Business Entities- Final (Stetson Law; Prof. Torres-Spelliscy)

Certified B Corp

B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. -B Lab re-certifies companies every 2 years

Alderstein v. Wetheimer 2002 WL 205684 (Del. Ch. 2002) CB 174

Directors may not act on a plan to remove a controlling shareholder and director without first informing that person of the plan and giving him a chance to protect his interests HOLDINGS: personal notice was given in the July 5 call with Adlerstein and the lack of written notice or an agency does not invalidate the notice (neither is required by the bylaws) -also no requirement that notice of the agenda be given in advance (bylaws contain no such provision and there is no such statutory requirements or judicial ruling to that effect) BUT because Adlerstein was both a controlling stockholder and a director, and so when withholding advance notice is done for the purpose of preventing the controlling stockholder/director from exercising his or her contractual right to put a half to the other directors' schemes. **failure to give him advance notice deprived him of adequate opportunity to protect his interests**

Peck v. Greyhound Corp. 97 F. Supp. 679 (S.D.N.Y. 1951)

FACTS: in litigation following the SEC's no-action letter, the court sided with Greyhound, but on exhaustion of remedies grounds HOLDING: in 1952 the SEC clarified what subject were proper for inclusion on the proxy including excluding "racial topics"

conflicted contracts

a contract between a corporation (or another corporation in which a director is financially interested) and a director is not void or voidable solely because of the director's relationship if the transaction is: 1) approved by a disinterested majority of the board upon full disclosure of the conflict; 2) approved or ratified by shareholders upon full disclosure; 3) is entirely fair to the corporation

Corporate Fiduciary Duties

evolved as a judge-made common law of equity fiduciary standards and principles -duty of loyalty -duty of care -in a sense there is only one duty, the duty of "good faith" --if a director is acting in good faith they will diligently (care) seek the best interests of the company (loyalty) courts impose fiduciary duties in decision-making courts review challenged business decisions under the business judgement rule (BJR) -therefore the BJR applies when a stockholder challenges the board's decision-making -it seeks to determine if the decision-making was tainted by a breach of fiduciary duty -if so, the court will examine the decision -but, if the decision was not tainted by breach of fiduciary duty, the court will defer to the business judgment of the board--even if the decision turned out to be a bad one.

Piercing the Corporate Veil (corporate formalities)

must show that the parent dominates the subsidiary so that they are run as a single economic entity -this involves things like board meetings, record keeping, and significantly, separate account (or not)

Dram Shop Law

owners of a bar or any other business that shells alcohol can be held legally responsible for what their customers do after they've been drinking (dram shop laws vary somewhat from state to state)

Moral Hazard

people may take undue risks if others may bear the consequences if things do not go well; last of incentive to guard against risk where one is protected from its consequences there is a lack of incentive to guard against risk where one is protected from its consequences

Equity v. Debt

stock represents equity (ownership) interest in the corporation, while bonds do not. a bond is a debt security and does not represent an ownership interest in the corporation (instead, the corporation borrows money from an investor to whom the debt security is issued).

Agency

the authority of corporate officers and agents is governed by the law of agency. an agent's authority may be either actual or apparent; in either case the agent has the power to bind the corporation, his/her principal, in contractual dealings with third parties

SEC

we have the SEC to prevent securities fraud. its role begins when it receives a no-action request in which a company asserts that a proposal is excludable under one or more parts of rule 14a-8. the SEC analyzes each of the bases for exclusion that a company asserts, as well as any arguments that the shareholders chooses to set forth, and determine whether it concurs in the company's view. -the company has the burden of demonstrating that it is entitled to exclude a proposal, and the SEC will not consider any basis for exclusion that is not advanced by the company.

Piercing the Corporate Veil (the parent-subsidiary relationship)

where the defendant is a corporate shareholder, the courts consider the effect of the intra-corporate relationship

Baatz v. Arrow Bar, Inc (DISSENT)

"The corporation in this case is not a separate entity, but rather the instrumentality of its owners and shareholders, created to escape individual liability in just this kind of action. The Neuroths admit that the corporation was formed to shield them from individual liability. The corporation was also under-capitalized. An under-capitalized corporation formed to escape personal liability should not be used to avoid liability for negligently selling alcohol to a person who is obviously already intoxicated." the plaintiffs were badly injured, the bar has a bad reputation, the Neuroths are using a corporation to circumvent this court's prior ruling, because: -the Neuroths are the stockholders and are employed by the corporation to run the bar, so they are the real parties. he testified they formed the corporation on advise of counsel to create a shield against personal liability -therefore, this is a fraud. the corporation Arrow Bar, Inc. is used to avoid theoretical liability and importantly it operates a real business.

Dirks v SEC DISSENT

"The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury. ...It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally from the transaction; the shareholder still has lost because of the insider's misuse of nonpublic information." "Because Dirks caused his clients to trade, he violated § 10(b) and Rule 10b-5. Any other result is a disservice to this country's attempt to provide fair and efficient capital markets. I dissent."

In re Cady, Roberts, & Co.

"[A] special obligation has been traditionally required of corporate insiders, e.g., officers, directors and controlling stockholders. These three groups, however, do not exhaust the classes of persons upon whom there is such an obligation. Analytically, the obligation rests on two principal elements; -first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and -second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing..." *an insider's failure to disclose material facts known to him virtue of his position is a violation of the Securities Exchange Act and Rule 10b-5. THE RULE IS REFRAIN FROM TRADING OF DISCLOSURE.

Piercing the Corporate Veil in Florida

"the rule is that the corporate veil will not be pierced, either at law or in equity, unless it be shown that the corporation was organized or used to mislead creditors or to perpetrate a fraud upon them..."

Securities Act of 1933

"truth and securities law" two objectives: 1. require that investors receive financial and other significant information concerning securities being offered for public sale; and 2. prohibit deceit, misrepresentations, and other fraud in the sale of securities

8 Del. C. Section 102(b)(7)

*Articles of Incorporation that use this provision are said to have an exculpatory clause for directors. these can eliminate the duty of care, but not the duty of loyalty. 7) a provision eliminating or limited the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate of limit the liability of a director: i) for any breach of the director's duty of loyalty to the corporation or its stockholders; ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; iii) under section 174 of this title; or iv) for any transaction from which the director derived an improper personal benefit

American International Group (AIG)'s role in the 2008 financial collapse & Dodd Frank

-AIG, an insurance conglomerate witha securities subsidiary that specialized in financial derivatives, including credit default swaps, was unable to post collateral related to its derivatives and securities lending activities. -the Fed intervened with an $85 bil loan to prevent bankruptcy and to ensure full payment to AIG's counterparts

The difference between a Certified B Corp and a Benefit Corporation

-a Certified B Corp can be any business organization that is certified as meeting the B Lab's high standards whereas a Benefit Corporation is a coporation incorporated under 33 state laws --many Benefit Corporations are also Certified B Corps, but they may not be. and not all Certified B Corps are Benefit Corporations.

Directors

-manage the company -decisions are made by the board as a group -make decisions at meetings -set policy and make big decisions duties: -owe fiduciary duties to stockholders and the corporation --they run the corporation for benefit of stockholders types of directors: "inside" and "outside"

two types of duty of care claims

-where the board makes a decision that results in a loss and the plaintiffs alleged the decision was ill advised or "negligent" -where the loss arises from an unconsidered failure of the board to supervise the operation of the company

Business Judgement Rule (BJR)

1) judicially created presumption that the directors acted in -good faith, -with the requisite care, and -the belief that their decision would be in the corporation's best interests it functions as a gatekeeper to the courthouse and shields directors from liability the burden is on the plaintiff to rebut the presumption by showing that there is reason to believe a majority of the directors who made the challenged decision did so in violation of at least one fiduciary duty owed them to the company thus, the plaintiff must show facts that suggest -absence of good faith, -reason to question loyalty, -lack of care, -lack of belief that the decision was in best interests of the company.

Corporate Structure

1. Owners (shareholders) 2. Board of Directors (elected by the shareholders) 3. Officers (hired by the Board; i.e. CEO, senior managers) 4. Employees (workers; not considered part of the corporate govt. structure)

Convictions after Enron

1. former CEO Jeffrey K. Skilling 2. former CEO Kenneth Lay (died before appeal) 3. Lea Fastow former treasurer 4. CFO Andrew Fastow 5. Michael Kopper 6. Paula Reiker 7. Richard Causey 8. Ken Rice 9. Timothy Belden

Factors to Pierce the Corporate Veil

1. fraudulent representations by directors 2. under-capitalization 3. failure to observe corporate formalities 4. absences of corporate records 5. payment by the corp. of individual obligations 6. use of the corporation to promote fraud, injustice, or illegality.

Shareholders' Role in a Corporation

1. invest capital 2. vote -at shareholders' meetings -express consent in writing 3. sue risk: limited to amount of investment -no personal liability return: residual claimants -last in line --dividends --distribution of dissolution

Piercing the Corporate Veil (factors the courts consider)

1. the corporation is closely held -if courts did this to a publicly traded corporation, it would undermine the ability of the stock market to function -public stockholders cannot use the corporation as their "alter ego." 2. Is the plaintiff an involuntary (tort) creditor of the corporation or a voluntary (contract) credits (i.e. supplies, employees, customers, banks)? -where the plaintiff is a tort victim, the courts have stronger theoretical ground for piercing the veil. 3. a tort victim did not have a chance to contract with the owner for a guarantee (but this factor alone is not enough to justify piercing the veil) 4. where the plaintiff is a contract creditor the courts still apply the doctrine -but the plaintiff was on notice it was dealing with a corporation and knows the corporation is responsible for its obligations -if plaintiff was unwilling to rely on the corporation's financial strength, it shouldn't have contracted for a guarantee.

3 central dimensions (or factors) that may affect the likelihood that veil piercing will occur

1. the distinction between plaintiffs suing to enforce contract claims and those suing to enforce tort claims (contact v. tort) 2. identity of the person behind the veil (identity) 3. the distinction between closely held and publicly held corporation (close v. held) -use of the corporate to deceive creditors will almost always justify piercing the veil

What Shareholders Vote On

1. to elect directors 2. to approve or disapprove transactions initiated by the board of directors 3. to amend bylaws MUST be allowed to vote on fundamental corporate changes and MAY be allowed to vote on transactions in which some of the directors have a conflict of interest and for which they seek shareholders

Brehm v. Eisner 746 A.2d 244 (Del. 2000); CB 379

A board of directors has a duty to inform itself, prior to taking action, of all material facts that are reasonably available to it. HOLDING: directors are "not required to be informed of every fact." -in making business decisions, directors must consider all material information available to the board -the directors face personal liability only for "gross negligence" FACTS: The Walt Disney Company (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). Under the five-year agreement, Disney agreed to give Ovitz a $1 million per year salary, a discretionary bonus, and stock options that would enable Ovitz to buy 5 million shares of Disney common stock. A non-fault termination ("golden parachute") provision in the agreement provided that if Ovitz left his employment with Disney through no fault of his own, he would receive a severance package, including a $10 million termination fee, his remaining salary under the five-year agreement term, the amount of probable unpaid installments of bonuses, and acceleration of his options for three million shares, which would become immediately exercisable at market price. Fourteen months after he was hired, the 1996 board (the New Board) terminated Ovitz's employment on a non-fault basis. Ovitz received approximately $140 million under his severance package in cash payments and the value of his stock options that vested upon termination. Shareholders (plaintiffs) brought a derivative action against Disney's directors (defendants), claiming that the Old Board breached its fiduciary duty and committed waste by approving the employment agreement without properly informing itself of the cost of the non-fault termination provision. The complaint admits that the Old Board was advised by a corporate compensation expert in deciding whether to approve the agreement. The complaint also alleges that the New Board breached its fiduciary duty by agreeing to the non-fault termination, which constituted waste. The Court of Chancery dismissed the complaint.

Dirks v. SEC 463, US 646 (1983); CB 1124

A breach of an insider's fiduciary duty must occur before a tippee inherits the duty to disclose inside information. HOLDING: under the inside-trading and tipping rules set forth above, the court finds that there was no actionable violation by Dirks, nor did Dirks misappropriate or illegally obtain the information about Equity Funding. -unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal. "Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure. This standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate "use of inside information for personal advantage." Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure."

Dodge v. Ford Motor Co. Mich. S. Ct. 170 N.W. 668 (1919); CB 270

A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns. FACTS: Dodge brothers owned about 20% of Ford Motor Co., and Henry Ford owned 58%. Ford wanted to reduce the selling price of its cars, even though it would reduce profits and decrease the value of the company's stock. HOLDING: a business corporation is organized and its business is conducted for the profit of its stockholders. the powers of directors are to be deployed to that end and the discretion of directors is to be exercised in the choice of the means to attain that end. *one of the few times a court ordered a company to pay a dividend to stockholders.

Sinclair Oil Corp. v. Levien 280 A.2d 717 (Del. 1971)

A parent corporation must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing. the basic situation for the application of the intrinsic fairness test is the one in which the parent has received a benefit to the exclusion and the expense of the subsidiary --but, where the parent received nothing from the subsidiary to the exclusion of the minority stockholders of the subsidiary, there is no self-dealing Here, the dividends are not self-dealing. they resulted in the transfer of a lot of money from Sinven to Sinclair (but, Sinclair got the same amount per share as the minority shareholders received). Under the intrinsic fairness standard, Sinclair must prove that it was intrinsically fair for Sinclair to cause Sinven not to enforce its contract rights against International, Sinclair's wholly owned subsidiary. -this, is had failed to do. Sinven is entitled to damages for International's breach of contract -Sinclair must account to Sinven for this self-dealing. actionable "self dealing" involves a transaction in which one person (or a set of persons) controls both sides and that party received corporate assets to the exclusion of shareholders generally.

Tax Gross Up

A practice usually in reference to an employer reimbursing a worker for the taxes paid on some portion of their income, usually from a one-time payment such as relocation expenses. In other words, if an employee is promised $5,000 for relocation expenses, the actual check might be issues for $6,500. this would leave the promised $5,000 after the required taxes had been deducted.

Zidell v. Zidell (Oregon S. Ct. 1977)

A shareholder suing to compel a corporation to issue a dividend has the burden of showing that the directors acted in bad faith in declining to do so. FACTS: one brother, Arnold, owned 37.5% the other, Emery, and his son, Jay, owned 62.5%. in May 1973, Arnold asked asked for a raise, was refused, quit but remained as director until his term expired, was not re-elected. prior to May 1973 it had been the company's practice to retain earning in the business rather than to distribute them as dividends because all significant stockholders were active in the business and took money out of the business with their salaries. Following his resignation, Arnold demanded that the companies start paying dividends. the company started paying small dividends, but Arnold claimed a) the dividends are unreasonable small and the boards did not act in good faith, and b) at the same time, the companies increased the salaries they were paying the others. he claimed the combined effect is to deprive him of his fair proportion of the profits. HOLDINGS: -the controlling stockholders owe fiduciary duties to the minority shareholders. -the essential test of bad faith is whether the policy of the directors is dictated by their personal interests rather than corporate interests -absent conflicting self-interest, courts tend to defer to board decisions on dividends -before a court will intervene in a dividend decision, it must, generally, be shown that the decision not to declare a dividend amounted to fraud, or bad faith. -the party seeking the payment of a dividend has the burden of proof -if there are plausible and credible business reasons for the board's decision not to pay a dividend, the court will defer to the board's decision (otherwise, the court would referee every corporate dispute). this is not a case where the majority is squeezing the minority out of the company -plaintiff voluntarily left his job -the directors did not intentionally squeeze plaintiff out of the company to force a sale of his stock at an unreasonably low price --the plaintiff did not carry his burden of proof and so the decision in his favor below is REVERSED. *bad faith is hard to prove. -the plaintiff would have to show that the company is sitting on such a large pile of money that there is no other explanation than "bad faith"

Chiarella v. US 445 US 222 (1980); CB 1117

An allegation of securities fraud based upon nondisclosure of information will not succeed unless there is a duty to speak. FACTS: Chiarella (defendant) was an employee for a printing company that handled documents concerning corporate takeovers. The companies to be acquired were redacted until the final draft of such takeover agreements. In one instance, Chiarella was able to discover the companies involved in a takeover bid through the information provided in the draft takeover agreement. He then traded on this information, which was not public, and enjoyed earnings of $30,000. When it was discovered he was trading on nonpublic information, the United States (plaintiff) brought charges against him for violation of § 10(b), prohibiting fraud based on his nondisclosure of information. HOLDING: Chiarella's conviction should be vacated because he did not have a duty to speak as he was not an employee or majority shareholder in the companies in which he traded stock. An allegation of securities fraud based upon nondisclosure of information will not succeed unless there is a duty to speak. In this case, Chiarella was not an employee of the companies in which he traded stock. He also was not a majority shareholder in said companies. As such, there was no fiduciary relationship between him and the other shareholders of the companies. Thus, he had no duty to disclose the information in his possession prior to executing his trades. Since Chiarella had no duty to disclose the information in his possession, he cannot be found guilty of insider trading. The judgment of the court of appeals is reversed.

Globe Woolen Co. v. Utica Gas & The Electric Co. 224 N.Y. 483, 121 N.E. 378 (N.Y. App. 1918) (Cardozo)

As a fiduciary, a corporate director has a duty to deal fairly with the corporation and not to permit the corporation to suffer losses at his expense. FACTS: mills switching from coal to electric, Maynard (the chairperson) abstained from voting/voicing his opinion even though he organized the deal and was on both ends of the contract. . HOLDING: A corporate director has a duty to protect the corporation from suffering losses at his personal expense. When a trustee has business dealings with his beneficiary, he may not take advantage of his superior knowledge and bargaining position. Such contracts may be set aside by the beneficiary unless they are fair and unless the trustee has been fully candid about the transaction. The same principles apply to dealings between a director and the corporation. The fact that a self-dealing director did not actually vote on the transaction does not guarantee safe harbor for the contract. The director has a duty to fully inform the other directors about the potential risks and losses associated with the transaction. If the director fails to do so and unfairness actually exists, the contract is voidable at the corporation's election. Here, the contracts were startlingly unfair and Maynard clearly failed to be fully candid with the other directors. He did not inform the board that Globe intended to increase production, which would significantly increase power consumption. Simply abstaining from the vote was insufficient. Maynard was in a position of superior knowledge and had a duty to share that knowledge. Since he failed to do so, the contracts are voidable. The judgment of the appellate court is affirmed.

Shlensky v. Wrigley Ill App. Ct. 237 N.E.2d 776 (1968); CB 266

As long as a corporation's directors can show a valid business purpose for their decision, that decision will be given great deference by the courts. FACTS: Shlensky, a minority stockholder, sued Wrigley and other individuals on the board of the Chicago National League Ball Club for breaching a duty in carrying out their decision-making function/not acting in the best interests of the company (being the only major league team with no lights in the stadium so no night games) HOLDING: it is not the function of courts "to resolve for corporations questions of policy and business and business management...the judgement of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve." -the plaintiff has failed to show that Wrigley's refusal to install lights is contrary to the best interests of the company. -the court does not decide which course of action would be better for the company.

Securities Exchange Act of 1934

Companies with more than $10 mil. in assets whos securities are held by more than 500 owners must file annual and other periodic reports. -these reports are available to the public through the SEC's EDGAR database PROXY SOLICITATIONS: also governs the disclosure in material used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action INSIDER TRADING: the securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities -insider trading is when a person trades a security while in possession of material nonpublic information REGISTRATION OF EXCHANGES, ASSOCIATIONS, and OTHERS: the Act requires a variety of market participants to register with the Commission, including exchanged and brokers and dealers. Registration for these organizations involves filing disclosure documents that are updated on a regular basis. the stock exchanged are identified as self-regulatory organizations (SRO) -SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are subject to SEC review.

Externalities

Externalities are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. Externalities create a divergence between the private and social costs of production.

Koibel v. Royal Dutch Petroleum

Externalities create a divergence between the private and social costs of production. FACTS: Nigerian nationals who'd moved to the US and had been victims of atrocities committed by the Nigerian military sued Royal Dutch (aka Shell) and other British, Dutch, and Nigerian companies under the Alien Tort Statute for allegedly aiding and abetting the Nigerian military. -1st) Can a corporation be held liable for violating fundamental human rights norms under the Alien Tort Statute? HOLDING: No, corporations are often present in many countries and it would reach too far to say that mere corporate presence suffices -2nd) Can federal courts in the US recognize a cause of action under the Alien Tort Statute, 28 USC 1350, for violations of the law of nations occurring within the territory of a soveriegn other than the US? HOLDING: No. US law does not apply extraterritoriality, unless the law itself clearly provides for such application. the statute provides district courts with jurisdiction to hear certain claims, but does not expressly provide any causes of action.

Ringling v. Ringling Bros.-Barnum & Bailey, Inc. (Del. Ch. 1946), aff'd (Del. S.Ct. 1947)

FACTS: After the death of the original Ringling brothers who had founded the circus, there was disagreement between the Widow of a Ringling brother who owned about 30% of the stock, the Daughter-in-Law of another Ringling brother who owned about 30%, and the Son of a Ringling sister. (widow and daughter in law pooled their shares to oust the son); widow and daughter in law could not agree on how to vote their stock so one brought suit to enforce the agreement. HOLDING: An agreement between two shareholders in a closely held corporation to vote jointly is binding and enforceable as a contract. (voting agreement is enforceable)

Baatz v. Arrow Bar, 452 N.W.2d 138 (1990)

FACTS: Kenny and Peggy Baatz were seriously injured by Roland McBride when he hit them with his car while they were on a motorcycle. McBride was uninsured and therefore so the Baatzs' sue Arrow Bar (owned/operated by Edmond and LaVella Neuroth) for serving McBride alcohol at their bar while he was already intoxicated HOLDING: A court may pierce the corporate veil and hold shareholders individually liable where continued recognition of a corporation as a separate legal entity would produce injustices and inequitable consequences. -there is no evidence to support the plaintiff's contention that the corporation is the Neuroth's alter ego. -the evidence shows that they treated the corporation separately from their personal affairs, i.e. no commingling of funds. -the evidence does not support the plaintiffs' theory that the company was under-capitalized in this case there is no evidence that recognition of a corporate entity would produce injustices and inequitable consequences, in which case a court may pierce the corporate veil and hold individual -the court rejects plaintiffs' arguments (under the S.D. Dram Shop Law) that the individual defendants were liable as employees of the corporate licensee (which is the corporation for purposes of the S.D. Dram Shop Law, since the S.D. license to sell liquor was issued to the corporation) If they had used corporate money to pay their personal obligations that would justify piercing the veil, but this is the opposite (they pledged their personal assets to pay the company's obligations). -the mere fact that the sign over the bar did not include the word "incorporated" or the abbreviation "Inc." is not enough to support plaintiffs' contention that they failed to observe corporate formalities.

Western Rock Co. v. Davis 432 S.W.2d 555 (Texas App. 1968); CB 624

FACTS: Owners of homes and business damaged by blasting conducted by Western Rock sued the company, their president (Mr. Stroud) and a director (Mr. Fuller) and Fuller and Stroud knowingly permitted the blastinf to continue even though they knew it caused harm; appeal. by the time the 1966 verdict came in against Western Rock, it had assigned its assets to Fuller's family corporation. -they can be held personally liable for the harm caused by the negligent way they conducted the corporation's blasting activities. HOLDING: Directors and officers may be held personally liable for a corporation's tortuous conduct if they exercised dominating control over the corporation and deliberately kept it under-capitalized. the corporate form may not be used to shield principals from liability for wrongful acts they knowingly caused to be committed. If directors or officers have control over a corporation, knowingly cause the corporation to engage in behavior that results in damage to third parties, and intentionally keep the corporate conduct. Here, Stroud (as manager) and Fuller (as financial backer) dominated the corporation -even though Fuller was not a corporate employee, he was in control.

Lovenheim v. Iroquois Brands, Ltd. (D.D.C. 1985) CB 237

FACTS: Under Rule 14a-8(c)(5) [now Rule 14a-8(i)(5)], a shareholder proposed resolution for a proxy statement can only be turned down when the proposal both concerns less than 5% of total earnings or assets, and when it is not significantly related to the business.Plaintiff wanted to insert a proposal to determine whether a supplier of pate de fois gras force-fed the geese in order to enlarge the livers. Defendants wanted to omit the proposal. Defendants believed that only a proposal related to economic purposes are required to be accepted per Rule 14a-8(c)(5), and that the 5% threshold was not exceeded. HOLDING: The court held that precedent demonstrated that Rule 14a-8(c)(5) would only omit proposals that were less than the minimum 5% of sales and not significantly related to the business. In this case, the pate issue was significant to its pate business regardless that it did not comprise greater than 5% of sales. Prior cases also demonstrated that Congress wanted to ensure that non-economic factors could be considered as relevant to the business. *The court holds that both sections of Rule 14a-8(c)(5) need to be met. The ruling is consistent with the idea that not all decisions made by a corporation will be made solely along economic lines.

Medical Comm. for Human Rights v. SEC (D.C. Cir. 1970) CB 240

FACTS: a shareholder proposal at Dow chemical about their sale and manufacture of napalm -Dow said it was excludable under 14a-8(i)(7) if they were related to "ordinary business operations." and Dow said it was excludable under 14a-8(i)(5) which provided shareholder proposals did not have to be included if they were not "significantly related" to company business. HOLDING: the corporate proxy rules could not be used as a shield to isolate managerial decisions from shareholder control and shareholder proposals are proper when they raise issues of corporate social responsibility or question the "political and moral predilections" of management *in 1976 the SEC deleted the social cause exclusion provision all together

K.C. Roofing Center v. On Top Roofing, Inc. 807 S.W.2d 545 (Mo. App. 1991) CB 616.

FACTS: plaintiff sued company (specifically the owners). Although there was no evidence that Mrs. Nugent had participated in the wrongful conduct (and therefore is not personally liable), Mr. Nugent had continued to use the same trade name "on top" as he shifted from company to company. he caused the company to continue making purchases on unsecured credit event though it was not paying its unsecured creditors -this is an unfair way to use a corporation. It was probably fraud, and if not it was at least unjust, unfair, and inequitable. HOLDING: to pierce the veil the plaintiff needs to show the stockholder dominated the company's finances, policies, and business practices regarding the challenged transaction (company had no mind of its own) AND the control must have been used to: commit fraud or wrong, perpetuate the violation of a statutory or other legal duty, or perform a dishonest and unjust act in contravention of plaintiff's legal rights. AND the bad conduct must cause the injury of which plaintiff complains mere voting control is not enough to pierce the veil, otherwise majority shareholders would always be liable In Missouri, it is proper for a court to "pierce the corporate veil" of a corporation and hold its shareholders or owners personally liable for injury caused to a plaintiff if the owners (1) maintained complete control of the entity's business practices so as to render the corporation functionless and (2) utilized their control over business functions in order to violate a plaintiff's legal rights.

Jesner v. Arab Bank/ In re Arab Bank

FACTS: plaintiffs are victims of terrorist attakcs that occured over a 10 year period in Israel, the West Bank, and Gaza. Arab Bank maintained accounts for known terrorists, accepted donated that it knew would be used to fund terrorism, and paid out families of suicide bombers. plaintiffs filed lawsuits under the Alien Tort Statute. HOLDING: "we conclude that Kiobel I did not overrule Kiobel II on the issue of corporate liablity under the ATS. we note nonetheless that Kiobel II appears to suggest that the ATS may indeed allow for corporate liability--a reading of the statute that several of our sister circuits have adopted. Even were we to agree with that view, however, as a three-judge panel, we would not be free to overrule the law established by the previous decisions of the Kiobel I panel."

Private Ordering Two-Steps

First, a shareholder may propose changes to the company's governing documents specifying procedures by which shareholders may include director nominees in the company's proxy materials. Second, if proxy access procedures are adopted, a shareholder may then require specific director nominees to be included in the company's proxy materials pursuant to the company's proxy access regime.

Salman v. United States

HOLDING: "Our discussion of gift giving resolves this case. Maher, the tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to 'a trading relative,' and that rule is sufficient to resolve the case at hand." "As Salman's counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother. It is obvious that Maher would personally benefit in that situation. But Maher effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it. Dirks appropriately prohibits that approach, as well." "Dirks specifies that when a tipper gives inside information to "a trading relative or friend," the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds." "by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its client—a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed."

Burwell v. Hobby Lobby Stores, Inc.

ISSUE: We must decide whether the Religious Freedom Restoration Act of 1993 (RFRA), permits the HHS to demand that three closely held corporations provide health-insurance coverage for methods of contraception that violate the sincerely held religious beliefs of the companies' owners. HOLDING: It is okay for them to not provide contraception because they are a closely held corporation. "we do not hold...that for-profit corporations and other commercial enterprises can "opt out of any law (saving only tax laws) they judge incompatible with their sincerity held religious beliefs." nor do we hold ,as the dissent implies, that such corporations have free rein to take steps that impose 'disadvantages... on others" or that require "the general public [to] pick up the tab.'"

SEC v. Texas Gulf Sulphur Co. 401 F.2d 833 (2d Cir. 1968), cert. denied (1971)

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. FACTS: drilling revealed extraordinary rich copper and zinc deposit. company pres. told the employees to keep news confidential and then people with the knowledge bought stock. company released a misleading press release after all the stocks were bought. HOLDINGS: Before insiders may act upon material information, such information must have been effectively disclosed in a manner sufficient to ensure its availability to the investing public *key element is whether a reasonable person would believe that the information would be relevant to the price of the stock

VGS, Inc. v. Castiel

Members of an LLC violate their duty of loyalty to a fellow member if they do not give him notice of an LLC action that is adverse to him and that he would be able to prevent given his controlling role in the LLC. FACTS: Sahagen and Quinn each owerd a duty of loyalty to the LLC, its investors, and Castiel -that fiduciary duty required them to give castiel prior notice, even though such notice was not required by statute HOLDING: they may have been motivated by a good faith belief that the company's best interests would be served by reducing Castiel's power, but that does not excuse their breach of their duty of loyalty to Castiel.

Donahue v. Rodd Electrotype Co. (Mass S. Ct. 1975) CB 476

Stockholders in close corporations owe one another strict duties of care and loyalty, similar to the duties owed among partners in a partnership. when controllers cause company to buy back shares must make the opportunity available, pro rata, to all shareholders --if the company buys all of my shares must it buy all of the other shares? -unique to closely held co. FACTS: In 1955, Harry Rodd held 200 of Rodd Electrotype Co.'s 250 shares, representing an 80 percent stake in the company. Joseph Donahue owned the remaining 50 shares, which passed on his death to his wife Euphemia Donahue (plaintiff) and his son. By the end of the 1960s, Harry Rodd had ceded the management of the corporation to his sons Charles and Frederick Rodd (defendants), and Harry wished to dispose of his shares. He gave most of them to his children as gifts. Additionally, Charles and Frederick - who controlled the board - caused the corporation to purchase 45 of Harry's shares for $800 per share. When the Donahues learned of the purchase, they offered to sell their shares to the corporation on the same terms given to Harry. The board rejected the offer. Euphemia Donahue sued Harry, Charles, and Frederick Rodd, as well as the third member of the board, for breaching fiduciary duties owed to her as a minority shareholder. She asked the court to rescind the corporation's purchase of Harry Rodd's stock. The trial court found in favor of the defendants, holding that the transaction was inherently fair. The appellate court affirmed. Euphemia Donahue appealed to this court. HOLDING: -stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. -stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard --this "good faith" standard is even more stringent than the duty owed by directors to the corporation and its stockholders. This is duty of the "finest loyalty" and "the punctilio of an honor the most sensitive" Donahue should have been offered the same opportunity. Sup. Ct. reversed.

Smith v. Van Gorkom DISSENT

The combined experience of the Trans Union board of directors warrants a finding that they would not have entered into the merger without being fully informed. They were "more than well qualified" to make an informed business judgment and under the business judgment rule, they should not be liable.

In re Caremark Int'l, Inc. Derivative Lit. 698 A.2d 959 (Del. Ch. 1996); CB 361

The directors of a corporation have a duty to make good-faith efforts to ensure that an adequate internal corporate information and reporting system exists. FACTS: The company allegedly violated laws that prohibit health care companies from paying doctors to refer Medicare or Medicaid patients to their services. A group of Caremark shareholders (plaintiffs) promptly brought derivative suits, alleging that Caremark's directors (defendants) breached their duty of care by failing to adequately oversee the conduct of Caremark's employees and thereby exposing the company to enormous civil and criminal penalties. The parties negotiated a settlement.. In the settlement, the board did not agree to any monetary penalties; it simply agreed to implement a number of more cautious policies moving forward, such as the creation of a compliance and ethics committee. HOLDING: the duty of care owed by corporate directors may be breached either by active decisions which are negligent, or by negligent failure to act. -when a plaintiff challenges a board's decisions, the judge reviews the matter under the deferential Business Judgment Rule --a claim charging the board with failure to supervise, on the other hand, alleges that the loss was caused, not by the boards decision to do something, but by the boards inconsiderate inaction (thus, the Business Judgement rule does not apply) to support a claim for failure to supervise the company's employees, plaintiffs must show: -that the directors knew or should have known that violations of law were occurring; and -the directors took no steps in a good faith effort to prevent or remedy that situation; and -that such failure proximately resulted in the losses complained of -"[A] director's obligation includes a duty to attempt in good faith to issue that a corporate information and reporting system, which the board concludes in adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards." --a director has a duty to monitor coproate operations ---aka director has a duty to create an information system --director "should" know what a proper information system would reveal to them (they should know what they would have learned had they met their duty to monitor) -does a failure to create a "corporate information and reporting system" constitute a "sustained or systematic failure of oversight?" YES INDEED.

Hoschett v. TSI International Software, Ltd. (Del. Ch. 1996) CB 168

The obligation to hold an annual meeting may not be satisfied by shareholder written consent action. FACTS: the corporation has less than 40 shareholders of record and had never had an annual meeting for the election of directors. the corporation argued that it had received a written consent representing a majority of the voting power of the corporation, which elected directors of the corporation and thus it had satisfied the need to hold an annual meeting for the election of directors. HOLDING: corporations may not elect directors via shareholder written consent and thereby avoid holding an annual meeting. Section 211(b) of the Delaware General Corporation Law (DGCL) requires corporations to hold an annual meeting of stockholders for the election of directors. This requirement trumps DCL section 228(a), which provides that any action required to be taken without a meeting if a majority of shareholders submits written consent that the action be taken. The annual meeting performs critical functions in addition to the election of directors. It is a structured occasion in which shareholders may interact with management. *court ordered the corporation to hold an annual meeting and make available a complete list of shareholders by the DGCL

Smith v. Van Gorkom 488 A.2d 858 (Del. 1985); CB 331

There is a rebuttable presumption that a business determination made by a corporation's board of directors is fully informed and made in good faith and in the best interests of the corporation. nder the business judgment rule, a business determination made by a corporation's board of directors is presumed to be fully informed and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that the directors were grossly negligent in that they did not inform themselves of "all material information reasonably available to them." The court determines that in this case, the Trans Union board of directors did not make an informed business judgment in voting to approve the merger. The directors did not adequately inquire into Van Gorkom's role and motives behind bringing about the transaction, including where the price of $55 per share came from; the directors were uninformed of the intrinsic value of Trans Union; and, lacking this knowledge, the directors only considered the merger at a two-hour meeting, without taking the time to fully consider the reasons, alternatives, and consequences. The evidence presented is sufficient to rebut the presumption of an informed decision under the business judgment rule. The directors' decision to approve the merger was not fully informed. As a result, the plaintiffs are entitled to the fair value of their shares that were sold in the merger, which is to be based on the intrinsic value of Trans Union. The Delaware Court of Chancery is reversed, and the case is remanded to determine that value. HOLDINGS -the directors are entitled to rely on reports from corporate officers -The board's decision was based primarily on Van Gorkom's oral presentation, but Van Gorkom's presentation was not a report. He was uninformed as to the essential provisions of the acquisition agreements. -Roman's statements about LBO models were irrelevant to price. (LBO models measure how much debt the cash-flow will repay; not the value of the tax credits to a profitable buyer) *no one called for a valuation study (does not have to be done by an outside investment banker, can be done by an insider).

Citizens United v. FEC

Under the First Amendment, the government may not suppress political speech on the basis of the speaker's corporate identity. FACTS: Citizens United sought an injunction against the Federal Election Commission in the United States District Court for the District of Columbia to prevent the application of the Bipartisan Campaign Reform Act (BCRA) to its film Hillary: The Movie. District Court denied the injunction. HOLDING: corporations may have the same rights to political speech as an individual, but 8-1 in favor of disclosure of election-related spending

Joy v. North 692 F.2d 880 (2d Cir. 1982)

Under the business judgment rule, corporate directors and officers will not be held liable for bad business decisions. directors and officers may face liability for negligence in the performance of their duties, however bad judgment or mistakes regarding the state of the market or the economy, customer preferences, or production capabilities typically will not give rise to liability. -policy considerations that support the Business Judgment Rule's treatment of the Duty of Care --if courts impose liability on directors for decisions that don't work out, they will become risk adverse (they will follow the safe, but less profitable, path) -the business judgment rule which says that courts will defer to the decision of the board applies were the board is exercising disinterest, diligent, and independent business judgment --it does not apply where any of these conditions is absent -the common law business judgement rule protects directors from being sued for decisions that comply with the rule. the director will not be found liable for a decision that turned out poorly if they took all reasonable measures to evaluate the decision. the business judgement rule extends only as far as the reasons which justify its existence -thus, it does not apply in cases, e.g., in which the corporation decision lacks a business purpose, is tainted by a conflict of interest, is so egregious as to amount to a no-win decision, or results from an obvious and prolonged failure to exercise oversight or supervision.

Broz v. Cellular Information Systems, Inc. 673 A.2d 148 (Del. 1996)

Under the corporate opportunity doctrine, it is not required that the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity. FACTS: Bros (D) served as director of CIS (P) and CIS, under control of its new owners, alleged that Broz usurped a corporate opportunity. Court below ruled against Brox because he failed to formally present the opportunity to the company. in the 80s Broz was the President of CIS and in the 90s he deiced to invest personally in the development of cell networks for RSA's (Rural Statistical Areas) HOLDING: Although a corporate director may be shielded from liability by offering to the corporation an opportunity which has come to the director independently and individually, the failure of the director to present the opportunity does not necessarily result in the improper usurpation of a corporate opportunity. CIS was not financially capable of exploiting the Mich-2 opportunity -it had just emerged from bankruptcy -it was not in a position to commit capital to buy a new business it had debt covenants that restricted the scope of CIS's discretion in acquisitions an its ability to take on additional debt. presenting to the board is a safe harbor, not a requirement -in the circumstances of this case, Broz was not required to formally present the opportunity to the board. the fact that PriCellular had purchased an option on CIS's outstanding debt and could exercise that option to waive debt covenants that would have permitted CIS to pursue the transaction does not change this analysis, because: -PriCellular was on shaky financial ground, -at the times when Broz (1) learned of and (2) took the opportunity, PriCellular had not yet acquired CIS and it was not certain that PriCellular would be able to close the deal. Broz was entitled to pursue his economic self-interests in the cellular telephone industry in the absence of any countervailing duty.

Malpiede v. Townson 780 A.2d 1075 (Del. 2001); cb 353

When a corporation has an exculpatory provision in its articles of incorporation, a complaint alleging breach of fiduciary duty by directors will be dismissed if the complaint does not adequately allege breach of the duties of good faith or loyalty. FACTS: Frederick's of Hollywood in a bidding war between 3 buyers but ends up agreeing to merge with Knightsbridge when they offer $7.75 per share purchase price (matching Vertias, another bidder). the merger agreement included a "no shop" provision that prevents Frederick's board for seeking a higher offer, and a "fiduciary out" that lets the board negotiate with a third party that makes an unsolicited offer, and a termination fee of $1.6mil. Veritas offers $9 per share but the Frederick's board regects the offer, citing the agreed-upon restrictions (with Knightsbridge) among other factors, and ultimately merges with Knightsbridge. Frederick's articles of incorporation included an exculpatory provision which shields its directors from personal liability provided they have not acted in bad faith or breached their duty of loyalty to the corporation. -plaintiff argues that by failing to adopt a poison pill, the board denied itself the ability to auction the company for the best price and it agreed too quickly to the Knightbridge offer that merely matched the Veritas offer and it should not have agreed to the no-talk provision HOLDINGS: carelessness alone wont establish a claim for liability. an exculpation provision is like an affirmative defense -102(b)(7) only applies to directors. it does not protect officers or controlling stockholders Under DCL § 102(b)(7), corporations may protect their directors from personal liability for breach of their duty of care by including an exculpatory provision in the articles of incorporation. The exculpatory provision cannot, however, shield directors who have acted in bad faith or in breach of the duty of loyalty. According to this court's ruling in Emerald Partners v. Berlin (1999), a director facing allegations of breach of duty ordinarily bears the burden of demonstrating that she did not act in bad faith or in breach of the duty of loyalty. If, however, the complaint only asserts a claim for breach of the duty of care, the exculpatory provision blocks the claim and no such burden applies. In this case, the entire complaint was appropriately dismissed by the trial court.

Direct Shareholder Suit

a direct suit is when a shareholder brings forth a claim based on the shareholder's ownership of shared. some exampled of direct suits involve contract rights related to shares, rights related to the recovery of dividends, and rights to review the records of the corporation.

equity/cash flow test

a dividend is permissible only if the corporation will be able to pay its debts as they become due in the usual course of business

Derivative Suit

a shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer a director. Preparation for a Derivative Action: Plaintiff must plead particularized facts to support his contention that demand is excused. -He can get the information to support these claims by making a §220 demand to inspect the company's books and records with respect to the two challenged board decisions.

Directors and Officers (D&O) Liability Insurance

a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer. D&O liability insurance can be written to cover the directors and officers of for-profit businesses, privately held firms, not-for-profit organizations, etc. in effect, ,the policies function as "management errors and omissions liability insurance," coverage claims resulting from managerial decisions that have adverse financial consequences.

Proxy

a written authorization for another person to vote the holder's shares. it is an agency relationship. the stockholder is the principal and the proxy holder is the stockholder's agent.

In re The Walt Disney Co. Derivative Litigation- 2003

after Brehm v. Eisner, the plaintiff made a section 220 request for documents regarding the challenged transactions and using the info. obtained, the plaintiffs filed a second amended derivative. HOLDING: to establish demand futility the plaintiff must plead with particularity facts that create a reason to doubt that "1) the directors are disinterested and independent" or "2) the challenged transaction was otherwise the product of a valid exercise of business judgment." He can get the information to support these claims by making a §220 demand to inspect the company's books and records with respect to the two challenged board decisions. KEY NOTES: -He can get the information to support these claims by making a §220 demand to inspect the company's books and records with respect to the two challenged board decisions. -The allegations of the complaint "suggest that the defendant directors consciously and intentionally disregarded their responsibilities, adopting a 'we don't care about the risks' attitude concerning a material corporate decision... *plaintiffs' new complaint sufficiently alleges a breach of the directors' obligations to act honestly and in good faith in the corporations best interests

Waste

an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. usually, it involved a transfer of corporate assets that serves no corporate purpose, or for which the corporation receives no consideration. a transaction will not constitute waste if there was substantial consideration or the board made a good faith judgment that the consideration was adequate

In re The Walt Disney Co. Derivative Litigation- 2006

appealed from the 2003 In re the Walt Disney Co The concept of intentional dereliction of duty and a conscious disregard for one's responsibilities is an appropriate standard for determining whether fiduciaries have acted in good faith. 3 categories of fiduciary conduct could fall within "bad faith": 1. subjective bad faith --fiduciary conduct motivated by actual intention to do harm to the company or its stockholders 2. gross negligence --102(b)(7) allows exculpation for gross negligence but not bad faith --section 145 allows indemnification for gross negligence but not for bad faith 3. intentional dereliction of duty or a conscious disregard for duty --should be treated as conduct that is not entitled to exculpation or indemnification (i.e. conduct that should expose the fiduciary to personal liability) "bad faith" includes by way of example and not limitation: -acts taken for a purpose other than the best interests of the corporation -intentional violation of applicable law -and intentional failure to act in the face of a duty to act a sustained and systematic failure to supervise is a violation of good faith because it is an intentional failure to act in the fact of a duty to act (i.e. the duty to supervise; see Caremark) plaintiff claims Litvack and Eisner breached their fiduciary duties as officers when they fired Ovitz under terms that allowed him to keep the Golden Parachute. -however the court rejects this claim because Ovitz did not engage in conduct that fell within the definition that would allow termination for cause.

Voting Agreement

at common law, a stockholder agreement that imposes limits on the board's power was presumptively invalid. today, they are valid if they comply with Model Business Corporation Act (MBCS), a statute that permits stockholders to customize the internal governance In Forida, there is no requirement that shareholder agreements be filed with the state.

Duty of care (and supervision)

corporate fiduciaries must act with due diligence in making decisions in the same manner as a reasonably prudent person in their position would. a defendant can meet the duty of care by showing entire fairness, meaning that both a fair process was used to reach a decision and that a decision produced substantively fair outcome for the corporation's shareholders.

Stockholder Agreements Contract Theory

corporation is viewed as a cluster of contracts: -between stockholder and the company; -among stockholders; or -between the company and stockholders and directors state corporations law is the "standard form" of contract regarding internal governance of the company -some things are flexible and some are not LIMITS 2 concepts are unchangeable: -the idea of "majority rule" -the corporation is run by and under the board of directors AKA the board has control

Corporate Criminal Liability

corporations, just like a human, can be charged criminally. -but a corporation doesn't have a 5th amend. right to avoid self-incrimination.

Business Judgment Rule (20/20 hingsight)

courts are extremely reluctant to hold directors personally liable when their predictions are wrong there are good reasons for this -shareholders voluntarily undertake the risk of bad business judgment -they do this because, as stockholders, they elect the directors in whose business judgment they place the management of the co. -they make the decision to buy stock in a company based, in part, on the quality of the company's management.

Rating Agencies

credit rating agencies provide investors with an evalutation fo the creditworthiness of bonds issues by a wide spectrum of entities -the grading of the creditworthiness is typically displayed in a letter hierarchical format: for example, AAA being the safest, with lower grades representing a greater risk. -credit rating agencies are typically paid by the issuers of the securities being rated by the agencies

bankruptcy/balance sheet test

dividends are limited to the amount by which total assets of the corporation exceed the sum of total liabilities and the liquidations preferences of preferred shares.

Jumpstart Our Business Startups Act of 2012 (JOBS Act)

enacted April 5, 2012 aims to help businesses raise funds in public capital markets by minimizing regulatory requirements.

Burwell v. Hobby Lobby Stores, Inc. DISSENT

if congress wanted people to be able to opt out, it should have said so. In sum, with respect to free exercise claims no less than free speech claims, "'[y]our right to swing your arms ends just where the other man's nose begins.' " In the Court's view, RFRA demands accommodation of a for-profit corporation's religious beliefs no matter the impact that accommodation may have on third parties who do not share the corporation owners' religious faith—in these cases, thousands of women employed by Hobby Lobby and Conestoga or dependents of persons those corporations employ. "The ability of women to participate equally in the economic and social life of the Nation has been facilitated by their ability to control their reproductive lives." Planned Parenthood of Southeastern Pa. v. Casey (1992). Congress acted on that understanding when, as part of a nationwide insurance program intended to be comprehensive, it called for coverage of preventive care responsive to women's needs. While the Women's Health Amendment succeeded, a countermove proved unavailing. The Senate voted down the so-called "conscience amendment," which would have enabled any employer or insurance provider to deny coverage based on its asserted "religious beliefs or moral convictions." That amendment, Senator Mikulski observed, would have "pu[t] the personal opinion of employers and insurers over the practice of medicine." Rejecting the "conscience amendment," Congress left health care decisions—including the choice among contraceptive methods—in the hands of women, with the aid of their health care providers. Smith should control here -In Smith, ...this Court, ... rejected the employees' claim that the denial of unemployment benefits violated their free exercise rights. The First Amendment is not offended, Smith held, when "prohibiting the exercise of religion ... is not the object of [governmental regulation] but merely the incidental effect of a generally applicable and otherwise valid provision." The ACA's contraceptive coverage requirement applies generally, it is "otherwise valid," it trains on women's well being, not on the exercise of religion, and any effect it has on such exercise is incidental. Even if Smith did not control, the Free Exercise Clause would not require the exemption Hobby Lobby and Conestoga seek. Accommodations to religious beliefs or observances, the Court has clarified, must not significantly impinge on the interests of third parties. The exemption sought by Hobby Lobby ...would override significant interests of the corporations' employees and covered dependents. It would deny legions of women who do not hold their employers' beliefs access to contraceptive coverage that the ACA would otherwise secure. need more than a sincerely held belief

Inadequate capitalization of the corporation

if the corporation is formed without adequate capital that is evidence that the corporate form was created to be misused -but simply running a corporate business that has little or no capital is not, standing alone, enough to pierce the veil -sometimes the controller siphons the money out -that, coupled with other facts, may justify piercing the veil

Business Judgment Rules (substantive rule)

in the absence of facts that call the board's loyalty, care, or good faith into question, the court will not second guess the board's decision

Piercing the Corporate Veil (what it does)

it places the creditors' interests ahead of the insider's expectation of being able to use the corporation as a shield against personal liability (courts do this only in exceptional circumstances)

Foreign Cubed Problem

lawsuits filed by foreign plaintiffs against foreign defendants, alleging violations that happened in a foreign location.

Lock- Up Option

lock-up provision is a term used in corporate finance which refers to the option granted by a seller to a buyer to purchase a target company's stock as a prelude to a takeover.

Piercing the Corporate Veil (Enterprise Liability- sibling corporations)

multiple corporations formed to operate a single cohesive business in an effort to isolate the risk associated with a particular function to the corporation organized to carry out that function each company is owned by a single holding company in this situation courts are likely to disregard corporate separation where: -the corporations are under-capitalized and under-insured -the corporations are operated by a single group of people -the assets are moved from risk-taking corporations to a risk-free corporation

the individual's active participation in the business of the corporation

piercing may reach the individual who operated the business and not the innocent investor-stockholders piercing is most likely where the corporation is owned and operated by only one person

Piercing v. Corporate Criminal Liability

piercing the corporate veil is a problem for civil litigants who are trying to get at the assets of the shareholders beyond the investment they made in the corporation (courts hate to do this). criminal liability is different. a prosecutor doesn't care about the veil, they can reach through the corporation to get who is culpable for a criminal act provided they have enough evidence that the crime occurred and that there was sufficient mens rea.

Closely Held Corporations

pposite of publicly traded corporations shares held by a single or closely knit group of shareholders there is no market for the company's stock; if you want out, you sell your stocks: -back to the company -to other existing shareholders (might put them in a majority; will be hard to find someone to buy a minority stake in a closely held co.) -NO EASY EXIT when shareholders invest they are "buying jobs" governed based on personal relationships -formalities of "stockholder" and "director" are less important -when personal relationships begin to dissolve, the majority may take steps that tend to oppress the minority

Public Corporations

publicly traded stock separation between: owners (stockholders) and managers (officers and directors) -as a result of this separation^: --stockholders invest in the company but they don't rely on it for their principal employment --employees of the company do not rely on its stock for their income, they rely on their jobs. company has perpetual existence -shareholders' investment in the company is permanent -if they want out, they must find a buyer -company is not required to buy back or redeem its stock no personal relationship between stockholders and managers everything is based on majority rule -prevents opportunistic behavior by the minority majority stockholders elect the board and the board makes decisions for the corporation by majority vote -the board has the power to hire and fire officers/employees at will --allows the board to respond to business needs and eliminate opportunistic officers who abuse their positions directors' decision making is protected by the business judgement rule -if directors are acting in a fashion consistent with their fiduciary duties to the company, the court with defer to the board's decision

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

signed into law July 21, 2010. the law reshaped the US regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance, and transparency introduces significant regulation of hedge funds for the first time and mandates the creation by the SEC of an Office of Credit Rating to provide oversight over rating agencies the act requires that various derivatives known as swaps, which are traded over the counter be cleared through exchanged or clearinghouses. Two new agencies are tasked with monitoring systemic risk and researching the state of the economy: -the financial stability oversight council -the office of financial research SEC is specifically authorized to issue "point-of-sale disclosure" rules when retail investors purchase investment products or services; these disclosures include concise information on costs, risks, and conflicts of interest.

Sarbanes-Oxley Act of 2002

signed into law July 30, 2002 mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as PCAOB, to oversee the activities of the auditing profession. public company accounting oversight board -creates a new oversight board to regulate independent auditors of publicly traded companies -operating under the oversight of the SEC auditor independence -raises standard of auditor independence by prohibiting auditors from providing certain non-audit services consulting services to their audit clients; audit committees -requires top corporate management and audit committees to assume more direct responsibility for the accuracy of financial statements; corporate responsibility -section 302 requires that the company's "principal officers" (typically the CEO and CFO) certify and aprove the integrity of their company financial reports quarterly; internal controls -section 404 is a requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. corporate and criminal fraud accountability -specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers; increases criminal penalties for a variety of offenses related to securities fraud: misleading an auditor, and mail and wire fraud.

Wall St. Rule (public corporations)

stockholders rely on the free transferability of their shares to obtain relief from business decisions with which they disagree. if you don't like the way the board is running the company, sell your stock. -if the board is doing a bad job, there will be a lot of sellers and the price of the stock will drop. -public markets make this cheap and quick.

Leveraged Buyout- LBO

the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. the purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Business Judgment Rule (procedural rule)

the court begins with the presumption that the directors acted with loyalty, care and good faith in approving the challenged transaction the plaintiff has the burden is pleading and proving facts that call at least one of these into question -if the plaintiff can do this, the burden shifts to the directors to prove that the challenged transaction was, nonetheless, entirely fair to the company this means the court looks at the substance of the deal -but the court will only look at the substantive fairness of the deal if the plaintiff first gives reason to question the directors' performance of their fiduciary duties decision

Say on Pay

the practice of providing shareholders with an advisory vote on executive compensation. in 2006 the first shareholder say on pay proposals in the US were submtted under Troubled Asset Relief Program (TARP) in 2009, companies receiving bailout funds were required to conduct say on pay votes. Section 951 of Dodd-Frank expanded say-on-pay to all public companies by adding new Section 14A(a) to the Securities Exchange Act of 1934, which requires all public companies with more than $75 million in public float to at least once every three years, provide shareholders with an opportunity to vote on a non-binding basis on the compensation of named executive officers starting Jan. 21, 2011. at least once every 6 years, companies must provide shareholders with an opportunity to vote "to determine" whether the say-on-pay vote will be annual, biennial, or triennial (the "say on frequency" vote) A separate vote is required to approve so-called "golden parachute" compensation whenever a public company seeks shareholder approval for "an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer."

securitization

the process of turning mortgages, credit card loans, and other debt into marketable securities. securitizers acquire and pool many loans from primary lenders and then issue new securities based on the flow of payments through the pool. -if the risks of securitized producsts are adequately managed and understood, securitization can enhance financial stability by shifting financial risk to those most willing and able to bear it. -securitization risks were not properly managed during the period leading up to the 2008 crises, which contributed to the housing bubble and financial turmoil in a variety of ways.

Commingling of assets

use of corporate funds to pay personal obligations or to satisfy personal needs -this is strong evidence for piercing the veil

Piercing the Corporate Veil (purpose/policy)

used to impose personal liability on stockholders or directors purpose/policy: to protect outsiders who would otherwise be harmed as a consequence of their dealings with the corporations.

Enron

widely regarded as one of the most innovative, fastest growing, and best managed businesses in the US before its bankruptcy in Dec. 2001 "Enron also recorded significant losses in certain foreign operations. The firm made major investments in public utilities in India, South America, and the U.K., hoping to profit in newly-deregulated markets. In these three cases, local politics blocked the sharp price increases that Enron anticipated...Energy trading, however, did not generate sufficient cash to allow Enron to withstand major losses in its dot com and foreign portfolios. Once the Internet bubble burst, Enron's prospects were dire." ...Rather than disclose its true condition to public investors, as the law requires, Enron falsified its accounts. ...the firm's public accounting statements pretended that losses were occurring not to Enron, but to the so-called Raptor entities, which were ostensibly independent firms that had agreed to absorb Enron's losses,...but were in fact accounting contrivances created and entirely controlled by Enron's management. In addition, Enron appears to have disguised bank loans as energy derivatives trades to conceal the extent of its indebtedness." -dropped from $90 to $0.60 per share and wiped out the 401K of Enron workers because 60% was invested in Enron stock