Corporations Law
Close Corporations: Delaware
-A close corporation is one where all the company's issued stock is held by no more than 30 people, all the issued stock are subject to restrictions on transfer, the corporation shall not publicly offer the stock
Dissolution: California §1800
-Complaint for involuntary dissolution may be filed by any of the following: 1/2 of directors in office, a shareholder who holds no less than 1/3 of the total number of outstanding shares, or any shareholder of a close corporation on the grounds that the corporation has abandoned its business, the corporation is deadlocked, the shareholders are deadlocked, or have failed to elect directors at 2 annual meetings, those in control of the corporation have been guilty of or knowingly took part in fraud, mismanagement or abuse of authority, or have misapplied or wasted corporate property. In the case of a close corporation, liquidated is necessary for protection of interests of complaining shareholders.
Grounds for Involuntary Dissolution
-Deadlocked directors -illegal, oppressing, or fraudulent behavior by directors -deadlocked shareholders -abandoned business -waste -protection of shareholder rights
MBCA Discharge of Duties
-Each director shall act in good faith and in a manner the director reasonable believes to be in the best interest of the corporation -when becoming informed in connection with their decision making function, director shall discharge their duties with the care of a person in a like position would reasonably believe appropriate under similar circumstances -director shall disclose to other board members, information not already known to them by known to director. Disclosure is not required to extent that director reasonably believes would violate a duty under the law -director who does not have knowledge is entitled to rely on reliable and competent officer or employees, legal counsel, accountants, or other persons retained, board committee . Director can rely on information, opinions, statements prepared by these people.
14a-8 When can a company exclude a proxy statement?
-Improper under State law --binding on company if approved by shareholders -violation of law -personal grievance/special interest --proxy relates to personal claim or grievance against company or other person, not for the benefit of other shareholders at large [argue that this is aimed at disgruntled employees] -relevance --if proposal related to operationa which account for less than 5% of company's total assets and is not otherwise significantly related to company's business -absence of power/authority --company can't do it -management functions --if proposal deals with matter relating to company's ordinary business [management functions must be mundane, ordinary business decisions -director elections -conflicts with company's proposal --if proposal directly conflicts with one of the company's own proposals to be submitted at same meeting -substantially implemented -duplication --duplicates another proposal previously submitted that will be included for the meeting -resubmissions --proposal deals with substantially the same subject as previous proposals included within last 5 years, a company may exclude it from proxy materials for a meeting held within 3 years of the last time it was included if the proposal received 1. less than 3% of the vote within last 5 years 2. less than 6% if proposed twice in last 5 years 3. less than 10% if proposed 3 or more times within last 5 years -specific amount of dividends
Elements of 14e-3
-Material nonpublic information -regarding a pending tender offer -knows or has reason to know how the information was acquired -directly or indirectly from offeror, issuer [target], or any employee acting on behalf of the offeror or issuer
Significance of Close Corporation Status
-Present special problems relating to control -need to ensure that a minority shareholder will not be taken advantage of by the majority holder[s]
Looting Coporate Assets
-buyer is using corporate assets for self-interested transactions -using corporate funds for personal use -funneling money into own power look for: buying history, reputation, buyer's type of business, credit report/history
10b-5 Requirements
-disclose or abstain from disclosing only material information must be disclosed
Fraudulent or misleading statements [10b-5]
-false/misleading statements/omissions -materiality -scienter to deceive -reliance -harm/damages
Closed Corporations: MBCA Restrictions on shareholders
-the articles, bylaws, and agreement between shareholders may impose restrictions on shares of corporation. Restriction is valid if the restriction is enforceable against a person without knowledge of the restriction. -restriction may obligate the shareholder first to offer the shares to the corporation or other stockholders, the corporation or other persons to acquire the shares, require the approval of share transfers, prohibit the transfer to designated people if prohibition not manifestly unreasonable
Which transactions count for 16(b)
-the transaction that makes a trader a 10% shareholder will not be counted as the purchase in question -profit = buy low, sell high within 6 months. [purchase price MUST be lower than sale price. -transaction must have a matching price within the 6 month period.
What implicates Revlon duties?
1. Corporation initiates bidding process 2. corporation abandons long-term strategy and seeks alternative transaction involving the break-up of the company
SEC v. Texas Gulf Sulphur Co.
1. It is unlawful to trade on material inside information until such information has been disclosed to the public and has had time to become equally available to all investors. 2. a company press release is considered to have been issued in connection with the purchase or sale of a stock for purposes of imposing liability under federal securities laws and liability will flow if a reasonable investor, in the exercise of due care would have been misled by it.
Unocal Rule
1. Reasonable grounds to believe of threat 2. good faith and investigation then BJR
Test for Tipper/Tippee Liability
1. insider tipper must have breached his fiduciary duty to the corporation and its shareholders -look to see if tipper received any personal gain [interpreted broadly] 2. tippee must have or should have known that the tipper breached that duty
10b
10b prohibits any manipulation or deception in the purchase or sale of any security, whether registered or not.
10b-5 Conduct
10b-5 applies to the nondisclosure by directors or officers as well as misrepresentations. it applies not only to insider trading but also to any person who makes a misrepresentation in connection with purchase or sale of stock
Duty to Disclose [14e-3]
A misappropriator of inside information may be absolved of liability if he discloses to the target company his intent to trade based on the information
Rule 14a-8 When a company must include a shareholder's proposal in its proxy
A proposal is shareholder's recommendation or requirement that company or directors take action, which the shareholder intends to present at a shareholder meeting. in order to subject a proposal, shareholder must have continuously held at least $2000 or 1% of the company's securities through date of meeting for at least one year. each shareholder may submit one proposal, no more than 500 words, not less than 120 days before the date of the company's proxy statement released to shareholders in connection with the previous year's annual meeting
Lovenheim v. Iroquois Brands
A shareholder proposal can be significantly related to the business of a securities issuer for noneconomic reasons, including social and ethical issues, and therefore may not be omitted from the issuer proxy statement even if it relates to the operations which account for less than 5% of the issuer's total assets
Close Corporations: Delaware Voting Agreements
A written agreement among stockholders is valid as between the parties to the agreement, on the ground that it relates to the conduct of the business and affairs of the corporation as to restrict or interfere with discretion of the board
Zatlin v. Hanson
Absent a looting of corporate assets, conversion of a corporate opportunity, fraud, or other acts of bad faith, a controlling stockholder is free to sell, and purchaser is free to buy that controlling interest at a premium. Minority stockholders are not generally entitled to share equally in a premium paid for a controlling interest in a corporation
MBCA Ultra Vires
Act may not be challenged on ground that the corporation lacks or lacked power to act
Restatement second §1 Agency
Agent has fiduciary relationship based on consent by one person to another that the other shall act on his behalf
MBCA General Partnership
All general partners are liable jointly and severally for all debts, obligations, or other liabilities of a limited partnership, unless otherwise agreed
Taking Corporate Opportunity ALI Definition of Corporate Opportunity
Any opportunity to engage in a business activity of which a director becomes aware in connection with performance as a director that offeror expects to be offered to corporation, or through use of corporate information if director should reasonable be expected to believe would be of interest to the corporation. Or any opportunity to engage in a business activity of which senior officer becomes aware and knows is closely related to the business the corporation is engaged in.
Materiality of speculative information
Balancing test: probability that event will occur versus the anticipated magnitude [effect]
Antidote
Board has power to redeem/eliminate right in redemption clause; needs to exercise redemption provision to eliminate right in exchange for money -encourages negotiation to redeem right and forces a friendly takeover
Cumulative Voting
Changes the number of votes each shareholder has and allows all directors to be elected at once eg: if you have 500 votes, you would be able to vote 500 for each position of director [suppose there are 4 open positions]. You'd be given the 2000 votes at the outside to split how you want - meaning you'd be able to get at least one director of your choice
Types of Fiduciary Relationships [Insiders]
Classic Insider 10b tipper/tippee 10b-5 temporary insider 10b-5 misappropriator 10b-5
Expansion of 10b-5 liability
Classic Insider: must disclose material nonpublic information to public misappropriator: must disclose intent to trade to source of information [principal]
Restrictions on Transfer
Close corporations usually have a restriction on the transfer of shares: noted on stock certificate
14a-8 Company Exclusion requirements
Company must file its reason to exclude no later than 80 days before it files definitive proxy statements Company must file six copies of the proposal, explanation of exclusion, and supporting opinion of counsel when based on state or foreign law. shareholders may submit response, but not required
Self Tender [Unocal]
Company will buy back stock from its own shareholders at a premium price
Reasonable Relation
Compare/combat defensive strategy with threat faced
Entire Fairness/Inherent fairness test [Freeze-out mergers]
Comprised of fair dealing and fair price. Minority shareholders voting in favor of a proposed merger must be informed of all material information regarding the merger for the dealing to be fair -breach of fiduciary duty were buyer and seller are the same.
Exception for Control Block Premium
Controlling shareholder may not garner a premium price if doing so would be injurious to the minority shareholders
general rule of control block premiums
Controlling shareholder may sell his control block for a premium
PA Duty of Directors
Corporation may consider to the extent they deem appropriate: -the effect any action has on any or all groups affected, including shareholders, employees, customers, suppliers, creditors, and communities. -the short and long-term interests of the corporation -any other pertinent factors
Reimbursement of Costs [Proxy fights] - Management's Expenses
Corporation may properly pay the normal expenses of preparing and soliciting proxies to obtain a quorum for the annual meeting. In the event of a proxy contest, the corporation may also properly reimburse reasonable amounts expended by management in good faith, as long as controversy is of corporate policy and not personal
Delaware Indemnification
Corporation shall have power to indemnify any person who was or is a party by reason that they were a director, officer, employee, or agent of the corporation, except where the director was found liable. -to the extent present or former director or officer has been successful on the merits, they shall be indemnified
NY City Employees' Retirement System v. Dole Foods Company
Corporations may omit shareholder proposals from proxy materials ONLY if the proposal falls within an exception listed within Rule 14(a)-(8)(c). A proposal cannot be denied insertion if the shareholder has met the burden of demonstrating that the proposal pertains to significant strategic business decisions.
Dissolution: MBCA
Court may dissolve a corporation in a proceeding by a shareholder if it's established that the directors are deadlocked, unable to break the deadlock, and irreparable injury to the corporation is threatened/suffered, or the directors are acting in a manner which is illegal, oppressive, or fraudulent, the shareholders are deadlocked in voting power and have failed to elect successors to directors, or the corporate assets are being misapplied or wasted in a proceeding by a creditor
involuntary dissolution
Court ordered dissolution.
Interpretation of 16(b)
Courts will interpret the rule literally. This allows traders to buy and sell in such a way as to purposefully avoid liability under 16(b)
MBCA Derivative Lawsuits Settlement
Derivative suit may not be discontinued or settled without approval of the court
classified stock
Different classes of shares: -voting shares -non-voting -or eg: Class A gets to elect 5 directors, class B gets to elect only 2 directors
Taking Corporate Opportunity ALI General Rule
Director may not take advantage of corporate opportunity unless the director first offers it to the corporation and makes a disclosure regarding conflict of interest; the corporate opportunity is rejected by the corporation and the rejection is fair to the corporation and upon full disclosure and by disinterested directors, or rejection is authorized by disinterested shareholders and is not a corporate waste.
Paramount v. Time-Warner
Directors involved in an ongoing business enterprise may take into account all long-term objectives in responding to an offer to take over the corporation.
Burden on Directors for Defensive Measures
Directors must show reasonable grounds to believe a danger to corporate policy and effectiveness existed by presence of targeting company
Rule 16 Disclosures
Directors, officers, and principle stock holders [every people who is beneficial owner of more than 10% of any class of security] are required to file any profits from purchase and sale of security within 6 months. Suit to recover profit may be instituted by issuer, or owner of any security of issuer on behalf of issuer [if issuer fails or refuses to bring such suit] within 60 days after request but not more than 2 years after such profit was realized. Does not apply to any transaction where beneficial owner was not such both at the time of purchase and sale or the sale and purchase of security [MUST HAVE BEEN BENEFICIAL OWNER AT TIME OF TRANSACTIONS] -any person who is beneficial owner of more than 10% of any class, any director or officer shall be subject to Rule 16 --a transaction following the cessation of director or officer shall be subject to the Rule only if within 6 months of an opposite transaction which occurred while the person was in office. the transaction that results in a person becoming 10% beneficial owner is not subject to rule 16
Restatement 3rd Duty and Liability to Principal
Duty of loyalty duty to not acquire benefit out of position duty to not deal with principal on behalf of adverse party duty to not compete during the agency relationship duty to not use confidential information for own purpose duty to not use the property of the principal for own purpose duty of care duty created by contract duty of care, competence, and diligence [special skills and knowledge are taken into account] duty to act within actual authority duty to provide information duty to not deal with the principal's property so it appears as agent's, duty to not mingle principal's property with own duty to keep and render accounts to principal These duties constitute a breach unless the agent acts in good faith, discloses all material information, deals fairly with the principal and the principal consents
Familial Relationship - Fiduciary Duties
Family members do not owe a fiduciary duty to one another
Restatement 3rd Agency Definition
Fiduciary Relationship when principal manifests assent to an agent that the agent shall act on the principal's behalf and subject to the principal's control
materiality [10b-5]
For 10b-5 to apply, the information misrepresented or omitted must be material. A reasonable shareholder would consider the information important in deciding whether to buy or sell. Courts will weigh two factors 1. probability of the information being true 2. magnitude of the impact the information would have on decision making
Disclosure [Corporate Opportunity]
Formal Disclosures are not required [as long as some form of disclosure]
Modern view of voting agreements
Generally valid today
Standing under 14a-9
Grants private right of action to shareholders even if they did not grant a proxy on the basis of the misleading information
Types of Defensive Measures
Greenmail Self-Tender Pac-man Additional debt white knight crown jewel lock-up option poison pill
Ringling Bros-Barnum & Bailey Combined Shows v. Ringling
Group of shareholders may lawfully contract to vote in any matter they determine. An agreement between two shareholders in a closely held corporation to vote jointly is binding and enforceable as a contract.
Closely Held Corporations
Has the following traits: -small number of shareholders -lack of any ready market for the corporation's stocks in the management, direction, and operations of the corporations -not subject to same requirements as publicly held
No Action Letter
If a corporation decides not to include a proposal, SEC will review, and if they agree that it's okay to exclude the proposal, they'll send the corporation a letter stating that they will not recommend action against corporation
Misappropriator
If a person receiving information knows or has reason to know that information is the result of a breached fiduciary duty, he must not trade based on that
Distinguish QVC from Time-Warner
In Time-Warner, the shareholders of both companies were a fluid aggregation of unaffiliated stockholders. public shareholders who were anonymous. in QVC, Paramount had a majority shareholder of fluid aggregation of unaffiliated shareholders, while Viacom [acquirer] was a single majority shareholder.
Rosenfeld v. Fairchild Engine and Airplane co.
In a contest over policy, corporate directors have the right to make reasonable and proper expenditures from the corporate treasury for the purposes of persuading the stockholders of the correctness of their position and soliciting their support for policies that the directors believe, in good faith, are in the best interest of the corporation
NY Duty of directors
In taking action, a director shall be entitled to consider -long and short term interest of the corporation and shareholders -effects that corporation's actions may have in short or long-term on: --potential growth, development, productivity, --current employees --retired employees --customers and creditors --ability of corporation to provide goods and services, contributions to the community doesn't create duties owed by director to anyone or specify how much weight is given to any of the factors
Common law insider trading
In the absence of fraud, there is no duty to disclose to the shareholders inside information affecting the value of shares in impersonal transactions
Levin v. Metro-Goldwyn Mayer, Inc.
Incumbent Directors may use corporate funds and resources in a proxy solicitation contest if the sums are not excessive and the shareholders are fully informed
Mergers and Acquisitions
Individual wants 100% of the company - shareholders basically being forced to give up their interest in the corporation [lies in the idea that property should be put to good use]
Temporary Insiders
Information is legitimately revealed to a professional or consultant [attorney or accountant] working for the corporation may make that person a fiduciary of that corporation Dirks v. SEC, footnote 14: lawyers, accountants, consultants enter into special confidential relationship and access is only given for benefit of the corporation
10b-5 requirements
Insider Trading and Fraudulent or misleading statemnts
Stuparich v. Harbor Manufacturing
Involuntary dissolution is not appropriate when the group seeking the dissolution is comprised of minority shareholders than have continued to receive significant dividends from the corporation. the distribution of voting shares, where consistent with state laws, does not present a reasonable necessity for dissolution Under CA law, only a majority shareholder has standing to move under §2000
MBCA Uniform Liability Partnership
Limited Partner is not personally liable for the debt, obligation, or other liability of the limited partnership
Frigidaire Sales Corp v. Union Properties, Inc.
Limited Partners do not incur general liability for the limited partnerships' obligations simply because they are officers, directors, or shareholders of the corporate general partner
Revlon v. MacAndrews
Lockups and related defensive measures are permitted where their adoption is untainted by director interest or other breaches of fiduciary duty. Duty of board changes when takeover/dissolution is imminent. -once the dissolution is imminent, board role changes to auctioneer to get the best price for stockholders. -while board may consider other constituents under Unocal, there must be rationally related benefits to stockholders -there can be no favoritism in auction
Use of Corporate funds for Proxy fights - Management
Management may use corporate funds to fully inform shareholder concerning the relevant issues and to protect the corporation against raid by wealthy insurgents
Close Corporations: Delaware Certificate of Incorporation
May provide that the business of the corporation shall be managed by stockholders rather than board of directors. As long as this is in effect, no meeting needs to be called to elect directors, the stockholders shall be deemed directors, the stockholders shall be subject to all liabilities of directors.
Competition with the Corporation
Mere preparations for competition with the corporation are not a breach of any duty. -the use of any proprietary information or confidential information by the director or employee may be considered a breach of loyalty.
Weinberger v. UOP
Minority shareholders voting in favor of a proposed merger must be informed of all material information regarding the merger for the merger to be considered fair -Freeze-out merger approved without full disclosure of a share value to minority shareholders is invalid.
Parent-Subsidiary Dealings
Must be done at arms' length.
Closed Corporations: MBCA
Must set forth any class of shares and the number of shares that corporation is authorized to issue. The articles may authorize that one or more class of shares may have special, conditional, or limited or no voting rights. -the articles, bylaws, and agreement between shareholders may impose restrictions
Delaware Articles of Incorporation
Must set forth: -Name of corporation -address of corporation -nature of business -total number of shares of stock -name and mailing address of incorporation -names and addresses of the people who are to serve as directors
MBCA Derivative Lawsuits Demand
No shareholder shall commence a derivative suit until written demand has been made and 90 days have passed from the date of the delivery of demand, unless previously rejected.
Rule 10b-5-2
Non-exclusive definition in which person has duty of trust or confidence for purposes of misappropriated theory of insider theory
MBCA Derivative Lawsuits Payment of Expenses
On termination of the derivative proceeding, the court may other the corporation to pay the plaintiff's expenses if the proceeding resulted in substantial benefit to the corporation [therapeutic/cosmetic changes count as "substantial benefit"]
Avoiding Dissolution: California §2000 [Avoidance of Dissolution by Purchase of Plaintiffs' Shares; Valuation; Vote Required; Stay of Dissolution Proceedings]
Only majority shareholders have standing to avoid dissolution through buy-out. In any suit for involuntary dissolution, the holders of 50% or more stock may avoid dissolution through a buy-out. The buy-out may be made upon approval of outstanding shares, excluding shares held by moving parties. The buy-out must be at fair value as determined by court appointed disinterested appraisers.
Conversion right
Preferred stock holders may have option to convert stock to common stock
10b-5
Prohibits the use of mails or other instrumentality of interstate commerce to defraud, misrepresent, or omit a material fact in connection with a purchase or sale of security
Special Rule for Tender offers - 14e-3
Provides that if any person has taken substantial steps to begin or has begun a tender offer, it is fraudulent, deceptive, or manipulative act or practice for any other person who is in possession of material information relating to the tender offer to purchase or sell any of the target's securities if the person knows or has reason to know that the information is nonpublic and has been acquired from the bidder, the target, or a director, officer, or any other person acting on the bidder or target's behalf. anyone can be liable for tender offer, fiduciary duty doesn't matter
Insider Trading
Purchase and sale of corporate stock by a director, officer, or other insider with the use of corporate information not available to the general public
Unocal Corporation v. Mesa
Self-tender based on triggering event. Test: 1. reasonable grounds for believing there's danger to corporate policy and effectiveness 2. proportionality: defensive device was reasonable in relation to threat posed -nature of takeover of board and effect on enterprise [need to consider corporate constituents] If burden is met, then BJR Establishes that there are both duty of care and duty of loyalty issues, so show reasonable grounds of believing danger exists and then BJR
Galler v Galler
Shareholders in a closely held corporation are free to contract regarding the management of the corporation absent the presence of an objecting minority and threat of public injury
Closed Corporations: MBCA Voting Trusts
Shareholders may create a voting trust, conferring on a trustee the right to vote or act for them, by signing an agreement setting out the provisions and transferring their shares to the trustee. The trustee shall prepare list of names and addresses of all beneficial owners, with number and classes of shares in the trust, and deliver copies of the list and agreement to the corporation. Cannot be perpetual.
Closed Corporations: MBCA Voting Agreements
Shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. Voting agreements are specifically enforceable.
Poison Pill
Shareholders' Rights plan -adopted without shareholder's consent gives the shareholder a right attached to their share -the right doesn't have a value and doesn't come into effect until triggering event [usually a hostile acquirer] -considered poison to corporation once hostile company comes in
Reasonable Grounds
Show good faith and reasonable investigation important: disinterested board
Smith v. Atlantic Properties
Stockholders in a close corporation owe one another the same fiduciary duty in the operation of the enterprise that the partners owe to one another. A minority stockholder in a close corporation that requires unanimous vote for corporate action may not repeatedly vote against an action for personal reasons if the action would be in the best interest of the corporation
Piercing the Corporate veil
Suits by corporate creditors against directors and officers seeking personal liability for corporate liabilities. This is an equitable remedy and the burden lies with the party asserting the claim
Greenmail
Target Company repurchases own stock from bidding company at premium price. The goal is to make the bidder go away
White Knight
Target looks for another company to acquire target on friendly basis to allow management to stay, to avoid hostile acquirer -downfall: is hurried process and may lead to future regrets
Crown Jewel
Target negotiates to sell subsidiary [or any prized asset, usually a subsidiary, division, or tax benefit] triggered by acquirer purchasing % of target [or any other triggering event]
Additional Debt
Target takes on additional debt and seems less attractive and wards off acquirer [intent is to fund other defensive measures]
BJR: Remaining Informed
The Business Judgment Rule will apply if directors took all the reasonable steps to become informed of issues surrounded the operation of a corporation
Requirements of the Proposal
The Proposal and its supporting statement may not exceed 500 words
Shareholder Proposals
The corporation must include shareholder proposals in the proxy materials, provided certain conditions are met
Sinclair Oil Corp. v Levine
The intrinsic fairness test should not be applied to business transactions where a fiduciary duty exists but is unaccompanied by self-dealing. Parent corporation must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing in that the parent is on both sides of the transaction with its subsidiary and parent receives a benefit to the exclusion and expense of subsidiary.
Proxy Fights
The solicitation of proxies by parties not in corporate power is a method of gaining corporate control or steering corporate direction
Business Judgment Rule
There is no liability [absent a conflict of interest, bad faith, illegality, or gross negligence] for errors of judgment made in the court of a director's duties. Director must have been reasonably diligent before the rule is invoked
Use of Corporate Funds [Greenmail]
There's nothing wrong in using corporate funds to buy back own shares, except cannot use corporate funds for self-interested reasons [like warding off threat to their control]
Lock up option
To give white knight a lock up option to buy the crown jewel if hostile acquirer buys up % of target [or any triggering event] -will be disclosed to hostile acquirer
Fiduciary Obligations of Controlling Shareholders
Two Standards: Intrinsic fairness [only where there is self-dealing] -must show fair to minority shareholders BJR
Broz v. Cellular Information System
Under hte corporate opportunity doctrine it is not required that the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity. In this case, director was approached in individual capacity.
Elements necessary to pierce the corporate veil
Unity of interest and ownership and prevention of fraud or injustice.
Rule 10b-5
Unlawful for any person, directly or indirectly, in connection with purchase or sale of securities, employ any device, scheme to make any untrue statement of material fact or omit to state material fact necessary in order to make statements made not misleading, or to engage in any act or practice which operates as fraud or deceit
MBCA General powers of corporations
Unless the articles of incorporation provide otherwise, every corporation has perpetual duration and has same powers as an individual including to sue and be sued, make and amend by-laws, to make donations for public welfare or charitable, scientific, or educational purposes, to make payments or donations or any acts that furthers business and affairs of the corporation
Expenses for Proxy Fights - Insurgents
Unlike management, insurgents do not have a right to reimbursement of their proxy expenses, even if they win. Usually, corproation will voluntarily reimburse the reasonable expenses of insurgents who win a proxy contest involving policy rather than personal contest, on the grounds that they have conferred a benefit on the corporation [at least if shareholders ratify the reimbursement]
Burden of Proof for Fiduciary obligations of majority shareholders
When a transaction between a corporation and controlling shareholder is challenged, as in a derivative suit by minority shareholders, the burden is on the controlling shareholder to prove the transaction's fairness
Duty of Possessors of Inside information
When corporate insider has corporate information not available to public, that person must disclose the information to the public if he wishes to trade securities, or must abstain from trading
Enterprise Liability
When plaintiff with a claim against one corporation attempts to satisfy the claim against assets of an affiliated corporation under common ownership. Only permitted when each affiliated corporation is not a free-standing enterprise, but merely fragment of an entity composed of affiliated corporation
in re silicone gel breast implants products liabilities legislation
Where a parent corporation directly controls the functions of a subsidiary and markets the subsidiary's products, using its own name, it can be held liable both through the subsidiary and directly for injuries caused by that product
control block: defined
a person owns a controlling interest if he or she has the power to use the assets of the corporation however they choose. A majority owner will always have a controlling interest. But, a less than majority interest will often be controlling [eg 20-40% interest where the remaining ownership is highly dispersed and no other shareholder is as large]
Essex Universal v. Yates
a sale of a controlling interest in a corporation may include immediate transfer of control provision in a contract for the sale of majority share control in a corporation that calls for the immediate transfer of control of a board of directors to the buyer is not illegal even if the buyer cannot convert that share control into operating control immediately -burden is on challenger to show there is another control block
McQuade. v Stoneham
a shareholder agreement prohibiting the board of directors from changing officers, salaries, or policies retaining individuals in office is illegal and void absent express contractual consent -directors cannot agree to elect themselves because they ow a fiduciary duty to all shareholders and the corporation to make the best decision [traditional view]
Tipper/Tippee
a tippee is a person, not a classic insider, who trades on information received from an insider and may be liable under rule 10b-5. Tipper may also be liable.
Freeze-out merger
action taken by a firm's majority shareholders that pressures minority holders to sell their stakes in the company
Exception to Traditional View re: control by shareholders
agreements among all shareholders that do not substantially affect the interest of minority shareholders were generally upheld
Business dealings with corporation
although a controlling majority shareholder may validly contract with the corporation, he cannot exploit the corporation at the expense of the minority. If the contract is unfair, as in not at arm's length, the controlling shareholder has breached his fiduciary obligation.
Voting Agreement
an agreement in which two or more shareholders agree to vote together as a unit on certain or all matters. Some voting agreements expressly provide how votes will be cast. Other agreements merely commit the parties to vote together [without specifying how the vote is to go, so that the parties must reach a future agreement]
Who may bring involuntary dissolution action?
any shareholder of a close corporation may bring a dissolution action [due to the fiduciary duties owed to each other in a close corporation]
Delaware Law [Cash out merger]
cash out merger can be reviewed under BJR as long as minority votes and independent negotiation committee that has power to refuse offer
Cheff v. Mathis
corporate fiduciaries may not use corporate funds to perpetuate their control of the corporation. -if board's buying out a dissident stockholder was motivated by sincere belief that the buyout was necessary to maintain what th eboard believed to be proper business practices, the board will not be held liable.
MBCA Derivative Lawsuits Mandatory Indemnification
corporation shall indemnify director who was successful on the merits in the defense on any proceedings to which director was a party because they were a director
Close Corporation Management by shareholders: Traditional View
courts tended to invalidate agreements among the shareholders of a close corporation that curtailed the power of the board
Scienter to deceive
defendant is not liable under 10b-5 for a misrepresentation or omission if he was without fault or merely negligent. The scienter requirement is satisfied by recklessness or intent to deceive, mislead, or convey a false impression.
Pro-hostile takeover view
defensive measures are a way of perpetuating directors in office, raising duty of loyalty problem
Control in Unocal
determined by management continuing, thus where management continues, no break of corporation
Protecting one's self [Duty of Care]
director may seek to avoid being personally liable for acts of the board by recording his dissent [must dissent in order to raise this]
ALI Rule 5.05
director or senior executive may not take a corporate opportunity unless -director or officers first offers opportunity to corporation with full disclosure and corporation rejects the opportunity and one of the following: -rejection is fair to the corporation, or -rejection is by disinterested directors and satisfies BJR [informed] -rejection is authorized by disinterested shareholders and rejection is not a waste of corporate assets
Extent of Director Liability [Duty of Care]
director's are personally liable for corporate losses directly resulting from their breach of duty or negligence in failing to discover wrongdoing
Settling derivative suits [director's motivation]
director's legal fees may be paid by corporation if the director is not assessed any liability. Settlement does not assess liability, and clears the director [Delaware law]
Restatement 2nd Duties and Liabilities to Principal
duty of care duty to disclose duty to keep and render accounts duty to obey duty to act solely for benefit of principal duty to account for profits arising out of employment duty to not compete duty to not use confidential information duty to not act for conflicting interest duty to not disclose trade secrets, other confidential information even after termination
Generally: Fiduciary Obligations of Controlling Shareholders
even if controlling shareholder does not serve as a director or officer of a corporation, he may owe fiducariry obligations to the minority shareholder in exercising his control. A controlling shareholder must refrain from using his control to obtain a special advantage or to cause the corporation to take an action that unfairly prejudices the minority shareholders
MBCA Purpose of a corporation
every corporation incorporated under MBCA has purpose of engaging in any lawful business
Reasonable Grounds [defense strategies]
good faith and reasonable investigation needed to establish reasonable grounds
Pac-man
hostile acquirer buys shares of target company, but the target company will tender offer acquirer's shares and try to take them over
Anti-hostile takeover view
hostile acquirer isn't thinking of corporate constituents and defensive measures are in best interest of corporation
Settling Derivative suits [plaintiff's attorney]
huge legal fees
Short Swing Profits [16(b)]
if a director, officer, or beneficial owner of 10%+ of shares purchases and sells an interest in the corporation, within a 6-month period, he must disgorge any profit to the corporation. -intent is irrelevant -potential defendants: directors and officers, beneficial owner or 10%+ of stock -only applies to public corporations
Rule 14e-3
if any person has taken substantial steps to commence a tender offer, it shall constitute a fraudulent, deceptive, or manipulative act for any other person who is in possession of material information relating to the tender offer which he knows or has reason to know is nonpublic and which he knows has been acquired from the offering person, the issuer of securities sought [target], or any other person acting on behalf of the offeror to purchase or sell any such security unless within a reasonable time prior to such transaction such information and source are publicly disclosed by press release or otherwise
Wilkes v. Springside Nursing Home
in a closely held corporation, the majority stockholders have a duty to deal with the minority in accordance with a good faith standard -burden is on majority to show legitimate business purpose -minority has burden to show there was less harmful alternative balance the relationship between shareholders and business interest
Foremost-McKesson, inc. v Provident Securities Company
in a purchase sale sequence, a beneficial owner must account for profits only if he was a beneficial owner before the purchase
Transfer of control
in most situations, the court will allow a controlling shareholder to sell controlling interest at premium price
Close Corporations: abuse of control/duty owed to other shareholders
majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty
Alaska Plastics, Inc. v. Coppack
majority shareholders in a closely held corporation owe a fiduciary duty of utmost good faith and loyalty to minority shareholders. a judgment ordering a close corporation to buy a minority shareholder's stock at fair value is an appropriate remedy when it is provided for int eh incorporating documents, the court orders the involuntary dissolution of the corporation, there is significant change in the corporation's structure, or if there is a breach of fiduciary duty among the directors.
Basic v. Levinson
misstatements about merger negotiations can be material statements of fact, depending on the significance that a reasonable investor would place on the withheld or misrepresented informaiton -probability of merge + magnitude of merge
Validity and Requirements of Voting Trusts
most states enforce voting trusts if they conform with statutory requirements: -maximum term [usually 10 years] -disclosure [need to disclose to shareholders who are not part of the agreement] -writing [trust must be in writing and implemented by formal transfer on records of corporation] -Strict compliance required, if not strictly compliant, the court is likely to hold the agreement unenforceable
When does Revlon apply?
multiple defense measures, look for change in control, imminent break-up
MCBA Articles of Incorporation
must set forth: -corporate name -number of shares authorized to issue -street and mailing address of corporation's initial registered office -name and address of each incorporator
Friendly Takeover
negotiate a buyout -officers approve and shareholders vote
Goodwin v. Agassiz [Common law Insider Trading]
no breach of duty, due to the fact that no duty to reveal info not known to outsiders. The nature of trade is that it occurs on an open market and it's anonymous stock. [plus speculative information]
Rule 14a-3 [proxy statements]
no solicitation shall be made unless each person solicited is furnished with publicly filed preliminary or definitive proxy statement
Liability of Shareholders
only liable for his personal acts or conduct, not liable for debts of the corproation
Opportunity presented in an Individual Capacity
opportunities that are presented to a director in an individual capacity must still be brought to the attention of the corporation.
Humble Oil
party may be liable for contractor's torts where the party exercises substantial control over contractor.
Restatement 2nd Independent Contractor
person who contracts with antoehr to do something for him but who is not controlled by the other nor subject to the other's right of control
Causation and Reliance
plaintiff must prove the violation caused a loss [must establish reliance on the wrongful statement or omission]. however, in omission cases, there is a rebuttable presumption of reliance once materiality is established.
Why resist takeover?
self-interest of board members: they don't want to lose control, salary, job, position, prestige -suspicious of resistence against take-over attempts because it implicates duty of loyalty
Scope of 10b-5-2
shall apply to any violation based on purchase or sale of securities made on basis of material nonpublic information misappropriated in breach of duty or trust
MBCA Shareholder Liability
shareholder is not liable to the corporation or its creditors with respect to the shares except to pay consideration -shareholder is not personally liable for any liabilities of the corporation except that the shareholder may become personally liable by reason of his own acts or conduct
"flip in" right
shareholders can buy target company at discounted price -> dilutes shares -more shares are issued and outstanding, meaning acquirer needs to buy more shares
Pedro v. Pedro
shareholders in a closely held corporation have a fiduciary duty to deal openly, honestly, and fairly with one another -reasonable expectation
Close Corporation management by shareholders: modern view
shareholders may adopt special governance rules
Voting Trust
shareholders who are part of the arrangement convey legal title to their shares to one or more voting trustees, under the terms of the trust. The shareholders become beneficial owners - they receive a voting trust certificate representing their interest and get dividends and sale proceeds. But no longer have voting power
Property Interest [Mergers and Acquisitions]
since corporations are created by the law, the property interest is defined by law and the law provides shareholders can be cashed out
Who can bring 10b-5 suit
suits for violation of 10b-5 can be brought by SEC or private plaintiffs. However, private plaintiffs must be either purchasers or sellers of securities.
Hostile Takeover
target company isn't interested and will use any way to defend from takeover -acquirer goes straight to shareholders and makes argument to them; essentially bypass target company's resistence
Paramount v. QVC
the directors of a corporation targeted by two or more suitors may not institute tactics that favor one suitor in such a manner as to allow the favored suiter to offer less than it otherwise would have. Revlon applies where there is change in corporate control and there's inevitable break-up. Unocal aspect: Paramount here took defensive measures prior to threat and they were too draconian in relation to threat. -role of board is to get best price for shareholders and not play favorites
Private Actions for Proxy Rule Violations
the proxy rules create an implied private right of action in the individual investor. Typically such actions are under rule 14a-9, which prohibits solictation by means of any proxy statement, form of proxy, notice of meeting, or other communication written or oral, containing any statement that is false or misleading with respect to any material fact necessary to make the statements therein not false or misleading
Packing Control of the Board
the sale of a controlling interest may include an agreement to deliver control of the board of directors -you can sell control shares at a premium, but can't sell a corporate position due to the fact that hte position is not personal property of the officer
Dissolution
the termination of a corporation's status as a legal entity. Either voluntary or involuntary.
Dirks v. SEC
tippee will be held liable for openly disclosing nonpublic information received from an insider, if the tippee knows or should know that the insider will benefit in some fashion from disclosing that information to the tippee. -in protracted tipper/tippee situations, every tipper must receive a benefit, although it doesn't have to be the same benefit to each tipper
Who is eligible to make a proposal?
to be eligible under rule 14a-8, the proponent must be a record of beneficial owner of at least 1% or $1,000 in market value of securities entitled to be voted on the proposal
Materiality [Proxy statements]
to establish materiality for purposes of rule 14a-9 violations, there must be a showing of substantia likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of the information made available.
Takeovers
two types: friendly hostile
Enforcement of Voting Agreements
two ways: proxy: first the agreement may require each signatory to give a third person an irrevocable proxy to vote the signer's shares in accordance with the agreement. Usually this will be enforced today. Specific Performance: courts today will grant specific performance of the terms of the voting agreement
Chiarella [Old law]
under 10(b) and 10b-5, a corporate insider must abstain from trading int eh shares of his corporation unless he has first disclosed all material inside information known to him. The duty to abstain arises from a relationship of trust between corporate shareholders and employees. -mere possession of information is not enough to trigger insider liability -in this case, regular employees didn't trigger the fiduciary relationship
Classic Insider
usually directors or officers. There is duty to disclose or abstain.
Reliance Electric v. Emerson Electric Co.
when a holder of more than 10% of the stock in the corporation sells enough shares to reduce its holdings to less than 10% and then sells the balance of its shares to another buyer within 6 months of its original purchase, it is not liable to the corporation for the profit it made on the second sale
Duty of Trust or Confidence [Rule 10b-5]
when a person agrees to maintain confidential information, when person communicates the material nonpublic information and the person to whom it is communicated have history of sharing confidences, and recipient should know that the person expects to maintain its confidentiality; or when person receives or obtains material nonpublic information from spouse, parent, child, or sibling
United States v. O'Hagan
when a person misappropriates confidential information in violation of a fiduciary duty, and trades on that information for his own personal benefit, he is in violation of 10b-5
Fraud on the market
where securities are traded on a well-developed market, rather than face to face transaction, reliance on a misrepresentation may be shown by alleging reliance on the integrity of the market
Clark v. Dodge
where the directors are also the sole stockholders of a corporation, a contract between them to vote for specified persons to serve as directors is legal and not in contravention of public policy McQuade agreements are valid in close corp settings
Perlmann v. Feldman
where the sale of the corporation's controlling interest commands an unusually large premium due to a market shortage of the corporation's product, a fiduciary may not appropriate to himself the value of that premium. Directors and dominant stockholders stand in fiduciary relationship to the corporation and to the minority stockholders as beneficiaries thereof.
Materiality
whether a reasonable investor would consider information important those facts which affect the probable future of the company and the desire of the investors.
Expenses for Proxy Fights - Incumbents
will be reimbursed whether they win or lose. They're entitled to expenses when they lose because they're expected to defend themselves in a proxy battle.
Dodge v. Ford Motor Co.
A corporation's primary purpose is to provide profits for its stockholders
Common Stock
Common shares entitle the owner to dividends, voting rights, and right to liquidated assets, without any preferences in exchange for risk, common stockholders get control over corporation: voting control, beneficiary of fiduciary duties
Delaware [Zapata Test]
Court will look to -level of independence exhibited by committee -whether the investigation was done in good faith -the sufficiency and reasonableness of the investigation -the court's own BJR to determine whether motion should be granted
Grimes v. Donald
If shareholder demands board of directors take action and that demand is rejected, the board is entitled to the presumption that the rejection was in good faith, unless shareholder can allege sufficient facts to overcome the presumption. Business Judgment Rule applied.
Francis v. United Jersey Bank
Liability of a corporation's directors to its shareholders requires a demonstration that 1. a duty existed, 2. the directors breached that duty, 3. the breach was a proximate cause of the shareholders' loss.
Fiduciary Relationship
One party acting on behalf of another with the latter's consent and control.
Issuing new stock
a corporation issuing new stock must refile its articles of incorporation
Cohen v. Beneficial Industrial loan corp
a statute holder an unsuccessful plaintiff liable fo the reasonable expenses of a corporation in defending a derivative action and entitling the corporation to require security for such payment is constitutional NJ law requires plaintiff to indemnify - held constitutional
recovery for derivative suits
any recovery in the form of damages or other compensation goes to the corporation
Brehm v. Eisner
board of directors has duty to inform itself, prior to taking action, of all material facts that are reasonably available to it.
Settling Derivative Suits
derivative suits may not be settled without the court's approval
Duties during and after termination of Agency
duty to not compete using confidential information due to unfair competition reasons. [Town and Country House & Home Service v. Newberry]
organizational meeting
filing the articles in proper form creates the organization. The organizational meeting is held after creation by the incorporators or the initial board, if named in the articles.
right to enforce pre-incorporation contract
if the corporation is not formed, the promoter may still enforce the contract
DE Articles of Incorporation
name of corporation address nature of business total numbers of shares name and mailing address of incorporator name and mailing address of directors
Energy Resources Corp, Inc. v. Porter
without full disclosure to the corporation, it is too difficult to verify the unwillingness to deal. Breach of duty to protect the interests of the corporation can be found even where there is no corruption, dishonesty, or bad faith.
AP Smith Manufacturing Co v. Barlow
State legislation adopted in public interest can be constitutionally applied to preexisting corporations under the reserved powers. Does not apply where directors have self interest in "pet charities"
Policy reasons for corporation donations
- benefit to community -enlightened self interest [selfish] -more able to donate large amounts than individuals
rights an liabilities of promoters
- pre-incorporation contracts: promoters are liable if corporation rejects the pre-incorporation contracts; fails to incorporate; adopts contract, but fails to perform, unless contracting party clearly intended to contract with the corporation only and not promoters
promoters' duty
-promoters are agents of the corporation, and owe a fiduciary duty to the corporation. They must disgorge profits - full disclosure and fair dealing are required
Definition of Corporate Opportunity
Any opportunity for business that director learns of -during performance of functions as director or officer, or under circumstances where reasonable to believe that offeror expects it to be offered to corporation, or -through the use of corporate information or property, and it is reasonable to believe it would be of interest to the corporation Any opportunity for business of which senior executive becomes aware and knows is closely related to business pr the corporation, be it current or anticipated
Duty of Loyalty
Arises from conflicts of interest from self-dealing. Must disgorge profits to prevent unjust enrichment.
Possible Defenses to Corporate Opportunity: Refusal to deal
Claim by director that a prospective client refused to deal with the corporation and would only deal with the individual. Rule: before a party invokes refusal to deal as a reason for diverting a corporate opportunity, he must unambiguously disclose that refusal to the corporation to which he owes a duty, together with a fair statement, of the reasons for that refusal
Grimes Test
Demand is deemed futile if: -majority of board has material financial or familial interest -majority is incapable of acting independently for some reason [like domination or control] -underlying transaction is not the product of valid exercise of business judgment
Disclosure [Duty of Loyalty]
Interested Directors and Officers must disclose all material information to board. -if there is no disinterested board, go to shareholders. if no disinterested shareholders, must show fair and reasonable.
Settling Derivative Suits [Plaintiff's motivation]
Plaintiff may be required to pay the legal fees of the corporation if unsuccessful in litigation. If there is a benefit to the corporation, plaintiff's fees will be paid by the corporation
ultra vires
beyond the power of the company's power to give away shareholder's money - no longer followed corporations can now engage in any lawful activity, even those not enumerated in articles of incorporation
Eisenberg v. Flying Tiger Line, Inc.
cause of action that is determined to be personal, rather than derivative, cannot be dismissed because the plaintiff fails to post security for the corporation's costs. When a corporate shareholder brings a lawsuit based on teh direct impact of the corporation's actions on his interest in the corporation, that suit is personal, not derivative.
Sea-land services v. Pepper source
corporate veil will be pierced where there is a unity of interest and ownership between the corporation and an individual and where the adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice
modern view for purpose of corporation
corporations may use resources for public welfare, humanitarian, educational, or philanthropic purposes without requiring a showing that a direct benefit is likely
General Principle of Duty of Loyalty
directors and managers owe their corporation a duty to act in the best interest of the corporation and put their loyalty to the corporation above their own interests
Duty of Care Obligations
directors must exercise the care of an ordinarily prudent and diligent person in a like position, under similar circumstances
Preferred Stock
have preference over other classes of stock - generally as to dividends or liquidation rights. Usually have less voting power [sometimes none]. -pay more in exchange for dividend preferends -less risk than common stock, because there's contractual right, but less control over corporation -entitled to specified right before dividends are paid to other classes
Avoid Fraud and Injustice
must show fraud or injustice -unsatisfied judgment is not enough
Independent Contractor
person who contracts with another party to do something on behalf the party, but is not controlled by the other nor subject to the other's right of control with regards to his physical conduct in the performance
Servant
physical conduct in performance is controlled by master
Master-Servant Relationship
principal who employs an agent to act on his behalf and who controls or has right to control the physical conduct of the servant.
Rationale for Modern View for role and purpose of corporation
profit maximizing: charitable support is a use of a board's business judgment designed to maximize profit legitimate end: the use of corporate resources for such purposes is a legitimate end in itself, on the grounds that: activity that maintains a healthy social system necessarily serves a long-run corporate purpose and there is an independent social policy that maintain diversified centers of charitable, educational, etc. activity and full effectuation of that policy depends upon, and therefore justifies corporate support
Promoter's Duty of Disclosure
promoter owes corporation a duty of full disclosure as to dealings in which the promoter has personal interest. Requires full disclosure of all material facts which might affect corporation's decision
policy considerations for Derivative suits
pros: insiders are normally hard to get at consL waste of corporation's time, management becomes averse to risk, strike suits
MCBA Articles of Incorporation
requires name of corporation number of shares authorized to issue street and address of corporations initial registered office and agent name and address of each incorporator
limited partnership
requires 1 limited partner and 1 general partner -general partner has personal liability -in exchange for all the risk of personal liability, the general partner gets all of the control
Disregarding Corporate Form
shareholders are normally shielded from corporate obligations. In certain instances, the corporate entity will be disregarded. -Piercing the Corporate Veil
Smith v. Van Gorkum
the BJR shields directors or officers of a corporation from liability only if, in reaching the business decision, teh directors or officers acted on an informed basis, availing themselves of all material information reasonably available.
General Rule regarding role and purpose of corporation
the purpose is to conduct business activity with a view to corporate profit and shareholder gain
Differences between derivative and direct suits
the test is whether the injury was suffered by the corporation directly or by the shareholders, and to whom the defendant's duty was owed
Defenses to liability [Duty of Care]
these include good faith reliance on management or experts' reports. Disabilities may be considered in determining whether the director has met the standard of care.
Prerequisites for derivative suits
to avoid strike suits, the plaintiff-shareholder must specifically plead and prove that he exhausted his remedies within the corporate structure. Must make a demand on the directors to remedy the wrong, unless such demand would have been futile.
Possible Defenses to Corporate Opportunity: Financial Incapacity [Futility argument]
weak argument. Claim by director that his company was not in position financially to deal or take on an opportunity. rebuttals: courts have found that the opportunity must still be presented. A compromise such as alternative financing might be found.
Auerbach v. Bennett
when a board of directors delegates its authority to a committee of disinterested members, the official determination of those members will be given due deference under BJR -court may inquire as to the adequacy and appropriateness of the investigative procedures, but not those under the BJR
Lewis v. SL & E, Inc.
when a corporation enters into a contract in which the corporation's directors have a personal interest, the directors must demonstrate that the contract was fair and reasonable to the corporation
Reading v. Regem
when servant uses his position for personal profit, without consent of master, the servant must disgorge his earnings
Southern Gulf Marine Co v. Camcraft
where a party has contracted with what e acknowledges to be a corporation, he is estopped from denying the existence or the legal validity of such a corporation
Karim v. American Express Company
whether or not a dividend is to be declared or a distribution made is exclusively a matter of business judgment for the board of directors and the courts will not interfere as long as the decision is made in good faith
Policy Reasons against Corporate donations
-shareholders' money -able to give to charity without disclosure -corporate donations are just a status thing [way to get admitted to parties]
Rights and Liabilities of Corp [contracts made by promoters]
-corporation is liable if it later adopts the contract - corporation may enforce contract against party with whom the promoter contracts it if so chooses
assumption of the risk [applies to contract cases ]
-court will require a showing that plaintiff used best efforts to ensure it contracted with reputable corporation [must look to see corporation without financial difficulty, or history of malfeasance] -look for corporate formalities
New York [Auerbach Test]
-level of independence exhibited by the committee -whether or not the investigation was done in good faith -sufficiency and reasonableness of the investigation
Test for Activity which Benefits Relative of Director [Duty of Loyalty]
-no conflicting personal interest at stake -board must show that they exercised good faith and the decision was inherently fair Basically: the decision benefits the corporation
Walkovszky v. Carlton
liability extends to negligent acts as well as commercial dealings. Where corporation is fragment of larger corporate structure which actually conducts the business, the court will not pierce the corporate veil to hold individual shareholders liable.
Shareholder Suits
look to nature of harm to determine whether derivative or direct
Direct Suit
may be brought by a shareholder on his own behalf for injuries to shareholder interest. If the injury affects a number of shareholders, the suit may be brought as a class action
Discharge of Duties
A person remains a promoter until formally released of fiduciary obligation by the Board of Directors
Share
A share represents the shareholders proprietary interest in a corporation [specifically it represents a right to dividends, right to share in corporate assets upon liquidation, the right to vote]
securities for expense statutes
A statute that requires the initiator of a derivative suit to power a bond covering fees if the shareholder owns less than a required percentage of the corporation
Corporate Opportunity
Corporate Opportunities doctrine bars directors from usurping any business opportunity belonging to the corporation without first offering it to the corporation. -if the corporation is unable to take advantage of the opportunity, director still must disclose [but many times will be able to take the opportunity after disclosure] -if corporation is unwilling to pursue an opportunity [after an independent board is fully informed of the opportunity] the director may pursue it
Activity of a relative of a director [Duty of Loyalty]
Corporate activity which benefits a relative of a corporate director is not necessarily bad faith. If the activity had a legitimate business purpose and a benefit to the company is shown, then the activity will be allowed to stand.
Traditional View for role of corporation
Corporation could not support public welfare, humanitarian, educational or philanthropic purposes without showing a direct benefit to the corporation
Debt Securities
Corporations borrow money from investors. The income is fixed by contract and corporation must pay back the amount borrowed with interest. Less voting control by investors, but in event of liquidation, investors get paid back before equity -less risk than equity, like a creditor, has more rights to repayment, but also no right to vote
Bayer v. Beran
Directors have an obligation to not put their own interest before the interests of the corporation. Test for Activity which benefits relative of director [no conflicting interest, good faith and inherent fairness]
Unity of Interest and Ownership
Established by: -failure to maintain adequate corporate records/formalities -the commingling of personal and corporate assets -undercapitalization [particular for tort claims] -one corporation treating the assets of another corporation as its own
Burden of Proof [Duty of Loyalty]
If there is no conflict of interest, then the burden lies with the shareholders. If there is a conflict, the burden lies with the directors to show good faith and inherent fairness in the transaction. If the transaction was voted and ratified by shareholders, then burden shifts back to the shareholders to show lack of inherent fairness.
Promoter
In charge of discover [finding business opportunity that can be developed] Investigation [researching the validity of the business Idea] assembly [making the corporation happen]
Settling Derivative Suits [Corporation's motivation]
MBCA may obligate corporation to pay the plaintiff's legal fees in derivative suits if there is a substantial benefit to the corporation which means settlement is attractive. -does not need be the result of a trial and verdict in plaintiff's favor
Arguello v. Conoco
No agency relationship. In order for an employer to be held liable for discriminatory acts of its employees, there must be an agency relationship
Zapata corp v. Maldonado
When asserting a special litigation committee's motion to dismiss a derivative action, a court must 1. determine whether the corporation acted independently, in good faith, and made a reasonable investigation. 2. Apply court's own independent business judgment. a corporate board cannot dismiss a derivative lawsuit based solely on the fact that a committee composed of disinterested members found that the litigation is not in the corporation's best interest.
General Automotive Mfg. v. Singer
agent who draws business away from principle is liable to principal for profits: must disgorge
recovery for direct suit
any recovery in the form of damages or other compensation goes to individual shareholders
Fiduciary Obligations
high duty of care and loyalty must take steps to protect the principle refrain from conduct which would injure the principle not deprive principal of profit opportunities not compete with the principal not use confidential information to harm the principal's interest
Special litigation committees
if a corporation refers a matter to a special litigation committee that finds no basis for pursuing a lawsuit, a court will look at different factors depending on the jursidiction to determine the validity of the committee's recommendation
derivative suits
if a duty owed to the corporation has been abridged, suit may be brought by a shareholder on behalf of the corporation
waiver of futility argument
if demand is made on board, the shareholder may not claim at later date that demand was futile. Making the demand means that you're conceding that it's a sound board.
Hoover v. Sun Oil
independent contractor relationship exists when one party works on behalf of another independently, with no control exerted by the other party over contractor's day-to-day operations