BA Quiz 2

Smith v. Van Gorkom

BOD approved merger (sale) of corp. at a 2-hour meeting based solely on the representations of the CEO. The directors did not have any documents summarizing the merger, nor did they have justification for the ultimate sales price of $55 per share. The shareholders brought forth a lawsuit challenging the directors' decision for the merger as uninformed. RULE: Though under the business judgment's a corporation's board of directors are said to make decisions that are fully informed and in good faith in the best interests of the corporation, that presumption is rebuttable in DE if P's can show that the directors were grossly negligent in that they did not inform themselves of "all material information reasonably available to them" such as info. Regarding the value of a corporation. Here, the evidence rebuts the business judgment presumption, as the merger was not made under a fully informed basis.

Baatz v. Arrow Bar

Baatz brought suit against Arrow Bar and the Neuroth's for the injuries they suffered when a patron of their bar collided with them after having been served drinks. RULE: Where there is no evidence that recognition of a corporate entity would produce injustices and inequitable consequences, the court may not pierce the corporate veil and hold individual shareholders personally liable. Here, no reason to pierce the corporate viel.

Consumer's Co-op v. Olsen

ECO failed to maintain its account with Consumer's Co-Op. ECO was founded by Chris Olsen and his parents owned shares. Despite nonpayment, CCO continued to extend credit. CCO then sued the Olsen's, seeking to pierce ECO's veil. RULE: Generally, the default rule is that a w/drawing partner or LLC member is entitled to fair value for her ownership interest int eh business, but the parties are free to vary this arrangement in their K. When the members of the LLC have clearly agreed to a contrary arrangement apart from the default rules, that agreement trumps the default rule. Delaware LLCA § 604

Bay Center Apartments Owner, LLC v. Emery Bay

Facts: Bay Center (P) and PKI (D) were co-venturers in a condo development project. P and D formed a LLC for which PKI was responsible for overseeing the project and enforcing the development manager of the project to perform its obligations under the K. The LLC agreement had ambiguous language. The agreement said that the members should have the same duties as prescribed in the DLLCA, but also said that the members did not owe each other any duty of any kind. The project failed. Bay Center sued PKI for breach of the implied covenant of good faith and fair dealing, breach of K, and breach of fiduciary duty. R → In order to alter or eliminate fiduciary duties, the agreement must use clear and unambiguous language. An agreement may not waive/rid of the implied covenant good faith and fair dealing. Here, agreement did not unambiguously eliminate the duty, nor may the implied duty of good faith and fair dealing be waived, so motion to dismiss on D's behalf not granted.

Fisk Ventures, LLC v. Segal

Facts: Segal (D) founded Genetrix, LLC and retained 55% of Genetrix's Class A Membership interest. Fisk held much of the Class B interest, along with Fisk Ventures, LLC, (P) which was controlled by Johnson. The Class B members had a "Put Right" clause in their contracts, which stated that at any time, they could sell back to Genitrix any or all of their Class B interests for a price determined by an independent entity. Segal felt that the Put Right contractual clauses scared off potential investors, but despite his multiple requests, the Class B members refused to suspend their Put Rights. Genetrix was failing, so Fisk brought suit for dissolution. Segal filed counterclaims, charging that Fisk breached the LLC agreement and the covenant of good faith and fair dealing implied in the agreement by allegedly blocking Genitrix's chances at funding. → Section 9.1 of the LLC agreement stated that no member has any duty to any other member, except as expressly set forth in the LLC agreement itself, and that no member is liable for damage to the company unless it is the result of gross negligence, fraud, or intentional misconduct. R → (1) An LLC agreement regulates the terms by which members control the LLC, and a court will not insert itself into the agreement to decide which member's business judgment was more in line with the LLC's best interests. (2) The fiduciary duties of an LLC member or manager may be expanded, restricted, or eliminated by the LLC agreement. Here, LLC agreement eliminated fiduciary duties so there are no plays. The implied covenant of good faith and fair dealing does not apply if the matter was not bargained for, like the Put Right clause!!!!!!!!!!

R&R Capital, LLC v. Buck&Doe Run Valley Farms

Facts: The Russet brothers formed and managed two New York LLCs (the New York Entities) (P's). They also contributed funding to nine other entities, all Delaware LLCs. The New York Entities were not themselves members of two of the Delaware entities, Pandora Racing, LLC and Pandora Farms, LLC (the Pandora Entities) (D's). The New York Entities were, however, members of the other seven entities (the Waiver Entities) (D's). The Waiver Entities had identical LLC agreements. Each noted that the members recognized that "irreparable damage would occur" if a member sued for judicial dissolution of the company. Therefore, the agreements stated, each member "waives and renounces such Member's right to seek" a court-ordered dissolution. The Russets caused the New York Entities to petition the court for either dissolution of the Delaware LLCs or appointment of a receiver once relationships deteriorated. Pandora Entities claimed that the New York entities lacked standing to seek dissolution b/c they were not members of the Pandora Entities. The Waiver Entities claimed that the right was waived. R → 1. DLLCA § 18-802 provides that a member or manager of an LLC may petition the Court of Chancery for a decree of dissolution whenever the LLC is unable to conform to its LLC agreement—only a member or a manager of a LLC has standing to seek a dissolution. 2. Members of an LLC may waive their right to seek judicial dissolution through the LLC agreement. Here, there is no standing for the dissolution for the Pandora Entities and dissolution was waived with the Waiver Entities. Application for dissolution can be "by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement." DLLCA §18-805 grants any creditor, member, or manager of an LLC the right to seek a judicial appointment of a receiver. Could do this in R&R, but they want to end the relationship.

Elf Autochem North America, Inc. v. Jaffari

Member brought purported derivative suit against limited liability company and its manager, alleging breach of fiduciary duty. SC of DE held that 1) limited liability company was bound by agreement defining its governance and operation, even though company did not itself execute agreement, 2) contractual provisions directing that all disputes be resolved exclusively by arbitration or court proceedings in CA were valid under LLC Act

Aronson v. Lewis

Meyers is the Defendant and Lewis the P. Meyers made transactions that had no valid business purpose. Meyers is giving money to someone who is no longer part of the company. RULE: "demand futility" - if you can show that the board is not independent of Mr. Fink, then can show that there was not futility. The idea is that there is reasonable doubt about the two factors listed on 334. There is a two-prong test: 1) Are the directors disinterested? 2) Substance of the claim? This rule is pro-director making it difficult to bring the action against directors. · Why is there reasonable doubt about the directors being disinterested? o The shareholders did not plead with particularity the facts because there has to be specificity when pleading fraud. Here, the court said that there was not particular enough information to allege sufficient facts. · What about the 50% stock ownership? o The court said that this was not enough · Disinterested? o The court says the burden is on the plaintiff to show that the directors are disinterested.

Olson v. Halvorson

Olsen, Halvorsen, and Ott met to discuss the formation of a hedge fund called Viking Global. They orally agreed to form Viking Global. As part of the agreement, it was clear that if a partner left, they would have no equity in the business and would only get accrued compensation. VG later formed multiple LLC's. Olsen proposed several times that departing founders to be paid an earnout in addition to the agreed upon amount. The proposal was never approved. Olsen was dismissed by VG. Olsen demanded an earnout. RULE: Generally, the default rule is that a w/drawing partner or LLC member is entitled to fair value for her ownership interest in the business, but the parites are free to vary this arrangement in their K. When the members of the LLC have clearly agreed to a contrary arrangement apart from the default rules, that agreement trumps the default rules. Delaware LLCA § 604

U.S. v. Best Foods

Procedural History: The district court found that CPC was directly liable under CERCLA as an operator of a hazardous plant because of the degree of control it exercised over Ott's operation. - Used the "actual control test." { The appellate court reversed, holding that a parent could only be liable for a subsidiary's operation of a plant if state law piercing requirements were met, or if the parent and subsidiary operated the plant as a joint venture. - Used the "piercing standard." { The United States appealed. { Remanded by the United States Supreme Court to the lower court for the application of the appropriate test. Facts: Ott owned a manufacturing plant which polluted the area with hazardous chemicals.Ott later became a wholly-owned subsidiary of Bestfoods. Ott and Bestfoods had common directors and officers. One Bestfoods employee dealt with the environmental risks of the plant. The Environmental Agency (EPA) brought suit against Bestfoods, the parent corporation, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act. R →A parent corporation may not be held liable for a subsidiary's actions under CERCLA unless state law piercing requirements are met, but the parent may be held directly liable if the parent itself exercised significant control over the facility. Thus, the appropriate test is the operating test, a.k.a. the "direct operation test." Bestfoods may be liable if it directly operated control over Ott.

VGS, Inc v. Castiel

Procedural History: First time before the court. Facts: Castiel (63%), Ellipso (11%), and Sahagen (25%) were all members of the VGS, LLC. Quinn was later hired as a manager along with Sahagen and Castiel. When the relationship soured, Sahagen convinced Quinn that Castiel could not run the LLC properly, and Sahagen and Quinn, without notice to Castiel, merged the LLC into VGS, Inc. (D). The other LLC ceased to exist. Sahagen went from owning 25% to owning 62.5%. The only reason that Sahagen and Quinn did not give Castiel notice of the merger was because Castiel had the ability to remove Quinn as manager and certainly would have if he had been given notice of the merger. R → Although the LLC Act does not require members of an LLC to give notice to another member before acting by written consent on behalf of the LLC, the acting members violate their duty of loyalty to the fellow member if they do not give the member notice of the action when the action is adverse to him and he would be able to prevent the action given his controlling role in the LLC. Delaware court imposing equitable powers. Here, the exclusion was a violation of Sahagen's and Quinn's duty of loyalty.

Kaycee Land and Livestock v. Flahiv

Procedural History: First time before the court. Facts: P allowed Flahive Oil to use the surface of Kaycee's property, D allegedly contaminated Kaycee's property. Kaycee brought suit against the managing member Flahive, seeking to pierce the limited liability veil of the LLC. R → An aggrieved party may pierce the LLC veil in the same manner as it would pierce the corporate veil.

Kahn v. Portnoy

Procedural History: First time before the court. This case will not be dismissed based on 12(b)(6).Facts: Portnoy (D) was the director of multiple companies, including HPT which owned real property to TA, LLC. to operate truck stops. HPT acquired Petro Stopping Holdings L.P., and then, TA acquired Petro. Portnoy and the other defendants were directors of TA. Alan Kahn (P), a shareholder of TA, brought suit, alleging that the terms of the Petro Lease Agreement were more favorable to HPT than to TA because the lease required TA to pay above-market rents to HPT, which benefitted Portnoy as an HPT director. A typical REIT capitalization rate of 7.5% would result in $49 million annual rent, but this agreement would result in TA paying an annual rent of $62 million at a 9.5% capitalization rate. → TA's LLC agreement said that it was adopting the fiduciary duties "identical to that of a board of directors of a business corporation organized under the DGCL." However, in another section of the agreement, the duties were modified to say that the board of directors decision would be presumed as a sound business judgment and as in line with fiduciary duties. There was ambiguity as to whether fiduciaries duties were eliminated as to all directors decisions or was not applicable to conflicts between a director and the LLC. → The exculpatory clause in the LLC would only allow directors to be liable for a breach of a fiduciary duty if they did not act in good faith. R → (1) Where the application of language in a LLC agreement aims to modify duties of directors under Delaware law, it must not be ambiguous. Otherwise, it will not rid fiduciary duty requirements. (2) A director does not act in good faith if the director acts with the subjective belief that her actions are not in the best interest of the company, such as when she is acting for the benefit of a related person at the expense of the of the company...this is "classic, quintessential bad faith."

Zion v. Kurtz

Procedural History: The trial court found for Zion (P).The appellate court reversed, the Court of Appeals granted certiorari. The New York Court of Appeals reversed, finding in favor of Zion. Facts: Kurtz (D) was the sole stockholder for a close corporation. Zion later acquired all of the group's Class A stock and Kurtz retained the Class B stock. Zion and Kurtz entered into a shareholders agreement where it was stated that the company could not engage in any business or activities without the consent of the Class A stockholder, i.e. Zion. The agreement was to be enforced by Delaware law. Kurtz agreed in writing to act in line with the agreement. Despite that, the board of directors approved two agreements without Zion's consent. Zion sued to have the agreements cancelled. The agreement was not incorporate into its certificate of incorporation. R → In a Delaware corporation, a stockholders' agreement requiring a minority shareholder's consent prior to undertaking any corporate business or activities is valid and enforceable, even though the formal steps required by statute to establish a close corporation have not been taken, because DGCL permits a close corporation to restrict the powers of directors'. It is permissible to take away management functions from directors—it is not against public policy. Under DGCL § 141(a), a corporation's affairs must be managed by a board of directors, unless otherwise provided for under the law or in the corporation's certificate of incorporation. DGCL §§ 350-351 states that, in a close corporation, a written agreement between a majority of the stockholders is not invalid simply because it restricts or interferes with the board of directors' powers.

Klang v. Smith's Food & Drug Centers

Procedural History: The trial court found in favor of SFD. Affirmed on appeal. Facts: Smith Food & Drug Centers corp. entered into a merger and repurchase agreement with another supermarket. Before completing the merger, SFD had an opinion issued as to the company's solvency. The opinion found that SFD only had liabilities totaling $1.46 billion, showing a positive of $346 million. After the repurchase agreement and merger, a balance sheet showed that SFD having a negative net worth—the $1.46 figure did not include current liabilities of $372 million. Klang brought a suit on the behalf of the shareholders alleging that SFD violated DGCL § 160 because it caused an impairment of capital, which was evidenced by the balance sheet. Trying to say that deal was bad. R → As a general rule, DGCL § 160 forbids a corporation from repurchasing its shares if doing so would cause an impairment of capital. An impairment occurs if the amount spent on repurchase exceeds the corporation's surplus, defined as the amount by which net assets exceed the par value of all outstanding shares of stock. The corporation's balance sheet, presenting the company's assets, liabilities, and owners' equity at a particular point in time, is not conclusive evidence of the presence or absence of impairment. Here, there was no impairment of capital.

Ramos v. Estrada

Procedural History: The trial court found in favor of the Ramoses and Estrada appealed on the grounds that the agreement constituted a proxy, which expired when Estrada revoked it. Affirmed on appeal.Facts: Broadcast Group partnered with Ventura 41. Each group owned 50% of Television Inc. The Ramoses (P's) owned 50% of the Broadcast Group/25% of Television Inc. and Tila Estrada owned 10% of the Broadcast Group/5% of Television Inc. The members of the Broadcast Group entered into an agreement to vote all of their shares in Television Inc. the same way as determined by a majority of members. Estrada later voted with Ventura 41 members to remove Ramos as president after he was elected to the position. The Ramoses sued for a breach of K. R → Pooling agreements are valid and specifically enforceable even if one of the parties seeks to get out of the agreement. Here, this a pooling agreement, which does not constitute a proxy.

Sinclair Oil Corp. v. Levien

Sinclair is the parent corporation and Sinven is the subsidiary. The subsidiary continued to make late payments and did not comply with the terms of the K. Sinven brought suit against Sinclair, its parent corporation. RULE: A parent corp. must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing in that the parent is on both sides of the transaction with its subsidiary and the parent receives a benefit to the exclusion and at the expense of the subsidiary. Otherwise, the business judgment rule will apply. Here, the dividends were properly paid out under the business judgment rule, but the K that Sinclair induced b/w Sinven and its other subsidiary caused Sinclair to be on both sides of the deal so there was a breach of duty.

Western Rock Co v. Davis

The Court entered judgment against Stroud and Fuller personally on the grounds that Western Rock was a shell corporation that they used to conduct destructive activities. S and F appealed. WRC engaged in blasting operations. S was the president and owned 50% of stock. S received complaints that the blasting was impacting the nearby residents. Even though S knew WRC was being sued by a group of plaintiffs about the damage, S did not tell F and continued blasting activities. RULE: If directors or officers have control over a corporation, knowingly cause the corporation to engage in harmful behavior that results in damage to third parties, and intentionally keep the corporation undercapitalized, courts may hold them personally liable for corporate conduct.

Stone v. Ritter

The Court of Chancery dismissed the shareholder's complaint. Shareholders brought suit against Amsouth Directors for failure to engage in proper oversight of Amsouth's policies and procedures. RULE: Under Caremark, if shareholder's claim of directorial liability for corporate loss is based upon ignorance of liability-creating activities within the corporation, then only the board's sustained or systemic failure can establish the lack of good faith that is required for liability, which can be established by an utter failure to attempt to assure a reasonable information and reporting system exists.

In re The Limited, Inc.

The shareholders claim that there was a breach of the duty of care and loyalty. The lawsuit is occurring because of a breach of fiduciary duties. They said that they did not bring this up to the board because it would be futile.

K.C. Roofing Center v. On Top Roofing, Inc.

The trial court "pierced the corporate veil" of On Top and held Russell personally liable for the monies owed to plaintiffs. The Nugents and On Top appealed. Nugents created corporations and would form a new corporation after one of the corporations failed. When one of the corporations, On Top Roofing, failed to pay $45,000 in roofing supplies to K.C. Roofing, KCRC sued On Top, seeking to pierce the corporate veil, and the Nugents. RULE: Appropriate to pierce the corporate veil when P shows that a company's owners: 1) maintained complete control of the entity's finances, policies, and business practices so as to render the corporate entity functionless; 2) had control over business functions in a manner to commit fraud or to perpetuate a violation of a law or other legal duty in contravention of plaintiff's rights; and 3) caused injury the plaintiff. HERE: There was substantial evidence that Russell operated an intrictate corporate shell game in which he would cease business operations as one corporate entity when he was unable to pay the company's debts and then form a new company in its place in order to get a "fresh start."

Craig v. Lake Asbestos

This case involves an issue with Environmental law. The gov't has the right to invoke a statute that allows for the President to demand a landowner clean up their land. This is an issue for whomever may buy the property after the owners were aware of the damage.; The. control which a parent must exercise over a subsidiary so as to warrant piercing the veil b/w them is more than "mere majority or complete stock control;" instead it is "complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own."

Malpiede v. Townson

Trial court dismissed the suit for failure to state a claim, ruling that the directors were shielded by the exculpatory provision. The shareholders brought suit b/c the BOD failed to obtain the best price in the sale of the corporation. They could have gotten $9/share versus $7.75/share. However, the corporation's Articles of Incorporation included an exculpatory provision pursuant to DGCL Section 102(b)(7), which shielded directors from personal liability unless they acted in bad faith or breached their duty of loyalty. RULE: Under the statute, corporations may protect their directors from personal liability for breach of the fiduciary duty of care by including an exculpatory provision in the Articles of Incorporation. The exculpatory provision cannot, however, shield directors who have acted in bad faith or in breach of the duty of loyalty. Here, the exculpatory provision is applicable.