TOCForm of Business 1Incorporation1 Characteristics/Structure of Corp2Mechanics of Corp3Double Entry Accounting4Dividends4Corporate Formalities: Directors5Corporate Formalities: Officers5Corporate Formalities: Shareholders6Federal Securities Acts: General: 1933 Act, 1934 Act, 10b-5 Generally, Williams Act 14e-3, 14a-9, 14a-87Reimbursement for Proxy Contests8Duty of Care and BJR9Duty of Loyalty: Self Dealing10Duty of Loyalty: Corporate Opportunities11Duty of Loyalty: Controlling Shareholders12Direct and Derivative Litigation13Securities Fraud: 10b-5 elements; Misdisclosure Actions14Securities Fraud: Insider Trading: Classical and Misappropriation Theories; 14a-3 Tender Offer Reqs.15Appraisal Rights16Takeovers Unocal Test; Williams Act; Blasius; Liquid Audio; Lockups17Takeovers- Revlon Duties; QVC; Time Warner; Omnicare18

Biz Form + IncorporationForm of business0) General NoteMay contract around most of these provisions. These are tax distinctions more than distinctions in reality.1) Sole Proprietorship/ General partnershipBenefits: Flow Through Tax, No formalities. Disadvantages: Full liability, Destroyed if principal dies or leaves. Examples: Lemonade stand (SP), his In-Law's Bakery2) CorporationsBenefits: 1)Ltd Liability; 2)perpetual existence; 3)Entity Status; 4)Transferability of ownership interests;5) Central management. (Also: ability to raise capital) Disadvantages: "double taxation" (entity-level and personal income taxation); significant formalities; organizational costs. 3)Ltd. PartnershipBenefits: Flow Through Tax, Ltd Liability for Ltd partners. Disadvantages: Minor formailities, Full liability for general managers, General Mgrs. Must be owners. Examples: Hedge funds, Venture Capital. Note: IRS will treat you as a corporation, not LP, if you behave like a Corp (If Bd is passive, pass through tax; if active, treated as corp)3.1) Hedge Funds"lightly regulated investment vehicles": A firm that pools the capital of generally [(Liabilities)+(Stated Capital)].1.1) Equity InsolvencyPassed if can pay debts as they can come due.1.2) Balance Sheet/Impairment of Capital Isolvency[ Passed if Assets > (Liabilities)+(Stated Capital) Del 160] [(Klang: may not use a stock repurchase to impair capital, since a repurchase is similar to a dividend) , Del 170.]1.3) Bankruptcy InsolvencyPassed if Assets > Liabilities1.4) Earned Surplus TestPassed if Assets > Liabilities+Stated Capital+Capital Surplus. (No one uses this)1.5) Nimble Dividend TestPassed if there were profits in last one or two years. Del 1702) Test to pay Dividends under RMBCA 6.40cMay pass BOTH 1)Equity Insolvency AND 2)Balance Sheet Insolvency test (Both RMBCA and CA 501 are moves away from capital impariment test and toward insolvency test)3) Test to pay Dividends under CA 500 and 501 [CA 500 a) May issue dividends up to amount of retained earnings OR b) {After paying the div: 1) assets would be 1.25 times liabilities AND 2) current assets would be at least equal to current liabilities, or [(average earnings over past two years)-( average interest expense over last 2 years)=1.25*current liabilities]} (Further details page 1184 Statutes) [501- Equity insolvency test: No dividends if paying them would make corp unable to meet its liabilities as the come due.]4) Dividend Theories"Left": Dividends are disfavored because Board should invest in company to create cash buffer against bankruptcy and destruction of jobs. "Right": Make lots of dividends, which will trickle down to SH and to fight agency costs by taking cash from managers. "Middle" - Modigliani and Miller say it doesn't matter. Focus of managers is to keep a stable dividend from year to year. (Skeel: these labels are pretty arbitrary)

4

Directors + OfficersCorporate Formalities: Directors1) Directors: DE Sec. 141(a)A company is managed by the board; directors make decisions at meetings. (b)Quorum: 50% of board must be present by default, but cert/bylaws can set it as low as 33%. Vote is by a majority present, by default (bylaws or cert can set higher req.). Board members may resign at any time (c) Board can set up committee and delegate powers of the board, except mergers, sales of corp assets, and changes in cert, which require full board. (Compensation and Audit Committess must be independant - Sarbanes Oxley) (f) no board meeting required if board members give written consent or use electronic communication. (k) Directors may be removed w/o cause by default. BUT: if Staggered board, removal only for cause.1.1) Straight VotingUsed by vast majority of firms: 1 share = 1 vote; votes for each director are separate, so majority can elect all dirs.1.2) Electing Directors: Cumulative VotingEach SH gets a number of votes equal to (Shares)*(# directors being elected). This practice is in decline and in the extreme minority. Can be set up in the Cert.1.21) Directors: Cumulative Voting FormulaN=[(x)(D+1)]/S X=number of shares controlled by minority D=number of directors that can be elected S=Total Shares that will be voted Solve for N, the number of directors minority can be assured of electingunder cumulative voting.1.3) Dirs: Removal141(k)Any director can be removed with or without cause, by a majority SH vote, EXCEPT: 141(k)(ii)Must have cause to remove dir. from staggered board.). DE 228: SH action may be taken on written consent, rather than at an election.1.31) Replacement DE 223(a)(1): Remaining directors can fill a vacancy, but if don't before next SH meeting, then replcmt by SH vote.1.4) Directors: CommitteesDE 141(c) Board can set up committee and delegate powers of the board, except mergers, sales of corp assets, and changes in cert, which require full board. (Compensation and Audit Cmtes must be independant - Sarbanes Oxley) 1.5) Restrictions on Power: SH Voting[Blasius] Directors may not take actions with primary purpose of limiting SH franchise. A compelling justification must be shown to limit SH franchise - THIS TEST HAS NEVER BEEN MET.1.51) Directors: Restrictions on Power: SH Voting [Liquid Audio] synthesizes Unocal+Blasius: 1) Directors of target must show a reasonable belief of a threat to the corporation (compelling justification requirement) 2) Defensive measures must be reasonable in relationship to the magnitude of threat (Action may not be draconian. Draconian=coercive or preclusive) (Blasius plays in here)1.6) Directors: Reforms: Sarbanes OxleyHistorically there were managing, inside boards (unpaid for their roles on the board), but in the 70's, there was a transition to outside directors (paid) that were supposed to monitor the officers, and the officers would run the company. Sarbanes -Oxley was adopted in early 90's because boards were not effective monitors. Section 404: internal controls requirement to ensure financial info received by board was dependable. Prohibits auditors from advising or consulting for the board. Audit committee must be comprised entirely of independent directors, and that independant committee selects the auditing firm. Compensation and Nominating cmte. must be outside dirs.1.61) Reforms: NYSE rules changesSection 303(a) Majority of Board must be independent (Somone holding a lot of stock may still be independent). Officers1.7) Hiring of OfficersDel 142: Directors hire officers, not SH (Charleston Boot v Dunsmore) (SH may only may make precatory motions)2) Officers: AuthorityActual Authority: 1) Express authority (given in formal doc) or 2)implied (inferred from way corp is set up. 2.1) Officer Authority: Apparent Authority: Authority a 3d party would reasonably expect the officer to have. CEO can enter into ordinary transactions BUT NOT extraordinary transactions (long term deals, big money, politically explosive.)

5

SHsCorporate Formalities: Shareholders3.1)SH: MeetingsDel 222(b): Meetings must be held annually, and Must be noticed at least 10 and not more than 60 days before meeting. Must include proxy statement/agenda. Purpose need not be stated. Del 211(c) If no annual meeting held, SH may compel by petition to Chancery court. Del 228: Anything at a meeting may be done w/o a meeting by written consent. 3.11) SH: Special Meetings211(d) Special meetings may be called by Bd itself, or cert may authorize meeting under other special circs. 211(a) SH must be told purpose of a special meeting.3.2) SH: Voting216: Requires vote of majority of shares present or in proxy at meeting. But a fundamental change requires a majority of all shares with voting rights. Fundamentals: 271 (sale of most or all for firm assts); 275 (dissolution); 242 (cert amendment); 251 (mergers) . 3.21) Record Date213(a): Board sets record date of who is SH for voting purpose. Date must be at least 10 and not more than 60 days from vote. 3.22) SH: Record Holders, Beneficial OwnersRecord Holder: Depository or Brokerage holds the actual stock certificates and owns the technical right to vote. Beneficial Owner owns the economic rights attached to the stock. The SEC tries to get the votting rights to the beneficial owners by proxy - Non-Objecting Beneficial Owner rules facilitate this. NYSE tries to make the brokers get the vote to the beneficial owners as well.3.23) SH: Cumulative VotingEach SH gets a number of votes equal to (Shares)*(# directors being elected). This practice is in decline and in the extreme minority. Can be set up in the Cert.3.231) SH: Cumulative Voting FormulaN=[(x)(D+1)]/S X=number of shares controlled by minority D=number of directors that can be elected S=Total Shares that will be voted Solve for N, the number of directors minority can be assured of electingunder cumulative voting.3.24) Straight VotingUsed by vast majority of firms: 1 share = 1 vote; votes for each director are separate, so majority can elect all dirs.3.25) SH: Voting on SH rights plan(Int'l. Brotherhood of Teamsters): SH have right to propose bylaw change to require SH voteon implementatino of poison pill. Although options plans are normally voted on by Directors (Del 157), because this affected SH voting rights, SH were given the right vote on it. A bylaw rquirement for a SH approval before Directors could adopt a poison pill is not contrary to Del Sec. 109. 3.31) SH: Information Rights to SH list220(c) Burden on Corp to show SH doesn't have proper purpose to requirest SH list. SH must make written demand of Board during normal business hours. If Corp doesn't produce, Chancery can compel. Statute is SH-Friendly, but not in practice.3.32) SH: Information Rights to books and records220(c) : Burden on SH to show they have a proper purpose to get books and records other than a SH list. Company must turn over information only if it has the information in its control or has the legal right to get it from a subsidiary (Subsidiary must turn info over to SH if SH has a right to get it from the parent). (Pillsbury: not proper purpose if SH doesn't care about the economics of the company) (Saito: whether or not you have standing to make derivative suit under DE 327, will not affect your SH rights under DE 220)3.33) SH: Examples of Proper purpose(Pillsbury) Examples include: Determine whether Corp has been properly managed; to determine financial condition of corp, acertain value of petitioners shares.

6

Securities ActFederal Securities Acts: 1933 Act, 1934 Act, 10b-5 Generally, 14a, Williams Act1) 1933 Sec. ActRegistration and disclosure reqs of IPOs and subsequent sales of Stocks (rules for issuing stock)2) 1934 Sec. ActACT APPLIES ONLY TO FIRMS W/>$10M and >500 SH. Filings, tender offers, and proxy contests (rules for when stock is out there.) 12(g) Act applies to firms W/>$1M in assets and >500 SH. EXCEPT every corporation is subject to Section 10(b)/Rule 10b-5. Rule 12g: Increases to $10 Million in Assets.2.1) 1934 Act: Periodic Disclosure RequirementsDisclosure when something major happens. 14a-2: Defines who is subject to proxy rules (Corporations and SH are and so may not solicit proxy voting withoutcomplying with proxy rules. Note: Institutional SH can make public statements and talk to each other without offically soliciting a proxy) 14a-3: info that must be provided in proxy statment, including an annual report. 2.2) 1934 Act: Rule 14a-8(b)SH right to place SH's proposal in company's proxy material at company's expense: 14a-8(b): SH must have continuously held $2000+ of stock for a year prior to submission of proposal. 2.3) 1934 Act: Rule 14a-8(i)Reasons to exclude SH proposal from Company proxy: 1) Improper under state law 2) Violation of law 3)Violation of proxy rules 4) personal grievance 5) Relevence (excluded as de minimis if deals with less than 5% of company assets and net earnings) 6)Absence of power to do what's proposed (non-precatory proposal) 7) Management functions (ordinary business or management power) (Roosevelt v DuPont: proposal concerned timing of action) (Exception for socially important issues) (Beginning of 1990s, Social issues are excluded more often - Phillip Morris SH proposal for divestment of tobacco excluded) 8) Related to Directorial elections (own rules in DE 109 etc.) 9) Conflicts with something Company already proposing 10)Substantially implemented already 11) Duplicates another proposal 12) Resubmissions 13) Dividends2.4) Williams Act: Rule 14e-3Regulation of tender offers and takeovers. Deals with fraud in the tender offer context. Broader than 10b-5. 2.5) 1934 Act: Rule 14a-9Applies only to Proxy statements: Elements: 1)materiality (What a reasonable SH would care about) 2) False Fact (either [material subject matter is false] or [both a lie AND subject matter is false]) 3) Causation (Can't establish essential link if vote doesn't matter for vote's passage, unless potential P lost cause of action). (From Mills v. Electric Auto Light [materiality def. and no damages if it's fair transaction] and Virginia Bankshares [Causation req: As result of misstatement, P lost appraisal rights after 60 days passed, and .: established causation. ).

7

Proxy ReimbursementReimbursement for Proxy Constests2.51) Reimbursement for Proxy contest costs(Rosenfeld v. Fairchild) Reimbusement for proxy fight will be appropriate -- For Incumbents when: 1) contest over policy 2) good faith 3) in best interests of the corp. 4) expenses were reasonable. -- For Successful Insurgents, 1) newly elected directors propose reimbursement per incumbent rules 2) SH ratify. Practically, only successful insurgents get reimbursed.2.511) Rosenfeld v Fairchild OpinionsFroessel (3 votes, controls: [the holding above] ) Desmond (1, concurrence: agrees with Van Vorhis on merits, but concurs in judgment for failure to prove cause of action ) [Van Vorhis (3, dissent: doesn't want to encourage proxy contests, and says any reimbusement was ultra vires)

8

Duty of Care+BJRDuty of Care and BJR1) Duty of Care: GeneralDuty is owed by Directors to SH, but in Insovency, Dir. owes same duty of care to creditors as to SH. Directors causing Corp to violate law is Per Se breach of duty of care.1.1) Duty of Care: 102(b)(7)(From Van Gorkem). DE Corporations can waive Dir.'s personal, monetary liability for breach of duty of care by placing 102(b)(7) clause in cert (But do not assume presence of this clause). Does not eliminate 1) non-monetary/injunctive relief; 2) violations of duty of good faith 3)violations of duty of loyalty.1.2) Duty of Care: RemediesSH will be awarded difference between what they got and what they should have gotten, absent the misconduct. Also, injunctive relief possible, if appropriate.1.3) Duty of Care: OmmisionsIf Ommission: 1) No Business Judgment Protection. Skeel: Did not pursue proper process. 1.31) Duty of Care: Internal Monitoring. (Caremark) Lack of internal controls is an omission - No BJR] Must have a compliance program to prevent problems and make board aware. Cannot merely put things on paper and rely on that (must be active)1.32) Internal Mnitring (Sarbanes Oxley Section 404) Codfies mandate of internal auditing and disclosure.1.33) Duty of Care: Internal Monitoring. (1934 Sec. Act, Rule 13a-15) (A)Controls management reporting (B)assessment of effectiveness of disclosure control procedures1.4) Duty of Care: Commissions1)Check for BJR protection 2)If no BJR, the Duty of Care test. (Sinclair) BJR vs Fairness (Which world are we in?) 1.411) BJR: DelawareSkeel says 1) Check for proper process (apply Francis Std to process) 2) Check for proper substance (Reviewed under Gross negligence std. - A very high bar for Plaintiff to meet. [(Aronstin v. Lewis) Presumption: Directors acted properly by 1) acting on informed basis (employing proper process) 2) acting in Good Faith, and 3) reasbly believes the act is in best interests of corp. Burden on SH to show at least one of the three is not met. If SH meets burden, burden shifts to Dir. to show they fulfilled the duty of care. (Van Gorkem [DE]: This, together, is the a gross negligence standard)]1.412) Duty of Care: Delaware (From Francis v. United Jersey Bank): 1) Check for good faith; 2) Check for 102(b)(7) clause (don't assume); 3) Entire Fairness standard .1.421) Duty of Care/BJR: ALI 4.01BJR if: (a)Dir acts in good faith and (c) Dir is 1)Not interested 2) informed as to subject matter of the business judgment to extend Dir. Reasonably believes appropriate under circs. 3) Dir. rationally believes the business judgment is in best interests of the corp. No BJR protection under ALI = Failure of the Duty of Care.1.43) Duty of Care: RMBCA 8.30 (a) Dir. must act 1)in good faith 2) as Dir reasonably believesis is in best interest of corp. (b) board or committee when [becoming informed about decisions] or [exercising oversight] shall exercise same care a person in a like position would reasonably believe appropriate under the circs. [Measured by a minimum standards, with a scale sliding up with relevant expertise. Sarbanes Oxley raised the min. stds. bar in some circs.]1.5) Duty of Care: CausationThere is no requirement for causation in a breach of Duty of Care action, EXCEPT (Barnes v Andrews) that in some Jxs, (Not Delaware), no cause of action if loss would have occurred even if every director had fulfilled duty of care.

9

Loyalty - Self DealingDuty of Loyalty: Self Dealing Transactions2) Duty of Loyalty: Cannot waive duty of loyalty2.1) Duty of Loyalty: Self Dealing, Iowa Statute[Cookies, IA 108] Must have: 1) One of [a) Disclosed to Dirs. and approved b) Disclosed to SH and approved c) the transaction was fair and reasonable AND 2)Good Faith 3) Honesty 4) Fairness] Facts of case: Director negotiated terms of royalties/distribution/warehousing deal for BBQ sauce and taco sauce recipe, but they were fair to the company.2.2) Duty of Loyalty: Self Dealing, ALI 5.025.02(a): A self dealing transaction is valid only if it fulfills duty of fair dealing by (1): transaction and conflict of interest disclosed to the corporate decision maker AND (2) EITHER (A) [the transaction is fair to corp (Burden to self dealer)] OR (B) [the transaction is authorized in advanced by disinterested directors who reasnbly condlude it was fair, following disclosure of conflict and transaction to the board (burden on P)] OR (D) [Transaction authorized in advance or subsequently ratified, after full disclosure, by disinterested SH and doesn't constitute waste (burden on P)]. [(5.02c): 5.02(a)'s disclosure req. is satisfied by ratification by board, SH or decision)]2.3) Duty of Loyalty: Self Dealing, DE 144A self dealing transaction is not void or voidable solely because it is SD if any one of: (1)disclosed to and authorized by Bd or Cmte, or it is known by Bd or Cmte. (2) material facts are disclosed to or known to SH, who approve in good faith (approval by majority of disintered) (3) transaction is fair to corp. [Skeel: Transaction must also have some measure of fairness, but, If disinterested directors approve the transaction , then BJR applies.]2.4) Duty of Loyaty: DamagesDisgorgement: Penalty is to give up amount violator earned by the breach2.5) Duty of Loyalty: Self Dealing: Compensation ContextIf Bd is voting to change compensation of someone on Bd, it is not treated by DE courts as a normal duty of loyalty issue (cts very deferential). (Disney: Eisner wasn't yet on the board, so no duty of loyalty issue in his compensation package) (Tournament theory: View high CEO salary as incentive performance. Note: in law firms, not everyone vying for prize, and multiple "co-equal" partners). Current event: SH approval of compensation is coming.

10

Loyalty - Corp OppDuty of Loyalty: Corporate Opportunities2.6) Duty of Loyalty: Corporate OpportunitiesDisclosure is very important (Hawaiian Intl v. Pablo: nondisclosure of finders fee [Dir. Went to CA and finds property for corp, but keeps the finders fee])2.71) Corporate Opportunities: ALI 5.05 {In brief: Cannot take a corporate opportunity unless first offered to corporation. Under 5.05(e) Exception: No relief if Dir. didn't present opportunity because of belief it was not a corp opp., but presented it to board soon after suit filed} Test: (1) Determine whether a corp opportunity [For Dirs and Officers: used firm assets to pursue, learn of it in firm capacity, rsbly expected that it would be offered to corp AND/OR for Officers: closely related to business] (2) If so, present to corp (3) If rejected, was it rejected permissibly because one of (a) fair to corp (b) rejected by disinterested dirs (in advance) (c) rejected by disinteresed SH. (either in advance or ratification within reasonable time after transaction)2.711) Corporate Opportunities: ALI 5.05 : burden of proof Burden of Proof: If Decision maker approved the transaction, Burden on P. If not approved, burden on D. 2.712) Corporate Opportunities: ALI 5.05 : Example(Northeast harbor Golf Club v Harris: Pres. of the golf club used corp opportunity (to buy second golf course, opp learned of while golfing on own course), never offered it to club, was a breach)2.72) DE "Line of Business Test"An "AND "Test: 1) is it in the line of business + 2) Could the firm afford to pursue the financial opportunity (*** different from ALI) + 3)Opportunity is of practical advantage to corp + 4) Corp has an interest or reasonable expectation in the opportunity + 5) By taking opp for own, forced Dir into conflict with interests of corp.2.73) MA "Fairness Test"Is it fair for the executive to take the Opp?2.74) "Two Step Test"1) Was there an expectency or interest in the opp? 2) Equitable Considerations (fairness)2.75) Corporate Opportunities: RemedyDisgorgement of Opportunity and profits

11

Loyalty - Controlling SHDuty of Loyalty: Controlling Shareholders2.8) Duty of Loyalty: Duties of Controlling SH: DE Case lawA Controlling share is techincally 50.01%, but it can be much lower if the Corp is sufficiently widely held. 2.81) Duty of Loyalty: Duties of Controlling SH: DE Case law: Disclosure[Zahn] Controlling SH must give all material info to minority SH. Facts: Tobacco company has spike in profits during WWII, then decides to liquidate and take profits. Has two classes of stock: Class A has liquidation preference and economic rights; Class B Has control rights. Directors call class A, without disclosing the impending liquidation of the company, so Class B gets more in liquidation than it would have gotten had Class A held onto their shares.2.82) Duty of Loyalty: Duties of Controlling SH: DE Case law: Intrinsic fairnessDoes the transaction have a negative, disproportionate effect on minority SH? [Sinclair] If no disporpotionate effect on minority SH, then BJR. If disproportionate, then use "intrinsic fairness" standard. ("Fair dealing + Fair Price")2.83) Duty of Loyalty: Duties of Controlling SH: Sale of Control RightsGenerally, Controlling SH may sell stake in corp at a premium that includes the control rights. No duty that restricts a controlling SH from buying or selling interest to anyone they want, EXCEPT: [Zeitlin] Controlling SH must use discretion not to sell to looters. Red Flags: 1) Company with very liquid assets easy to loot 2) Buyer offering unrealisticly high price [Gerdes] 3) reason to believe buyer will do something pernicious. [Perlman, Steel case] Controlling SH may sell his stake for a control premium, but may not take advantage of strange mkt conditions. 2.831) Duty of Loyalty: Duties of Controlling SH: Seriatum resignationWhen selling a controlling share of board, the majority directors resign and are replaced by the new owner 1 at a time. (mechanism used is DE Section 223)Duty of Loyalty: 4.5) Duties of Controlling SH: Special Committees used to provide "fairness" cover If there is a truly independent committee --> burden shifts to plaintiff. Committee is independent and effective if: 1) Controlling SH does not dictate terms of merger 2) Special committee must have real bargaining power that is can exercise with controlling SH on arms-length basis.

12

SH Litig. - GeneralDirect and Derivative Litigation 0) GeneralIn Delaware (Tooley v DLJ) : Direct action lies if the harm was "connected to the intimate rights of the SH) (right to vote, dividends, pre-emptive rights[right to purchase amount of new shares issued], appraisal rights). A Derivative action arises out of "general corporate harm" and is brought on behalf of the corporation. Note: Direct is better for SH, because recovery goes to SH. In Derivative action, recovery goes to the corp. Exception outside of Delaware (Barth v Barth): If corp is closely held, may bring a suit for general corpoate harm directly against corp unless: 1)It would expose corp to multiplicity of actions OR 2) it would materially predjudice the creditors of the corp. OR 3) it would interfere with the fair distribution of recovery. Some states allow direct suit if SH can show special injury by director, but this was rejected by DE SCt in Tooley: You must look to the nature of the wrong and to whom relief should go.

1) Derivative Suits1) Contemporary Ownership, DE 327: Must have been SH at time of harm to Corp (New Owner exception: damage done by former owners not reflected in stock price) (Operation of Law exception: SH have standing if you get shares through law, such as through inheritence) (Continuing harm exception: harm contintues presently, even though initial harm occured prior to ownership.) AND 2) Security for Expenses (Not req. in DE, is req. in NY) P must post bond to cover D's fees if judge so awards. 3) Demand on SH (Unless too expensive: Skeel says not usually required, but may now be because Internet makes it easier) 4)Demand on Corporation, unless excused (See below). Demand req. is outcome determinative in DE (Court will not reverse bd. decision to kill suit unless breach of good faith.) 1.1) Standing: Demand on Corp. Requirement: DE Futility Test(Aronson/ Futility test): Demond on corp not necessary if SH can show reaonable doubt on: 1)Disinterested/Independence OR 2) Valid exercise of BJ [Disinterest/independence is easier. Disney was rare example of faulty Business Judgment] Must make written Demand that Board. Demand req. is outcome determinative in DE(Court will not reverse bd. decision to kill suit unless breach of good faith.) 1.11) Standing:Demand on Corp. Requirement: Independent Cmte Req.(Zapata Test) If Demand would be excused and isn't made, but company sets up cmte to take control of litigation, Court will examine 1) Independence and good faith of Cmte AND 2) Court will determine, using its own business judgment, whether the suit should go forward. (2nd Prong is discretionary by Court, and the test is meant to be unfriendly to Dirs.). Zapata Facts: Directors as a group monkey with dates of their options plans to allow themselves to profit. 1.2) Role of Plaintiff Attny.Benfits: minitgates collective action problem. Deterrence for other corp. Concerns: Collusive settlements (Pay attny a lot, Corp minimal damages, little SH recovery.

13

Securities Fraud-MisdisclosuresSecurities Fraud: 10b-5 Elements and Reforms; Misdisclosures2) 10b-5"Forbids the use, in connection with the purchase or sale of any security, of any device, scheme, or artifice to defraud or any other act, practice or course of business the operates as a fraud or deceit." Scope: Applies to 1)insider trading(disgorgement) and 2) mis-disclosure (financial) . Applies to EVERY firm with securities. Includes both civil (private P and SEC) and criminal actions (DOJ and State AGs). 2.1) 10b-5: Elements[Dura] 1)Material Misrepresentation or Omission (Basic) 2) Scienter (Ernst) 3) In connection with purchase or sale of security (Zandford: securites must be integrally connected to the transaction) 4) Reliance (Basic) - Mis-disclosure: personal reliance; Insider Trading: Fraud on the market 5) Economic Loss 6) Loss causation (Apollo: loss must be related to false statement or omission. Termporal coincidence of revelation of fraud and price change. Revelation must be mirror image of false statement.) 2.2) 10b-5 reformsPSRLA of 1995: Reformed securities litigation, and made it more difficult to bring, because it tightened scienter rquirement. Stoneridge (2008) and Central Bank (1995) severly limit ability of private plaintiffs to bring 10b5 actions against secondary actors (accountants, lawyers, consultants), unless they personally meet all the elements of 10b-5, including reliance (usually statments must be attributed to actor personally)2.3) Mis-disclosuresAffirmative Duty to Disclose: Delaware: few, other than 14(a)(9): Must disclose if the fact would change the total mix of info a person would use to decide to perform the transaction. NYSE 202.03: If there are rumors, Corp must clear them up.2.31) Mis-Disclosures: Fraud on the market(Basic) Presuming a semi-strong efficient market, FOTM lowers the bar of reliance by saying price of stock is determined by available public market info, if lie that affects the price of stock, element reliace is satisfied for any who traded in the stock.2.32) Mis-disclosures: Right to Lie ArgumentArgument that Dir should lie, if it would maximize SH value. Counter: hurt those who would react to lie, and undermines efficiency of market.

14

Securities Fraud-Inside trading Insider Trading: Classical+ Missappriation; 14a-3 Tender Offer Reqs3) Insider TradingMust disclose material non-public info OR abstain from trading on it. If you trade on security before the market price reflects all the information you are liable.3.11) Insider Trading: Single Person, Classical TheoryArises from definition of CL Fraud in context of Fiduciary Duties to Company. Must have 1) Duty to company whose stock was being bought or sold. (A duty to someone else doesn't matter) 2) Personal profit from the information. (Chiarella: Employee of financial printer who individually figured out details of another company's transactions in course of him employment was not liable because of lack of duty)3.12) Insider Trading: Single Person, Misappropriation Theory(O'Hagan) 1) Misapppropriates (=deceptive device) 2) confidential information 3) for purpose of trading on securities 4) in volation of duty owed to source of information. BUT: Full, sufficiently public disclosure forecloses 10b-5 liability (Disclose or abstain). Pure Stealing does not equal misappropriation3.2) Insider Trading: Fraud on the Market Theory(Basic) Presuming a semi-strong efficient market, FOTM lowers the bar of reliance by saying price of stock is determined by available public market info, and trading on other non-public material info constitutes fraud by putting inside trader at unfair advantage. 3.31) Insider Trading: Tipper Liability(Dirks) For Tipper Liability: 1)Someone in chain must buy or sell stock, and 2) Tipper must have a duty under [classical theory (duty to company whose stock is bought or sold)] or [misapropriation theory (expectation of confidence or trust with source) (10b-5(2): duty arises from agreement to keep info confidential; history of sharing confidences; receipt of non-public info in family situation(unless established that there is no history on confidence in the family relation)] 3) Expectation to receive a direct or indirect personal gain (broadly interpreted), or must mean the info as a gift. 3.32) Insider Trading: Tippee Liability(Dirks) 1)Everyone earlier in the chain must have tipper liability 2) Tippee must have known or should have known that BOTH: Tipper was breaching Duty AND Tipper expected a benefit or intended it as a gift. 3.4) Insider Trading: Rule 14e-3Disclose or Abstain: If any person who has taken a substantial step to commence a tender offer it is a fradulent act for any person who is in posesssion who is in possession of material info that the know is non-public to purchase or sell, or cause to be purchased or sold, any connected securities.

15

Appraisal RightsAppraisal Rights1) GeneralAppraisal rights are a SH protection. If not happy w/ merger, SH can force buyout by Corp at agreed upon or judicially determined price. Appear ONLY in merger context. Policy: want to prtect SH who cannot easily trade their share on the open market at a fair price, and to compensate minority SH for losing their veto rights.1.1) DE 262(B)Appraisal rights if there is a merger AND ( 1. Company is non-public OR 2. SH will be required to accept something other than survivor stock or stock of another publicly held company). Notes: "other than survivor stock" = getting cash, mix of cash and something else. No Appraisal rights for fracitonal shares. A company is public (and therefore no appraisal rights attach) if: 1) Traded on national exchange OR 2) has >2K SH. 1.15) Caveats to DE 262262(c): Can make appriasal right mandatory for ever merger in cert. NEVER Appriasal rights in small scale merger under DE 251(f). ALWAYS appraisal rights in a Short Form Merger under DE 253. 1.16) DE 251(f)NEVER appraisal rights for bidder/survivor in a small scale merger (where survivor does not pay stock or the stock they use to effect the merger is