Biz Org II

Solicitation under federal proxy rules

Any request for a proxy Any request to execute or not to execute or to revoke a proxy The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy

Proxy Rules and consent

Applies to management seeking consent just like proxy fights

Exculpation Statutes

Exculpation statutes limit the amount of damages that can be recovered by shareholders for a breach of duty (Limits are usually only in relation to duty of care, because loyalty is held to a higher level by the courts.) DGCL 102(b)(7) - Corporations can add them to their articles (Opt in)

Rosenfield Rule

Expenses in proxy fight are reimbursable if the fight is over policy, but not allowed if fight is over control

Two Types of Poison Pills

Flip In - Allows existing SH's to (except the acquiring company/company trying to takeover) to buy more shares at a discount. Flip Over - Allows SH's to buy the acquiring company's shares at a discounted price after the merger occurs.

Moran v. Household International (Delaware)

Upholds in concept a rights plan (poison pill) adopted as a pre-planning defensive measure but notes courts will evaluate the board's compliance with their fiduciary duties if and when the plan is actually exercised.

Del Corp Sec 221

Voting, inspection, and other rights of bondholders

10(b)(5) Materiality

Weigh the probability of it happening with materiality if it does happen

Rule 14(a)4 - Requirement as to proxy

What needs to be in a proxy statement: Bold faced typed stating wether proxy is from management or insurgent Blank space for dating card (because last dated proxy card for each share wins) Each proposed measured, separated and indicating who is proposing Must provided space to vote for the proposal, against it, or abstain (except for board seats. Those are either for or abstain)

When is a shareholder vote required?

When approving directors and certain "fundamental" changes to the corporation like mergers, liquidations, sales of sub. corporate assets and others

Incumbent Test for Proxy Fights

When directors acted in good faith in a contest over policy, they have the right to incur reasonable and proper expenditures, subject to the scrutiny of the court when duly challenged, for solicitation of proxies and in defense of their corporate policy, and are not obliged to sit idly by. (don't have to win) Policy - It was NOT their choice AND it would be unfair if could not fight back for a lack of funding.

Vote Buying

Sometimes acceptable but really handled on a case by case basis

Rule 10(b)

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange — (b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange Commission] may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Tony buys 180 shares on February 1 at $10 per share, sells 150 shares on May 1 at $15 per share, and sells another 100 shares at $18 per share on June 1. What is his disgorgement liability under § 16(b)?

$1,200. Explanation - First we match the transactions that produce the greatest gains (100 shares—February and June) and then any other transactions that produce gains (80 shares—February and May). The combined profits equal $800 for February and June (100 shares x $8 profit) and $400 for February and May (80 shares x $5 profit) = $1,200

Tony becomes a director on March 1. Prior to this, on February 1, he had purchased 100 shares at $10 per share. He purchases 100 shares at $12 per share on April 1 and sells 100 shares at $15 per share on June 1. What is his disgorgement liability under § 16(b)?

$300. We get this by matching April and June (100 shares x $3 profit). Though greater profits would be found by matching February and June, this match isn't available under § 16(b) because Tony wasn't a director during the time of the February transaction.

Determining Size of Attorney's Fee Award, Derivative Suits

(1) Loadstar Method - Primary factors are the amount of time spent and hourly rate customarily charged in the region for similar work; adjusted by size/value of recovery, expertise of counsel, and the degree to which the attorney was precluded from accepting other work. Pro - Prevents windfall. Con - Encourages billing hours (less incentive to settle quickly). (2) Percentage Method - Recovery is simply multiplied by percentage to generate the size of fee. Pro - No concern for increasing billing hours/delaying settlement. Con - Inapplicable to non-pecuniary cases, which might give windfall.

How is voting regulated?

Almost entirely by state law Section 14(a) is the federal equivalent

Damages under 10b-5

1) Out of pocket damages 2) Recision (unjust enrichment) 3) Cover Damages 4) Consequential Damages

Entire Fairness evaluation

1) P pleads that D undertook conduct that violated entire fairness 2) D has burden to show fairness 3) If D meets burden, back to P to show how it was unfair To be fair, the sub's board most have the ability to say no

Elements of a 10b-5 Action

1) Standing (Blue Chip) 2) Materiality (Basic/ TSC) 3) Causation 4) Scietner (guilty intent) 5) Damages

10(b)(5) and breach of fiduciary duty

10(b)(5) does not offer a remedy for breach of fiduciary duty

Insurance and Directors

145(g) - The corporation can carry insurance to bear the financial burden that would otherwise be placed on the director - even if indemnification would not be available under the circumstances.

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use. It cannot be voted by the corporation

Line of Business Test (DE)

A director or officer may not take the opportunity if the corporation can financially exploit it and: the opportunity is within the corporation's line of business, the corp has a interest or expectancy in it, and if the fiduciary were to take it, it would put the fiduciary in a position that is adverse to the corporation. This test allows a director to take an opportunity if: it is presented in the individuals capacity and not as a director or officer, it is not essential to the corporation, the corporation has no interest or expectancy in it, and the individual has not used the corporation's resources to obtain the opportunity. No single factor is dispositive, must look at all of the factors as a whole and make a determination based on the combined factors.

Derivative Suit

A lawsuit filed by one or more shareholders of a corporation against that organization's management. This suit is brought to benefit the corporation directly and its shareholders indirectly. Shareholders cannot recover damages; they go to the corp. You ALWAYS want a direct suit if you can get it

Posion Pill

A strategy used by corporations to discourage hostile takeovers. When using a "poison pill" plan, the target company (company that is fending off takeover) attempts to make its stock less attractive to acquirers. This is a way of blocking a tender offer by making the bidder negotiate with the board.

Direct Suit

A suit that is brought by a shareholder or by shareholders on behalf of themselves because they were personally harmed, and they are looking to get damages for the personal harm to themselves.

Lock ups and voting

Aim to keep people from transacting a deal

Lock ups, termination fees in sale of company

Allowed if they are used to maximize shareholder value in sale

Aspects the BJR

BJR is a rebuttable presumption that a director's decision was made with a rational business purpose. To take shelter within the BJR, the decision must be made: In good faith, With a reasonable decision-making process, AND With no conflict of interest. If all three of these criteria are met, the court will uphold the decision, so long as it can be attributed to rational business purpose.

Merger Standards (unrelated companies)

BJR/Duty of care standards

Causation in 10(b)(5)

Basic - You don't have t show reliance because the efficient market theory allows you to rely on market having a fair price and that the market has taken into account the information already. Defendant has burden to show that the buyer/seller did not rely on the statement in the market

Takeover Analysis

Basic test for takeover = Unocal. Go to BJR if met, entire fairness if not. If company is up for sale, use Revlon scrutiny.

"Just Say No" doctrine

Board can just say no to an unsolicited tender offer without shareholder approval. They can reject an offer if it's counter to the corporation's long term interest or if it's inadequate. However, there are some limitation to this (may be confined to weird fact of Time). Board may defend against an unwanted bid ("just say no") to carry out an established long-term business plan without regard to the comparative value of the bid and the plan. Fiduciary duties still attach: good faith, due care, etc.

Classical Theory of insider trading

Cady, Roberts duty to abstain from trading or disclose the information applies to those who owe a fiduciary duty to the corporation. Anyone who does not owe a direct fiduciary duty to the corporation can trade on material inside information under this theory.

Closely held corps and derivative suits

Can likely sue on a direct action from fiduciary duty owed by board to shareholders

For Revlon to apply, there must be a sale

Change in control in the corporation

Del. Corp 151

Classes and series of stock, establishes shareholders rights

DGCL Demand Required v. Demand Excused

Complaint for a derivative action must allege with particularity the efforts made by the shareholder-plaintiff to obtain the action desired from the board or comparable authority and the reasons for failure to obtain the action or for not making the effort Demand will be excused if the shareholder-plaintiff can allege with particularity facts that create a reasonable DOUBT either that: A majority of the current directors upon whom demand would have been made are disinterested and independent; or The challenged transaction was protected by the business judgment rule (i.e., the shareholder can show a conflict of interest, bad faith, grossly uninformed decision making, or significant failure of oversight).

Del. 228

Consent and solicitation rules

Derivative Suit Standing Requirements

Contemporaneous ownership requirement: Plaintiff must have owned the shares at the time of the misconduct Exceptions: Plaintiff who didn't own shares at the time of misconduct may still bring suit if: (1) he acquired the shares by operation of law; (2) *misconduct began before he acquired the shares but continued after the acquisition; or (3) he was involuntarily deprived of his stock (controversial) Continuous ownership requirement: Plaintiff must continuously own stock through completion of the suit Adequate representative requirement: Plaintiff must be an adequate representative of the

Advantages of management in a proxy fight

Control proxy machinery and decides when to hold the annual meeting, Possesses current list of SHs (other SHs have to go to court to get it, and SHs have pro-management bias since dissatisfied shareholders usually just sell their shares.

Controlling Shareholder Duties

Controlling shareholders owe a duty to deal fairly with the corporation - Called the utmost good faith. Not true fiduciary duties, as shareholders are permitted to put their own selfish interests ahead of the interests of the corporation.

Del. 151 (g)

Corp can create and register unissued stock that can be sold and voted

Securities and Exchange Commission v. Texas Gulf Sulphur Co.

Court applies Rule 10b-. Individuals with knowledge of material inside information must either disclose it to the public, or abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. An omitted fact is "material" if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Materiality of Speculative/Contingent Events - Balance the probability of event's occurrence with the event's anticipated magnitude considering the company's total activity.

Constraints on Sale of Control Block, Looting

Courts may intervene in the sale of a control block of shares if they perceive that the sale involves: a sale to looters, conversion of a corporate opportunity (This is when a controlling shareholder convinces a buyer to forgo a tender offer and just buy the control block instead), misappropriation of a corporate asset, a secret transaction (this generally applies when a controlling shareholder receives an undisclosed premium and the minority shareholders are kept in the dark about the transaction), and finally a share owned by corporate officers.

Defenses to derivative suit

D's in derivative suits are often able to raise defenses that apply to the P-SH but not to other SH's. (D's raise the defenses). The most common of these defenses are: P participated in, consented to, or acquiesced in the alleged misconduct, P purchased the stock with knowledge of the alleged misconduct, P purchased the stock from someone who participated in, consented to, or acquiesced in the alleged misconduct ("Tainted Shares" Rule), AND P is guilty of laches in bringing the suit (waited too long).

Hilton II

Entrenchment of the board is not acceptable reason to disenfranchise voters

Ligget

Damages capped to gain, disgorgement. Must be a continuous seller

Order of Analysis for Direct or Derivative Suit

Delaware Demand Requirements Complaint for a derivative action must allege with particularity the efforts made by the SH to obtain the action desired from the board or comparable authority and the reasons for failure to obtain the action or for not making the effort. Demand will be excused if the SH-P can allege with particularity facts that create a reasonable doubt either that: A majority of the current directors upon whom demand would have been made are disinterested and independent; OR The challenged transaction was protected by the business judgment rule (i.e., the shareholder can show a conflict of interest, bad faith, grossly uninformed decision making, or significant failure of oversight). DGCL - Eliminated reference to making a demand on shareholders; a fair inference that a demand on SH is no longer required.

Fed. R. Civ. 23.1

Derivative Actions The complaint must be verified and must: (1) allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law; (2) allege that the action is not a collusive one to confer jurisdiction that the court would otherwise lack; and (3) state with particularity: (A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort.

BJR in the DGCL 141(e)

Director will be protected from liability if they reasonably relied on reports created by officers or employees on matters of their professional expertise. Director's reliance on report will be protected if it was in good faith, reasonable and was fully informed.

Directors Duty of Care

Directors are fiduciaries of the corporation and thus owe the corporation a duty to act with the level of care that a reasonable and prudent person in a like position under similar circumstances. Does not mean that the directors have to be perfect, only that they must act in a manner that is appropriate for someone whose careless actions can have dire effects on the corporation.

Cady, Roberts Rule

Disclose the the insider information or abstain from trading in the market

Schedule 13(d)

Disclosure is required once any person or group acquires beneficial ownership of more than 5% of a company's stock, or begins a tender offer that is consummated will lead to beneficial ownership of more than 5% of the class of securities subject to the tender offer (Schedule TO) Filings and Disclosures Schedule TO - Filed by bidder upon commencing the offer. MUST disclose: 1. Terms of the offer, 2. Any previous communications between bidder and target company SH's, 3. Source and amount of financing, AND 4. Any plans bidder has following consummation of the offer. MUST disclose if relevant: Any conditions on the offer (e.g., obtaining adequate financing, acquiring a majority of the stock, withdrawal or nullification of takeover defenses, etc.). OFTEN discloses: Bidder's financial information.

Del 141, 142

Discusses board of directors and their duties

Voidable Transactions and Shareholders

Disinterested shareholders can vote to approve an otherwise voidable transaction

Indemnification and Insurance

Due to the potential of litigation arising out of any action that is taken by a corporate director, it is wise to provide indemnification or insurance options to protect that director and limit fears of being held personally liable for decisions made as director. DGCL §145(a) - Permissive indemnification under (a) - Can narrow and broaden, but if allowing indemnification under this section, it must meet all of its requirements. DGCL §145(f) Indemnification rights granted under 145(f) can be broader than (a), but cannot be inconsistent with (a), additionally, Good faith is always required. Under 145(c) - Affirmatively requires companies to indemnify officers when they successfully defended themselves. As long as the charges were dismissed, Plaintiff should be considered vindicated.

Fair dealing

Everything related to the process of the negotiations. Was there an independent value assigned by an investment bank?

Short-Form Merger (DE)

For a Short Term Merger: Parent corporation owning at least ninety percent (90%) of the shares of one or more subsidiaries merges with the subsidiary or subsidiaries. Approval Vote - MUST be approved by a parent's board of directors. If the parent corporation survives the merger, the parent SH's have no voting rights. Policy - No material change in the investment of parent SHs when their corporation absorbs a 90% owned subsidiary. However, if the parent corporation is extinguished by the merger, the parent's SH's enjoy the usual voting rights in connection with a merger. A short form merger does NOT have to be approved by a subsidiary's board. Because the parent owns at least ninety percent (90%) of the subsidiary, the subsidiary's board is controlled by the parent and CANNOT be expected to be independent. SH's of the subsidiary have no voting rights in connection with a short form merger because they lack sufficient voting power to block the merger. Dispenses with the cost of unnecessary meetings and proxy solicitations (DGCL 253(a)).

How do shareholders vote for directors?

Generally its a plurality but that can be changed. Some use a majority of vote

Unified Test for an uninterested board

Has to be recomended by an independent committee AND a majority of the minority shareholders must approve. If both are met, apply BJR. If not, apply entire fairness

Factors suggesting Looting

High price, liquid and easily sold assets owned by the corporation, purchaser's insistence on immediate transfer of control and assets, lack of concern with corporate operations, purchasers use of corporate assets to fund the purchase, prior history of the purchaser in engaging in unscrupulous behavior.

16(b)

Strict liability claim brought by the SEC - To fall under 16(b), a trader must be either director/ officer OR a 10% owner (deemed insider) but you do not have to have both. Court generally construe 16(b) very narrowly. You must be a 10% owner at the time of the trade. The trade that makes you a 10% owner does not count. Applies to stock purchase and sold within 6 months For options under 16(b), they are dated on the issue date, not the exercise date For damages, match the lowest purchase price within 6 months to the highest sales price

Special Litigation Committees

If demand is excused, P-SH can file derivative suit, then D's (board of directors) can take action in an effort to get a suit dismissed. A typical tactic is to take three directors who were not on the board at the time of the challenged transaction and constitute them as a special litigation committee. Committee investigates whether bringing suit is in best interests of corporation and typically hires its own legal advisors/experts; considers factors such as: likelihood of winning, likely benefit to corporation if it wins, expenses of conducting litigation, ancillary costs, etc.

Entire Fairness Test

If the BJR does not apply, the dealing must meet the entire fairness test, in that it meets the requirements of fair dealing, and fair price. Fair dealing: When the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how approvals of the directors and stockholders were obtained, etc. Fair price: The economic and financial considerations of the transaction are fair (everything having to do with the intrinsic or inherent value of the company's stock).

Redeeming a poison pill

If the board is willing to accept the take over (or it some cases the Court will order it), it can redeem the pill before its activated and let the merger go through

Practical effects of demand required/ demand excused

If the plaintiff concedes that demand is required, they've already lost. If a demand is required on the board, the board will refuse and the court will apply the BJR. Plaintiff will always plead demand was excused and then show why the board was not disinterest/ independent OR BJR is not applicable because of a conflict, fraud, etc

freeze-out merger

In a merger with a controlling shareholder, some shareholders (usually the public shareholders) are required to surrender their shares in the disappearing corporation for cash. Can create an issue for breach of loyalty if the parent company has its own people on the sub's board

Unocal Standard

In order for a board's defensive measure to be protected by the BJM, it must show: It had reasonable grounds for believing that there was a danger to corporate policy and effectiveness existed Must demonstrate good faith and reasonable investigation Approval by outside directors helps (more deference). AND Its defensive measures were reasonable in relation to the threat posed (proportionality). Look to: inadequacy of price, the nature and timing of the takeover bid and its effects on the corporation, questions of illegality, impact on constituencies other than SH's (i.e. creditors, customers, employees, community), risk of nonconsummation, coerciveness, and quality of securities being offered.

Aronson Test

Looking to see if demand is excused. Demand is excused if: 1) there are interest directors, or 2) the BJM does not apply

Drop and sweep

Target company ends tender offer and buys on the open market instead. Its legality depends on whether the plan was to do it from the beginning of tender or not

Revlon duties are generally triggered when a board

Initiates an active bidding process to sell the company or effect a break-up; or In response to a takeover bid, abandons its long-term strategy and seeks an alternate strategy involving break-up of the company. Unocal doesn't require directors to abandon a long-term corporate plan for short-term SH profit unless there is clearly no basis to maintain the corporate plan.

Insider Trading

Insider trading is the buying or selling of a security by someone who has access to material nonpublic information about the security. An omitted fact is "material" if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." No common-law duty to disclose information or refrain from trading on material non-public information. This however has been addressed under federal law, as well as many state laws that are relevant to this issue.

Scienter under 10(b)(5)

Just negligence is not sufficient, but recklessness is

Meeting dates

Set by the board. If a shareholder wants to change, they have to show an improper purpose

Fraud by management

Management has to not believe what they say and what they say has to be false

Tender offer rules

Minimum Open Period - Tender offer must be left open at least twenty (20) business days, plus ten (10) additional days after any amendment to the bid. Withdrawal Rights - SH's can revoke their tenders any time while the offer is open. All Holders - Tender offer must be open to all holders of the same class and not exclude any shareholders from tendering. Best Price - Each SH must be paid the best price paid to any other shareholder. If consideration alternatives are provided, each SH can choose which to accept. Pro Rata Purchases - If bidder seeks less than one hundred percent (100%) of the shares and the offer is oversubscribed, bidder must purchase pro rata. No Outside Purchases - Bidder CANNOT purchase shares outside the tender offer while it remains open.

Schedule 14D-9

Must be filed by the target company to announce its response to the tender offer MUST disclose: 1. Whether company recommends acceptance or rejection (or that it can't take a position), 2. Any negotiations with the bidder, AND 3. Any pending transactions relating to the offer.

Entire fairness standard

Must have fair price AND fair dealing in a freeze out merger

United States v. O'Hagan

O'Hagan, was a partner in a law firm, which was representing a co. potentially tendering an offer for common stock of Pillsbury. He wasn't personally involved in the transaction but he was considered an outsider who had access to confidential information, and he profited from the information at the expense of the company and other shareholders. The Securities and Exchange Commission (SEC) accused Respondent of Section:10(b) and Section:14(e) (misappropriating) violations. Rule 10b5-2 provides a nonexclusive list of circumstances under which a person will be deemed to owe a duty of trust and confidence in a misappropriation case: When the person agrees to maintain information in confidence; When the person communicating the information and the person with whom it is communicated have a history of sharing confidences so that the recipient of the information should know that the person communicating the information expects the recipient to maintain confidentiality; or When the person receives the information from a spouse, child, parent, or sibling (unless the recipient can prove that he had no reason to know that the information was confidential). O'Hagan had no duty owed to Pillsbury. Thus, Misappropriation theory applies because he is an outsider. He does however owe a duty of confidentiality to the law firm. NEED DECEPTION. Rule 10(b)(5) requires "in connection with" - once you disclose the source, you're off the hook.

Del. Sec. 228

Shareholder meeting required for corporate action can be waived by consent if consents in writing that represent at least the minimum number of votes needed to pass the issue at a meeting are signed and return to company

14(e) and 10(b)(5) Together

Shareholders do not have to tender to bring an action under 14(e), but if they do, they can also use 10(b)(5). This includes either a sale to offeror or the market

Compensation of Directors

Officer receiving compensation bears the burden to prove reasonableness of the level of compensation. Wilderman (DE) - This test is most strict when the officer is also a director. If the compensation was set by a disinterested board, the court will often give more deference. Courts look to a broad range of factors to determine if the compensation is reasonable. Including compensation of similarly situated officers, the profitability of the corporation, etc... Can be a duty of loyalty and/or a duty of care claim, this is because if the officer is also a board member, there is a COI, and if the board was grossly negligent in setting the level of compensation, the may have violated the duty of care.

When is demand required to be brought before shareholders in a derivative action?

Only when it is an issue that the shareholders could have cured (very rare)

Different types of threats in tender offers

Opportunity Loss - Where a hostile takeover might deprive target SHs of the opportunity to select a superior alternative offered by target management (missing out on a chance to stick with long term goals). Structural Coercion - Risk that the disparate treatment of non-tendering SHs might distort SHs tender decisions (pressure to tender). Substantive Coercion - Risk that SHs will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value (SHs sell shares for too little because they don't know that they should get more).

Adequate Representative Requirement

P MUST be an adequate representative of the corporation on whose behalf he sues. Adequacy depends on the existence of any conflict of interest between the P and the corporation and the competence of P's attorney.

Continuous Ownership Requirement

P MUST continuously own stock through completion of the derivative suit.

Regulations of Tender Offer Disclosures - (Williams Act 14(e) (15 USC 782(e))

Prohibits any untrue statement of material fact or omission of material fact necessary to make the statements not misleading under the circumstances, and any fraudulent, deceptive, or manipulative acts or practices, with respect to a tender offer. Private right of action for damages exists for target company's SH's; bidders can seek injunctive relief. Most courts require scienter of intent to deceive. Most courts require P's to prove reliance and loss causation.

Section 14(e) of the Williams Act

Prohibits fraudulent, deceptive, and manipulative practices in connection with a tender offer.

Rule 14a-(8)

Provides full list of types of proposals that are not appropriate for shareholder proposals and do not have to be put to a vote by the company

Shareholders and Voting

Shareholders must be given a periodic opportunity to change the board but when and where to vote is up to the directors. Shareholders have two remedies if they are unhappy: sell their shares or change the board

Del Corp. Sec 220

Relates to inspection of books and records To sue under 220, plaintiff must show credible basis that their reason for pursing information they want from the corp is true

SEC Act Sec 14

Relates to proxies, laws out proxy rules

Revlon v. MacAndrews & Forbes Holdings (Delaware)

Revlon ONLY applies when a company is up for sale. When directors have made the sale of the company inevitable, their duty shifts to getting the highest price possible for shareholders

Paramount Communications v. QVC Network (Delaware)

Revlon duties attach when: a corporation initiates an active bidding process to sell or break up the company, or the target responds to an offer by abandoning its long-term strategy and seeking an alternative transaction involving the break-up of the company, or There will be a sale or change of corporate control. Did directors properly perceive that shareholder interests were enhanced? Consider adequacy of decision process; and Was the board's action reasonable in relation to advantage sought to be achieved or threat to be avoided?

Shareholder's Rights Plan

Rights plans are used as a way to prevent takeover bidder from dealing with SH's. Existing SH's were issued "rights." These rights are contractually based and were triggered on a specified event (buying 20-30% of the company). If the triggering event occurs, the SH's who hold the rights can exchange them for X amount of shares of common stock per right. This increases the number of shares - making it harder for the acquiring company to gain a majority. Until the trigger occurs, however, these rights are basically worthless. (e.g. Acquirer purchases 20% of a company, but as a result of the trigger, only receives 5% with all of the new shares).

Del. 145(a)

Rules for reimbursement of directors and officers defending against lawsuits

Rule 14a-9

SEC anti-fraud rule for proxy statements There is an implied cause of action here if plaintiff: 1) is a shareholder 2) the fraud was during a proxy solicitation Can bring BOTH a 14a-9 and 10(b)5 claim if both are applicable Uses the materiality standard from Basic (if a reasonable investor would have considered it in deciding how to vote) Causation - must be an "essential link" approving deal Scienter is generally not required - recklessness is enough

RULE 10b-5:

SEC rule prohibiting fraud in relation to the sale of securities. 10(b)(5) "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails or of any facility of any national securities exchange: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security."

Insurgent Test for proxy reimbursement

SH's have a right the reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest. Insurgents (or successful SH's) can be reimbursed if there are reasonable and bona fide expenses in proxy contest AND SH's ratify. 1. Insurgents must win, 2. Expenses must be reasonable and bona fide, AND 3. MUST be a policy contest. Insurgents ONLY get paid back if they win; decided by SH's

Order of Analysis for a True Insider's Liability

Say the rule for insider trading (10(b) and 10b-5) Determine whether this is material non-public information Material Non-public Determine whether it's used in connection with the purchase or sale of a security. (O'Hagan) Say this is classical or quasi-insider theory Classical Theory - Insiders who obtain material nonpublic information because of their corporate position have a duty to abstain from trading or disclose Quasi-Insider - Quasi-Insiders who are retained temporarily by the company in who securities they trade have the same 10b-5 duties as true insiders. Conclude whether liable.

Order of Analysis for Misappropriation Theory (When You're Holding a Tippee Liable, but the Tipper is not liable)

Say the rule for insider trading (10(b) and 10b-5) Determine whether this is material non-public information Material Non-public Determine whether it's used in connection with the purchase or sale of a security. (O'Hagan) Say this is Misappropriation theory: A person has a duty of trust or confidence for purposes of the misappropriation theory when the person: Agrees to maintain information in confidence; Has a history, pattern, or practice of sharing confidences with the source of material, nonpublic information, such that the recipient of the information knows or reasonably should know that the source expects that the recipient will maintain its confidentiality; or Receives or obtains MNPI from his spouse, parent, child, or sibling; except that the recipient can demonstrate there was no duty of trust or confidence. Determine there was/was not a duty. If so, did they breach it? Conclude whether liable.

Payment of D's Expenses, Derivative Suits

Some states require derivative P to post security covering the reasonable expenses, including attorney's fees, of the corporation. Derivative P is required to take a substantial risk. If he loses, his security is forfeited to pay the corporation's expenses. Many of these security-for-expense statutes contain an exception if P or P's own enough shares, as measured by a percentage or dollar amount.

DGCL 144 (Director's Conflicts of Interest)

The DGCL deals with COI in Section 144: Transaction is not void/voidable if: Material facts are disclosed to directors and approved in good faith by disinterested directors, Material facts are disclosed to the shareholders and approve of the transaction approved by majority vote. Transaction is fair to the corporation at the time it is authorized, approved, or ratified by board or shareholders.

To whom do directors owe fiduciary duty?

The corporation

Who does the corporate claim have to be against for a derivitive suit?

The directors

Duty of Loyalty for directors

The duty of loyalty can be explained generally as the duty of directors to hold the interests of the corporation above their own interests. The director has a duty to avoid self-dealing and to act in good faith and in a manner reasonably believed to be in or not opposed to the corporation's best interests. Breaches of Loyalty include: Diversion of assets, conflict of interest transactions, usurpation of opportunities, disclosure of false information to shareholders, insider trading, selling out the corporate office, entrenchment (using the corporate governance structure to protect position).

Business Judgment Rule (BJR)

The principle pursuant to which a director or officer is immunized from liability from consequences of a business decision that turns negative as long as the decision was reasonable, informed, made in good faith, and in the best interest of the corporation. *The courts do not require directors and officers to manager "in hindsight," so in determining BJR protection courts look at the circumstances at the time of the decision.

Chiarella

The printing company markup man case: Silence in connection with the purchase or sale of securities is actionable as fraud under Section:10(b) if there is a duty to disclose such information arising from a relationship of trust and confidence between parties to a transaction. Here, Petitioner did not have a duty to disclose because he had no special confidential relationship with the transacting parties

Dirks/Newman/Salman

Tippee assumes a duty to disclose or abstain from trading when (1) the insider breached a fiduciary duty to the corporation and/or its shareholders by intentionally or recklessly disclosing non-public, material information to the tippee in exchange for a personal benefit, and (2) the tippee knows or should have known (a) that the information was confidential and (b) the tipper (the insider) breached his or her fiduciary duty by disclosing the information. Under this theory, a personal benefit can simply be the good feels associated with helping out a buddy or whatever.

Settlement or Discontinuance of Derivative Suit

To address problem of allowing private settlement of derivative suits ("serious evil"), settlements of derivative suits have now been brought under judicial control. A derivative proceeding may not be discontinued or settled without the approval of the court. If a settlement affects the interests of the SH's other than the P, notice must be given to those SH's so that they have an opportunity to object in the settlement (Del Ch. Ct. R. 23.1, Trial court must consider whether settlement is fair, adequate, and reasonable. Among the factors to be considered are: Size of potential recovery and size of suggested settlement, Probability of ultimate success, Financial position of D's, Costs to the corporation of continuing the suit, Degree to which SH's intervened to object to the settlement, AND Extent to which settlement was product of arm's length bargaining. Appellate court will review decision to approve a settlement for abuse of discretion.

Conflict of Interest Transactions

Under the common law, if a conflict of interest was involved in the transaction, it was void or voidable. Under modern statutory law, not all COI transactions are per se void/voidable, but must meet the requirements of the statute to remain in force. Fairness in the process as well as the overall price paid are two factors that are scrutinized when examining a COI transaction.

Tipper/Tippee Liability

Under this theory of liability, a person who receives material inside information (the tippee) assumes a duty to abstain or disclose when they receive information from a corporate insider (tipper) who owes a fiduciary duty to the corporation. The breach of duty comes from the fact that the tipper receives a personal gain from disclosing the information, this gain does not need to be financial, can be simply a social gain from disclosing to a friend or family member.

Quasi-Insider Theory of Insider Trading

Under this theory of liability, anyone who is a "temporary-insider" to the corporation owes a fiduciary duty. This includes corporate lawyers, accountants, auditors, etc..., Under this theory, these "temp insiders" owe the traditional Cady, Roberts abstain or disclose duties as traditional insiders. These include individuals in a position of trust with the corporation, these people gain temporary fiduciary duties due to the type of relationship with the corporation.

Hostile Tender Offer standard

Unocal, Revlon

When must information be disclosed by a corporation?

When the information is material and "ripe and ready for disclosure" McDonald. If there is a false statement by the corp, the corp is under a duty to correct it

SEC 14(a)(7)

When there is a proxy fight company can decide whether the furnish a shareholder's list to insurgent or mail their proxy proposal along with the corporate one

Does a corporation have to be named in a derivative suit?

Yes, its the corporation's rights and cause of action being litigated

Proxy fight

an attempt by a person or group to gain control of a firm by getting its stockholders to grant that person or group the authority to vote its shares to replace the current management

Standing to sue under 10(b)(5)

limited to plaintiffs who have purchased or sold securities in connection with manipulative or deceptive conduct.

tender offer

offer to buy shares made by a prospective buyer directly to a target corporation's shareholders, who then make individual decisions about whether to sell

Compelling justification standard (Blauis)

only used when the primary purpose of actions was to impede/ frustrate shareholder franchise. If an action is taken for the primary purpose of restricting shareholder suffrage, a compelling justification must be shown

Shareholder Proposals

shareholders have the right to make their own proposals at meetings; rarely successful Usually have to 1% of stock or at least $2,000 You get one per meeting and it cannot be presented every year unless it receives a minimum number of votes

Misappropriation Theory

the legal doctrine supported by the SEC and the courts that any person who shares nonpublic information with another party or who trades on the information violates the securities laws if that information was intended to be kept confidential Under the misappropriation doctrine, the government can prosecute a person under rule 10b-5 for trading on market information (i.e., information about the supply of or demand for stock of a particular company) in breach of a duty of trust and confidence owed to the source of the information; the duty need not be owed to the issuer or shareholders of the issuer.