Corporate Law Final Review
Evasion of existing obligations
A real way for courts to pierce the corporate veil.
Single Economic Unit
A real way for courts to pierce the corporate veil.
Business Judgment Rule
A rule under which courts will not hold corporate officers and directors liable for honest mistakes of judgment and bad business decisions that were made in good faith.
pro rata liability
A shareholder is only responsible for what they paid for their shares. Allows you to diversify your portfolio
Piercing or disregarding the corporate veil
A way for courts to treat the persons and company as one, to disregard limited liability
Gilford Motor Co. Ltd v Horne
An example of courts piercing the corporate veil because Horne attempted to evade an obligation in his contract.
Jones v Lipman 1962
An example of courts piercing the corporate veil because Lipman created a company to evade his obligation of selling land to Jones
DHN Food Distributors Ltd v London Borough of Tower Hamlets 1976
An example of courts piercing the corporate veil, treating subsidiary and parent companies as one single economic unit. Courts say you can pierce the veil because there is no activity going on in the subsidiary business
Adams v Cape Industries (CA 1990)
An example of courts piercing the corporate veil, treating subsidiary and parent companies as one single economic unit. We find that you can pierce amongst groups of companies when there is no activity. And also find that there is No way you can pierce just on the basis of justice
Shlensky v Wrigley (1968) (Illinois)
Another case surrounding the Directors Duty to act in good faith. Some shareholders take action against the directors saying they aren't doing whats best in the companies interest by not putting the flood lights in Court rules that "directors are chosen to pass upon such questions and their judgment" "The judgment of the directors' decision was formed in good faith, and was designed to promote the best interests of the corporation they serve"
Lee v Lee's Air Farming Limited
Another case that shows how incorporation can give you limited liability.
Standard of review
Benchmark we set to be able to assess the conduct of the directors
Race to the Top
Board is cautious about moving to a state that has board primacy because they could get fired by the shareholders, so they move to a state that has shareholder primacy. Delaware
Poison Pills
Company created takeover defense. This forces the bidder to negotiate with the board. If a ceertain threshold of shares is exceeded without board approval other stockholders become entitled to purchase additional stock in the target at a (50)% discount ("Flip-in"). The bidder does not get this discount price
Disney Case
Courts gave a definition for gross negligence. The reckless indifference or deliberate disregard of the whole body of shareholders when the directors made their decision
CA 2006 s. 175
Courts say that It doesn't matter that the company did or not do it, the fact that the opportunity existed is sufficient. If there is a profit making opportunity, the Director should not take it(alone). Boardman v Phipps (HL) UK
s. 1157 CA 2006
Directors may be excused by the court. A person that is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him.
21.1 of the Takeover Code; The non-frustration rule. UK
During the course of an offer, or an offer is expected to be made, the BoD must not do anything that could inhibit the takeover offer, unless they get approval from the Shareholders
Duty of Loyalty
Duty to avoid conflicts of interests which are Self-dealing contracts and Corporate or Business Opportunities. And also, The Duty to promote the success of the company.
s 174 CA 2006
Duty to exercise reasonable care, skill and diligence. Looks at standard of conduct and standard of review
Direct Suit
Either shareholders or BoD brings the suit. These can be problematic. They are people who work together and can cause distractions and be overall worse for the company. BoD could be Backscratching or little independence. Problematic for Shareholders because are independent but less informed They don't have as much capability.
Kinney Shoe Corp. v. Polan
Example of US courts piercing the Veil. Courts says you can pierce if there is a unity of interest and ownership such that the separate personalities of the corporation and the individual no longer exist. Court focuses on "inadequate capitalization," Saying if you don't put enough money into a company then you don't get the benefits.
S. 141 (k) DGCL
If they have a classified Board (non staggered) you can remove without cause Staggered board is with cause This is a default rule so you can change it Most corporations follow this Most corporations have a staggered board in the US
Salomon v Salomon
Important case protecting Limited Liability. Establishes that a Corporation has a separate legal existence from the members
Smith v Van Gorkom (1985) (Deleware)
Important case which shows gross negligence of Board members. The fact the Courts held them liability created a lot of concern. Lead to S. 102 DGCL
Entity Shielding Problem
In sole proprietorship firms, bank will assess the person along with the business
Hindsight bias
Knowledge of failure inevitably affects your assessment of failure. This has a negative impact on directors They may act in a risk averise behavior, Or may even that they wont join the board. The response to this is that the standard is very low
US Proprietary approach
Need all three of these. 1. Financial capability of the company to pursue the opportunity. 2. Is the opportunity in Line of business of the company. 3. Interest in the opportunity or future interest from the company of the opportunity. Established out of Broz v Cellular Information Systems 1995 (Deleware)
Indirect Agency costs
Perquisites. This is when managers Use corporate power to fly first class or buy a nicer company car. Another is Shirking when a manager Avoids or neglect work. Hubris too can lead managers to overpay for assets. Incompetence is debatable for this category, it is Not clearly an agency cost, but if you are incompetent it does cost the agency money but don't know if it belongs here
Aaronson v Lewis
Represented the business judgment rule. After this case you have a rationality review if: There is good faith, The directors are informed; they took sufficient care in their judgment, and there are No conflict of interests
US default power
Resides with the directors in theory and practice. Weak shareholder rights and weak incentives.
UK default power
Resides with the shareholders in theory but Directors in practice.
2006 Act; s 177
Self-dealing reuglator. In the statute if you disclose then the contract is enforceable. If there is no disclosure then then the contract is not enforceable
The Corporate Governance Code. UK
Sets up the structure for the board. Atleast half have to be non-executive independent members.
S. 168(1) of CA 2006
Shareholders can remove a director whenever they want without cause as long as they have simple majority of votes cast. This creates job insecurity for Directors and a tremendous power for shareholders
Regentcrest plc v Cohen (2001)
Shows a situation where The court will look for a rationality standard: any reason to plausibly explain why the directors did what they did. In this case, their reason was that you do not sue your directors when you're company is trying to survive. Applies to the Directors Duty to act in good faith of the company
US takeover defense strategy, Business combination statutes S. 203 DGCL
Statute says that if you cross a percentage threshold without getting board approval then you cannot do anything with the assets of the company apart from run it as a separate business for 3-5 years (depending on state), Things like transfer assets. Stops from generating synergies which hurts the economics of the deal. Pretty powerful defense
Joy v. North
Tells us how to assess if litigation should be brought. Courts approached it in two steps. First, legal matters, they asked if it was a strong suit, are there chances of winning, they also looked at the value of the claim. Second, they do a business analysis where they look at how it will affect the reputation of the company, how it will disrupt the decision-making.
Aberdeen Railway v Blaikie Brothers (1854) UK
The no-conflict rule is used. Courts rule You do not have to put yourself in a situation where there is a possibility of conflict. Default rule and this can be changed in your articles.
S. 102 DGCL
They now allow companies to have liability waivers. Even if your directors breach the gross negligence standard you don't have to pay
Share sale deals
Type of deal structure. Company A buys, or tries to buy, the shares of Company B. Offer is made directly to the shareholders/ If deal goes through, Company B becomes a subsidiary company of A and A can do whatever they like with B
Merger deals
Type of deal structure. Every Asset is legally magically transferred over to the owning company according to "Operation of law." Delaware S. 251-262 says you need approval from BoD of both sides and Majority of outstanding shares approval from Shareholders
Rational apathy
Typically seen in companies with many shareholders. The shareholders are lazy and feel their vote is meaningless therefor they are inattentive and disinterested
Derivative Suit
a claim or a suit against Directors if they have breached their duties. A single shareholder can bring this suit. The single shareholder is independent and has incentives, the only issue is capability. Contingency fees create incentive for lawyers to bring the suit.
Economic Agency
a situation where one party may know more than the other which can lead to acting in certain ways that damage another person without them knowing it (Ex. A cab driver could take a foreigner a longer way to run up the meter).
Standard of conduct
behavioural expectation (what we expect our directors to do)
S. 172 of CA 2006
says It is the Directors duty to promote the success of the company (shareholders). To increase the value of their shares. The section also takes into account the interests of the employees, suppliers, customers, and others, as well as the impact on the community and environment. The balance between shareholders and other constituents appears to be leaning towards shareholders, however. While other constituents are taken into account, they only are as long as it benefits the shareholders. This section is a default rule meaning it is ultimately up to the individual companies and reasons for doing each are found in the question above.
Direct Agency costs
self-dealing and an example of this is when a manager enters into a transaction with the company there is a risk that the terms of that contract will benefit the manager at the company's expense. If the company overpays for an asset sold to it by the manager or the manager purchases a company asset for less than it is worth, value is transferred directly into the manager's pocket. Also Corporate Opportunities
Section 303, 304, and 305 of the Companies Act 2006
states that you need 5% of shares to call one of these meetings. Shareholders can call a Shareholder general meeting. Here they meet and can pass a resolution. One of these happens annually but they hold the right to call one whenever, called an interim meeting. The UK has strong shareholder rights but weak incentives, usually shareholders and rationally apathetic.
CA 2006 Ac S. 263
the court is being asked to put themselves in the feet of the director to decide if the litigation should continue or not. If you decide that it should continue it goes to this stage: (a) Asks if the shareholders are bringing the litigation in good faith. Are there Alternative motives? (b) Put yourself in the directors shoes again (c)(d) the likelihood of the breach (e) whether the company has decided not to pursue the claim. Look at the everyone and see why
Objective standard of review
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company
Subjective Standard of review
the general knowledge, skill and experience that the director has
Agent in Law
when an individual acts on behalf of a company or vice versa
Market for "Lemons"
· This type of problem—where it is difficult for buyers to distinguish between a good and bad product and so they refuse to pay more than the price of a bad product · You end up with a market that is in bad shape because of mistrust · Ex. Even if a car dealer sold good cars but people thought they were bad that would start selling some bad cars to balance their prices
Delaware General Corporation Law section 141 (a)
"The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation." Gives Directors their power
Concealment cases
Cases that feel and look like piercing but are not
Macaura v Northern Assurance Co.
Tells us If you transfer things into a company you don't own it anymore
Asset Sale
Type of deal structure. Each individual asset is traded over, alternative to buying every share. This would be used if you want to leave some things behind. Delaware law, S. 271, makes it clear you need board and shareholder approval