Corps

In-class notes on controlling shareholders - WIlkes

1. Controlling Shareholders - Wilkes 2. Why does Wilkes prevail? 3. Wilkes fact pattern - a gimme to analyze black letter law. Just discuss the facts as applied to the law 4. Wilkes decision tree: Reasonble expectation of employment (nexus)? No - D wins. Yes - does termination serve legit purpose? No - shareholder wins. Yes - is there a less harmful alternative? No - D wins. Yes - shareholder wins. 5. This is all about if you want to fire somebody, you have to lay the groundwork for it. 6. First issue in Wilkes: was there ever a partnership? Argument no - their only agreement before they created the non-partnership entity they were having discussions, and since they hadn't entered into another form, default was partnership. 7. They put money into corporation, this is the structure through which they own the entity. 8. History: guys go along for a while, each receive the compensation, but don't define their roles, don't discuss how much work various members are doing. Then there's a dispute - is about self-dealing: one of the investors wanted the entity to buy property from him, probably at an inflated price, Wilkes wouldn't go along with it. 9. Terminate Wilkes as a director and officer. Should've used minority shareholder protections that distributions be made, everybody be paid the same amount. 10. This is a fairly old case, where ct is looking for a legit business purpose, whether legit fired him or not. Now, cts don't go into these kinds of inquiries, that you had a business purpose. Instead, just look at what you have power to do, have you exercised that power consistently with corporate statutes. Now idea is that you have a set of contractual obligations as D and O of a corp, when you sign up. 11. Were they controlling shareholders? Was there a particular controlling shareholder - no one of them owned more than 50%. If there are four shareholders, nobody has more than 50, never will have working control, bc that depends on there being a widely diffuse number of shareholders you can command - don't have that here, so nobody is a controlling shareholder, and yet ct refers to them as a group of controlling shareholders. Did they really get together? Yeah, which is why they are treated by controlling shareholders. They just appear to be in agreement, the three of them, though none of them would have a duty as a controlling shareholder, they only get it as a kind of conglomerate. This includes fiduciary duty as an employer. 12. What if these guys came to you, said wanted to fire Wilkes: tell them they needed a legit business purpose. Treat him as a shareholder with a reasonable expectation of employment. Need to paper his file with his bad performance - then have a much stronger argument that he needs to be fired, didn't breach their duty. 13. Want to paper the file with a basis for a reasonable business purpose for getting rid of maj shareholder. Once ct sees it on its face, won't question it. 14. Would need minority shareholder protections in creation arguments, bc without them, would be very hard to win a case like Wilkes. 15. Could Ds have squeezed out Wilkes by merging into another entity: og, cts would say if you're merging to squeeze out a shareholder, can't do it if do it just to squeeze him out. But law has shifted, says that as long as corp law allows you to do that merger, you can do it, and can do it exactly to squeeze out a shareholder. 16. Again means that we need minority shareholder protections from eh get-go. 17. Facts for an exam question that goes to what the ct would analyze: reasonable expectations, no legit business purpose, original shareholder, 15 years of precedent 18. Reasonable epectations: reflected in og arrangmenet 19. No legit business purpose - did he just stop performing 20. Lotta years of precedent of everybody getting paid the same on the board - another factor if people stop dispensing to him

A. Core claims 1. Personal financial or other beneficial interest = some type of self dealing, corporate opportunity. 2. Four types of claims: a. gross negligence (key question here is if they were uninformed) b. illegality, c. personal financial or other beneficial interest, d. disloyalty 1) bad faith, Caremark claim B. How do you insulate yourself for those personal interest transactions: 122(17) corporate opportunity; director or shareholder approved, or fair.

A. Duty of loyalty: self-dealing scenario: 1) DGCL section 144: "no contract or transaction between a corporation and one or more of its directors or officrs, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose." a. Essence of this provision: first question what kind of k: between corp on one hand, one of the directors or officers. Ex a director or officer bought something at too low a price or sold corp something at too high. b. The second part, of these ks not being void or voidable: 1) solely bc this is a corp and one of those parties 2) can't be viod or voidable solely bc director or officer attends a meeting which authorizes the k or transaction; 3) director or officer voted for that transaction. i. These three things cannot be the sole basis for a claim to void the transaction. Any two of the three, or all three, also would not be sufficient to void the transaction. ii. Void the transaction: means the k never existed. So no k to sue on. Voidable: can claim less than non existence. Does NOT do anything to remove liability in respect to director or officer 2) DGCL section 144: "...if (1) material facts as to director's/officer's relationship/interest and contract/transaction are disclosed/known to board/committee, and board/committee in good faith authorizes contract/transaction by affirmative votes of majority of disinterested directors even though [they comprise] les then a quorum; or (2) material facts...are disclosed/known to stockholders entitled to vote, and contract-transaction is specifically approved in good faith by stockholders; or (3) contract/transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders." i. The core here: approval by board or committee. Second: approval by shareholder.s third: transaction is fair and has been approved by committee or board. These are the three ways you can prevent the voiding or making voidable of the k. there are conditions associated with approval by board and approval by shareholders: person involved int his interested transaction ahs to reveal all material facts by the shareholders or committee that is voting, and they typically don't want to do that.

A. Inadvertent Partnership 1. Question: is a person a lender or an inadvertent partner. If they're a partner, there's liability 2. Inadvertent partnership - ex is the KN&K case. Trying to figure out if Payton is doing the business with martin, if Peyton is a parter in the KN&K partnership. Payton is doing stuff with the co that the P is arguing makes Peyton a partner. a. The crux of Peyton's case: "are the terms of the agreement such as may e properly inserted to protect the lenders? Or do they go further?" b. Evaluating factors using "lender" hat:

1) 1) right to inspect the books - that's consistent with wanting to protect your investments. 2) 2) veto speculative business - would al ender normally do this? Not normal, banks don't do this, PLUS it'd be hard to determine what exactly is 'speculative.' It's hard to write a defeault clause that says lender defaults if they start acting too randomly. Lenders are stuck with the speculative risk that you might not get paid; they protect themselves by getting a secured interest. Speculative business vetoing seems more like vetoing - that's the kind of power we'd expect a partner to have. 3) 3) partners' withdrawal rights are limited - it sounds like you're acting like a partner - withdrawal rights in Cargill case, note, were called dividends - a lender would naturally be concerned about money going out of the co, but will lenders really be involved in every instance to withdraw money from the partnership? A default rule would give rule on when you can, can't withdraw money. This makes sense as a lender - want to have a clause to keep partners from bailing with the money if things go down 4) 4) Option to buy half of the business - lenders definitely don't do this. This is more of something that a lender would do. Normal, commercial lender won't have this term. 5) 5) can't bind partnership or initiate transactions - lenders normally can't bind partnership or initiate transactions - more of a partner role 6) what was the interest rate, if this really was a loan. In the KN&K case, there wasn't one. Instead, said that the guy would get a percentage of the profits. That's a pretty strong argument in favor of finding he was a partner. BUT was there a limit on what he got in respect to the profits: 100k minimum, 500k max. is having a cap consistent with having a residual interest, like partners have? No. for partners, don't cap a residual interest. So this max, min complicates what might normally just be a normal partner's residual interest.

A. Jenson Farms v. Cargill 1. The Cargill case: question rests on whether there was actual (what did Cargill DO) or apparent authority (what did the creditors THINK - What was the co doing to make the creditors think they could rely on Cargill as the principal backing up Warren grain). 2. When we have to defend cases dealing with principal-agent relationships, what we want to do is find other hats that Cargill could have been wearing. a. Those would include being a lender, purchaser of the grain, or consultant, instead of 'principal' hat. That'd be a defense to the argument that Cargill was acting as principal. 3. What are some factors/things that could cause us to think that what Cargill was doing might establish principal-agency relationship (had actual authority): 1) secured open account a. Cargill took a secured interest in assets of Warren, and did so in connection with an account, which means that Warren could write a check that then draws money from the open account on which it will then pay interest until it pays back some or all of that account in which case the balance is adjusted, and you pay interest on that 2) Drafts/checks had Cargill's name on this a. This might create an apparent authority issue, bc if parties saw that the checks they were being paid with had Cargill's name on them, might think Cargill was backing up Warren, acting as principal. Prob with this: your checks have your banks on them - this is consistent with Cargill acted as a lender. 3) Cargill insisted on receiving annual financials from Warren a. This is pretty consist with being a lender, especially if there's an open account; seeing the financials will all Cargill to suspend lending from that account if it sees something it doesn't like. 4) Right of inspection - going in an inspecting Warren's books. a. That's NOT consistent with a lender, though it is consistent with a lender wanting to protect its interests. 5) Cargill wants either to have an audit done, which is consistent with being a lender, but ALTERNATIVELY it will keep Warren's books for it. a. Cargill is not in the bookkeeping business, nor is that common for a lender to do just as a matter of protecting its interests. 4. Things over which Cargill has prior consent rights: 1) With respect to the prior consent guarantee, or any encumbrance a. Hypothecation or pledging of assets, where you essentially have some third party take a security interest in your assets - that third party will not get that asset before other lenders). b. Here, Cargill is telling Warren they're not allowed to go out and get a security interest in the machinery unless Cargill approves that, because that lender would get priority over Cargill if there's bankruptcy - this is consistent with being a lender. 2) Declaring a dividend = paying money out of Warren, which means there would be less money in bankruptcy. a. Less unlikely a lender would do this if they're afraid of bankruptcy, the money running away. 3) Consent is req by Cargill for Warren to buy stock/buy back its own stock. a. Lender concerns: if you buy stock, there will be less money in the business. b. But why does Cargill also require consent for Warren to issue stock? If they have that control, that means Cargill gets money from those who are buying Warren stock. c. Indicates Cargill is acting as more than a lender. 4) Consent authority over 5k+ improvements/repairs. a. This, again, can be consistent with Cargill acting as lender. b. Consultant role: issuing/buying stock, req approval for 5k repairs, are consist with acting as consultant. Same with keeping the books.

1. Additionally, Cargill was making various recommendations to Warren: 1) "1) a reduction of seed grain and cash grain inventories; 2) 2) improved collection of accounts receivable; 3) 3) reduction or elimination of its wholesale seed business and its speciality grain operation; 4) 4) marketing fertilizer and steel bins on consignment; 5) 5) a reduction in withdrawals made by officers; 6) 6) a suggestion that Warren's bookkeeper not issue her own salary checks; 7) 7) cooperation with Cargill in implementing the recommendations." 8) NOTE: First four of these are consistent with 'consultant' capacity. 2. Cargill as purchaser: developed its rel with Warren bc wanted to ensure it had a steady supply of grain. a. It had arrangements that would ensure it had that steady source. That's not inconsistent with tit being a third party purchaser. b. They had to: i. Buy 90% of Warren's grain output; ii. had a right of first refusal § Cargill had right to buy grain at a given price before Warren can sell it to somebody else. § It's hard to explain these in the context of all the other factors. iii. Cargill would serve as Warren's grain agent with clearing corp that is essentially a gov agency to facilitate the sale of grain. § Warren would normally control this by itself. This isn't consistent with purchaser/lender/consultant behavior 3. Apparent authority, what might have made third parties rely on Cargill as Warren's principal: 1) Bank drafts had Cargill's name on them a. Possibly consistent with being a lender 2) Cargill's name was also on all of Warren's business forms a. Hard to explain; strong indication Cargill is somehow standing behind Warren 3) Testimony regarding what farmers were told when they called about Warren's status a. They were told not to worry about getting paid, the implication being that Cargill will stand behind Warren. 4. In summary: it's possible purchaser, lender, consultant would have been a more credible hat as the one Cargill was wearing, but when you put together all the factors, that's a pretty rough row to hoe.

A. Decision tree 1. Only gross negligence? a. Yes: 102b7 provision? 1) Yes - case against directors dismissed 2) No: uniformed? i. Yes: case settles ii. No: case dismissed iii. NOTE: This is Van Gorkum, which today would be brought as a duty of loyalty claim for two reasons: 1) protection afforded by 102(b)(7) and (2) extremely high bar for duty of care claim b. No: personal financial or other beneficial interest? 1) Yes: insulated? i. Yes: case dismissed ii. No: fairness proved? § No: judgment for P § Yes: judgment for D 2) No: disloyalty? Bad faith/Caremark claim i. Yes: case settles ii. No: case dismissed

1. Breakdown: a. Start with a claim only for gross negligence. b. Next question will be fi there is a 102b7 provision. c. If yes: case against the directors is dimssed. d. If not, the question is v likely going to be whether directors or officers were uninformed. e. If can show uninformed/create reasonable doubt in your claim, case settles. If not, case dismissed. 1) This is where Van Gorkum was, which was in a pre-102b7 world. i. But Van Gorkum, bc of 102b7, typically will be brought as a duty of loyalty claim; two reasons for this - 1) protection afforded by 102b7; and 2) extremly high bar for duty of care claim (have to show pretty egregious failure to be informed) a. If NOT a case for gross negligence: is this an illegality claim. b. If yes, strong likelihood case will be settled. c. If no: perhaps you have a claim of some sort of benefit to the Ds. That's a classic conflict of interest claims - could include some type of self-dealing or corporate opportunity. d. If can allege sufficient acts there, one of the questions will be if that claim is insulated - pursuant to either rapproval by directors or shareholders. e. Ask if it's insulated. If yes, case is dismissed. f. If not, then it's an unprotected transaction, burden will shift to Ds to show it was fair to the corp. these cases not as likely to be settled - where self-interest is involved, more likely to have discovery and trial. g. So: if fairness is proved: judgment for D. if not: judgment for P. h. IF you don't have a personal financial or other beneficial interest, you might have a disloyalty claim/bad faith/Caremark. 1) What is a Caremark claim: this is a claim where there is usually an omission, a failure to act, it rises to the level of "intentional dereliction of, deliberate indifference in face of or conscious disregard for known duty." i. Botox case is the quintessential ex of a Caremark claim 2) Bad faith = usually decisions so egregious on their face that they are in and of themselves evidence of level fo recklessness that may warrant a finding of a breach of the duty of loyalty. i. If no disloyalty, case dismissed. If yes: case settles.

A. Will have some reqs to make sure the derivative aspect of this, aka the idea that one shareholder should be allowed to rep the interests of the others, is respected. Reqs for a derivative claim: 1. Harm to entity ("derivative") a. There has to be some loss for which you're seeking recovery; has to have been suffered by the entity. 1) One way to think about that harm: the recovery would go to the entity, not the shareholder. So for ex if you're a shareholder that didn't get your dividend one year, not a derivate claim - recovery would just go to you, harm wasn't to entity, just you. Harm to the shareholder cannot be separated from harm to entity. b. Ex of "harm to entity:" Snapbuzz declares a dividend but does not pay Class B shareholders their share of the dividend. Derivative claim? No. shareholders are acting on behalf of their class of shareholders, not the entity. c. Another ex of "harm to entity:" Snapbuzz acquires Clipbizz. Joe, a shareholder of Clipbizz, sues Jill, a director of Clipbizz, for accepting an inadequate price. Derivative claim? We often see derivative claims brought bc of the opinion of a shareholder that the director made a bad decision. Here, there's harm to the entity, harm to all the shareholders, IS an appropriate derivative claim. d. Another ex of "harm to entity:" Snapbuzz acquires Oxford Mall for three million. Bert, a shareholder of Snapbuzz, sues Ernie, a director of Snapbuzz, for paying too much. Derivative claim? Again, we have a claim that Snapbuzz paid to for an asset. Will hurt the entity the same for all shareholders. This is a proper derivative claim 2. Demand (or satisfy utility doctrine) a. Have to have made a demand on the board to bring the claim or satisfy the futility doctrine. b. Futility doctrine - common law doctrine; ct looks at the failure to make a demand, determine if it would've been futile to make a demand. Ex: it would be futile to make a claim that the entire board embezzeled millions from corp, that'd be futile to demand the board to sue themselves. 1) Aka futility = it would be futile to ask the board to pursue the claim. c. Note that some states, like MS, have a diff statutory standard: 1) Miss. SEC 79-4-7.42: "no shareholder may commence a derivative proceeding until a written demand has been made upon the corp to take suitable action....(2) ninety days have expired from the date the demand was made unless the shareholder has either been notified that the demand has been rejected by the corp or unless irreparable injury to the corp would result by waiting for the expiration of the 90-day period." i. No futility doctrine here - you MUST make a demand. ii. BUT in most js, we have a common-law futility doctrine. § FRCP 23.1: "this rule applies when one or more shareholders or members of a corp or an unincorporated association bring a derivative action to enforce a right that the corp or association may properly assert but has failed to enforce." v This is an ex of the catch all of how ct will look at derivitave action. a. FRCP 23.1: "the complaint must be verified and must...state with particularity...any effort by the P to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and the reasons for not obtaining the action or not making the effort." Futility doctrine exists in these last four words.

1. Contemporaneous (and continuous) owner a. P shareholder must be a contemporaneous and continuous owner. b. FRCP 23.1: "The complaint must be verified and must: allege that the P was a shareholder or member at the time of the transaction complained of, or that the P's share or membership later devolved on it by operation of law..." 1) This is known as the contemporaneous owner rule. If there is a transaction, have to be shareholder at the time of the transaction. 2) The "devolved by operation of law:" if you inherit shares from someone, and that person was a shareholder at the time of the transaction, you will be deemed to be a shareholder at the time of the transaction. 3) Ex: Snapbuzz acquires Oxford Mall for three million. Bert, a shareholder of Snapbuzz, sues Ernie, a director of Snapbuzz, for paying too much. When does Bert need to have been a shareholder: at the time of the transaction. Then pin down whether that means when the k was igned, time of the closing, time of the directors' decision, etc. SUPPOSE then Bert sells his shares before the case is decided. Well, he is no longer a continuous shareholder bc he sold his shares before the ct ruled. c. Common law req: have to be a shareholder throughout the litigation. d. Ex of contemporaneous and continuous ownership: Snapbuzz acquires Clipbizz. Joe, a shareholder of Clipbuzz, sues Jill, a director of Clipbizz, for accepting an inadequate price. Joe is shareholder at the time of the transaction. Is no longer a shareholder of Clipbizz, but of Snapbuzz. How do you sue Clip, then? 1) Issue of whether he is a continuous shareholder is affected by the fact he's not a shareholder at all. BUT this is not an impediment to bringing this claim which is: if the transaction you're complaining about is the one that extinguished your ownership of the shares, you can still bring the claim. 2) But if this was a case where Joe was sueing in connection with the purchase of Oxford amll, long before acquisition of Clip by Buzz, this transaction WILL extinguish that claim. So his claim will go away as a result of that acquisition of Clip due to continuous ownership rule. i. Aka: continuous ownership rule won't terminate your claim with respect ott he transaction that extinguishes your ownership, but it will terminate your claim as to all other prior actions. 2. Fair and adequate representative. a. FRCP 23.1: "the derivative action may not be maintained if it appears that the P doesn't fairly and adequately represent the interests of shareholders." b. Ex of fair and adequate rep: Snapbuzz acquires Oxford Mall for three million. Ernie, a director and the CEO of Snapbuzz, fires Snapbuzz employee and shareholder Bert. Bert sues Ernie for unlawful termination and brings a derivative claim on the ground that Snapbuzz paid too much for the mall. Fair and adequate? 1) No, bc Bert has an individual interest in his unlawful termination case - can use derivative claim as leverage to settle his termination claim, and therefore sell the other shareholders short. Don't want that kind of conflict of interest representing shareholders. c. Ex of fair and adequate rep: Snapbuzz declines to collect payments owed to it by the Democratic National Party. A prominent Republican and Snapbuzz shareholder sues Ernie, a director of Snapbuzz, for corp waste. Fair and adequate? Yes. The shareholder's status as fair and adequate rep is suspect. 1) But say that the shareholder was just a rep, and not a prominent rep: shouldn't disqualify you as a fair and adequate representative. Depends on how prominent of a party member you would have to be.

A. Derivative litigation 1. There are different steps for this type of litigation; it follows a predictable pattern: a. Dispute 1) Brought to counsel's attention b. demand letter 1) file letter unless it would be futile AND the jurisdiction recognizes the futility doctrine c. complaint/motion to dismiss 1) D will almost always file a MTD. Corps cases are almost always decided here. d. SJ motions e. trial f. judgment g. appeal 2. Our focus is on the MTD for derivative litigation, unlike other types of civil litigation. a. In addition to 12b6 basis for the MTD, you also will be arguing in the demand context that the futility doctrine has not been satisfied; bc that's a tougher standard for Ps, that'll often be the driving factor in whether the case is dismissed, NOT the 12b6 standard.

1. Decision tree for how derivative litigation: a. Is demand made? 1) No: i. Is demand excused? § No: case is dismissed § Yes: Settlement 2) Yes: i. Is demand rejected? § No: Corp. brings case § Yes: is rejection wrongful? v Yes: settlement v No: case dismissed b. Important for us: what happens in the case where either the demand is excused or the rejection of the demand is wrongful. 1) What happens after the MTD is dismissed is discovery. Discovery is very dangerous for D companies - it's very costly, risky, burdensome. Ps might find some other dirty laundry. Burdensome - have to take a lot of emps off work, time out for deps and be prepped for deps. i. Companies want to avoid it, so don't want to continue litigation if lose MTD. So then they'll settle IF the demand is excused or if the rejection was wrongful. Directors and officers will have insurance, can settle inside the insurance limit, so co isn't actually writing a check. c. Substantive standard that applies if you have not made a demand - you will be challenge din MTD for not having an excuse. You will then have to present: 1) "particularized facts alleged support reasonable doubt that (1) directors are disinterested and independent OR (2) transaction was product of valid exercise of business judgement." i. This is a tougher standard than 12b6, remember. In practicality, this means that you will have needed to do some discovery even before you file your complaint. d. Standard that applies if the board's rejection of your demand is wrongful: 1) "particularized facts alleged supporting reasonable doubt as to availability of business judgment presumption." i. Note that this is a standard that applies only to the transaction and judgment exercised in connection with the transaction. § One reason for this is that if you've made a demand on the board, can you then turn around and argue that the board was not independent or not disinterested. § It implies that you trust their independent and disinterestedness if you have asked them to make a decision regarding your request in your demand letter. § So a ct may find you have given up the argument that the board is conflicted. This is when you have the option of not filing a demand. e. Deviation from normal procedure: special litigation comm is created by board. 1) Purpose is to insulate any recommendation regarding the case that the Ps want to be brought, insulate it from any claim of the board not being independent or disinterested. 2) If the board has members who are too close to the CEO, for ex, then they may want to protect any decision they make by offloading it onto a special litigation comm that has the independence and disinterestedness to pass the ct's msuter when ct is evaluating the rec the committee makes regarding the demand. 3) What is the standard for the special litigation committee? Cts definitely give them more leeway than a conflicted board; apply these reqs: i. independent and disinterested ii. operated in good faith conducted a reasonable investigation.

A. In-class notes 1. The bank will take a security interest, it will be in respect to the amount received by the business. 2. Take money from raw materials, make widgets, those widgets go into inventory. 3. Say there's a fire, everything burns up - no inventory, machinery is destroy. We'd probably have to have a fire sale. a. It's when you have to sell something for less than its value. i. Happens when companies are going bankrupt, just need money to pay creditors. 4. If a company is failing, will the bank want it to continue? Not really; they don't get any more money than what they are owed if there is no bankruptcy. 5. In bankruptcy, for creditors, the question will be where in line are you with all the other creditors 6. Sole proprietorship: a business entity that is virtually indistinguishable form the owner themselves. Unity of interest between Chancy and the business. That means if somebody sues the business, will sue Chancy individually. 7. Limited liability entity: what we will create to avoid sole proprietorship, give you protection from creditors for your personal assets. 8. Trade creditor: the business supplier; aka, if have shoe store, a trade creditor is Nike. 9. What's the big downside of the limited liability: providers of capital are not personal responsible for the uses of their capital. 10. Summary: business owners are personally responsible for the obligations of their businesses unless the business is organized as a limited liability entity; limited liability protects the owner's personal assets 11. Indemnification: if the tort victim obtains a judgment against Chancy, the business will pay. 12. Board of directors will typically delegate a lot of their power to a CEO. Board will make big decisions, like issuing stock. CEO, CFO, COO make day to day decisions, will report to the board at a board meeting.

1. Double-entry bookkeeping: stands for the principle that when there is a change in one area of a balance sheet, there must be a corresponding change in another part of the sheet. 2. Liquidation value: how much you could get for your assets if you were to liquidate and sell them. 3. Public offering: IPO = initial public offering, aka the first time a business registered its shares to sell them publicly. 4. Get generally raise capital in two ways: debt and equity (those who own stock, issue shares to get cash) 5. Safely makes an equity investment, gets stock. Alternatively, a bank will provide a loan to the business. Thatll be ruled by a loan agreement. Both of those ocntributions will be added to the cash accounts. 6. Capitalization: begin to create capital - contribution of asset (garage), issued stock, raised additional capital (debt and equity) 7. More debt increases the risk a business is taking on. 8. Bank will take a security interest in the business if they give a loan (usually). The idea is that interest will give the bank priority over any other creditor if the business goes bankrupt, get paid first. 9. Secured transaction occurs when a security interest is created. 10. Shareholders equity: what's left over when you subtract the business's liabilities from its assets. This is also called a residual interest. Structure of corporate law: choice of law is important, aka the state in which the business is organized. What's also law about corporate law is that it's dominated by DE. It's the most popular state of organization for corps.

I. Transactional cases A. Donahue 1. Donahue - Closely held corporation 2. Gagliardi sold company to third part. What went wrong. Donahue kept the co in the family? What went wrong? 3. Problem in Donahue: early in co's life, stock is given to people that you really do not want owning stock. don't do that early in the life of your small co. and if you do,make sure they are non-voting stocks. 4. Problem: wanna squeeze out minority shareholder before you get in a situation where Sr is going to sleep during the meetings - wanna do this early on. 5. The issue here is that you wanna get money into the hands of Sr. lotta way you can pay someone money. a. One option is just buying their shares. Problem: if Sr wants a certain amount of money, then another shareholder later says "I'm entitled for the same price for mine." b. Another option: corp can borrow money to buy those shares. c. Another option: can use cash in the business, pay dividends to kids to buy shares; downside to this option - when you pay dividends, you have to pay to every shareholder, including the minority shareholder you wanna squeeze out. d. Another tool: simply loan money to Sr, make it as low an interest rate as possible. IRS will deem that income at that super low rate, the diff between IRS bottom rate and the rate you give. e. Another option: if somebody has been running a company for 20 years, have a good argument to just hire them as a consultant. That'd be a way to give Sr the 100k he wants (to get out of business). 6. Control issues (protect minority): 1) supermajority provisions, 2) voting trust/agreement (way to give kids fewer shares, leaving more corp can sell, giving them more money to give to Sr) (voting trust = agreement they'll all vote the same way). 8) type of interest (type of stock, stocks that have diff rights) 7. Court's statement of ODnahue issue: you bought stocks from a controlling shareholder: the shareholder must offer each stockholder an equal opportunity to sell to the corp at an identical price. That's a harsh rule. 8. What is a closely held corp: 1) a small number of stockholders; 2) no ready market for the corp stock; and 3) substantial majority stockholder participation in the management, direction and operations of the corp.

1. How co in Donahue actually starts: Rodd Sr. buys co from someone else, but that someone else only owned 80%. First then he should've done is get rid of Donahue, who owns 20%/50 shares (want to do this for a closely held business). 2. Problem: a. Squeeze out minority shareholder b. 2) Corporation buys shares c. 3) Corporation borrows to buy shares d. 4) Pay dividends/salaries to kids to buy shares e. 5) Make a low-interest loan to Sr. f. 6) Hire Sr. as a consultant (life insurance to protect spouse?) g. 7) Control Issues (protect minority): 1) 1) Supermajority provisions 2) 2) Voting trust/agreement h. 8) Type of interest: Preferred Shares + Debt 3. Closely held corporation: a. When a close corporation reacquires its shares from a controlling shareholder, the shareholder "must have acted with the utmost good faith and loyalty to the other stockholders. To meet this test, . . . [the shareholder] must offer each stockholder an equal opportunity to sell . . . to the corporation at an identical price." b. Closely held corp = 1) a small number of stockholders; 2) no ready market for the corp stock; and 3) substantial majority stockholder participation in the management, direction, and operations of the corp 4. Original setup: Rodd Sr. had 80%, 200 shares; Donahue had 20%, 50 shares. a. From 1959 to 1967, Sr gifts 117 shares to his kids and two shares to the company; his sons work for the business, daughter doesn't. 1) Why give two shares back to the corp? Who benefits? a. So: Sr then has 33%, Donahue still ahs 20%; sons and daughter each have 16%. b. Board ultimately votes to buy Sr's stock for 800/share. c. Rule of three is at play here. d. Sr sells 45 shares to the company at 800/share. 1) Assuming he wanted that amount, would it have been better not tot have gifted two shares to the company? Is there economic dilution of the remaining shareholders? i. 47/36,000 + 765.96 e. New situation: Sr has 18%, Donahue has 25%, each of the kids has 19% f. Then: each child gifted two shares; Sr sells two of them at 800/share. NOTE: why not gift more share to the corp? g. Assume then that three more shares are purchased by the corp instead of by the kids - the daughter and Donahue could then form a controlling block. h. Way to fix this: give each child 51 shares. 5. In-class notes a. When a close corporation reacquires its shares from a controlling shareholder, the shareholder "must have acted with the utmost good faith and loyalty to the other stockholders. To meet this test, ...[the shareholder] must offer each stockholder an equal opportunity to sell...to the corp at an identical price. b. Sr, over time, gives 117 shares to his kids, two shares to the company. Two sons and a daughter. c. Will wanna make sure that if rule of 3 ocmes into play, one of the kids can't split off and just joint with Donahue. Complex set of needs that you, as lawyer, would need to work through. So: don't wanna give it all to the kids. Why not just keep the two shares. d. You want to sell shares at the price which is the lowest price you'd be willing to buy out Donahue - bc if you don't do that, he can argue he deserves the same amount per share for his shares. e. Pie chart shows where we are after 117 shares have been distributed to kids. f. Phyllis is the sister g. We don't want to just set up a future conflict between sister and two brothers h. Next thing that happens: Sr sells 45 shares to company at 800/share. Keeps six shares. i. What is close to happening here, if sister doesn't like things are going: turn to Donahues. 50+39 is 89, 78+6 is 84. This is not where we want things to be frozen. j. If he hadn't given those 2 shares: 47/$36,000 + $765.96 k. That actual, ultimate distribution of shares: Sr gives 10 shares to each of the three kids, then sells another 2 for 800/share. Each kid buys two each, gifted some more, each end up with 51. This is good - need to get each child to 51, make sure that one doesn't have enough to outvote the other two with Donahue l. Shareholder's agreements, voting trusts: could make it so that the kids always have to vote together. Such an agreement would also mean that you could give the three kids just enough to together always outvote Donahue, then sell the rest. This would also mean you could give Donahue a small amount when you wanna squeeze him out m. Should've squeezed out Donahue long before you worry about succession. ALSO: don't give the kid that's going to have nothing to do with the company these types of stocks. Should give her a bond 1/3 of the value of the company. Don't wanna give her a stake in the co - that leads to fights.

A. Duty of loyalty claims 1. MS LLC version of 102b7 2. How do we insulate a conflicted transaction, in terms of duty of loyalty claims? 3. Ex of duty of loyalty claims: guy sells his art collection to the co for more than it's worth. 4. There are three approaches as to how to insulate a transaction: 1) informed approval by disinterested directors; 2) informed approval by disinterested shareholders; OR 3) transaction is fair to the corp. which is the best option: 1. Reason to disfavor shareholders: more of them, plus you don't wanna share all of this info with the shareholders - much happier doing that with the board of directors. Directors is already probably going to be a friendly audience. Two hard parts with this: picking out disinterested directors; making sure they were informed a. Hard part: getting enough info from the CEO so that what the board decides to do will be informed/sufficient. CEO isn't going to want to give out any info that makes them look like they're self-dealing, even if it's a fair deal. 5. Miss. BVA section 79-4-8.62: the provision that insulates transactions. Gives basically the same three reasons we've already discussed. Provides that the conflicted CEO can't even be in the room when directors vote. 6. Duty of loyalty: particularized facts that support a reasonable doubt that decision was not 1) independent, disinterested, valid exercise of business judgment. a. Ex: Setup: Alonso is CFO. Baker is his brother in law. Cruz is CFO's cousin. Donos is coach. Els is hairdresser. Fowler is chauffeur. Who would we want to be there? NOT: Baker, probably not Cruz (if just fourth or fifth counsin). Coach: he's the guy's high school coach - helps that the coach once was OVEr the guy, but still a question of whether coach is still on board just to rubber stamp stuff. Els - more than likely will do what the guy wants, IF they have a relationship - and they probably have a rel if they're on the board. Fowler - no, he's paid to chauffeur the guy around. Over all of them is a cloud. All of these people should have insurance and indemnification.

1. If something is a corporate opportunity, and you take it, you're liable. a. One factor to consider: if opportunity is brought to you in your capacity as an officer or director. That would indicate that somebody considers the opportunity to be within the line of business or within the interest/capacity of your business. b. Would the corporation be able to pursue the opportunity: c. Option three, conflict with the corp: how big of a conflict is this - is this lieterally the taco stand by the taco stand situation? How direct is this interest, opportunity in terms of how it competes with the P. 2. NOrtheasy Harbor Golf Club: a. Factor one, line of business or within the co's interest/expectancy/brought in D/O's capacity: the fac that the question fo whether the co wanted to buy the land indicates that somebody thought it was in co's line of business. b. What about ability to pursue: the co was going through financial hardship at the time. c. Conflict with the corporation: look at whether they've done any development around the club before. d. What would you want to do for Harris to protect her before she takes this opportunity? 3. Corporate opportunity doctrine discussion. On exam: either one really long question (corporate loyalty, duty of care, mix of different ks and decide if it's a pre-incorp, de factor corp, estoppel situation). 4. Corporate opportunity doctrine: an opportunity to discuss why or why not this is within the interest or expectancy of the company we've been given. 5. Ideally, Del section 122(17): will say renounces any interest or expectancy in ... and give specific examples. Where must these types of renouncements take place: in the co's certificate of incorporation OR do so by an action of the board of directors 6. Ex corp version of Del. Section 122(17): the opportunity is defined in terms of the person to whom it is presented. This is not a business opportunity, irrespective of what type of business it is. What makes it an excluded opportunity is how someone comes into possession of it. That's really not what 122(17) says. 7. Classic self-dealing model: CEO has info; gives info not to the corp, but to the opportunity taker, where he can take 100%; but the co is worst off. 8. What also happens: CEO has co do a lot of deals with the co that CEO owns 100% of, like buy materials from, or rent space from, pay too much. 9. The 122(17) ex he put up is weird - no idea what kind of exact opportunity this is. 10. Duty of care: really only will be a case you make against officer, bc co will have a 102b7 provision that will protect the directors. If sue CEO, don't say breached duty as director, say you breached duty as CEO. 11. Duty of loyalty claims: self-dealing (taking something for yourself, that actually belongs to corp), corporate opportunity, illegality (breach of specific statute), bad faith (includes conscious disregard, indifference), Caremark claim (ex: botox case)

I. Dilution of shares A. Van Gorkom 1. Key concepts: a. Stalking horse b. Treasury stock: stock held by a corp that it has repurchased from shareholders c. Lockup d. Dilution e. Control premium f. LBO g. Leverage h. Section 141(e) 1) A member of the board of directors, or a member of any 2) committee designated by the board of directors, shall, in the 3) performance of such member's duties, be fully protected in 4) relying in good faith upon the records of the corporation 5) and upon such information, opinions, reports or 6) statements presented to the corporation by any of the 7) corporation's officers or employees, or committees of the board of 8) directors, or by any other person as to matters the member 9) reasonably believes are within such other person's 10) professional or expert competence and who has been selected 11) with reasonable care by or on behalf of the corporation. i. Fairness option 1) Business judgment rule: presumption that, absent illegality, self-dealing, or other breach of the duty of loyalty, directors acted in good faith, on an informed basis, in the honest belief that the action taken is in the best interests of the corp. 2) Did the board have a fairness option? Did it see the agreement before the meeting at which it was approved? How long did it review that agreement? Did it have supporting data for the valuation? 3) Where was Van Gorkum when he signed the deal? j. Section 102(b)(7) (fallout from Van Gorkum) 1) The certificate of incorporation may eliminate a director's personal liability for breach of fiduciary duty except: "(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 § 174 of this title [liability for unlawful payment of dividends]; or (iv) for any transaction from which the director derived an improper personal benefit." 2. Exculpation: a. Article XII: "To the fullest extent permitted by the DE General Corporation Law as the same exists or as may hereafter be amended, a director of the corp shall not be personally liable to the corp or its stockholders for monetary damages for a breach of fiduciary duty as a director."

1. LBO and Leverage: requires large interest payments 2. Could be purchased with 90million borrowing, 10 mill equity OR 0 borrowing, 100 million equity a. Does value of business depend on the way its purchase is financed? 3. "By their own admission, they could not rely on stock price as an accurate measure of value. Yet, also by their own admission, the Board members assumed that Trans Union's market price was adequate to serve as a basis upon which to assess the adequacy of the premium for purposes of the September 20 meeting. The parties do not dispute that a publicly-traded stock price is solely a measure of the value of a minority position and, thus, market price represents only the value of a single share." 4. Explanation a. Always start out with the money in the pot. No of shares, money in pot, tell you how much each share is worth. So no matter how many how many new share are issued, fair price would be 5/share. Uncertainty: never really know the net value of a company. b. But if you know net value, you know what fair price is. c. If you sell 1mill shares at 5 mill a share, 5 million more shares are into the pie. d. Say you have 2 mill shares, 5mill of assets. For 2, get share worth 2.50, get dilution. Two million will go into pie, so we will only have seven mill in the pie. The stake of existing shareholders goes down; new shareholders have more worth, but that og group has gone down, worth less than 5million that was originally in the pie. e. When you're doing a transaction, what matters is the evaluation. Investor wants to say it's worth less, current shareholder will say it's worth more. Will fight, get a price at which the new investor buys. f. Dilution also happens when they have somebody buy in at too low of a price - it's just that the new guys' share will be less than what they put in. g. Van Gorkom: Trans Union is worth 5.500 billion. If 100 mill share outstanding, are worth 55/share. Selling them at 38/share will dilute the shareholders. But won't see a huge effect, bc there are so many share outstanding. But all of that loss to shareholders will end up in one guy's pocket, Pritzger. h. Pritzger put in 38 million. Divide into 101 million shares, now worth 17 cents less. But all of that went in Prtizger's pocket. Total that shareholders lost: 16.83 million. That gives them a stake that is 5483.17, instead of 5500.00 million. Pritzger ends up with a million shares worth 54.83 million, writes a check for 38 million for them, has a gain of 16.83 million. He was acting as a Stalking Horse

1. In-class notes a. What if corp is sold, shareholder doesn't like the price: p is a contemporaneous shareholder, continuous shareholder, but the co doesn't exist anymore, has been merged into a new co or made a subsidiary, so technically hasn't satisfied the contemporaneous/continuous rule. But this is the very type of transaction that you would wanna bring. b. Don't have to be contemporaneous if you interhited from someone who was c. Don't have to be continuous if the transaction complained of made the co no longer exist d. Fair and adequate ex: have a cnotmeporaneous employment claim; bc of that claim, they have other motives than just acting as a representative shareholder, standing in the shoes of all shareholders - also standin gin the shoes of someone with an employment claim e. Prominent republican ex: that rep would likely be representing his own status, since he is a prominent republican, will want to represent replicans' interests, not just shareholders' interests f. Note, though, that just being a member of a particular group won't disqualify you from being a fair and adequate representative. If you're a prominent member of the group, though, that might do it. g. Here's what you have to show for the demand to be excused: either 1) directors are disinterested and independent OR 2) transaction was product of valid exercise of business judgment. h. How to tell if rejection is wrongful: particularized facts are alleged supporting reasonable doubt as to availability of business judgment presumption i. Circular thinking: if you really thought demand was disinterested or unreasonable, you never would have filed complaint. j. Standard for special litigation committee: 1) independent and disinterested; 2) operated in good faith; 3) conducted a reasonable investigation 2. Martha Stewart case: what particularized facts would create a reasonable doubt as to the directors' independence? a. Personal relationships, doing favors, Stewart's 94% stake, donations to university employing Special Litigation Committee member? b. Martha Stewart case: what particularized facts would create a reasonable doubt as to the directors' independence? Personal friendships; doing favors; Stewart's 94% stake; donations to university employing Special Litigation Committee member? 1) Does just owning 94 percent mean directors won't be independent

1. Loyalty claims a. Ex: 1) This is a derivative action brought on behalf of nominal plaintiff Allergan against the directors of Allergan for beaches of their fiduciary duty of loyalty to Allergan. 2) Plaintiffs have not made any demand on the Board to institute this action against the individual defendants. Under Delaware law, pre-suit demand on the board is excused where the allegations of the complaint create a reasonable doubt that (1) a majority of the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment 3) The Defendants knowingly caused Allergan to promote illegal sales of Botox for off-label uses, thereby causing significant harm to the company. As a result of the Defendants' misconduct, in September 2010 Allergan agreed to pay $600 million in penalties and criminal fines to resolve allegations by the U.S. Department of Justice that the Company illegally promoted sales Botox for off-label uses. This payment exceeds Allergan's total net profits in both 2007 and 2008, and almost exceeds its net income of $621 million in 2009. Allergan reported a net loss of $607 million in the third quarter of 2010. 4) The Defendants' knowing approval of Allergan's promotion of illegal, off-label sales of Botox, as demonstrated by particularized facts set forth in ¶¶ 50 - 65 supra, supports a reasonable doubt that their actions were the product of a valid exercise of business judgment. These particularized facts also show that a majority of Allergan's directors cannot be disinterested or independent in evaluating misconduct alleged in this Complaint because it is the directors themselves who knowingly engaged in the misconduct 5) The Company's internal documents, most particularly documents presented to the Board and minutes of Board meetings, further evidence that each of the Director Defendants had actual knowledge of the extent of the Company's off-label sales; the Strategic Plans that required and authorized such sales, as well as the sales personnel and facilities expansions necessary to implement the sales goals; and the widespread programs instituted to carry out the Strategic Plans. In this regard, the Board considered and approved: the many Strategic Plans described herein; Botox expansion plans; a Botox versus Dysport strategy; neurotoxin business overviews and outlooks; five-year plan updates 6) Court: "With all reasonable inferences drawn in favor of the plaintiffs, as required at this procedural stage, the Complaint's particularized allegations raise a reasonable doubt that a majority of the Board could properly consider a demand. Read as a whole, the particularized allegations support a reasonable inference that the Board consciously approved a business plan predicated on violating the federal statutory prohibition against off-label marketing." b. Model complaint: This is a derivative action brought on behalf of nominal P Allergan against the directors of Allergan for breaches of their fiduciary duty of loyalty to Allergan. c. Loyalty case: like bad faith. Encompasses what isn't disloyalty in a conventional sense; can include reckless disregard of info given to the goard indicating, for ex, botox is being marketed for off-label uses. This is how you turn a duty of care case into a duty of loyalty case (bc now in corps bylaws, often will say that corp owes no duty of care). Key words: "knowingly, illegally" caused harm. For model complaint, which says knowingly and illegally: at first, just make assertions, don't state facts. Will be dismissed if don't state facts.

1. T or F, the concept of the "opt-out" structure of the law of business organizations refers to the promulgation of state statutes that provide for a wide range of default rules that often can be opted out of by an entity a. True. Lawyers need to be attentive to the opt-in or -out structure of the governing law when drafting organizational documents. Opt-out rules are described in the question. Opt-in rules are ones that do not apply unless the corporation affirmatively adopts them in their organizational documents 2. Why might one choose to organize a business as a sole proprietorship (choose all correct answers: a. To benefit from retaining earnings in the business without incurring tax at individual income tax rates b. To limit liability to one's investment in the business c. To realize the benefits of separation of management and control d. To operate under a structure that will continue to exist indefinitely e. None of the above f. ANSWER: E. None of (a) to (d) applies to a sole proprietorship, which: subjects the proprietor to taxes at individual rates (but does not incur a tax at the entity level), does not provide the protection of limited liability, does not provide for the separation of management and control, and will cease to exist with the death or retirement of the proprietor. 3. T or F: Although a pass-through-tax entity results in taxation on earnings only at the owner level (and not at the entity level), it has the disadvantage, not shared by the corporation, that an owner's tax liability on the LLC's net income allocated to the owner is triggered regardless of whether the owner actually receives any distribution. a. True. If you have a lot of cash, this might not concern you. But if you did not, you would have to come up with cash to pay your taxes on an LLC's profits if the profits were not distributed. This is the "ghost income" problem. What might cash-poor LLC members do to protect themselves?

1. Mark any that are generally pass through tax entities: a. S corp b. Corporation c. Limited partnership d. LLP e. LLC f. Partnership g. ANSWER: S corp, LLP, Limited partnership, LLC 2. All things being equal, when the individual tax rate on dividends is reduced, corporate dividend payments will: a. Increase. A corporation can reinvest or distribute profits. The balance of or reinvestment and distributions at any given time reflects the value of each approach given reinvestment opportunities, tax rates and other factors. If taxes on dividends decline, and nothing else changes, the value of dividends will rise, which will shift the balance toward more dividend payments. 3. All things being equal, when the corporate tax rate is reduced, corporate dividend payments will fall, T or F: a. False. A corporation can reinvest or distribute profits. The balance of reinvestment and distributions at any given time reflects the value of each approach given reinvestment opportunities, tax rates and other factors. If corporate taxes decline, corporations will have more after-tax profits to reinvest or distribute. Some may reinvest every additional dollar of after-tax profits, so their dividend payments will not change. But some will cross the tipping point between reinvestment being more valuable than distributions to reinvestment being less valuable than distributions (there is always some point at which reinvesting profits becomes increasingly less valuable to a corporation). If corporate tax rates decline, all other things being equal, dividends will rise because the value of reinvestment an additional dollar of after-tax profits will fall for at least some corporations. 4. Although limited liability partnerships offer limited liability to owners, the scope of the liability may vary depending on the state of organization: True.

A. Electing Directors to the Board of Directors 1. The default rule for electing directors is that they are elected by using straight voting/straight line voting. a. Straight voting ex: assume there are two shareholders, A and F. A owns 60 shares, F owns 40. There are three directors on the board. For the first slot, A will vote 60 shares for himself, his nominee, and F will vote 40 shares for himself, his nominee. A has more votes, so he will be elected to that position. The same thing will happen for the second and third slots - A has more shares, so A's nominees will win those director positions. 2. Cumulative voting: changes the rules so that a minority shareholder can elect at least one member to the board of directors. In cumulative voting, each shareholder will cast votes equal to the number of shares they own times the number of board spots up for election. So A will have 180 votes, and F will have 120. This means that F can place 120 votes on herself, and A can elect the other two members to the board. 3. Formula for determining the minimum number of shares that a shareholder, the minimum number of directors that a shareholder will be able to elect: N = (x-1) * (D+1)/S a. X - number of shares owned. D - number of board seats up for election. S -number of outstanding shares. N = number of directors that can be elected. b. Aka, formula shows you the minimum number of directors that F can elect with their number of shares 4. Conditions that are necessary for cumulative voting to work: if board is staggered/classified, cumulative voting won't help minority shareholder. If only one slot is open each year, they'll only have their number of shares. Same for each year. a. Argument for staggered/classified voting: 1) Small amount of turnover with the board. Argument against it: just entrenches management; plus, since it takes so long to elect directors, might discourage some investors who want to see implementation of new ideas. 5. The removal of directors can also create difficulties for minority shareholders. a. The default rule for removal of a director without cause is either a majority of votes cast or a greater number of votes for than for against. 1) This means that A, with 60, could boot F with just 40, regardless of the vote that put F there. Solution to this problem: both DE and MBCA provides that a director may not be removed without cause if there is a minimum number of votes cast against removal. This is called reverse cumulative voting.

1. Reverse cumulative voting: if forty shares would have been enough to elect F, then F cannot be removed without cause if forty shares are cast against her removal a. MBCA also requires reverse cumulative voting for removal WITH CAUSE - but not DE. 1) This means that if A wants a vote for removal of F with cause, and F believes the charges are false, F will nevertheless be removed under DE law. i. SO: for a DE corp, reverse cumulative voting will apply only to removal for cause if provided for in the organizational documents. § Ex provision that would accomplish that in the organizational documents: "a director may be removed with or without cause by a majority of votes represented at the meeting, except that, if less than the entire board is to be removed, no director may be removed if the votes cast against removal would be sufficient to elect the director if cumulatively voted." b. To determine the minimum number of votes cast against removal that would defeat removal and keep the director on the board, apply this formula: M = S/(D+1) + 1 1) D = number of board seats up for election 2) S = number of outstanding shares 3) M = number of shares necessary to elect one director 4) Aka, this formula shows the minum number of shares necessary to elect one director in reverse cumulative voting. 2. Two possible exam questions: a. 1) how many directors will shareholder A be able to elect? b. 2) how many shares will be enough to prevent removal? 1) Each of these would require one of the two formulas. 3. Ex of how we prevent majority shareholders from just changing the rules, so that cumulative voting or reverse cumulative voting is no longer required: a. "an affirmative vote of three-fourths of the outstanding shares shall be required to amend this provision or to stagger the terms of the directors. 4. Declassified board = not staggered

A. Corporate governance examples 1. Three general types of provisions in state corp law: 1) Required/prohibits 2) Implies that something is req or sets a minimum but gives you the option to opt out 3) Permits an action 2. DGL ex regarding no of votes req for a quorum for a shareholders' meeting: 1) "Subject to this chapter in respect of the vote that shall be req for a specific action:" a. There may be other specific reqs for a quorum for a particular type of action - reminds you that there are diff types of action. 2) "The certificate of incorporation or bylaws of any corp authorized to issue stock may specify the number of shares and/or the amount of other securities having voting power the holders of which shall be present or represented by proxy at any meeting, in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business." a. This is where you have the action of specifying something. Allowing you the authority to est something. You are allowed to specify the number of votes req for a quorum. 3) "But in no even shall a quorum consist of less than 1/3 of the share entitled to vote at the meeting." a. This is an exception to the permission that was given - says that whatever your quorum is, it cannot be less than 1/3 of the share entitled to vote at the meeting. This is called a 'Floor.' There's also sometimes a 'Ceiling.' 4) "In the absence of such specification in the certificate of incorporation or bylaws of the corp: (1) a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum." a. This would be known as a Default Rule, what happens if the corp is itself silent on what the quorum needs to be. 5) Classic structure for this kind of provision: a. Default rule - shareholder. b. Meeting quorum = majority. c. Quorum comprised of those entitled to vote and present. d. Also, may opt out, but quorum cannot be less than 1/3 of those entitled to vote at meeting, and that has to appear in articles or bylaws.

1. Structure of corporate law ex: quorum requirement for a board meeting (as opposed to shareholder meeting req): 1) "A majority of the total number of directors shall constitute a quorum for the transaction of business:" a. Lays out the default rule. 2) "Unless the certificate of incorporation of the bylaws require a greater number:" a. This is an exception to the general rule. 3) "Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors." a. Establishes a Floor. 4) Structure: a. Default rule for board meeting. b. Quorum = majority. c. May opt out: in the articles or bylaws; if not otherwise stated in the articles, bylaws d. Quorum cannot be less than 1/3. 2. Summarize: there's a common structure to state corp statutes. a. Look for default rule, then see if there is some type of opt-out authority. Then you want to make out where you can do that, in either or both articles or bylaws.

1. Mark any entity type that offers full limited liability to its owners: a. Corporation b. S corp c. LLP d. LP e. LLC f. Partnership g. ANSWER: Corporation, S Corp, LLC. A partnership does not offer limited liability. An LLP can if it is organized in a "full shield" state. An LP offers limited liability only to the limited partner owners, not to the general partner owner, although the general partner is often a corporation that itself offers limited liability to its ultimate owners. 2. T or F, the LLP form is popular with professional firms, such as law and accounting firms. a. True. 3. T or F, Partnerships provide a high degree of separation of management and control, which promotes efficient allocation of functions but increases the potential for conflicts between managers and owners. a. False. Although the characterization of the costs of benefits of separation of management and control is correct, partnerships do not provide for such separation. 4. Which of these forms of organization is most likely to offer the highest degree of separation of management and control: a. Partnership b. LP c. Corporation d. S Corp e. LLP f. LLC g. ANSWER: All of the others allow for some degree of separation. Management for all of them is likely to have some ownership, and all may have investors who are entirely passive. The corporation offers the highest degree of separation because it is the form most likely to be chosen by a business with a large number of investors, where separation of management and control is likely to be greatest. But even the corporation can be 100% owned by managers.

1. T or F, E ntities that issue interests that are securities and are widely held by a large number of investors are generally required to make disclosures required by the securities laws, make periodic filings with the SEC, and comply with federal proxy rules. a. True. 2. T or F, interests in general partnership generally are securities that are subject to securities regulation: a. False. This will be false unless there are partners who do not participate in management. Securities include stocks, bonds, and any interests in which one invests money in a common enterprise with an expectation of gain resulting from the efforts of others. It is this last prong that a partnership fails 3. T or F, prospective business partners may hesitate to organize as an LLC that lacks clear exit rules for members who wish to terminate their relationship with the business: a. True, but it's probably the partners' lawyers, not the partners, who are likely to be sensitive to the importance of clear exit rules. Partners may tend to underestimate the possibility of conflict at the beginning of a business relationship and be reluctant to plan the terms of the divorce -- so to speak -- at the inception of the marriage. 4. T or F, a corporation offers the advantage of perpetual life, but investors may be leery of investing in it if its shares are publicly traded in a highly liquid market. a. False. Perpetual life is generally considered an advantage, partly because it encourages investment by those who otherwise might be concerned about the sudden dissolution of the business. However, the overall statement is false because investors are more likely to invest in a company whose shares are publicly traded in a highly liquid market. One consideration that always hangs over investors' decisions about investing in a business is how easily and at what price investors can extricate themselves from the business. The more difficult the exit and the less liquid the market, the greater the hesitation to invest. 5. Voting rights for LLC members, if not set forth in the operating agreement, will be: a. Equal for each member b. Equal for each member of allocated based on each ember's proportional interest in the LLC, depending on the law of the state c. Allocated based on each member's proportional interest in the LLC d. Based on the court's understanding of the parties' intentions at the time that the LLC was formed. e. Based on the number of members f. Based on the number of outstanding unit g. ANSWER: B. . . . but you generally should include voting rules in the operating agreement even if they match the applicable state's default rule.

1. T or F, a corporation's articles of incorporation generally have greater authority than its bylaws: a. True 2. T or F: the management of the corporation is vested in its shareholders a. F. the power to MANAGE the corp is vested in the board of directors. 3. T or F, directors are permitted to vote on matters before the board by proxy: a. False. Directors aren't permitted to vote by proxy, although they generally can vote during a teleconference of other live electronic discussion. 4. T or F, a corporation must provide advance notice of a meeting and a quorum must be present for actions taken at the meeting to be valid a. False. 5. T or F, a corporate board can take action without a vote: a. False. They must vote, but if the vote is unanimous, they don't necessarily have to meet. 6. T or F, notice of annual board meetings is not required: a. True. Notice isn't required for annual meetings or other regularly scheduled meetings.

1. T or F, if the quorum for a corporation is a majority of sitting directors, then a 15-member board cannot take action at which only 8 directors are present: a. False. Eight is a majority of the sitting directors, so the board can take action. 2. T or F, if the corporation's quorum is 2/3 of its 15 sitting directors, then approval by 6 of the 10 directors attending a meeting could not be sufficient to adopt a resolution. a. False. It could (and probably would) be sufficient. The quorum has been met (10 is 2/3 of 15), so board action is possible. The typical approval requirement is a majority of those present, which would be satisfied here (6 out of 10). If 2/3 was required for approval (at least 7 of 10), it would not be sufficient 3. T or F, if minutes of a board meeting are not kept, any action taken at that meeting will be invalid: a. False. Minutes aren't a requirement for corporate action, although if a corporate action is challenged it's certainly more convenient to have minutes to prove that it was properly approved. Do you want to keep detailed minutes of everything said at a meeting? That's a different question 4. Shareholders generally don't have the right to vote on: a. Sale of substantially all of the corporation's assets b. Amendment of the articles of incorporation c. Appointment of the CEO d. Merger of the corporation e. Election of directors f. ANSWER: C. the other four powers represent those for which shareholder approval is required.

A. Minority Shareholder Protections 3

1. T or F, preemptive rights are not necessary to prevent ownership dilution: F. preemptive rights are necessary to prevent ownership dilution. 2. T or F, preemptive rights aren't necessary to prevent economic dilution: T. Economic dilution will not occur if the shares are sold at their fair value. Preemptive rights authorize minority shareholders to buy, in an offering of shares, the number of shares they already own, T or F: F. they authorize them to buy a percentage of the offering equal to their percentage ownership

A. Troublesome Problems 1. A well-drafted pre-incorporating k would ensure that the entity became a party to the k upon its formation: NO, upon its ADOPTION. Co has to be formed, THEN can adopt 2. An entity's adoption of a k automatically relieves of liability nany promoter who had signed the agreement: co doesn't have authority to relive a third party of their obligations under a k. that's why the k needs to say 'upon co's adoption, third party is released.' 3. Employees can be held personally liable for ks they sign on behalf of their employer: ks no, torts yes 4. If the promoter learns, after signing an agreement, that the incorporation docs had not been filed, he cannot claim estoppel: True. Estoppel is an equitable doctrine, brought in fairness - nothing unfair about sticking someone with liability who has unclean hands, who knew that the docs hadn't been filed. 5. Which defenses might be available to an individual who signs an agreement on behalf of a corp before the incur docs have been filed: probably estoppel. 6. If an entity's representative thought the entity was dealing with acorp when signing a k with the corp's putative CEO, and the CEO knew at that time that the articles for the corp had not been filed, then: unclean hands situation. No estoppel. There entity can recover from the person because the person knew that the corp didn't exist. 7. The promoter unknowingly signs an agreement before the articles of incorporation have been filed. There is a law authorizing incorporation, and the promoter has acted in good faith and as if the corp existed. There is no evidence that the counterparty believed it was contracting only with the corp. under what theory would the promoter argue that she wasn't liable under the k. we're in de facto corp land, have all three factors 8. The promoter signs an agreement before filing incorporation docs. The promoter has acted in good faith, but not acted as if the corp existed. The counterparty believed it was contracting only with the corp. under what theory would the promoter argue they were not liable under the k: uncertain de facto claim, but slam dunk estoppel claim - good faith. 9. Which factor would support piercing the corp veil: commingling of assets; excessive insurance; management by non-shareholders; small/large number of shareholders: a. NOTE that inadequate insurance would be a factor leading to inadequate capitalization, leading to piercing, but NOT excessive. Small/large no of shareholders: this is just an empirical factor, doesn't lead to piercing.

1. T: Ps generally must allege more than one factor to prevail under a piercing the veil theory. 2. Indemnification would have protected Cavaney (the swimming pool D) against personal liability: 3. What are the two most important recommendations to make to someone considering becoming a director: Insurance; indemnification 4. Proof of apparent authority is not sufficient to support a finding that a person is acting as a principal: T 5. Apparent authority: don't have a strong argument if the alleged principal told the alleged agent not to use their forms. DO have a good argument if principal knew, but didn't tell agent to stop 6. In Cargill, had Warren Grainery been a Cargill subsidiary, the Ps might have been able to pierce the veil directly to Cargill's shareholders: F. would have to be INDIRECT. 7. A creditor of a wholly-owned subsidiary could not pierce the veil to the parent without proving agency: False, bc you don't have to prove agency to pierce the veil, nor do you have to show piercing factors to show agency. 8. Limited partnership: limited partners only get limited liability if they're not involved. General partners are involved, but don't have LL. 9. The business owner might benefit from double taxation if: 1) the entity tax rate is v high relative to the owner's rate and the entity doesn't plan on making idstributions. 2) the entity tax rate is very high relative to the owner's rate and the entity plans on making significant distributions; 3) the entity tax rate is very low relative to the owner's rate and the entity plans on making significant distributions. 4) the entity tax rate is equal to the owner's rate and the entity plans on making significant distributions. 5) the entity tax rate is very low relative to the owner's rate and the entity doesn't plan on making distributions. a. What we WANT is a really low corp rate so he can reinvest. Low rate is good, but if money is distributed, you've lost advantage. SO: 5 is correct answer. If dividends go up, so do personal taxes. If dividend tax go down, big increases in dividends will be paid. 10. Socrative quizzes: if John is deemed to be a partner in an inadvertent partnership, then: John will be jointly and severally liable for the partnership's obligations. WRONG: if there is no partnership agreement, john will be jointly and severally liable for partnership's obligations; John will be jointly and severally liable for obligations arising out of his partnership activities (for ALL partners' activities, not just his, is why this is wrong); John will be solely liable for the obligations of the partnership (wrong - someone can go after him, but then he can also go after the other partners as well to pay him back). 11. Had KN&K been an LLC, Peyton might have been found personally liable as an inadvertent member. 12. Limited liability co law allows business owners a great deal of flexibility in setting rules for managing the business's internal affairs 13. An "opt out" corporate law provision typically imposes a requirement that a corp can choose to change in its articles of incorporation, bylaws, or both. 14. V few cases will be brought on basis of duty of care - 102b7, plus are just hard to win.

1. Shareholders generally don't have the right to vote on: a. Sale of substantially all of the corporation's assets b. Amendment of the articles of corporation c. Merger of the corporation d. Issuance of new stock e. Election of directors f. ANSWER: D. 2. T or F, a corporation generally may impose a higher quorum requirement than that required by statute: T 3. T or F, for widely held companies, shareholder approval is often obtained by written consent in lieu of holding a meeting for thousands of shareholders. a. False. This is true for companies with a small number of shareholders, but it'd be impracticable to obtain written consent from every shareholder for a widely held company. But shareholders don't need to ATTEND the meeting to vote. They can vote by proxy. 4. What is the difference between these shareholder approval requirements, approval by: 1) more affirmative votes than votes in opposition and 2) affirmative votes representing at least a majority of shares voted? Which is a higher standard? a. He former requires more votes in favor than against. The latter requires more votes in favor than the sum of those against or abstaining. The latter therefore is a higher standard because abstentions count, in effect, as "no" votes. 5. Assume that a quorum is a majority and approval requires 2/3 for a corporation with 1,250 outstanding shares. If 580 out of 600 votes cast are in favor of a proposal, the proposal passes, T or F: a. F. A quorum would be 625. There isn't a quorum. 6. Assume a quorum is 2/3 and approval requires ¾ for a corporation with 2,400 shares outstanding. If 1,200 out of 1,600 votes cast are voted for a proposal, the proposal generally passes: a. True. The quorum of 1,600 is satisfied, as is the approval requirement of 1,200/1,600. Unless applicable state law requires a higher approval percentage for certain actions (e.g., a merger or charter amendment), the measure would be approved. It would be unusual for state law to require more than 3/4 approval.

1. Under plurality voting, five directors running unopposed for five slots who received only one affirmative vote each would be seated, even if 10,000,000 votes were cast against by abstaining. a. True. Plurality means that the top vote-getters win. When unopposed, a nominee's election is virtually assured. However, if this were a public company, those directors would likely be replaced given such a high level of "opposition." 2. With respect to a shareholder's meeting, what's the difference between a written consent and a proxy: a. Written consents from enough shareholders will render a meeting unnecessary for a valid vote. A proxy only authorizes another person to vote the shareholder's shares at the meeting. 3. The way in which the choice of organization form is "state specific" is that for each form there may be differences among the states in the default rules and legal precedent for that form, T or F: a. True. The state of organization generally is the source of law governing the operation of the entity. Although virtually all states offer all of the principal forms of organization and the essential characteristics of each form are generally consistent across all states, each state's rules and legal precedents for each form are slightly different. 4. T or F, double taxation refers to the taxation of both capital gains on the sale of an interest in a business and of dividends (or other distributions of earnings) received by shareholders. a. False. Double taxation refers to the taxation of income at the corporate level (this generally applies only to corporations) and at the investor level. For example, when a corporation earns $100, it might pay a 10% corporate tax, leaving it with only $90 to distribute to shareholders as a dividend, which is then taxed again at the shareholder's individual income tax rate.

A. In-class notes on PTV, pre-incorporation quiz 1. Preincorporation liability quiz: can approach it by structuring it as an offer. If Aapp king builds, somebody has to pay for it. Another issue: what counts as 'received.' "It's understood" should never be used in a k. Just state what you mean. a. Promoter represent that you have 80k balance, warrant that you will keep that balance til x date/event (such as: App LLC has adopted, therefore promoter is off the hook. make sure you note if the entity has yet to be formed. The thing that happens here, that we need to account for: promoter is released. (... "then promoter is released.") b. Don't say who the "app is for" - stare who the app will be delivered to. Then state an obligation to pay. c. If you have dates, give a buffer for those dates when writing a k 2. PTV doctrine knows a lot of companies go bankrupt - rarely will this doctrine actually come into play. 3. Greenman v. Yuba invented products liability. Entities can also be put into the stream of commerce, buy stocks. Therefore, makes sense that we require them to have enough to cover themselves. 4. Minton: Minton's role in the Corp - Director, shareholder (1 share). This was a small business, he took on responsibilities. Co doesn't have enough funds to cover judgement. Note: if the co had insurance, genuinely thought it'd cover, there probably would be no PTV in that case. In short: I adequate capitalization can mean more than just money in the bank - can include insurance. In short: insurance - need it!!! 5. Commingling - treated property of business as your own. Thought: you'd just yank out all the money out of the corporation the second you get sued. 6. "Holding out:" if you represent to third parties that you'll personally cover a corp's liabilities, you're on the hook. Like when you personally co-sign a loan 7. PTV will be one of two situations: 1) a small, closely held business. 2) When an entity is a shareholder (parent co is pierced bc of its subsidiary)

1. Walkovsky: problem was that P didn't make a real PTV argument, to get to Carlton. PTV has nothing to with sibling entities. Sue him, his assets include ownership of those other corps 2. Problem with enterprise liability: stable companies might be evaluated depending on the risk level of the other corps. 3. Commingling will usually be a problem when it is two way, when there's a back-and-forth. 4. Walkovsky: if you spread the assets out, you may protect owners against creditors, but on the flip side you may leave an entity undercapitalized. 5. Luckenbach: a case where the ct applied enterprise liability (this is very rare, not the black letter principle). Steamships in one entity, the steamships' leases in another. If the leasing entity is sued for a ship running into someone, you've protected your assets, the ships. If we do a conventional PTV argument, though, can still get at the ships by going after the assets of the owner/guy who owns 90% of the other entity's stock. 6. "use as a conduit:" makes sense if combined with something like commingling. 7. "closely held business:" this is when you tend to have commingling. 8. "same shareholder/directors/officers of multiple entities:" relevant in cases of parent cos (parent might have no operations other than owning the sub co). 9. PTV: how, despite LL, you might be liable as a shareholder 10. Parent-sub rel will be subject to a piercing situation

A. Always looking for two diff possibilities regarding authority: apparent or actual. 1. Apparent - creditors are led to believe there is principal-agent relationship, even though there isn't. 2. Actual = actual control. B. Another way to phrase this principal-agent relationship: 1. Another basis for when one party is held responsible for another's actions: when you are deemed to be a principal. Principals are liable for their agents' actions within the scope of the agency. The issue for the defense in these cases will be what 'hat' you were wearing when you took the actions you did - aka if not the principal, what hat is the purported principal wearing. C. In-class notes on Agency 1. In the corp context, you have a lot of fiduciaries and agents. 2. Agent: has consented to act under the pinricpal's control, and vv. If you are a principal and your agent does bad stuff, pursuant to your control, you're responsible for that agent's doings. 3. Cargill as lender: a. Secured an open account - Warren can go in and draw money from that account. Such accounts usually have limits. These accounts are automatically secured by a bunch of assets you've secured with that lender. b. 2) the drafts from the open accounts had Cargill's name on them (note: banks always do this for paper checks - not too uncommon for lenders. BUT Cargill isn't a bank). c. 3) Cargill requires Warren to have annual financial statements (lenders normally req this to keep an eye on the borrower, their assets). d. 4) Cargill had the right to inspect the books of Warren - this is more unusual, but still concistent with a v concerned lender. e. 5) demands Warren to have audited financials (this isn't weird - they want to make sure things are ok). The second part of this is weird - they say they could keep the books (not a lot of banks keep books for their borrowers). f. 6) Cargill give prior consent for any guarantees or encumbrances (aka secured interests) of Warren (before you, Warren, go out and pledge your assets, borrow from somebody else, I have to approve that. Banks can do this, bc they have a secured interest. But they certainly don't do this every time they make a loan. Banks are not in the business of running businesses). Also gotta get permission if you want to declare a dividend (this is intrusive because banks don't do this on a regular schedule; banks usually only worry about this if they think the company is about to go under). Cargill also have to give consent for Warren to issue to buy/buyback stock (banks are usually worried about money going out of a company (for buybacks); but what you might expect instead is a clause saying that you can't buyback. But what about issuing: issuing means that money is coming in. this is weird - lenders never have a problem with money coming in). ALSO, Cargill had to give prior consent for any improvements/repairs that were over 5k (weird that they would want to do that every time).

1. Was Cargill acting as a purchaser: a. 1) they bought 90% of Warren's grain (Warren basically exists to supply Cargill with grain, it sounds like not a buyer relationship but a (an actual) control relationship). b. 2) Right of first refusal for the sale of any grain (Warren has to offer the grain to Cargill first - Cargill gets to decide where the grain goes, basically). c. 3) Warren acted as Cargill's grain agent (not really acting as purchaser here). 2. Cargill on bank drafts and on the business forms: an exercise of both actual and apparent control if Cargill is telling Warren what forms to use, other third parties are seeing those forms. 3. Cargill told people dealing with Warren not to worry, they'd be paid: that implies they'd be paid by Cargill.

MORE DEI In-class notes

1. Washington, NASDAQ, CA each have diff reqs for board diversity regulation. A lot of other js don't have diversity reqs, though some have adopted pro-diversity, or encouraging diversity, wording. Likely that others, later, will adopt regulations. 2. Ex question regarding NASDAQ company: if you add a sixth director TO SATISFY this subparagraph, then you won't be subject to the two diverse directors req. BUT: if you subsequently expand your board, then you will become subject to the req. could this co have added a sixth without having expanded the board? How long after adding the sixth member, that you expand, will you trigger the two director rule? 3. Second ex, using CA: unclear writing here. If really wanna know, call the regulator. Might also consider: the risk of litigation, what the penalties are, who can enforce the penalties (if they exist) 4. Washington ex: mismatch between quota and disclosure - as long as you have 25% women on board, don't have to tell us your policies with minorities on the board. That's not great drafting. 5. Ex: CA 3 women and 3 UC. Same question on Socrative quiz. Yes, this board complies. Structure of CA rule gives you an incentive to get women who are minorities. 6. Ex: what if 3 women, 3 UC board is in NASDAQ? Yes, it complies. NASDAQ reqs one female and one UC. Can could one of the women as the female, can count another as a UC. One way to look at this statute is to interpret it that if we have one woman, the UC cannot be a woman. 7. Make sure to compare definitions of UCs. Diff definitions might have diff groups. In ex: the bottom paragraph includes "two or more races." In the ex he gave, though, there's no significant risk of breach just bc you might include "two or more races" in CA. this is another ex of the type of judgement you'll have to make. 8. The "queer" ex: probably won't actually be an issue in CA if you hire somebody who identifies as queer - you have to make that evaluation. Note that also this issue might not occur if the person, when filling out CF forms, just checks the UC box (which doesn't note the lack of "q") 9. When yOU draft diversity forms: follow NASDAQ, bc if you follow NASDAQ, you've covered CA as well. 10. Looking at NASDAQ ex, can you tell if they're in compliance: Bullard thinks so. They WANT you to identify for each ethnicity whether it's male or female. 11. You could work for a big company and be subject to every j's diversity reqs. Have to comply with all of them. 12. Another non-compliant matrix: includes categories not included by NASDAQ. 13. Compliant matrix: F, M, non-binary, didn't disclose gender. Includes all groups specified by NASDAQ. Problem: NASDAQ has relegated disabled people to the bottom of the chart. Same with middle eastern people. 14. Issue with Keith Jackson ex: the bottom ex seems to say that we put him on the board just bc he's AA. Could instead emphasize their qualifications.

I. Corporate Organization A. In-class notes 1. Default rule for a corp is straightline voting. Do NOT confuse with staggered voting. 2. Staggering the no of directors who are up for election can affect how many directors the minority shareholders can elect. 3. Straight line voting: each shareholder casts the no of voting shares owned in a separate vote for each slot open for election 4. Cumulative voting: each shareholder allocates votes equal to no of voting shares owned times the no of open slots across all open slots 5. Corp A: 200 shares outstanding, 5 member board, 5 directors up for election. Hulk: 60 shares, nominess are A, B, C, D, and E. Wonder has 40 shares; nominees are F, G, H, I, and J. in total, Wonder gets 200 votes, if five are up. Cumulative voting ex. How would you allocate them? 6. When there is a tie, the majority is always going to win BECAUSE somebody has to control the board when there is a vote, aka the controlling shareholder. If you go into an election and you control the board, there's a tie, the OA says board will break the tie, you will win. 7. If at the end of formulas you have a decimal, round up when looking for the minimum no of votes you'd put on each nominee. 8. Just a reminder that a minority shareholder can sometimes get an extra nominee on the board, if the majority shareholder screws up.

1. What if two shareholders get together to get a nominee elected? 2. Staggered voting: four one year, five another. This makes problems more complicated. Will have to recalculate each year. In ex on board: she can't get any in a 'four' year because she has a decimal point for her answer - can't get a single director. 3. Exs on review day slide: a. Formulas don't always work, but for our purposes, plug them in. b. First, figure out how many votes they each get. c. First ex: minimum you can put on a director is 215 (because can't put a decimal point) d. Round down for N, round up for V. e. The formula doesn't always give you exactly the minimum. f. How many TOTAL directors can WW elect: give total numbers, not decimals. ALSO: calculate both/all cycles, then add "N"s together. g. Iff WW casts only 160, makes a mistake: Hulk gets all three spots h. When WW and Shrek team up: doesn't help them out in an actual control situation. Would potentially work when Hunk just has working control. i. Working control ex (NOT on exam): Hulk has 350 shares. Hulk is only guaranteed two, since this is just working control.

I. Quiz answers A. Quiz 1 1. In a sole proprietorship, who's responsible for the business' contracts with third parties: a. Sole proprietor 2. In a sole proprietorship, who's liable for the business' torts: a. Sole proprietor 3. What will defense counsel file in response to a complaint: a. Motion to dismiss 4. What will plaintiffs get if they survive a motion to dismiss: a. Discovery 5. Why does discovery matter in litigation a. It's costly, risky, burdensome 6. Along with contracts and torts, what is a third source of important legal duties for businesses: a. Administrative or regulatory law, and you should consider taking at least one regulatory class 7. What is arguably the single greatest invention of modern times: a. The LLC

1. What is the mechanism most commonly used to protect business and personal assets from third-party claims: a. Insurance, a course you should consider taking 2. What are the four most significant weaknesses of insurance as a form of protection against liability: a. Loss not covered; loss exceeds coverage limits; claim denied; insurer fails 3. Proper organizational planning will protect which category of assets of the business owner: the assets used in the business or the owner's personal assets a. Owner's personal assets 4. Limited liability protects the business owner for torts he commits himself while acting on behalf of the company, true or false a. False 5. What is the triumvirate of protection from claims that you will advise every business-owner client to have: a. Insurance; limited liability; indemnification 6. What does an indemnification obligation running from a business to an employee accomplish: a. It obligates the business to pay any liabilities of the employee arising out of his employment 7. How do I get limited liability for a business: You choose the correct organizational form

1. T or F, a corporation generally must maintain an office in the state of incorporation, which limits he practicability of incorporating in DE for small businesses. a. False. A company must maintain an in-state office, as well as a registered agent to receive process, but this is not a significant barrier because there are services that provide a technical office and registered agent at low cost. 2. How is limited liability qualified for limited liability partnerships in some states: a. Partial shield states generally limit partners' liability only for acts of their partners b. Full shield states limit partners' liability for debts owed to third parties. c. Partial shield states limit partners' liability to obligations of which they have specific knowledge. d. Full shield states provide full limited liability. e. Partners are liable only for their own torts. f. ANSWER: A. Partial shield states generally limit partners' liability only for acts of their partners. B, C and E are false. D is true, but it does "qualify" limited liability.

1. What is the structural reason that a LP may be an inferior choice to an LLC: a. A limited partnership has a general partner and limited partners, which means a more complex structure. 2. What are the four key limiting features of an S corporation: a. 1. 100 shareholder maximum, 2. Generally only individual shareholders allowed, 3. Only one class of stock allowed, 4. Subject to corporate formalities

more in-class notes on fiduciary duties

1. duties of controlling shareholders 2. ex: we have a Feldmann plan instead of bars of gold. Idea: you can be engaging in a practice, a buyer buys you, the practice ends, that is in a sense depriving the target of the asset. It is then deemed to be the seller who is on the hook; he's then, in theory, supposed to be liable for damages related to the sale of the corporate asset. 3. If the buyer is in the business of, say, buying steel, the target is in the business of making it, that is a potential red flag. Court will look at what the seller knows when thinking about whether the seller should be on the hook for what the buyer ends up doing in respect to the corporate asset. 4. Corporate asset can involve an ongoing harm. Question: is the seller then paying the value of all future losses, or only some period of time after which will deem the buyer to be responsible, or is the seller only paying to the extent of the abuse going on while the company is still in their hands. 5. What if a non-steel buyer had offered 18 per share? This fact suggests that the co is actually worth less to a non-steel person. 6. A worse fact for Feldman: if Feldman knew that the steel buyer would eliminate the Feldman pan. This makes a stronger case for Feldman to be held liable. 7. There are different fact patterns that will run in favor of Feldman being held liable, not liable. 8. If he gives you purchase price: tell him that the default rule is that the seller/buyer is due a control premium. Can argue that paying more than purchase price is control premium. Then, you'll get into the facts, which might include that seller has some hint of what could happen if he sells to this buyer. Argue then the different facts, how do they play into this idea of seller liability. Go through steps: controlling shareholder bc has working control, has right to control premium, getting more than market price therefore. All of that needs to come before you even get to the bad facts. 9. Say: a working control shareholder has a fiduciary duty. Add this to short answer 10. Explain what the source of the duty is. 11. Might ask if outcome would be different for a director defendant: answer: director is not actually involved in the sale. But the director IS allowing the looting to go on. 12. Also: buyer might itself be breaching its fiducariy duty as a controlling shareholder ot the other shareholders. 13. Perlman ex - had Ps rebutted the business judgment presumption, and if so, how: is the presumption available here: yes, it's always available. Have to overcome that presumption. How? It applies when duty of care allegation. Duty of loyalty: doesn't apply. Here, the presumption is going to be overcome, not available, bc thisi is a clear self-dealing scenario. 14. Logic of the next slide (per share value of 14.67): there has to be the cost per share, the control premium, and something extra. Something in that 5.33 is the Feldmann plan loot, what's being looted. 15. If feldman puts the 2.1 million into Newport, the problem is that Wilport will own 37% of that. Don't want to be writing a check to Wilport, give money back, IF the buyer is continuing to loot. The other logic: Wilport is getting back just a lot of the excess that it paid. And if it weren't continuing to loot, maybe that makes sense - NOT the case if it does keep looting though. 16. Drafting practice, Jack and Jill 17. ASK BULLARD FOR MODEL EXAM ANSWER FOR THIS FACT PATTERN 18. Back to drafting practice Provision is about under what circumstances Jill can SELL.

I. Duty of loyalty claims A. Duty of loyalty can be covered from three general perspectives: 1. duties of care and loyalty; 2. bad faith; 3. conflict of interest transactions B. In context: 1. business judgment rules = the presumption that directors have acted in good faith and if the court finds that presumption has not been rebutted by P, case will be dismissed a. three grounds on which P can overcome that presumption: 1) illegality, 2) self-dealing or other duty violation, 3) duty of care violation (almost always will be a claim that the board and/or officers were uninformed). b. These claims may be in the context if a demand was made on the board. 2. Final piece of context: Del Section 102b7: a. allows a company to include in its articles, essentially exculpation for directors as to their duty of care violations. 1) That doesn't care officers, duty of loyalty claims, self-dealing claims b. 102b7's limitations: 1) has to be in the articles of incorporation to be effective; 2) limited to directors, not officers; 3) only applies to money damages; 4) only covers duty of care claims. i. What this means: Ps will always allege disloyalty or some form of bad faith. So that's where ball game is at in modern derivative actions C. Duty of care claim 1. is generally going to be uninformed officers a. uninformed bc that's really all that's left until you will have tried to move your claim into he world of disloyalty or bad faith, and officers only bc usually there'll be a 102b7 provision that will have insulated the board. 2. Duty of loyalty - two groupings: a. claiming illegality OR 1) claiming illegality will involve the identifying of the provision that violated the law b. some sort of self-dealing for the seizing of a corporate opportunity; 1) self-dealing and corporate opportunity will allege self-interest on the part of the Ds - these will be fairly explicit; more complicated claims are bad faith claims, Caremark claims, where there is such an egregious judgment that it constitutes bad faith or a reckless disregard.

A. 102b7 makes it so corps can provide exculpation for their directors on duty of care violations. Ex: 1. 1. To the fullest extent permitted by the Delaware General Corporation law as the same EXISTS OR MAY HEREAFTER BE AMENDED, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for a breach fo fiduciary duty as a director. 2) the corporation may indemnify (NOTE: if you're representing CEO, you're going to tell them not to join this corp; we want a contractual agreement of indemnification) to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation or serves or served at any other enterprise as a director, officer of employee at the request of the corporation or any predecessor to the corporation. (B) Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection of a director during of the corporation with respect to any acts or omissions of such director occurring prior to such repeat or modification. a. Question: what would be the effect if DE expanded Section 102b7 to cover breaches of the duty of loyalty? Here, we have two sections that seem to conflict together, regarding shareholder approval. Instance of bad writing. Regarding B: note that we just couldn't continually have provisions stating that if one is repealed, another is still good. But B makes sense - want to assure CEO, directors that they're going to be protected from their actions even years after they leave the company.

A. General Review 1. What forms of protection from third-party liability should directors and executives obtain from their lawyer: indemnification (NOT insurance). 2. T or F, LL will protect an owner for torts committed personally that were within the scope of their employment: False. 3. What will Ps get if they survive a motion to dismiss: discovery 4. Why does discovery matter in litigation: costly, risky, and burdensome 5. What is arguably the single greatest invention of modern times: Limited liability 6. What is the mechanism most commonly used to protect business and personal assets from third-party claims: insurance 7. What does an indemnification obligation running from a business to an employee accomplish: if the employee is sused on account of their employment, the employer will pay to defend the employee and cover any damages awarded

A. Agency 1. Company A's actual authority over Company B depends on: a. Company A's express consent to the agency relationship b. Company A's knowledge of third party expectations c. Company A's directing Company B to take or refrain from action d. Company B's violation of a fiduciary duty to third parties e. The reasonable reliance of third parties on the agency relationship 1) Answer: C. Actual authority is demonstrated by cause and effect; Company A tells Company B what to do. 2. Proof of actual authority is sufficient to support a finding that a person is acting as a principal, T or F: a. True. Either actual or apparent authority is sufficient. 3. Proof of apparent authority is not sufficient to support a finding that a person is acting as a principal, T or F: a. F. apparent authority can alone be the basis for finding a principal-agent relationship. 4. Company A instructs Company B to use Company A's stationery when corresponding with third parties. These facts would show: a. Actual authority only b. Apparent authority only c. Both apparent and actual authority d. Neither apparent nor actual authority. 2) C. Instructing someone to do something shows actual authority; apparent authority is created because the stationery might lead third parties to believe that Company B was acting on behalf of Company A. 5. T or F: In Cargill, had Warren Grainary been a Cargill subsidiary, the Ps might have been able to pierce the veil directly to Cargill's shareholders: a. False. Tricky question. They would have to pierce FIRST to Cargill, as Warren's shareholder, and THEN demonstrate that they should be allowed to pierce through Cargill to Cargill's shareholders. This would be a "double piercing" claim. 6. A creditor of a wholly-owned subsidiary could not pierce the veil to the parent without proving agency, T or F: a. F. piercing and agency are two different theories of liability. Facts could support piercing the veil without necessarily supporting agency (eg, inadequate capitalization). But there may be overlap. If the parent and sub had the same directors and officers, that might support both theories. 7. Had Warren been a Cargill subsidiary, Ps might have been able to pierce Warren's veil to reach Cargill's assets, T or F: a. T. piercing would apply because Cargill would be Warren's sole shareholder. Recall that piercing to an entity shareholder is one of the two scenarios where piercing claims have succeeded. If you successfully pierce to a shareholder, you get the shareholder's assets. 8. Company A's apparent authority over Company B depends on: a. A's express consent to the agency relationship b. A's knowledge of third party expectations c. A's exercise of authority over B d. B's violation of a fiduciary duty to third parties. Answer: E. The "apparent" in "apparent authority" refers to how the alleged principal appears to the third party. The alleged principal's knowledge of third party expectations gets at the same point, but what matters is more what third parties (reasonably) think than what the alleged principal knows about what third parties think. "Express consent" would go to the question of actual authority.

A. What is a quorum for board action? 1. MBCA § 8.24. QUORUM AND VOTING (a) Unless the articles of incorporation or bylaws require a greater number or unless otherwise specifically provided in this Act, a quorum of a board of directors consists of: (1) a majority of the fixed number of directors if the corporation has a fixed board size; . . . (b) The articles of incorporation or bylaws may authorize a quorum of a board of directors to consist of no fewer than onethird of the fixed or prescribed number of directors determined under subsection (a). 2. DGCL § 141 b) . . . A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors. B. Assuming a quorum, what is required for board approval? 1. MBCA § 8.24. QUORUM AND VOTING (c) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of incorporation or bylaws require the vote of a greater number of directors. 2. DGCL § 141 b) . . . The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number.

A. Articles Amendment ex: 1. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 What is the minimum number of affirmative votes required for each type of stock to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001. a. Approval by the majority of directors present at a meeting that has a quorum B. Which shareholders are entitled to vote 1. Snapbuzz Articles of Incorporation: . . . 2(a)(iii). Voting. The holder of outstanding Series A Preferred shall be entitled to vote with the Common Stock as a single voting group upon any matter submitted to the shareholders for a vote. Each share of Series A Preferred shall be entitled to ten votes. . . . (b)(ii). Voting. The holders of outstanding Series B Preferred shall have no voting rights except as required by the Act a. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 b. What is the minimum number of affirmative votes required for each type of stock and/or the directors to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001? 2. MBCA § 10.04. VOTING ON AMENDMENTS BY VOTING GROUPS (a) If a corporation has more than one class of shares outstanding, the holders of the outstanding shares of a class are entitled to vote as a separate voting group (if shareholder voting is otherwise required by this Act) on a proposed amendment to the articles of incorporation if the amendment would: . . . (3) change the rights, preferences, or limitations of all or part of the shares of the class; . . . (d) A class or series of shares is entitled to the voting rights granted by this section although the articles of incorporation provide that the shares are nonvoting shares. 3. DGLC § 242. Amendment of certificate of incorporation after receipt of payment for stock (b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner: . . . (2) The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. 4. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 What is the minimum number of affirmative votes required for each type of stock and/or the directors to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001?

I. Diversity A. Require disclosure of board makeup (gender, race, ethnicity, and LGBTQ) 1. California 2. NASDAQ 3. Illinois 4. New York (women only) 5. Maryland (women only)Cong. Bills (excludes LGBTQ; includes veterans) B. Flowcharts 1. Need to create market for shares leads to listing shares on national securities exchanges, which requires registration of shares under Exchange Act, WHICH requires reporting 2. Need to raise capital and/or create market for shares leads to IPO and listing, which requires registration of shares under Securities and Exchange Acts, which requires reporting 3. 1) > 2,000 (or 500 non-wealthy shareholders and 2) > 10million assets requires registration of shares under the Exchange Act, which requires reporting C. What we're always concerned about: is your client covered by the rule D. Rule 407, Reg S-K (c)(2)(vi) Describe...whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominess for director. If the nominating committee (or the board) has apolicy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy

A. Board Diversity - California (2018 and 2019) 1. "a publicly held domestic or foreign corp whose principal executive offices, according to the corp's SEC 10-k form, are located in CA a. Does this provision apply to a domestic corp that has its principal executive offices outside of CA? 2. "publicly held corp" means a corp with outstanding shares listed on a major US stock exchange." 3. Mandatory: a. Up to 4-person board: 1 underrepresented community (UC); 1 female b. • 4-to-8-person board: 2 underrepresented community (UC); 2 female c. • 9-or-more-person board: 3 underrepresented community (UC); 3 female 4. UC director: "self-identifies as black, African American, Hispanic, latino, asian, pacific islander, antive american, native Hawaiian, or Alaska native, or who self identifies as gay, lesbian, bisexual, or transgender."

A. Board Diversity - NASDAQ (2021) 1. Either/or: a. Minimum diverse directors: 1) Up to 5-person board: 1 underrepresented minority (UM), LGBTQ+ or female 2) • 6-or-more-person board: 2 diverse (1 UM or LGBTQ+ and 1 female) b. Explain why the minimum hasn't been met 2. UM director: a. "self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities"

A. Board Diversity - Washington State (2020) 1. "each public company must have a gender-diverse board of directors or..." 2. "corp" or "domestic corp" means a corp for profit, including a social purpose corp, which is not a foreign corp, incorporated under or subject to the provisions of this title 3. "public company" means a corp that has a class of shares registered with the federal securities and exchange commission pursuant to section 12 or 15 of the securities exchange act of 1934 4. Description a. "This section does not apply to any public company: 1) (a) That does not have outstanding shares of any class or series listed on a United States national securities exchange; 2) (b) That is an "emerging growth company" or a "smaller reporting company" . . . 3) (c) Of which voting shares entitled to cast votes comprising more than fifty percent of the voting power of the public company are held by a person or group of persons; 4) (d) . . . articles . . . authorize the election of . . . directors by one or more separate voting groups . . . ; or (e) . . . not required by this chapter or the rules of any United States national securities exchange to hold an annual meeting of shareholders.

A. How do you actually accomplish the inslation against liability: your corp has adopted some version of the MBCA section 8.61: 1) MBCA 8.61: "(b) a director's conflicting interest transaction may not be enjoined, set aside, ro give rise to an award of damages or other sanctions, in a proceeding by a shareholder or by or in the right of the corporation, because the director, or any person with whom or which he has a personal, economic, or other association, has an interest in the transaction, if: (1) the transaction was at any time approved by informed vote of disinterested directors; (2) transaction was at any time approved by informed vote of disinterested shareholders; or (3) the transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation." i. This says you are protected from damages. Section 144 doesn't provide that. Also, MBCA applies only to directors, not officers. ii. Three reqs for insulation, note that fairness determination will be litigated - you'll never want to rely on that form of insulation. B. Common law insulation of conflict of interest transactions: 1) informed approval by disinterested directors; 2) informed approval by disinterested shareholders; OR 3) transaction is fair to the corp i. never wanna rely on the third, bc essentially relying on ct to decide this. ii. Also generally don't wanna rely on no. 2, bc you'll be reluctant to disclose this info. iii. Typically, before you enter into the transactions, you'll go before the directors, make sure all info has been provided, have them vote to approve transaction, which then insulated it from liability. iv. The problem here will be making sure that it is INFORMED approval. It'll be hard to get the info outta that conflicted director.

A. Corporate opportunity transaction 1) What is a corporate opportunity = "whether or not a director has appropriated for himself something hat in fairness should belong to the corporation is 'a factual question to be decided by reasonable inference from objective facts." 2) Very fact intensive. There are generally three necessary elements for something to be a corporate opportunity; Key factors that favor a finding of corporate opportunity: i. 1) line of business or within the interest/expectancy (opportunity taken by a director or officer that's in the same line of business as the corp - if you work for a co that makes bike seats, you go start a co that makes those seats, likely to find corp opportunity. Within interest/expectancy: if you go start a co that makes bike handles, might be in interest or expectancy of bike seat maker). ii. 2) corporate has financial means to pursue the opportunity (old-fashioned factor; gaining access to capital much easier now. iii. 3) opportunity has to cause some sort of conflict with the corporation. 3) These three are all necessarily in almost all cases to find corporate opportunity. A fourth factor that'll contribute to a finding of corporate opportunity: i. 4) it was brought to the director or officer in their corporate capacity, brought to them in a communication addressing them as a director or officer. B. Restating what we know about claims 1) Typical duty of care/Van Gorkum claim (today, a claim that the board was uninformed). Can limit it with 102b7 provision (only applies to directors) 2) Self dealing transaction: can insulate yourself from that by getting informed pre-approval (by directors, not shareholders); if self-dealing takes the form of corporate opportunity, then you'd want the corp to have adopted 122(17) provision. 3) Disloyalty claim: in the form of bad faith. Facially egrecious decisions that require little analysis. Caremark claim: there is a duty, and there's failure, and the failure is a failure to act on the part of the board or officers. C. How do we insulate ourselves against corporate opportunity doctrine: Del Section 122(17). Cos can adopt it, which allows corps to renounce a specific opportunity. 1) Del. Section 122(17): "Every corporation created under this chapter shall have the power to: (17) Renounce, in its artificate of incorporate or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders." Straightforward: in your articles of incorporation, you renounce any interest in a particular business, like bike handlebars. Has to be specified types or classes of business opportunities. Many cos have interpreted this provision to allow them to say that any opportunity to a director or officer not included within their capacity as director or officer, aka came to them on their own initiatives or somebody approached them without knowledge they were d or o, that's satisfactory for renouncement. Draft these very broadly (which might not be considered effective)

A. Inadvertent partnerships 1. What form is a business with 1+ persons that has not filed organizational documents with a state: a. LLC b. Limited partnership c. Partnership d. Corporation e. None of the above f. Answer: C. 2. If John is deemed to be a partner in an inadvertent partnership, then: a. John will be solely liable for the obligations of the partnership b. John will be jointly and severally liable for the amount of his investment in the partnership c. If there is no partnership agreement, John will be jointly and severally liable for partnership's obligations d. John will be jointly and severally liable for the partnership's obligations e. John will be jointly and severally liable for obligations arising out of his partnership activities f. Answer: D: John will be jointly and severally liable for the partnership's obligations 3. Had KN&K been an LLC, Peyton might have been found personally liable as an inadvertent member, T or F: a. F. There is no such thing as an "inadvertent LLC member" (and LLC members have limited liability) 4. Had Warren been a partnership, Ps could have reached the assets of Cargill as partner, T or F: a. T. the facts supporting a principal-agent relationship could support a finding that Cargill was partner.

A. Derivative Claims 1 1. I have a derivative claim if I'm not paid a dividend that was paid pro rata to other shareholders, T or F: a. F. this harm if specific to a particular shareholder 2. I have a derivative claim if a director embezzles funds from the corp, T or F: a. T 3. I may have a derivative claim if the board approves the sale of the business for inadequate consideration, T or F: a. T, but if it's been sold, you might fail the continuous owner requirement unless the claim is about the deal. 4. If my demand is refused, I can challenge the board's decision on the grounds that the directors weren't independent/disinterested, T or F: a. F - you generally would be deemed to have waived that argument by making a demand (Levine). Why would you make a demand on a board that you believed not to be independent or disinterested? 5. If my demand is refused, I can change bd's decision on grounds that directors weren't entitled to the business judgment presumption: True - by alleging particularized facts supporting a reasonable doubt as to availability of the business judgment presumption.

A. Piercing the Veil 1 1. Which factor would support piercing the corporate veil: a. Excessive insurance b. Large number of shareholders c. Small number of shareholders d. Management by nonshareholders e. Commingling of assets f. Answer: E. eg, a shared personal and corp bank account. Although piercing is more likely to occur when there's a small number of shareholders, it's not, in and of itself, a factor that supports piercing. Management by shareholders, not nonshareholders, would support piercing. 2. Which factor would support piercing the corp veil: a. Active involvement in management b. Use of independent contracts c. Excessive profits d. Payments of dividends e. Answer: A; see Minto 3. Ps generally must allege more than one factor in order to prevail under a piercing the veil theory: a. True. And inadequate capitalization is often one of them. 4. Indemnification would have provected Cavaney (the swimming pool D) against personal liability, T or F: a. F, for two reasons: 1) indemnification doesn't protect you from personal liability, it only requires your employer to reimburse you for the judgment against you; and 2) the corp was insolvent, so it wouldn't have been able to indemnify him 5. Successful piercing claims usually involve closely-held businesses or shareholders that are entities: T 6. Piercing claims virtually never succeed against individual shareholders of widely held firms: T 7. What are the two most important recommendations to make to someone considering becoming a director: a. Ensure that 1) the corp has purchased D&O (Directors and officers) and E&O (errors and omissions) insurance policies, and 2) the employment agreement provides for indemnification.

A. Derivative Claims 2 1. Why are derivative claims that survive a motion to dismiss typically settled: a. Costly and risky discovery begins b. Costly, burdensome, and risky discovery begins c. Costly, burdensome and risky discovery begins and insurance/indemnification typically doesn't cover settlement amounts d. Costly, burdensome and risky discovery bgins and insurance/indemnification typically covers settlement amounts. e. Costly, burdensome and risky discovery begins and insurance and limited liability typically ensures coverage of settlement amounts f. Answer: D 2. What are the four key elements of a derivative claim: a. Entity harm, contemporaneous/continuous holder, fair/adequate representative and demand (unless futile) 3. I can bring a derivative claim if I bought my shares from someone who owned them when the misconduct occurred: F. you must be a contemporaneous and, in some js including DE, a continuous owner of the shares 4. I can bring a derivative claim if I inherited shares from someone who owned them when the misconduct occurred; T (shares may devolve by operation of law) 5. I bought shares of a company was later acquired. I can still bringa claim for any pre-acquisition misconduct. F. not for any misconduct; only for some acquisiton-related misconduct. 6. I bought shares of a DE corp, filed a derivative claim, and then sold my shares. My claim is still good. a. F - DE requires continuous ownership through the resolution of the case (but the careful P attorney will have other shareholder-plaintiffs as backups) 7. What three factors determine whether a special litigation committee is entitled to the business judgment presumption: a. Independence, operated in good faith, made a reasonable investigation. B. Drafting Tips 1

I. Corporate interest A. Types of interests in businesses: interest in corps is referred to as shares or stock. Refer to interest in a partnership as just 'interests' or units; refer to LLC as "units." 1. All of these are types of equity interests - aka, they have a residual interest that means that they have some participation in the profits of the entity - contrast to debt or some other type of creditor interest, where the interest is fixed. B. Diff types of transactions: 1. Cash distributions a. Referred to as a dividend - that's when cash is paid out to the shareholders or unitholders). 2. Stock issuance a. The reverse of this is called a repurchase or a buyback. i. Issuance is when the company actually receives share and it receives cash from investors. That's where we are creating new shares, adding to the total number of shares outstanding. ii. Repurchaser buyback: co is paying shareholders to buy back their shares, those shares are then removed from the pool of shares, those shares are retired. 3. Stock purchase or sale a. On the secondary market - transactions between share-holders that do not involve the corp directly. The category usually isn't a significant interest in corp classes

A. Diff classes of shares: 1. Often you'll refer to class A or class B shares with respect to common stock as opposed to preferred stock, and each of those classes will have diff rights in certain respects. a. Those respects are most commonly the right to distributions of the company - in the context of the copr, call that their 'divident preference.' 2. Secondly, they will often be diffs in respect to what they would receive in liquidation a. That means if there is a bankruptcy, after all the creditors have been paid, how will whatever is left over be allocated amongst the holders of equity interest. 3. There will also be diffs in respect to the voting rights of diff classes. a. May be that a class will have exclusive authority to change those terms bc those rights only affect the rights of those classes of shares

I. Fiduciary Duties A. Duties of controlling shareholders 1. Generally: how can you owe a duty to an entity, much less to other shareholders of the entity, solely by reason of owning shares of the entity? a. Note different situations: 1) Shareholder A has 44 percent, B has 56. 2) Shareholder A has 44 percent, other 56 percent is held by diffuse shareholders B. Example 1. Sylvestri family owns 44 percent of Gable Industries, other 56 percent held by diffuse shareholders. Flintkote gives money to Sylvestri, gets controlling percentage of shares. Does Flintkote get immediate control over the board? C. Zetlin: right to receive a control premium D. Perlman, grabby looter example: 1. Seller owns 37 percent of shares, 63 percent held by diverse shareholders. Have working control. Grabby buys the shares for 10.81 per share from the seller and loots the gold. Is seller responsible 2. The same fiduciary duties as a director "apply to his as majority stockholder, for in that capacity he chooses and controls the directors, and thus is held to have assumed their liability." 3. "only if the defendants had been able to negate completely any possibility of gain by Newport could they have prevailed...fiduciaries always have the burden of proof in establishing the fairness of their dealings with trust property. a. Had the Ps rebutted the business judgment presumption? If yes, how?

A. Feldman, Newport example 1. Feldman sells controlling percentage of Newport stock to buyer. Newport has Newport plan. Newport makes steel. Newport could not raise prices against buyer, so entered into loans, long-term contracts. Is there looting? 2. What if a non-steel buyer had offered 18/share? What if, in contrast, steel buyer WAS the buyer, offered 20/share? 3. What if Feldman knew that the steel buyer would eliminate the Feldman plan? a. "if you do that, you will be liable for violating your fidicuary duty as the controlling shareholder." 4. What if the deal is 20//share, and court says the shares have a value of 14.67 per share. The excess/"corporate asset" = 5.33/share a. 14.67 is the per share "enterprise" value b. 5.33 presumably includes a permissible control premium AND a Feldman plan premium, something not cool or ok c. What, in this situation, should Feldman pay the other shareholders? 1) Feldman pays Newport 5.33*400k = 2133333? Or pays 63% shareholders? 2) What if Wilport paid 2.1 million to the 63% shareholders as compensation for dropping the Feldman plan? 5. Different facts make us lean towards Feldman being liable, not liable: a. Seller knows nothing 1) More like Feldman not liable b. Known felon is the buyer 1) More likely Feldman is liable c. Buyer is known incompetent manager 1) More likely Feldman is liable, but not overwhelmingly d. Buyer is a steel purchaser 1) more likely Feldman is not liable e. Buyer is a steel purchaser, and a non-steel purchaser offered 18/share 1) About an equal chance that Feldman is, is not liable; maybe leans slightly towards not liable f. Knew buyer would eliminate Feldman plan 1) Extremely strong chance Feldman is liable g. Knew buyer would eliminate Feldman plan and told buyer you're violating your fiduciary duty About equal chance of Feldman being liable, not liable. Maybe silghtly stronger argument he's liable.

A. Piercing the Veil 1. Why might you advise a client to place assets of a single enterprise into multiple corps? a. Segregating the assets protects them against claims made against the other entities 2. What piercing risk may be created when assets are spread among multiple corps? a. Each corp may be inadequately capitalized because their assets are spread among different entities. 3. Which would a 100% shareholder of two corps prefer: a. The veil of one corp be pierced to the shareholder b. One corp to be found liable for the obligations of the other 1) Answer: B. if one corp is liable for the obligations of the other, the P reaches both corps' assets. Piercing to the owner would allow the P to reach, directly or indirectly, both corps' assets plus any other personal assets of the owner. 4. One benefit of the parent-subsidiary structure is that the veil can never be pierced, T or F: a. F. the parent is like any shareholder, and the veil can be pierced to a parent/shareholder. 5. T or F, one benefit of the parent-subsidiary structure is that the veil can never be pierced to the parent's shareholders. a. F. Under the right facts, you can keep piercing through parent after parent and get to the ultimate shareholders, although it is unlikely that piercing will extend to a large number of natural-person shareholder. 6. In Minton, what could have substituted for a large amount of corp assets that would have protected Cavaney from the financial harm of liability? a. Insurance (indemnification would not be sufficient because the corp was bankrupt). Note that insurance would protect him from the financial harm of liability (because the insurance co would pay), not liability. In most cases, the insurance will cover his defense and the insurance co will hire and control the legal defense team.

A. Form of Organization 1 1. What business organization forms offer limited liability: a. Corp b. LL Partnership c. Limited Partnership d. LLC e. All the above (Correct answer) i. Explanation: all the above, so there are going to be other factors to determine the best form of organization 2. Limited liability extends to loans on a business that are personally co-signed by the business owner, T or F: a. F. See the Double Whammy article. This is a common mistake that you should ensure your clients don't make. 3. Limited liability will protect an owner for torts committed personally that were within the scope of their employment, T or F: a. F. Limited liability protects you only in your owner capacity and not in your employee capacity 4. What forms of protection from third party liability should directors and executives obtain from their employer: a. Stock options b. Indemnification c. Waivers d. Insurance e. Severance pay 1) Answer: B and D.

I. Business judgment presumption A. Business judgment presumption: presumption that the directors did the right thing, what they did was reasonable given the circumstances. Not a lot of cases involve claims of illegality. Second reason: self-dealing (other breach of the duty of loyalty) or other breach of the duyt of loyalty (includes stuff such as failing to take appropriate action). Third: due care - you have not exercised due care if didn't act in good faith, act on an informed basis, or actually believe that actions were taken in corp's best interests. Need a smoking gun for the third one. 1. Informed basis: where almost all claims will be brought. B. Business judgment rule: 1. Presumption that, absent illegality, self-dealing or other breach of the duty of loyalty, directors acted in good faith, on an informed basis, in the honest belief that the action taken is in the best interests of the corporation. a. Presumption: plaintiff must overcome the presumption for the court to review substantive merits of decision b. Higher than negligence standard, basically require gross negligence

A. Gagliardi example 1. Gagliardi: before co was sold, owned 75% of it. Had majority control. It's his business. Probably it's all about him, co won't be worth nearly as much under someone else's control. If he sells, it'll probably be a stipulation of the k that he stays on. After he hands it over, he only has 13%; a controlling block has 45%. 2. Moral of this story: if you're going to sell your co, then sell. Either that, or make sure you maintain control of it. 3. Business judgment rule from Gagliardi: a. "In absence of facts showing self-dealing or improper motive, a corporate officer or director isn't legally responsible for decisions made in good faith. There is a theoretical exception for egregious conduct, but that exception has result in no awards of money judgments against corp officers or directors in this jurisdiction." A. WeWork ex: a. Had a failed IPO. Bought five cos in a year before IPO. Two of those cos messed up, took stock in WeWork. That's why they should've taken cash, not stock. B. Diversification a. Diversified investor puts 100 in 100 companies. Non-diversified investor puts 10k in one company. Which investor wants directors to take greater risk?

I. Corporate Governance A. Default control: 1. The most straightforward ex of control is where you have one shareholder for a corp, where more than 50% means they have unassailable control, assuming that all have voting shares. 2. Our default rule will be that more than 50% constitutes control, generally also approval. 3. Majority control: you own 60%, you have majority control. We're assuming that more than half of the votes mean that you will win every vote - you can account for this by adding some provisions in your operating agreement, require 80% for a vote when you might only have 60%. But in this class, we'll assume that more than 50% gets you majority control. B. Working control: 1. Nobody actually owns more than 50% of voting stock but bc somebody like bobby owns such a large stake, say 35%, and the other shares are widely held, by a widely diffused group of shareholders, bobby has de facto or working control bc those shareholders are unlikely to be able to get together and vote in a block big enough to keep him from running the show. 2. Contrast to No working control: if one person has 35, another has 25, another has 40. Control will be in the hands of whichever two investors get together. 3. Working control: you own 35%, but a diffuse group owns the rest. So diffuse, no way that they will all vote together. C. Management control 1. Common for public cos. 2. Exists when you have a v, v widely diverse set of shareholders and a CEO, someone who owns a very very small stake - but by being able to control the machinery of elections and use corp assets to lobby for his preferred proposals, he will have a special type of control called managing control. 3. Even if just owns 1%, can have this type of control over the 99% super diverse shareholders. 4. Management control: Chancey has 1%, the 99% is owned by diffuse shareholders. Nobody has a decent-sized block of stock. This means that management is calling the stock - but this isn't unlimited control. If a public co does bad for years, it's likely the board will dump the CEO, notwithstanding management control, and hire somebody else. D. No working control: Chancy has 35, Joe has 25, Safely has 40. No individual shareholder has control over that entity. E. For the LLC, doesn't matter how much of a percentage someone has - they might not have that same percentage in terms of votes - you will need to look at the terms of the operating agreement. F. Some other aspects of control: this will apply to a LLC or a partnership or other type of entity where you're writing the terms of the deal yourself, where there are no default corp rules. 1. Here, it'll depend on terms of operating agreement. If shares are divided 20, 20, 60, one with a 20% may have control still even though they don't have the most shares. Depends on how control is tailored in the operating agreement

A. Key terms/concepts 1. Quorum: the number that must be present for a vote to count. No quorum, no action can be taken. 2. Entitled - has right to vote: contrast to being present 3. Present a. Present, for a shareholder meeting, means: you've cast or submitted your vote, NOT that you're present at a physical space. b. Present, at bboard meeting, means: you're physically present. c. So for quorum: the idea of being present is what matters for somebody to be counted toward the quorum 4. Approval: depends on the number of directors, or the percentage of shares that must be voted for a measure to be adopted. In general, we'll assume that this would be a majority. 5. Board voting and shareholder voting: diff rules apply. 6. Articles or bylaws: governing docs of the entity - articles are akin to the const, the bylaws are akin to the statutes. 7. Corporate governance also depends on subject matter: are we talking about an election? A bylaw provision? 8. In-class notes a. Quorum: the number of voters present to take any action. That's independent of the number of votes needed to approve an action. So as a minority shareholder, you can prevent bad things from happening just by not showing up. b. Entitled to vote vs. right to own: means you have a share attached to one vote VS being present at a meeting - present means you either are physically there or sent in your vote. This same concept applies to board meetings c. Approval: what it takes to adopt an action. d. Often the board alone can change bylaws, but board AND shareholders will often have to approve changes to the Articles (like the const). e. If you're changing something that affects a specific class of stock, often those shareholders will have to approve separately, apart from a general vote of all shareholders. f. Diff voting rights apply to the different classes of stock, usually g. How to describe the articles ex he gave us: majority is a quorum; an opt-out is in the articles, can only opt out to a higher number. Refers to votes entitle dot be cast, any subject matter h. If quorum is five, majority is needed for approval, need only 3 people to approve.

A. Drafting Tips 1 1. What term should be used to impose an obligation: a. Must b. Shall c. May not d. Agrees to e. Will f. Answer: shall 2. The following is proper drafting, T or F: lessor is entitled to receive the rent payment no later than the first of each month a. F. never use "entitled to" when describing performance to which the obligated person is entitled. Use shall: "Lessee shall pay..." 3. The following is proper drafting, T or F: the parties agree that lessor is responsible for prompt repair of apartment appliances. F - never use 'agree' or 'is responsible.' Instead, use "shall" 4. The following is proper drafting, T or F: neither party may assign the agreement. T - the use of 'may' here is correct because of the negative subjective ("Neither party). Alternatively: "The parties shall not assign the agreement." 5. The following is proper drafting, T or F: the rent shall be paid by the lessee no later than the first of each month. F - the use of 'shall' is correct, but the passive voice should not be used in this context. Instead, say Lessee shall pay

A. Minority Shareholder Protections 2 1. Minority representation on the board ensures that no action opposed by the minority can be approved a. F. representation doesn't mean majority representation, it just means you will have someone at the meeting. 2. The issuance of shares for less than their value will dilute existing shareholders' economic stake, T or F: a. T. it will always dilute their ownership stake and, because here the shares are sold for less than their value, it'll also dilute their economic stake. B. Minority protections 2 1. In an opt-in state, preemptive rights aren't available unless provided for in the articles. T. in an opt-in state, the corp must opt in by including the rights in the articles 2. Tag-along/co-sale rights entitle minority shareholders to sell on the same terms as the majority shareholder. T. the rights entitle minority shareholders to sell on the same terms as the majority shareholder. 3. Veto rights can, in effect, be accomplished by raising the votes needed for a quorum, T or F: T. by skipping a meeting (which could conceivably be a fiduciary duty violation) a shareholder can present a vote 4. A board's decisions regarding the payment of dividends is very difficult to challenge successfully a. T: a board's decisions regarding the payment of dividends is very difficult to challenge successfully. 5. To ensure that dividend payments are made when legally permissible, they must be required in the governing documents or a shareholders agreement T. they must be required in governing documents or shareholders' agreement.

I. Derivative Claims A. In-class notes 1. Harm to entity: what we're doing is looking to see if the loss would be felt by everybody in the co 2. We want the board to have the opportunity to act first, since they're elected, supposed to act. That's why we do the demand letter. 3. A complaint for derivative actions must be verified, particular in respect to the demand, reasons why not doing the demand. B. Background: fiduciary relationships 1. Recall: a fiduciary relationship exists where there is: a manifestation of consent by principal to agent that the agent shall act on principals behalf and subject to principal's control. There is consent by the agent to so act. a. Issue with derivative claims: whether directors and officers, who are ALWAYS fiduciaries, are going to be held liable bc they violated that fiduciary relationship. We discussed fiduciary rels earlier, in respect to Cargill case - question there was whether Cargill was acting as principal. NOT the issue here - directors and officers ARE ALWAYS fiduciaries.

A. Nature of a derivative claim: if you were a shareholder, who would you like to be brining claims, when would you like to be bringing claims on behalf of the corp. 1. Restated: When a corp has been harmed: who is in the best position to decide whether the corp should sue? a. Options: a single shareholder? Or the officers and directors? Who is in the best position to decide whether the corp should sue when an officer or director has harmed the corp? b. When an officer or director has harmed the corp: like when there has been embezzlement - the embezzling officer isn't in a good position to decide whether or not to bring that claim. c. Need to have some mechanism for someone other than officers or directors to make decision on whether corp should be suing over someone who harmed the corp. 1) What we essentially do: derivative claims are brought by: a shareholder who stands in the shoes of all shareholders and seeks to remedy a harm to the entity. i. We appoint a shareholder to bring a claim on behalf of all the shareholder with respect to harm to the entity, shard by all shareholders. ii. P counsel usually line up a gaggle of shareholders to sue - will inevitably lose some along the way

I. Controlling Shareholders A. Wilkes 1. Why does Wilkes prevail? B. Wilkes decision tree 1. Reasonable expectation of employment (nexus)? a. No: defendant wins b. Yes: does termination serve legit purpose? 1) No: shareholder wins 2) Yes: less harmful alternative? i. No: Defendant wins ii. Yes: shareholder wins C. Thoughts regarding Wilkes 1. Was there ever a partnership? 2. Why do the partners put the property in Springside Nursing Home Inc.? 3. '67: Wilkes receives zero dollars in distributions and terminated and director and officer; continues to try to work. What would have protected him? 4. "It must be asked whether the controlling shareholder can demonstrate a legit business purpose for its action." a. Who were the "controlling" shareholders? Were they controlling shareholders? b. How could the controlling shareholders have established a better defense? c. What other approaches might they have taken to freeze out Wilkes 5. "duties of other shareholders...appear to have changed in significant respects...recover...the salary he would have received had he remained an officer and director." a. What should the controlling shareholders claim on remand? 6. "Defendant must show legit business purpose, after which the burden shifts to the P to show that the purpose could have been achieved by means less harmful to the P." a. Could Ds have squeezed out Wilkes by merging into another entity? 7. Why does Wilkes prevail? a. Reasonable expectations? b. No legit business purpose? c. Original shareholder? d. 15 years of precedent (business conduct)?

A. Nixon 1. How would the Nixon court have decided Wilkes? a. Self-ordering, shareholder agreement (buy-out provisions, voting trusts) b. Independent legal significance of Close Corporations subchapter B. Wilkes (1976) = it's a fiduciary world. Nixon (1993): it's a self-ordering world C. ReliaStar 1. What is control? a. Majority stake? b. Working control? c. Exercise of voting power alone? d. Enough of your directors voted against your interests to decide the outcome? e. ALL of your directors voting in your interests? 2. "...SVS has not alleged any wrongdoing by ReliaStar through its designated directors; raher, the alleged harm stems solely from the purported abuse of ReliaStar's contractual right to withhold its consent...and veto any dividend payments..." a. What if all but one of ReliaStar's directors voted against paying a dividend but the majority still voted in favor? b. Were the ReliaStar directors really voting against ReliaStar's interests?

A. What is a quorum for shareholder action? 1. MBCA § 7.25. QUORUM AND VOTING REQUIREMENTS FOR VOTING GROUPS (a) Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the articles of incorporation provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. § 7.27. GREATER QUORUM OR VOTING REQUIREMENTS (a) The articles of incorporation may provide for a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is provided for by this Act 2. DGCL § 216 Quorum and required vote for stock corporations. Subject to this chapter in respect of the vote that shall be required for a specified action, the certificate of incorporation or bylaws of any corporation authorized to issue stock may specify the number of shares and/or the amount of other securities having voting power the holders of which shall be present or represented by proxy at any meeting in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business, but in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting, . . . In the absence of such specification in the certificate of incorporation or bylaws of the corporation: (1) A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum . . . 3. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 What is the minimum number of affirmative votes required for each type of stock and/or the directors to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001?

A. Number of shareholder votes necessary for approval? 1. MBCA § 7.25. QUORUM AND VOTING REQUIREMENTS FOR VOTING GROUPS . . . (c) If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation require a greater number of affirmative votes. 2. DGCL § 216. Quorum and required vote for stock corporations. . . . In the absence of [an alternative] specification [of votes required to approve a matter or elect directors] in the certificate of incorporation or bylaws of the corporation: . . . (2) In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders; 3. Assume Snapbuzz has the following shares outstanding: a. Common Stock: 6,000,000 b. Series A PS: 100,000 c. Series B PS: 100,000 d. What is the minimum number of affirmative votes required for each type of stock and/or the directors to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001? Approval by the majority of directors present at a meeting that has a quorum. e. Approval Quorum MBCA DGCL 7,000,000 * 2/3 = 1 4,666,667 2,333,334 100,000 * 2/3 = 1 66,667 33,334 4. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 What is the minimum number of affirmative votes required for each type of stock to pass an Articles amendment to change Snapbuzz's name from Snapbuzz Incorporated to Snapbuzz Inc B. Things to know: 1. Quorum • Entitled to Vote or Present •Approval • Board / Shareholders •Voting Class •Articles or Bylaws • Subject Matter

I. Piercing the veil A. The most important thing for piercing the veil is to remember that there will always be bankruptcies where creditors can't collect the standard roll is that business owners should be allowed to try and to fail B. an example of piercing the veil: Greenman v. Yuba - This was a product liability case; a here is a quote from it: the purpose of such liability is to ensure that the costs of Injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves. C. Another example of piercing the veil: Martin: a company has a lease on a swimming pool. Somebody is injured while visiting the pool. 1. When will the veil be pierced? There are four situations in which the veil will be pierced: a. 1) Commingling. b. 2) holding out. c. 3) inadequate capitalization. d. 4) active participation 2. Holding out = This refers to the owner representing or otherwise stating that they will be responsible for the liabilities of the entity. That is the owner shows or promises that he's personally responsible. This may occur because the owner makes a personal promise to pay. 3. Inadequate capitalization: company doesn't have enough money to pay and therefore a plaintiff doesn't have the ability to fully recover from that company 4. Active participation: owners actively participated. Note: one of these four reasons is not itself sufficient to carry a claim of piercing the veil. We typically require there to be at least two for there to be successful piercing claim 5. Martin is a case of "a trifling level of capitalization." 6. The second factor in Martin aside from the lack of capitalization was the fact that the director was also the owner and was also a shareholder and he kept records. Hot Springs it adequately capitalized to do what: pay off creditors. More specifically: "it seems obvious that one of the "risks of loss" Referred to was a possibility of drownings due to the corporations negligence and the defendant's failure to provide such assets or any fund for recovery resulted in his being held personally liable." Martin raises the fact that not all creditors are the same; this in turn raises the question of whether or not they are all equally deserving of protection.One top of creditor is a lender. A lender is able to look at a company's books evaluate their credit and decide whether to take on a risk. Another top of creditor is an involuntary creditor. An example of involuntary creditor is someone who suffers a tort due to the actions of the company. In other words an involuntary creditor is one who uses a businesses facilities but hasn't agreed to the risks that go along with that use. Courts tend to be much more sympathetic to involuntary creditors.

A. Piercing the veil successful claims almost always involve either closely held firms or entity shareholders 1. Entity shareholders = parent companies 2. Piercing the veil claims almost never succeed against shareholders of widely held entities, such As for example IBM B. Piercing the veil is the exception to the fact that there will be bankruptcies and owners should be allowed to try and fail C. The most common piercing the veil factor is inadequate capitalization D. Piercing the veil means reaching the assets of owners to spot their limited liability status E. Walkovsky v. Carlton: In this case Carlton had multiple cabs and put them in separate entities. The benefit of this was that each entity was protected from the others liabilities. The problem is that in this case the tort victim sued the other entities. This approach is not actually piercing the veil. A correct piercing the Ville approach would be to directly sue Carlton. That way you can be sure to still get to the other entities assets. 1. Enterprise liability? Maybe. This may be a case where the court funds this is a single organization. But enterprise liability usually is not a real cause of action in the United states. This case reminds us that piercing the veil means piercing to the owners as owners, not the other entities in an enterprise. F. Luckenbach Co: This case is another example of enterprise liability. In this case the owner stroked his business so that his steamships were in one entity. He had another entity which was recharge of leasing the ships. The court implied that there was liability to spot the fact that there was no pure piercing argument. Here, there were overlapping directors and offices. This fact would have been useful if there really was a piercing argument. 1. Another problem in this case was it the owner only owned 90% of the company's shares there were other shareholders that held the 10%. G. To conclude: 1. There are different factors that support a piercing argument: a. 1) Formation to avoid liability for events or occurrences that happened before the organization existed. b. 2) inadequate capitalization. c. 3) Co mingling - no separately held corporate assets; diversion of assets to personal use. d. 4) Representations of personal liability. e. 5) active in management. f. 6) disregard of legal formalities. g. 7) Closely held business or patent (indirect factors). h. 8) same shareholder/directors/offices of multiple entities (indirect factors).

A. Board approval: number of votes necessary to approve an action: 1. MBCA § 8.24. QUORUM AND VOTING (c) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of incorporation or bylaws require the vote of a greater number of directors. 2. Explanation: a. 1) quorum when vote taken b. 2) majority of number present (arts or bylaws opt-out > majority c. 3) any subject matter d. 4) no class reference 3. DGCL § 141 a. b) . . . The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number. 4. Explanation: a. 1) quorum at meeting (not when vote is taken) b. 2) majority of number present (articles or bylaws opt-out > majority c. 3) any subject matter d. 4) no class reference. B. Election of directors: Quorum and approval: 1. DGCL § 216. Quorum and required vote for stock corporations. a. . . . In the absence of [an alternative] specification [of votes required to approve a matter or elect directors] in the certificate of incorporation or bylaws of the corporation: . . . (3) Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors; . . . A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors. 2. Explanation: a. Quorum When Vote Taken b. Plurality of Votes Present (Abstentions Do Not Count) c. Articles or Bylaws Opt-Out (directors cannot amend bylaw amendment) d. Director Election Only e. No class reference

A. Practice Problem 1. Assume Snapbuzz has the following shares outstanding: Type of Stock Shares Outstanding Common Stock: 6,000,000 Series A Preferred Stock: 100,000 Series B Preferred Stock: 100,000 What is the minimum number of affirmative votes required for each type of stock and/or the directors to pass an Articles amendment to change the par value of Snapbuzz's common stock to $0.001? B. How do you amend the articles? 1. MBCA § 10.03. a. AMENDMENT BY BOARD OF DIRECTORS AND SHAREHOLDERS If a corporation has issued shares, an amendment to the articles of incorporation shall be adopted in the following manner: (a) The proposed amendment must be adopted by the board of directors. (b) Except as provided in sections 10.05, 10.07, and 10.08, after adopting the proposed amendment the board of directors must submit the amendment to the shareholders for their approval. 63 Corporations Articles Amen 2. Explanation a. Approval by Board first b. Approval by Shareholders 3. DGLC § 242. a. Amendment of certificate of incorporation after receipt of payment for stock (b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner: (1) If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment [or direct a vote at the next shareholder meeting. . . provided, however, that unless otherwise expressly required by the certificate of incorporation, no meeting or vote of stockholders shall be required to adopt an amendment that effects only changes described in paragraph (a)(1) or (7) of this section. 4. Explanation a. Advised by board b. Approval by shareholders unless (a)(1)-(7)

A. Form of Organization 2 1. Principals are responsible for the actions of their agents within the scope of the agency, T or F: a. T. 2. What organizational form subjects its owners to double taxation: a. Limited partnership b. LLC c. Partnership d. Corporation e. S Corp 1) Answer: D. Corps are taxed on their income; shareholders are taxed on that income when distributed (ie dividends) 3. A business owner might benefit from double taxation if: a. The entity tax rate is very high relative to the owner's rate and the entity does not plan on making distributions. b. The entity tax rate is very high relative to the owner's rate and the entity plans on making significant distributions c. The entity tax rate is very low relative to the owner's rate and the entity plans on making significant distributions. d. The entity tax rate is equal to the owner's rate and the entity plans on making significant distributions. e. The entity tax rate is very low relative to the owner's rate and the entity does not plan on making distributions 1) Answer: E. The effect of E might be to reduce the net tax on the owner's income because the entity can keep re-investing its after-tax profits, which are higher when the corp tax rate is lower. 4. An entity that is not subject to double taxation is a: a. Withholding entity b. Pass-through entity c. Immune entity d. Gross-up entity e. Transparent entity 1) It is a pass-through entity because the entity's taxable income is not taxed at the entity level, but rather is passed through the entity to its owners, who then pay the tax. 5. The limited partnership form is appropriate when the limited partners expect to participate actively in management, T or F: a. F: limited partners may lose limited liability if they participate actively in management 6. Why are the sole proprietorship and partnership forms of organization almost always a poor choice of form? Choose one, best answer: a. Limits on the number of partners b. No limited liability c. Automatic dissolution upon death of proprietor/partner d. Less attractive form for outside investors e. Filing with the state not necessarily required 1) Answer: B. Answers A and C-D are potential disadvantages; the lack of limited liability is almost always a disadvantages. 7. A partner in a partnership is personally liable only for their actions and not for the general obligations of the business, T or F: F: A partner is personally liable for the obligations of the partnership. A partner has unlimited liability.

A. Preincorporation Liability 1. What factors would support a finding that a party was estopped from denying the existence of a corp: a. Reliance on the credit of the corp rather than that of the individual counterparty b. Dealing with the counterparty as a corp c. Absence of any indication of individual counterparty's assuming personal liability d. Lack of individual counterparty's actual knowledge of defective incorporation e. All of the above 1) Answer: E, all the above 2. If the promoter learns, after signing an agreement, that the incorporation documents had not been filed, he cannot claim estoppel, T or F: a. F; she could argue estoppel, which depends on what the counterparty thinks, as long as she did not know at the time that he signed that the corp had not been formed. 3. Which defenses might be available to an individual who signs an agreement on behalf of a corp before the incorporation docs have been filed: a. De facto corp b. Preincorporation liability c. Estoppel d. Enterprise liability e. Principal liability 1) Answers: A and C. he might prevail under the de facto and/or estoppel theories depending on whether facts supporting those defenses applied. 4. Which theory would the CEO of a defective corp argue after signing a k incorrectly believing that the incorporation docs had been filed? a. De facto corp b. Preincorporation liability c. Enterprise liability d. Principal liability e. Partnership liability 1) Answer: A. the individual might also argue estoppel. The counterparty would argue preincorporation liability. 5. If an entity's representative thought the entity was dealing with a corp when signing a k with the corp's putative CEO, and the CEO knew at that time that the articles for the corp had not been filed, then: a. The entity can recover from the person because the person didn't use or exercise corporate powers b. The entity cannot recover from person because the person didn't make a good faith effort to incorporate c. The entity cannot recover from the individual because it believed it was dealing with a corp d. The entity can recover from the person because the person knew that the corp didn't exist e. The entity can recover from the person because the person didn't make a good faith effort to incorporate 1) Answer: D. the equitable doctrine of estoppel would apply but for the fact that the CEO doesn't have the clean hadns necessary to benefit claim equity. 6. The promoter unknowingly signs an agreement before the articles of incorporation have been filed. There is a law authorizing incorporation, and the promoter has acted in good faith as as if the corp existed. There is no evidence that the counterparty believed it was contracting only with the corp. under what theory would the promoter argue that she was not liable under the k? a. Preincorporation liability b. De facto corp c. Estoppel d. Principal liability e. Enterprise liability 1) Answer: B. the facts match the elements of a de facto defense. If there was no evidence that the counterparty believed it was contracting only with the corp, then estoppel would not apply. 7. The promoter signs an agreement before filing incorporation docs. The promoter has acted in good faith but not acted as if the corp existed. The counterparty believed it was contracting only with the corp. under what theory would the promoter argue they were not liable under the k: a. Preincorporation liability b. De facto corp c. Estoppel d. Principal liability e. Enterprise liability 1) Answer: C. estoppel is supported by the promoter's good faith (clean hands) and the counterparty's belief it was dealing with a corp. a de facto defense also might succeed, but this theory is weakened by the promoter's not having acted as if the corp existed. Some courts will not accept a de facto defense if incorporating docs have not been filed, in which case only an estoppel argument could prevail.

I. Pre-incorporation liability A. Plaintiff can use the "no entity" argument to say that there was no entity, no LL. The defendant business can use it as a shield to say that an entity was about to be formed, that the k was with that entity B. What if the P builds a bridge, and the bridge co refuses to pay? It is now the P that wants there to be an entity. The defendant will then be arguing, as a shield, that there was no entity.

A. Preincorporation liability refers to liability that exists prior to the formation of a ll entity. 1. Preincorporation: almost always talking about k conflicts in these cases. Actual k text in Geary: "It is understood by the parties hereto that it is the intention of the Purchaser to incorporate. Upon condition that such incorporation be completed by closing, all agreements, covenants, and warranties contained herein shall be construed to have been made between Seller and the resultant corporation and all documents shall reflect same." 2. How would we write a pre-incorporation k? Here are exs: a. Under this version, the promoter is bound until the corporation is formed and adopts the contract: "Builder shall build a taco stand and deliver it to Chancy on or before October 10, 2021. Chancy shall pay $10,000 to Builder no more than 10 calendar days after the taco stand is delivered to Chancy. If CJS Taco Stand LLC ("CJS") adopts this Agreement, then Builder releases Chancy from any liability under this Agreement, and Builder shall deliver the taco stand to CJS." b. Corporations Sample Unilateral Offer - Under this version, the promoter assumes no liability by having the counterparty make a unilateral offer to be accepted by the corporation: "Builder offers to build a taco stand for CJS Taco Stand LLC ("CJS") in return for CJS's payment of $10,000 to Builder received no more than 10 calendar days after the taco stand is delivered to CJS. Builder shall complete and deliver the taco stand on or before June 1, 2017." c. Under this version, the promoter assumes no liability by having the counterparty make a unilateral offer to be accepted by the corporation: "Builder offers to build a taco stand for CJS Taco Stand LLC ("CJS") in return for CJS's payment of $10,000 to Builder received no more than 10 calendar days after the taco stand is delivered to CJS. Builder shall complete and deliver the taco stand on or before November 15, 2021." Note: When does this offer expire? d. Under this version, the promoter assumes no liability by having the counterparty make a unilateral offer to be accepted by the corporation: "Builder offers to build a taco stand for CJS Taco Stand LLC ("CJS") in return for CJS's payment of $10,000 to Builder received no more than 10 calendar days after the taco stand is delivered to CJS. Builder shall complete and deliver the taco stand on or before November 15, 2021. This offer expires at 5:00 pm EST on the earlier of: (1) November 1, 2021, or (2) 10 calendar days after the date that CJS Taco Stand LLC is formed."

I. Principal-agent Relationship A. There are three types of business relationships we need to know: 1. Principal - agent. 2. Parent - sub. a. What are the factors that make this diff from agent rel: 1) 1) natural persons don't have directors, but parents do - if the parent has the same directors as the sub, that'd be a factor in favor of piercing - if they have the exact same directors. 2) 2) if they run out of same offices, have the same address - not a lot of separation, then we will pierce. 3. Partner - partnership.

A. Principal-agency relationship often arises in a relationship with there is some fiduciary relationship. 1. A fiduciary relationship exists where there is: one party who owes a heightened duty to the other party that is above the normal standards of commercial conduct. 2. That fiduciary rel often exists where an agent is a fiduciary of a principal, where there has been a manifestation of consent by the principal to the agent that the agent shall act on principal's behalf and subject to the principal's control. a. Key here for our purposes is the idea of control. If the principal is exercising that control, it will be deemed responsible for the agent's actions that occur with the scope of that agency.

A. Quiz 2 1. In a sole proprietorship, who is responsible for the business's contracts with third parties: a. The sole proprietor 2. In a sole proprietorship, who is liable for the business's torts a. The sole proprietor 3. What will defense counsel file in response to a complaint: a. A motion to dismiss 4. Why does discovery matter in litigation: a. It's costly, risky, burdensome 5. Along with contracts and torts, what is a third source of important legal duties for businesses: a. Administrative or regulatory law, and you should consider taking at least one regulatory class 6. What is arguably the single greatest invention of modern times: a. The LLC 7. What is the mechanism most commonly used to protect business and personal assets from third-party claims: a. Insurance 8. What are the four most significant weaknesses of insurance as a form of protection against liability: a. 1) loss not covered; 2) loss exceeds coverage; 3)claim denied; 4)insurer fails 9. Proper organizational planning will protect which category of assets of the business owner: a. The assets used in the business b. The owner's personal assets (correct answer) 10. Limited liability protects the business owner for torts he commits himself while acting on behalf of the company, T or F: a. F. 11. What is the triumvirate of protection from claims that you will advise every business owner client to have: a. Insurance; limited liability; indemnification 12. What does an indemnification obligation running from a business to an employee accomplish: a. It obligates the business to pay any liabilities of the employee arising out of his employment 13. How do I get limited liability for a business: a. You choose the correct organizational form 14. What will Ps get if they survive a motion to dismiss a. Discovery

A. Quiz 3 1. What is leverage: the amount of a business's debt relative to its equity 2. What does it mean to have priority in bankruptcy: to be a creditors whose claims are satisfied in bankruptcy before the claims of another creditor 3. What is a secured transaction: a loan where the lender takes a security interest 4. What is a secured transaction: a loan where the lender takes a security interest in an asset of the borrower 5. What is a security interest: what a secured creditor has "in" a specific asset when the creditor has claim to that asset superior to that of other creditors. 6. What is a secured creditor: a creditor of a business that has a security interest in the property of the business. 7. What are liabilities: the fixed claims of third parties in a business; usually able to be satisfied by a financial payment. 8. What do we call the part of the balance sheet that represents the value of the shareholder's stake: shareholders' equity 9. What appears on the left side of the balance sheet: assets 10. What is double-entry bookkeeping: a financial accounting rule where every change in a balance sheet must be offset by a matching change somewhere else on the sheet.

I. Drafting practice - Jack and Jill ex

A. Right of first offer: no stock shall be sold or transferred unless or until the majority shareholder has the first opportunity to purchase them at the most favorable terms as offered to a third-party. Jill shall not offer he shares more than one in any six-month period. After such six-month period expires, the stocks may be sold to any third-party. THIS: is an ex of phrasing for a proper right of first offer. The last part, "after such six-month period," is confusing - makes it seem like after a time period of him not accepting you have to have made the third party sale. B. Long options: corporate opportunity, stages of pre-incorporation, de-facto and piercing. C. There IS a penalty if you go over word limits. D. Permissive: "May" instead of "shall.

A. Board meeting quorum: minimum number present necessary to take action: 1. MBCA § 8.24. QUORUM AND VOTING a. (a) Unless the articles of incorporation or bylaws require a greater number or unless otherwise specifically provided in this Act, a quorum of a board of directors consists of: 1) (1) a majority of the fixed number of directors if the corporation has a fixed board size; b. (b) The articles of incorporation or bylaws may authorize a quorum of a board of directors to consist of no fewer than onethird of the fixed or prescribed number of directors determined under subsection (a). 2. Explanation: a. 1) Majority (arts or bylaws opt-out greater than or equal to 1/3 b. 2) number of board slots c. 3) any subject matter d. 4) no reference to class. 3. DGCL § 141 a. b) . . . A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors. 4. Explanation: a. 1) majority (Arts and bylaws opt out > majority; bylaws opt out - less than or equal to 1/3 unless inconsistent with articles) b. 2) number of board slots c. 3) any subject matter d. 4) no reference to class

A. Shareholder approval: number of votes necessary to approve action 1. MBCA section 7.25: Quorum and voting requirements for voting groups a. (c) If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless th articles of incorporation require a great number of affirmative votes. 2. Explanation: a. 1) quorum b. 2) yes votes > no votes (abstentions on't count; articles opt-opt > plurality) c. 3) any subject matter except director election; d. 4) no class reference 3. DGCL § 216. Quorum and required vote for stock corporations. a. . . . In the absence of [an alternative] specification [of votes required to approve a matter] in the certificate of incorporation or bylaws of the corporation:. . . 1) (2) In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders; 4. Explanation: a. 1) quorum when vote taken (majority of votes present; abstentions count; arts or bylaws opt-out) b. 2) any subject matter except director election c. 3) no class preference

A. Class notes 1. Quorum = majority of the board 2. Approval = majority of those present 3. What this means is that you can have a quorum, but a minority shareholder's interest might or might not get approval depending on WHICH PART of the majority has showed up. Depends on how 'minor' they are, and how big the quorum req is. The bigger the board/quorum, less likely that you can pull a coup. 4. Yes/no standard: have to have a quorum. In the ex he put up, where there's 1.2 million shares, don't have 6k votes, so no quorum. a. Under majority of votes case standard: would need 2k +1. b. Fb bylaws ex: plurality means more yes votes than no votes. Don't worry about absentions here. For all other matters/not election votes: this is the same thing as saying that there are more yess than nos. 5. In bankruptcy: secured interests, other debtors, preferred shareholders. That why VCs want preferred stock 6. Election of directors ex "directors shall be elected by a plurality..:" req is majority of votes that are present, if there's a quorum. Plurality = yess or nos. if nobody is running against CEO, then, CEO only needs one 'yes.' Snapbuzz ex: we're changing the value of common stock. Common stock will be affected, so they should get to vote. Will have one big vote of all the shareholders, then probably also have a specific vote of either series A or B.

A. Shareholder meeting quorum: minimum number present necessary to take action: 1. MBCA § 7.25. QUORUM AND VOTING REQUIREMENTS FOR VOTING GROUPS a. (a) Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the articles of incorporation provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. b. § 7.27. GREATER QUORUM OR VOTING REQUIREMENTS 1) (a) The articles of incorporation may provide for a greater quorum or voting requirement for shareholders (or voting groups of shareholders) 2. Explained: a. 1) majority (articles only, can opt out higher) b. 2) entitled to be cast c. 3) any subject matter d. 4) class matter? Class quorum 3. DGCL § 216 Quorum and required vote for stock corporations. a. Subject to this chapter in respect of the vote that shall be required for a specified action, the certificate of incorporation or bylaws of any corporation authorized to issue stock may specify the number of shares and/or the amount of other securities having voting power the holders of which shall be present or represented by proxy at any meeting in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business, but in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting, . . . In the absence of such specification in the certificate of incorporation or bylaws of the corporation: 1) (1) A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum . . . 4. Explained: a. 1) majority (articles or bylaws opt-out greater than or equal to 1/3) b. 2) entitled to vote c. 3) any subject matter d. 4) does not reference class matters.

I. Corporate governance A. Why don't venture capitalists like LLCs: 1. Transfer is more difficult/complex 2. Option grants are more difficult 3. Certain investors may not want pass-through tax 4. Less predictable legal regime 5. Explanation a. Why do venture capitalists do not like LLC: 1) transfer is more difficult/complex (gotta get into the agreement, figure out how the co works). 2) option grants are more difficult (want options so you can incentivize employees) 3) certain investors may not want pass-through tax. 4) less predictable legal regime B. Why don't venture capitalists like S Corps: 1. No preferred shares 2. No more than 100 shareholders 3. Most entities excluded as investors 4. Same pass-through tax issue 5. Explanation a. Why VCs don't like S Corps: 1) no preferred shares (when VCs invest, they get preferred stock; it's preferred in two senses: 1) you get dividends first; 2) give you a preference in liquidation - you go ahead of common stockholders). 2) No more than 100 shareholders (VCs want an IPO, get 100s of investors). 3) most entities are excluded as investors (VCs aren't human beings). 4) Same pass-through tax issue (ghost tax issue). b. This is why C corps are the preferred vehicles for VCs.

A. Sources of corp law 1. State law (MBCA/DGCL) 2. Public companies a. Federal securities law 1) Proxy solicitations b. Exchanges 1) NYSE: Majority of independent directors 3. Explanation of some terms 1) Public companies = reporting cos; file annual quarterly reports, filed on the securities exchange website. 2) Proxy solicitation: goes out in the mail, says we're having a shareholder vote, here are the issues, we need you to vote. It's a proxy solicitation bc it's asking you to let management vote for you. Very tightly regulated by the SEC. B. Structure of corporate law 1. Required/prohibited 2. Required with an opt out option 3. Not required with an opt-in C. Types of interests in business: 1. Corporate "shares" or "stocks" 2. Partnership "interests 3. LLC "units." 4. Issuance of money: a. Cash distributions (for corporations, "dividends") b. Stock issuance/repurchase (buyback) 1) Why would you buyback: if a co thinks that its shares are undervalued; buy them back for 10 dollars, when they think they're really worth 15 c. Stock purchase/sale 1) Stock purchase/sale (third party transactions, in the secondary market

A. Preincorporation, Estoppel, and De Facto Corporation 1. T or F, a well-drafted preincorporation k would ensure that the entity became a party to the k upon its formation a. F. the entity would become a party only upon adoption of the k, not upon formation 2. An entity's adoption of a k automatically relieves of liability any promoter who had signed the agreement, T or F: a. F. there must be a provision that expressly relieves the promoter of liability upon adoption by the entity; otherwise, the promoter remains bound 3. Employees can be held personally liable for ks they sign on behalf of their employer, T or F: a. F. only the employer would be a party to the k. the employee was not a party 4. Under the CJS Taco Stand LLC operating agreement, how would the LLC adopt a k for building the taco stand? a. A majority of the LLC interests would have to approve the LLC's adoption of the agreement b. Safely and either Joe or Chancy could vote to approve the LLC's adoption of the agreement c. Meeting and approval by members would be necessary, although only a majority vote would be needed d. Chancy would exercise his individual authority as Manager to cause the LLC to sign the agreement e. According to the k's terms, the LLC would be bound upon its formation. 1) Answer: D. Under Section 5.03, Chancy has the individual authority to bind the LLC to such agreements.

A. Structure of Corporate Law 1. T or F, the law that governs shareholder relations is the law of the state in which the business is organized, not where it operates: T. the "internal affairs" of the corp are governed by the state of organization 2. Limited liability company law allows business owners a great deal of flexibility in setting rules for managing the business's internal affairs, T or F: a. T (and it is the lawyers who are responsible for getting the rules right) 3. T or F, the most popular "foreign" state for forming a business is Delaware: a. True. 4. Public companies need only be concerned about state law as to the governance of their internal affairs: F. public cos also need to consider federal laws that govern tender offers, disclosure and voting rights (proxy solicitations) 5. An "opt out" corporate law provision typically imposes a requirement that a corporation can choose to change in its articles of incorporation, bylaws, or both: a. True. An "opt in" provision would be one that authorized a corp to adopt a procedure or rule but that did not require it.

A. Two kinds of dilution: 1. Ownership dilution a. the kind of dilution that occurs when a co issues new shares b. Ex: 1) Start with a business with 10$ assets; it has ten shares outstanding. Needs to raise cash, plans to issue new shares. Co sells five new shares for a dollar each. Fifteen shares outstanding now, co is worth 15$. In this case, ownership dilution has occurred bc the owners of the original 10 shares have a small share of ownership than before. Og shareholders ten shares, which represented 100% control, only represent 2/3 stake. Don't control as decisively as before. This dilution is esp problematic if the ten shares are owned by three diff people, but the new five are owned by one. This transaction, note, doesn't cause any eco dilution 2. Economic dilution a. occurs when new shares are issued at too high or too low a price b. Ex: co is worth ten dollars, there are 10 shares outstanding. That means they are worth a dollar per share. If the co sells new shares for a dollar, either new shares or shareholder will be diluted. Say five new shares are sold. c. What if new shareholder pays too little for the shares: imagine she pays just 2$ for five shares. Value of co rises to 12$. She receives 5 shares, 1/3 of co's value. So each of her shares are now worth 4$, twice what she paid. Og shareholders have seen the value of their shares have gone from 10$ to 8$. Two dollar loss. What if new shareholder paid too much: shareholder pays 14$ for five shares. Co worth 24$, but would own only 1/3 of its shares. Six dollar loss. Og shareholders are now worth 16$. When this type of dilution occurs, the shares are called watered stock = shares sold for more than their value.

A. The reason a shareholder might pay too much or too little: investment based on an inaccurate evaluation of the co. 1. Consider now the company inflated its value, says it's worth 28$ instead of really 10, there are 10 shares outstanding. If shareholder makes 14$ investment, that comprises 7/12 of the actual price, when she thinks she just has 1/3. 2. When co is undervalued, says it's worth 4 instead of 10. New shareholder pays 2$ for five shares. The value of her 1/3 share is equal to the 2$ she contributed. However, the correct value is ten: her investment is only 1/6 of the co's value, but she owns 1/3 of its shares. Og shareholders shares now worth just 8$. 3. Preventing economic dilution depends on an accurate pre-money valuation. Best way to stop dilution is to make sure the valuation is as correct as possible. B. Ownership dilution: usually occurs when new shares are issued and can affect control of the company. C. Economic dilution: occurs when an incorrect pre-money valuation is used and can result in an economic loss. Need not occur when a co issues new stock.

I. Introduction A. Sole proprietor: only owner, operator of a business. He's personally exposed for all the liabilities of the business. He'll want to make sure that business is in a limited liability structure. If Chancy is sued bc of the company, he loses personal assets, esp his house. 1. Is chancy protected by LLC if he fires somebody for their race: No. because in that situation, hes wearing the individual tortfeasor hat. Individual tortfeasors will still get sued. 2. Another ex: if he didn't clear the ice from in front of his business, he's individually negligent: yes, he's still liable as tortfeasor. Is he liable when wearing a shareholder hat: no, not even for the race issue. a. If an individual failed to clear the ice, he can't be sued as a shareholder, only as an individual B. Trade creditor: somebody supplying materials for widgets. If trade creditor sues a business with a sole proprietor: Chancy will be personally liable for this obligation bc he's a sole proprietor. If he had incorporated, could it get anything from him individually: no. they can only get the business's assets, not personal assets C. Philo question: should corps have limited liability? The persons who actually were pressing the buttons aren't responsible D. Steps in a civil case: dispute, demand letter, complaint/motion to dismiss, SJ motions, trial, judgment, appeal 1. Survive motion to dismiss, then you get discovery. That's costly, risky, burdensome. E. The limited liability will protect the house, but not the business's assets 1. Also: if you're a sole proprietor, you won't be inclined to invest in a lot of enterprises, put the business in the hands of more people, because you can't watch all those people, and you're on the hook. That means without limited liability, we won't make cars, vaccines. 2. Say somebody falls on the ice and dies. The tort victim will sue Chancey, because he was in charge of the truck, and he didn't clear the ice. He's NOT liable as a shareholder, though. That victim, also, will be an involuntary creditor (unlike a supplier). F. Respondeat superior: businesses/employers responsible for acts of employees G. If chancey pushes somebody down intentionally; is he liable as the shareholder: no. as the tortfeasor: yes. 1. He can wear a lot of hats - tortfeasor, CEO, director, shareholder. There are different situations that will trigger liability for each of those hats.

A. Ways to protect your business (the "Triumvirate of Protection") 1. Insurance a. There are limits on insurance!!!!!!! b. Limits of insurance: 1. Loss not covered, 2. Loss exceeds coverage limits, 3. Claim denied, 4 insurer fails. i. Loss not covered ex: Covid. ii. Ex of claim denied: sometimes insurance cos just deny claims. iii. Coverage exceeds limit: not a lot of litigation about amounts; but there is litigation about amounts as a result of an event, series of events. iv. 2. Limited liability 3. Indemnification a. Indemnification: business will pay the judgment if employee is sued in their job capacity. B. Corporations are people; they can sue and be sued, can own assets, enter into contracts and assume debts and other liabilities; can commit torts; can make campaign contributions; has free speech rights; has exercise of religion rights 1. Businesses are the biggest players on the political, economic scene C. If chancy is the only shareholder, says an asset is worth more than it is: no defrauding, because he's the only shareholder if he tries to go get a loan, though, or sell shares, then that'll be a problem. D. All of the decisions of a corporation are the responsibility of the board of directors. Smaller decisions are CEOs. This is why we can have situations where CEOs are liable, but not directors 1. Chancy, let's say, will appoint himself to the board and some of his siblings. 2. Once you issue stock to executive member, they buy shares, put in money. Issued shares in return for the money. It's really important to know what the value is before you issue the stocks. E. If borrow money from the bank: bank will get an endenture/loan agreement. 1. That agreement entitles the bank to a fixed claim in principal interest. the stockholders have a residual interest. if business does well, they'll get money back after paying the bank. Vv, shareholders will be last in line in the bankruptcy window. F. Debt/equity ratio: it IS a ratio. G. Bank wants to get ALL their money in bankruptcy. They need a secured interest, which means they go first in bankruptcy. If there's nothing left after that, then too bad for everybody else that's owed money. 1. If you need to get a second loan, you'll want as many of your assets as possible not tied up in secured transactions, so you can offer them to that new lender. 2. Secured creditor: a creditor that has a secured interest in a business; higher priority than unsecured creditors. 3. What's left over after assets and liabilities (like bank loans): shareholders' equity

A. Staggered boards 1. MBCA § 8.06. STAGGERED TERMS FOR DIRECTORS The articles of incorporation may provide for staggering the terms of directors by dividing the total number of directors into two or three groups, with each group containing 1/2 or 1/3 of the total, as near as may be practicable. In that event, the terms of directors in the first group expire at the first annual shareholders' meeting after their election, the terms of the second group expire at the second annual shareholders' meeting after their election, and the terms of the third group, if any, expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting held thereafter, directors shall be chosen for a term of two years or three years, as the case may be, to succeed those whose terms expire. 2. Staggered boards impede takeovers 3. Staggered voting downside: you can't take over an entity all at once. Problem: if you want to turn around a company, make it more profitable, it'll take a long time to get control of the board. 4. Staggered boards impede takeovers - prob is that takeovers can be beneficial, bc assets then will be put to their best and highest use. Downside: people take over, fire employees, sell the shell of the co. 5. In terms of who gets to vote for staggered voting: record date - the date on which you own the shares is when you get to vote. The fact is that if you own shares with a record date, and vote happens on a date that's not your record vote, don't get to vote. We basically allow vote buying, bc people can go out and buy a bunch of stock on the record date, then can vote them long after they maybe have sold them. They just bought the votes for a day by owning the shares for a day. 6. Question - if you buy stock on x date, there's a gap between then and your record date (like buying and closing a house). So you'll want to buy the shares before the date 7. If you "settle" the votes on Wed, the record date, do you vote: Yes. What if you get record date the day after the vote: No. you may have bought them, but don't own them. 8. Who gets dividends? People who own the shares on the record date. Dividends are earmarked for a particular record date; if you own shares after that date, the co may still have that money if payment date hasn't occurred, but you won't get it bc that money is earmarked for something else

A. Who gets dividends? 1. Timeline: declaration and announcement; record date; payment date 2. What does it mean to own shares on the record date for purposes of receiving a dividend? 3. There is a gap of time that exists between the purchase of stocks (contract to buy but not owner yet_ and the "closing" of that purchase (gains title; takes two business days approximately after purchase). a. What does it mean to have purchased rather than own shares on the record date for purposes of receiving a dividend? B. Record date ex 1. Timeline is Mon, Tues, Wed, Thurs. Wed is the record date. If buy on Mond, own shares on record date. Tuesday then would be the ex-dividend date. But tues purchasers won't own till Thurs. a. Ex-dividend purchase (or later) means you will not be record holder on the record date for purposes of receiving a dividend I. Cumulative voting A. DGCL Section 214: Cumulative Voting. The certificate of incorporation of any corporation may provide that at all elections of directors of the corporation, or at elections held under specified circumstances, each holder of stock or of any class or classes or of a series or series thereof shall be entitled to as many votes as shall equal the number of votes which (except for such provision as to cumulative voting) such holder would be entitled to cast for the election of directors with respect to such holder's shares of stock multiplied by the number of directors to be elected by such holder, and that such holder may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any 2 or more of them as such holder may see fit.

I. Types of organization A. Why are LLC the most popular LL form: limited liability, tax issues, simplicity and cost, flexibility B. Sole proprietorship and general partnership: neither of these forms will give LL. C. Limited partnership: ll is available. But it has a more complex structure - has to have a general partner as one of its partners, and the rest are limited partners that must be passive investors, can't be involved in the decisions of the partnership. So: general partner has unlimited liability. The limited partners have LL. How do we solve this: you can organize the general partner as a corporation, some other LL form. But that's still complex. D. Limited liability partnership: not necessarily available in all states. And some states provide a partial shield, instead of a full shield, for liability. What that means: the partial shield would only give liability, for ex, for the works of your fellow lawyers, not for acts concerning, say, your lease. Also, some states limit this organizational type to professional entities. E. C Corporation: two disadvantages - subject to corporate formalities, double taxation. Corporate formalities: there are a lot of formalities under state law for corps that you don't have for other entities. Double taxation - corp is taxed at its income on the corporate level. Then, after it distributes to shareholders, shareholders are taxed again at an individual level. Contrast to LLC/S Corp: LLC/S Corp isn't taxed at the corporate rate. F. S Corporation: very popular form. Has four problematic reqs: can't have more than 100 shareholders - can't be widely held. Generally, the shareholders can only be individual persons. 3. They can only have one class of stock. 4. Corporate rules/formalities apply. G. LLC comes out as our top choice: all states have an LLC statute, has LL, simple structure, flexible form without mandatory details in statutes H. Why do large businesses end up incorporating, then? If you want to be big, you need capital. To get capital, you need investors, venture capitalists. Venture capitalists usually insist they invest in corps. They like corps because there are predictable rules/precident; also, get to avoid accounting complexities of pass-through taxation. Also, you can get favorable capital gains treatment. Also, venture capital firms are not eligible to invest in S corps, and they require preferred stock. Finally, corporate share are generally more transferrable than those of non-corps

I. Corporate taxation A. Sole proprietorship pays direct tax. C corp pays double tax. These pay the pass-through tax: partnership, LL partnership, limited partnership, LLC, S Corp B. Pass through tax: owners are allocated their share of income. Tey pay tax on that income - regardless of whether they receive any cash distributions. Hence, owners may pay tax, in effect, on "ghost income." C. Double tax (C Corp): the corp pays tax on its income. Owners pay tax ONLY when they receive distributions or sell their shares. D. Three different approaches to taxation of businesses: direct, pass-through, double E. Direct tax: equivalt to paying tax on income earned. F. Pass-through tax: entity won't pay an entity tax, but its owners will be allocated their pro rata share, will pay tax on that the year the entity earns that money G. Double taxation: applies to corps; pays an entity tax, the money will be subject to a second tax after that money is distributed to shareholders

I. External responsibilities - de facto incorporation/estoppel: when there's been an attempt made to create a ll entity. A. De facto: what was done to make it appear that the person was thinking of doing business as a copr. B. Estoppel: what did x THINK C. De facto: there are three elements that comprise a de factor corporation: 1. Law exists for corp creation; 2. Good faith (turns on the fact that the CEO "Thought" the ll entity had been created. One act that would give you this status is filing the doc to create an ll). 3. Conducts business as a corp. (fact in Cranson case: rec'd stock cert.; had corp seal/min. books; corp bank accounts and auditor; elected and acted as president). a. Ex of not having good faith: he knew he hadn't filed docs, bylaws, etc. b. Estoppel: this is an equitable doctrine (wouldn't be fair to reach x result) key is whether a third party was thinking of the entity as a corp or an individual. D. Estoppel (argument with de facto): it would be inequitable to deny the existence of the Corp. note: to benefit from equity, you must have clean hands E. To go along with estoppel: 1. MBCA § 2.04: All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. Note: What does this imply about someone who doesn't know there was no incorporation under the Act? 2. MBCA § 2.04: All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. 3. ULLCA § 304: (b) The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or liabilities of the limited liability company. Pre-incorporation issues hinge on the question of, although there is no legal entity, should we presume an entity for litigation purposes

I. In-Class notes on external responsibilities A. External responsibilities: preincorporation liability, de facto corporation (some effort was made to make a corporation; owner will argue there was one), piercing the veil (if, despite the fact that there's definitely limited liability, you get the benefit of that, or it's taken away because you did a bad thing) 1. Preincorporation liability: no LLC (Geary) 2. De facto corporation: act as though there was an entity B. Preincorporation: there's no Corp, no argument that there should be. We'll be looking at a k, where a party thinks the k actually protects it. In Geary: there's "condition" language that makes k promises dependent on incorporation: no food faith argument to incorporate yet. Estopppel question: is it fair to make the defendant pay. Argument: how would you write this k - two ways: 1) person is bound til the Corp is formed and ADOPTED the k, aka either keep the dole proprietor on the hook til the Corp is formed and takes over the k or say the Corp ONLY will be liable when it's adopted it. C. You have to have been incorporated to adopt a k. FORMATION IS NOT ADOPTION. The entity has to take action once it exists. D. Sample unilateral offer: they make an offer that can only be accepted by the Corp E. Exam question: you'd have assurances, letter of credit from the bank. Problem: doesn't say how long the money has to stay with the entity. F. (Cranson) de facto Corp: estoppel is a big issue - is it fair. There's a defense here: you TRIED to create a Corp, limited liability. Alternatively, you can make fairness arguments: why wouldn't it be fair for you to be served. There are three elements to de facto: 1)law exists where you could in fact make a Corp. 2) you acted in good faith. 3) you conducted business as though you were an entity. Another factor: what you actually did to try to incorporate. If you know you haven't filed your docs, that won't be good for you. Ex's of good behavior: ordering stationary, signing "ceo" on stuff G. Estoppel: an equitable doctrine. "What's just." We don't want somebody to randomly get a windfall. Question is what's in the plaintiff's mind, did they think they were conducting business with an entity. If so, thought they'd be recovering from an entity, D should get entity protection. If they saw minute books, a ceo signature, thought they were dealing with an entity. 1. Estoppel argument: if D knew Corp docs hadn't been filed: don't have clean hands, not fair that you get to use estoppel on them.

I. Some basic facts concerning corporate law A. Key source of corporate law is state law. The MBCA has been adopted in a majority of states outside of DE (model business corporation act) B. Public companies: refers to a company's obligation to file reports with the securitie and exchange commission. Subject to fed securities law that often trumps state law. C. Securities excahnges, like NY stock exchange, often have their own rules required beyond fed securities laws, for businesses listed on that exchange D. Three types of provisions: require/prohibit a particular thing for a corporate (these requires/etc may often have an opt out provision. The provisions also generally permit something. E. Articles of a corps: they can supercede a corp's bylaws. Articles are like the corp's const, the bylaws are like its statutes.

I. Under what circumstances can an owner, wearing their "owner hat," be held liable for an entity's actions A. There are three main doctrines: 1. Pre-incorporation 2. De facto corp./estoppel 3. Piercing the veil B. Under what circumstances do these doctrines arise C. What facts are dispositve to the determination of shareholder liability D. External responsibilities - when is X responsible for the liabilities of Y? When is an owner responsible for the liabilities of the business? Answers: when there is no ll entity, when there is no legal entity (pre-incorporation liability), entity loses ll, entity is an agent or partner

· Potential drafting questions - Right of first offer - did it in class, is very hard. Issues can include how many times can a minority shareholder make an offer in reliance on this provision after which the majority shareholder can sell the shares. Make sure you have EVERY PIECE of what's requested in there. · DEI: along the lines of the same questions we did in class - Ex: you think you've put a female director on the board, but self-identifies as male, what do you do. That's a judgment kind of question, won't have a specific rubric. Represent it to client, don't take a position on rule on your client's diversity. Do NOT reveal your personal hand. Sit down with director, ask how they self-identify, describe req, take blame with how you thought they identified. Don't mean to embarrass them, make sure that they just checked the right box. - Another approach: kept confidential everybody's form, so you don't know which director identified as woman/man. You'd have to go to each director in succession to decide who had identified as what, make sure they had marked correct box. That's not ideal. Take responsibility for any mistakes, assumptions you made. - How would you bring board into compliance: do math, follow relevant provision. Can add a female, or might be in the j where you only have to have x females. But look at one of the directors is going to be retiring soon, if you could make hem retire soon because of a mandatory retirement age - you know that this board problem will go away in a year anyway bc they'll be retiring. Another option: you can kick the problematic person off the board. Raise that option to you client, tell them what you think, note that it isn't that great of an option.

· Controlling shareholders - Fiduciary duty of controlling shareholders - Group, as a "majority group" might have a duty to not fire someone. - Nixon: cts will want to apply a contractual approach that says you have ability to protect yourself by adding into organizational docs this agreement that the person said is in play, about your employment. Never an issue about getting fired when wearing a shareholder/employee hat, bc you'll make sure that there is an agreement in place on what to do if the person does get fired - Wilkes remedy: get compensation you're entitled to - Perlman remedy: - If dissolution remedy: might need some remedy, like depriving Wilkes and BOlvik of their livelihood - BOlvic: left his job to join the company. Good fact in his favor. - BALVIC - Reliastar case issue: ct takes the position that you're only a controlling shareholder if that is evidenced through the board doing what you want. - ReliaStar: had probiison in organizational docs that said a controlling shareholder had right to veto a dividend. - REMEMBER: ReliaStar is JUST about whether or not we find that you're a controlling shareholder. Does NOT mean that you win the entire litigation. Remember to walk through this control question whenever you have a fiduciary duty in a context where a dividend is being refused (not a loyalty, self-dealing problem). - Wilkes: had three people vs. one.

In-Class notes on controlling shareholders - ReliaStar

a. Raises question of whether somebody really has control. What the answer fo whether somebody has control: if they have majority stake, they always have control. In this case, don't have maj stake. b. Ct: if they had a majority, wouldn't have an issue, have control, then we'd move on to whether they breached fiduciary duty. Just have working control over the board. c. In this case, their directors voted one way, but shareholders voted against what he directors voted. Directors were unanimously opposed to what controlling shareholder wanted. So can't say that directors were influenced by controlling shareholder's power. If you don't have a controlling shareholder, don't have a fiduciary duty, EVEN THOUGH we have working control, and that control isn't evidently being exerted by the board. d. Issue: if the board does not vote your way, you are exercising your control as maj shareholder ONLy as a voter, so you should be able to vote in your self interest, not voting under the shadow of the fiduciary duty that's owed to the directors. e. What if: some of the directors that you elected that have control of the board voted in your favor, other didn't, there were enough ohers that you still have not exercised control and changed the outcome. Does ct still say there's no duty owed bc not exercising control? Can argue that the outcome is not changed even by exertion of power over board. f. Analysis: it has to be a DECISIVE use of controlling shareholder's authority for there to be fiduciary duty. Your exercise of control has to be THE THING that led to the board not paying a dividend - have to keep all your directors in line. That's the only way you would've breached your fiduciary duty. g. So in reality, you want all your directors to vote against the dividend, later use veto power, not as controlling shareholder, dividend isn't getting paid. So there's a logical disconnect here h. If exercise of control is only measured by how your directors vote, can only be proven if their votes decide what happened, then what you want them to do is for all of them to vote against your interest, thereby stripping you of control and the duties that go along with it. i. In this case, all the directors voted for the dividend, contrary to controlling shareholder, ct said that controlling can now just use his vote, and won't impose fiduciary vote on him. Bullard thinks that doesn't really make sense. j. C assuesm that exercising your VOTE SOLELY has a shareholder, use the size of your stake, means that you have no fiduciary duty. k. The reason that you can exercise control: there's a contractual provision that says your x% is enough, don't need to make a bunch of diffuse shareholders work with you l. Another way to look at it: not a controlling shareholder if your control of the vote can be used successfully without any shareholders, bc that gives you veto power. Idea then of contractual right being bargained for, if there's a k provision that says your x% is enough to control. m. This case says you're exercising your contractual right, and only your contractual right, to get what you want n. Instead of looking at how directors behave, should instead look at what power does your power to decide if dividends are paid comes from. If you require 90% for a divided to be paid, a 10% can stop the divided from being paid. Aka, stopping the dividend is a completely different exercise of power bc is totally unconnected to our idea of working control - is ordered by what that number is in the k. o. Preferred stock: has a lot of k provisions. But fiduciary duties still apply. p. If you're controlling shareholder, you owe fiduciary duties to other shareholders. Working control can be viewed as conrollign shareholder telling the shareholders what to do. q. Might really "win" if they all vote against your position - that means, in analysis, hat you don't have control.

I. Forms of organization A. For each form of organization, consider these factors: 1. Limited liability 2. Tax 3. Simplicity and cost 4. Flexibility 5. In-class notes on applying and evaluating forms of organization a. Come up with list of reasons why each type of organization will/won't be good for that taco stand ex we have b. In the double whammy case: LLC didn't protect businesses; the banks went after individuals, because they personal co-signed the loans. That completely wipes out the power of LL. c. Different forms of organization: sole proprietorship, partnership, LL Partnership, Limited Partnership, LLC, S Corp, C Corp (CHECK THIS) ONE MORE. Surprise, the answer is LLC d. Taco stand ex: Safely is the equity - she was a say in and veto power over fundamental decisions, no exposure to liability. e. What about sole proprietorship: virtually should never be used because of unlimited liability to individual. f. Partnership: have to have a general partnership. If you set up general partnerhip, can get to human beings behind that general partnership. Not as complex. g. Limited partnership: has to have a general partner. The corp has to be a general partner, but do NOT have to have a general partnership. The shareholders, then, are protected. If GPI is general, though, there is no protection. Little more complex, have to actually file things.

a. What's the issue with passive investors? You lose their limited liability for those investors if they make decisions. Safely wants to be a limited partner. b. If Safely really wants to play a role in business's decisions, limited partnership won't work, because she won't be a passive investor c. Limited liability partnership: partial shield problem - we won't extend the general partner's torts to you, but you can still be on the hook for some liabilities. Some states say only professional orgs, like firms, can use this bype of organization. Problem: what if you have a business, then go to a state with a partial shield? Even if you're in a full shield state og, a plaintiff can still go after you in the partial shield state. d. C Corporation (or just Corporation): double taxation and corporate formalities. Double tax: we have an entity tax AND an owner tax on the same entity. The entity is having to pay taxes twice. What happens when you odn't have double tax issues: the partners pay tax, not the entity. Alt to double tax entities: tax gets paid by the owners, the entity never pays a tax. e. Double tax ex: corp will pay 20% tax rate corporate tax. LLC doesn't pay corporate tax. Corp then only has 80 to distribute to shareholders. After the dividend goes to shareholders/owners, there is a 20% individual tax. ALSO: the LLC isn't required to even give the owners enough to pay the tax. f. Slides illustrate that corps' after-tax owner income will be a lot lower. g. Why would you even choose double taxation: there can be differences in the tax levels; corporate tax rate might be 10%, individual tax rate is 50%. LLC won't be a good thing, bc they'll pay 50% on ALL the LLC income. h. The corporate form also doesn't have to make up its rules; corporate codes have already set out a lot of how to run things. Venture capitalists like that - they know what they're getting. i. Eliminate ghost income problem: can write a provision in operation agreement that'll prevent Safely from having to pay taxes. j. Double taxation quiz 1: 375 v. 500. After individual tax rate: corp is still poorer; but individual taxes will be less. Individual taxes are paid on what was distributed to owners. k. Ghost income problem: will you have enough to pay the individual taxes, subtracting the dividends you have to pay to owners/shareholders. l. S corporation: S is disfavored because you can only have a max of 100 shareholders (means a "no" for venture capitalists), generally inidivudla shareholders only, one class of stock, corporate rules apply. Venture capitalists won't like this because they want you to eventually have an IPO, initial public offering, you can have tons of shareholders. Generally only individual shareholders: venture capitalists are entities. One class of stock: the rights an dobligations that each of the investors has is pro-rata; won't have a second class, where someone has say different voting rights. m. Safely has 60% of 100k, so only has 60k, even though she put in 80k. if only 60k is left after fire sale: she only gets 60%o f the 60k. Safely should have a provision in the operating agreement that she gets her money back first, before anybody else. n. The winner: LLC o. How will you organize LLC: in every state, ther eis an office. File something with that state, comply with its reqs, for an LLC.

In-Class notes on controlling shareholders - Nixon

a. Ct distinguishes between common law treatment of closely held businesses, where you'll get to re-write the deal if you're abused by your minority status. b. Independent legal significance: if corp laws says you can do an acquisition, you can do it even if you couldn't do it in another way. aka, use a diff structure to squeeze out the shareholder - circumvent. Indep legal significance = if the legislature has given you the ability to squeeze out somebody in A way, even if you couldn't do it with approach B, can still do it with A, bc each transaction have indep legal significance.

even more exam review

- Business judgment presumption: not only applicable to van gorkum. But also for plastics question. If have fiduciary duty, we have this presumption. - Perlman = duty of loyalty problem. Clear benefit to him, clear detriment to other minority shareholders bc he sold the corporate asset. - What part of the price constitutes control premium, what part is the corp asset. Assuming that Perlman got all the value of the corp asset, Perlamn owned 37% of corporate asset; could only send 63% of the loss of the other shareholders in a check to them, bc that's all they had anyway. Clue in problem, decline in stock price, as to the value of the corp asset to the company. Might estimate how much of the sale price is control premium, how much is for sale of corp asset. - Perlman will always get stock price value, control premium. VERY IMPORTANT - If Perlman gets 20 million, loss of asset was 5 million, how much of the 20 million was paid to Perlman? Can assume of all of it. Assume 5 million was for sale of asset, that's a five million loss to entire company. Perlman owned 37 percent of that company, so PErlamn is entitled to be paid 37% of the damages. PErlamns 20 million, five mill of that is corp asset, have to give it back to corp. give thirty-five percent of 5 million back to Perlman, the other shareholders get the rest. That's how to do it. VERY IMPORTANT - 102b7, 122(17) are often confused. B7 ONLy covers directors, duty of care, is written as an exclusion, covers duty of care - written as 'can't recover except for doing really bad stuff;' only what's left over are duty of care claims. This JUST covers writing a check, not asking CEO to remove an officer. - 122(17) is NOT about liability; it's about whether there's a breach, if there is even a corporate opportunity to be breached. If no opportunity, then there can't be a breach for taking it. - Ski resort in NH, wanna open one in NE, but don't care about CO. want something hat kinda splits the difference. Could say "nothing west of MS." Could also say "in PA." so what you're looking for thinking about 122(17) provision that is tailored to get person on the board without unnecessarily restricting ability of company to seize opportunities it only wants for itself. Write the provision for both sides, so that both are protected.

I. Diversity A. In-class notes 1. Socrative: board diversity regulation 2. Note that since George Floyd, a lot of companies haven't even changed their boards. Of those that have, what sorts of changes are they making? 3. Charts show that businesses have started appointing more black directors. 4. There will eventually be questions: is there discrepancy between the apparent composition of the board, how the board itself identifies (bc a lot of diversity now is due to self identification). 5. Another tension: eventually a white male will argue they're being discriminated against 6. Board diversity - important to understand the diff tween reporting companies that report their diversity stats and public companies. 7. How you become a reporting company? Need to create market for shares leads to listing shares on national securities exchange; this leads to registration of shares under the exchange act, which requires reporting. Other reasons listed on slides

1. Almost first look at diversity rules: figure out if they apply to your client. 2. Board diversity rule 407 applies to reporting companies. 3. California ex: we know from other statutes that it applies to domestic corps that have their offices in CA. poorly written thing here. 4. WA ex: drafted so that we start with a broad definition, then have a bunch of exceptions, so a small number of businesses are actually the only ones affected 5. The way the CA statute is written: can just have one person that satisfies multiple categories. Aka, black woman can count as both a woman and a UC. This creates an incentive to hire "intersectional" people. What's the potential problem here: you'll look like you're doing as little as possible. 6. One theoretical problem: you have three bio women, but after an anonymous survey, you find out that one of them self-identifies as male. What do you do 7. NASDAQ 8. If you have a minority women, can only satisfy one of the boxes you're supposed to check. If you have a sucky client: always explain things to them in terms of public opinion and how that could affect them.

DEI Quiz

1. Which type is NASDAQ's board diversity rule: a. Mandatory quotas b. Meet quotas or explain why you haven't c. Meet quota or disclose board diversity policies d. ANSWER: B 2. Which type is Washington State's board diversity rule: a. Mandatory quotas b. Meet quotas or explain why you haven't c. Meet quota or disclose board diversity policies d. ANSWER: C 3. Which type is California's board diversity rule: a. Meet separate quotas for 1) women and 2) underrepresented minorities or LGBTQ b. Meet single quota for women c. Meet single quota for women, underrepresented minorities or LGBQ d. Meet single quota for women, underrepresented minorities or persons with disabilities e. Meet separate quotas for 1) women and 2) underrepresented minorities or persons with disabilities f. ANSWER: A 4. Under CA's board diversity rule, a minority woman can be considered for both the female quota and the underrepresented minority/LGBTQ quota a. True. This is not, though, the case for the NASDAQ rule.

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· Do we have limited partnership in addition to LL partnership? YES!!! · All material we need for forms of organization question is on slide. Winner of best form will be LLC. Corporate formalities - based on the facts of our fact pattern, we want to tailor our organizational docs. Can't do that with corporate formalities. We will have set of facts like taco stand facts. Need flexibility. · External responsibilities - Can be treated "as if" entity wth de facto, estoppel. - May end up with liability for third party with piercing the veil. - In the case of two entities: might be liable for another if there's an agentive relationship. - Preincorporation liability quiz: - Unilateral offer: maybe given an acceptance of offer within specific date. Drafting problem: don't use "agrees;" "shall" in the middle - promoter will no longer have any responsibility.for ex on slide: get dates right. - Van Gorkum question: duty of loyalty, duty of care, etc. - Preincorporation: not an issue that person has made a good faith effort like with de facto (good faith argument that you filed articles, believed you had). - PTV: identify at least two factors. - Preincorporation: means before there's any argumentation, really. The question then will be what does the agreement SAY. Only out: piece of paper indicates that I'm not the one on the hook, but rather the entity is. - For de facto: key issue taking steps to file docs; opening corp account; corp headings. - Estoppel: what a third party thinks, believes they're dealing with. · Agency - Cargill agency problem. - Breakdown into actual authority vs. apparent authority. - E of both apparent and control: McDs doesn't totally own you, but tells you that you have to wear their uniform. Apparent - wearing uniform. Actual - have to follow their orders. Another ex: if you have a book laying out telling the company what to do from another company, apparent authority might again be triggered. · Articles amendment - Preferred stock - how to we factor in B, other types of stockholders · Preemption and dilution · Cumulative voting - USE THE FORMULA ON THE SLIDE · Van gorkum - Business judgment presumption - Is there a fiduciary duty - directors have them - Board has fiduciary duty to act in company's best interest - For a motion to dismiss: was a demand made, yes or no, walk through decision tree regarding the decision. He'll tell you facts to show whether or not directors are conflicted.