Businses Law Slim Outline

8/18/2019 Businses Law Slim Outline

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Liability to third parties in CONTRACT

o What authority does the agent have?

Actual authority (R7): the power of the agent to affect the legal relations of

the principal by acts done in accordance with the principal’s manifestations ofconsent to him

• ccurs when the principal tal!s to the agent"• #$press actual authority (R%&): authority to do an act can be created by

written or spo!en words or other conduct of the principal which'reasonably interpreted' causes the agent to believe that the principaldesires him so to act on the principal’s account

• mplied actual authority (R*): unless otherwise agreed' authority to

conduct a transaction includes authority to do acts which are incidentalto it' usually accompany it' or are reasonably necessary to accomplishit

o What was it reasonable for the agent to believe? +onsider:

,he agent’s understanding of his authority

-ast and present conduct of the principal toward the

agent ,he nature of the tas! or .ob

-rior similar practices

/pecific conduct by the principal in the past permitting

the agent to e$ercise similar powers Apparent authority (R0): the power to affect the legal relations of another

person by transactions with third persons' professedly as agent for the other'arising from and in accordance with the other’s manifestations to such third parties

• ccurs when the principal tal!s to the third party" Was it reasonable for the third party to believe that an agency e$isted?

• +an e$ceed actual authority

• /ome disagreement between /econd and ,hird restatement regarding

how direct the holding out by the principal has to be"o /econd Restatement: if there is no statement made by the

principal to the third party' there is no authority"o ,hird Restatement: broader view" f the principal puts an agent

out there' he holds out to the world that the agent is capable ofdoing things"

nherent authority (R0A): indicates the power of an agent which is derived not

from authority' apparent authority or estoppel' but solely from the agencyrelation and e$ists for the protection of persons harmed by or dealing with aservant or other agent"

• /ometimes the law protects third parties in situations where it seems

unfair to allow the principal to escape liability"

• ,he 1dumping ground2 if there is a perceived in.ustice


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• Was it reasonable for the third party to believe that they are dealing

with an appropriate person?o #$ that would not be reasonable: A car vendor comes into a bar

and thin!s that the bartender has the authority to buy 34 millionworth of cars"

o f actual' apparent' and inherent authority do not e$ist' two other concepts may helpcreate liability:

Ratification (R0%): the affirmance by a person of a prior act which did not

bind him but which was done or professedly done on his account"

• #lements to ratification:

o ntent to ratify

o 5nowledge of the facts

o After these elements have been met' +6/#R acceptance of

the benefits ,he person must have the ability and time to re.ect the

benefits" ,here must be a fair opportunity to decidewhether to accept them"

• f ratification is found to occur' it acts to signify that it’s as if agency

had been established from the outset8from the transaction itself" #stoppel (R09): f a proprietor' through dereliction of duty' allows someone to

act as if he were an agent' the proprietor is liable"

• #lements to estoppel:

o Act or omission of the principal that creates the appearance of

authority in another o ,he third party must reasonably and in good faith have acted in

reliance on the appearance of authority"

o ,he third party must change position in reliance' to herdetriment"

Liability to third parties in TORT

o oes the principal have sufficient ability to control how the tas! is performed?

o -olicy behind ma!ing masters liable for their servants

f the #R has the right to tell the ## what to do in his .ob and the ## does

something wrong that in.ures someone' the #R himself should ta!e theresponsibility"

nnocent victims should be compensated from the deep poc!ets of principals'

who should !now that they ta!e on liability and that accidents happen"-rincipals should !now to get insurance"

• +ounterargument: f the principal can’t assert a defense that he was

overly careful in hiring' training' etc"' there will be no incentives for principals to e$ert this care"

o Rules

R%: aster' servant' independent contractor:


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• A master is a principal who employs an agent to perform service in

his affairs and who controls or has the right to control the physicalconduct of the other in the performance of the service"

• A servant is an agent employed by a master to perform service in his

affairs whose physical conduct in the performance of the service is

controlled or is sub.ect to the right to control by the master"• An independent contractor is a person who contracts with another to

do something for him but who is not controlled by the other norsub.ect to the other’s right to control with respect to his physicalconduct in the performance of the underta!ing" ;e may or may not bean agent"

R%%


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-olicy reasons against this concept: f we loo! at it too broadly such that a

franchisor is liable for every tort of his franchisee' this reduces the incentive touse franchise agreements in general" ,herefore' large corporations willtentacle>li!e plant its own branches"

• R%&7: apparent agency: one who represents that another is his servant

or other agent and thereby causes a third person to .ustifiably rely uponthe care or s!ill of such apparent agent is sub.ect to liability to the third person for harm caused by the lac! of care or s!ill of the one appearingto be a servant or other agent as if he were such

• +rucial test:

o Whether the putative principal held out the third party as an

agent ando Whether the plaintiff relied on that holding out

Scope of employment

o R%%0: @eneral statement for scope of employment doctrine:

+onduct of a servant is within the scope of employment if' but only if:

• t is of the !ind he is employed to perform

• t occurs substantially within the authoried time and space limits

• t is actuated' at least in part' by a purpose to serve the master (the

most important factor a!a 1otive ,est2)

• f force is intentionally used by the servant against another' the use of

force is not une$pectable by the master +onduct of a servant is not within the scope of employment if it is different in

!ind from that authoried' far beyond the authoried time or space limits' ortoo little actuated by a purpose to serve the master

o Other factors to consider: similarity to acts which the servant is authoried to

perform whether the act is commonly performed by the servants the e$tent ofdeparture from normal methods whether the master would reasonably e$pect thatsuch an act would be performed

o Minority test !oreseeability8Budge Criendly’s approach

o "resently interfering test: f the - was presently interfering with the servant’s ability

to do his .ob for the master' the master is liable"o Agruello v" +onoco: even with violations of statutory law' you can still create agency

such that the servant is liable

#ndependent contractors

o R%4: f you hire an independent contractor' you can also be liable for what that

person does"o Where there is an independent contractor' the law will still hold the principal liable

for the torts even if the standard analysis is that the servant has to have control overthe daily operations C:

(4) ,here is an inherently dangerous activity

• #$: swinging a wrec!ing ball in a crowded city

• RD4&: nherently dangerous activity


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(%) ,he independent contractor maintains control over one particular aspect to

a great degree () ,he principal has hired an incompetent independent contractor"

• Eou must negligently hire an independent contractor to be liable for

this"

!iduciary obligations of agentso Why have fiduciary duties?

#conomic efficiency: create a generalied duty of obligation so that the agent

may fill in for any issue that ariseso Three main duties

uty of care and s!ill (R7F)

uty of obedience (R0*)

uty of loyalty (R%07)

• 5eep the business’s actions confidential

• o not profit using the principal’s materials

o What if the parties don’t put a loyalty clause in their contract? t may not matter" f a duty of loyalty is breached in such an egregious

manner' a duty of loyalty may still be found to have been breached"

• #$: f ,om +lancy enters into a contract with a publisher under the

agreement that there won’t be a duty of loyalty to that publisher' andthen goes out the ne$t day and partners with a competitor publisher'the duty of loyalty may still be breached: 1no duty of loyalty2 may notmean that ,om could go out and do what he did"

• 9e specific in your contractsG

,he Restatement %d is overly broad for its use of 1unless otherwise agreed2:

this gives the parties much fle$ibility to tailor their relationship" ,he Restatement d is more specific and gives better guidance: 1+onduct that

would otherwise constitute a breach of duty does not constitute a breach ofduty if the principal consents to the conduct' provided that the principal’sconsent concerns either a specific type8act8transaction' or acts of a specifiedtype that would ordinarily be e$pected to occur"2

• Reinforces the idea that fiduciary duty H duty of loyalty

o uties IR6@ agency

,he duty of loyalty is one>way: the master does not owe any duty of loyalty to

the servant" oney earned using principal’s clothing belongs to principal: Reading v"

Regem• Where a person’s employment is the sole cause of his personal profit

and he obtains it dishonestly' this is an advantage that he is not allowedto !eep" ;ere' the soldier breached his duty of honesty and good faith"

• Where the employment is 6, the sole cause of the personal profit'

the profit does not necessarily belong to the principal" (i"e"' eansgrows B in his office in the law school his position as professor probably is not the sole reason he profits from this side business)


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• #ven where the master is not harmed by the conduct (the court uses

the e$ample of the servant who e$ercises the government’s horses and profits from it as well by giving rides)' it is still a violation of theagent’s duty"

oney gained from 1secret side service2 belongs to principal: @eneral

Automotive v" /inger o uties AC,#R agency

Ways to terminate agency

• R440: +ommunication from - to A or A to - saying that the

relationship is over terminates the agency" Without consent' agencyfails"

o /uch a communication may ta!e away actual and implied

authority' but apparent authority may still e$ist" ,a!eaffirmative steps to notify third parties"

• ,he purpose of the agency has been accomplished

• ,he passage of time can end agency if that has been provided for

Agent may not solicit the clients of his former boss: ,own and +ountry ;ouse

v" 6ewberry RF&: Ising confidential information after termination of agency

• As long as the former employee contacts people that he !new' that is

fine" ;owever' if he ta!es a printed8written list and contacts everyonewhether he !new them or not' that is wrongful"

o RF&(b) draws the distinction here

• Joo! to the circumstances of the departure and see what it would have

been reasonable for the agent to ta!e with him when he left

-AR,6#R/;-/

• -artnerships are controlled by the $niform "artnership Act %$"A&' which contains the

default rules of partnership"

• "artnership (defined) I-A &(A): An association of two or more persons to carry on as co>

owners a business for profito 1-ersons2 may be corporations

• +reation

o A general partnership does not re=uire written documentation: it can be formed 1by

accident2

o I-A 7: Rules for determining the e$istence of a partnership ,he sharing of profits is prima facie evidence' but not if the profits were

received in payment as:

• ebt installment

• /alary or rent

• Widow’s annuity

• Joan interest (even if variable)


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• +onsideration for sale of property

,he person attempting to establish partnership will have the burden of

evidence proving it"o Cactors ta!en into consideration in determining the e$istence of a partnership:

,he intent of the parties

A right to share in profits An obligation to share in losses

,he ownership and control of the partnership property and business

+ommunity power in administration

,he language of the agreement

+onduct of the parties to third persons

"artnership by estoppel

o Eoung v" Bones

I-A 4&: When a person who represents himself' or permits another to

represent him' to anyone as a partner in an e$isting partnership or with others

not actual partners' is liable to any such person to whom such representation ismade who has' on the faith of the representation' given credit to the actual orapparent partnership" #lements:

• Representation or holding out by person (or with consent) and

• ,hird party reliance that causes damage (giving credit to the actual or

apparent partnership)

• Ciduciary obligations of partners

o I-A %4: -artner accountable as a fiduciary

6o secret profits

Anti>theft provision

f you’re a partner' you can’t steal something that belongs to the partnership"

o Waiver of fiduciary obligations

As a blan!et matter' you cannot waive fiduciary duties" ;owever' you may

specify that certain actions will not violate those duties" (e$: 1+ompetingventures do not violate fiduciary obligations"2)

-olicy: it’s better to have gap>filling norms that insert fiduciary obligations

• A limited partnership must be formally created: the general partner

has all the liability' while the limited partners loo! li!e shareholders inthat they are passive and protected" ,he limited partners must notcontrol the business their role is only to put in money" ,he @- willactively manage the business"

•Ratification is a potential solution to the problem of fiduciary duty:the @- owes fiduciary duties and cannot benefit at the e$pense of the partnership without violating that duty I6J#// the disinterested partners ratify the action"

• A partner who see!s a business advantage over another partner bears

the burden of showing complete good faith and fairness to the other"

• Accountability of partners

o I-A 4: -artnership bound by partner’s wrongful act


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Where' by any wrongful act or omission of any partner acting in the ordinary

course of the business of the partnership or with the authority of his co> partners' loss or in.ury is caused to any person' the partnership is liabletherefore to the same e$tent as the partner so acting or omitting to act"

/ome firms are JJ+’s such that not all partners are liable for everyone else in

the firm"o I-A 40(b): Rules determining rights and duties of partners

,he partnership must indemnify every partner in respect of payments made'

and personal liabilities reasonably incurred by him in the ordinary and properconduct of its business or for the preservation of its business or property

• Ciduciary obligations when partnerships end

o I-A %F: -artnerships are not permanent and can be dissolved' unli!e corporations"

-artnership dissolves if any partner leaves"o I-A %


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• I6J#// no authority in particular matter and third party !nows"

o I-A 40(e): n the absence of an agreement to the contrary' all partners have e=ual

rights in the management and conduct of the partnership business' regardless of the percentage of control8capital they have put in"

o I-A 40(h): Any difference arising as to R6ARE A,,#R/ connected with the

partnership may be decided by a ABR,E of the partners" Any differenceaffecting a ma.or issue must be decided by a I6A6I/ vote"

16on>ordinary course of business2 decisions are those that all the partners

ma!e together" 6ote that you can contract around this for greater protection if you own' for

e$ample' F


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,he basic rule is that partnership dissolves if any partner leaves" (I-A %F)

issolution is different from termination" ,he partnership can continue even if

it’s dissolved" f the other partners decide that the partnership should no longer e$ist' creditors will be paid off' etc" before the partnership is terminated"

,ermination is more finite" ,his ma!es sense' because you wouldn’t want an

entire law firm ending with one partner’s e$it"o +auses of issolution (I-A 4)

#$press will of a partner

• #ither:

o Without violation (no definite term or underta!ing

accomplished) R o n contravention of an agreement (for the conse=uences of this'

see I-A 0(%)) n this circumstance' the partner has the power to

dissolve but not the right" As a matter of law:

• ,ermination of definite term

• 9usiness is unlawful

• eath or ban!ruptcy

• +ourt order

,he rules have two goals in mind:

• -reventing the individual partners from being trapped when they want

to e$it the investment

• Jimiting the ability of individual partners to use their power to e$it to

damage the partnership (or to threaten to do so in order to demande$tra benefits)

o ,he right to dissolve I-A %: (issolution by decree of court: ,he court shall decree a dissolution

whenever:

• A partner has been declared a lunatic or is shown to be of unsound

mind"

• A partner becomes incapable of performing his part of the contract

• A partner has been guilty of such conduct that affects pre.udicially the

carrying on of the businesso ,his is a fact>based in=uiry L whether or not the business has

been affected pre.udicially

• A partner willfully or persistently commits a breach of the partnershipagreement or otherwise conducts the business such that it is notreasonable to carry on the business in partnership with him

• ,he business can only be carried on at a loss

• ther circumstances which render a dissolution e=uitable

t’s not enough that the partners don’t li!e each other their behavior must

affect the operation of the business"


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A partner is always free to breach the contract and demand a winding up if he

wants it' but he will be liable for damages" A partner can terminate' but he isnot always entitled to a legal dissolution" ,he legal right to dissolution isconferred by the court"

• ,he I-A provides that a partnership may be dissolved by the e$press

will of any partner when no definite term or particular underta!ing isspecified"

• f the court were to accept the trial court’s reasoning that the

partnership was for a specific term' it would be going against theI-A’s default rules"

• f can prove that - acted in bad faith and breached his fiduciary

duties' the dissolution would be wrongful and - would be liable"

• - has the -W#R to dissolve the business because it’s at will' but he

would also have to show that he had the R@;, to do so"o ,he conse=uences of dissolution

f thin!s he was wronged' I-A 0(%) allows him to get damages:

• When dissolution is caused in contravention of the partnership

agreement' the right of the partners shall be as follows: ,he partnerswho have not caused the dissolution wrongfully' if they desire tocontinue the business in the same name' may do so: the other partnerswill have to pay damages"

• -ractice pointer: mplement a buy)sell agreement at the initiation of

the partnership that includes specifications for a future valuation' etc"

• -ractice pointer: When considering a possible dissolution of your

partnership agreement' thin! through all the hypotheticals of whatcould happen and what you would want as a result" t’s a good idea to

bargain in detail for what you want because' if you leave gaps' thecourt will supply terms8apply fiduciary duties"

+R-RA,6/

• @enerally

o odel +ode of 4F0D provides the governing statutes for corporations"

o Corporation: an artificial person under the law that has certain constitutional rights"

Inli!e a partnership which dissolves when a person leaves8dies' a corporation canlast forever L at least until it goes ban!rupt or is merged out" wnership is freely

transferable you can sell your shares"o +orporations v" partnerships

Cormality: Cormal creation is re=uired by state law" A corporation does not get

formed by accident" ,he corporation has a legal personality that gives it rightsunder the law" Articles of incorporation must be filed with the /ecretary of/tate" (you can form a partnership by accident no written agreementnecessary)


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Jimited liability: As a corporation' an investor is protected" #ven if the

corporation goes ban!rupt' the shareholders behind it are protected" (,hegeneral partnership does not protect partners and they are fully e$posed fordebts and liabilities of the partnership" ,hey can protect themselves throughinsurance")

,ransferability of ownership: Eou can sell your shares in a corporation" +ontinuity: ,he only thing a shareholder can do is leave" (n a partnership'

you always have the ability to dissolve it' even though you may have to paydamages")

+entralied management: /eparation of ownership and control" ,he corporate

forum is ready>made with an e$ecutive board already set out in law" (n a partnership' everyone controls")

+ost: /omewhat more e$pensive with annual filing fees' notification of the

annual shareholders’ meeting' etc" (Cor the partnership' the cost is


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• f you’re large' you may find which state law wor!s best for your

business" +onsider:o Which courts have the most e$perience with businesses of your

!indo Where is the corporate law bar the most sophisticated?

o Where are the filing fees the most reasonable?• #nternal affairs doctrine: if you want to !now what duties the

directors owe to the shareholders' you need to loo! to the law underwhich the company is incorporated

o n corporate law' =uestions arise about the duty of loyalty because people can ta!e

various roles within the corporation' but the courts are less strict than they are withagency law"

,herefore' if the 9oard of irectors agreed to enter a transaction with people

they are connected to' they may have breached the duty of loyalty by failing todisclose to shareholders' but the court will re=uire the board to show that therelationship was fair"

• -romoters and the corporate entity

o 9+A %"


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o #$: Eou’re a promoter and you hire a lawyer to complete the

articles of incorporation for you" ,he lawyer tells you theyhave been filed' when in reality they have not" f you’ve actedin good faith and have no reason to thin! that you are not acorporation' you will be treated as one"

o Inder de facto status' the shareholders are not personally liable Corporation by estoppel

o esigned to avoid windfall to a third party if the third party

deals with the corporation as though it’s a corporation and yetit isn’t' the third party cannot get an additional right that wasn’t bargained for"

• ,he corporate entity and limited liability

o 9+A &"%%: Jiability of shareholders

Inless otherwise provided in the articles of incorporation' a shareholder is not

personally liable for the acts or debts of the corporation e$cept that he may

become personally liable by reason of his own acts or conduct" ,his language is strong" -iercing the corporate veil and holding individual

shareholders liable is M#RE RAR#"

• -olicy: allowing corporations to shield their investors is a good thing

because it encourages growth of capital and allows us to put ourmoney in investments even if we’re not there to monitor it all the time

• Bust because the assets of one company may not cover the liability

does not mean that all of the corporations will be liable" ,here must besomething more li!e fraud or ine=uitable manipulation of the corporateform"

•

Where the parent so dominates the affairs of the subsidiary that it isessentially a 1dummy2' there may be liability because this ismanipulation of the corporate form" ,hat did not happen here"

• A piercing of the corporate veil is much more li!ely where there is a

co>mingling of assets" Although grossly inade=uate capitaliation is a factor in determining whether

to pierce the veil' it is not dispositive" ost courts re=uire that there be eithersome affirmative fraud or wrongdoing by the shareholder' or a gross failure tofollow the formalities of corporate e$istence' before the veil will be pierced"

• "iercing the corporate veil

o A properly>formed corporation will normally shield the stoc!holders from being

personally liable for the corporation’s debts" ,herefore' veil piercing is rare";owever' in a few e$treme cases' courts pierce the veil and hold some or all of theshareholders personally liable for the corporation’s debts"

o Meil piercing is e=uitable and fact>based"

Cactors that are important to a court’s decision to pierce include:

• Whether the case involves a tort or contract

o uch more typical to pierce in tort cases


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• Whether the stoc!holder had engaged in fraud or wrongdoing

• Whether the corporation was ade=uately capitalied

o +ourts want to see that the corporation was initially

inade=uately capitalied before piercing

• Whether corporate formalities were followed (i"e"' !eeping of minutes

at meetings' issuing stoc! certificates' having a separate ban! account)o Test for corporate veil piercing

/how unity of interest

• s there a separate ban! account?

• o we treat the corporate form in their respective form?

/how fraud or in.ustice

• /how that there’s a reason why the shareholder shouldn’t be able to

benefit from limited liability

• Reverse piercing: occurs when you can show that the shareholder is

not respecting the corporate formality by treating his other

corporations as his personal piggy ban!s you can go from theshareholder to the separate businesses' even if the separate businesseshad nothing to do with your in.ury"

,est for corporate veil piercing: A corporate entity will be disregarded when

two re=uirements are met:

• ,here must be such unity of interest and ownership that the separate

personalities of the corporation and individual no longer e$ist"(satisfied here archese used corporate funds to pay alimonycorporate formalities had not been maintained assets had beencomingled' etc")

• +ircumstances must be such that adherence to the fiction of separate

corporate e$istence would sanction a fraud or promote in.ustice (notsatisfied here)

,he court considers highly relevant the fact that set up a corporation

without giving it the capital that it would almost certainly need"o irect liability

f 9ristol has no legal duty to assure the safety of these products but

underta!es to do so and does a bad .ob' 9ristol will be responsible" When9ristol put its name on the label' it represented to the world that it had verifiedthe safety of the products"

o Meil piercing

A finding of fraud8misconduct is sometimes necessary to pierce the veil" 9ut'

when a corporation so controlled as to be the alter ego of its stoc!holder' thecorporate form may be disregarded in the interests of .ustice" Cactors thatshow that a subsidiary may be the alter ego of the parent corporation:

• +ommon directors or officers

• +ommon business departments

• +onsolidated financial statements and ta$ returns

• ,he parent finances the subsidiary


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• ,he parent caused the incorporation of the subsidiary

• ,he subsidiary operates with grossly inade=uate capital

• ,he parent pays the salaries and other e$penses of subsidiary

• 6o business e$cept that given to the subsidiary by the parent

• ,he parent uses the subsidiary’s property as its own

• ,he daily operations are not !ept separate

• /ubsidiary does not observe the basic corporate formalities li!e

!eeping separate boo!so Advice to give to clients to avoid veil piercing

bserve the formalities (i"e"' don’t comingle funds)

on’t act in bad faith (i"e"' observe the minimum insurance re=uirements)

• Jimited partners do not incur general liability for the limited partnership’s obligations simply

because they are officers' directors' or shareholders of the corporate general partner:Crigidaire /ales +orp" v" Inion -artners

o ,he law creates this mechanism whereby you can protect yourself as long as you

don’t ta!e an active roll" ;ere' ’s did not ta!e an active roll"o -ractice pointer: -’s could have ensured that ’s personally guaranteed the contract in

order to ma!e them liable"

Limited Liability Corporations

o @enerally

JJ+’s are neither corporations nor partnerships' but have aspects of both

/elect your own governance rules:

• ember managed (proportional to membership interest)

• anager managed

+an’t form one by accident Articles of rganiation are re=uired

perating agreement• a$imum fle$ibility v" cost of contracting

• efault rules:

o 6ew members need unanimous consent

o -artnership' flow>through ta$

o Jimited liability

o ,he main reason people choose JJ+ is to get the benefit of limited liability while

being able to choose the form of ta$ and the governance ruleso Meil piercing of JJ+’s

+ourts have e=uitable power to pierce the veil of an JJ+ but the various

factors that would .ustify piercing an JJ+ veil would not be identical to thecorporate situation for the obvious reason that many of the organiationalformalities applicable to corporations do not apply to JJ+’s"

o -ractice pointers: bserve the formalities and don’t act in bad faith (i"e"' observe the

minimum insurance re=uirements)"

/hareholder erivative Actions


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• efined: a suit in which the shareholder sues 1on behalf2 of the corporation' on the theory

that the corporation has been in.ured by the wrongdoing of a third person' typically aninsider" t may in theory be against anyone who has wronged the corporation' whether that person is an insider or an outsider"

o 9+A 7"D defines 1derivative proceeding2 as a civil suit in the right of a domestic or

foreign corporation 1shareholder2 includes a beneficial owner whose shares are heldin voting trust or held by a nominee on the beneficial owner’s behalf

• ,usiness +udgment rule: a strong presumption that the 9oard of irectors (9) acts in

good faith on behalf of the corporation and its business decisions are entitled tosubstantial8total deference by the court" Cor the court to counter this presumption' the - willhave to show:

o 9reach of fiduciary duty R

o ,hat the decision was so egregious that it led to a waste of corporate assets

• ;ow does a plaintiff shareholder get into court?

o 9+A 0"ta!eover defenses

• corporation fails to hold shareholder meetingso ,est for whether a suit is direct or derivative: if - is harmed on his own' he can sue

individually" ;ere' - claims that his voting interest has been impaired" ,he right tovote is a right that the stoc!holder has L he holds those rights" Joo! to see whetherthe corporation or the individual was harmed"

#$: A9+ board votes to eliminate all preferred stoc!" Eou' as a holder of

preferred stoc!' can sue directly because you have been directly in.ured"o erivative action: if the shareholder steps into the shoes of the corporation and sues

in the corporation’s own name A/5: /#,;6@ AA@# ,;# MAJI# C ,;# +-A6E?

#$amples:

• /uits for breach of 1duty of care2 or 1duty of loyalty2

• /uits against an officer alleging that he has usurped a corporate

opportunity

• #$cessive compensation

#$: f something happens to damage the value of the business itself' which in

turn lowers the value of your stoc!' you can sue derivatively" /o' if A9+’s


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treasurer embeles money and A9+’s 9 has not voted to authorie alawsuit against her to recover the money' you may sue derivatively"

erivative actions call for more stringent procedural rules

-olicy: if the 9 is doing something wrong' it needs to be corrected"

• +ounter: if shareholders can sue at their whim' this would undermine

the core principle of preserving the irector’s discretion to manage the business"

Re-uirements for bringing a derivative suit

o +ontemporary ownership rule (9+A 7"D4)

o emand on the 9 (9+A 7"D%)

,he - must ma!e a demand on the 9 that it bring suit"

o -osting bond

-olicy: posting bond discourages stri'e suits: because of the large waste of

senior management time when a suit continues through trial' management willoften be tempted to settle even suits that have little merit" ,his incentive gives-’s lawyers an incentive to bring stri!e suits L those that have little probabilityof succeeding on the merits but are troublesome enough to induce thecorporation to ma!e a settlement"

o (emand made

Accepted

Refused

• Wrongful

• 6ot wrongful

o (emand not made

#$cused

6ot e$cused

• ,he demand re=uiremento Inder the 9+A' you AJWAE/ have to ma!e a demand"

o Inder the 6E and # approaches' demand is a re=uirement unless it would ma!e no

sense because it would be futile" f you can show that the board has violated its business .udgment rule' you can pursue your claim without ma!ing a demand"

• ,he business .udgment rule applies unless the error is egregious here'

the merely high salary is not enough" f has made a demand to the board' which is not e$cused' he has conceded

that the board is independent enough to ma!e an appropriate businessdecision"

,o ma!e a claim for wrongful refusal' have to show with particularity that the

board acted without due diligence in ma!ing its decision to refuse the -’sdemand"

o ,he standard in # for when demand is e$cused is R#A/6A9J# I9, that the

9 is capable of ma!ing an independent decision to assert the claim if demandwere made"

o ,hree main reasons for re=uiring -’s to ma!e demands:

,o relieve courts from deciding matters of internal corporate governance


19/36

-rovide corporate boards with reasonable protection from harassment by

litigation on matters within the board of directors iscourage stri!e suits

o (emand futility e.ception: demand is e$cused if it would be futile in permitting a

shareholder derivative action to proceed because a demand on the corporation’s

directors would be CI,J#' the court substitutes its .udgment ad hoc for that of thedirectors"

o (/ approach: nce director interest has been established' the business .udgment rule

becomes inapplicable and the demand is e$cused without further in=uiry"o N0 approach: A demand would be futile if a complaint alleges with particularity that

4) a ma.ority of the directors are interested in the challenged transaction %) the boarddid not fully inform themselves about the challenged transaction to the e$tentreasonably appropriate under the circumstances' or ) that the transaction was soegregious on its face that it could not have been the product of sound business .udgment of the directors

• /pecial litigation committees

o 9+A 0"%*: +ommittees A 9 may create one or more committees and appoint one or more

members of the 9 to serve on any such committee (d) each committee may e$ercise the powers of the 9

(e) a committee may not:

• (%) approve or propose to shareholders action that this Act re=uires to

be approved by shareholders

• (D) adopt' amend' or repeal bylaws

o 9+A approach:

f the ma.ority of the 9 were independent' - had the burden of showing

bad faith and that a reasonable investigation was not made" f a ma.ority of the board were not independent' the corporation has the

burden of proving that a reasonable investigation was made and was done ingood faith"

o Cirst' the person bringing the motion (here' the corporation) must ma!e an initial

showing" Inder the 6E standard' this showing is that this is a disinterested andindependent board" After this has been shown' everything is the -’s burden"

o ,he business .udgment rule comes into play' and so the - must rebut this presumption

by showing that what the committee did was improper"

• 1apata Two2Step (which only applies where the demand has been e$cused):

o Cirst' the court should in=uire into the independence and good faith of the committee

and the bases supporting its conclusions"o /econd' the court should determine' applying its own business .udgment' whether the

motion should be granted" 6ote that this is a change" ,he court applies its W6 independent business

.udgment" +ourts rarely step in and assert their own .udgment' but this is oneof those cases where they do"


20/36

,he role and purpose of corporations

• $ltra vires doctrine: corporate actions that are beyond the corporation’s authoried powers

are void" ,he doctrine is of much less significance today than formerly"

• +haritable donations

o 9+A "


21/36

uties of officers' directors' and other insiders

Three basic fiduciary duties

o Joyalty A breach of this duty is almost impossible to show unless you can prove self

dealing' etc"o @ood faith

/ometimes considered to be a subset of the duty of loyalty

,o show that there has been a breach' you must show +6/+I/

/R#@AR of evidence of wrongdoing versight falls under this duty

o uty of care

,he directors and officers are supposed to use the care' s!ill' and diligence of

a prudent person in li!e circumstances ,o get past the business .udgment rule and to allege that there has been a

violation of the duty of care' you must show @R// 6#@J@#6+#"

• 9+A 0"


22/36

• uty of care

o ,he business .udgment rule is a bar to a court second>guessing a business decision" f

- can establish a breach of any one of the triads of the BOD’s fiduciary duty (goodfaith' loyalty' or due care)' the business .udgment protection goes away" 9ut' if the9 can show the entire fairness of the transaction' the board can still win"

o ue care is a type of procedural due care (the court avoids getting into the substance(i"e"' by as!ing whether the board settled on the right number))

id you loo! in the right places8tal! to the right people to inform yourself?

;ow did you get to your end result: did you negotiate8shop the offer around'

etc"? A potential downside of overemphasis on procedural due care is that it’s easy

to spend money on process"9+A 0"


23/36

• (a) Itter failure to implement reporting or other controls R

• (b) +onscious failure to monitor or oversee e$isting controls

• 6ote:

o negligence is not enough

o cannot ignore a red flag

#$: f you’re on the 9 and someone presents youwith a problem' you cannot refuse to loo! ino it"

o versight is part of good faith' which is a subset of the duty of loyalty: /tone v" Ritter

,he Articles of ncorporation e$culpate directors for violations of the duty of

care" ,herefore' they will not be personally liable" f they were to be personally liable' demand would be e$cused because the 9 would not beable to ma!e an independent and informed decision about whether the caseshould proceed" ;ere' however' demand is not e$cused"

,he e$culpatory clause will protect the directors from liability for breach of

due care' but not for breach of loyalty or good faith" Where directors fail to act in the face of a !nown duty to do so' thereby

demonstrating a conscious disregard for their responsibilities' they breachtheir duty of loyalty by failing to discharge that obligation in good faith"

n the absence of red flags' good faith in the conte$t of oversight must be

measured by the directors’ actions to assure a reasonable information andreporting system e$ists and not by second guessing after the occurrence of ##conduct that results in an unintended adverse outcome"

• What sort of actions may rise to the level of being 1red flags2?

o A single offense may not be a red flag' but it may if it is serious

enough"o A series of offenses may be a red flag"

• uty of loyaltyo Words associated with duty of loyalty

/elf dealing

• irector tailoring his own salary

+orporate opportunity

• f the director establishes a corporation rather than letting the business

have the chance +ompetition

• Inless a member of the 9 has had it specifically blessed' he is not

supposed to compete against the corporationo

"rocedure for establishing a violation of a duty of loyalty (o we have a duty ofloyalty5

+onflict

• 9oard or shareholder authoriation (must be material disclosure and

disinterested ma.ority)o f so' 9usiness .udgment rule restores"

• 6o authoriation

o demonstrates fairness


24/36

o does not show fairness

6o conflict

• 9usiness .udgment rule

,he # statute that provides that no contract shall be void because the

director is present at or participates in a meeting of the 9 which authories

the contract if the material facts regarding the relationship or interest aredisclosed and the contract is approved in good faith

,usiness opportunity doctrine

o @enerally

-eople would not be willing to serve on 9s if they always had to give

away every opportunity to the business" ;owever'' shareholders would notwant a rule that would allow directors to decide without constraint when anopportunity should be completely theirs"

Jaw8economics e$planation: -eople want a contract that imposes a fiduciary

duty on the directors such that they cannot ta!e for themselves what may bean opportunity for the corporation"

f the court finds that a corporate opportunity was usurped and that the ta!ing

was per se wrongful' the director will have to account to the corporation forany profits made and the venture may have to be handed over to the company"

o (/ test used to determine whether there was a corporate opportunity seied:

Whether the corporation has the financial ability to e$ploit the opportunity"

Whether the opportunity is in the line of business of the coroporation

Whether there is an interest or e$pectancy in the business"

Whether embracing the opportunity would create conflict between director’s

self interest and the corporation"o - must be able to ma!e a strong showing that the director has breached his fiduciary

duty" 9ecause -’s have alleged enough in this case' the burden is on the directors toshow that there was not a corporate opportunity"

o Safe harbor of the board*s blessing : A5# A CRAJ -R#/#6,A,6 to the

9

• ominant shareholders

o @enerally

/hareholders don’t owe fiduciary duties to the corporation or to each other

#N+#-, if they are controlling shareholders"

• ,his especially occurs when there is a parent corporation8dominant

shareholder and a subsidiary8minority shareholder"

• ,he dominant shareholder will have a fiduciary duty to the minority

shareholder that is essentially an anti>theft duty such that it can’t .ustta!e all for itself"

o -arent>subsidiary relations

,he fact that a parent has set subsidiary’s dividend policy does not necessarily

constitute fair dealing' but a breach of contract may constitute self>dealing:/inclair il +orp" v" Jevin


25/36

o Where the parent dominates the board of the subsidiary' this means that unless the

minority shareholders have been given a chance to ratify the self>dealing transaction'they can have the court stri!e the transaction if it is unfair to them" n fact' once theminority has shown self2dealing4 the burden shifts to the parent to show that it

was fair"

o A irector is entitled to the business .udgment rule if -’s cannot show that thedividends resulted from improper motives and amounted to waste"

o The intrinsic fairness standard applies when the parent has received a benefit

6to the e.clusion and at the e.pense of the subsidiary78

o As long as everyone receives their proportional shares' there is no self>dealing"

o Avoid being sued by:

#nsuring that they were mindful of the rule of no disproportionate benefits

and respecting the corporate identity by being cautious in appointing directors 9uying out the K minority shareholders

Appointing' for e$ample' two neutral directors per year to evaluate decisions

neutrally and ta!e a loo! at the special issues that arise

• uty of complete disclosureo -ar value: the articles specify that the corporation will not sell the shares for less than

the amount of money specified per shareo ,ypes of stoc!

Common stoc'

• shareholders have a right to the residual value of the company' either

in dividends or dissolution

• ;olders get to vote on 9' mergers' etc"

"referred stoc'

• /hareholders have some preference over common stoc! holders L

normally a right to special dividends that are paid before the commonstoc! gets paid"

• 9ehaves more li!e a debt

• ;as a fi$ed rate of interest that gets paid to whomever buys the stoc!

• ,he price doesn’t fluctuate nearly as much as regular stoc!

• f the company goes ban!rupt and li=uidates' the preferred

stoc!holders get paid before the common stoc!holders"

• A less ris!y investment than common stoc! because it has less

volatility and less downside in a ban!ruptcy Cumulative stoc'

•

+umulative dividends: if the corporation is unable to ma!e dividend payments' the payments accrue so that you’re entitled to the lump sum payment of all dividends

• 6on>cumulative dividends: if the corporation is unable to ma!e the

dividend payments' you won’t get the money that year and you don’thave a right to it in the continuing year

Convertible stoc'

• A type of preferred stoc!


26/36

• At the election of the shareholder' it can be converted into a different

!ind of stoc!" ,his allows the holder to capture the upside of commonstoc! if the stoc! really ta!es off' while still maintaining the less ris!ystructure of preferred stoc! if they choose not to convert"

• A holder can convert his preferred shares into common at what is most

li!ely a lower price than it trades at currently' and then sell it at thehigher trading price"

• -eople are often willing to pay a premium for it because it offers a lot

of fle$ibility and room for advantages Redeemable stoc'

• ,he 9 can e$ercise its option to 1call2 the stoc!

• ,here must be some sort of incentive (such as discounted rate or

higher interest rates) to buy this because it carries with it the ris! thatthe 9 may at any time redeem8call it bac!

o +ontrolling shareholders must ma!e full disclosure to their fellow shareholders when

they propose a transaction with those fellow holders"o When dealing with classes of stoc!' the directors* primary fiduciary duty is to the

common stoc' : if other classes of stoc! e$ist' they e$ist on more of a contract basis"

/ecurities Jaw

• What is a security?

o Any investment contract in a common enterprise where a third party is meant to

produce profits for the investor"

• ,rading in corporate securities ta!es place in two mar!ets:

o "rimary mar'et

ssuer of securities sells them to investors

Regulated by the Securities Act %9:;;&

• andates disclosure of material information to investors and

prevention of fraudo Secondary mar'et

nvestors trade securities among themselves without any participation by the

original issuer Regulated by the Securities /.change Act %9:;


27/36

• Rule 4*

o ,he te$t: t is unlawful for any person to"""

#mploy any device' scheme' or artifice to defraud

a!e any untrue statement of material fact or omission that renders a

statement misleading

#ngage in any conduct that would operate as a fraud upon any person inconnection with the purchase or sale of any security

o n 4FD%' /#+ enacted this to prevent insiders from ma!ing e$plicit fraudulent

statements to investors about how badly the company was doing' so that the investorscould buy up the shares cheaply"

o ,here must be a misstatement or omission of a material fact in connection with the

purchase or sale of a security" f this e$ists' there is a private right of action" ,his covers anyone who ma!es a misstatement in connection with a security

it’s broad and covers a lot of conduct"o Re-uirements for a 9=b2> private cause of action

Craud8scienter

• ntention to defraud

• Re=uires more than negligence

• -’s must be able to allege with specificity that ’s acted with the

re=uired state of mind -ro$imate cause

• ,he fraud caused the damages

ateriality

• ,he Basic case below outlines the definition of 1material2

• /tandard: if there is a substantial li!elihood that a reasonable

shareholder would consider it important in deciding whether to buy'hold' or sell the stoc!"

• ;ighly dependent upon the facts

Reliance

• Reliance is presumed in cases where the fraud is one of //6"

o An investor cannot prove that she relied on a statement that

was never made"

• Where securities fraud is based on a //,A,##6,' the investor

ordinarily must prove that she reasonably relied on the misstatement"

• -laintiffs may be able to establish reliance through the use of the

fraud on the mar'et theory: 1When purchased8sold stoc! in N

corporation' relied upon the current mar!et price being a fair one thatreflected all !nown information" When made a misstatement to the public about N’s prospects' his wrongdoing made the price differentform what it would have been had he fulfilled his obligations",herefore' when bought8sold on the mar!et price' paidmore8received less because of ’s wrongdoing' and my loss wascaused by that wrongdoing"2


28/36

,his creates a presumption of reliance on ’s

misleading statements' since the efficient mar'ettheory posits that the publicly traded stoc! incorporatesall available information"

,his is what happens in Basic

#nformation is material to investors if there is a substantial li'elihoodthat a reasonable shareholder would consider it important in deciding

whether to buy4 hold4 or sell the stoc' " Where it’s uncertain whether the merger will actually happen' apply the

probability)magnitude approach: balance both the indicated probability thatthe event will occur and the anticipated magnitude of the event in light of thetotality of the company"

,his is a loose' hard>to>apply standard"

There is no affirmative duty to disclose" ,he fact that information is

material does not mean that directors have a duty to disclose it" Ees" (R#JA6+#)

!raud on the mar'et theory: As long as the information is out there on themar!et where a sophisticated investor can find it' the mar!et price will movein the direction of a price that incorporates all publicly available information",herefore' it created a situation in which everyone relied"

-roblems of +ontrol

• -ro$ies' generally

o A pro.y is a document whereby the shareholder appoints someone (usually

management) to cast his vote for one or more specified actions" t is a !ind of agencyrelationship in which the owner of the shares gives someone else the right to vote it",he pro$ygiver consents to the pro$yholder’s voting on her behalf"

,he person at the shareholder meeting votes by pro$y for someone who isn’t

at the meeting" 6o individual shareholder is li!ely to show up at everystoc!holder meeting"

o Why do publicly held companies solicit pro.ies?

9ecause few individual stoc!holders show up"

,he annual stoc!holder meeting is re=uired by law to have a =uorum' which

can be set by the articles of incorporation but by default has to be a certain percentage of the stoc!holders"

o

When do shareholders vote? +orporations must hold annual shareholder meetings

/pecial meetings can be declared

• Cor e$ample' if a merger were on the table

• /hareholders that hold at least 4


29/36

What can a shareholder do if she opposes a course of action?

• Mote against it

• /ell his shares

• issenters rights to get shares appraised

o ifficult remedy lots of procedural hurdles

o ;ow are shareholder votes counted? ne vote' one share

o ;ow is a pro$y solicitation regulated?

Rule 4D(a) of Cederal /ecurities Jaw

• -ro$y fights

o /hareholder democracy is used as a tool to constrain the management’s ability to do

certain things by replacing management"o #nsurgents want pro$ies returned for their slate of candidates" f the incumbent

directors aren’t doing what they thin! is in their best interest' one way to change it isto elect new directors"

o Cederal rules on pro$y fights Inder Rule 4Da>7' the firm can choose to either mail your material and bill

you for the costs or to give you the shareholder list instead" 6othing in federallaw re=uires the firm to give you the list' but you still have your rights understate law"

o ,he reality: pro$y battles are rare and e$pensive

,he incumbent slate of directors will almost always win"

,hey are too e$pensive the easier thing is for the shareholder to e$it the

corporation" f you’re a shareholder and you thin! the business would be worth more under

different management' even if you’re right' that money will not actually

benefit EI L it will benefit other people and your value of shares will onlyincrease slightly"

• +ollective action problem

A better strategy is to ma!e a tender offer: try to ta!e over the business at a

premium to capture all the benefits

• /trategic use of pro$ies and reimbursement"

-rovide interpretive guidance to private parties raising

=uestions about the application of the securities laws toa particular transaction

Advise the +ommission as to new rules or revisions of

e$isting rules nvestigates and prosecutes violations of the securities

laws

• ,he e$isting 9 may use corporate funds for a pro$y battle: Jevin v" @

• ncumbents have a right to be repaid whether they win or lose' as long as the pro$y battle is

on a policy (and not a personality) issue: Rosenfeld v" Cairchild


30/36

o 9ecause secured shareholder ratification' the business .udgment rule serves to

protect it" ,he presumption is that the 9 made a business decision in the bestinterest of the corporation"

o f the insurgents win' they still don’t have a right to be paid' but it may be appropriate

if they get shareholder approval on full disclosure"

o ,he corporation can only reimburse R#A/6A9J# #N-#6/#/ in a pro$y contest" #$ample: ta!ing important institutional investors out to dinner is reasonable

• /hareholder proposals

o ften used:

,o re=uire that all directors be elected annually

,o cultivate voting to prevent the same person from being the +# and

+hairman of the board ,o remove poison pills: methods a public company uses to deter hostile

ta!eovers

• -oison pills are normally things li!e clauses in the charter agreement

that create some sort of overwhelming event that prevents a hostileac=uirer from achieving a ma.ority holding" ,hey ma!e attemptedta!eovers more e$pensive"

o #$: +lause that states that' if someone buys in and owns' for

e$ample


31/36

• 9road proposals are better than specific ones that could be attac!ed as

interfering with management Reasons for e$cluding a proposal (#N+#-,6/):

• ,he company can omit any proposals that

o """Relate to less than *K of its total assets and sales A6

o s not otherwise significantly related to the business ,his is not a strict 1economically significant2 test"

o """are improper under state law

o """would cause the company to violate any state' federal' or

foreign law to which it is sub.ecto """are a violation of pro$y rules

o """are a personal grievance or special interest

o """are irrelevant

o """have an absence of power8authority

o """relate to management functions

o

"""relates to election (specific election for a specific seat)

/hareholder inspection rights

• @enerally

o ,here is nothing in the federal pro$y rules re=uiring a corporation to give a

shareholder the shareholder list' but the federal rules do not impair any rights theshareholder may have under state law" 9attles for the list are fought under state laws"

o #$change Act 4D>a

@ives the shareholder two options if he wants to send out a proposal:

• ;e can as! the corporation to mail it at his e$pense R • ;e can as! the corporation to provide him with the list of all

shareholders"o ost corporations don’t want to part with the list

oes not address what records must be !ept or when shareholders are entitled

to inspecto odel +ode 4&"


32/36

prove a proper purpose to inspect records ,;#R than shareholder lists" t isthe corporation’s burden to show that the purpose for re=uesting shareholderlists is not proper"

• ,he shareholder is presumptively entitled to receive the shareholder

list"

o t’s easy to produce"o ther records may involve the compilation of data that aren’t

already in list form other information may be sensitive or private shareholders could be trying to ma!e political pointsand not be focused on the value of the corporation"

- does not get the list here because his focus is on being an activist L not on

the business" ;e would need to prove an investor purpose"

• ;e could do this by arguing that whatever profit the company is

ma!ing in producing fragmentation bombs is outweighed by having itsname attached to the bombs"

o ,he internal affairs doctrine: the law of a corporation’s state of incorporation

governs the internal affairs (i"e"' voting rights' fiduciary duties) of the corporation" Access to shareholder lists is an #N+#-,6 to the internal affairs doctrine'

because here' law would control L not 6E law" 6E law only controls here because there are 6E shareholders whose interests need to be protected"

+lose corporations

• +ontrol and close corporations

o Close corporation: a corporation that does not have publicly traded stoc!

,ypically consist of only a few family members and friends

/ome .urisdictions specify an actual number of shareholders (i"e"' # law

specifies


33/36

7"4: Moting agreement

• Alternative to the voting trust

• ,wo or more shareholders may provide for the manner in which they

will vote their shares by signing an agreement for that purpose" Avoting agreement is not sub.ect to 7"


34/36

how A divides up his %4& votes (7% shares $ seats)' he cannot come up withthree candidates all of whom beat 94"

o ;ow to avoid the problem to ma!e the vote that was supposed to happen binding and

enforceable: - and rs" ;aley could have made this enforceable by a voting trust: under

this' a trustee has the power to vote the shares' which eliminates the problemof people who decide to breach the agreement"

• ownside: as a shareholder' you lose control"

- and could have given an irrevocable pro.y to Joos so that if there were a

disagreement and he had to arbitrate' he’d have the power to vote everyone’sshares in accordance with his decision"

-ractice pointer: f you’re -’s counsel' tell her that she should have wal!ed

away from the meeting as she was supposed to once Joos said that it wasad.ourned"

Shareholder agreements limiting what directors can do

are not ok in public corporations. Agreement not valid in

McQuade v. Stoneham Practice pointer: What could P havedone to protect himself here?

• -ut himself into an employment contract that would give him a

generous severance pac!age if he was fired without cause

• +reate a class of stoc! that has certain rights associated with it

o ;ave a redemption right defined that will guarantee -

protection

• a!e - a venture capitalist

• +reate a class of stoc! that can only be held by -’s position"

,his is no longer good law: shareholder agreements of this type +A6 be

enforced"o /hareholder agreements limiting what directors can do are not o! in public

corporations" 9I,' this is not the case in closely held corporations' as long as thereare no ob.ecting minority shareholders"

• ,his is the leading non>6E case showing the trend to approve

agreements that interfere to some e$tent with the discretion of the9' even where no statute e$pressly authories such an agreement"

• Agreements that have no termination provisions are problematic' so

the court implies a term based on the wife’s life e$pectancy"

• ,here are no complaining minority shareholders"

• n a close corporation' a shareholder agreement that goes beyond what

the shareholders normally do may be enforced' as long as there is nocomplaining shareholder who is not a party to the agreement"

Abuse of control

o A position

-articularly concerned about the minority shareholder

/tarts from the view that close corporation people are basically partners

o # position


35/36

Eou made your bed' now you must lie in it

f you wanted protection' you and your lawyer should have instituted a

buy8sell agreement' an employment agreement' etc" ,he courts do not want to give special protection to shareholders who refuse

to protect themselves

Re.ects fiduciary duties L the relationship is fundamentally contractualo ,alancing test: When a minority challenges a ma.ority action' the ABR,E must

show a 1legitimate business purpose2 for the action" ,he burden then switches to - toshow that the same purpose could have been achieved in a less harmful way"

;ere' therefore the ma.ority shareholder must demonstrate a legitimate

business purpose" (f - was an original investor there is obviously acomponent of bad faith in pushing him out of the business")

• What could - have done?

o 9rought a derivative suit on behalf of /pringside 6ursing

;ome to argue that the salaries being paid are disguised asdividends" 9ut' if he wins' the money merely gets paid bac!

into /pringside"o ;ad this been a partnership' - would have an e=ual right of

participation in management and profits' so he 4) couldn’t have been e$cluded and %) could have dissolve the business andforced ’s to buy him out"

• -ractice pointer: f you represent ' draft the language of the contract

so that there is 6 =uestion about its meaning: write' 1f the ## ceasesto be an ##' either with or without cause' shall have the option torepurchase his stoc!"2

o Ise the reasonable e$pectations of the minority test to determine whether there was a

breach of fiduciary duty: 9rodie v" Bordan %MA& ,he proper remedy for a freee out is to restore the minority shareholder as

nearly as possible to the position she would have been in had there been nowrongdoing"

Analye the proper remedy for a freee out in terms of shareholders’

reasonable e.pectations"

• What were - and ’s reasonable e$pectations?

• +on of this approach: doesn’t tell us whose e$pectations matter when'

or what ma!es them 1reasonable2

• bligations of 6R,E stoc!holders

o A minority shareholder owes a fiduciary obligation to his co>stoc!holders if he holds

a veto power over corporate actions: /mith v" Atlantic -ropertieso f the shareholder has +6,RJ' he can e$ercise it over the corporation and

therefore owes fiduciary duties"o -ractice pointer: always have a buy8sell agreement and do not set up your corporation

in a way that invites deadloc!"

• /hareholder oppression: summary

o 4: Inderstand the problem


36/36

a.ority control of 9' lac! of e$it' etc"

n a close corporation' there’s no separation of control" ,he formality of

corporate law can be useful when all the players get along"o %: Budicial approaches

/trong fiduciary duty among shareholders in closely held corporations (A)

• Wil!es two>part testo 9alance

• ,he duty is a!in to those owed by partners

Reasonable e$pectations of shareholders (6E' A?)

• What did the shareholders understand at the time of investment?

Eou made your bed' now lie in it" (#)

• f you want it' bargain for it"

o : /tatutes

9+A 4D"

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