes, hybrid/intermediate category of fiduciary misconduct is appropriate. o Breach of Duty to be Fully Informed Breach of Duty of Good Faith, but a Breach of Due Care

o What is a "bad faith" activity in the fiduciary duty of good faith? (Here did not satisfy DOC but no matter b/c excul)

Subjective Bad Faith - intent to do harm & clearly disloyal conduct

Lack of Due Care - no malevolent intent, but grossly negligent action

Without more, grossly negligent acts cannot necessarily be "bad faith"

3. Intentional dereliction of duties & conscious disregard for responsibilities - intermediate, hybrid category of

breach of "good faith" & due care

Fiduciary conduct which doesn't involve disloyalty, but is qualitatively more culpable than gross

negligence

Ex. Director acts contra to corporate interests, but does not personally gain from actionso Duties of "Due Care" & "Good Faith" overlap? NO, distinct categories

DGCL 102(b)(7) allows BD exculpation from breaches of duty of due care, but NOT breach of good faith =overlap would defeat statutory purpose b/c now alleged due care breaches (exculpatory) can be shifted into good

faith (non-exculpatory)

DGCL 102(b)(7)(ii) - legislative recognition of hybrid, intermediate category of fiduciary misconducto Breach of Fiduciary Duty of Good Faith

Middle ground is probably correct b/c duty of loyalty already covers subjective bad-faith & duty of due care

covers lack of due care - if they made a new category, it needs to fit in among the others

More than gross negligence - must be intentional or deliberate acts (Maybe Van Gork was unCon breach)

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