Business Associates - cases

Zetlin v. Hanson Holdings (NY 1979)

Absent bad faith, such as corporate looting of assets or a conversion of a corporate opportunity, a party can purchase a controlling share of a corporation at a premium price w/o extending a tender offer to all SHs.

Ringling Bros. v. Ringling (DE 1947)

*Facts:* 1000 outstanding shares of Ringling Bros. Edith owned 315; Aubrey owned 315; and John owned 370. Edith and Aubrey agreed that they would vote jointly and in the same way. The agreement provided that if they could not agree on how to vote, the issue would be submitted to binding arbitration. At an annual meeting, they disagreed on whom to elect to one of the Ringling Bros. director positions. They agreed that Edith would vote for herself and her son, and that Aubrey would vote for herself and Mr. Haley. But couldn't agree on a fifth director. Arbitrator directed the women to cast 4/5 of their votes as provided above, but the final 1/5 of their votes in favor of a Mr. Dunn. Instead of doing this, Mr. Haley (as proxy for Aubrey) cast all of Aubrey's votes for himself and Aubrey, omitting Mr. Dunn. John, meanwhile, voted for himself, a Mr. Woods, and a Mr. Griffin (as he was entitled to do b/c he was not a party to the agreement). Chairman of board ruled that the following were elected to the seven-member board: Edith, her son, Aubrey, Mr. Haley, Mr. Dunn, John, and Mr. Woods. T/f, Mr. Dunn was elected, and not Mr. Griffin, as would have been the case the way Aubrey voted in violation of the agreement. At the next SH's meeting, Mr. Griffin attempted to join in the voting despite the arbitrator's and the chairman's ruling and Edith brought suit, seeking declaratory relief. *Holding:* Arbitrator did not have power to enforce his agreement and force Aubrey to cast votes, and nothing in agreement gave Edith power to cast Aubrey's votes for her. H/e court finds that it was NOT a voting trust and that Aubrey was in breach of a valid agreement t/f invalidates her vote result was Edith's 3, John's 3, and a vacancy left.

Walkovsky v. Carton (NY 1966)

*Facts:* A fleet of taxis owned by many corporations, each on owning only one or two cars, was operated as a single entity. Plaintiff argued he should be able to hold stockholders personally liable for his injuries (resulting from being run down by a taxicab) b/c the multiple corporation structure is fraud on the general public. *Holding:* Not relevant that the corporations were structured this way b/c the law allows it. Either a defendant is operating a corporation for his personal benefit or he isn't . . . on the pleadings, no evidence that he was doing so. Majority did not take issue w/ minimum amount of liability insurance b/c again, it was legal and carrying the statutory minimum is sufficient. *Dissent:* looks at minimal amount of insurance and constant funneling out of funds as undercapitalization - makes the larger structure judgment proof for small corporation's liability

A.P. Smith Mfg. Co. v. Barlow (NJ 1953)

*Facts:* AP was incorporated w/ the purpose to engage in manufacture and sale of equipment for water and gas industries. AP Smith brough a derivative claim arguing that a $1,500 donation to Princeton University was not authorized by its certificate of incorporation, and that NJ statues expressly authorizing this conduct did not apply b/c the company was formed before enactment. *Holding:* Donation was permissible b/c there was some link b/w the action and corporate benefit (good business and civic duty . . . student of Princeton may come to work for company . . . etc.). Court notes that since 19th century there has been a shift in corporate ownership of wealth t/f individual donations less prevalent, so applies NJ statute even though technically retroactive.

Wienberger v. UPO, Inc.

*Facts:* Action to challenge the SH vote for a cash-out merger b/w Defendant UOP, Inc. and UOP's majority SH, the Signal Companies, Inc. Plaintiff asserted that Signal breached its fiduciary duty to the minority SHs by withholding relevant information as to market share value and not disclosing conflicts of interest. *Holding:* - Minority SHs challenging a cash-out merger as unfair must allege specific acts of fraud, misrepresentation or other misconduct - If such allegations are adequately made, the burden of proof is then on the majority SH to show fairness of the terms to the minority - H/e if the merger is approved by the informed vote of the majority of the minority burden shifts to plaintiff to show unfairness to the minority

Kamin v. AMX (NY Sup. Ct. 1976)

*Facts:* AmEx made a bad investment in stocks ($30 million value to $4 million) and instead of selling the stocks (allowing them to deduct a huge loss against their income) AmEx decided to distribute them to SHs as dividends. This eliminated the possibility of recovering some of their losses in tax savings, but BOD argued that the significant loss would adversely affect the value of AmEx stock. *Holding:* Court gave great deference to substantive decisions b/c no evidence of fraud, illegality, or conflict of interest. The substantive decision didn't make a lot of sense BUT the BJR applied b/c the directors were fully informed when they made the decisions (informed process = great deference).

Stone v. Ritter (DE 2006)

*Facts:* AmSouth and a subsidiary paid $50 million in fines, which arose from bank employee's failure to file particular reports required by federal anti-money-laundering regulation. Evidence was shown that the corporation dedicated considerable resources to its compliance program, put various procedures and systems in place and in an effort to ensure compliance, and regularly monitored the corporation's compliance. On a regular basis, the BOD received reports and training for the compliance systems and had written procedure. SHs of AmSouth brought a derivative action against the corporations' directors claiming that they breached their oversight duties before making a demand on the board. They contended that demand was excused b/c the Defendant faced a good chance of liability and personal liability that would render them incapable of exercising disinterested judgment in respond to a demand request. AmSouth's certificate of incorporation contained a provision shielding directors for breaches of their duty of care, provided they acted in good faith. *Holding:* Court adopts Caremark standard, requiring that (a) directors failed to implement system OR (b) consciously failed to monitor or oversee its operation. Knowing failure to discharge fiduciary obligation is a failure to discharge duty of loyalty in good faith. Here, there was a report that indicated they had a system and implemented it. Plaintiff's complaint equated bad outcome w/ bad faith.

Hart v. Arco Electronics (DE 1963)

*Facts:* Arco and Loral Electronics entered into a reorganization agreement in which Arco sold all its assets in exchange or 283,000 shares of Loral. Arco agreed to call SH meeting for voluntary dissolution, and Arco distributed to its SHs all of the Loral shares for complete liquidation. 80% SHs vote yes. One sued arguing illegality b/c Arco didn't follow merger procedure and didn't give appraisal rights. *Holding:* Held that the combination of the sales of assets and dissolution statutes was legal. Although Defendant's actions did accomplish the same thing as a merger, the sale of assets and merger statutes were independent, and the validity of actions taken pursuant to one statue did not depend on the other.

Grimes v. Donald (I) (DE 1996)

*Facts:* BOD of DSC approved contracts w/ CEO, Donald, that promised him employment until his 75th birthday. Contracts provided that if Donald lost his job w/o cause, he would be entitled to the same salary he would have earned until anticipated end contract date. Also included inventive bonuses, lifetime medical coverage. . . etc. Grimes demanded that the board abrogate the contracts. BOD refused. Grimes sued, alleging that the BOD abdicated its responsibility to oversee the management of the company; board had given up responsibility to oversee the future of DSC. Additionally, Grimes alleged that the contracts constituted waste and excessive compensation and were the product of the board's failure to exercise due care. Although Grimes did not raise these issues in his demand to the board, he claimed that demand was excused b/c it would have been futile. *Issue:* Whether Grimes's suit was direct or derivative. *Holding:* Look to the nature of the wrong alleged and the relief, if any, which could result if plaintiff were to prevail. Waste and excessive compensation claims were derivative; h/w, abdication claim was direct b/c he seeks only a declaration of invalidity and monetary recovery will NOT accrue to the corporation as a result of his potential victory.

Grimes v. Donald (II) (DE 1996)

*Facts:* BOD of DSC approved contracts w/ CEO, Donald, that promised him employment until his 75th birthday. Contracts provided that if Donald lost his job w/o cause, he would be entitled to the same salary he would have earned until anticipated end contract date. Also included inventive bonuses, lifetime medical coverage. . . etc. Grimes demanded that the board abrogate the contracts. BOD refused. Grimes sued, alleging that the BOD abdicated its responsibility to oversee the management of the company; board had given up responsibility to oversee the future of DSC. Additionally, Grimes alleged that the contracts constituted waste and excessive compensation and were the product of the board's failure to exercise due care. Although Grimes did not raise these issues in his demand to the board, he claimed that demand was excused b/c it would have been futile. *Issue:* Whether Grimes's waived his right to argue that demand was excused w/ respect to the waste and excessive compensation claims b/c he had already made demand that the agreements be abrogated as unlawful. *Holding:* Yes. By making demand upon the board, Grimes had in effect conceded that the board was in a position to consider and act upon his demand. This concession waived his right to those claims. BJR protected decision to refuse demand where it was not pled w/ particularity why the refusal was wrong.

Auerbach v. Bennett (NY 1979)

*Facts:* BOD of GTEC (defendant) found that GTEC and its officers had made bribes, and that some of the directors had been directly involved in those payments. Auerbach and other SHs brought a derivative action against BOD, GTEC, and GTEC's outside auditor. The complaint alleged that the board members involved in the transactions and the auditor were both liable to DTEC for the money lost through those improper transactions. BOD formed a special litigation committee composed of directors who joined the board after the questionable transactions took place and asked them to evaluate what GTEC should do about the litigation. Committee found that the directors had not violated their duties and that the claims were w/o merit. Trial court dismissed the action. *Issue:* Can the decision of the special committee be subjected to judicial inquiry? *Holding:* Court reviews procedure of investigation, not substantive decision (BJR). If the Corporation meets its burden of proof to show that the committee members are disinterested and used appropriate investigative procedures, court will apply BJR to evaluate the substantive decisions to dismiss. Here, three disinterested directors came onto board after the alleged conduct. No issue of material fact raised as to the independence and disinterested status of these directors no bias to warrant inquiry.

Cheff v. Matthews (DE 1964)

*Facts:* BOD used corporate funds to buy back shares at a premium from a prospective acquirer known for liquidating. Plaintiffs argued that the BOD only did this to secure their jobs and the use of corporate funds was illegal. *Holding:* (traditional rule on defensive action to prevent tender offer) The defendant fiduciary bears the burden of proof (w/o BJR) of showing either fairness (if inside directors) or good faith and reasonable investigation (if outside directors) in concluding that reasonable grounds existed to believe that the takeover posed a danger to corporate policy and effectiveness . . . Held to be reasonable here

Basic v. Levinson (I) (SCOTUS 1988)

*Facts:* Basic was in negotiations for a potential merger and made three public statements denying that it was in merger negotiations. Later, announced the merger. Sued by SHs who sold their stock after the first statement but before the public announcement. *Issue* Whether the statements were material *Holding:* Adopts TGS probably/magnitude test and remands for decision . . . although preliminary merger discussions are contingent/speculative, whether they are material will depend on the facts.

Basic v. Levinson (II) (SCOTUS 1988)

*Facts:* Basic was in negotiations for a potential merger and made three public statements denying that it was in merger negotiations. Later, announced the merger. Sued by SHs who sold their stock after the first statement but before the public announcement. *Issue:* Whether reliance can be shown b/w petitioners decision to sell their shares and the public statements made denying merger discussions *Holding:* Reliance may be presumed (rebuttal presumption) based on the "fraud on the market" theory.

Essco Geometric v. Harvard Industries (8th Cir. 1995)

*Facts:* Breach of contract case in which Essco, a materials supplier, sought damages from Harvard Industries, a manufacturer of office chairs, for Harvard's failure to honor an exclusive contract for materials. *Issue:* Whether the purchasing manager of Harvard had authority to bind Harvard to such an exclusive and non-cancelable contract w/ Essco. *Holding:* Court found implied actual authority and apparent authority. It derived implied actual authority from purchasing manager's testimony and job performance review and the customary practice w/i the industry. It derived apparent authority from the ongoing relationship between the companies (signing and delivering on purchasing orders) and trade norms. T/f Harvard was bound to the contract.

Raymond v. Estrada (CA Ct. App. 1992)

*Facts:* Broadcast Group partnered w/ Ventura 41 to obtain a permit to run a TV station. Each group owned 50% of the combined entity, TV, Inc. The Ramos owned 50% of Broadcast (t/f 25% of TV) and Estrada owned 10% of Broadcast (t/f 5% of TV). Members of Broadcast entered into agreement to vote all of their shares in TV the same way, as determined by a majority of the members. Agreement provided that if anyone did not vote w/ the majority, their shares would be sold to the other members. Ramos was elected president of TV at first, but after that, Estrada "defected" from Broadcast. She voted w/ the Ventura members of TV to remove Ramos as president and replace him w/ a member from Ventura. Ramos sued Estrada for breach of contract, seeking specific performance causing Estrada's shares to be sold. *Holding:* Voting agreement was valid even though the corporation was not technically a close corp. The agreement, including its buy/sell provisions, was unanimously executed after Estrada has a full and fair opportunity to consider it in its entirety. Estrada violated the agreement voluntarily, aware of the consequences.

Broz v. Cellular Information Systems (DE 1996)

*Facts:* Broz was director of CIS. He was also president and sole SH of RFB Cellular (competitor of CIS). CIS was having financial difficulties and was being sold to PriCell. Broz takes an opportunity fro RFB w/ a third company, Mackinac Cellular. He informally told some CIS directors about the opportunity, who did not seem interested and he knew that CIS had no financial ability (prior to merger w/ PriCell) to take advantage. PriCell finishes acquisition of CIS and sues Broz for breach of duty of loyalty/corporate opportunity. *Holding:* Adopts DELAWARE RULE to hold that Broz did not owe a duty of loyalty to PriCell for this opportunity. A directors' right to take an opportunity depends on the circumstances existing at the time it presented itself to him w/o regard to subsequent events.

In the Matter of Random & Neidorff, Inc. (NY 1954)

*Facts:* Business of printing musical compositions w/ two sole and equal SHs, Henry Neidorff and David Random. Henry died, leaving stock to wife, Anna (also David's sister). Anna and David did not get along. Anna refused to sign David's salary paychecks. David sues for dissolution. *Holding:* Prime inquiry is as to necessity for dissolution, i.e., whether judicially imposed "death" will be beneficial to the SHs or members and not injurious to the public. Here, dissolution NOT granted b/c everything about the business was functional (very profitable) and no harm was being caused to the corporation by not signing David's paycheck. W/ only salary issue on the table, not able to show deadlock as to corporate policies.

Jenson Farms v. Cargill (Min. 1981)

*Facts:* Cargill extended multiple lines of credit to Warren Grain & Seed, attaching conditions such as approving any expenditure over $5,000; approving of any stock sale or dividends; and instructing Warren to explain any withdrawals on the account. Warren also sold a majority of its grain to Cargill. When Warren went under, 3P farmers sued to hold Cargill responsible for Warren's unfulfilled obligations, in the amount of *Issue:* Whether an agency relationship existed b/w Cargill and Warren such that Cargill was liable to the farmers. *Holding:* Yes. Cargill transformed from a creditor to a principal of Warren after it began exerting control over the organization, manifesting consent to Warren being its agent.

Sinclair Oil Corp. v. Levien (DE 1971)

*Facts:* Chancery court in a derivative action required Sinclair to account for damages sustained by its subsidiary, Sinven, organized by Sinclair for the purpose of operating in Venezuela. Sinclair owned 97% of Sinven's stock and had all of its board members acting also as officers in Sinclair. Sinclair undisputedly owed Sinven a fiduciary duty. Chancellor also held that Sinclair's fiduciary duty and control over Sinven required Sincalir to meet the test of intrinsic fairness. *Issue #1—Self Dealing:* Plaintiffs argue that from 19600 to 1966 Sinclair caused Sinven to pay out excessive dividends ($38 million in excess of its earnings) that the development of Sinven was prevented, and effectively caused a corporate dissolution. Chancellor found that Sinclair did this b/c it was in need of large amounts of cash. - *Holding:* Chancellor erred in applying intrinsic fairness test as to the dividend payments; BJR should have been applied . . . While intrinsic fairness test can be applied to dividend declarations by a dominated board, in this case, the dividends were not self-dealing . . . although the dividends resulted in a large sum of money being transferred to Sinclair, a proportionate share of money was received by the minority SHs of Sinven . . . t/f Sinclair revied nothing to the exclusion of the minority SHs. *Issue #2—Corproate Opportunity:* Plaintiffs argue that Sinclair purchased or developed oil fields in Alaska, Canada, and Paraguay, all of which were opportunities that could have been taken by Sinven BUT Plaintiffs could not point to opportunities that came to Sinven. - *Holding:* Subject to BJR b/c no proof of self-dealing (Sinven formed for purpose of taking opportunities in Venezuela) *Issue #3—Breach of Contract:* Sinclair caused Sinven to contract w/ Sinclair International whereby Sinven agreed to sell all of its crude oil and products at specified prices. Plaintiffs contend Sinclair caused this contract to be breached in two ways: (1) although contract called for payment on receipt, payments lagged as much as 30 days after receipt; and (2) the contract required International to purchase a fixed minimum and it did not do so. - *Holding:*Chancellor was corrected in finding breach of contract on both counts AND that there was self-dealing . . . Under intrinsic fairness test, Sinclair must prove that causing Sinven not to enforce the contract was intrinsically fair to the minority SHs . . . Sinclair failed to meet the burden.

Clark v. Dodge (NY 1936)

*Facts:* Clark owned 25% of each of two corporations. Dodge owned the other 75% of each. Clark was director and GM of Bell, one of the corps. Entered into an agreement providing that Clark would disclose a secret formula to a son of Dodge and in return, Dodge would vote his stock so that (1) Clark would continue to be a director of Bell; (2) Clark would continue to be GM of Bell as long as he was "faithful, efficient, and competent"; (3) during his lifetime, Clark would receive ¼ of net income of the corps.; and (4) no unreasonable salaries would be paid to other officers of corporations that would reduce the net income. Clark sued claiming Dodge did not vote to maintain Clark as director and GM and that Dodge hired incompetent persons at excessive salaries. *Issue:* Whether the voting agreement was valid *Holding:* Agreement was not illegal under McQuade where directors are the sole SHs and there was no damage to the public parties. The court found the "faithful, efficient, and competent" limitation to be significant to its decision as not a complete abdication of directorial right to manage/terminate GM as an officer.

Kahn v. M&F worldwide Corp. (DE 2014)

*Facts:* Controlling SH of M&F wanted to merge. Implemented two procedural protections—made offer contingent on (1) approval by an independent special committee of M&F w/ the power to say no and that would fulfill its duty of care, and (2) approval by fully informed vote of majority of the minority SHs. Kahn was a dissenting minority SH and challenged the merger. *Holding:* In controller buyouts, the BJR will be applied IF AND ONLY IF (1) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority SHs; (2) the committee is independent; (3) the committee is empowered to freely select its own advisors and to say no definitively; (4) the committee meets its duty of care in negotiating a fair price; (5) the vote of the minority is informed; and (6) there is no coercion of the minority

Timberline Equipment Co. v. Davenport (OR 1973)

*Facts:* Davenport, Dr. Gorman, and Dr. Bennett were partners doing business as "Aero-Fabb Co." Bennet submitted defective AOI. Before the certificate of incorporation was issued in the name of Aero-Fabb Corp., Davenport entered into rental agreement w/ Timberline Equipment Co. on behalf of Aero-Fabb. Timberline sued the defendants under the rental agreements. Defendants alleged that the rentals were made to a de facto corporation t/f he could not be held personally liable and that Timberline was estopped from denying the corporate character of the lessee organization. *Holding:* Held that the de facto doctrine no longer existed under state law and that estoppel was inapplicable b/c nothing indicated Timberline believed it was dealing w/ a corporation.

Dirks v. SEC (SCOTUS 1983)

*Facts:* Dirks investigated a massive fraud of Equity Funding and openly discussed information relating to it w/ various clients and news organizations. The news organizations did not believe him, and the clients traded away their stock. He nor his firm traded in Equity Funding and Dirks did not benefit from the information. *Issue:* Was Dirks liable under § 10b as a tipper? *Holding:* No . . . motivation was to expose fraud not personal gain NOT liable

Newberry v. Barth, Inc. (Iowa 1977)

*Facts:* Florence and her late husband created Barth, Inc. in order to purchase a large apartment complex, using FHA loans to finance the purchase. Florence continued as secretary-treasurer and building manager. Florence entered into a contract w/ Newberry to sell the complex, but FHA owned preferred stock and Barth, Inc. could not sell w/o FHA approval. Newberry sued for specific performance. *Issue:* Whether Barth, Inc. was bound by Florence's contract w/ Newberry *Holding:* No. Florence was a fully disclosed agent of Barth, Inc. BUT she had no actual or apparent authority to sell the property. She was expressly prohibited from doing so, and no apparent authority was created b/c apartment managers generally do not have the power to sell properties; t/f it was not reasonable for Newberry to believe that she could.

In re the Walt Disney Co. Derivative Litigation (DE 2006)

*Facts:* Disney CEO hired Ovitz almost single-handedly to be president and contracted in a pre-negotiated severance. Company later discharged him w/o cause and Ovitz collected over $130 million in severance. SHs sued for breach of fiduciary duty, arguing that such an exorbitant severance agreement could not be made in good faith. Trial Court dismissed immediately b/c no fiduciary duty until assumed position. On appeal, the corporate directors' decisions were challenged: (1) hiring; (2) negotiation of contract; (3) termination, not for cause (even though facts would support). Disney's charter had a raincoat provision that shielded directors from duty of care claims, so plaintiffs argued that breach of loyalty through bad faith to get around this. *Holding:* Directors were, at most, negligent in connection w/ Ovitz's hiring. H/e negligence (even gross negligence) does NOT amount to bad faith. The CEO stretched the outer boundaries of his authority by acting w/o specific board involvement, but also did not act in bad faith. T/f severance upheld.

Richert v. Handly (Wash. 1958)

*Facts:* Dispute arising from the dissolution of a logging partnership in which one partner contributed 26K and the other only contributed labor *Holding:* The court found that the labor partner had to put up cash to share in the capital losses.

Drashner v. Sorenson (N.D. 1954)

*Facts:* Drashner, Sorenson, and Deis formed a partnership to operate a business. Sorenson and Deis fronted $7.5k to purchase the business from its original owner. No written partnership agreement but orally agreed that the money would be repaid to Sorenson and Deis from partnership earnings, and they agreed on percentages which each partner would receive in commissions. Drasher neglected his duties and also requested additional cash distributions, which Sorenson and Deis refused. In order to cash out his share of the partnership, Drashner sued Sorenson and Deis, seeking an accounting and dissolution. At the time of filing, Sorenson and Deis had only recouped $3k of their loan. *Issue:* Did Drashner cause the dissolution wrongfully? *Holding:* - Yes. The court found that Drashner spent most of his time in bars, had been convicted of reckless driving and jailed, and had wrongfully caused the dissolution. - Consequences of Wrongful Dissolution: (1) Wrongful partner cannot force sale; (2) good will is not taken into consideration in valuation of wrongful partners' share of the partnership when he's paid out; (3) must pay damages. Innocent partner can (1) insist on sale OR (2) continue w/o wrongful partner, paying wrongful partner the value of their partnership at the time of dissolution (minus good will).

Ernst & Ernst v. Hochfelder (SCOTUS 1976)

*Facts:* E&E, an accounting firm, was retained by a small brokerage firm for 21 years to perform periodic audits of the brokerage firm's book and records. Sued under § 10b by customers of the brokerage firm who had invested in a fraudulent securities scheme perpetuated by the presided of the brokerage firm. Argued that E&E was negligent in not detecting the fraud w/i the brokerage firm. *Holding:* Negligence is insufficient under 10b claim

Hall v. Hall (MS Ct. App. 1974)

*Facts:* Ed and Harry Hall were equal SHs and directors of Musselman. Ed died, passing his interest to his wife, Margaret. Harry appointed his own wife, Florence, director to fill the vacancy. Harry and Florence then appointed themselves president and VP. Subsequently, Harry refused to attend SH meetings. MS law required the presence of a majority of SHs to constitute a quorum, t/f new directors could not be elected. Later, the sale of unissued capital stock was approved. Margaret made clear that she wanted to exercise her right to purchase half of the stock but asserted that the action was invalid b/c Harry and Florence were not legal directors. Sought an injunction to bar Harry from refusing to go to SH meeting, bar the setting of a terminal date on Margaret's preemptive purchase rights, and bar Harry and Florence from continuing as directors. *Holding:* Court may not compel participation where there is nothing to suggest that plaintiff may not move to dissolve the corporation or try by quo warranto the right of Harry and Florence to continue in the offices of directors and corporate officers where statutory requirements for annual SH meetings had been subverted . . . EVEN IF the court had ordered Harry to attend, would have been the same result b/c 50/50 voting . . . deadlock.

Mills v. Electric Auto-Lite (SCOTUS 1970)

*Facts:* Electric merged w/ Mergenthaler. Mills et al. were SHs of Electric and brought suit seeking to set aside the merger on the grounds that the proxy statement contained misleading statements in violation of §14 of the 1934 Act. SHs claim that the proxy statement told SHs that Electric BOD had approved the merger but failed to tell SHs that all of the directors were also nominees of Mergenthaler and were under Mergenthaler's control. Plaintiff minority SHs were necessary for the vote to succeed b/c Mergenthaler owned roughly 50% of shares but needed 2/3 votes. *Issue:* Whether the claimed defect in the proxy statement should be considered a material omission. *Holding:* Court declined to follow the lower court's "fairness of the merger" test b/c it basically removed the SHs from the voting process . . . a company could release an extremely false proxy statement and justify it so long as they could demonstrate that the merger was fair. § 14(a) makes it unlawful to contravene the SEC's rules and the rules make clear that a materially misleading solicitation is itself a violation of the law . . . need not show that the decision was unfair, just that a reasonable SH might have considered the information important.

Elf Atochem North America, Inc. v. Jaffari (Del. 1999)

*Facts:* Elf and Cyrus Jaffari (founder of Malek Inc.) agreed to form an LLC, Malek LLC, to develop and distribute solvent-based maskants. Elf and Jaffari entered into an operating agreement, which established and set forth governance provisions for Malek LLC. It contained an arbitration clause. Malek LLC itself never signed the agreement. Subsequently, Elf sued Jaffari and Malek LLC individually and on behalf of Malek LLC for breach of fiduciary duty to the LLC, breach of contraction, and tort claims. Claims dismissed b/c of arbitration clause. *Issue:* Whether an LLC operating agreement that is NOT executed by the LLC itself is valid against the LLC. *Holding:* Yes. Delaware LLC Act has strong freedom of contract policy underlying the entire act t/f that the LLC isn't a party to its operating agreement does NOT negate or void it . . . the agreement is b/w the members of the LLC.

Dodge v. Ford Motor Co. (MI 1919)

*Facts:* Ford did extremely well and instead of declaring special dividends (which it had previously), reinvesting in smelting operations to lower the price of cars. Mr. Ford (owned 58% of company) testified that the profits were too large and that the benefits should be distributed to the public and employees. *Holding:* The action likely would have been permissible under a theory of planned expansion (a totally reasonable goal for a company) BUT Mr. Ford's testimony and public statements made it impossible for court to find that it was done for a business purpose act was ultra vires.

Wilkes v. Springside Nursing Home (MA 1976)

*Facts:* Four SHs each owning 25% of shares and having equal power w/i the corporation, Springside. Eventually the relationship b/w W and the other three directors soured. When Springside became profitable, the defendants voted to pay out salaries to themselves, but did not include W. Then, at the annual meeting, W was not reelected as director and was informed that he was no longer wanted in the management group. W faithfully and diligently carried on his duties to the corporation. W later sued for breach of fiduciary duties owed to him. *Holding:* Court eased the Donahue standard by granting majority SHs an opportunity to show they had a legitimate business objective. When such showing is made, burden shifts back to plaintiff to show that the same objective could have been accomplished in a less harmful way. Here, majority SHs did not show legit business objective for firing W and refusing to re-elect him as a salaried officer and director. No misconduct on the record, exact opposite in fact. T/f the majority's conduct defied the reasonable expectation of minority SH where a long-standing policy exists that SHs in close corps are likely to have employee-role and direct hand in management

Goodwin v. Agassiz (MA 1933)

*Facts:* G owned stock in Cliff Mining Company. Exploration on Cliff's property was undertaken in 1925 to find copper deposits. In 1926, A and M, directors of Cliff, learned of a geologist's theory regarding the existence of copper deposits in another part of Cliff's property. They thought that if the geologist's theory was correct, Cliff's stock would go up. Later, the initial exploration was stopped b/c it was unsuccessful. W/o knowledge of the geologist's report, G sold his stock through a broker. Stock ended up being bought by A and M. G sued arguing that defendant's nondisclosure of the theory to Cliff's SHs was improper. Nondisclosure did not harm Cliff, but G claimed that he would not have sold his stock. *Holding:* A and M did not owe G a fiduciary duty to disclose. First, duty to disclose is to corporation itself NOT individual SHs. Second, A and M bought the shares from a broker, not G directly (no legal privity). Third, the information did not disclose an absolute certainty that copper would be found, but rather was only an opinion.

Galler v. Galler (IL 1964)

*Facts:* Gallers were brother and each owned half of 220 shares in Galler Drug Company (later sold 6 shares to an employee, Rosenberg, w/ guarantee to repurchase shares if Rosenberg's employment was terminated). Executed an agreement to ensure that after death of either brother, the immediate family of the deceased would maintain equity control of GDC. When Benjamin died, his shares were supposed to go to his wife, but prior to his death, Isadore and his family decided that they were not going to honor the agreement. When Benjamin's wife tried to convert his stock into her name, Isadore and co. tried to convince her to abandon the agreement; she refused but agreed to let Isadore's son become the president of GDC for one year w/o interference in exchange for reissuance of Benjamin's stock in her name. Subsequently she demanded enforcement of the terms of the agreement guaranteeing her equal control, dividends each year, and a continuation of Benjamin's salary. *Issue:* Whether the agreement was valid *Holding:* Conduct of Defendants toward plaintiff was inequitable. The provisions of the SHs' agreement were permissible b/c they implicated no injury to a minority interest

Marciano v. Nakash (DE 1987)

*Facts:* Gasoline, Ltd. was a corporation owned in equal parts by the Nakash family (original plaintiffs) and the Marciano family (original defendants). Family members were also on BOD. Gasoline was placed in custodial status b/c of a deadlock among its BOD. W/o consulting the Marcianos, the Nakashes loaned $2.5 million to Gasoline (undisputed that this was an interested transaction). B/c of the deadlock, the transactions did not receive majority approval from the BOD or SHs. Lower court validated the Nakashes' claims in Gasoline's liquidation proceedings, finding that the loans were valid and enforceable debts of Gasoline, despite originating from self-dealing transactions. Marcianos argued that the loan transactions are voidable regardless of their fairness or the good faith of their participants, and that Nakashes nonetheless failed to meet their burden of establishing fairness. *Holding:* DGCL § 144 does not require ratification, but instead shifts the burden to the self-dealer to prove intrinsic fairness where ratification does not occur. Here, Nakashes were able to satisfy their burden b/c the loans were made on favorable terms and the company's financial circumstances at the time of the loan were poor.

Lehrman v. Cohen (DE 1966)

*Facts:* Giant had two factions of SHs—Cohen family and Lehrman family. Issued two classes of stock to give them equal control—AC and AL. Each class entitled to two directors. To avoid deadlock b/w the AL and AC stock, a fifth directors office was created. Also created an AD class of stock, which consisted of a single share and its holder was entitled to vote for and elect one of the five directors but was not entitled to dividends, etc. BOD unanimously issued AD stock to Danzansky, and Danzansky voted to elect himself as the 5th director. A resolution was later proposed to give Danzansky an executive employment contract. AC and AD SHs voted in favor, and the AL stock voted against. The BOD elected Danzansky president of the Company, w/ the AC and AD directors voting in favor, and the AL directors voting in opposition. Danzansky resigned his position as director to begin serving as the Company's president, and a new director was elected to take the vacant position. Lehrman sued, claiming that the creation of the Class AD stock was illegal under DE law b/c it is a voting trust that is not limited to a ten-year period as required by DE's Voting Trust Statute. *Holding:* No voting trust never gave up the right to vote, only diluted it.

In re Cady, Roberts & Co (SEC 1961)

*Facts:* Gintel was a broader of CD&C. Cowdin was a representative of the registrant and a director of Curtiss-Wright. CW announced a new engine development plan. Gintel bough CW stock for his customers. Later, CW directors, including Cowdin, met and approved a dividend cut. Due to some technical problems, the dividend news was not communicated to NY stock exchange immediately. Before it became public, Gintel learned of the cut through Cowdin. Gintel placed two sales of CW stock to protect his clients. *Issue:* Was the Gintel was liable as a broker under § 10(b)? *Holding:* It is clear that Cowdin was an insider of CW and could not trade on the information . . . Gintel knew Cowdin possessed non-public material information t/f he is treated as an insider as well and was also prohibited from trading. This was fraud by omission—insider has the affirmative duty to either disclose before trading OR walk away from the transaction.

Northeast Harbor Golf Club v. Harris (ME 1995)

*Facts:* Harris president of Golf Club. Twice approached about purchasing land adjacent to Golf Club by realtors. Harris purchased land in her own name w/o telling Golf Club. Informed board of directors after the purchase, but said she had no plans to develop the land. Eventually she did develop the land. Club (under new direction) sues Harris for usurping corporate opportunity. Trial court found it was not in the Golf Club's line of business and club was unable to financially make the purchase. *Holding:* Court rejects line of business test in favor of the ALI APPROACH, which requires disclosure prior to taking corporate opportunity (and changed from the "line of business" test to the "closely related" test). Here, the realtor specifically testified that he offered to Harris in her capacity as a director in the first case. Remanded for further proceedings.

National Biscuit Co., Inc. v. Stroud (NC 1959)

*Facts:* In a two-person partnership, one partner (Stroud) told vendor that the partnership was no longer buying bread from them, but the other partner (Freeman) bought it anyways. Vendor sued for payment. *Issue:* Whether Stroud can be held liable for the deliveries that Freeman consent to but Stroud decline. *Holding:* No. Each partner has an equal right to the management of the business and partners cannot restrict the ordinary business practice of the others w/o majority vote (50% is NOT a majority).

Diamond v. Oreamuno (NY 1969)

*Facts:* Insiders knew negative information about he company that nobody else knew and then sold their stocks before the information came out. SHs sued on theory that they used corporate information for personal gained. Company was not harmed, just the buyer. *Hodling:* Damage to the corporation has never been a dispositive require for breach of fiduciary duty suite. Insiders had a duty to disclose or abstain.

Lewis v. S.L. & E., Inc. (2nd Cir. 1980)

*Facts:* Intra-family dispute over the management of two closely held affiliated corporations. Plaintiff and Defendant directors were brothers. The father left each of his children shares of SLE but only Defendants were SHs of Lewis. Plaintiff brought a derivative suit against Defendants (as directors of SLE) for waste after Defendants did not raise the rent paid to SLE by Lewis. *Issue:* Whether Defendants have the burden to prove that there was no waste in the transaction in which they have a personal interest. *Holding:* Yes, Plaintiff does not have the burden of proving waste . . . Defendants must prove that the transactions were fair and reasonable. Where directors have an interest other than as directors of the corporation, the burden shifts to the self-dealing director to prove reasonableness (intrinsic fairness) at the time of the transaction (BJR does NOT apply).

Lee v. Jenkins Bros. (2nd Cir. 1959)

*Facts:* JB purchased the Crane Company. Lee was the Crane Company's business manager. Yardley was JB's president and a substantial stockholder. Yardley and JB's VP met w/ Lee to convince him to join JB. At the meeting, Yardley agreed orally, on behalf of JB, that Lee would be paid a pension when he reached age 60, and an amount not to exceed $1,500 a year even if he were no longer working for JB. Lee joined JB for 25 years but was discharged at 55. JB argued that Yardley did not have authority to bind JB to the pension agreement. *Holding:* Lifetime pensions are not automatically void b/c future director or SH control is not impeded. H/e reasonable minds could differ on the facts as to whether Yardley had apparent authority so SJ was revered.

Zapata Corp. v. Maldonado (DE 1981)

*Facts:* Maldonado (plaintiff), a SH in Zapata Corp. (defendant), brought a derivative action on behalf of Zapata against 10 of Zapata's officers and directors, alleging breach of fiduciary duty. Maldonado had not made a prior demand that the board bring the action and instead argued that demand was futile, b/c all of the board members were named defendants who allegedly took part in the challenged transactions. After two new outside directors were added to the board, the board as a whole appointment only those two new directors to an investigation committee charged w/ investigating Maldonado's claims. The committee found that it was in Zapata's best interest that Maldonado's derivative suit be dismissed. *Holding:* Trial court erred in holding only plaintiff can seek dismissal. Applied a two-step test to determine if the committee should be permitted to dismiss the litigation. First, Defendant corporation has the burden to prove that the committee is independent and is exercising good faith and reasonable investigation. If the it is unable to do so, a motion to dismiss will be denied. Second, if the defendant satisfies step one, the court should apply their independent business judgment to determine whether the motion should be dismissed. This includes further weighing of how compelling the corporate. Interest in dismissal is when faced w/ a non-frivolous lawsuit.

Unocal Corp. v. Mesa Petroleum (DE 1985)

*Facts:* Mesa made tender offer w/ two-tiered system, offering $54/share until it obtained 51% and then it would offer substantially less (coercing SHs into selling early to avoid). BOD responded by offering $72/share for the remaining 49% once Mesa acquired 50% and excluded Mesa from the deal. This decreased the likelihood that Mesa would succeed in obtaining a majority b/c SHs would want to wait for 50% before tendering in order to get the $72 rate. Mesa sued to prevent the self-tender offer. *Holding:* Added a second element to the Cheff test . . . fiduciary must also prove that the defensive tactic is proportionate to the threat to corporate policy and effectiveness posed by the hostile take over . . . Here, reasonable action by the board b/c Mesa was a known "green-mailer"

Ingle v. Glamore Motor Sales (NY 1989)

*Facts:* Minority SH, Ingle, w/ repurchase option agreement upon termination for any reason was fired and the option was exercised. Ingle sued arguing that his minority SH in close corp. relationship protects him from at-will termination. *Holding:* No right to protection from at-will discharge based on minority SH in close corp. status where contractually agreed to repurchase of share no reasonable expectation to protection from termination.

Shlensky v. Wringley (IL Ct. App.1968)

*Facts:* W is the director of the Chicago National League Ball Club, which is the company that owns the Chicago Cubs. W refused to install lights at the Cub's stadium b/c he was concerned that night baseball would be harmful to the surrounding neighborhood. S (minority SH) argued that the team was losing money b/c of this . . . pointed to White Sox who had high attendance during the weekdays b/c they played at night. S argued that W's first concern should be w/ the SHs rather than the neighborhood. *Issue:* Whether the court should overrule decision made by the director absent a showing of fraud, illegality, or a conflict of interest *Holding* No. The courts will not interfere w/ the directors' honest business judgment unless there is a showing of fraud, illegality, or conflict of interest . . . Need a clear showing of dereliction of duty and mere failure to "follow the crowd" is not such a dereliction.

McQuade v. Stoneham (NY 1934)

*Facts:* NY Giants close corp. S (majority SH), sold minority shares to G and Q. Parties entered into an agreement whereby parties would: (1) use best efforts to continue the three as directors and as officers in stated positions/salaries; and (2) unanimous consent required to change the prior condition. Board later expanded to 7 (w/ 4 disinterested). The disinterested directors voted to replace Q (S and G abstained from voting - possibly trying to absolve themselves), apparently b/c Q tried to protect corporation and minority SHs against S's control. Q sued for specific performance. *Issue:* Whether the SH agreement to use their best efforts to keep each other in their respective positions is valid. *Holding:* Agreement is invalid. SHs MAY combine to elect directors, BUT power CANNOT extend to contracts whereby limitations are placed on the power of directors to manage the business of the corporation by the selection of agents at defined salaries breach of fiduciary duty to the corporation b/c agreement is to be loyal to an individual rather than do what's best for the corporation. - Contract is illegal and void so far as it precludes the board or directors from changing officers, salaries or policies or retaining individuals in office, except by the consent of the parties.

Eisenberg v. Flying Tiger Line, Inc. (2nd Cir. 1971)

*Facts:* NY law required that plaintiff in derivative suit must post a security for the defendant's litigation costs. FTL had been reorganized so that it was a wholly owned subsidiary of another company, FTC. FTL shares were rescinded and replaces w/ an equivalent number of FTC shares. FTL continued to carry on its old business, now as a subsidiary. Eisenberg contended that this corporate restructuring diluted his ability to vote his shares to influence FTL's business and brought suit to reverse the new structure. FTL replied that Eisenberg must post a bond in order to institute the suit. Eisenberg replied that he was not bringing a derivative suit, but was instead brining a representative suit on his own behalf as a SH. *Holding:* If injury is one to plaintiff and not corporation, suit is direct. Here, the deprivation of SH's voting right by conversion of FTL into a subsidiary w/o voice in the operation of the company implication SH's rights, not those of the corporation. Also, purpose of having security requirement is to prevent strike suites . . . here, no monetary damages requested, and no individuals will be liable, so no danger.

McArthur v. Times Printing Co. (MN 1892)

*Facts:* Nimocks was a promoter attempting to organize Times, a newspaper publisher. On Sept. 12, 1889, Nimocks made a contract on behalf of Times w/ McArthur by which McArthur was to work as an advertising solicitor for a one-year term beginning Oct. 1, Times' supposed organization date. Time actually organized on Oct. 16, but McArthur worked from Oct. 1, 1889 to April 1890 when Times fired him. Times' officers were aware of the contract w/ McArthur but took no formal action to approve or object to it. McArthur sued for breach of contract. Corporation defended arguing several theories, including Statue of Frauds. *Issue:* Was Times bound by the contract made by its promoter? *Holding:* Yes. - Statute of Frauds did not apply b/c the corporation did not actually come into existence until 10/16, so the contract b/w Time and Nimocks was really only from 10/16/89 to 10/1/90 (t/f less than a year). - Although Times was not bound by the contract made by its promoter before its organization, after its organization, Times adopted the contract by acquiescing in McArthur's employment (retaining him for those six months w/o other contracts).

SEC v. Texas Gulf Sulphur (2nd Cir. 1968)

*Facts:* Nondisclosed discovery of valuable minerals in drilling exploration in Canada. Released a statement that rumors as to discovery were overstated, then later officially announced the mineral strike (a bunch of insider trading happened as well). Company needed to keep strike quiet so they could buy more land. Company was not under a duty to disclose but chose to make affirmative untrue statements to downplay the rumors. Action brought against corporation itself for committing fraud in issuance of false press release. *Holding:* Material if a reasonable man would attach importance in determining his choice of action in the transaction EVEN WHERE event/information did not produce unusual market action. Additionally, Court creates probably/magnitude test . . . remanded to determine whether material under this standard.

U.S. v. O'Hagan (SCOTUS 1997)

*Facts:* O'Hagan was a partner at Dorsey & Whitney. D&W was retained by Grand Met to represent it regarding a potential tender offer for Pillsbury common stock. O'Hagan did not work on the representation but upon learning of the potential offer, began purchasing call options for Pillsbury stocks. Following D&W's withdrawal of representation, Grand Met publicly announced its tender offer. O'Hagan sold his options/stock and profited over $4.3 million. SEC alleged O'Hagan defrauded his law firm and its client and misappropriated the material, non-public information regarding the tender offer. *Holding:* Criminal liability may be imposed under § 10(b) under the misappropriation theory. Here, O'Hagan was a misappropriate and t/f was held liable.

In re Drive-in Development Corp. (7th Cir. 1966)

*Facts:* Officers of DIDC (debtor) issued a guaranty of payment to National Boulevard Bank (creditor) in exchange for a loan. Maranz signed the guaranty as Chairman of DIDC. Dick, DIDC's secretary, attested to the guaranty. As part of his secretarial duties, Dick made recorded of board resolutions and attested to guaranties. Dick presented to the bank a certified copy of a purported resolution of DIDC's BOD authorizing Maranz to issue the guaranty. H/e no such resolution was ever passed by the board. DIDC filed for chapter 11 bankruptcy, and the bank filed a claim. The referee disallowed the bank's claim, finding that Maranz had no authority to bind DIDC to the guaranty. *Holding:* Maranz had apparent authority where the secretary certified the guarantee's resolution b/c it is w/I the duty of secretary to keep corporate records and make proper entries of the actions and resolutions of directors.

Robertson v. Levy (D.C. Ct. App. 1964)

*Facts:* Robertson and Levy entered into an agreement, under which Levy was to form Penn. Ave. Record Shack, Inc. to purchase Robertson's business. Levy submitted AOI for Penn Ave., but they were rejected. Robertson assigned his lease to Levy as president of Penn Ave. and Levy began to operate the business under the same name. Robertson executed a bill of sale disposing of his business assets to Penn Ave. in return for a not providing for installment payments, signed "Penn Ave. Record Shack, Inc. by Eugene M. Levy, President." The certification of incorporation was later issued to Penn Ave., and one payment was made on the note. Penn Ave. ceased doing business and is now w/o assets. Robertson sued Levy personally for the balance due on the note. *Holding:* Rejects concepts of de facto corporation and corporation by estoppel. Levy was subject to personal liability b/c, before the letters of incorporation were issues, he assumed to act as a corporation w/ any authority to do so. Held that subsequent partial payment by the corporation did not remove the liability.

Revlon v. MacAndrews & Forbes (DE 1986)

*Facts:* Pantry Pride (plaintiff) sought to acquire Revlon (defendant) and offered $45/share. Revlon determined the price to be inadequate and decline. Despite defensive efforts by Revlon including an offer to exchange up to 10 million shares of Revlon stock for an equivalent number of Senior Subordinated Notes of $47.50 principal at 11.75% interest, PP remained committed to the acquisition of Revlon. PP raised its offer to $50/share and then $53/share. Meanwhile, Revlon was in negotiations w/ Forstmann (defendant) and agreed to a leveraged buyout by Forstmann, subject to Forstmann obtaining adequate financing. Under the agreement, Revlon SHs would receive $56/share and Forstmann would assume Revlon's debts. Upon the announcement of that agreement, the market value of Notes began to drop, and the holders threated suit against Revlon. PP raised its offer again to $56.25/share. Forstmann then raised its offer to $57/25 contingent on two conditions: (1) a lock-up option giving Forstmann the exclusive option to purchase part of Revlon if another entity acquired 40% of Revlon shares, and (2) a "no-shop" provision. In return, Forstmann agreed to support the par value of the Notes even though their market value had significantly decline. The Revlon BOD approved the agreement w/ Forstmann and PP sued challenging the lock-up option and the no-shop provision. *Issue:* Whether Revlon's agreement should be enjoined b/c it is not in the best interest of the SHs *Holding:* When a takeover is inevitable, the directors' duty is to achieve the best price for the SH. "Reasonableness" in terms of whether proportionate to threat posed to the target's control is no longer a factor. Here, the lock-up and no-shop provisions violated the BOD's duty by making it impossible for a bidding war to drive up the price.

Virginia Bankshares v. Sandberg (SCOTUS 1991)

*Facts:* Parent company owned 85% of subsidiary, merged w/ subsidiary. Didn't need proxy to carry vote but chose to send a solicitation anyways. Acquired a 3P assessment of value of shares to cash out minority SHs at $42/share and sent to SHs w/ a statement that the BOD felt it was a "high value" for minority SHs. Sandberg, minority SH, did not approve the merger and sued under Rule 14a-9. *Issue:* - Whether a statement of opinion can be actionable under Rule 14a-9. - Whether reliance/causation can be shown where proxy was not needed to carry vote. *Holding:* - A statement of opinion is not always non-actionable . . . instead turns on whether SHs would reasonably rely on directors' opinions and beliefs b/c they are the experts. Opinion/belief statements are action able where (1) the statement was false, AND (2) the directors knew their statement was false. Here, plaintiff has burden to show that $42/share was NOT a high value AND that directors knew that. - Plaintiff argued two theories as to why the proxy solicitation was an "essential link" even w/o numerical necessity to carry the vote: public relations and insulation from suit. Court rejects both b/c (1) it did not actually insulate company from suit b/c VA law does not give SHs a right to appraisal, so signing a proxy statement did not waive right to appraisal; and (2) public relations were insufficient to show essential link. H/e Court does NOT hold that a numerical necessity is required for an "essential link." (Must look at what actions are available under state law).

Summers v. Dooley (Idaho 1971)

*Facts:* Partners agreed to hire employees to cover their responsibilities at their own expense. One partner wanted to hire a permanent employee, other disagreed, but he went ahead and hired him anyways. Suit claiming partnership should pay for it b/c other partner accepted the benefit of the employee's work. *Holding:* Where partners agreed that hiring an employee is not in the ordinary business practice, cannot change practice w/o majority.

Cortez v. Nacco Materials Handling Group, Inc. (OR 2014)

*Facts:* Plaintiff sued Swanson Group, Inc., owner of Sun Studs LLC (Plaintiff's employer) for a workplace accident involving a forklift (purchased from Nacco). Though Swanson was the sole member of the LLC and was formally a manger of it (member-managed), the LLC also had its own supervisory employees tasked w/ the day-to-day operations. Plaintiff sought to hold Swanson personally liable for negligently ailing to provide a safe workplace and failing to provide competent safety personnel, arguing that the OR LLC statue only protects managers from vicarious liability for LLC's debts obligations, and liabilities. *Holding:* LLC members and managers remain personally liable for their acts and omissions to the extent that those acts or omissions for be actionable against the member or manager if that person were acting in an individual capacity . . . must have actual knowledge or actively participated in the negligent act. Here, no such showing can be found.

In re Kemp v. Beatley (NY 1984)

*Facts:* Plaintiffs were two SHs that held a combined 20.33% of Kemp. Both were long-time employees and held significant management positions. During their employment, they and the other SHs received either dividends or extra compensation is proportion to their stock each year. After both plaintiffs left the company (on resigned, the other terminated), the company began to make its annual distributions on the basis of service rendered rather than stock ownership. Consequently, plaintiffs no longer received distributions . . . petitioned to the court for dissolution, arguing that the controlling SHs had frozen them out via fraudulent and oppressive conduct. *Holding:* When looking into oppressive conduct, must investigate what the majority SHs knew, or should have known, to the be minority's expectations. Oppression should be deemed to arise ONLY when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to minority's decision to join the venture . . . Here, reasonable expectations to distributions subverted. T/f finds for minority SHs.

Lovenheim v. Iroquois Brands (D.C. District Ct. 1985)

*Facts:* Proposal pertaining to the human treatment of geese in production of pate no included under de minimus exception. Conceded that no related 5% of total assets, but SH argues that social and ethical significance makes it significantly related to the issuer's business. *Holding:* Social and ethical significance is related to the business.

Kessler v. Antinora (NJ Ct. App. 1959)

*Facts:* Venture to buy a lot and sell a residence on it. Kessler was to provide funds and Antinora was to build the home. Agreement that Kessler would take 60% of the profits and Antinora 40%, but silent on losses and no agreement that Antinora would be paid for labor. Loss of 80K. Kessler sues for 40K of the loss and his interest. *Holding:* Court found an implied understanding that where one party contributes and the other labors, it is as if they had agreed that the labor would be valued the same as the capital contributions. T/f Kessler had to absorb his entire loss.

Santa Fe Industries v. Green (SCOTUS 1977)

*Facts:* SF owned 95% of Kirby. Enacted a short-form merger where DE statute permits a parent company owning over 90% of a subsidiary to merge w/o prior notice to minority SHs but gives the minority the right to petition for appraisal at court. SF got an appraisal showing its assets were $640/share its stock was worth $125/share (total value $755/share). Sent a statement to minority SHs offering $150/share. Minority SHs sued, arguing this conduct was fraudulent under Rule 10b-5 b/c the merger was intended to freeze out the minority SHs and that SF knowingly received a "fraudulent appraisal" of the stock in order to mislead SHs into believing that they were only entitled to the value of the stock, not the assets AND stock, t/f misleading them into believing they were getting a good deal at $25 over. *Issue:* Did SF employ manipulation and deception in carrying out the merger? *Holding:* No. Merger was carried out in compliance w/ DE law and did not involve manipulation or deception as defined in § 10b. Sant Fe fully discloses values so there was no material misrepresentation, nondisclosure, and the post-merger notice gave the minority SHs the opportunity to determine whether the accept the price offered or seek an appraisal in state court (which they hadn't done).

In re Caremark International (DE Chanc. Ct. 1996)

*Facts:* SHs sought to hold BOD liable under duty of care for illegal kickbacks done by lower level employees that they had no knowledge about. *Issue:* Does the BOD have a duty to monitor by adopting procedures to ensure compliance w/ laws? *Holding:* Yes, but w/ limits . . . Liability if: - Directors utterly failed to implement any reporting or information system or control; or - Having implemented such a system or controls, consciously failed to monitor or oversee its operation. - Utter failure = bad faith

Meinhard v. Salmon (NY 1928)

*Facts:* Salmon entered into a lease for a hotel, received necessary fund from Meinhard who became his partner. Salmon managed the property, but Meinhard continued to provide funds. Near the end of the lease, Salmon gets an opportunity to renew the lease (plus some). He does not tell Meinhard about the opportunity. *Holding:* Breach of fiduciary duty not to disclose opportunities that arise out of the joint venture (partnership)

Simpson v. Ernst & Young (S.D. Ohio 1994)

*Facts:* Simpson sued Ernst & Young, where he had worked as an accountant and had been formally denominated a "partner," alleging that defendant fired him in violation of the Age Discrimination and Employment Act. *Issue:* Whether Simpson was an "employee" rather than a "partner" such that he was subject to ADEA protection. *Holding:* Yes, the title of "partner" does not make them so. Simpson was not a partner because he: (1) did not make a true capital contribution to the firm; (2) did not share in the firm's profits and losses but rather received a salary; (3) had no other indicia of an ownership interest in the firm; (4) had no right to examine the books and very little management authority; and (5) there was no fiduciary relationship b/w the management committee and Simpson.

Paramount Communications v. Time (DC 1989)

*Facts:* Time began considering merger candidates to enter entertainment field, including Paramount and Warner. Time and Warner eventually agreed to, and both BODs approved, a stock-for-stock merger. Before merger was approved, Paramount announced an all-cash offer for $175/share. Time's BOAD concluded that the offer posed a threat to Time's future business and "Time culture." Time then made a cash offer for 51% of Warner's outstanding shares at $70/share. Paramount raised its offer for Time's outstanding shares to $200/share. Time BOD again rejected, maintaining that Warner acquisition offered better long-term value for its SHs. Time SHs sued based on Revlon, claiming that Time-Warner agreement effectively put Time up for sale, thus triggering Revlon duties such as the requirement that the BOD seek to increase the corporation's short-term value. Additionally, claimed that based on Unocal, belief of future threat to culture was not reasonable and that BOD failed to fully investigate Paramount's offer. *Holding:* - Directors are not required to favor a short-term SH profit over an ongoing long-term corporate plan as long as there is a reasonable basis to maintain the corporate plan. Even though Time sought out a merger did not mean that it had decided to dissolve . . . no duty to SHs under Revlon until dissolution is inevitable. - Time'a actions also satisfy Unocal b/c journalist integrity was a valid concern and the debt taken on was not too injurious to the company and t/f was not unproportionate.

Smith v. VanGorkom (DE 1985)

*Facts:* Trans Union had large investment tax credits (ITCs) coupled w/ accelerated depreciation deductions w/ no offsetting taxable income. Their short-term solution was to acquire companies that would offset the ITCS, but the CFO, Romans, suggested that Trans Union should undergo a leveraged buyout to an entity that could offset the ITCs. The suggestion came w/o any substantial research, but Romans thought that a $50-$60 share price (on stock currently valued at a high of $39.5) would be acceptable. CEO, Van Gorkom did not demonstrate any interest in the suggestion, but thereafter pursued the idea w/ a takeover specialist, Pritzker. W/ only Romans' unresearched numbers at his disposal VG set up an agreement w/ Pritzker to sell Pritzker Trans Union shares at $55/share. VG also agreed to sell Pritzker one million shares of Trans Union at $39/share if Pritzker was outbid, and he agreed not to solicit other bids or provide proprietary info to other bidders. VG only included a couple people in the negotiations w/ Pritzker, and most of the senior management and the BOD found out about the deal on the day they had to vote for approval. VG did not distribute any information at the voting, so the BOD had only his word, the word of the President of Trans Union (who was privy to the earlier discussions w/ Pritzker, advice from an attorney who suggested that the BOD might be sued if they voted against the merger, and vague advice from Romans who told them that the $55 was the beginning end of the range he calculated. VG did not disclose how he came to the $55 amount. On this advice, the BOD approved the merger and it was also later approved by SHs. *Issue:* Does BJR apply? *Holding:* No. Court finds gross negligence in violation of the duty of care (informed business decisions) from the BOD based off of three factors: - BOD did not adequately inform themselves as to VG's role in forcing the sale and establishing the purchase price - BOD was uniformed as to the intrinsic value of the company - Given the circumstance, approving the sale in 2 hours w/o prior notice or an emergency

Francis. v. United Jersey Bank

*Facts:* Two brother directors of a closely held reinsurance corporation misappropriated trust funds and the third director (mother), who had inherited 48% of the shares, knew nothing about it and was not active in the corporation's affairs. *Issue:* Whether a corporate direct is personally liable in negligence for the misappropriate of trust funds by other directors who were also officers and SHs of the corporation. *Holding:* Mother's nonfeasance was a substantial factor contributing to the misappropriate (proximate cause) where the sons knew that she was not reviewing their conduct.

In re Wheelabrator Tech. Inc. Shareholders Litigation (DE Chanc. Ct. 1995)

*Facts:* Waste was a 22% SH of Wheelabrator Technologies, Inc. Waste elected 4 out of 11 directors. Merger of two companies proposed. 7 non-Waste directors of WTI met and approved the merger (court determined the meeting satisfied duty of care). 4 WTI directors rejoined the meeting and entire board re-approved the transaction. SHs also approved after receiving a proxy statement that satisfied disclosure requirements. Court discusses the effect of SH vote on a claim that the transaction should be voided as a violation of the duty of loyalty. *Holding:* In this case, the transaction did not involve an interested and controlling SH, so no burden shift, and must overcome BJR.

Martin v. Peyton (NY 1927)

*Facts:* When Peyton's investment firm was in financial trouble, his friend (Hall) invested $2.5 million in securities to it. The loan was contingent on receiving 40% of profits until the loan was repaid. Additionally, Hall received control direct management and veto power over curtained, he could inspect the books, and had firm member's interests assigned to him. BUT could NOT initiate any transactions that could bind the firm. Shortly after, firm went under and the creditors went after Hall. *Issue:* Whether the conditions of the agreements b/w Peyton and Hall created a GP. *Holding:* No, the agreements did not establish a partnership. Although Hall ensured that he had some control over the operations of the business, the controls were to ensure that the investment was secure. Court noted that some of the options were unusual, but not enough to create a partnership

Chiarella v. US (SCOTUS 1980)

*Issue:* Whether a person who learns from the confidential documents of one corporation that it is planning an attempt to secure control of a second corporation violates § 10(b) if he fails to disclose the impending takeover before trading in the target company's securities. *Holding:* Duty to disclose or abstain does not arise from the mere possession of non-public market information. Requires a relationship like fiduciary or trust and confidence. Here, he owed no duty to the target company (employed by the acquirer) and the Court didn't decide whether he owed a duty to the acquiring company b/c it was not raised below. (3) Dissent: Anyone who uses insider information should be liable.

Alford v. Shaw (NC 1987)

*Issue:* Whether a special litigation committee's decision to terminate plaintiff minority SH's derivative action against defendant corporate directors is biding upon the courts. *Holding:* Court approval is required for disposition of all derivative suits, even where the directors are not charged w/ fraud or self-dealing, or where the plaintiff and the board agree to discontinue, dismiss, compromise, or settle the lawsuit, i.e., even w/o an excused demand (first step of Zapata/DE approach)

Pearlman v. Feldmann (2nd Cir. 1955)

*OLD RULE* *Facts:* Feldmann was the majority SH in Newport Steel Corp. During Korean War, there was a shortage of steel, making Newport valuable. Feldman, taking advantage of the shortage, sold his controlling interest to Wilport Co. for a premium price. Newport minority SHs sued seeking accounting for and restitution of Feldmann's gains, arguing that the premium Wilport paid included a corporate asset—the ability to control production of steel in a time when supply was very low. They argued that this power was held in trust for Newport by Feldman as its fiduciary. *Issue:* Whether the minority SHs were entitled to a share of the premium *Holding:* Court held that Feldmann breached his duty of loyalty to the corporation. Looked at transaction as majority SH selling a corporate opportunity to someone outside of the company but corporate opportunity was not his personally to sell; it belonged to the corporation.

Litwin v. Allen (NY Sup. Ct. 1940)

*RARE case where BJR does NOT apply* *Facts:* Derivative action by persons owning 36/900,000 shares of the Guaranty Trust Company. Defendants included directors and members from JP Morgan & Co. The complaint sought to hold them liable for losses incurred as a result of a transaction: a. Alleghany needed money but couldn't borrow. Happened to hold Missouri Bonds in its portfolio, so it wanted to get money by selling the bonds w/ the option of buying them back at the same price. Entered into a deal w/ GTC where it gave itself the option w/I 6 months. During those 6 months, the value continually dropped, so Alleghany did not buy them back. GTC left w/ the bonds. *Issue:* Whether directors of GTC breach a duty of care buy purchasing the bonds *Holding:* Yes. GTC BOD not protected by BJR b/c the purchase was a no-win decision for GTC. If bonds went up, then Alleghany would just buy them back. If bonds go down, GTC is left w/ the depreciated bonds.