Corporations

Zion v. Kurtz, New York Court of Appeals (1980) Contracting as a Device to Limit the Majority's Discretion DE 141, 344, 350, 351

(D) formed Lombard-Wall Group, Inc. initially sole SH. In transaction w/ P, P acquired all of Group's Class A stock, D retained all of Class B stock. D & P entered into SHs' agreement, provided that company would not engage in any business or activities w/o consent of holders of Class A stock, so P. Agreement states construed, enforced, governed according to DGCL. Group's articles of inC do not refer to veto power of Class A SHs. D agreed in SHs' agreement to take any further actions nec to give effect to provisions, intent of agreement. D was sole SH, dir of Group, and as part of transaction in which P became SH, D also agreed in writing that he was auth., empowered to take any further actions nec. to give effect to SHs' agreement. THIS AGREEMENT IMPLICITLY CREATED A CC—2 SHs, managing alone. HOLDING: Under DE C law, in close C, written agreement b/n majority of SHs is valid even if it restricts or interferes with BODs' powers. REASONING: SH agreement that gives SHs mgmt powers is enforceable even though corporate formalities have not been followed, b/c SH may manage close corporations. Agreement should not be unenforceable solely b/c corp had not completed steps to become CC. Appellant promised to take all reasonable steps to carry out purposes of SH agreement which included giving SHs management power. SH agreements that limit board's mgmt power are enforceable even though may not be included in articles b/c such act not prohibited in statute if corp is CC. Group only had 2 SHs and appellee here, originallynsole owner of Group before appellant bought shares in corp, promised to take all steps to fulfill purpose of agreement. Since Group can elect to become CC, a mere formal act, agreement should be enforced b/c appellant may have relied on arrangement before agreeing to buy shares in corp.

Stone v. Ritter, Delaware Supreme Court (2006) Demand Futility in the Contest of Caremark Claims

AmSouth Bank paid $50 million in fines, civil penalties after gov investigations into unlawful "Ponzi" scheme. AmSouth EEs provided custodial accounts for investors in Ponzi scheme, distributed monthly interest payments to each account upon receipt of check from one Ponzi man, instructions from the other. AmSouth failed to file Suspicious Activity Reports resulting in vio/ of Bank Secrecy Act. HOLDING: Caremark properly applied, P' case dismissed. Ps did not allege particularized facts that created reason to doubt whether dirs had acted in good faith, should have exercised demand before filing suit. Ps must plead facts to show board was ever aware internal controls were inadequate, inadequacies would result in illegal activity, board chose to do nothing about problems allegedly knew. existed in order for P to bring derivative claim w/o filing for demand using breach of good faith, duty of loyalty argument. REASONING: Apply Rales, P needed to plead facts that allow court to determine whether factural allegations in complaint create reasonable doubt that @ time of complaint, BOD could have exercised indep., disinterested BJ in responding to demand. P should show that Ds ability to be exculpated from liability for breach of duty of care, but not for conduct not in good faith or breach of loyalty is critical to p's demand excusal. Court found reasonable reporting system existed here. For P's derivative complaint to withstand motion to dismiss, "only sustained, systematic failure of board to exercise oversight—such as utter failure to attempt to assure reasonable info, reporting system exists—will est. lack of good faith that is necessary condition of liability." "With benefit of hindsight, Ps' complaint seeks to equate bad outcome with bad faith.

Rales v. Blasband (DE 1993) Aronson Test

Aronson Test does not apply to every demand futility motion, like where board that would be considering demand did not make challenged business decision. 1. Majority of Board has been replaced. 2. Subject of derivative suit is not business decision of board. 3. Decision being challenged was made by another C. In such cases, should determine whether current board can impartially consider demand.

Say on Pay

Dodd-Frank Act requires public companies to conduct SH votes on exec compensation. Not binding on corp.

Protecting Participants' Expectations in a Closely Held Business: Cs and LLCs

Closely Held Businesses: More intimate enterprises, lacking sep of function of publicly traded companies (no rigid division of those contributing money capital, those putting in human capital), no market for ownership interests. Close Cs: Challenge is to change corporate law norms already discussed. LLCs: Challenge is to create rules, as few statutes provide "default" form; statutes very deferential to parties' contracts. Members serve as C's officers, directors and key employees. Each receives equal salary, but no dividends. Profits in excess of salaries are pumped back into C. Should one want to bow out (or overrun by majority of 2), difficult to sell shares to 3rd party w/o substantial transaction costs and, unless other members are willing to purchase ownership interest, stuck as the sad minority. Boohoo. Central governance problem: How to provide optimal amount of adaptability, protection from opportunism to both majority, minority interests. Any reduction in risk of majority opportunism results in increase in risk of minority opportunism—and vice versa. Contract-based solutions? Leave it up to folks. Seems like best option, as CCs tend to have differences in expectations from both SHs, managers. Judges step in for breaches of FD or "oppression" b/c of difficulties in planning, bounded rationality and/or funds, or other psychological dynamics of folks deciding to venture with one another. Publically Traded Companies: SHs able to provide money capital and invest human capital elsewhere, officers able to specialize in day-to-day mgmt w/o making money investment, BoD serves as check on managers. Norms allow C's adaptability, protects against opportunism by minority SHs: decisions made by majority rule, officers, dirs may be discharged at will, apparent permanence of C, protection of BJR protects against disgruntled minorities. Free transferability of shares allows indiv to protect self from majority opportunism; can sell when pleases, either b/cwants cash or b/c doesn't like mgmt; makes centralization of power more palpable.

Fiduciary Duty of Loyalty

Constrains directors in pursuit of self-interest; est. an actionable wrong against director for diverting assets or opportunity otherwise belonging to the C for personal use; applies to both closely held and public Cs.

2 Step Zapata Test

Court apply a 2-step test to the motion: 1. Inquire into independence, disinterestedness, and good faith of committee and bases supporting its conclusions (limited discover allowed to facilitate). C has burden of proving indep, good faith and reasonable investigation. If any of these factors aren't met Court should deny C's motion. If factors met, Court may proceed in its discretion to step 2. 2. Court applies own BJR as to whether motion should be granted. This step intended to thwart instances where C actions meet criteria of step one, but result does not appear to satisfy spirit or where corporate actions would imply prematurely terminate SH grievance deserving of further consideration in C's interest (essential key in striking balance between legitimate corporate claims).

Dismissal of Derivative Litigation at Request of Independent Litigation Committee of the Board MBCA §7.44

Cs began appointing committee made up of dirs who were not involved in first suit (one instituted by SHs who got demand excused and got past BJR), asserted for committee right to claim board's power to control derivative litigation. Three distinct views in indep litigation committee litigation: Auerbach v. Bennett (NY 1979): Interested board retains power to delegate authority to special litigation committee composed of disinterested directors whose recommendation that derivative litigation be dismissed would be entitled to normal BJR presumptions. A court would inquire into committee members' disinterestedness, reasonableness of procedures used in their deliberations, and good faith. Courts will NOT inquire into substance of special litigation committee's decision. [Committee okay, given BJR protection, so long as disinterested folks making decision.] Miller v. Register (Iowa 1983): Conflicted board has power to appoint special litigation committee to investigate, advise C concerning derivative litigation, but special litigation committee has no power to control derivative litigation on behalf of C. Recommendations of special litigation committee that derivative litigation be dismissed entitled to no more BJ deference than would rec made directly by interested board. (Structural bias prevents special litigation committee members from exercising impartial business judgment.) [Committee okay, not given BJR protection.] Zapata Corp v. Maldonado (DE 1981): Middle ground approach...

Agency Law and the Choice of Sole Proprietorship Form Restatement (Third) of Agency §§1.01, 1.02, 103

Firm = unifying of ownership and control of the team. Principals and agents; relationship may be terminated by either, unless contracted otherwise; agent is subject to principle's control. Discrete contracting is often necessary to specify the rights and duties of each.

Adlerstein v. Wertheimer, Delaware Court of Chancery (2002)

Holding: Dirs. may not act on plan to remove controlling SH and Dir. w/o first informing that person of plan and giving him chance to protect his interests. Reasoning: Even if meeting itself is properly called, notice of particular agenda items may be required in some circumstances, other directors may not conspire to take away majority SH's control w/o giving him an opportunity to protect himself. It was a breach of fiduciary duty for Wertheimer and Mencher not to give notice of intention to remove Adlerstein. Had Adlerstein known this, he could have acted preemptively to remove Wertheimer and Mencher from board under DGCL 228(a). Actions taken toward this end at July 9 meeting are therefore void.

In re The Limited, Inc. SHs Litigation, Delaware Chancery Court (2002) Fiduciary Duty and Aronson's First Prong

Holding: If dir is beholden to controlling SH or other dir such that lacks capacity for indep judgment, not indep for purposes of demand excusal. Reasoning: P avoids dismissal for failure to make demand by pleading specific facts that cast reasonable doubt on either disinterestedness or indep of majority of board members w/ regard to challenged transaction. (Was there personal financial stake in transaction? was D sufficiently beholden to party who has interest in transaction? Fact-specific inquiry). To state claim for breach of duty of loyalty - P must show no disinterested director/SH approval of trans and was unfair to C. To state claim for waste - P must show transaction showed no business purpose. Here, 6/12 interested directors, SHs EXCUSED FROM DEMAND REQ. SHs adequately stated breach of duty of loyalty b/c shown that majority of dirs were not disinterested, b/c plausibly argue that transaction was unfair to C. No claim for waste b/c trans offered @ least some benefit.

Grimes v. Donald (DE 1996) Derivative Litigation and the Demand Requirement

If SH makes pre-suit demand, what course of action may she take if Ds refuse the demand or simply take no action? SH who makes demand is entitled to know promptly how board will respond. o Board may not be neutral or take no position. o By making demand, SH does not waive right to claim that demand has been wrongfully refused. o While board may appear indep, may not act indep. o SH has right to bring underlying action w/ same standing which SH would have had if demand had been excused as futile.

Contracting as a Device to Limit the Majority's Discretion - As to Director Decisions MBCA §§ 7.32, 8.01, 8.24(c); DGCL §§ 141(a-b), 350-354

In creating jointly owned firm, long-term contract is entered, which specifies each owner's rights, duties. While corp law will provide default rules (w/ strong fear of majoritarian bias), CCs can contract around those rules. Rule, specifically permitting SHs to restrict or eliminate Ds' discretion, like DGCL § 141(a), now default rule in almost every state; may even authorize a unanimity requirement. DE Special Provisions for CCs §§ 341-356: Sterilizing SH agreement, agreements permitting SHs to avoid majority rules my Ds. Most states are now like MBCA § 7.32: Specifically authorizes agreements taht est. who will be officers/dirs and even permits elimination of board or transfer of corp power to one or more SHs. Permits SHs to vary norms not only by provisions in the AoI (and sometimes bylaws), but also in SH agreements (to, say, eliminate board).

Determining Shares to Issue

MBCA §6.01; Delaware G.C.L. §151 Norms specify must be class of shares that (1) carries authority to elect directors and exercise all other SH voting rights and another (2) that entitles bearer to receive C's net assets upon dissolution. Common shares: Combine both residual claimant status and voting rights. Preferred stock: Increased financial preference (ex. extra dividend) may be coupled with limitation of voting rights. Specific to particular company, may have to research exactly what you're buying or selling.

Care, Good Faith and Director's Oversight Responsibilities

MBCA §§8.30, 8.42 MBCA §8.01(b): "The business and affairs of the C shall be managed by or under the direction of, and subject to the oversight of, its board of directors."

Officer's Oversight and Reporting Duties

MCBA §8.42 When officer is not also dir, assumption is that, as agents of C, officers subject to FDs imposed by common law of agency. Under Sarbanes-Oxley, CEO, CFO are central to C's financial reporting system, but state law stipulates that it is up to Board to ensure internal financial controls, system.

Zapata Corp. v. Maldonado, Delaware Supreme Court (1981) Dismissal of Derivative Litigation at the Request of an Independent Litigation Committee of the Board

Maldonado brought derivative suit against 10 officers, dirs of D, asserting that they breached FDs. P did not demand that the D officers bring action b/c all dirs at time were named in suit. After suit, D corporation appointed "Independent Investigation Committee" comprised of 2 dirs who were not part of initial suit. Committee decided that derivative suits would be harmful to company and therefore moved to dismiss litigation. HOLDING: Court should first determine if D corp proves thatp appointed committee is indep, then determine, when applying BJ standard, whether motion to dismiss derivative suit should be granted. REASONING: Indep committee possesses corporate power to seek termination of derivative suit. Sec 141(c) allows board to delegate all authority to committee. A committee w/ properly delegated authority would have power to move for dismissal or SJ if entire board did. Board entity remains empowered under §141(a) to make decisions regarding corporate litigation. Problem is one of member disqualification, not absence of power in the board. 8 Del. C. §144: It seems clear that DE statute designed to permit disinterested directors to act for board. Court's two-step test shifts burden to corp to prove independence, which limits advantage to company of appointing indep group to determine merits of derivative suit.

How Publicly Held Cs are Different

Number of important differences dramatically affect governance of publicly held Cs and influence relative roles of law and private ordering in that setting. o The presence of a market for shares; o The impact of institutional SHs among the census of SHs of publicly held Cs; o The practical necessity for shareholder action in public Cs to be by proxy. o Federal regulation based on company having publicly traded shares.

Ryan v. Gifford, Delaware Chancery Court (2007) Demand Futility Under Aronson's Second Prong or Under the Rales Test

P SH filed derivative action against Ds, corporate board, compensation committee members, for alleged breach of duties of due care and loyalty in approving/accepting backdated options in violation of stock option plan, stock incentive plan. SH alleged that grants of stock options to founder of C were backdated, as grants were too fortuitously timed to be explained as coincidence. Compensation committee which approved transactions was composed of 3/6 corporate dirs under Del. Code Ann. tit. 8, § 141. P lawyers allege breach of FD of loyalty, D responds demand should have been made. P says futile. Here no interested, beholden dirs (making profit off deal). In Aronson II (though this could be addressed in I, according to the opinion). HOLDING: "A board's knowing, intentional decision to exceed SHs' grant of express (but limited) authority raises doubt regarding whether such decision is valid exercise of BJ and is sufficient to excuse failure to make demand." REASONING: Altering actual date of stock option grant so as to affect exercise price contravenes plan. Knowing, intentional violations of stock option plans cannot be exercise of BJ. Backdating options qualifies as one of "rare cases in which transaction may be so egregious on face that board approval cannot meet test of BJ, and substantial likelihood of dir liability exists." "Directors of Delaware Cs should not be surprised to find that lying to SHs is inconsistent with loyalty, which necessarily requires good faith."

Rales v. Blasband - SC of DE Rales Rule & Demand Futility

SC of DE held that "where there is no conscious decision by corporate BoD to act or refrain from acting, BJR has no application . . . . The absence of board action . . . makes it impossible to perform essential inquiry contemplate by Aronson. Rales rule: Where challenged transaction was not decision of board upon which P must seek demand, P must create reasonable doubt that, as of time the complaint is filed, BoD could have properly exercised independent, disinterested BJ in responding to a demand.

Determining Voting Rights: Using Articles and Bylaws to Change Legal Norms

Using Art. & Bylaws to Change Legal Norms -Default rules can be changed by inclusion of preferred rule in AoI or bylaws; smaller firms: give each member a veto (make majority weaker).

Agent's actions will bind the principal only if the latter has manifested his assent by...

Actual authority: Writing, oral, or implied; principal is bound by the agent's authorized actions. (Btwn P & A) Apparent (or ostensible) authority: Principal manifests his consent directly to a third party who is dealing with an agent; express or implied. (Btwn P & 3rd) Inherent authority: Protect the reasonable expectations of outsiders who deal with an agent. Hand says, "Vouched reliability of agent merely by hiring him."

Caremark Standard Test

Test : In order to show that the directors breached their duty of care by failing adequately to control their employees, plaintiffs would have to show either... o (1) That the directors knew OR should have known that violations of law were occurring and, in either event... o (2) The directors took no steps in a good faith effort to prevent or remedy that situation, and... o (3) That such failure proximately resulted in the losses complained of. (Affirmative defense.)

UPA (Universal Partnership Act) (1997) §§103, 202, 301, 306, 401, 601, 801

These statutory provisions contemplate that courts will continue to provide particularized rules via ex post adjudication to enforce fiduciary duties or otherwise ensure equitable results. UPA provide a standard form, off-the-rack rules for persons who wish jointly to own and operate a firm.

To whom are fiduciary duties owed?

To SHs directly: must, for ex., disclose relevant info when recommending approval of merger. To C or SHs collectively (far more common): Actions brought on behalf of C by (1) directors (most common) or (2) SHs—in a derivative suit (where directors must be insulated from initiating suit due to FD). Irony: The dirs' ability to control fiduciary litigation is itself protected by BJR. Note: Judicial doctrine and corporate codes used to focus exclusively on directors, not managers—even though managers (like the CEO) are largely delegated responsibility to make ordinary business decisions. This trend is changing...

The Limited Partnership

Uniform Limited Partnership Act (2001) §102(8)-(13), 107, 110, 301-303, 401-404, 603, 604 A business association composed of one or more general partners and one or more limited partners that is formed by filing a certificate of limited partnership with the secretary of state in the jurisdiction chosen by the parties in control of the limited partnership

Directors - Locus of All Legal Power and Authority Exercised by C.

• 8.01; 141. Determine corporate policy, monitor officers, and determine if and when dividends are given. • Compensated, given no share of profit. • Act by majority rule . • Often own stock to align their interests with the SHs (sometimes are majority stockholders); have a FD to both C and SHs. o Often have "independent outside directors;" so, most have a few "inside directors" (CEO) and many "outside directors" (lawyers, accountants, bankers, etc.) • Must also consider other relevant constituencies: employees, creditors, suppliers, local communities. • Under the business judgment rule, courts and regulators will give great deference to the decisions of BoD. o Judicial presumption that directors acted properly. • Not liable for debts of enterprise.

The Market for Shares

When C reaches min. level of outstanding shares and net worth, can be traded in regional or national stock exchanges. Those markets provide... o Valuation: All have nearly identical value, provided with a reliable market price; cuts transaction costs. o Liquidity: Same as above + can sell shares whenever without incurring substantial broker's fees. o Monitoring of Managers: Possibility of a hostile takeover incentivizes managers to operate efficiently and to maximize value of shares. • Physical and Electronic Markets for Shares: Trading floor or virtually through securities firms that post prices online for buying and selling. • NYSE, NASDAQ: To lessen price of volatility, most stock exchanges use specialists who will step in in times of too little buying or selling to be the missing buyer or seller. • Has led to globalization of securities market.

Corporate Opportunity Doctrine: Various State Tests

DE's Line of Business test: Breach if opp was so closely associated with existing business activities so as to throw officer into competition w/ company. Sucks: (1) Requires determination of whether an activity is within C's "line of business." (2) And, separately, using financial ability of C to take adv. of opp. unduly favors inside director and disincentives officers to solve corporate financing issues. MA's Fairness Test: Whether exploiting opportunity was fair and equitable. Sucks: Because it's incredibly stupid... MN Combo Test: (1) Within C's line of business, (2) fair or not. Sucks: For the same reasons DE and MA fail.

The Intersection of Common Law and Conflicting Interest Statutes Delaware G.C.L. § 144; MBCA §§ 8.60-8.63

DE: 144 provides no conflicting interest transaction will be void if (1) authorized by disinterested dirs, OR (2) approved in good faith by SHs, OR (3) fair to C at time authorized; also requires candor, fair dealing. Leaves gaps: BoP, what constitutes a conflict, standard of review, what constitutes disinterestedness. MBCA: 8.60 defines conflict of interest; transactions falling outside of 8.61 do not expose an interested dir to any special duty of candor or fair dealing; 61(b), 62, and 63 provide that CIT may not be voided if ratified by qualified Ds, vote of qualified SHs, or is fair to C. Still, may be voided if transaction is "vulnerable on some other ground." [What the hell?] And, safe harbor does not subvert 8.30's req. that BoD must comply w/ care, best interest, good faith criteria.

Hamburger v. Hamburger (Superior Court of MA, Suffolk County 1995)

David employed at Ace by father and uncle, co-owners of business. David builds business up, after father teaches him about wire business and introduces him to customers and suppliers, while father and uncle feud. Holding: David's arranging for financing and leasehold agreement and solicitation of Ace's customers was not wrongful even though (a) commenced while he was still EE of Ace and (b) was facilitated by wrongful appropriation of confidential customer lists and trade secrets, which were given to him by his father. Reasoning: EEs free to make such logistical arrangements while still an EE (financing and leasehold) and he did not solicit any business before resigning. EE free to use his general knowledge, experience, memory, and skill in est. a new business. Customer lists are not trade secrets if the information is readily available from published sources. [No non-compete agreement reached.]

Derivative Litigation and the Demand Requirement MBCA §§ 7.42, 7.44; ALI, Principles of Corporate Governance § 7.03

Derivative suits involve 2 actions initiated by SH: (1) Action against C for failing to bring suit (2) action on behalf of C for harm to it from not having brought suit. Real incentive is not hope of huge return; rather, large attnys fees that result. Suits might be harmful to SHs if costs offset recovery. Such suits represent usurpation of Ds power to manage C. Safeguard: Require SH to make pre-suit demand, explaining claims that he wishes investigated. If C chooses not to bring suit, SH can challenge decision as breach of FD—but has no right to initiate original claim that was subject of demand. Some states waive demand req. if it would be futile, as when Ds lack independence to impartially consider demand. [MBCA, however, has a universal demand requirement.]

Disinterested Directors under DE Law

Directors have burden of proving entire fairness in DE. (1) Disinterested can vote and thus subject transaction to BJR or (2) where disinterested not available, SHs may ratify (or challenge, but cannot automatically nullify it). Good faith approval by DISHs: cannot be swayed by loyalty to director buddies.

Statutory Exculpation Provisions MBCA §2.02(b)(4); DE G.C.L. §102(b)(7)

Directors may incur substantial liability even when acting in good faith. Directors lacking protection against such risks could be expected to respond by (1) becoming overly cautious in carrying out their duties or (2) refusing to serve at all. States have now enacted legislation that allow Cs to limit or eliminate directors' liability for breach of fiduciary duties (e.g. exculpation clause)

Brehm v. Eisner, Delaware Supreme Court (2000) The Role and Nature of Substantive Review

Disney hired Michael Ovitz as its president in 1995. Ovtiz's employment agreement was negotiated by Disney chairman and CEO Michael Eisner and was approved by the 1995 board of directors—the Old Board. Pretty much incentivized him to want to quit, 14 months later, contract was terminated. SHs brought derivative action against Disney's dirs, claiming that Old Board breached its FD, committed waste by approving employment agreement w/o properly informing itself of cost of non-fault termination provision. Complaint also alleges that New Board breached FD by agreeing to non-fault termination, constituted waste. Holding: BoD only has duty to inform itself, prior to taking action, of all material facts reasonably avail to it, thus does not breach duty if it is fully informed as to how severance payout will be calculated, but not informed as to exact amount of severance payout. REMEMBER: Court only looks to process b/c courts are not qualified to second-guess substance, which is subject to BJR (unless waste—if C got nothing in return for assets). Procedural due care (process) v. substantive due care (the terms; is it worth it or is there adequate consideration?). Reasoning: Disney's financial exposure under contract was info (1) material to dirs' decision making. Info also (2) reasonably avail., b/c amount of exposure under various payout scenarios could have been calculated. While complaint satisfies obj. tests of reasonable availability, materiality, does not nec. create reasonable doubt that dirs exercised due care. Complaint admits dirs were advised by compensation expert, and relied on expertise. Under section 141(e) of DGCL, dirs not liable for relying in good faith on expert. Size, structure of executive compensation are matters of business judgment, and a board's decision on the issue is entitled to great deference. Thus, fails the waste test. NOTE: Irrationality is functional equivalent of waste test for PROCEDURAL due care or it may tend to show that a decision was not made in good faith.

Class Voting, Including Dual-Class Voting Schemes

Divide shares into classes and permit each class to select a specific number of directors. Dual class: Type of share division in which companies issue shares that have differing rights. In dual class ownership structure, company can issue two classes of shares, Class A and Class B. These classes may have different voting rights, but represent same underlying ownership in company.

The Role and Nature of Substantive Review

Doctrine of waste: General exception to BJR, allows courts to find dirs liable where direct proof of lack of care or loyalty is lacking—but only as function of failure to carry out fiduciary responsibilities? Saxe v. Brady (DE, 1962): SHs sue, alleging that investment advisory fees so unreasonable that they constituted waste. Where waste of corporate assets is alleged, notwithstanding independent SH ratification, court must examine facts. That examination, however, limited solely to discovering whether C has received such inadequate consideration in value that no person of ordinary, sound BJ would deem it worth what C has paid. [If reasonable people could disagree, BJR applies.] Grobow v. Perot (DE, 1988): Duty of care bifurcated into procedural due care (an informed decision) and substantive due care (purchase terms). Thus, doctrine of waste within duty of care— place where substantive review plays no part? Recall: Good-faith-based claims remain reserved for instances of egregious conduct.

The Fiduciary Duty of Loyalty

Duty of Loyalty comes up... Where Dir. personally takes opp that C later asserts rightfully belonged to it, OR...Transactions b/n C & dir., also known as "conflicting interest transactions." Duty also entails duty of candor: not only must Dir. put C's interests before own; also must be candid with C and SHs about conflicts. Failure of latter is itself breach of FD. Note: While courts used to be primary arbiter of FD, courts & legislatures have recently channeled those decisions to internal decision-making bodies.

Section 102(b)(7) charter provisions

Emerald Partners, 726 A.2d : Two important points about raising Section 102(b)(7) charter provisions... The shield from liability provided by a certificate of Inc. provision adopted pursuant to 8 Del. C. §102(b)(7) is in the nature of an affirmative defense. Where the factual basis for a claim solely implicates a violation of the duty of care, the protections of such a charter provision may properly be invoked and applied. When a C agrees to exculpate its directors, it is understood that the SHs are contracting away any right SHs might otherwise have to hold the directors labile for damages caused solely by the directors' breach of the duty of care. But what about creditors? They have no greater leeway the press these claims than stockholders.

Lyondell Chemical Company v. Ryan (DE, 2009) Directors' Duty of Good Faith Explained

Factually similar to Van Gorkom. Allegation of breach of Revlon (get best price for SHs at sale of company) and that dirs' misconduct rose to level of bad faith. TCT denies motion for SMJ, SC reverses, nearly impossible to plead bad faith claim against indep, disinterested dirs in transactional setting. o While unable to conclude dirs met Revlon burden (sans auction or market check), no legally prescribed steps that dirs must follow to satisfy duty. Thus, dirs' failure to take any specific steps during sale process could not have demonstrated conscious disregard of duties (recall standard above in Disney). o Inquiry should not have been whether dirs did everything they should have done to obtain best sale price, but rather should have been whether dirs utterly failed to attempt to obtain best sale price. Caremark standard, bitch.

Corporate Opportunity ALI Approach

Fiduciary may take advantage of corporate opportunity if such taking either is fair to corporation or is authorized in advance by disinterested directors in a manner that satisfies the standards of the BJR or is authorized by an informed vote of disinterested SH, so long as SH rejection of pop is not equivalent to waste corporate assets.

Limited Liability Partnership

UPA (1997) §§306, 1001; ULPA (2001) §§102(9), 404(c) The sole purpose was to make limited liability available as an opt-in default rule for firms operating as a general or limited liability partnership. To become an LLP an existing or newly created general partnership simply registers with the secretary of state as an LLP (or LLLP—limited liability limited partnership). Most states require a nominal initial and annual renewal fee. Once created, an LLP is governed by general partnership law in all respects—except for special statutory liability and asset-distribution-limiting provisions designed to protect third parties. Recent statutes give general partners the same security as members in an LLC or SHs in a C. LLC: If unable to satisfy its obligations, owners would lose only capital invested into the company; not responsible for debts that could not be satisfied from firm's assets. LLP & LLLP: File with Secretary of State; partners not responsible to wrongdoing of other partners.

Malpiede v. Townson, Delaware (2001) Statutory Exculpation Provisions

Frederick's of Hollywood searched for buyers for over year, finally approved offer from Knightsbridge. 2 months later, Fredericks received unsolicited, higher offers from 2 other buyers (Veritas, Milton). Next month, BoD discussed 2 others offers with firms. Knightsbridge came back, increased bid, imposed a # of conditions on board that made it essentially impossible for Frederick's to merge w/ any company other than Knightsbridge. Holding: Dismiss P's due care claim on ground that exculpatory provision in charter of target corp. auth. by Del 102(b)(7) bars any claim for money damages against dir Ds based solely on board's alleged breach of duty of care. Reasoning: Ps failed to properly invoke loyalty, bad faiths claims, leaving only due care claim. If there is only unambiguous, residual due care claim, nothing else—as matter of law—then section 102(b)(7) bars claim—under BJR! As matter of public policy, §102(b)(7) adopted to permit SHs to adopt provision in Cert of Inc. to free dirs of personal liability in damages for due care violations, but not duty of loyalty violations, bad faith claims, certain other conduct. Such charter provision, when adopted, would not affect injunctive proceedings based on gross negligence. Once statute was adopted, SHs usually approved charter amendments containing these provisions b/c freed up dirs to take business risks w/o worrying about negligence lawsuits.

Federal Rules providing SHs access to Persuasive Communication → Rule 14a-8

Generally, SHs are not entitled to set agenda or make ordinary business decisions. But, under this rule, qualifying SHs (min. amount of stock, from time of filing through meeting) may make SH proposals to make recommendation that board take action. In effect, qualifying SH makes motion at SHs' meeting, while using company's proxy materials to do so. May make one per meeting, no more than 500 words; often address broader social goals, mgmt practices. Subject to # of exceptions AND Cs may exclude under rule if proposal is "not proper subject for SH action under state law." So long as presented as recommendation, cannot exclude as "not a proper subject." Exceptions: Economic irrelevance (less than 5% of corporate assets, gross sales, and net sales) and "ordinary business," the latter of which is the topic of much controversy... Also, "Socially significant" limitation. See Lovenheim.

Duty of Care in the Decisional Setting MBCA §§8.30, 8.31

In decisional setting, dirs consider whether to authorize particular course of action, activity or transaction. When so acting, dirs face constant tension created by diff perspectives, access to info of "inside,""outside directors" Inside directors may: Have blind spots or be unable to be obj. or candid in observations, opinions about C's best interests. Duty of Care Role outside dirs play in publicly traded Cs: Mergers: Unlike most corp transactions, mergers require action by both dirs, SHs. If merger approved, dissenting SH may elect to reject consideration promised in merger and instead receive in cash fair value of stock as determined by judicial appraisal (this is an option not available in connection with most corporate transactions) Things to consider: How is dirs' duty of care related to BJR? What duty of candor applies whenever dirs ask SHs to ratify or approve dirs' actions or recommendations?

Corporate Opportunity Doctrine ALI Approach - Principles of Corporate Governance §5.05

Includes (1) opps closely related to business and (2) any opp that accrues to fiduciary as result of position w/ C. If C can prove X is "corp opp," dir. must (1) disclose in full and (2) offer opp to C. (3) Opp must then be rejected by C. (4) Rejection must be fair to C, must be rejected in accordance with BJR, or rejection must be authorized by disinterested SHs. BoP is on party challenging taking of opp. Good faith but defective disclosure can be cured by affirmative vote from disinterested SHs. Fiduciary may take advantage of corp opp if (1) it is fair to C, (2) it is authorized by dirs in way that satisfies BJR or (3) authorized by vote of SHs AND is not waste of corp assets. "Waste" = No (or inadequate) consideration + no rational business purpose; akin to a gift—which precludes it from BJR protection.

A Classified Board with Staggered Terms—Adaptability Versus Stability

MBCA §8.06: Allows classification of Dirs. into 2 or 3 groups of as equal size as possible. If Dirs are divided into 2 groups, then each Dir serves a 2-yr term. If Dirs are divided into 3 groups, each Dir serves a 3-yr term. Delaware G.C.L. §141(d) Terms of all directors are staggered so that term of only 1 group expires each year. o Staggered terms theoretically ensure that a C will always have experienced directors in office. o Absent removal of directors, having staggered terms means that 2 annual meetings would be required to replace a majority of the board of directors. Thus, SHs (even a majority SH) cannot easily change corporate policies simply by electing an entirely new board. o Staggering directors' terms operates as a constraint on the majority SHs' ability to adapt to changed circumstances by quickly naming new directors. o Varying statutory norms to diminish majority power requires careful planning to protect against later amendment by the majority. o Corporate planners must carefully consider whether the "constitutional" provision should be placed in the C's articles or bylaws, as a way to prevent the majority from amending the new rule.

Formation: The Articles of InC

MBCA §§2.01-2.06; Delaware G.C.L. §§101,102 To form a C participants must complete AoI and file with appropriate state official in chosen state (generally sec of state). Must satisfy statute and clients.... MBCA §2.01: Requirements for formation. Basic facts - C's name, registered office, agent for service of process, and number of shares it is auth. to issue. After the AoI are filed, there is usually initial org. meeting at which directors are elected, shares are issued in exchange for consideration that C receives to undertake its business, and bylaws governing corporate procedure are adopted

The Corporate Form

MBCA §§206, 8.01, 8.40, 10.01-10.04, 10.20 Delaware G.C.L. §§109, 141(a), 142, 242 Directors, officers, and SHs—form fits many types of business firms, one person may play two roles. By statute, all corporate power is exercised by the Board of Directors; acts as a unit via majority rule (like SHs). C is a separate entity; enterprise itself may own property; potential for perpetual duration.

The Annual Meeting and Other Forums for Shareholder Action

MBCA §§7.01-7.07, 7.21; Delaware G.C.L. §§211-213, 216, 222, 228 Annual meeting and election of directors: Immutably, corps must hold an annual meeting to elect new directors, meet once a year. Special SHs' meetings: Discuss other issues. o MBCA: Person with 10% or more of stock may call meeting. o DE: Directors or whomever is listed in the charter. Action by written consent. o MBCA: Only by unanimity. o Delaware: Majority rule. [DEFAULT RULES.] Record date, determining SHs entitled to vote: Stocks constantly changing hands, so whomever is the owner at record date, as specified by dirs, may attend meeting/vote. o See Hoschett: Importance that courts attach to SH voting and meeting rights. Directly after case, DE legislature amended law to allow non-unanimous written consent in lieu of annual meeting if all directorships to be filled at meeting are vacant.

Shareholder Access to Corporate Records and Shareholder List

MBCA §§7.20, 16.01-16.04, 16.20; DE G.C.L. §§219, 220; 1934 Securities Exchange Act Rule 14a-7 MBCA: Mandates basic recordkeeping, requires that annual reports and financial statements be given to SHs, and gives absolute right to minutes of SHs' meetings, corporate communication with SHs, etc. 16.02 gives right to inspect accounting records and minutes from board meetings and list of SHs—but only when demand is made in good faith and for purposes to which records are related. DE is less detailed in its code, but it has a wealth of on-point precedent.

Overview of Normal Rules of Shareholder Voting for Election of Directors: Straight Voting

MBCA §§8.04, 7.21, 7.28; Delaware G.C.L. §§141(d), 212(a), 214, 216 Default rule governing SHs' ability to elect directors: Directors are annually elected by plurality vote, according to votes cast on a one vote per share basis. 51% of stock = choice of 100% of the BoD.

Shareholder Access to Corporate Records and Shareholder List MBCA §§7.20, 16.01-16.04, 16.20; DE G.C.L. §§219, 220; 1934 Securities Exchange Act Rule 14a-7

MBCA: Mandates basic recordkeeping, requires that annual reports and financial statements be given to SHs, and gives absolute right to minutes of SHs' meetings, corporate communication with SHs, etc. 16.02 gives right to inspect accounting records and minutes from board meetings and list of SHs—but only when demand is made in good faith and for purposes to which records are related. DE is less detailed in its code, but it has a wealth of on-point precedent.

Policy Arguments for Limiting the Reach of the Duty of Care

MCBA § 8.30(b) Directors have duty to carry out managerial responsibilities w/ reasonable care, diligence. What the hell does that mean? Is a well-functioning board essential to a successful C? Absolutely, but how best to enforce it? Markets, not courts, bro. In DE, FD of care defined solely by judicial doctrine. Under MCBA, directors are required to carry out duties w/ care ordinary prudent person in like position would exercise under similar circumstances. Really only enforced when dir's actions were entirely egregious, w/o any apparent business reason. Dirs presumptively not liable under BJR. 1998 Amendments to MCBA make clear that this FD of care should not be confused with those enforced under tort principles.

Removal of directors and other midstream private ordering

MCBA §§8.08-8.10 DE G.C.L. §§141(k),223 Typically, Dirs can be removed w/ or w/o cause by majority vote, before expiration of term. Limits: MBCA (No restrictions if staggered terms, but if cumulative voting may not remove if votes against removal were sufficient to elect; if elected by a class, can only be removed by a majority of that class; immutable) v. DE (Members of staggered folk are protected by cause requirement, may remove protected directors for cause, ability to change the default rules). o Campbell v. Loew's, Inc. (DE, 1957): Desire to take over control/lack of cooperation does not meet the cause requirement for removal, but "a planned scheme of harassment" does. o Auer v. Drussel (NY, 1954): Before director can be removed, must be given service of specific charges, adequate notice and full opportunity to meet accusation.

Efficient Market Hypothesis

Markets provide unbiased prices; you cannot develop a trading strategy based on use of past prices that will enable you to beat the market return; whatever causes the price to move will be because of new information and thus stock prices move in random walk (old information is irrelevant; tracking patterns will do you no good).

SH Governance in the Public C Setting

Over last 70 years, have been repeated efforts by proponents of SH rights to use fed regulation of proxy solicitation process to provide greater power to SHs Opponents: Expanding SH's rights would lead to less effective corporate decision making and that state regulation of Cs' internal affairs should be preserved. Changing SH role organized around 5 core mechanisms: 1. Evolution over several decades of federal proxy rules permitting persuasive communication by SHs under fed Rule 14a-8 aimed at influencing dirs to change corp policies 2. More recent SH use of precatory, persuasive communication, coupled w/ newly effective institutional SH use of voting to elect or remove directors 3. Very recent SH use of power to amend bylaws to act for C, process that has involved combo of both state and federal law 4. Federal legislation or rule-making to change role of SHs, change that raises long-standing federalism issues 5. Use of traditional SH rights under state law to inspect documents

At-Will Employment Doctrine

Overcome by judicial doctrines that protect EEs. Exception to at-will employment doctrine: (1) Violation of public policy, (2) of employee handbooks that constitute a unilateral contract, and (3) of covenant of good faith and fair dealing. If principal has acted in bad faith, pulling out just as agent is near completion of his obligation, court will often bar principal's pulling out.

In re Walt Disney Company Derivative Litigation, Delaware Supreme Court (2006) Directors' Duty of Good Faith Explained

Ovitz much respected, well-known exec; convinced him to leave his lucrative and successful job with Creative Artists Agency. After Ovitz's first year on job, clear that he was not working out as pres and that he was "a poor fit with his fellow executives." Disney's CEO and attorneys could not find way to fire him for cause, so Disney fired him w/o cause, triggering severance package in contract. Ovitz ended up being paid $130 million upon his termination. SHs brought derivative suits against Disney's directors for (1) failure to exercise due care, good faith in approving contract and in hiring Ovitz, and, even if contract was valid, for (2) breaching FDs by actually making exorbitant severance payout to Ovitz. Holding: Dirs did not breach duty of due care in approving contract or hiring Ovitz b/c dirs fully informed of all info avail, including total poss. severance payout to Ovitz. Reasoning: 3 types of fiduciary bad faith... (1) Intent - subjective bad faith, intent to harm, SHs can prevail on good faith. (2) Intentional dereliction of duty - not intentional, but "is qualitatively more culpable than gross negligence." Can prevail. [But, this is a small space; Caremark falls outside because it had manuals, reporting requirements, and an auditing mechanism—both internal and external.] Would have to disregard red flags as in Miller. Note: If system in place, almost never liability, UNLESS you know it's not going to be adequate or simply do not pay attention to its enforcement (and sustained failure). (3) Gross negligence - lack of due careCannot prevail—too lose to duty of care (which can be exculpated). Dirs did not violate any FDs by actually making severance payout to Ovitz b/c dirs were entitled, under BJR, to rely on advice from Disney's CEO, attorneys that there were no grounds for Ovitz to be fired for cause—thus entitled to fire him w/o cause

Lovenheim v. Iroquois Brands, Ltd., DC District Court (1985)

P sought to include resolution about foie gras in SH meetingD refused to include info on Lovenheim's resolution in proxy materials. Iroquois defended refusal based on SEC rule that C may omit proposal from proxy statement "if proposal relates to operations which account for less than 5 percent of [Iroquois's] total assets at end of its most recent fiscal year . . . and is not otherwise significantly related to [Iroquois's] business." Holding: Meaning of "significantly related" in SEC rule for omissions in proxy statements is not limited to economic significance. Reasoning: Because of ethical and social significance of P's proposed resolution, P has shown likelihood of prevailing on merits in that his proposal is "otherwise significantly related" to D's business. Proposal may not be excluded from proxy statement being distributed.

Community Counseling Service, Inc. v. Reilly (4th Cir 1963)

Reilly breached his fiduciary duty as an EE of CCS when he solicited business for himself prior to his termination. Holding: Reilly had no right to solicit business for himself before his employment was terminated, solicited the business of three parishes for himself prior to that termination, and was thus untrue to his employment obligation, disloyal to his employer, and breached his fiduciary duty. Reasoning: EE must prefer interests of his ERr to his own, may not solicit for himself future business that his employment requires him to solicit for his ER, and cannot withhold information that would be useful to his ER in the protection and promotion of its interests. Must be substantial hiatus between termination of employment and commencement of subsequent campaigns. Note: Post-termination, ex-EE may compete with former ER, so long as he does not use confidential information or trade secrets obtained while employed (therefore stealing IP). INDEPENDENT CONTRACTOR has no FD

1934 Exchange Act Rules Proxy Solicitation

Rule 14(a) gives SEC authority to regulate proxy or consent solicitation process; Congress was concerned with preventing Cs from soliciting proxies by means of materials that did not reveal true nature of what was being acted on; SEC has actually promulgated extensive rules to address content and timing of proxy solicitation. 14a-3: Cannot solicit proxy unless person is fully furnished with a publically filed preliminary or of final proxy statement, including date and time of meeting, revocability of proxy, solicitors' ID and source of funds, basic info about candidates for director. 14a-5: Readability—font, tabs, grouped according to subject matter. 14a-4: Printed on rectangular card or via Internet; readability requirements, too. 14a-9: Prohibits making of false or misleading statements as to any material fact, or misleading omission.

Aronson Rule and Test

Rule: Must provide facts that create reasonable doubt that dirs' actions are entitled to BJR if you plan to avert demand requirement. Test: Must create reasonable doubt that (1) MAJORITY of Ds are disinterested and independent (beholden to the controlling person, for example) in making decision not to sue "and " (2) the challenged transaction was otherwise the product of a valid exercise of BJ. Prong I: About decision to sue. [FD of loyalty.] Prong II: About the transaction itself. [Of care.] Really an "or." If you show I, II is satisfied. Only reason II exists is if disinterested, indep (or new board) but fraud, illegality, or COI exist..

Cumulative Voting

SH may cast a total number of votes equal to number of shares multiplied by number of positions to be filled, and these votes can be spread among as many candidates as there are seats to be filled. To elect X number of directors, SH must have MORE THAN S(total number of shares)*X(number of desired directors) / (D (number of directors to be elected) +1).

Defining characteristics of Limited Partnership

Separation of ownership and management functions  Default norms: limited partners have essentially no management power and no authority to act as agents in carrying out the partnership's business.  General partners are the active participants in the firm, empowered to make and carry out the firm's business policies. Limited Liability  Limited partners are not personally liable for the limited partnership's obligations.  General partners are jointly and severally liable for the firm's obligations. Firm's continuity and adaptability to changed circumstances favored over individual's adaptability  General partners may withdraw from the partnership at will, but limited partners may not. Such withdrawal does not automatically or necessarily trigger dissolution and liquidation of the limited partnership.  General partners make ordinary decisions by majority vote and extraordinary decisions unanimously.

CA, Inc. v. AFSCME Employees Pension Plan, Delaware Supreme Court (en banc 2008)

A SH of CA, Inc., AFSCME, proposed SH bylaw and submitted it to be included in CA's proxy materials for its annual meeting. If adopted, the Bylaw would have instructed the BoD of CA to "reimburse a stockholder or group of stock holders for reasonable expenses incurred in connection w/ nominating one or more candidates in a contested election of directors to the corporation's BoD. . . ." CA's present bylaws and CoI fail to address the reimbursement of proxy expenses, although its CoI did state that the behavior of the affairs of the corporation and the management of the business were vested in the board. The stance was taken by CA that the proposed bylaw was not the suitable subject of SH action and sought a no-action letter from the SEC. Holding: It is a proper subject for action by SHs a bylaw amendment that directs corporation's BoD to pay back proxy expenses AND when a bylaw amendment, proposed by SHs, fails to allow the directors to keep their full power to exercise their FD in determining if reimbursement is proper and instead directs a corporation's BoD to pay back proxy expenses, is a violation of law Reasoning: The Bylaw, as written, would stop Dirs from employing FD in a situation such as this, even though provides dirs complete discretion regarding reimbursement amount, range is not expansive enough seeing as it includes no provision or language to reserve to CA's dirs their total power to employ their FD in determining if reimbursement would be approp at all. Either amending CA's CoI to contain Bylaw's substance or to have statutory law altered by legislature is AFSCME's only recourse. The Bylaw was interpreted as procedural by the court due to context of Bylaw being process for dir election. Promoting integrity of electoral process by enabling nomination of dir applicants by SHs is purpose of Bylaw, before Bylaw, only board sponsored nominees for election were repaid their election expenses.

Guidelines to consider for Corporate Opportunity

Although corp dir may be shielded from liability by offering to C opp which has come to dir independently and individually, failure of dir to present opp does not necessarily result in improper usurpation of corp opp. The below lists are guidelines "to be considered by a reviewing court in balancing the equities of an individual case. No one factor is dispositive AND all factors must be taken into account insofar as they are applicable." An officer or dir of a C MAY take a corp opp if opp: o Is presented to him in his individual capacity. o The opportunity is nonessential to the C. o The C has no expectation for the opportunity. o The director or senior officer has not wrongfully utilized corp resources to take advantage of opp. • Officer or dir MAY NOT take business opp for his own if: o The C is financially able to exploit the opportunity. o The opportunity is within the C's line of business. o The C has an interest of expectancy in the opp. o By taking opp for his own, corp fiduciary will thereby be placed in position inimical to his duties to C. The determination must be made depending on the circumstances existing at the time the opportunity is presented without regard to subsequent events

The Intersection of the Fiduciary Duty of Care and Loyalty (Including the Duty of Good Faith)

Although exculpation statutes barred damage claims based solely on claimed breaches of the duty of care , there was still an expended role for the duty of care with respect to injunctive claims and lawsuits involving more than the duty of care alone. DE G.C.L §102(b)(7): Battleground for testing the contours of the business judgment rule ("a C may not provide exculpation for breaches of the duty of loyalty, or 'for acts or omissions not in good faith ...") Any claim based solely on a breach of duty of care is immediately SMJ'd. A new focus on good faith and its relationship to the duties of care and loyalty. Originally recognized a directors' fiduciary duty as having 3 components (Care, loyalty, good faith) However, now good faith is a piece of the duty of loyalty. Breaches of duty of good faith, loyalty can be alleged on their own.

Sennott v. Rodman & Renshaw, (7th Cir. 1973)

Appellant was held vicariously liable for fraudulent misrepresentations of former associate and son of partner of appellant. Appellant contended that actions of former associate could not be imputed to them b/c appellant had no knowledge of deception.Who's responsible for a rouge broker's action? Distinguishing Blackburn. It depends on the mindset of the 3rd party; does the 3rd party think A is acting on behalf of P? In Sennott, dealer knew that broker had gone rouge and thus principal is not responsible for agent's doings. Blackburn distinguished: Both agency and reliance elements present. Here, while there may have been implied agency, there was no reliance on that agency in making the transactions. Damage to appellees was a result of their misplaced reliance on the former associate and not appellant.

Benefit Cs Delaware General G.C.L. Subch. XV

Benefit Cs = Allowed in 19 states (growing trend), allows C to put into charter that it has a purpose other than shareholder value (ex. Ben & Jerry's purpose is to make ice cream in a socially responsible way, at expense of SHs.). Requires adoption Cs to commit to pursuit of both profit and social benefit. DE - corporate purpose "to operate in a respons. and sustainable manner." Accountability - required to balance "pecuniary interest of SH, best interests of those affected by corp's conduct, and identified specific public benefit purpose." Transparency

Persuasive Communication with Punch: Rule 14a-8 Proposals Linked with Use of Shareholder Authority to Elect/Remove Directors

By 1990s, SH proposals to improve corporate governance structures were routinely receiving at least 30% votes, some majorities; proposals regarding broader social goals, however, were far less successful. Most successful: Striking practices that would insulate management from removal, too much compensation (say-on-pay), separation of roles of CEO and chair of board. RECALL: Dirs remain free to ignore even winning SH proposals, which are all mere recommendations. Recently, most of large American Cs have eliminated staggered voting requirements so that monitoring and changes in power were more common (down from 44% to 16% from 2003-2008, according to S&P). One-two punch: If no response to implementing majority vote, will vote those directors out the next year.

Proxy Voting

By appointing proxy to act on SHs behalf, that SH need not be present at meeting to participate. • Proxy = (1) Power to vote the shares of another, (2) person of entity given the power to vote, (3) actual document of agreement. o Some proxies are given absolute discretion, others are required to follow SH's instructions. o Most issues arise re: pre-meeting correspondence, not meeting itself: whether there is necessary quorum present to hold a meeting to determine directors.

Cleansing for Subsidiaries and Mergers

By statute, mergers require approval of SHs and Ds. But, when C owns most but not all of subsidiary and merger is proposed, "cleansing device" is needed: vote of majority of minority SHs AND "entire fairness review." Citron v. E.I. DuPont (DE): Even where no coercion, SHSs voting on parent subsidiary merger might perceive that disapproval could risk retaliation (like withholding dividends). Thus, even if minority SHs have ratified merger, must have procedural protections beyond mere disclosure—enter more stringent entire fairness standard of review. Kahn v. Lynch Communications Systems, Inc. (DE, 1994): BoP on party who stands on both sides of transaction; but if approved by indep. committee of directors, burden shifts to challenging SH-P

Meinhard v. Salmon (New York Court of Appeals 1928)

D entered into a lease for hotel. D, while in course of treaty with lessor as to execution of lease, was in course of treaty w/ P, for necessary funds. P & D were involved in JV in regards to property, for better or worse. D was manager o/ property. Near end of lease, Elbridge Gerry became owner of reversion, and he approached D. The tow entered into a new lease, which is owned and controlled by D. D did not tell P about it. When P found out about new lease, he demanded that lease be held in trust as asset of venture b/n D & P, D refused. Rule: Members of a partnership owed duty of loyalty to each other and so must disclose opportunities that arise in order for both to have an equal chance to take advantage of it. Reasoning: Partners in venture have fiduciary duty to each other. So, when opp arises that can benefit both partners, but one partner takes advantage of it w/o informing other, fiduciary duty is deemed to have been breached. Opp belonged to partnership, not to individual partners, so one partner is considered to have stolen opp from partnership.

Partnership law, statutory and common, are rules for those who wish to jointly own and operate a firm

o Formation requires no written agreement or governmental action, just a mutual manifestation of consent. o Modification to standard rules is common; immutable and default rules save transaction costs. o Equal sharing of ownership and management functions: All are (1) residual claimant and collect last, (2) oversees the business and management of the firm, and (3) acts as an agent of the partnership. Ideal: all make equal contributions. o Individual partner's adaptability to changed circumstances favored over firm's continuity and adaptability: Firing a partner is complicated because it requires dissolving the partnership and paying the value of her interest in cash AND threatens the firm's general stability and continuity. Also, decision-making norms (majority vote, etc.) are default and can be contracted around. o Unlimited personal liability: Joint and severally liable for ALL misconduct of one or several partners; requires internal checks. o Fiduciary duty: Each partner owes fiduciary duty to his counterparts; relations among equals.

Joint Ventures

• Associates join to exploit a particular opportunity (unlike GP, in which partners carry on business as co-owners). o Less permanent and less complete merging of assets and interests. o Third parties may not be able to assume that JVs have agency power; may have greater room to prefer own interests. o Often occurs when two large firms come together for a joint research project, marketing effort; intended to maintain separate identities.

Officers - Agents of the C.

• Compensated, no profits. • Duties often specified in bylaws . §8.41  All power set forth in (1) bylaws, (2) by vote of board of directors, and (3) by another officer that the Board has delegated to. • Principal officer is often the CEO—often is the chair of the Board of Directors, too. Uh oh. • Not liable for debts of enterprise.

Where to Incorporate: State C Laws as Competing Sets of Standard Form Rules

• Internal affairs doctrine: Courts look to the laws of the incorporating state to determine the basic rights and duties applicable to a particular C. • More than ½ of country's largest Cs are incorporated in DE and, if not, in hq state. • Substantial uniformity in state law codes; many pull from DE and MBCA and in courts' jurisprudence. • Sources of corporate law: State law, federal law (Securities Exchange Act), listing standards of the national stock exchange. • Notes on Dev. of Corporate Law o Shift from special charting by state legis. general Cs codes. o Immutable features began to disappear. o DE might unfairly skew C's laws in favor of mgmt interests at expense of SHs? Best b/c it best balances conflicting interests of mgmt and SHs? Winning the race: Best substantive corporate code AND proven reliability of adapting its law to changed circumstances AND predictability provide by well-developed body of case law AND judges expertise in corporate law matters.

SHs - Owners, Share in the Firm's Profits.

• Risk bearers and residual claimants. • Annually elect the C's directors and approve changes in governing rules or structure. • No liability beyond that which she has invested; not liable for debts of enterprise (cuts transaction costs). What do SHs do? Vote: §7.28(a)  Remove directors—power to choose those who have the power. Vote: Fundamental changes (mergers, approval to changes in AoI). Vote: Bylaws (but not on ordinary business decisions). SH agreements: §7.32  Limit directors' power, given by §8.01(b). Sue: §7, subchapter D  Suing directors for breach of FD. Sell: §6.27  Restricting transfer of shares (right to sell is fundamental to properly law). • Norms entrust management of corporate affairs to directors. o Original AoI can give shareholder a right to control/make ordinary business decisions, but this is very rare. • Amendment to AoI may be initiated only by directors; so, the AoI are effectively immutable, as they will never give power back. • Most states allow to initiate change to bylaws—but may not make business decisions or establish corporate policy. May pass bylaws on process for electing SHs, not for decision-making. May suggest that directors take partic. action or adopt new policy.

Sarbanes-Oxley Act of 2002

If traded on national securities exchange, has 500 or more SHs, or more than $10M in assets, must register with SEC and make public disclosures about business and property of the company, financial data, core information about managers and their conflicts of interest, and executive compensation. Helps SHs in selling and buying, less so in voting. Reporting = accountability, if done correctly. Importance has grown: (1) Increase in mandatory disclosure, (2) tech makes this info far more available & quickly so, and (3) has actually promoted more voluntary exposure (indicates a transparent, well-functioning company).

BJR

Rebuttable presumption of good judgment—sans self-dealing or personal interest, reasonable diligence, and good faith; leaves directors with broad discretion to manage. Imposes heightened pleading and evidentiary burden on Ps, thereby deterring frivolous lawsuits. Aronson v. Lewis (DE, 1984): Absent an abuse of discretion, [this] judgment will be respected by the courts.

Majority Voting

Recent shift from plurality to majority voting for election of directors. 2006, In an uncontested election, one million withheld or no votes would lose to one yes vote under plurality voting. DE Amendments: Dir resignation may be made conditional upon failure to garner majority vote, could also make that resignation irrevocable. Pfizer: Dir who does not receive a majority vote must submit his/her resignation to board for consideration—and Board can decide whether or not to accept.

In re Caremark International, Inc. Derivative Litigation, Delaware Court of Chancery (1996) Care, Good Faith and Director's Oversight Responsibilities

Caremark was found criminally liable (illegal kickbacks for Medicare drug referrals) for illegal actions of lower level EEs, which subjected C to extensive liability. SHs brought suit against dirs for failure to monitor. Ruling on motion pursuant to Chancery Rule 23.1 to approve fair, reasonable proposed settlement of consolidated derivative action. Settlement (agreed to implement more corporate reporting processes; no monetary component to SHs, but paid out to federal, state government in fines) is fair, reasonable. Dismissal of derivative claims of dir fault. Holding: Generally, where claim of directorial liability for corporate loss is predicated upon ignorance of liability-creating activities within the C...only sustained or systematic failure of the board to exercise oversight (utter failure to attempt to assure reasonable info and reporting system exists) will est. lack of good faith that is nec. condition to liability. Here, no evidence of a systematic failure to inform themselves of the operations of the company. Reasoning: Dir liability for breach of duty to exercise approp attent. may arise in 2 distinct contexts: 1)follow from board decision that results in loss b/c decision ill advised/negligent. (subject to review under BJR, court can only determine on basis of good faith/rationality of process employed, otherwise, no grounds for liability. 2) when unconsidered board's failure to act in circumstances in which due attent. would have prevented loss. In this case, no evidence that board knew of violations of law. Board informed by experts that company's practices, while contestable, were lawful. No evidence that reliance on such reports was not reasonable. Note: Strengthening audit committees became a major focus of the Sarbanes-Oxley Act of 2002

DE & MBCA Rules - SH Derivative Suits & Demand

Chancery Court Rule 11 works to prevent strike suits—sets requirements for notice pleading. Chancery Rule 23.1: Pleadings in derivate suits; must have factual particularity, thus requires more than notice pleading (though need not plead any evidence). People bitch calling for factual particularity is unfair b/c Rules 26-37 do not allow discovery. Court says stop bitching—can look at relevant books, records if able to est. proper purpose. DGCL, § 220. Under MBCA and its requirement for (near) universal demand, most of litigation energy will be focused on judicial review of a motion to dismiss made by the C after the Board has concluded that the suit is not in the best interests of the C.

Fiduciary Duty of Care, Good Faith

Conduct in directing and managing the business and affairs of the C; typically only applicable to PCs. Note: MBCA §8.30, which imposes these duties on directors, refers to fiduciary duty as "standards of care." Recall: It is efficient—and thus lucrative—to leave business decisions to directors. An essential element of this overarching authority is the business judgment rule (BJR).

Transactions with a Controlling Shareholder or Director

Conflicting interest transactions between the C and person in control of the C are subject to heightened judicial scrutiny to protect interests of C and non-controlling SH.

The Special Problem of a Director's "Self-Compensation" Delaware G.C.L. §§ 141(h), 157; MBCA §§ 6.24, 8.11

Conflicting interest where BoD approves compensation of its inside directors or compensation to be paid to directors for service as director. Such situations fall outside of BJR protections; BoP on directors to show the compensation is fair to C. However, given judicial deference if (a) seek SH ratification or (b) put decision in hands of board members who are independent and disinterested. Stock option-option: Usually, vests only after the optionee has served company, b/c the value of other SH's equity may be severally diluted when that occurs, subject to heightened judicial scrutiny. Byrne v. Lord (DE, 1995) Test: Benefit Prong: Must be an undeniable benefit to C—must contain conditions that ensure that benefit. Value Prong: Value of options (FMV at time option is granted) must bear reasonable relationship to benefit passing to C from dir.

Non-Compete Agreements

Courts will enforce if reasonable given duration, geographical coverage, and nature of employer's risk from such competition. Robbins v. Finlay (Utah, 1982): Court will not enforce NCA b/c company's investment in training EE was small and there was no showing that his services were special, unique, or extraordinary; unrestrained by uniqueness, trade secrets, confidentiality, or even competitive unfairness; general knowledge or expertise cannot be appropriated as a trade secret.

Shapiro v. Greenfield, Court of Special Appeals of Maryland (2000) The Intersection of Common Law and Conflicting Interest Statutes

D was dir, CEO of College Park Woods, Inc. College Park purchased large parcel of land in 1961. Dev. shopping center on parcel, which proved to be unprofitable. BoD determined College Park needed to redevelop property into much larger shopping center, and business partner needed to accomplish this. After struggling to find suitable partner, BoD ultimately agreed to arrangement w/ a JV in which Shapiro held large interest. College Park conveyed title to property to JV in exchange for 50% ownership interest in JV . College Park retained no mgmt rights, but also bear no risk if project failed. Prior to approving arrangement, BoD called special meeting of SHs to consider transaction, & provided notice of exactly what was being considered. Ps were SHs but did not attend meeting. Attending SHs approved project unanimously, and BoD thereafter ratified decision. Ps sought to access corporate records concerning transactions. Board provided some but refused others. Issue: Even if a dir does not stand to personally benefit from transaction, dir is an interested dir if would reasonably be expected that dir's exercise of indep judgment would be compromised due to personal relationship to party w/ an interest in transaction. Reasoning: Though both stem from duty of loyalty, usurpation of corp opp, interested dir transactions are fundamentally diff events. When corp opp is usurped, insider seizes business opp from C, thereby enriching herself and depriving C of opp.Interested dir transaction, by contrast, is transaction b/n dir and C; C is itself party to deal. Under MD's C statute, interested dir transaction not automatically void or voidable, provided that either (1) transaction is substantively fair to C, or (2) majority of disinterested dirs or SHs approve transaction after interested dir discloses all relevant facts. Director is "interested" for these purposes if her capacity for independent judgment is compromised (i.e. relationship w/ interested party, or...)or if dir has personal financial stake in transaction, then dir is clearly interested under def. If dir does not have personal interest, but potentially subject to influence of another who does have such interest, court must make inquiry into specific circumstances of relationship. Found interest here because of familial relationship among Ds

Broz v. Cellular Information Systems (DE, 1996) Duty of Care - The Delaware Approach Delaware G.C.L. §122(17)

D was presented opp by Mackinac Cellular Corp. that targeted RFBC as potential buyer of cellular license, Michigan-2, which was adjacent to another license held by RFBC. At time of offer, CIS was undergoing Ch. 11 reorganization after came into financial straits from being overaggressive in other acquisitions. Another company, PriCellular, was also bidding for license while also trying to purchase CIS. PriCellular was eventually successful at acquiring CIS, but only after several delays and shaky financing. Meanwhile, D outbid PriCellular for Michigan-2 license. CIS, now owned by PriCellular, brought this action against D, claiming usurped corp opp belonging to P. P also argued that D had FD to PriCellular since they were trying to acquire CIS. D countered that he held FD only to CIS, and they did not have resources or desire to bid for Michigan-2. Rule: Corp opp doctrine holds that an officer or director of a corp can take a corp opp if opp is presented to them in their individual capacity, the opp is nonessential to corp, the corp has no expectation for opp, and they have not wrongfully utilized corp resources to take advantage of the pop Reasoning: Speculative nature of PriCellular's acquisition of CIS, and uncertain future business strategy of CIS after it reorganized under Ch. 11, were strong factors in D's favor. Businesses and officers would be severely limited in capacities if they had to consider how every present-day decision could adversely affect future dealings w/ company they owe a FD. This holding balances interests of both sides.

Delaware G.C.L. §141(e) Amended Post-Van Gorkem

Gimbel v. Signal Companies, Inc.: Chancellor preliminary enjoined board's sale of stock of wholly-owned subsidiary for alleged grossly inadequate price, finding that BJR had been pierced for failure of mgmt to give its board "the opp to make reasonable, reasoned decision." Delaware G.C.L. §141(e) amended in wave of Smith v. Van Gorkom to provide that dirs could rely on opinions by C's officers, even if not expressed in the form of report. Relationship b/n reliance on 141(e) and BJR, the board is entitled to presumption that exercised proper BJ, including proper reliance on expert. To survive motion to dismiss in due care case where expert has advised board in decision making process complaint must show: o Dirs did not rely on expert, reliance was not in good faith, did not reasonably believe that expert's advice was within expert's professional competence, expert was not selected w/ reasonable care, subject matter that was material, reasonably available was so obvious that board's failure to consider it was grossly negligent regardless of expert's advice or lack of advice, decision of board was so unconscionable as to constitute waste or fraud. • Now, interested-SH vote to approve merger would not cure any breach of duty by the dirs (as indicated in Smith v. Van Gorkom). Scope of SH ratification doctrine limited to circum where fully informed SH vote approves dir action that does not legally require SH approval in order to become legally effective. Only dir action or conduct that can be ratified is that which SHs are specifically asked to approve. With one exception, cleansing effect of such ratifying SH vote is to subject challenged director action to business judgment review as opposed to extinguishing the claim altogether.

Northeast Harbor Golf Club, Inc. v. Harris, Supreme Judicial Court of Maine (1995) The Corporate Opportunity Doctrine The ALI (§5.05) and MBCA (§8.70) Approaches

Golf Club brought suit against Nancy Harris for breach of FD as its pres by purchasing & developing property adjacent to that owned by Golf Club. Suit filed alleging (1) inadequate notice, (2) no opportunity for Club to purchase the property, and (3) bad for club to have nearby subdivision. Rule: Corporate opp is one that is closely related to business in which corp. is engaged or one that accrues to fiduciary as result of position within corp. Fiduciary must make full disclosure prior to taking advantage of any corporate opp. Corp. must then formally reject opp. A good faith but defective disclosure may be ratified after fact only by affirmative vote of disinterested Dir. or SH. Reasoning: Line of business test has two flaws. 1) whether opp is within corp's line of business is difficult to answer. 2) evaluation of financial incapacity will often unduly favor inside dir. or exec. who has command of facts relating to finances of corp. Fairness test also unhelpful b/c lacks principled content. Combo of 2 tests has resulted in compounding flaws in both. ALI test may bring clarity to murky area of law b/c provides clear procedure whereby corp. officer may insulate herself through prompt and complete disclosure from possibility of legal challenge. Case is remanded for proceedings consistent with this opinion.

Graham v. Allis-Chamlers Mfg. co Caremark Standard

Graham v. Allis-Chamlers Mfg. co., (Del. 1963): No claim dirs knew about behavior of subordinate EEs of C that had resulted in the liability. The claim, instead, was that the directors ought to have known of it and if they had known they would have been under a duty to bring the C into compliance with the law and thus save the C from the loss. DE Supreme Court concluded that there was no basis to find that the directors had breached a duty to be informed of the ongoing operations of the firm. "Absent cause for suspicion, there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists."

Hoschett v. TSI International Software, Ltd., Delaware Court of Chancery (1996) Annual Meeting

Holding: C may not elect directors via SH written consent and thereby avoid holding an annual meeting. Obligation to hold an annual meeting may not be satisfied by SH written consent action. Reasoning: Annual meeting performs critical functions in addition to election of dirs. It is a structured occasion in which SHs may interact with mgmt. Even if annual meetings are rarely deliberative in practice, allow for possibility of discussion of direction of business. Therefore, Dir. election by written consent is not permissible substitute to an annual meeting. Pursuant to DGCL § 228(a), SH majority may elect or remove dirs outside of meeting, but such changes only last until next annual meeting. In this case, it is undisputed TSI has never held annual meeting. TSI ordered to hold annual meeting.

Joy v. North, USCTA 2nd C (1982) Fiduciary Duty of Care

Holding: Corporate officer who makes mistake in judgment as to economic conditions, consumer tastes, or production line efficiency will rarely, if ever, be found liable for damages suffered by C. Policy reasons for limiting reach of FD of care. Reasoning: 1. SHs voluntarily buy stocks they buy. Selecting mgmt part of selecting one's preferred stock to invest in. When we buy a stock, we voluntarily assume risk of bad BJ. 2. Business decisions require quick decisions that, when viewed in litigation years down the line, may seem like wild, foolish hunch—when, at time, it made plenty of sense. Retrospective litigation puts dirs under unfair considerations. 3. Taking risk increases profitability for SHs, thus law should not create incentives for overly cautious corp decisions. Courts should not protect those that refuse to reduce risk by diversifying—as, in the long run, it will hurt value of investments. BJR will apply to all ordinary business decisions, unless corp decision has no business purpose, is tainted by conflict of interest, is so egregious as to amount to no-win decision, or results from obvious, prolonged failure to exercise oversight or supervision. Notes: Gagkiardi v. Trifoods Int'l Inc. (DE, 1996): B/c corp dirs of public companies often have very small ownership stakes in C, would be manifestly unfair to put liability on them for whole loss of bad business decision—too much disjunction between risk, reward. In re Walt Disney Shareholder Litigation (DE, 2005): Essence of business is risk. While dirs must act in good faith and w/ loyalty, only approp. redress for failures that arise from faithful mgmt must come from markets—not courts.

Globe Woolen Co. v. Utica Gas & Electric Co., Court of Appeals of New York (1918) Conflicting Interest Transactions

Maynard both pres and dir of Globe, operator of 2 textile mills. Also on BoD of local electric power company, Utica, but held no stock in it. Maynard wished to convert Globe mills from steam power to electric power but concerned that cost of conversion would be too high. Greenidge, GM of Utica , engaged in negotiations w/ Maynard that resulted in 2 contracts to provide electricity to mills. Contracts included guarantee that monthly cost of electricity at least $300 less than Globe's prior steam expenses. After agreed to terms, contracts presented to Utica's board for ratification in December 1906 and February 1907. Greenidge presented contracts, vouched for them. Maynard, dir, is Greenidge's boss. So, G inclined to work w/ M (even as he represents another company) b/c he fears loss of employment. Maynard silent @ meetings, did not vote on either contract. Self-dealing: Even though Maynard cannot directly dominate/choose board, he failed to disclose his intentions. Both approved by BoD, P made nec. changes for conversion to electric power @ own expense. Soon clear that Greenidge miscalculated and contracts would generate huge losses for Utica. Globe increased prod., power usage significantly, but Utica still required to provide cost savings based on prior production levels. Maynard hadn't warned of changes (increases in prod). Predicting losses up to $300,000 if held to terms, Utica gave notice of rescission in February 1911. Globe sued for specific performance. Holding: Corp. Dir. has a duty to protect C from suffering losses @ personal expense. Reasoning: Fact that self-dealing dir did not actually vote on transaction does not guarantee safe harbor for contract. Dir has duty to fully inform other dirs about potential risks, losses assoc. w/ transaction. If dir fails to do so, unfairness actually exists, contract is voidable at C's election. BJR gives presumption to dirs; so, SHs must rebut presumption w/ evidence of fraud, illegality, or conflict of interest (Wrigley case). After rebutted D must show sans conflict of interest OR that transaction was fair to C—entire fairness review. [Both VERY hard for D.] Contracts were startlingly unfair, Maynard clearly failed to be fully candid with other dirs. Maynard was in position of superior knowledge, had duty to share that knowledge. Since he failed to do so, contracts are voidable.

Miller v. U.S. Foodservice, Inc., DC of MD (2005) Officer's Oversight and Reporting Duties

Miller Pres., Chairman,CEO of USF, also served as dir of USF's parent company, Royal Ahold, received letter from USF's external auditor (Deloitte) stating that USF's internal accounting controls were problematic. Miller forced to resign all his positions amid an accounting scandal. After resigning, Miller sued USF and Royal Ahold, seeking post-termination benefits alleged was entitled to according to his employment contract. USF and Royal Ahold countersued, alleging D had breached his duties of care, good faith, and loyalty to the Cs, not entitled to benefits, D failed to implement proper internal systems despite warning signs, intentionally misled USF's audit committee for three years. D argued BJR. Holding: Corp dir may be held liable for failing to address potentially fraudulent internal practices. Reasoning: in Caremark, dir's duty of care includes req. to make good-faith efforts to ensure adequate systems for oversight exist. When warning signs emerge, dirs obliged to ensure an approp investigation occurs. Dir who intentionally misleads other dirs regarding oversight has acted in bad faith, in breach of duties of care and good faith. Complaint that alleges such deception overcomes presumption of BJR, adequately states claim for relief. Here, USF stated claim for breach of the duties of care and good faith, D not protected by BJR. NOTES: Gantler v. Stephens (DE, 2009): Officers owe the same FDs as directors. Under Sarbanes-Oxley, CEO,CFO must certify each quarterly, annual filing to SEC, confirming reports are not misleading, fairly present company's financial situation (and have disclosed any defects in company's financial controls).

Shlensky v. Wrigley, Illinois Appellate Court (1968) Discretion To Determine General Business Policies

P (SH in Cubs) brings derivative suit against dirs of D (Chicago National League Ball Club, Inc.) for negligence and mismgmt. D owns Chicago Cubs, operates Wrigley Field, concessions, television/radio broadcasts, leasing of field for extraneous events, garners admissions monies from away games. Wrigley is pres of C, owns 80% of stock therein; evidence shows has whole Board by balls. P alleges that Cubs should play night games to recover losses in profits: most other teams do it. Wrigley refuses to put lights in, play night games because baseball is a "daytime sport" and he's concerned about the neighborhood's response. P suggests that Wrigley is not motivated by best interests of the C, but rather in his personal views—hence, negligence and mismanagement. Holding: D's decisions are protected by BJR—and P has failed to prove that D's decisions are indeed injuring corporate profits. Reasoning: BJR (IL, DE precedent): In buying stock, we impliedly agree to be bound by acts of majority of SHs—or those who the majority of SHs delegates power to. Courts will not judge the policy or business of C, unless in contravention of its charter or public law. Not clear that D's choices are contrary to best interests of C and its SHs: reasonable to consider effects on surrounding neighborhoods and that's a decision properly before directors. Absent fraud, illegality or conflict of interest, as here, this decision is left to directors. No allegation that there will be a net benefit if lights are put in, night games are played, cannot be said that what appears to work for other teams will work for the Cubs. "Courts may not decide these questions in the absence of a clear showing of dereliction of duty on the part of the specific directors and mere failure to 'follow the crowd' is not such dereliction."

City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc. Delaware Court of Chancery, 2009

P SH filed action under Del. Code Ann. tit. 8, § 220 against D C based on BoDs' refusal to accept resignations of 3 dirs who received less than majority of SH vote at 2008 annual meeting, and failure to accept an acquisition offer from competitor to whom it soon thereafter sold company's principal asset for fraction of initial offer. Holding: SH did not meet credible evidence standard Reasoning: SH did not show that BoDs decision to retain dirs. was based on an entrenchment motive. Corporate policy requiring dirs..not receiving majority of votes to submit resignation to a board-designated committee, which had discretion to accept/reject resignations was followed. Moving forward w/negotiations w/competitor was not sole justification for retention of dirs.; retention was not defensive measure requiring application of Unocal standard. No evidence that BoD disloyally desire to fend off competitor's advances, that board's negotiations were conducted in bad faith, or that rejecting competitor's acquisition proposals was defensive action. Corporation was eventually forced to sell one of its valued assets to competitor, which had sought to acquire corporation, but SH had to show more than precipitous drop in stock price before sec. 220 inspection rights could be granted.

Dodge v. Ford Motor Co., Michigan Supreme Court (1919) Discretion to Consider Interests of Non-Shareholder Constituencies

P challenges company's actions in refusing to pay dividends, while hoarding profits to expand company's facilities & simultaneously lowering price of its cars. In most cases of great profit surges had been practice to declare large(r) dividends, seems to be arbitrary refusal to do so, says court in running over facts. Plan to take in profits, expand facilities, reduce price of cars all comes at expense of SHs, who get no dividend and whose shares are thereby devalued. Ford: "My ambition is to employ more good men, to spread the benefits of this industrial system..." Really altruistic purpose behind policy—considering community, mankind in general, before SHs. Holding: Not breach of FD: court will not delve into ordinary business decisions (price of cars, 100% expansion of facilities, building of smelter) absent fraud, illegality, or conflict of interest. Not BJ b/c, even though decision to give dividend is left to directors, remains great surplus (more than enough to pay dividend, double plant, build smelter, etc.). No valid reason not to pay a dividend—even though BJR remains; will not defer to directors when the surplus is this great, even absent F, I, COI. This case is an outlier. Notes: Traditional view: SHSs are corp constituencies who most need protection of FDs, as they are firm's residual claimants—their investment has value only after all other claimants have been paid. ABA firmly rejected an amendment to MBCA §8.30 to include consideration of other constituencies; fear of undermining the effectiveness of the system that has made the C an efficient device for creation of jobs and wealth.

Foley v. Interactive Data Corp., (California Supreme Court 1988) At-Will Employment Doctrine

P given repeated assurances of job's continued viability; performing extremely well, constantly promoted; company had termination guidelines, which suggested a "cause" requirement for firing; because of security, P did not seek additional job opps. Foley's contract is treated as RELATIONAL (not for a one time purpose); IDC could have avoided these issues by writing at-will into the contract, not making oral assurances, and not having the termination guidelines. Breach of Employment Contract Found, Sufficiency of Oral or Implied Contract: Presumption of at-will employment, even if expressly stated in written contract, may be overcome by evidence of contrary intent. Employment security agreements are not unfair to ERs; often benefit ERs from increased loyalty and productivity that results from the confidence they instill. (1) Six years is sufficient time to find an implied contract. (2) Repeated oral assurances. (3) Termination Guidelines that were in place. (4) NCA, which suggests that the parties intended a long-term relationship. So, P has indeed pleaded sufficient facts for a jury to find that an implied-in-fact contract limiting D's ability to fire him arbitrarily. Court found no tort: When the duty of an EE to disclose information to his ER serves only the private interest of the ER, the rationale underlying the public policy cause of action is NOT implicated.

Conservative Caucus v. Chevron Corp. Delaware Court of Chancery (1987)

P owner of 30 shares of D's stock, seeks SH list in order to communicate w/ other SHs about alleged economic risks of D's business activity in Angola & a resolution which is proposed to be submitted in connection w/ next annual meeting of D. Ruling: Court granted P's request for SH list b/c demonstrated proper purpose for request in desire to call SHs' attention to poss that corp. was likely to suffer economic loss if it persisted in engaging in certain business. Reasoning: Court found P was registered owner of shares of stock of D, had made proper demand for SH list, and D had not borne BoP of showing that purpose for which P sought SH list was improper. P entitled to list. D urged # of reasons why P's purpose was improper, but court held that once proper purpose was proven all other reasons were irrelevant.

Kistefos AS v. Trico Marine Services, Delaware Court of Chancery (2009) Using Shareholder Authority to Change the Bylaws

P was a minority SH of D a publicly-traded Delaware C. Trico's bylaws provided that dirs were to be elected by majority vote. However, bylaws permitted dir. who was only elected by plurality to continue to serve at board's discretion. P submitted # of proposed bylaw amendments to Trico to be voted on at Trico's 2009 annual meeting. One, Proposal Eight, provided that dir who receives plurality but not majority of vote is immediately disqualified from serving on board. P filed motion to expedite action for declaration that Ds, company and its board, improperly rejected proposed bylaw as inconsistent w/ DE law and company's certificate of incorporation. Holding: In deciding whether to grant motion to expedite, court must determine if P has shown sufficient probability of irreparable harm. Where there is no likelihood of irreparable harm, expedition is inappropriate. Reasoning: In deciding whether to grant motion to expedite, court must determine if P has shown sufficient probability of irreparable harm. Where there is no likelihood of irreparable harm, expedition is inappropriate. A C does not waive its right to challenge the validity of a bylaw by simply allowing it to come to SH vote. Dirs of Trico are ordered to allow Proposal Eight to come to vote as they would w/ any other proposed amendment. This eliminates need for expedited proceedings, b/c Kistefos, as it has conceded, will not suffer irreparable harm as long as Proposal Eight proceeds to a vote. Since SHs have not yet approved Proposal Eight, not ripe for court to adjudicate validity. The motion to expedite is denied. Note: Different than Rule 14a-8 b/c, here, P was willing to solicit proxies itself, as opposed to getting his proposal into the company's proxy.

Blackburn v. Witter, (California District Court of Appeal 1962) Theory of Ostensible Authority

P was widow who did not have business experience. Selected an agent of brokerage companies to serve as investment advisor. Agent told client that brokerage companies had research divisions that advised when to buy and sell stock. Agent persuaded client to invest in nonexistent company. Client filed an action against brokerage companies for fraud to recover misappropriated money. Holding: Principal should be held liable for agent's fraudulent actions. Reasoning: "A principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud." Principal claims that Blackburn should not have been misled by Long, that any reasonable person would have smelled fraud. Court says no, that she was reasonably misled. Difficult to see how principals can accept the benefits of the sale of the stock by Long as their agent and deny liability for the fraudulent misuses of the money obtained by the sale of the stock. DW liable only if 3rd party reasonably believes that A is acting on P's behalf. DW manifested itself to Blackburn by allowing Long to sell stock as its rep. AND, DW knew of Long's gambling, drinking, etc.—so should bear blame for agent's action.

Aronson v. Lewis, Delaware Supreme Court (1984) Derivative Litigation and the Demand Requirement

P's derivative suit against D based on D's approval of certain transactions that occurred b/n Meyers and D Dir, (Fink), 47% SH of Meyers. P challenges employment agreement b/n Meyers, Fink and interest-free loan by Meyers to Fink. Worrisome to SHs of Meyers: Waste (no consideration, no requirement that he actually work, Prudential getting some benefit), breach of FD of loyalty (best argument, easier to prove; has 47%, able to elect entire board; self-dealing/COI; rebuts BJR, burden shifts to BoD to entire fairness). Fink's lawyer will rebut: P did not make demand to disinterested, indep BoD to sue interested directors (and Fink)! [Could cure self-dealing with non-conflicted SH vote, get back to BJR, but chose not to. Recall: Demand will cure self-dealing, get you back to BJR, when it is made to disinterested, independent Ds. Recall: 102(b)(7) When you move to negligence, you're into duty of care, which is harder to prove. Negligence has exculpation.P claims did not make demand for action to Ds before bringing suit b/c such demand would be futile b/c: (1) Ds participated in, approved, may be personally liable for wrongs complained of; (2) Fink controls, dominates Ds b/c personally selected Meyer's officers, dirs; (3) Ds would need to sue selves, putting action in hostile hands. HOLDING: UNDER DE LAW: SH not required to make a futile demand to BOD before filing a derivative suit. REASONING: SHs will not be required to make demand to dirs if demand would be futile. Demand futile if "dirs under an influence which sterilizes their discretion" such that they cannot reasonably be charged w/ suing on behalf of company. Here, complaint did not support allegation that Fink selected or controlled dirs, Fink's stock ownership not enough.

Airgas

Power to defeat an inadequate hostile tender offer ultimately lies with BoD. Holding: Under Unocal only BoD found to be acting in good faith, after reasonable investigation and reliance on advice of outside advisors, may address perceived threat of hostile tender offer by blocking offer and forcing hostile bidder to elect board majority of directors that supports its bid. Reasoning: Prong #1: Under first prong of Unocal, Court found that Airgas board was comprised of majority of outside indep. directors who relied upon "not 1, not 2, but 3 outside indep. financial advisors in reaching its conclusion that Air Products' offer [was] 'clearly inadequate.' Prong #2: combination of Airgas' rights plan and classified board worked only to delay, not prevent, successful proxy contest for control of Airgas board. Court thus concluded that Airgas board met its burden under Unocal to articulate legally cognizable threat and prove its defensive measures fell within range of reasonable responses proportionate to that threat. Air Products' and SH plaintiffs' requests for relief were therefore denied, and all claims asserted against Ds were dismissed with prejudice. Use of SH rights plan has been recognized as valid takeover defense.

Sinclair Oil Corp . v. Levien, Delaware Supreme Court (1971)

Sinven was subsidiary of D w/ ops exclusively in Venezuela. D, as majority shareholder of Sinven, caused Sinven to pay dividends that were so large that amount exceeded earnings of Sinven. Dividends provided cash to D as well as minority SH, but left no resources for Sinven to expand ops. D also neglected to meet terms of contract b/n them & Sinven. Agreement required Sinven to sell all of its products to D at specified prices, but D was late in payments, did not fulfill min. purchasing obs. P therefore brought action, claiming dividends were excessive and D breached contract with Sinven. Holding: A parent C must pass intrinsic fairness test only when its transactions w/ its subsidiary constitute self-dealing (parent is on both sides of transaction w/ its subsidiary and parent receives benefit to exclusion & at expense of subsidiary). Otherwise, BJR will apply. Again, begins w/ BJR; P shows conflict of interest (shows that Sinclair owns 97% of Sinven); D must pass entire fairness review (damn hard to pass); P shows that was surely not fair (lost advantage of contract). Reasoning: D did not engage in self-dealing by issuing large dividends but did engage in self-dealing when breached agreement. D complied w/ DE statute 8 Del.C. Sec: 170, concerning payment of dividends, D's motives not factor when all SH s benefit from transaction (not self-dealing). However, contract breach was to the detriment of Sinven and its minority SHs w/ positive effect being exclusive to D, so breach is self-dealing. D's involvement not objectively fair b/c International breached contract and Sinclair reaped benefits w/o fully paying for them. D breached FD to P by its role in formation & execution of contract w/ International. Note: On remand, P awarded damages for both late payment of invoices and failure to purchase minimum amounts of crude; wear it, however, re: dividends.

Agency Law

Standard form rules that provide a backdrop for contracts or market transactions among team members; governs both relationships between team members and between the firm and outsiders.

Smith v. Van Gorkom , Delaware (1985) Duty of Care in the Decisional Setting

Van Gorkom, CEO of Trans Union C, engaged in own negotiations with 3rd party for buyout/merger with Trans Union. In negotiations, Van Gorkom determined value of Trans Union to be $55 per share and agreed in principle on merger. No evidence showing how Van Gorkom came up with value other than Trans Union's market price at time of $38 per share. Subsequently, Van Gorkom called meeting of Trans Union's senior mgmt, followed by meeting o BoD(Ds). Senior mmgmt reacted very negatively to idea of buyout. However, BoD approved buyout @ next meeting, based mostly on oral pres by Van Gorkom. Meeting lasted 2 hours & BoD did not have opp to review merger agreement before or during meeting. Directors had no docs summarizing merger, nor did they have justification for sale price of $55 per share. Rule: Under BJR, BJ is presumed to be informed judgment, but judgment will not be shielded under rule if decision was unadvised. Reasoning: Suit arises not b/c VanG could have gotten more $$$, but b/c he breached FD of care to find out if he could. Should have gotten (1) valuation from indep body (like Goldman or Deloitte), should have had (2) written report and (3) copy of merger @ BoD meeting (did not want to because it would have been costly to have an independent report made), (4) might be smart to have an auction and see what company will sell for, (5) should fully inform SHs, get their vote, and (6) directors must DELAY this decision—give it time to simmer. BJR is rebuttable if rebuttable if Ps can show that dirs were grossly negligent in that they did not inform themselves of "all material information reasonably available to them." CLEANSING: Merger can be sustained, notwithstanding infirmity of board's action, if approval by majority vote of SHs found to have been based on informed electorate OR disinterested SHs OR fair to C.

Caremark Standard

Where a claim of directorial liability for corporate loss is predicated upon ignorance of liability-creating activities within the C only a sustained or systematic failure of the board to exercise oversight (utter failure to attempt to assure a reasonable information and reporting system exists) will establish the lack of good faith that is a necessary condition to liability. Absent grounds to suspect deception, neither corporate boards nor senior officers can be charged w/ wrongdoing simply for assuming integrity of EEs and honesty of dealings on company's behalf. Dir's ob includes duty to attempt in good faith to assure that corp info, reporting system exists, that failure to do so under some circumstances, may, in theory, render dir liable for losses caused by noncompliance w/ applicable legal standards. "A dir's duty of care can never be determined by ref. to content of board decision that leads to corp. loss, apart from consideration of good faith or rationality of process employed."

Non-Legally Enforceable Rules and Standards (NLERS)

White shirts, teamwork, etc. = corporate culture, a self-check on Cs. Courts can impose penalties on a broken contract; only the parties can impose penalties for violating a norm. Norms may interfere with success, but may also foster a better work environment, which in turn my foster more success.

The Shareholder Census: The Emergence of Institutional Investors

With small stakes investors, instead of engaging managers to affect change, more often would apply Wall Street Rule and sell, sell, sell. Now, large institutional investors—HFs, private/public pension funds, banks, insurance companies—own massive blocks of stock and may have more active hand in affecting mgmt changes. Arbitrageurs: Seek out companies whose stock is in play and seek to encourage trends that will make them $. Value Investors: Actively seek to influence corporate mgmt so as to produce higher share value from underperforming companies. Relational Investors: Purchase large blocks in particular companies and seek a long-term relationship w/ mgmt Social investors: Give explicit priority to social needs in guiding investment decisions. Ex. HFs often successful in aligning themselves w/ large institutional SHs for proxy fights to replace BoDs Issue: Empty voting → Ability of some SHs to use financial instruments to keep voting interests in company while disposing of financial risks. HFs often control actions of companies, rather than merely applying Wall Street Rule; also, PE firms are acquiring larger # of public Cs than in past. New political process within Cs has emerged; all suggestions made to board are really threat aimed at board representation or control and thus elective representatives must remain accountable to their consistencies—the SHs. Another reason that HFs won't apply WSR: Hard to sell huge blocks of stock and they have more info (and ability to influence board) than do individual investors.