Corporations Cases

Hanson v. Kynast (Ohio, 1986)

Agency: Both lacrosse players, Hanson (OSU) was injured by Kynast (Ashland). Hanson sues Kynast and Ashland Univ. claiming respondent superior. Court finds that Ashland was not bound by Dynast's conduct last here was no principal-agent relationship. No 1) consent 2) benefit and 3) control was conferred to the Univ. by Kynast playing lacrosse for them. A

Jenson Farms Co. v. Cargill (Minn. 1981)

Agency: When is a creditor liable for the debtor? Cargill became liable as principal in contracts that Warren made and then defaulted on. Cargill and Warren had 1) consented into this arrangement and 2) Cargill was substantially controlling Warren, and 3) Cargill was benefitting from a steady stream of grain from Warren. Warren was essentially a shell company for the operations of Cargill.

Cookies Food Products v. Lakes Warehouse (Iowa 1988)

"Speed" Herrig's Auto Parts and BBQ Sauce. Plaintiff shareholders claim that Herrig breached fiduciary duties to the corporation and its shareholder because he negotiated the agreements (for more pay, royalties, better warehouse storage fees for side business) without fully disclosing the benefit he would gain. Ct. held that he did not breach his duty of loyalty because according to Iowa statute and caselaw, if there is 1) fully disclosed and ratified by disinterested board members or 2) fully disclosed and ratified by SHS or 3) is fair price and beneficial for the corp than the self-dealing transaction is not voidable (not breach of fiduciary duty). Here, the court says that it was a fair price for all the work that he was doing for the company and Speed's place in the company has been beneficial for it.

In Re Oracle Corp. Derivative Litigation

• Concludes that the SLC has not met its burden of persuasion to show an absence of material fact about the question that it was independent because the SLC members, who were tenured profs at Stanford, did not disclose the substantial gifts that Oracle had made to the University

Vohland v. Sweet

(1) Facts: Sweet has been working at Vohland's nursery for a long time. Sweet says it's a partnership. When Vohland's son took over, he reorganized and gave Sweet 20% of profits and a commissioned salesman role instead of an hourly wage. Rule: factors of pship formation: sharing of net profits; people don't have to contribute money, can be services and labor too

Core Characteristics of the Corporate Form

1. Legal personality with indefinite life 2. Limited liability for investors 3. Free transferability of share interests 4. Investor Ownership 5. Centralized management 6. Cost and Formalities of Formation and Operation 7. Tax Treatment 8. Appointed by equity investors

Benefits of the Corporate Form

1. Limited liability 2. Facilitates investor entry/exit 3. Reduces hold-up by threat of dissolution 4. Simplifies issues of authority 5. Dominance of statutory default (rather than individual tailoring by contract) reduces information costs for investors

Gallant v. Isaac

Agency (Inherent authority) Woman is suing for insurance coverage that Agent told her she had, but Principal says that Agent wasn't authorized to extend insurance in that way. Gallant knew that its Agent was doing business in a way contrary to its policy. This made conduct → normal course of dealing that principal allowed to continue. Thus there was inherent authority given to the Agent and Gallant will be liable.

Freedman v. Adams

A SH derivative complaint alleging corporate waste for not adopting a plan to make executive bonuses applicable for tax deduction failed to state a claim. Ct. dismissed the case saying that it did not plead with enough particularity that the decision was not one that a reasonable person would make. The BOD said that they understood their decision to not take part in the tax program, and they decided they wanted to remain flexible. That was enough. BJR. Also, in a derivative stockholder plaintiff suit, one must plead that the demand on the board to redress the actions, would have been futile. (Court of Chancery Rule 23.1). Ps here did not accomplish that.

Kahn v. Lynch Communications Systems, Inc (1994)

Alcatel has supermajority voting position in Lynch because it owns 43.3 percent. Lynch wants to merge with Telco because it has fiber optics but needs the permission of Alcatel to do it. President of the parent company of Alcatel did not want Lynch merging with Telco and want it instead to merge with another one of its subsidiaries that produce wire, cable and related products (Celwave) Entire fairness standard is appropriate standard of review when a controlling shareholder stands on both sides of the transaction. Defendant can place burden on plaintiff to show that the price was not fair by pointing to 1) a special committee and good process or 2) an informed affirmative vote of the majority of the minority. Here there was not entire fairness because: 1) The controlling shareholder must not exert control over the terms of the merger --Alcatel told them that "you have to do what we say" 2) the independent committee should actually have bargaining power that it can exercise with the majority shareholder on an arm's length basis

White v Thomas

Apparent Authority in Agency Law. Simpson paid too much for the land that her principal told her he would only pay 250K for. She then tries to sell back some of that land. White, the principal, when finds out wants to go through with the purchase of the land but not the re-sell. Court finds there was apparent authority for the purchase of the land but not the sale of the land because there was a blank check given to Simpson but there was real power of attorney statement that conferred that power and Simpson's statement (the agent) is not enough.

In re Rural Metro Corp. Stockholders Litigation (2013)

Breach of fiduciary duty by the advisor to the board aided and abetted the breaches of fiduciary duty by the Board. Standard of review: intermediate view

Stone v. Ritter

Categorized Caremark as a duty of loyalty case. Derivative suit based on millions of dollars in fines that AmSouth was required to pay for bank employees' failure to file suspicious activity reprots required by federal statute. The employees unwittingly assisted a couple in conducting a ponzi scheme. The court explained that Caremark's oversight holding was correct in that it incorporated the requirement of good faith and that good faith is a subcategory of loyalty. Thus, to be successful in an oversight claim, the shareholder must show that the board 1) utterly failed to implement any reporting system or control and the directors knew that they were not discharging their fiduciary duties OR 2) having implemented a system, consciously failed to monitor or oversee its operations. Here, a reasonable reporting system existed and no conscious disregard of duties. Thus, no breach.

Citizens United v. Federal Election Commission (S. Ct. 2010)

Congress cannot regulate its free speech just given that it is a corporation. To the extent that there are differences between individuals and corporations, they are not sufficient to ban them from political speech. The normal laws of agency should govern these decisions just as they do for other decision to regulate self-dealing by managers.

Tooley v. Donaldson Lufkin & Jenrette

Clarified the distinction between direct actions and derivative suits. The standard to determine the whether it is direct or a derivative is: o 1) Who suffered the alleged harm (the corp or the alleging shareholders) o 2) who would receive the benefit of the recovery (the corp or the s holders indiv.)? o 3) Thus they removed the analysis of "special harm" as being the mark of a direct claim

In Re: Gleeson (1954)

Colbrook was the tenant of the land in a tract of land. He is then also named as the executor of the state. Now he becomes a fiduciary. Without advertising it for lease to the public, he continues to stay on the land for another year, , after the principal for whom he is an executor dies. Rule: One can not be getting a personal benefit while acting as an agent with fiduciary duty. Per se rule that the Courts use as a prophylactic measure so that they are not having to determine the fairness of a business decision in court and agents are not incentivized to act in their self-interest.

Blasias

Compelling justification reasonable in light of threat posed: applies when defensive measure involves diminishing shareholder franchise. Standard is only available when the primary purpose of a defensive measure is to limit the shareholders voting

In Re Direx

Court held that as a controlling shareholder he was free to use his voting power to keep the subsidiary from being purchased from another company, but the controller nevertheless violated a duty of fairness because it pressured the subsidiary's board to waive §203 (where there was not a benefit to the corporation to do so)

Paramount Communications v. QVC Network, Inc. (1994)

Court says that Revlon applies here, because Paramount is selling itself • But what makes this different from the way that Time was selling itself? • There was a controlling shareholder in Viacom, and it was not a merger of equals • Then the voting power does not really matter after the merger and the shareholders really only care about the return they will get on their control premium • In Time, the shareholders were still going to be part of a dispersed ownership and they would not have lost their control

Unitrin

Defensive measures must not be draconian or preclusive.

Southern Peru (2011)

Derivative shareholder action against fiduciary directors and controlling shareholder of Southern Peru. Facts: Southern Peru publicly held company on NYSE. Grupo Mexico owns a majority of Southern Peru. Grupo Mexico also owner of Minera and wanted Southern Peru to buy 99% of Minera with Southern Peru's stock. Grupo M stands on both sides of the transaction. It is more like a freeze out then a transaction like Sinclair Oil. The Court is Skeptical about the valuations of Goldman: o They sought out a way to validate the price that Grupo Mexico wanted to get from Southern Peru o Not really a good process to determine the proper value. Why? o Goldman's first valuations gives them a $1.7 billion gap. Then they try to find a way to reconcile the number.

In Re Caremark (Del Ch. 1996)

Director liability may follow from a board decision that results in a loss because the decision was ill-advised or negligent, or liability may follow where a loss follows unconsidered inaction. (Two potential bases for director liability for breaching duty of care: negligent decisions, failure to monitor.) For failure to monitor liability, only a sustained or systematic failure of the board to exercise oversight will establish the lack of good faith that is necessary for liability.

Dirks v. SEC (1983)

Dirks received some negative information from insiders of a corporation with which he had no connection. As an investment advisor, he told some of his clients and they subsequently sold their stock on the basis on this information. Dirks did not trade himself on the information. Rule: No violation of 10b-5 because he had no fiduciary duty to corporation's shareholders, did not try to gain corporate shareholder's confidence, and did not illegally obtain the information about the corporation.

State Ex. Rel. Hayes Oyster Co. v Keypoint Oyster Co. (Wash 1964)

Disclosure Requirement. Did Hayes breach his fiduciary duty of loyalty as director by voting for the sale of the oyster beds to his side company, Keypoint Oyster Co.? Yes, nondisclosure by an interested officer or director is, in itself, unfair. It is not necessary that an officer or director of a corp. have an intent to defraud or that any injury result to the corp. for an officer or director to violate his fiduciary obligation in secretly acquiring an interest in corp. prop

Francis v. United Jersey Bank (N.J. 1981)

Duty of care--A director should acquire at least a rudimentary understanding of the business' dealings Facts: Mrs. Simpson was a board member of a reinsurance company that her two sons ran into the ground with illegal activity. This case established the majority view that there is a minimum objective standard of care for directors—that directors cannot abandon their office but must make a good-faith attempt to do a proper job. Otherwise full liability will fall on them.

Mylan Labs v. King Pharm.

Empty voting issue that never was concluded by Court because the merger failed for other reasons.

Perlman v. Feldman

Equal Sharing Rule. Feldmann was the president of the corporation, the chairman of the board and controlling stockholder of Newport Steel Corporation 1. Short supply of steel sheets during the Korean war, price controls in effect to limit the price a company will charge for steel Rule: When a sale necessarily results in a sacrifice of corporate good will and consequent unusual profit to the fiduciary who has caused the sacrifice, he should account for his gain 1. Feldmann has "appropriated" a corporate asset because it was a unique leverage point that they had

Kamin v. American Express (N.Y. 1976)

Even though the business judgment led to an $8million loss in taxes, there was not liability and breach of care. "The Court will not interfere (with a business judgment) unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust."

In Re: The Goldman Sachs Group, Inc Shareholder Litigation

Executive Pay issue. Plaintiffs allege that this payment structure for employees diverged from shareholder interests and the ratio was without analysis. Allege a breach of good faith by the BOD in approving this structure. Std for bad faith: Must be conscious disregard for responsibility. Here, GS looked at competing banks and at the public opinion. Ct. rules that it was a BJR decision. Standard for waste: Must plead particularized allegations that "overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests"

Page v. Page

Facts: 2 partners form linen supply co. and run it for 10 years at a loss. The partner responsible for operation is diligently running the business and the other partner puts in money to keep it going. They'll get a huge K because a military base comes in. One partner decide to wind up the business while they still have no profit to cut the other partner out of the new profit. Rule: Can wind up pship and bid on new biz opportunities if no bad faith, and obey fid duty to inform and allow to bid

Adams v. Jarvis

Facts: Doctors form business where pship agreement said one partner leaving didnt create right to wind up. Drafting was unclear about what partner would get when partner left - went to court. Rule: Partnership agreement controls, but can't contract away fiduciary duties

National Biscuit Co. v. Stroud

Facts: Stroud and Freeman go into business running grocery store. Stroud goes to Nabisco and says we're not taking any more bread. Per Freeman's request, bread delivered and sold. When partnership divides assets, Stroud says he's not responsible for the money because the sale was not authorized by the partnership. Bread not delivered to partnership? (a) Majority rule means more than half. In a 2-person partnership, one partner can't be out there disavowing what the partnership is doing. (i)If partnership of 2 -->need both to agree (ii)If partnership of 5 --> need 3 to agree

Boilermakers v. Chevron (Delaware Chancery Court 2013)

Forum selection in the bylaws. Holding: It is consistent within §109 and is not illegal, deals with the internal affairs and the contract was the original Charter agreement that gives them the right to amend the bylaws without the shareholders assent.

Virginia Bankshares (S. Ct. 1991)

Fraudulent statement on the proxy. Rule 14a-9. Majority holder said that the merger price was "high" and "fair" in the proxy to minority shareholders. Holding: False or misleading statements on proxy must be 1) material and 2) relied on in order to establish the equitable basis required to extend the 14(a) private action to shareholders. The Court found that even conclusory statements can be material when the reasons for these statements are knowingly false. However, since the shareholders votes ultimately didn't matter (they were minority bloc) there was no link of causation that would have allowed them to vote down the proposal. Ct. thinks this should be a breach of loyalty case for unfair price in State court, not a proxy fraud case.

Kahn v. Sullivan (Del. 1991)

Hammer Art Museum Case. If this is not exactly charity, and the funding of an art museum is not really that, but is more of a business decision. Therefore, the Court decides to use the BJR to determine that the decision was up to the directors.

Hewlett v. Hewlett Packard Company (2002)

Hewlett Packard plans a merger with Compaq. The Hewlett Foundation claims that they 1) coerced Deutsche Bank into voting their shares for the merger and 2) materially misrepresented key financial figures in the proxy statement to shareholders. HP moves to dismiss. Holding: 1) Hewlett Parties made out a cognizable vote buying claim against HP. Corporate vote buying is not illegal per se, but Management may use corporate assets to buy votes in a proxy contest only if there is no deleterious effect on the shareholder franchise. (Schreiber) "Absent measures protective of the shareholder franchise like those taken in Schreiber, this Court should closely scrutinize transactions in which a board uses corporate assets to procure a voting agreement." In Schreiber, they (i) board hired special committee, (ii) vote buying agreement between board and shareholders sent to all shareholders for approval with full disclosure of agreement, (iii) majority of shares required to vote not including those involved in agreement.

Hexion v. Huntsman (2012)

Hexion signed a merger agreement with Huntsman in July 2007 • Then the financial crisis hits and they want to walk away from the contract, they invoke the MAE (material adverse effect) clause in the contract Holding: This was not an MAE, the behavior of Hexion shows a "knowing and intentional breach"

In Re Emerging Communications (Del Ch. 2004)

How do you determine fair price? Experts. What is the best way of valuation? DCF when the Market analysis is not sufficient because there are not comparable companies on the market. What projections are most appropriate? The most recent ones. Court will look at outside numbers when available because they are more reliable because they have been used in a side negotiation not used for the purposes of litigation. (RTFC's determination of stock price for ECM's loan) Valuation is a highly scenario and fact specific determination.

Rosenfield v. Fairchild Engine (N.Y. 1955)

In a proxy contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures, when soliciting SH support for the policies which the directors believe, in all good faith, are in the best interests of the corporation. **Win or lose.** SHs have the right to reimburse the expenditures of successful contestants in a proxy contest.

Santa Fe Industries, Inc. v. Green (1977)

In a short-form merger, Plaintiffs allege that the conduct of Santa Fe to conceal the asset value of Kimber Lumber through the JP Morgan report was using a "device" to defraud the shareholders in the purchase or sale of the security and was thus a violation of Rule 10b-5. However, the Ps just thought that the price was "unfair" bc it was low. There was actually no deception involved because the SHs got full disclosure leading up to the report produced by JP Morgan. Rule: It is integral to a violation of Rule 10b-5 that there be deception or manipulation in the transaction. Not just unfairness.

Weinberger v. UOP

In duty of loyalty cases the appropriate standard is entire fairness (fair price and fair dealing). D must establish entire fairness but initial burden of production is on P to introduce evidence of unfairness. Where merger has been approved by an appropriate vote by majority, then it's fine but not if conflicted directors withhold information. Entire fairness is 1) fair dealing and 2) fair price.

Waltuch (2d Cir. 1996)

Indemnification case for the manipulation of the silver market. DCL §145(a) cannot be indemnified unless you act in good faith. DCL §145(f) does not allow corporations to have a broader indemnification policy, but §145(c) has to indemnify is the "any action" is successful "on the merits or otherwise" The court agreed with the lower court that an article of incorporation which required appellees to indemnify appellant for such expenses regardless of whether appellant acted in good faith was invalid and unenforceable because it exceeded the scope of indemnity granted to corporations by Del. Code Ann. tit. 8, § 145(a).• The court found, however, that appellant was entitled to indemnity under Del. Code Ann. tit. 8, § 145(c) (1991) for private lawsuit expenses. Appellant did not make any payment or assume any liability in connection with the settlement, meaning that he had been "successful on the merits or otherwise," and was entitled to indemnity without regard to good faith.

Paramount Communications v. Time (1989)

Issue: Was the BOD's decision to submit a tender offer for Warner (as a defensive move against Paramount's offer) a breach of their fiduciary duty to the shareholders? Holding: No, it was within the BOD's long-term plan to create business value, and it was not under Revlon duty to optimize Time's current value because (there was not a bidding war?) • Revlon is triggered when 1) there is a bid for control of the company without being front loaded or coercive and 2) abandons its long term business plan and seeks alternative transaction involving the break u of the company Her Time was still pursuing its long-term business plan as a merger with Warner, and it was a share for share offer. This doesn't count as it being essentially up for auction.

What does limited liability mean?

Limited liability means that business creditors cannot proceed against the personal assets of some or all of a firm's equity investors.

Kahn v. M & F (2013)

M & F owns 43% of the MFW, wants to freeze out the remaining shareholders and take the company private. What standard of review should apply to a going private transaction where a controlling stockholder conditions upfront that approval from an empowered, independent special committee and an affirmative vote from an informed majority of the minority shareholders? Holding: Business Judgment rule because the normal, arms-length transaction with a third party, is substantially substituted by the two processes of the special committee and the shareholders in tandem. In a determination of the standard of review for a merger between a controlling stockholder and its subsidiary, where the merger was conditioned ab initio upon the approval of both an independent, adequately-empowered special committee that fulfilled its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders, the business judgment standard of review would be applied if and only if the controller conditioned the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders, the special committee was independent, the committee was empowered to freely select its own advisors and to say no definitively, the committee met its duty of care in negotiating a fair price, the vote of the minority was informed, and there was no coercion of the minority.

Chiarella v. United States (1980)

Man handling financial documents about a merger deduced the names and identities of the companies in preparation for a merger. He then bought stock in these companies and sold them quickly after the mergers were closed, to a substantial profit. Rule: No insider trading. Insider trading must be premised upon a breach of duty.

Meinhard v. Salmon (NY, 1928)

Meinhard and Salmon enter into a lease on a hotel. Salmon acts as manager partner. Meinhard just puts up the money. Owner of the reversion on the lease approaches Salmon with a business idea. Salmon enters into the new venture without telling Meinhard. Rule: Joint ventures, like co-partners, owe to one another the duty of loyalty, "a punctilio of an honor the most sensitive." The co-partner may not renew the lease on its own even if it expires at the end of the partnership, but he can buy the reversion if he acts openly and honestly.

Unocal Corp. v. Mesa Petroleum (1985)

Mesa wants to take over Unocal, but Mesa's Board resists the offer saying it was coercive. Mesa owns 13% and makes a tender offer to shareholders to acquire 37% more at $54/share for the first tier of tenderers. Then they will give those that do not tender their share "junk bonds" (bonds rater less than investment grade by a credit agency) to acquire full control of the company in a freeze out merger. Mesa adopts a series of defensive measures. Offers a self-tender at $72/share, excluding Unocal. Rule: BOD can adopt defensive measures to resist a tender offer, if they are reasonably tailored to the situation. UNOCAL Standard: The BOD may consider other constituencies other than the shareholders if their motive is in the shareholders' best interest o Three part test: Burden lies on management to prove that they were responding to: 1) a threat and 2) the response to the threat was reasonable and 3) management must be doing this for the benefit of the corporation (did not act out of desire to keep their jobs)

In Re Delphi Financial Group Shareholder Litigation (Del. Chancery 2012)

Minority shareholders say that Rosenkrantz is coercing an approving vote on his special dividend, because he says that if they do not vote to approve this deal, he will then block the merger. Holding: There was enough evidence to show that the plaintiffs were likely to win on the merits, but the damages could easily be calculated ex-post and so there was no need to issue an injunction.

United States v. O'Hagan

Misappropriation theory. Addresses the argument that was not included in Chiarella. Used information that was in breach of the source of the information, although there was no duty to the corporation or the shareholders. A partner an Minneapolis law firm, O'Hagan borrows money from the Mayo Clinic to purchase call options and stock of the Pilsbury Co. because he is advising a client, Grand Met, who is in negotiations for a merger with Pilsbury. Rule: A person commits fraud in connection with a securities transaction, and thereby violated §10(b) and Rule 10b-5 when he misappropriates information that is confidential for securities trading purposes, in breach of a duty owed to the source of the information.

Fletcher v. A.J. Industries, Inc.

Modification of the Common Fund Doctrine - when there is a Substantial benefit to the corporation, attorney's fees will be paid. Holding: If there is a substantial benefit to the corporation, even without a statutory basis or common fund, the attorney can be awarded fees. Standard: The party prevailing in an action may not recover attny's fees unless a statute expressly permits such recovery.

Verata and Trilogy vs. Selectica (2010)

Passed the Unocal test because 1) Selectica perceived a rational threat from losing its NOLs by the actions of Trilogy and 2) The tactics it adopted weren't preclusive or coercive so as to be draconian so the court will look to see if it was within the range of reasonableness 3) it is within that range because there were other companies that did similar 5% triggers on their poison pills when they had NOLs to protect and were reasonable in relation to the threat

Tarnowski v. Resop (Minn. 1952)

Seller has an agent investigate whether jukeboxes are a good investment. Agent tells him that they are, but it turns out he was sloppy in his investigations. Agent was also getting money under the table to sell those jukeboxes to the seller. Duty of loyalty. Rule: Benefits belong to the principal.

Revlon v. MacAndrews and Forbes Holdings, Inc (1986)

Perelman tries to acquire Revlon, offer $47.50 for the stock currently trading at $25 (a 90% tender). Note: all cash, all-shares offer (no coercion on the back end because he will cash out the minority shareholders at the same price.) Revlon engages in defensive tactics. Adopts a flip-in poison pill and offers to buy back 20% of its stock. Gets a white knight. And offers him a lock up deal that would ensure that he get the deal. Revlon breached their duties to shareholders by adopting preclusive defensive measures. Court creates Revlon duties. Are different from and in addition to Unocal duties. Reasoning: When there is an open auction for the corporation, the consideration of such constituencies is inappropriate, because object no longer is to protect or maintain the corporate enterprise, it is to get the highest bidder Rule: When a board ends a bidding contest on an insubstantial basis, and a by-product of that action is to protect directors from the threat of personal liability for consequences stemming from their defensive measures, the action cannot withstand the enhanced scrutiny of Unocal. Rule 2: Favoritism for a white knight to the total exclusion of a hostile bidder may be justifiable if not doing so would be detrimental to shareholders' interests. o But it is not permissible when the two offers are substantially similar, or dissolution of the corporation is inevitable

In re Walt Disney (2005)

Process Evaluation for Executive Compensation Package. It was not perfect, but it was a sufficient process. Provides suggestions for companies in their processes: 1) all committee members would have received, before or at the committee's first meeting, a spreadsheet or similar document prepared by (or with the assistance of) a compensation expert 2) Making different, alternative assumptions, the spreadsheet would disclose the amounts that Ovitz could receive under the OEA in each circumstance that might foreseeably arise 3) One variable in that matrix of possibilities would be the cost to Disney of a non-fault termination for each of the five years of the initial term of the OEA. 4) The contents of the spreadsheet would be explained to the committee members, either by the expert who prepared it or by a fellow committee member similarly knowledgeable about the subject. Also explains that violations of "good faith" is an extremely high standard for plaintiffs to prove and require a long list of particularized facts

Apple v. Greenlight

Proxy statement proposals cannot be "bundled" Rule 14a-4a3. (Apple wants to remove "blank check" stock which would allow directors to determine the interest rate

Smith v. Van Gorkum

Publicly held corp with unused NOL (net operating losses). They hadn't been able to use that to offset the amount of tax they could use. Their CEO, Van Gorkum was looking to retire. Van Gorkum approaches Pritzker for $55/share in a cash out merger to sell out his 75,000 stocks and the rest of the shareholders' stock for that same price SH suit alleging a breach to the duty of care. Holding: The Board of Directors did not reach an informed business decision with regards to the merger. • Shareholder vote that overwhelmingly approved the Prtizker Merger was not enough to exonerate them, because the shareholders were not informed about the decisions of the Board

Marchand v. Barnhill

Raises duty to investigate standard to include bad faith

Gantler v. Stephens

Reclassification of voting stock to preferred stock without voting rights. The corp. wants to avoid a merger. Officers owe the same fiduciary duties as directors.

Business Roundtable v. SEC

Rule14a-11, which allowed SH proxy access for nominating its own BOD candidates is invalid. Ruled "arbitrary and capricious," but SEC has additional obligation to consider the effect of a rule on "efficiency, competition and capital formation."

Omnicare, Inc. v. NCS Healthcare, Inc. (2003)

Rule: The deal protection provisions in unison exerted a coercive and preclusive effect on the deal and under the Unocal standard, it was not within the range of reasonable protections.

Smith v. Barlow (N.J. 1953)

Shareholder bring derivative action against board of directions for breach of loyalty because they made a small contribution to Princeton University. Common law rule that those who managed the corporation could not disburse any corp. funds for philanthropic or other worthy public causes unless the expenditure would benefit the corporation BUT New Jersey has a a statute that explicitly permits corporations to donate to charity. Valid under State law that the contributions could be made by directors when "they deem expedient and as in their judgment will contribute to the protection of the corporate interests." o Shall not exceed 1% of capital and surplus unless authorized by the shareholders

Graham v. Allis-Chalmers Manufacturing Co. (Del. 1963)

Shareholder sued for breach of duty of care because BOD was on notice of the prior violations of price fixing in the company and failed to put into place sufficient internal controls to ferret out and prevent further wrongdoing. Rule: Absent cause for suspicion there is no duty upon directors to install and operate a "corporate system of espionage" to ferret out wrongdoing which they have no reason to believe exists.

Miller v. AT&T (3d. Cir. 1974)

Shareholders bring a derivative claim against AT&T for breach of fiduciary duty to diligently monitor the business of the Corporation because they did not collect on a debt of $1.5 million from the Democratic National Convention for phone services. Rule: Not covered by the BJR because it was illegal and no matter how "good" or "bad" for business the decision is, that will not clear you of liability.

In re: Citigroup Shareholder Derivative Litigation (Del. Ch. 2009)

Shareholders bring claim of breach of fiduciary duty against board directors for failure to monitor and manage the risks of the Company in the subprime lending market. This is a case of hindsight bias, not of breach of fiduciary duty. The business judgment rule rules here and the court will not engage in whether it was the right or wrong decision for the directors to allow Citigroup to engage in the subprime market.

Basic v. Levinson (1998)

Shareholders sue because they sell stocks in Basic right before a merger, which the company denied it was in negotiation for. They claim a 10b-5 violation for the company's statements that they were not going to merge. Fraud on the market theory because the stock price reflected their misrepresentations that there wan't going to be a merger. STANDARD: Materiality will depend at any given time upon a balancing of both the indicated probability of the event occurring and the anticipated magnitude of the event in light of the totality of company activity. Agreement-in-principle approach abandoned o These merger agreements are likely to be material long before the agreement-in-principle is reached BUT you can say legally "no comment"

Zapata v. Maldonado

Special Investigative Committee to determine if an action against the corporation may be reason to apply to BJR, but the court needs to look into the thoroughness, independence, and good faith of the special committee's recommendations. • 1) Look in to the independence and good faith of the committee and the bases for supporting its conclusion • 2) The Court should determine, applying its own independent business judgment, whether the motion should be granted.

Levine v. Smith

Suit claims that in a share buyback from Ross Perot, the company, GM, paid a premium just to keep Perot from criticizing the company. Breach of fiduciary duty for paying the excessive price—it was corporate waste. The court held that shareholder's claim failed to state a claim of demand futility. The court further explained that shareholder's complaint failed to plead with particularity facts which would raise a reasonable doubt of director disinterest and independence or that the challenged transaction was otherwise the product of a valid exercise of business judgment. "When lack of independence is charged, a plaintiff must show that the Board is either dominated by an officer or director who is the proponent of the challenged transaction or that the Board is so under his influence that its discretion is sterilized."

In re Pure Resources (DE Chancery 2002)

Unocal offers a tender to Pure Resources at a certain price. The Plaintiffs move to enjoin the tender offer because they don't want the other shareholders to take the deal, because they think they will get a better price. The majority of the minority are affiliated with Unocal so they argue that they will be pressured to take the deal. Holding: Solomon line of cases is the appropriate standard. Entire fairness is not appropriate for tender offers, like they are in mergers. BUT this tender offer was coercive, SH have the right to more disclosure about the process. They need the special reports that the Special committee saw. New Standard: Raises the threshold for characterizing a tender offer as non-coercive. (more about process than price. If it included fair price than it would be the same thing as entire fairness)

In Re CNX Gas Corporation Shareholder Litigation

V.C. Lastar Opinion. Does not differentiate on whether it was a tender offer or a merger. He does not believe that The Tender Offer did not pass the standard required for BJR, as the Special Committee did not approve of the transaction. Nevertheless, he concludes that the tender offer was not coercive. o And The S Committee did not have the real, requisite bargaining power to effectuate its role. (There was only one independent director in it, and the other members refused his request to have another member.)

Credit Lyonnaise

When a corporation is insolvent, the BOD owe fiduciary duty to the corporation for the benefit of creditors while attempting to maximize value in the corporation for the benefit of residual claimants (shareholders). Because creditors are the main constituency injured by breaches of fiduciary duty while the corporation is insolvent, creditors in this situation have standing to bring a derivative suit.

Business Judgment Rule

When it is: 1) is made by financially disinterested directors or officers 2) who have become duly informed before exercising judgment 3) who exercise judgement in a good faith effort to advance corporate interests

Sinclair Oil v. Levian

With a claim of self-dealing transactions where the accused party is a parent to a subsidiary plaintiff. The standard of review is Intrinsic Fairness Review. Rule: Burden is on the defendant to prove entire fairness, and that it did not by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that benefits the parent to the exclusion of, and detriment to, the minority stockholders. Sinclair received nothing to the exclusion of Sinven, therefore these dividends were NOT self-dealing. The minority shareholders got their part of the dividends, therefore BJR should have applied.``

Kallick v. Sandridge Energy, Inc. (2013)

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