Corporations
Factors Demonstrating a Pship
1. sharing profits 2. sharing loss 3. right to manage 4. intent of parties (express or implied) 5. contribution (capital, labor, expertise, property) -- Vohland v. Sweet = contribution of capital is not required and the contribution of labor suffices, also no evidence that Sweet was supervised as an employee
Undisclosed Principal
A principal whose identity is unknown by a third person, and the third person has no knowledge that the agent is acting for a principal at the time the agent and the third person form a contract.
Caremark
- Caremark (D) provided healthcare services - bad Ks with physicians, but reporting systems in place Conditions Necessary for Liability: (1) Directors failed to implement any reporting o info control systems; OR (2) D's implemented such systems but consciously failed to monitor
Board Meeting
- Directors act as a board only at a formal board meeting, just because board members meet up and discuss business does not make it a meeting - act by majority vote - formally recorded meeting minutes - proper notice given to members - quorum is present (set in bylaws, min is 1/3 members) - board may act without a meeting if the members give their unanimous written consent
Income Statements
- Profit and loss statement - financial performance over a specified period = revenue = items sold x item price expenses (note fixed expense like Hut divided out over time) Net income = revenue - expenses
When will a court likely uphold a self-dealing transaction?
When the transaction is (1) fair and (2) approved by a board comprised of a majority of disinterested directors, after (3) full disclosure *not the type of self-dealing the court is concerned with
Does the default rule that an employee may not compete with his employer during the term of employment, but may compete following employment benefit both the employer and the employee?
Yes - employee will get paid more and the employer gets loyalty
May agency relationships be implied?
Yes may be implied when parties have not explicitly agreed to agency relationship A simply needs to reasonably understand from the action or speech of P that A has been authorized to act
Franchisor Cases
Humble Oil = liable in tort because exercised substantial control over daily operations Sun Oil = not liable because no control over daily details and the franchiser retained the overall risk of profit or loss
Lowendahl Test
Veil piercing requires that P show existence of (1) a SH who completely dominates corporate policy; and (2) uses her control to commit a fraud or "wrong" that (3) proximately cause P's injuries
Apparent Authority
authority that a reasonable TP would infer from Ps actions or statements A cannot grant themselves apparent authority White v. Thomas = A's authority cannot be shown solely by A's declaration or action -- must be based on manifestation from P (buying land -- authority to buy not sell)
Agency Termination
both A and P can terminate at any time if for a term -- then revocation by a party and subsequent breach can lead to a claim for damages
Board Member's Extraordinary Actions
cannot act with apparent authority in these cases because it is not in line with prior dealings where these dealings need: (1) a measure of similarity to the act for which the Principal is sought to be bound; and (2) a degree of repetitiveness Extraordinary actions place the TP's on notice to inquire re the officer or member's actual authority *dissolving a corp is an extraordinary act
Joint Venture
pship for a specific purpose
Balance Sheet
represent the financial picture of a business organization as it stands on one particular day Assets = Liabilities + SH Equity Assets = fixed (capital assets; not intended for sale - property, equipment) & current (cash, accounts receivable, IP) - each asset listed at its acquisition cost - increase in assets = debit - decrease in assets = credit Liabilities = current (due within a year, accounts payable, accrued liability, current portion of long-term debt) & long term (bonds, loans, debentures) Equity = amount of equity or ownership stake that SHs have in the business - SH equity = assets - liabilities = capital + surplus - Stated capital = all or a portion of the value that the SH transferred to the company when buying stock - capital surplus = amount paid for stock in excess of its surplus - accumulated retained earnings = equity with capital surplus before dividends paid out
Profits/Income =
revenue - expenses *sales people often paid from revenue compared to partners paid through profits -- this helps see who is a partner
Default powers of SHs
right to vote, right to sell, right to sue right to vote for most fundamental transactions & board of directors *if directors bought or received shares they can vote them
Limited Liability Partnership (LLP)
same as LP except does not have general partners *must be included in the firm's name to put the world on notice of the liability type
Removing Directors
shareholders may remove directors from office at any time and for any reason, except in the case of staggered boards in which case they do so only for cause unless the charter provides otherwise For cause = fraud and self dealing, but maybe not business judgment
Accounting
standardized methodology for describing a firm's past financial performance *use GAAP (Generally accepted accounting principles
Equitable Subordination
subordinating the debt claims of the creditor-SH (affiliated) to other creditors (unaffiliated) controlling SH is the last to get funds and often gets nothing
XYZ Corporation has 1,000,000 authorized voting shares, of which 400,000 are outstanding. The XYZ board concludes the corporation needs more capital and wants to issue another 500,000 voting shares. The board adopts a resolution to this effect. What more is necessary?
the board resolution is sufficient; the board of directors has the authority to approve the issuance of authorized shares, without a shareholder vote
If the charter and bylaws conflict . . .
the charter wins *if you want to constrain the board's power must do so in the charter
Valuation of a business under modern valuation methods is based on ...
the company's expected future cash flows, discounted to reflect the risk of the company and the inherent time value of money
LLC
contractual in nature -- all partners enjoy limited liability even if they exercise control over the business Fiduciary duty rules are the default in LLC's and can contract out "Just because a party is frustrated with the demise of the LLC, doesn't justify the post hoc refashioning of the bargain they struck when forming the LLC agreement"
BJR
courts should not second guess good faith decisions made by independent and disinterested directors Three main factors: 1. decision made by financially disinterested directors or officers 2. who have become duly (minimally) informed before exercising judgment 3. who exercise judgment in a good faith effort to advance corporate interests if you don't like what the board is doing you can vote them out
De facto control vs. De Jure Control
de facto = not mathematical majority but if 1 has 45% control and the 55% is in the market then basically has control de jure = mathematical majority of voting shares
Securities
debt securities -- a loan; investors receive periodic payments of interest; bonds - contracts between creditor and debtor with terms equity securities -- in the form of common stock
Board Election
default rule = by plurality vote
Limited Partners in LP
enjoy limited liability and risk no more wealth than what they contributed to the pship -- usually do not have control and only contribute financially *must be included in the firm's name to put the world on notice of the liability type
General Partners in LP
treated like partners of a normal pship
Actual Authority
what a reasonable person in the position of A would infer from the conduct of the P Express = based on speech and conduct implied = based on what is necessary or proper or what A reasonably interprets Ps manifestation
Controlled Corporations
where a single SH or a group of SHs exercise control through its power to appoint the board where there is no controlling SH the control is in the market
Assigning pship property or authorizing anything in contravention of pship agreement requires . . .
all partners to agree UNLESS partner authorized or Pship business abandoned
Failure to capitalize is . . .
per se illegal to have limited liability you have to put something in
Fiduciary duties in a pship
(1) duty of loyalty = agents cannot put their own interests before their principal (the pship) (2) duty of care = agents must act in the same manner that a reasonably prudent person in their position would *standard of evidence is subjective and the agent's intent does not matter
Agents Fiduciary Duties
(1) duty of obedience = duty to obey the Ps demands (2) duty of care = duty to act in good faith, to act as one believes a reasonable person would act, to be informed when exercising any fiduciary power (3) duty of loyalty = duty to act in a way that best advances the interests of the P, not to exercise fiduciary power for solely personal benefit in all matters connected to the agency relationship Juke Box case = A violated duty of loyalty and must disgorge profits Trustee duty to the trust and cannot contract out of duties (not an agent of the trust's beneficiary) -- should not have individual interests which conflict with duties, even if it is in good faith (In re Gleeson = share cropped land when couldn't find other renter and trustee paid more than market price which does not matter)
Corporation Characteristics
(1) legal personality with unlimited life (2) limited liability for investors (default rule which may be changed in charter) (3) free transferability of shares - encourages management to act effectively because the control in the corporation may shift (4) central management - BoD, passive investors (default rule is management must be elected)
Board may reduce capital . . .
(1) retiring stock -- can retire stock that was issued but not outstanding (2) transferring to capital surplus any cash in excess of stated capital -- can only do this when assets left are sufficient to pay debts
Shareholders Do . . .
(1) vote on election of directors (2) vote on amendments to articles of incorporation + bylaws (3) vote on certain transactions (i.e. mergers)
Duty to Monitor
* Failure to supervise or detect fraud Rich Mom and Bad Sons -- must make a good faith attempt to do a proper job -- Held D was negligent in her duties by (1) not informing herself about the operations of the corp and not continuing to be informed of its activities, and (2) not taking action from sons from looting the company Duty to keep informed and to perform at least min duties -- how to act depends on the facts of the case Duty for corporations to have ordinary reporting system -- an adequate reporting system is a safe harbor for failure to monitor - if the reporting system does not catch the wrong then this is an absolute defense *not enough to just attend board meetings
When will courts pierce the corporate veil?
* when there has been some abuse of the corporate form, ignoring the separate legal identity of the corporation *there has to be some wrong beyond the creditor's inability to collect Two-Prong Test (Alter-Ego Plus Test): (1) interest -- aggressive disregard for corporate form that the corporation becomes an alter-ego Factors -- (a) failed to maintain meetings/bylaws, other things; (b) commingling of funds/assets (no separation of corporate funds); (c) undercapitalization (2) Adherence to fiction -- (a) without piercing wrong would not be remedied; (b) seedy stuff not just business judgment
Sale of all or substantially all of the corporation's property or assets requires . . .
*the charter may require higher than majority vote to approve board engaging in an extraordinary action majority of the outstanding voting stock -- but the board can veto the SH vote and cancel the sale
Sinclair Oil
- Sinclair (D) owns 97% shares in Sinven + nominates all members of the board - P is a minority SH in Sinven alleging Sinclair forced Sinven to pay out high dividends disallowing Sinven to grow its business - Issue is that the dividends went to Sinclair as the majority SH - but not self-dealing because a proportionate amount of dividends went to the minority SHs - alleged it was usurping a business opportunity -- but have to show a viable business opportunity passed on, here it was just the money to maybe one day have an opportunity
Discount Rate
- estimate of expected returns - factors in risk premium which reflects that people don't value safe and risky investments the same - higher discount rate investors are risk averse
Close Corporations
- have only a few shareholders - usually incorporated for tax and liability purposes rather than capital raising purposes - SHs are also officers and directors - hard to sell shares
Charter
- incorporator drafts and files with sec. of state - must include name, address, etc. - DGCL 102(b) = can set out size of board, staggered or concurrent board, how to remove directors, provisions limiting or defining power - sets out the number of shares that the company can issue - shares issued or sold to the public are outstanding shares - DGCL 160(c) = only outstanding shares may vote in the board elections - can create different classes of shares = preferred shares -- often cannot vote but paid a fixed dividend; common shares -- can vote pro rata, but not guaranteed dividends - before stock is sold may amend; after sold need majority SH approval - SH vote to amend bylaws as well
Duty of Good Faith
- mere negligence does not give rise to liability - gross negligence can rise to the level of liability; however SH ratification is a safe harbor Bad Faith = (1) intent to harm; and (2) failure to act when a director knows they have a duty to (imposed by charter or K)
Publicly Traded Corporations
- most common - incorporated as a means of raising capital - large number of SHs
Meinhard v. Salmon (passive vs. active partner)
- pship to renovate the Hotel B - lease on Hotel B ended and owner and S agreed to a new lease -- important here that the offer made in the lease term touched the same property of the original joint venture - S did not notify M of the opportunity for the new lease - M sued for breach of duty of loyalty = S took for himself a business opportunity of the pship - when the owner made the new lease offer S was still in a partnership with M -- so S had the duty to notify M of the opportunity, but did not have a duty to bring him into the opportunity
BJR Elements
1. P shows that fiduciary duty exists 2. P provides evidence that the directors in reaching their decision breached either duty of good faith, duty of care, and duty of loyalty 3. if P is successful then directors must prove the entire fairness of the transaction (fair dealing + fair price) 4. If duty is not breached then apply BJR
Each partner binds pship when acting apparently carrying on the usual course of business unless . . .
1. Partner has no authority to act for the pship in a particular manner = outside the scope of business or contrary to an agreement; AND 2. TP knows that the partner has no authority or knows of the restriction animus on the TP to ask if the partner has the authority
Key Features of a Partnership
1. Unlimited (joint and several) liability = each partner individually liable for partnership obligations - pship bound by partner's wrongful act - partner can bind the ship by entering into K on behalf of the ship - loans to pship by partners are subordinated to loans by creditors - creditors may go after the assets of the pship, but if those are inadequate then they may go after personal assets 2. allocation of profits 3. allocation of losses 4. management = equal rights in management - all partners must consent to new partner - acting outside the scope of business requires majority vote 5. not a tax paying entity = partners pay on their own taxes 6. fiduciary duty = loyalty aka every partner must account to the pship for any benefit and hold as trustee any profits derived by him without the consent of the other partners 7. property = all pships must have property belonging to the pship not the partners individually 8. dissolvable = at will, but may be subject to damages (unless the pship K's out of the default at will rule) -- express or implied term not sufficiently proven by expected recoupment of investment
To establish a pship there must be . . .
1. a voluntary K of association for purposes of sharing profits and losses that may arise from contribution of capital or skill 2. an intention on the part of the principals to form a pship for that purpose = intent to do things that constitute a pship (express intent not required)
Usurping Business Opp
A corporate officer/director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest in the opportunity for the corporation's future; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimitable to his duties to the corporation Elements: 1. P has to show that D appropriated a business opportunity that belonged to the corp (or subsidiary if it's a controlling SH) 2. if D presented the opportunity then its a safe harbor -- then, P must defeat BJR 3. if in charter that officers and directors can take business opps then safe harbor
Partially Disclosed Principal
A principal whose identity is unknown by a third party, but the third party knows that the agent is or may be acting for a principal at the time the agent and the third party form a contract.
A, B and C are equal shareholders of RentEquip, Inc. C manages the business; A and B do not actively participate. There are no shareholder or board meetings, and A and B receive no information from C - though they receive sizable monthly "dividend" checks. C hires E, who rents to V a defective chainsaw. Ouch! When V sues RentEquip for her injuries, A and B discover the company's insurance policy has lapsed because C had not paid the premiums, despite C's assurances to them that the premiums had been paid. RentEquip has insufficient assets to pay V's judgment. Who is liable to V? A. A and B are not liable because they did not dominate the corporation or commit a wrong given their ignorance of the corporation's precarious financial situation B. C is liable because he is responsible for the business being under-insured, thus justifying piercing the corporate veil C. A, B and C are liable because the corporation failed corporate formalities, which by statute results in piercing the corporate veil D. C is not liable because the tort in this case was committed by E, who rented a defective item to V
A. A and B are not liable because they did not dominate the corporation or commit a wrong given their ignorance of the corporation's precarious financial situation
When a business owner sets up multiple corporations so that the assets of each are separated from the risks of the others, this use of limited liability ... A. is consistent with public policy, so long as the corporations comply with applicable insurance requirements and the owner doesn't siphon personal funds B. violates public policy, because all the risks of a business are part of the same enterprise and must be supported by enterprise assets C. violates public policy, because corporate law essentially creates an insurance mandate that business use its assets to insure against business risks D. is consistent with public policy, since the legislature created limited liability to encourage business formation regardless of social costs
A. is consistent with public policy, so long as the corporations comply with applicable insurance requirements and the owner doesn't siphon personal funds
Three friends D, E and F agree to go into business installing home insulation. They agree to share profits and properly register their partnership as HomeInsulate LLP. Despite opposition by D and E, F signs a contract to undertake an insulation project for a shopping center, a type of commercial project the business has never undertaken before. When the project falters and the shopping center sues, who is liable? A. only the partnership, because it is an LLP in which the partners have limited liability and F was acting with apparent authority B. only F, because he signed the contract and lacked authority to bind the partnership given that the partnership name limits the business to residential projects C. all three partners D, E and F, because the act of any one partner binds the partnership and all partners share jointly and severally in partnership liability D. nobody (neither the partnership nor the partners) because F acted without actual authority in signing a contract beyond the partnership's usual business
A. only the partnership, because it is an LLP in which the partners have limited liability and F was acting with apparent authority
A corporate executive does not usurp a corporate opportunity if ... A. the corporation has an expectancy in the opportunity and it is rejected by the corporation's informed, disinterested and independent decision makers B. the corporation has an expectancy in the opportunity and the fiduciary takes it without offering it to the corporation C. the opportunity is within the corporation's line of business and the corporation had the financial means to take the opportunity for itself D. the opportunity is one that the corporation sells to the corporate fiduciary at a fair price, based on independent market valuations
A. the corporation has an expectancy in the opportunity and it is rejected by the corporation's informed, disinterested and independent decision makers
GHI Corporation has a six-person board. At a regular board meeting, only two directors can attend. They then call directors Alice and Bob and put them on a conference call. The four talk about the corporation buying Blackacre and then agree to a resolution for GHI to buy Blackacre from Third Party. A. the purchase is authorized since four of six is a board majority B. the purchase is authorized, assuming the GHI bylaws permit conference calls C. the purchase is not authorized, since there was no quorum at the board meeting D. the purchase is not authorized, since real estate transactions require shareholder approval
A. the purchase is authorized since four of six is a board majority = quorum present and majority approved
L, M, and N are equal shareholders of LMN, Inc., a closely held corporation. All three are directors, but only L and M are corporate officers with salaries from the corporation. When N complains that the corporation has failed to pay dividends and "left him in the cold," L and M tell him to "take a hike - or sell your shares to us for $35/share." N is furious, convinced his shares are worth much more than $35. He asks for the corporation's full financial records and any documents related to indications by outside parties of an interest in buying in the business or its shares. A. N has a right to inspect these documents because he is a 10% shareholder B. N has a right to inspect these documents because he is a shareholder, and seeking to value the business and his shares is a proper purpose C. N does not have the right to inspect these documents because as a non-officer shareholder he may only request to see the articles, bylaws and board minutes D. N does not have a right to inspect these documents as a shareholder, but only as a director
B. N has a right to inspect these documents because he is a shareholder, and seeking to value the business and his shares is a proper purpose = right to request records and bookkeeping
A, B, and C are partners in ABC partnership. Their relationship breaks down. A wants out. She can accomplish this by -- A. selling her partnership interest to partner B, even without partner C's consent B. stating she is withdrawing, thus dissolving the partnership and forcing B and C to liquidate the business and pay her share to her in cash C. selling her partnership interest to stranger D, assuming partner C's consent (thus obtaining the approval of a majority of the partners) D. merging the partnership into ABC Corporation and then selling her shares on the open market
B. stating she is withdrawing, thus dissolving the partnership and forcing B and C to liquidate the business and pay her share to her in cash
Assume that Corporation XYZ has three shareholders, with X holding 20% of the voting shares, Y holding 25%, and Z holding 55%. The XYZ board is composed of 5 directors. Which statement is true: A. under straight voting, X and Y are each assured of electing one director to the five-person board B. under plurality voting, Z will be able to elect all the XYZ directors, and poor X and Y (even if they got together) can do nothing about it C. under cumulative voting, Z is assured of electing all four directors to the board D. under class voting, X will be able to name one director, Y will be able to name one director, and Z will name two directors
B. under plurality voting, Z will be able to elect all the XYZ directors, and poor X and Y (even if they got together) can do nothing about it
BJR Busters
BJR Buster -- Label -- Safe Harbor (1) inadequately informed -- duty of care -- DGCL immunization provision (DGCL 107(b)(7) = corporations can opt out of damages for breach of duty of care - in most charters) - whether informed turns on whether the board have informed themselves prior to making the decision of all material information reasonably available to them (2) Self-dealing (director/Controlling SH) -- duty of loyalty -- DGCL 144 only shields directors - need majority of directors to have conflict of interest (3) Usurping corporate opportunity -- duty of loyalty -- presentation to the board/charter renunciation (4) waste -- bad faith -- unanimous SH ratification (5) Knowing violation of law -- ?? -- none
Corporation Leadership
Board of Directors - not full time employees - default rule is they do not have to answer to the controlling SH Officers - full time employees hired by the board - usually make the management decisions instead of the board
L, M and N are the only (and equal) shareholders in closely-held LMN Corp. From the beginning of their business ten years ago, L and M were the company's only directors and officers, distributing the company's annual profits as dividends. Last year L and M decided to discontinue paying dividends. When N complains, L and M say they are retaining profits for expansion plans. N consults you and asks, "If I sue, would a claim seeking payment of dividends be successful?" A. Yes. Shareholders in a close corporation have a right to an equal share of profits, just like partner in a partnership (who can always seek an accounting) B. Yes. Shareholders in a close corporation can enforce their reasonable expectations, here to payment of dividends, by bringing a fiduciary claim C. No. Dividends need not be paid if the majority has legitimate business purposes for not paying them, here because of expansion plans D. No. Dividends need not be paid, even when funds are available and the majority is acting opportunistically to force the minority to sell his shares to them
C. No. Dividends need not be paid if the majority has legitimate business purposes for not paying them, here because of expansion plans
B owns 50 shares of XYZ Corp. (described in the previous question 11). On January 15, B sends the corporate secretary a written, signed proxy that states that his shares are to be voted against the charter amendment. But B then attends the meeting and, at the appropriate time, votes his shares for the amendment. The 50 shares should be counted as ... A. being voted against the amendment, because B was holder of the shares on the record date and properly executed a proxy for the amendment B. being voted against the amendment, because a written proxy is irrevocable since it was accompanied by an interest C. being voted for the amendment, because B properly rescinded his earlier by proxy by voting his shares in person at the meeting D. not being voted at the meeting, but treated as abstentions because of the inconsistency between the proxy and in-person votes
C. being voted for the amendment, because B properly rescinded his earlier by proxy by voting his shares in person at the meeting proxies are revocable
Which of the following statements is not true? A. in a limited liability partnership, partners are not personally liable for the commercial obligations of the business B. in a limited partnership, limited partners cannot participate in the management of the partnership (ie, writing checks) without incurring personal liability C. in a close corporation, the shareholders lack a readily-available market into which they can sell their shares D. in a publicly-traded corporation, the shareholders can redeem their shares by selling them to the corporation on public stock markets
D. in a publicly-traded corporation, the shareholders can redeem their shares by selling them to the corporation on public stock markets have to sell to other shareholders
Structure of Board
Default rule = all members of the board are elected annually for 1 year terms DGCL 141(d) = staggered boards -- directors may be divided into classes each of which is up for election at different times (increases the difficultly of takeovers)
Duty of Loyalty
Directors, officers, and controlling SHs must act in good faith to advance the interests of the company first and foremost -- this requires these individuals to fully disclose all material facts to the corp's disinterested parties
Time Value of Money
FV = PV x (1 + r)^n where r = interest rate PV = FV/(1 + r)^n where r = discount rate A dollar today is worth more than a dollar tomorrow the higher the discount rate the lower the PV
Liability of P in tort and contract
IC = liability in contract, not tort Employee = liability in tort and K Just because P is liable does not mean that A is not also liable Analysis Tree: (1) Is there an agency relationship between P and A because of: (a) a manifestation of assent by P to A that A shall act on Ps behalf and be subject to Ps control; and (b) A consented to act? If Yes . . . (2) Is A P's servant or IC? If servant --> within scope of employment = liability not within scope = no liability If IC --> Generally no liability unless: (a) P retains control; and (b) P engages an incompetent IC; OR (c) the activity is nuisance per se
P's right to select and control agent
Independent Contractor -- Ps rights are limited & A exercises considerable discretion Employee -- P has ability to control in detail how A acts
Agency Liability
P is liable to the third party, and A is not liable Rationale = this is less expensive for P
Self-Dealing
Rule = directors and officers may not benefit personally or financially at the expense of the corporation Disclosure requirement = valid authorization of a conflicted transaction between a director and the company requires the interested party to make full disclosure of all material facts which they are aware of (disclosure is required but not sufficient) -- even if the transaction is "fair" non-disclosure is inherently unfair and a violation Fairness Standard -- in a self-dealing transaction the court will look at: (1) are the prices and terms fair? (2) was the director/officer's relationship to the transaction disclosed? *actual harm does not matter
Close Corp Duties
SHs have duties like partners to the corporation not the other partners -- duty of upmost care and loyalty
Derivative Suits
SHs suing on behalf of the corp to enforce corp rights that affect them only indirectly
Burden Shifting Analysis in Self-dealing cases
Self-dealing transaction w/o approval = burden shifts to D to prove entire fairness (directors + controlling SH) Self-dealing transaction approved by informed, disinterested board = burden on P to defeat BJR (directors); burden on P to show the entire unfairness - look to whether the committee was actually independent (controlling SH) Self-dealing transaction ratified by SHs = burden shifts to P to defeat BJR (directors); burden on P to show the entire unfairness - look to whether there was ratification by informed majority of the minority (controlling SH) Self-dealing transaction approved by board and ratified by SHs = burden on P to defeat BJR (controlling SH)
Disclosed Principal
TP is aware of who the P is behind the agent's acts
What happened after Smith v. Van Gorkom?
The case led Congress to enact the Sarbanes-Oxley Act, requiring that boards of public corporations include a majority of directors with financial expertise
The board of directors of XYZ Inc. approves a $50 million expenditure for the company to sponsor a PBS program on "Earth: The Next Century." A is the show's producer; he is also married to B, the CEO of XYZ. Identify the strongest theory for a shareholder of XYZ to challenge the expenditure.
The directors violated a duty of loyalty because A and B are married, raising into question the fairness of the expenditure
When the court will impose subordination . . .
Two requirements: (1) the creditor is an equity holder and typically an officer of the company; and (2) the insider-creditor must have, in some fashion, behaved unfairly or wrongly toward the corporation and its outside SHs - the corp in bankruptcy has not been adequately or honestly capitalized - must not have been managed to the prejudice of the creditors - to not subordinate the claims would be unfair to the creditors - if switched from a pship to a corp this is suspect because trying to get limited liability body parts test -- the transaction at issue will look like a deal between strangers
Corporate Opportunity Doctrine
When is an opportunity corporate rather than personal and hence off limits to the corporation's managers Line of business test = anything that a corp could be reasonably expected to do is a corporate opportunity Fairness Test = look into factors such as how a manager learned of the disputed opportunity, whether they used corporate assets to exploit the opportunity Expectancy/Interest Test = hurt the companies interest in effecting the purpose of its creation DGCL 122(17) = allows waiver of the corporate opportunity doctrine in the charter while presenting the opp to the board seems like the safer practice it is not required under del. law
Can partners limit the scope of a pship's business?
Yes, only by a majority of the partners expressly limiting the scope Nabisco v. Stroud = if a partner wants to limit the scope of the business but cannot get a majority then the partner would need to dissolve the pship + notify creditors + half of a two person pship is not a majority for purposes of making firm decisions
Reverse Veil Piercing
a creditor of the SH is typically trying to hold the corporation liable for debts of the SH Forward veil piercing = creditor of the corporation is typically attempting to hold SH personally liable for debts of the corporation
DGCL 144 - Self Dealing Safe Harbor
a director's interested transaction is not viodable solely because it is interested, so long as it is adequately disclosed and approved by a majority of disinterested directors or SHs, or it is fair the approval of an interested party transaction by a fully informed board authorizes the transaction, but does not foreclose it from judicial review only applies to transactions which have taken place -- ex. Cookie v. Oolie where the transaction was only contemplated
Implied Partners
a written agreement is not necessary to determine the existence of a pship -- receipt of a share of net profits creates a presumption of pship, but the sharing of gross returns does not
Knowing Violations of Law
acting in good faith Miller v. AT&T -- not making AT&T pay bill as campaign donation -- BJR cannot insulate the directors because they participated in a knowing violation of the law DGCL 102(b)(9) = decisions that are not made in good faith cannot be immunized
General Agents
agent in line for a series of acts or transactions
Special Agents
agents limited to act in a single transaction
Inherent Authority
gives a general A the power to bind P, whether disclosed or undisclosed, to an unauthorized contract as long as a general A would in the ordinary course of business have the power to enter into such K and the TP does not know the situation is different burden of communication on P to disclose to TP that A lacks authority Gallant Insurance = insurance agents who sell insurance can bind P
Waste
holds that even a majority vote cannot protect wildly unbalanced transactions that, on their face, irrationally dissipate corporate assets (need unanimous consent) using corp funds for non-corp purposes
Expected Value
how much would you pay to play heads/tails if heads =$1 and tails = $0 probability = .5 & .5
Agency Estoppel
if P has knowledge and opportunity to act & TP reasonably and detrimentally relies OR if P intentionally/carelessly causes such a belief similar to inherent authority
Circular Control
if corp one owns the majority shares in corp 2, corp 2 cannot vote in corp one's meetings
A person who purports to act on behalf of a corporation (a promoter) and who enters into a contract with a third party when the corporation does not yet exist ...
is personally liable on the contract, provided the promoter knew the corporation did not yet exist
Piercing the Corporate Veil
most extreme form of SH liability -- equitable power of the court to set aside the entity status of the corporation to hold its SHs, directors, and officers personally liable directly on the K or tort
Staggered Board
must be in charter
DEF Corp. has a board of five directors. The company president learns of a chance to acquire a related business and wants the board to consider and approve the deal. The president sends a notice to the directors of a special meeting to happen in three days, but not to director D for whom the corporation has no address. The meeting is attended by three directors (but not D), two of them by Skype. The three at the meeting all approve the acquisition. Is their action valid?
no - notice must be sent to each director, and the failure to send a notice to D invalidates the meeting