could reduce systemic (market) risk by reducing agency costs -- but this would assume that shareholders are fully diversified
Piercing
Managers seem to be able to exploit shareholder disunity to entrench -- and maybe judicial is the only rational means to distribute corporation assets
Parties who piercing has effect on
Employees
It wouldn’t be so bad, except if liability were joint and several
Some would rather have pro-rated share
Alternative viewpoint: Agency theory: benefits of agency exceed the costs
Direct costs
Costs of controlling managerial assets
Shareholders may vote to do things that are irrational because of the control of the corporation
If the firm was a true contract there would be true-opting out of things that enabling things allow
Fiduciaries get a fixed amount, and they don’t get any more
Intra-firm incentives: may not be effective in controlling agency costs -- legal doctrine seems to be closest to contract model, and furthest form the fiduciary model which would grant bonus’s
Shareholders:
Optimizes investment decisions
The relationships between shareholders and management seems to be vaguely strutted by the laws, and these laws have changed politically
Evolution of corporations
Chaos: hard to predict exactly where they go
Path dependence: corporations may adapt to threats that stop existing: could be reason for strong managers and week owners, but there other alternatives
Modern evolutionary theory: no assurances that a destroyed group will reappear
Difficult to tell which is always efficient
There are few inequalities between markets for corporate control
Things might be better if firms had more choice of organization
Managers: can act efficiently because of liquidity
Close corporations aren’t as efficient
Mangers seem to be able to exploit shareholder disunity to entrench -- and maybe judicial is the only rational means to distribute corporation assets
Voluntary creditors can bargain to protect themselves
Courts pierce most often in contract cases
Reasons for piercing – Federal courts will only have jurisdiction under tort if there is a piercing issue -- burden of proof is on Plaintiff
Some say that There can be statutory insurance or bond requirements
Alternative Maybe the best time is when creditors are mislead
Outside director is defined as not part of, or have strong ties to the management
Reasons
Can reduce agency costs, but differences as to how long their scope should be -- ALI recommends mostly outsiders
problems
Outside directors may still be reluctant to displace an incumbent CEO
Outsiders aren’t good monitors, because of limited information
Directors have other demands
Lack experience in that business (s)
Few financial incentives
Not much time devoted
Most of the stuff doesn’t require the board of directors anyway
Business people are not lawyers who will peruse a right answer like lawyers
Boards make take an overly non-legal holistic view
There may be few decisions made
Board doesn’t necessarily control agenda
Board may want to maintain a management
Board may want to main control and information systems
Board may be unable to ignore trouble
Possible, in hindsight to always second-guess a board
Board won’t be devoted to researching
Attendance might not be all telling
People may unjustly place reliance on directors with certain expertise
Delegation to certain members of the board might not be the best solution
Decision making may be political in nature -- and may defer to management, anyway
May hesitate to rock board
Most boards have a majority of outsiders
"significant relationship with senior executives
has never worked for the corporation or subs
not a relative
proves no services
not employed by a firm providing services to the company
receives no compensation other than directors fees
still may be structural bias -- could be a "do unto others rule"
there may be too many shared perspectives
still might work
Structural bias even of outside directors is ever-present -- Rejected in Delaware absent showing of specific facts
Committees will be biased because it is asking corporate brethren to kill each other
Corporate dealings and investment is no structural bias
Contributions to a University may be enough (rare) for bias in Delaware
Mass: because of the danger of structure bias judicial oversight is necessary
Independent must have no interest at all
Just because someone is elected by interested people doesn’t make them interest
If there is an Independent majority, Plaintiff’s have burden of proof of showing that the majority of the board isn’t independent, else other way around
perhaps board should include employees and other constituencies
having ethnic diversity might limit talent pool
still open as to whether special interests should be on board
perhaps professional directors (maybe institutional investors)
a market for it might be more efficient -- but expertise is finite, and much of it may be inside
Board committees – usually to deal with technical work
Audit
Nominating
Compensation
For derivative suits
NACD: suggests oversight "governance" committee
Choice of law to piece -- states can’t place their corporate creatures above congress
NY: law of incorporation would govern
Not uniform
CERCLA has lead to shareholder liability
Who the court looks at when deciding whether to piece
Bankruptcy
Fraudulent conveyances: but there are federal bankruptcy laws that will do the same as piecing
Equitable subordination: also known as the "Deep Rock Doctrine," equitable subordination addresses this situation: A controlling shareholder (or other insider) makes a loan to the corporation, which also has outside creditors. The corporation becomes insolvent and is faced with bankruptcy or receivership. Should the controlling shareholder’s claim have equal priority to those of the other creditors? The principle of equitable subordination says that, if it would be manifestly unfair and inequitable to permit the controlling shareholder equal priority, the court will subordinate his loan to the other creditors (and even preferred shareholders’) claims.
Loans to close people – ultra vires
Old: need approval from stockholders
New: what is reasonably expected to benefit
corporate control: totality of the circumstances
theoretical criteria for mere conduit status
unity of interest
separate personalities of corporation no longer exist
usually governed in the sate in which the transferor sits
specific things that are indicative of being a conduit
directors, departments, tax returns, finance, caused the incorporation, capital, salaries, exclusive business, use of property formalities)
Not paying attention to formalities
Abuse of corporate entity
Common office space
Degree of discretion shown by the alleged dominated corporation
Payment or guarantee of corporations debts by entity
Intermingling of debts
MO variant: control (complete), fraud, proximate caused by the fraud of the injury
Initial Undercapitalization: Initial capitalization can be telling of a sham -- evidence need to show the traditional inadequacy, but There aren’t that many undercapitalization ceases
Tests for subsidiaries: Equitable ownership: Courts have used the "mere instrumentality’" test about subsidiaries -- and representations
If the corporation is a fragment of a larger corporation there is no piercing to hold individual shareholders liable
Arbitration: When things are pieced, people can be held to contractual duties
things that along are not enough
just sharing cash management system isn’t enough
requiring approval might not be enough to pierce
literature might not do it
Self insurance may be possible (or by subsidiary) based on market convention
Closely held corporations (i.e., with one or a few shareholders): Courts will honor the corporate veil as long as there’s no fraud or wrongdoing, the business is conducted on a corporate (not personal) basis, and the corporation had adequate initial capitalization.
Parent-subsidiary (or affiliated) corporations: Courts won’t hold the parent liable for the subsidiary’s obligations if there’s no fraud or wrongdoing, there’s no intermingling of respective business transactions, accounts, and records, the subsidiary was adequately financed in light of normal obligations foreseeable in businesses of its size and character, and the parent and subsidiary are held out to the public as separate corporations.
Market for corporate control means that things should not be pierced
pro
Stock market tender offers: efficient market may cause the firm to become more efficient
Firm’s assets are worth more in the hands of the new mangers
There are legal restrictions on this market for corporate control
Tender offers create wealth
Could be from production and distribution economies of the corporations
Technology transfers
Cost reducing
Assets shifted to higher valued losses
Gains from improved management
Operating synergies
Desire to increases the equity share price, in fact motivates the acquisition
Wealth maximizing
Efficiency
Wealth transfer or expropriation
Market inefficiency
Non-wealth maximizing
Tax benefits may be canceled out
Takeovers make society worse off because it makes corporations willing to terminate implicit long term contracts
In general, efficient market aligns management interests with that of shareholders
No direct evidence that anti-takeover measured caused the decline
Market prices will reflect information about value of firms
Markets may serve to constrain managerial discretion
Identity and wealth of investors is irrelevant
good things about the fact that markets could get around everything: Shareholders really are separate (Bearle)
Can be efficient diversification of investments `
Problems with free market for corporate control
Corporate legal duties may be necessary to deal with things that the market doesn’t have time to respond to
Control usually lies in the hands of those who select the proxy committee, as the stockholders have very little sway
There is no pressure to disclose exactly how much discretion a manager has
Ownership is widely distributed: Separation between people and the equity they control: now passive ownership is the norm
Wall-street rule: investors are rationally ignorant: "rational ignorance" presents managers with power
Shareholders might be rationally apathetic, be ignorant, or take a "free ride in corporate decision making" - - proxy statements are not viewed as real votes
There is opportunity cost in complex statements
Prisoner’s dilemma: he may realize that the temptation to give in is great, but he stands to lose more – e. g. there may be more to gain by collective action, but too high a risk
Institutional investors
Note: in Japan there is far more inter-corporate equity holding
Institutional investors might create a bit more – economies of scale that speak to activism.
Exponential incentive for institutional investors to be informed, diversification may also create economies of scale in monitoring,
Large investors may be constrained by SEC rules (e. g. short-swing forfeiture),
Risk of being deemed to be a control person,
There is a fiduciary duty on pension plans to act on behalf of beneficiaries, but this might not be enough to get pension active
Investment advisors have to produce profits
Some argue that institutions owe a duty to smaller shareholders to oversee
Institutions may wish more liquidity that oversight -- and there is not enough incentive to monitor
If the exit is blocked than one may be better sought to be diligent
Passive institutions may be more competitive -- more conflict of interest with money managers, and they won’t
Mutual funds raise their own issues of corporate governance -- conflict of interest, conflicts of scale, and regulatory concerns
Controlling shareholders may divert funds at expense of others
This is still an issue of agents watching agents
Reputation of money mangers might be the only check
In America there is not the degree of institutional control of corporations, but there is some institutional voice
Legal rules today put institutional investors toward the passive end
Note about institutional investment: Public pension funds might become more susceptible to shareholder interests -- but TIAA has shown some results, except when limiting blank check proposals
Restrictions on self dealing are somewhat less slack than under contract
Reducing agency cost by looking at the corporation as a series of contracts: Contractual theory of the corporation: the directors and the officers are really involved in contractual relationships -- agency cost isn’t reduced to zero but state-imposed discipline might not be worth it
Alternative: State imposed rules could be mere background rules
Revisionist theory of contracts looked not at unfair wealth transfers but there was misallocate gains
There might be actually bargaining over the terms of their relationship
Some corporate rules cannot be bargained around and the contracts may be hard Rules can be hard to determine in the first place
Some of the contracts may not be real contracts: contracts could be contracts of adhesion -- but they aren’t really forced into it -- the extra cost of the package might not be worth the benefit of dickering
The contractualists would not say that the inter-corporate arrangements are presumed to be efficient
These aren’t real contracts because they are enforced by the market, not legal mechanisms
external risks
corporate form
risk reduction
risks
Directors dissent has to be in writing (minutes or registered letter) and the dissent has be liable to avoid any liability, and presumption of concurring with action
Absent directors not liable
Good faith reliance can be a defence
Agency
Some statutes requires certain officers – RMBCA doesn’t like
Types of authority
Express: must be bylaw or resolution -- but the secretary of the corporation is allowed to sign for it
Board meetings
Directors have one vote and can’t vote by proxy unless bylaws provide for it
Must be a majority to pass, and must have a quorum
Intent of the law is to get the directors to act as a collective
Abnormal situations
Telephone is okay, but must be able to here each other
Informal, but unanimous written consent is okay
In some states, it is okay when they are not present, but written
With conference call: hence, a director can veto just by withholding consent
Proxies: Board members can’t give proxies
Emergency: corporation may proceed based on contact only with the directs that contact was made
Shareholders present
If it is made with all shareholders present it will probably be binding
Even if informal meeting g of shareholders could be ok
Tradition: when the legislature specifies the means by which directors act, and they do contrary to that by tradition, it may be struck down
Long time Vacancies may be a place where customary practices are upheld
Notice -- must be given or invalid
Directors must get notice of regularly scheduled board meetings
Directors can waive
Showing up at a meeting to protest is not a waiver
Sub-committees of board
Executive committee will have full authority except for dividends, and merger
Audit committee (required by NYSE and NASD)
Finance
Can have temporary committees
Directors can rely on reports of committees
Can’t have committee declare a dividend
Can’t have committee declare fundamental change
Shareholders giving authority
Elect board members
Annually
Staggered -- or a classified board
Multiple types of stock as classified in the articles of incorporation
Vacancies on the board
Directors can fill
If the size of the board increased
Majority: only the shareholders
Minority: everyone
Usually need the approval of all present, or present by proxy (directors can’t vote by proxy)
at common law, one shareholder could block
– this was based on a contractacian view
appraisal and opt-out rights: if there is a fundamental change, and the shareholder dissents, the stockholder can invoke the appraisal rights
some says that it is like a veto rights
shareholders can’t assert dissenters rights
Actual
Inherent: (not really agency) but enough of a relationship to make one liable under respondeat superior doctrine
Apparent: the third person acted reasonably in thinking that someone who purported to be an agent was such an agent -- officers usually have apparent authority – if it is in the usual course of business
Will depend not just on the nature, but on who is doing it
Exceptions: extraordinary nature rule
If consideration or reliance is given, courts are willing to find authority
Things to look for
Statutory provision
Articles of incorporation
Bylaws
Resolution of board of directors
Evidence that the corporation to act in similar matters and had recognized, approved and ratified
A failure to repudiate
Ratifying: after the fact -- the courts seem to say that if a board did thing, and the shareholder relected this is ratification, and the best remedy is the shareholders dismissing
Implied: inferred from the circumstances
An gent is vest with the implied authority to do all those things necessary or incidental to the agency assignment
Third party must reasonably rely
Limited authority: corporation is liable if there is no actual authority given or apparent authority is manifested to the third party
Few rules with respect to which officers can bind the corporation
By statute authorization is required for large, or fundamental transaction
Bylaws can be amended to change what the responsibility is
Procedures
Actual voting – shareholder vote is sacred, and the business judgment rule won’t cover attempts to manipulates
Disparate voting right plans
but not under state law -- the SEC wants to prevent the deprivation of voting rights once a stock has been purchased
re-capitalization plan are not a type of proxy -- this is not an issue of disclosure or proxy.
The SROs not have voting rights rules
Someone who wants to gain control of the board of directors will usually be grated the right even if not directly a proxy
proxies
Defining proxies
Not just specific forms, it can be a solicitation for a proxy, communication about whether or not to give a proxy, or the furnishing of a proxy to other people
Newspaper ads information the public in general might not be
A specific newspaper ad, is a proxy -- could be first amendment issue
An influenced brokerage firm report would be
Tension between speed of informing, and slowness of proxy process – may give the benefit to news releases
Exceptions from proxy rules
Exempted: If a solicitations oral or is by a person who owns less than $5 million, no notice is required except if Not available to the registrant, a person on behalf of the registrant, a person solicitation in opposition to a merger or extraordinary transaction, large shareholders trying to control, a person who would receive a benefit other than a pro rata share
Exempted: announcement of how people intend to vote
Required proxy content
Details for what it included in scheduling of proxy material
Requirement that management explain changes in company
Must be an opportunity to vote for or against a given matter or withhold vote for directors
Preliminary proxy materials are public
Shareholders meeting
Record date: the date at which one is considered to be a stock hold for the purpose of being invited -- board, not the shareholders set
Notice: corporation must given written notice to all shareholders -- and only matters within the purpose of the notice may be considered
Shareholders can waive
Timing requirement may be a big deal
Quorum must be a majority of shares entitled to vote
Can be proxies or by consent
Once a year, in the spring, after financial documents there is an annual meeting of shareholders
Calling: Can be called by the board of directors, or owners of 10% of the stock
DE: one doesn’t need to own stock
President doesn’t have discretion to deny the meeting -- there are no improper subject for any class (even in staggered voting, if the purpose is to dismiss)
Board will nominate people a that meeting, but proxies are given instructions on who to vote for. Later approved by SEC -- now can usually be filed in definitive form
Directors can be removed without cause
In general, power to remove directors can’t be restricted
At common law was with cause
Courts can remove directors for serious cause
Proxy
Corporations have to attempt to communicate with beneficial owners, and brokers will vote the proxy in an uncontested matter unless told otherwise
Costs of proxy
Cost is born by company except if no issue of policy is involved
Defenses to negative proxy material: directors who shareholders are solicited against have a right to a defense statement
In Delaware law there is no statute which specifically goes into the removal by stockholder action
there is no requirement to make predictions of whether you will make a proxy contest
criteria for including shareholder proposals
within the shareholders concern and benefits (audit)
specific right provided by state law (e. g. change bylaws)
"no logical basis for not including" (e. g. not reporting on the meeting to shareholders)
there has been shareholder social activism
reasons for excluding
preventing abuse of shareholder proposals
proper subject for action by security holders
can omit proposals that are about ordinary business operations -- especially if they are just a report on ordinary business operations
if the matters are mundane and don’t involve substantial policy or business, one can omit them
cracker barrel (overruled) held that employment was an ordinary matter
changing public and shareholder concerns have changed the way that the SEC Will consider policy
not significantly related to company’s actions
economic significance : things that don’t exceed 5% of sale, assets or earnings, but they still may be significant
just becomes things are under the threshold, they can still be considered -- the "otherwise" language can force inclusion
political causes used to be excludable
nothing wrong with asking for assurances
even non-binding recommendations, if significant are a proxy matter -- a binding resolution on something the shareholders can’t do is ommitable -- if it isn’t’ ordinary business it can’t be excluded
a resolution condemning a political action (Dam) might be excludable
adjudication of proxy issues
propriety of proposal under state law -- SEC will adjudicate state (DE law)
federal law, (e. g. compliance with EEO)
some states won’t allow bylaw generating committees
in some states just because bylaws are written by the board, it doesn’t mean that they are the only way the things can get written
deference will be given to no-action letters by courts
there was an SEC ruling saying it wouldn’t consider employment an issue
courts hold that employment is nt excludable -- especially if it just a report
adjudication of questions as to whether things can be excluded are done by the commission in no action letters (corporate finance may disagree with enforcement) – corporate finance doesn’t have to state a reason
staff can find a middle ground – and can note that the defect can be cured
no action letters aren’t binding
SEC could seek injunctive relief to compel
Counting votes
Sometimes proxies can be revoked
Sometimes unofficial voting rules between parities
Disclosure
People in the same family who go over the threshold for disclosure are consider to be one person
shareholder proposals
proxy soliciting process is the surrogate for the meeting
a solicitation that doesn’t include information is misleading
remedies: Court can use equity to deal with improper board of directors manipulation
Voting methods
Straight line voting: Each share is entitled to one vote for each director to be elected, but the shareholder is limited in the number of votes she may cast for a given director to the number of shares she owns
Cumulative voting: each share has the number of votes proportionate the number of directors to be elected. Number of shares require to elect is defined as 1 +(( number of shares represented at meeting * number of directors to elected)/(1+number of directors to be elected))
If the board is divided, than the board decisions could be left to managers
Staggering: will lower the total number of votes in a given year for each shareholder
Class voting: shares elect defined block of directors
Could be a problem if the person who fulfills the vacancy is the sole holder of the stock
Non-corporate arrangements
Voting trusts
Shareholders convey legal title to a trust, and get beneficial ownership. The ‘trust certificates" are transferable
Arrangements that create constructive trusts are also considered to be trusts
Irrevocable proxies (give someone else the power to vote) – ordinary proxies can be revoked at any time
Prohibition of voting trust
Definition of voting trust
Voting right s of the stock are separate from the attributes of ownership
Voting rights are intended to be irrevocable for a definite period of time
Principal purpose of the grant of voting rights is to acquire voting control
Will look at the substance, not the language of the agreement – if the contracts is so for divorced, it won’t be considered to be a rust
Might need a residual interest to remain
No voting trust created if failure to comply with non-illusory voting trust provisions
A voting trust is not a voting trust if it is illusory, or if more is required than an arbitrator’s decision
Giving a nominal class of shares, with voting agreements to a third party is not a voting trust -- can’t be a delegation
Can make grant subject to conditions
Granter must have an interest in an irrevocable proxy
Minority: interest must be in the stock itself
Sometimes have been upheld where the irrevocable proxy has been given as an inducement for the holder to furnish money to the corporation
Courts have held that inducement to buy stock, creating a future interest, might be creating a proxy
States have said that mutual promises might be all that is necessary, because it is what could make the corporation secure
In closed corporations, some states have eliminated the need for an interest to maintain a proxy
Pooling agreements
Remedy: Specific performance might be the only remedy
Restrictions
Powers delegated to non-directors by a voting agreement between two shareholders are be too braud
Pooling agreements are okay
Directors will act in every way as if they own it, but the directors do not own the corporation’s property
It is possible to have a contractual arrangement to vote, provided there is no oppression against other stockholders
Stockholders can do as they wish with corporate assets provided they don’t screw the creditors
Stockholders can’t make agreements to keep one another in office (they can’t limit the ability of each other to select agents)
It is okay to have an agreement that the directors will keep each other in office
Shareholder agreements can agree to infringe "slightly" on the statutory authority
Cannot completely delegate the power to clark
Invalidity and illegality – conditions on shareholder agreements are separate
In a close corporation, it may be possible to grant heirs stock that will exist after their deaths (the lack of a public market for the stocks seems to make things more free)
There is a notice requirement of unorthodox management structure (e. g. directors do not have that much control)
Voting requirements
Unanimous requirements
Common law: unanimity requirements are outlawed
Under Statute are okay -- or provision that it is required to transact any business
Quorum (can serve the same purpose): must be a majority, or else otherwise specified in the voting rules
If a director stays away from the meeting, he loses his right to complain
In a closed corporation, a bylaw that allows all shares to vote by be acceptable
Veto rights
Easy way to say that an extraordinary number of shareholders must approve a certain transaction
Some states require mandatory cumulative voting, some have opt-out provisions
shareholders votes
influencing shareholder votes on board decisions (e. g. primary purpose) not allowed
extended time to consider is okay
recapitalization won’t impede stock holder votes
a vote which would remove from judicial scrutiny unilateral board action might not be allowed
close corporation
Contracts for employment in close corporations --- general rule is that even though shareholders can’t remove directors, they can remove them provided they are willing to write check for breach of the contract
Generally not enforceable as they may bind future generations of directors
Editors of newspaper may be given an exception (granted specific performance)
Most courts would award only contracts damages
Solution may be to agree to employ the employee, though not as an officer
Delaware: Although not ever discharge an employee who owns stock in a closed corporation will result in a breach of the fiduciary duty, the termination of relationship has to be viewed under the Donhue principles (e. g. business purpose) -- for efficiency purposes
Other courts follow a different path
It a closely held, but not statutory corporation, in Delaware, people would be treated as having a fiduciary duty (applying Illinois law) (e. g. one can sidestep the issue by focusing on an implicitly employment contract)
Fiduciary duty not to waste corporate assets on people close to them
Minority can block only if waste or the like
Cannot show bad faith in scheduling a meeting
Stock purchase plans in closed corporation (some places where the relationship is determined, by contracts, others where it is determined by fiduciary duty) – in Delaware it is by contracts
Closely held, but not statutorily close corporation: A lack of parity in treatment between employee and non-employee shareholders might be okay, if it advances corporate objectives (including stock purchase plans) In a closely held, but not a statutory close corporation
Avoiding oppression of minority interests: in a close corporation, shareholders have fiduciary relationships to each other. But there may be legitimate business reasons that override. Stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that the partners one to one another
Definitions
Oppression is defined as NY: frustrating the reasonable interests of the minority -- can give an equitable remedy which include a buy-out
Courts can dissolve if there is deadlock, failure to elect directors, waste, or illegality
Supreme court can create a trustee
Must be balance with the business judgment rule
Shareholders bind together to vitiate the voting power of certain parties
Courts have held that in small corporations the stockholders have to treat each other as partners
Minority: patricians adopt the corporate form, they also agree to be bound by the tradition norms of corporate form
Freezing out (salary and dividends) of certain stock -- some have looked at it as a tort
When normally business judgments rule duties (e. g. excessive salaries) are tied to a freeze-out, it won’t stand
Would have to have the conduct that was tied to a freeze-out that froze the minority out form all beneficial interest
There is a fiduciary duty to inform people who have resigned from the board but are now in a minority position
Deadlock
Some state laws have taken the provision that in the face of deadlock, a court can dissolve a corporation – if it is causing irreparable injury, and there is oppression of the shareholders
The court may examine a failure to do something, but it must be in the face of all parties fulfilling their duty of good faith
Reasonable expectations theory
NJ: often the expectations of what the business will do is what will be considered to be oppression. Oppression may be a failure to achieve a resolution of any of the shareholders
Expectations can include retirement allocation (and things that are inherited from death)
If Plaintiff’s are not active participants, the only thing that they can rationally expect is the payment of the dividends
Shareholders have to have a large measure of discretion nevertheless
Remedies
Buyout may be necessary
Remedies
Dissolution
Entry of an order that the company will be dissolved, but at a future date if things aren’t resolved
Appointment of a receiver, until differences are resolved
Appointment of a fiscal agent to tell the court about the minority’s stockholders plight
Ordering accounting by majority in control about the funds that have been misappropriated
Injunction against the oppressive acts
Ordering of affirmative relief (e. g. distribution of capital)
Ordering one side to purchase the other’s stock
Letting the minority purchase more stock
Award of oppression tort damages
Looking at the fiscal condition of the parities and deciding who should buy the other out
Majority to repurchases shares from minority
Appointing independent director
Shareholder agreements might not effective equitable buy-outs
Some courts see only legal (not equitable remedy)
Restrictions on transfer of shares
Partnerships and close corporations
Partnerships can veto the entry of other partners – delectus personae
Close corporation: need to maintain balance and control and handle restriction due to death
Buy out provisions will provide a measure of liquidity
Modern exceptions: they may be required for closed corporations
Rules
American: unreasonable restrains are void
Restrictions -- may not bind future shareholders -- for it to be valid without notice, the transfer restrictions have to be noted conspicuously on the shares or the transferee must have knowledge
transfer restrictions not valid against people who don’t know knowledge, or are not conspicuously noted
restrictions are only binding upon those who consented
Limitations on holder to transfer stock
Corporation or remaining shareholders might have the option to repurchase the stock
NY: repurchase have to be out of surplus
DE: can’t impair capital
Treasury shares
Old: Reacquired shares are called "treasury shares"
Preemptive rights
there are no preemptive rights on treasury stock. If they are sold, the restrictions on surplus when purchased is eliminated
RMBCA: shares revert to the status of authorized, but unissued stock
In some states a new issuance will not include the sale of authorized, but unissued shares or the sale of treasury shares
At common law: were presumed to be available, in some state they exist until they have been eliminate
Even at common law there were no common law rights for non-cash issurance of stock
Repurchase of shares by company
NY: repurchase have to be out of surplus
DE: can’t impair capital
Treasury shares
Old: Reacquired shares are called "treasury shares"
Preemptive rights
there are no preemptive rights on treasury stock. If they are sold, the restrictions on surplus when purchased is eliminated
RMBCA: shares revert to the status of authorized, but unissued stock
In some states a new issuance will not include the sale of authorized, but unissued shares or the sale of treasury shares
At common law: were presumed to be available, in some state they exist until they have been eliminated
Even at common law there were no common law rights for non-cash issuance of stock
"buy-sell agreement " -- remaining shareholders have to purchase the stock upon the occurrence of triggering events
can be activated on death
right of first refusal
before selling it to someone else the shareholder must first offer the stock to the corporation
first option provision
the price is fixed by arrangement at which the shareholder must sell the shares to the corporation
there can be a consent provision, whereby the disposition is condition upon the consent of the corporation
valuing shares
book value: accounting term that may or not included intangibles
capitalized earnings
establishing of a formula that includes capitalized earnings
right of first refusal (only for third parities)
appraisal
often including arbitration
mutual agreement
psychological problems
funding repurchase and buy-sell agreements
could be the establishment of a sinking fund in which the corporation regularly sets aside money for the purpose of buying things back
contractual construction: will look to the face of the contract, and refrain from considering intent of the parties
strict construction may mean that if there is no provisions for the death of a party, may terminate alienation restriction
intent of corporate structure : "to all shareholders, each in his apportioned shares" was defined as granting the right to the shareholders as a whole to buy, and not to any individual to acquire a larger than thought of percentage
dividends
directors, not stockholders will have the choice to pay dividends -- court will intervene if the reason for not paying the dividend is fraud, or for the benefit of a 3rd-party
Hostility and tension doesn’t constitute bad faith (especially if bonuses and corporate funds were normal practice).
If the is a conflict between bonuses and dividends, the court might intervene
A complaint will be dismissed if it simply states that a dividend was not paid other than pursuing another course of conduct
Some argue that fiduciary duty should include maximization of a corporation’s intrinsic value
Agency cost: shareholders will prefer dividends, managers will have to issue stock – and this might lower the agency cost because there is closer monitoring
Dividends should reflect only long term corporate outlook
Debt-holders may signal to shareholders about the credit feelings
Managers may wish to retain cash to keep their capital market independence
Management inadvertently may wish to increase company size beyond most efficient
There are biases towards corporate growth, since managers are rewarded with bonuses
Corporations are more highly leveraged than before
Debt may be better for discipline
Debt may not be as harsh as equity
Debt can cause change
LBOs aren’t the answer because the debt makes companies unstable
Free market may do the job
Debt can be disciplining
cash dividends
regulatory scheme
majority: dividends can be paid out of surplus whether earned or not
RMBCA prohibits distribution, if the corporation wouldn’t be able to pay debts, or the corporations would be tells than it liabilities plus any sum need to satisfy claims of preferred stockholders
directors face personal liability of wrong – "big bomb"
RMBCA: says this is a case of the business judgment rule
The test can be made with either balance sheet tests, or other method of valuation
California: must use GAAP
some states only allow dividends to be paid up to where has "earned surplus"
will define how earnings have to be looked at
Nimble dividends : dividends that can be paid where such payment impair the state capital
Valuation: will be difficult to do, as many earnings are not realized, and the courts will allow even unrealized real estate to be an earning
Absent bad faith, the company can revalue its assets
Stock dividends (not included in distribution)
Additional shares of stock are distributed -- the par value of theses stocks has to be added to the stated capital
If a corporation lack cash, it doesn’t need to pay the dividends, it can sell securities or pay the dividends
Liability
Directors face liability if there is a loss to creditors
Liable directors have action for contribution against the stockholders who received
Shareholders cannot exculpate a director for a breach of duty to creditors
Duties of shareholders
Hurting the other shareholders
A controlling shareholder can be liable (duty of loyalty) good faith, and in the corporation’s best interests (courts are suspicious) if selling his shares hurts the corporation -- it is the responsibility of a fiduciary is not limited to a proper regard for tangible balance sheet assets, but includes the dedication of his uncorrupted business judgment for the sole benefit of corporation in any dealings which may adversely affect it (in lower case there was actually no evidence that the company suffered)
"only if the defendant had be able to complete able to negate any possibility of gain by Newport could they have prevailed
could test by plummeting shareprice
intra-company freezeout: majority shareholders have a fiduciary responsibility to minority and the corporation to use their power to control the corporation in a fair, just, and equitable manner and not profit from that control at shareholder expense
this will carry through holding corporations (especially when established for that purpose) just because no money changed hands in creation of a corporation doesn’t mean that it doesn’t violate duty of good faith -- one could get appraisal rights
Please visit
Duties of directors: originally care and loyalty were apart, now blurred
Duties of directors: manage the company, and have all corporate powers
Duty of care: in good faith, with the care of an ordinary person in a like position, and what they believe to be in the best interests of the corporation : shill shouldn’t be a disqualification, it just matters how they perform -- e. g. a common person with the same specific and industry knowledge
Monitoring
Directors have to be attentive to graft of others
Need rudimentary understanding of the issues
Day to day inspection not necessary
Should at least read the annual report
age, sex, inactivity are not excuses -- unsound mind isn’t liability
director who sold his shared and remained on board not liable
People have the duty to either inquire to the best of their knowledge (e. g. even without technical knowledge, people are on notice)
There needs to be proof that directors knew of graft in complex corporation -- this was extended to anti-trust activity (where things were decentralized)
Consent decrees of other directors are not dispositive even for inquiry
Duty to install corporate reporting system -- but there might be a problem with allowing ill-equipped courts to second guess
This might be encouraging a corporate system of espionage
Could be negligence
Could be a lack of attention
This would be very clear in the case of rogue traders
Directors duty includes a duty to be assured that a system exists
Could show
Directors knew
Should have know
Took no steps
Failure caused the loss complained – could be affirmative defense
Minority: no liability for ignoring obvious red flags
There is a question as to whether inquiring and monitoring is really business judgment rule
Only 4 states have inquiry statutes
Criminal liability
Strict liability for some things (mislabeled drugs, rodents in food
There are now incentives for corporate officers to implement control programs
Willful ignorance is still bad
Duty of loyalty (fair dealing): agency costs when the director might have conflicts of interest. Prohibitions would be bad: no transaction of a corporation with any or all of its directors was automatically voidable a the suit of a shareholders, whether there was a disinterested majority of the board or not, but the could would review such a contracts and subject it to rigid and careful scrutiny, and would invalidate such a contracts if it founds to be unfair to the corporation
There may be problems, because consent of shareholders is fictional: perhaps fiduciary norms should govern
Contract duty isn’t enough because of breach possibility
Corporate fairness: is defined as limits on the consensual allocation of gains to management from self-aggrandizing conduct by reference to what there would have been if it was an arm’s length bargain.
There might be concepts of waste and unconscionability
There are serious differences in information in interested transactions
Originally things were voidable if there was an interest (in1880s), later it ha d to be approved by a majority
Ultra vires and the corporate giving
Corporate giving has to be reasonable
Can show that the deal is fair or that he got approval from majority of disinterested directors or shares
In the past, the common law was automatic voidability
Rule with exceptions: Unfair transaction between corporations and common directors will be voided
Will be subject to closes scrutiny but it is possible -- and it can’t be waste and no personalismo allows
Common law rule was that the shareholders first now statutes allow for the community’s interest to be taken into account
Corporations can allow shareholder choice
Derivative suits must be based on fraud, not choice of business
Maybe corporations shouldn’t be charitable
Altruistic capitalism
Could alter the way the business do business
Corporate objective and cooperate conduct can be divorced
Constituency statues mean that there could be unwanted takeover
Would have to be approved by an independent and disinterested majority
Contemporary view
Mere disclosure of interest in not enough: Directors would need consent of all of those effected
Not telling about the interest is a problem
Fairness
Procedural fairness
Approval by shareholder’s can make it okay -- or the board
Shareholder ratification can shift the burden of proof
Where directors own the majority of shares there is no shifting
It is now common to get majority of minority approval
Interest shareholder is defined as part to transaction action or an interested director
Disinterest is defined as he not she nor any family has an interest in the transaction, and if her judgment isn’t adversely effected (common law would void altogether )
Party to the transaction
Pecuniary relationship
Director is controlled by
Familial relationship
Courts have found, even in the absence of marriage
Friendship might not be the issue
Exchange of board membership might be
Review of compensation might be
Just receiving director’s fees isn’t enough
Even if legally disinterested, a director could still be dominated
Being a dominant shareholder the other company might be domination
In the absence of dual interests, unbiased is presumed
State law
Model: Majority of disinterested directors needed to approve
NY: if there are insufficient disinterested directors under normal quorum the transaction can be approved by a unanimous vote of interested
DE: affirmative vote of the disinterested even if disinterested is less than quorum
There could be four effects under Delaware law of ratification
Could be a defense to breach of duty
Shift the judicial review
Shift burden to Plaintiff
No assurance of true assent
If shareholder votes are necessary for transaction than there this is not ratification
Ratification might be subject to collective action disabilities
Ratification could be really just the shareholders approving of a director
There could be problems with director ratification
Waste might not come into context in the courts alone (ill-fitted)
substantive fairness Factors or whether another, independent corporation would do it
financial gain on the part of shareholders that is different than the others may make a director interested
being an outside counsel might not be so bad -- and the presence of outside directors enhances truthfulness
fees aren’t necessarily dependent on transaction
it is the actions, not the method of election that might touch one the ability to judge fairly
Corporation received full value
Need for the property
Ability to finance
Whether at market price or below
Was there a detriment
Was there a possibility of corporate gained siphoned off
Was there a full disclosure
There is no such thing as shareholder waiver to dishonesty
There may only be judicial consideration of fairness if there has been no prior approval
Courts have not found that the relationship between the directors (structural bias) is domination
Alternative: a contract won’t be void just because of an interest
Some courts have held that there needs to be a majority of the disinterested sharheolder for there to be consent
Deadlock could be viewed as approval
"key to decision making might be approval of a neutral board of directors": could be approved by any of the shareholders, directors or courts
modern cases might just shift the burden to the director
Corporate opportunity (inverse of loyalty)
board of directors
Could be that selling a large stake in the company, in breach of a corporation and the court seeing a fiduciary duty is a wrongful appropriate of a corporate opportunity
could test by plummeting share price
court must ensure its managers and resources are devoted to furthering its business interests
management might be cordoned off from doing thing they would like to do
society benefits when people can take advance of things
test: someone taking an opportunity clearly that would benefit is usurping an opportunity -- there needs to be a substantial relationship -- but there might be a presumption
just a failure to refinance is not asset to allow a corporate opportunity
tests
inters or expectancy
vague: less than ownership – something necessary for growth of expansion
questions is how they learned of the business interest, and whether they gave them a chance
line of business: prior claim better, would encounter problems as corporations are dynamics – courts may determine on a case by case basis
e. g. there are some industries where it is practice to create a new corporation for each venture -- there may need to be an agreement as to the scope of that business
fairness – would they have acted lie together
mere fact of having funds to invest doesn’t make a corporation entitled to the opportunity – and someone could chose which corporation was best tax-situated to receive something
RMBCA: must first offer and be rejected fairly, or in advance, and is ratified
Information obtained through the use of a corporate position is always a corporate opportunity
Good faith, but defective disclosure can be ratified
There can be special rules for delay
Burden of proof usually on Plaintiff
ALI: if impossible, there may be no need to disclose
Some courts have allowed retention of opportunity if there was not enough liquid funds, and the director is under no obligation to advance funds
Counter: the possibility of potential profits, might generate more funding
Formal discussion might not be necessary, to get assent
There may be an argument for the director being too disadvantaged
remedies
amount of damage
imposition of constructive trust
controlling stockholders duties of loyalty: stockholders haven’t contracted with the minority stockholders
usually stockholders can vote as they please
DE: nothing
ALI:
if the transaction is fair to the corporation when entered into
or entered into in advance
some courts have seen their role as similar to directors
parent companies: BURDEN OF PROOF on parent to show that if a benefit on an unrelated deal applies, they have to show that the transaction was reasonable business transaction will only be applied with self-dealing
intrinsic fairness is defined as shift in BURDEN OF PROOF and a high degree of fairness
must prove that the deal was "intrinsically fair" to stockholders
the business judgment rule will apply to questions as to which subsidiary an opportunity should be shared
parent company’s can place restrictions on sub’s to the determinant of their stockholders -- the minorities shareholders might need to receive something for their trouble
Business judgment and a breach of fiduciary duty -- applies to directors and to transactional justifications
Directors owe a duty of care – must do what a prudent person would do (state)
Good faith
Manner that they reasonably believe to be in the best interest of the corporation
Lack of vigilance or misfeasance: although there might be a breach, he might not be liable, so would have to show a loss to the corporation
E. g. the corporation enters into an agreement which the director would have know is bad
Business judgment rules: should people be liable for decision -- under COMMON LAW – can’t define: corporate officers who make marketing business decisions won’t be found liable
Business judgment doctrine -- shield against second guessing but not where a corporate decision lacks a business purpose
Rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith an din the honest believe that the actions taken was in the bests interests of the company
Sword that can be used to dismiss
Shareholders undertake the risk of bad business judgment
Litigation isn’t a good way to make decisions
Potential profits correspond to potential risk, it isn’t a good idea to be too cautious
Two different standards – could be negligence or gross negligence
Fraud
Illegality
Conflict of interest (Plaintiff will have initial burden of showing the director’s breach of the duty of loyalty)
E. g. waste
Courts show deference to the board
There may be a conflict between the due care of a directors, and the fact that lawsuits are based on discrete events -- traditional rule placed burden of proof on Plaintiff
Plaintiff May need to prove causality, but gross negligence in not reading reports may draw inference
Courts may be confusing procedural with substantive outcomes
Tort doctrine might not be completely applicable:: but compound breach of duties could vitiate the business judgment rule
Elements and exceptions
Procedural due care
If the directors appear to be going too fast, the rule may be excluded or not informed themselves
No protection form unintelligent or unadvised judgment
Isn’t available, when a corporate officer hasn’t fully informed himself
Directors are granted the idea that a report by one means that the others can trust
Relying on one director might not be enough especially if oral an informal
Can’t really have blind leading blind
Inadequate price of a subsidiary may be because the board wasn’t given enough data to know
Good faith is the standard, not blind reliance
Usually can rely on information from other board of directors
Reports prepared by people who have a stake (especially employees) require closer scrutiny)
Reliance on counsel generally accepted -- directors need to make a judgment as to reliability
Can rely on committee if the director thinks the committee merits confidence -- slightly different than reliance on expert
Someone who is retained to do something specific is usually held to a high standard, and those who retained them are as well
Prudence requires more than 11th hour vigilance (e. g. by failing to curb risk investments)
Substantive due care
Directors can cure any business judgment problems by trying to repair
The presence of a premium or a spread doesn’t lend credibility in and of itself
The price of a stock is a value of the minority position, because there is no control, and no control premium
Outside valuations are not necessary
Directors may want to inquire into the source of number
Market texts and auctions are a mechanism of price discovery
Corporate lawsuits are a fact of life, and don’t change anything
Inquiring into the business judgment rule is done irrelevant to the litigation risk of derivative lawsuits
Bad decisions can only be ratified by a fully informed electorate, and the defendant has the burden of proof
Doesn’t matter how distinguished to the board of directors is
Fraud, immorality: no business judgment rule if there is bad intent
Collection of debts is an example of what could be termed fraud (could be a disguised election contribution)
Acts that are against public policy might vitiate the business judgment rule -- proof is only required later
Burden shifting isn’t liability per se, but a shift of the burden
Business Judgment Rule will be rebutted if the duty of loyalty or care rebuts the presumption that directors have acted in the best interests o the shareholders and requires the directors to prove that the transaction was fair
If a breach of the business judgment rule exists: The business judgment rule is then examined under fairness standard -- elements are considered holistically
Fair dealing: usually the range of values agreed to in an arms-length transaction
Timing
Initiation
Structure
Negotiated
Disclosed
procedure
Fair price
Economic and financial conditions
Earnings future prospects
Merger exception: a director cannot leave it to the shareholders to decide whether to approve, only an agreement of merger satisfying DE may be submitted
Due care seems to be affirmative defense for business judgment rule
Some say that by definition the business judgment rule is due care
Statutory protections for directors: the risk shifting may cause people to act irresponsibly (permissive and mandatory provisions)
Adoption of charter provision eliminator or reducing personal liability of directors for monetary damages in due care cases -- if the corporations put in chargers
Can’t exclude liability for improper financial benefits, intentional infliction of harm on shareholders, and criminal law
No exculpation for unlawful deacons
equitably relief is always available for breach of fiduciary duty
Change in standard liability to requires a higher degree o fault than ordinary negligence
Limit on monetary amount -- usually to suits by third parties
DE:
Permits indemnification of officers, directors, employees and agents for attorney’s fees in third party civil cases
DE: includes indemnification for attorney’s fees
There is a ‘non-exclusivity" clause which has been argued may be tempered by public policy concerns
Indemnification can carry beyond those rights provided for in the statute
There must be consistency between treatment of Plaintiff directors and defendant directors -- indemnification rights can’t be inconsistent with the scope of those powers.
In derivative actions, there is no indemnification for settlements, but there is for attorney’s fees -- there could be a legislative intent to prohibit indemnification in derivative suits
Payment can be otherwise authorized
There could be an issue, as most suits are dismissed or settled, and allows officers 2h indemnified as a matter of right for technical, etc. dismissals
Settlements of claims must be indemnified if it is in the charter
Even if against the CFTC
Commodities regulation can be defined to be in good faith
Can be a power to indemnify in the face of bad faith, but only if successful on the merits or otherwise -- but if not the defendant must attempt to prove their good faith
E. g. no contest may be consideration vindication (not court’s business to inquire as to why the result was reached)
In the past there was a requirement for directors to pay a bond
RMBCA: Court can order indemnification, and directors can be indemnified for third part and derivative suits
NY: Courts should offer protection against personal risk
VA: a limit can be placed on liability either in bylaws, $100k, or amount of compensation except in cases of willful misconduct
There may also be indemnification insurance
ALI: courts should uphold charter provisions limiting liability because of fairness, encouraging risk, potential penalties not draconian, reduce cost of insurance, and reducing incentives for attorney’s to sue
Most statues expressly authorize
Parts of insurance
Reimburse corporation for lawful expenses in indemnifying
Reimburse individuals
Payment of fines are excluded
There are troubling ideas about indemnification
Other alternatives (consistent with DE statue, but beyond the statues
Mandatory indemnification unless provided by statutes
Mandatory advancement by statute
Accelerate procedures for determination
Litigation appeal rights
Procedures under which a favorable determined will be 2deem to have been made under circumstances where the board refuses to act
Funding mechanisms
RMBCA (11 states): no exceptions for duty of loyalty or acts not in good faith
Indiana: standard of conduct giving rise to personal liability is changed (doesn’t need to be put in charger) to "willful misconduct or recklessness" – no shareholder approval, or opt-out provisions
ALI: courts should uphold charter provisions limiting liability because of fairness, encouraging risk, potential penalties not draconian, reduce cost of insurance, and reducing incentives for attorney’s to sue
Some commentators argue that the duty of care should be eliminated because the market will take care of it, other says it should be up to the shareholders and not the government
Limits
DE: amounts paid in settlement from expenses that can be indemnified in a derivative suit
Courts refrain from blocking payment of attorney’s fees as an "undertaking
If there are specific limits on the subject matter of the indemnification, it seems like the courts will interpret these limits widely
Could be seen as an advancement of credit
RMBCA: no difference between indemnification and the right to receive expenses proved the activity was not opposed to the activities of the corporation
Will allow a court to award expenses
If the same issue is being litigate in another case, it might be said that the issue isn’t resolved, and the suit isn’t really dismissed without prejudice
Probably the indemnification isn’t unlimited
Who decides the subjective questions
RMBCA: disinterested directors not a party, or connected
Some states have states for completely ignorant law first to decide, or someone else
Fees for fees: not entitled to fees when trying to get the fees
Changing hands of corporations
Negotiated
Definition Tender offer: will get ownership: there are issues of market efficiency
Can be done in secret
Can acquire undervalue stocks on the stock market
Can be two-tier tender offers (later people would get bonds) creating a proxy contest
If the offers is for more than the total, than a pro-rata shares must be done -- if offer amount goes up, this must be allocated to new shareholders
Must be open to all holders
Defenses
Defenses to tender offer: board cannot act to perpetuate itself, and reports of offeror past behavior can be taken into account
Board may use company funds if motivated by a proper business purpose -- companies can use their funds to purchase stock
Must be for Proper business purposes
It is possible to pay more than original market price because of "control premium"
Control can usually be sold at a premium price
Cannot sell corporate office
An officer who owns stock cannot couple a sale of minority stock with a promise to reign
In order to be in control, there has to be real control
Someone who owns a large block of shares (though less than a majority) might have de facto control
Managers usually have de facto control
Some stock may have different value than others because of the position of it
There could be exploitation by the control parties especially when stock is not sold in the open
Must have exercised domination or control in the past
Burden of proof: -- initially presumption of good faith exists, but there can be a conflict of interest
if there is an inherent conflict of interest in the purchase of its own stock to revoke a threat, than the burden rest with the corporation to show good faith
this is not the same as if there was an interested transaction
if the actions of the board were motivated by a sincere belief that the buyer out of the dissident stockholder was necessary to maintain what the board believed to be proper business practices, the board will not be held liable, even though hindsight
directors can satisfy this burden by showing good faith and reasonable investigation
tactics
poison pills: rights (revocable up to the time of an offer), usually as a dividend that come into effect at a triggering offer. Can be made if no bid had been made
flip-over
stops second-step mergers
allows the holders of the target company to purchase shares in the bidder’s stock at a specified price if there is a merger, will dilute the value of the other shareholder’s stock
flip-in
allows the holders to purchase stock of the target company at a below market price
back-end:
protects from coercive two-tier tenders offers, in which a bidder offers a higher price for a control block, and than a lower price on the back end for the remain shares
the shareholders have the right to require the target to designate a fair price for a target company stock and give shareholders the right to require the target to purchase their shares at that price
continuing director
the pill can only be redeemed by the directors who made the pill
corporate machinery
staggered votes for board of directors
super-majority requirement
corporate restructuring
can give shareholders an extraordinary dividend, making the stock worth more
will raise debt levels
will raise duty of loyalty issues
defensive mergers (white knight)
more palatable partner
often in haste
issuance of stock
can be through the employee stock ownership plan
enjoined
primary purpose was to prevent transfer of control to a suit who had acquired more than 50% of common stock
grossly inadequate information on the part of directors may cause enjoyment
not enjoined
principal motive was not related to control, and the effect on control was negligible
when due to timing, fairness, etc. Things don’t constitute an insurmountable obstacle to bid
may be conflict of interest because management controls the stock plan
share redemption
corporations will have power to repurchase their own stock so long as it doesn’t violate legal capital rules
could facilitate an auction
two times for enhanced scrutiny
behavior with things up for control
adoption of defensive measure
can be brought on by a judicial determination of the adequacy of decision
judicial examination of reasonableness of director’s actions – directors have burden
judging behavior in the face of a takeover attempt
Unocalland: Coercive tender offers
reasonableness of defensive maneuvers
tactics: usually, business judgment rule, but if conflict shown, than burden of proof on directors
inherent conflict between whether a change in control is in corporation’s best interest, on the other, there is a job interest
"fairness" might not be the best tactic to consider
if the other stock ownership threatened corporate policy, than the could would not second guess
has to be show by a preponderance that the director’s decision in fighting a takeover by one of the shareholders in the corporation was based on the perpetuation, or some other fiduciary breach, a court will not second-guess
discriminatory defensive tactics -- people with reputations as greenmailers make ironic claims
there will be enhanced scrutiny of the good faith an reasonable investigation
things have to be a good faith concern for the maintenance of the corporation
could violate a fiduciary duty to some shareholders to save the company and the way that the company does business -- provided reasonable response
can’t entrench themselves in office
Business Judgment Rule will apply during takeover, in that the directors acted in the best interests of the corporation
has to be reasonable and proportionate to the threat posed
Other corporate constituencies may be considered: provided these are rationally related to the stockholders
all cash offers are usually not coercive (but they could be a threat) if it was for an inadequate price
Revlonland – sale if it is inevitable, the board has to act as an auctioneer. Where a board needs bidding contest on an insubstantial basis, and where a significant byproduct will protect the noteholders there will be "enhanced scrutiny"
Two triggering things
Corporation initiates inactive bidding process to sell itself or effect a business reorganization
Corporation abandons a long-terms strategy and seeks an alternative transaction also involving the breakup of the company
Concern for the long run attributes when the board reaches a decision to sell
For sale, in Revlon is defined as "the moment that the breakup appears to be inevitable"
Things don’t necessarily have to be "shopped" around, but they do have to informed as to people’s options
When there is enough evidence they don’t have to shop
Revlon enters into a rights plan, whereby the shareholder have a right to exchange their shares for a one year short term note for 65 -–a type of flip-in poison pill
In the face of competing bids, when the company will be sold one way or the other, the board will have to call off the poison pill to, in the name of the duty to the shareholders, which is above the duty to the bondholders
It is legal to enter into LBOs, so long as it isn’t self-perpetuating: the burden is on the directors to show a danger to corporate policy: when a company starts dealing in its own stock, the board’s actions are stictly held to fiduciary standards
A bust-up plan can be said to be a danger to corporate policy
Some lockups (LBOs) might be good for the auctioning process, some might be bad
Preference to noteholders is not a fiduciary duty to shareholders
Auction
Supposed to get the best price reasonable available for the shareholders
Doesn’t have to be the highest nominal value for the shareholders -- there just needs to be no breach of duty of loyalty
The board will be responsible for the auction, even if it is delegated
Doesn’t need to be identical terns to each bidder (e. g. duties are owed to shareholders, not to the suitors) -- could be greater access to financial information -- but doing this will be subject to a very close watch
Redeeming poison pills: if the offer is coercive, they don’t need to redeem them, but otherwise they do
Decisions to "just say no" or LBOs -- Delaware has no constituency statue
"in some cases, JSN was considered acceptable, if the board granted an other capitalization plan"
if an offer is coercive or inadequate, a decision not to redeem a poison pill will stand
there might be a time when poison pills should be swept away if the best management can do is for a time delayed offer
continuing director pills
GA: continuing director pills might always be okay
NY: Might restrict the director’s ability to manage the corporation
Might be an exception for Newspapers and "quasi-public institutions"
Boards can’t really trade future current value for current value
Boards must consider alternative transactions
Stock for stock mergers don’t necessarily constitute a change in control
A possibility of future financial results going down might constitute a threat
Decisions not to redeem pills are usually no coercive
Business Judgment Rule can be applied to defensive measures, if the board feels that a threat to the corporate policies are at stake
Even if the shareholders are foreclosed out of a control premium
Lockup clauses, no-shop clauses etc. Might not present sufficient evidence
A reorganization could be subject to the business judgment rule, if it has to protect culture
Just because something is all cash doesn’t mean it isn’t threatening
A change of control doesn’t exist where there is a fluid aggregation of stockholders
In footnotes court may be giving additional authority to board and the JSN defense
NV: Plan that would deny shareholders their rights and give others a seat on the board is preclusive and violates Unocal
QVCland: Enhanced scrutiny will exist when control is transferred for less money
Court will probably act to protect stockholder rights especially if there is no controlling stockholder
Board’s
Obligation to be diligent
Act is good faith
Get information on rival offers
Negotiate actively and in good faith
Consideration
Adversely effect value provided to shareholders
Inhibit or encourage alternative bids
Were enforceable
Advance or retard the obligation of directors to the shareholders
Allowing long term ideas to dominate might not be in line with fiduciary duties
every maker of an offer has to pay every person who tenders stock, a price equal to the highest consideration paid to any other security holder during such tender offer
side payments to some directors, and later offers could be included as one tender offer
tender offers follows by mergers and their defenses
responses can’t be preclusive -- ‘American options’ might be going to far
e. g. a repo plan which prevented any future tender offers
response can’t be "coercive" – e. g. forcing the shareholders to accept management’s plan
legal strategies designed to end the shareholders vote are not allowed
plan that would was the most valuable of corporate assets to make the company unattractive might not be allowable
stockholders who vote to have their stock change form when sold in a recapitalization plan will have their feeling founds to be dispositive
check Williams and Unitrin
if a board acts for the primary purpose of keeping unaffiliated shareholders from expanding the board and electing a new majority it is offensive to the fiduciary relationship between the shareholders
the burden rests on the shareholders to say that the shareholders were informed
overall fairness is general standard, the burden is on the defendants to show unfairness
if a majority of the minority approve, the burden is on the defendants to show unfairness
Proxy contest: who will get managerial control
Difficult to arrange in secret due to federal laws due to potential filing
Management knows how the shareholders are, management can finance litigation from treasury, bidders have to solicit
Ok to use company funds to perpetuate board !!
SEC rules say that the names have to be released
Election contests there are rules which include details about biographical data
A contract for sale, can include resignations of management (e. g. a transfer of a controlling interest
types of mergers -- -- page 378 for graph of merger stats.
Estoppell issues
courts will look to the substance and see a de facto merger, if it is cast in another form to see if some rights have been violated – "facts must be independently studied without slavish adherence" – recently courts have taken de jrui approval
if a company compelled with one set of statues in a merger, than it will have a valid claim to that – even if some of the attributes are the same as as another time of merger
divisions: no approval needed to sell off a small division -- the question is whether it is a large transaction or not
51% of assets and 45% of sale might be enough
non-shareholder third parties cannot take advantage of de facto merger doctrine
maybe for fraud
ALI would give all shareholders appraisal rights, unless those person who were shareholders of the corporation immediately before the combination own 60% of or more of the total voting power
would include merger, consolidation, issuance of voting equity, sale of assets that would leave the business without a continuing business, issuance of securities
would not include transaction where the shareholders, as a result would own at least 75% of the voting company
statutory merger
board’s duties
both board of directors designate which corporation will survive
describe terms
describe the basis on which one’s shares will be converted into share or other property
sets for any necessary amendments to articles
shareholders
a variety of the shares of P and T are entitled to vote on the merger
after finished filed with the secretary of state
shareholders losing rights can seek appraisal
exceptions
in a widely help corporation, dissenters rights are not available to shareholders
small scale merger: one that doesn’t increase by 20% the acquirer’s voting stock
short-form: if one owned at least 90% before, no vote is needed – no dissenters rights
triangular merger
buying company creates a shell company all of its assets, as does the other company
it is the first company’s board of directors, not the shareholders who have the power to exercise their rights as a shareholder of S - e. g. the mergee’s board can eliminate the shareholders right to vote on a combination and to seek appraisal of their shares
statutory share exchange -- not in DE
approval of the board needed
functionally the same, but the voting status of the shareholders changes
exchange of stock for assets
buying all the assets of one with stock from other other
result will be a corporate structure similar to a merger
can retain sufficient liquid assets to pay off liabilities
tender offers
can make a tender offer without vote by shareholders
if a majority of sharholders tender then there is a merger
acquisition of one of the assets of another
Hostile
Cash-out
Appraisal rights: Forcing people to sell (cash out mergers) corporate stock is a create of state law -- check cash out mergers
Cash out issues are state law unless fraud or manipulation brings them under securities law
Cash out merger made for the sole purpose of freezing out minority shareholders is an abuse
Burden of proof
Burden of proof is on majority shareholders to demonstrative the fairness
Merger agreements that are approved by a majority of shareholders are binding on the other shareholders
Usually there is a new shell corporation in which stock is transferred into
Owners of the majority causes the board of directors and the majority of stock holders to enter into the agreement
No legal control by de factor control
Sales of less than 50% mean that the question of control is one of factor
Possibility for oppression and real lack of information and bargaining power
Issues
Proper purpose
NY: Freeze-out may be a breach of fiduciary duty: e. g. can’t effectuate a merger to pay personal debt
Remedies for Dissent to merger agreements (appraisal rights)
What procedures would make it fair
How the court would appraise
What factors would constitute in the court’s terms the fair market value
Minority shareholder who is dissatisfied has some avenues
Singer Remedies -- criticized
Business purpose test -- not criticized
Filled out complain alleging that the cashout merger was to eliminate minority shareholders at a grossly inadequate price
Could be a class action
Information and burden shifting: Where action has been approved by an informed vote of a majority of the minority shareholders, we conclude that the burden shifts to the Plaintiff to show that the transaction was unfair
A cashout deal approved by a majority of the minority shareholders can be challenged, on a fairness
Fair dealing: need full information: e. g. complete candor
When on both sides of a transaction board members have to demonstrate their utmost good faith -- even in a parent-subsidiary context
Duty of candor
Timing
Initiation
Structured
Negotiated
Disclosed
Methods of approval
Fair price - "more liberalized and less rigid framework" – the old method was an average method of valuation, formerly employed in appraisal
Assets
Market value
Earnings
Future prospect
Other elements
Might have been more fair, if there was an independent negotiating committee to negotiate at arm’s length
Appraisal remedy is last ditch effort -- but in many states is the only effort unless the action is unlawful
Could be personal action for breach of fiduciary duty
A way of appraising liquid stock is the fair market value the day before the merger -- and not the price resulting from the merger (and the pre merger price to be adjusted to eliminate the effects of the pending merger)
Merely getting a lower price isn’t enough
Absent deception, it isn’t unfair (and a full scale takeover isn’t deception)
Could be private right of action under securities laws, which would raise the issue of valuation
Loss of a state-law remedy could be a cause of action
Fraud can be another issue
Possibility of looting: Selling a subsidiary
May be a fiduciary duty between board members of a parent corporation and a child corporation being sold
This is unclear if it is a management or a board duty
Sellers are liable when the buyers loot the corporation
There seems to be a duty to look reasonable
This could be grounded in tort law
Questions may be "should the controlling shareholders see a duty to other shareholders"
could test by plummeting shareprice
Direct actions
What the usually are
Enforce the right to vote
Protect preemptive rights
To prevent improper distribution of voting rights
Enjoin improper voting of shares
Compel dividends
Protect accrued dividends arrearages
Using stock for a wrong purpose (e. g. perpetuate management)
Oppression of minority shareholders
Actions to compete dissolution
Appointment o f receiver
Challenging the improper expulsion of shareholders
Reactions to inspect corporation. Books
Actions to require the holders of a depress meting or the sending of notice thereof
Actions to hold controlling shareholder liable for act undertaken in their individual capacities that depress the value of the minority’s shares
Class action suits
Even though there may be a derivative action, an individual stockholders isn’t precluded from bringing an action based on the same injury
Derivative suit (shareholder asserts corporations rights on the theory that the board of directors hasn’t – in the case of a closed corporation. some courts can treat a derivative action as a direct action if it wouldn’t unfairly expose the corporation of defendant to multiple actions, materially prejudices creditors or corporation pr interfere with a fair distribution of recovery
Properly structured suit attributes
Enhance capabilities of shareholder and market forces
Provide for remedy that does not depend upon the ability of widely disposed shareholders to take coordinated action
Protect the market for corporate control from unreadable interference
Risks
Could reduce incentive on management to take business risks
On the other hand could allow risk-taking law firms to take the risk to improve the companies
Nuisance suits
Inadequate settlements that don’t accomplish corporate goals
Usual actions that can be sued for on a derivative basis -- something that injures the stockholders indirectly
Misfeasance or misappropriation of corporate property
Action for enforcement of corporation contracts with third parties
Actions against corporate directors for competing with the corporation.
Actions to correct false entries in records of corporation
Legal or equitable (jury trial or not)
Determining the "per-merger" (of law and equity)" way that this was dealt with
Remedy sought
Practical abilities and limitations of juries
Specific things
Breach of contracts and gross negligent might entitle them to a jury trial
Actions based solely on fiduciary are not legal, and only liable to chancery
Plaintiff’s attributes
Must fairly and adequately represent the interest of the shareholders
Could be describes as a fiduciary
New shareholders might benefit differently, as the ownership of companies is fluid
Could create a risk of repetition and could depress stock price
Standing by law
Federal Courts: Corporation itself can’t sue former owners after wrongs occurred – but individual shareholders might be able to sue -- e. g. could be a primary action in the name of the corporation
Usually no allegations of corporate mismanagement possible when someone purchased stocks from those who participated in the alleged wrongdoing at a fair price
Things that are tainted by fraud or deceit are different
If a corporation did things to itself, a later owner can’t sue (dissent, it is in the public interest to have efficiency
Ownership of stock
Must have owned the shares for a year (or have them willed o by operation of law to the Plaintiff)
Has been relaxed if the Plaintiff acquired the shares before there was a disclosure
A qualified shareholder can intervene to maintain
Continuing wrong doctrine
A Plaintiff who purchased shares after a wrongful taking of pro, but remained a shareholder while the wrongful holding contained wasn’t barred
"contracts inferred before shareholders purchase but under which payments are still being made"
requirements
must attack original transaction
but not permitted to recover for anything that occurred before the purchase
what if there was an acquiring of shares that discounted due to the harm
must maintain interest in shares throughout the litigation
exceptions: merger is a subject of fraud claim, or where it is reorganization does not affect the Plaintiff’s ownership
if the transactions was structured as a sale of assets by a dissolution, the shareholders had standing under NY law to sue previous directors
could be equitable exception to contemporaneous ownership requirement
ALI: Elimination of ownership due to voluntarily merger would be standing
Buyout of injured company
If there is a buyout of the injured company the interest passes to the new shares, if they are received as condition involuntary elimination: Ali would permit
Deterrence: any Plaintiff willing to file a complaint will do
Can be held in street name
Brokerage firms have to comply with SEC requests -- and non-objecting beneficial owners to a corporation that requests
Depository trust will compile a list of institutions
Ownership in holding companies (e. g. double and triple derivative) is acceptable, opposing view is that there must be a de facto control
Plaintiff in a double derivative suit is still require to satisfy the futile test to establish that demand on the subsidiary’s board is futile
Ownership of debt
Usually only stock
Convertible debt
No standing
Could be one because an equity security included convertible debentures according to the 1934 act
There is argument for a more relaxed rule because smaller creditors don’t have the economic leverage
Who has best interest
Maybe it is a good idea to auction to see who had been injured the most if there is a large number, with each a small amount at stake, efficiency, similar claims, the case doesn’t need active participation -- there might be an issue of discovery of the claims, etc.
Maybe others than shareholders should be allowed to bid
Maybe the courts should auction the litigation rights, that than to the claim
Drawbacks are the question of agency cost
Making demands on the directors to sue
Usually: business judgment rule are not present (self dealing, biased decision maker, transaction that creates waste)
1st circuit: undirected to a corporate purpose
Alabama: if they directors are the wrongdoers, the demand could be futile
ALI: where demand could cause ireprable injury to the corporation
Wants to reduce threshold litigation
Demand could be a form of ADR
Demand is easy and adds little
Federal: (e. g. under Investment Company Act) – must apply the law of the defendant corporation state of corporation to decide the futility exception
Model Code: Demands Mandatory
NY:
Futility test is lack of independence and no business judgment – have to allege either that the majority was interested or that the board failed to inform itself earlier
Majority of the board only has to be charged with a breach of the duty of care, rather than just a breach of the duty of loyalty (not as much specificity)
Even if the unaffiliated directors didn’t personally profit, it doesn’t end the question of their potential liability to the corporation
Could be excused if
Majority of the bard is interested,
Director with no interest is controlled by the directors is
Demand is exercised (if pleaded with particularity) if the directors didn’t reasonably inform
Transaction egregious
Delaware: must allege specific facts demonstrating the futility of such demand.
Obtaining information
Inspection rights : there is an unresolved question of the lesser inspection rights being not as good as discovery
Must do for a proper person
Mere naming of all directors will not excuse demand
Fact that they may be exercising fiduciary obligations not to take the suit (even if prior challenge) doesn’t excuse demand
Some states limit which rights – some limit to stockholders of record others to amount
Remedy: write of mandamus
Proper purpose
Must have to do with their action as a stockholder
Harassing not allowed no for person profit (e. g. if there is already a judgment
It might be okay if obtaining the stockholder list is to warn of the danger
failure to oversee: would need to allege bad faith, and ignorance of obvious signs -- check Caremark
No conclusionary allegations allowed – e. g. saying that majority ownership was control is not enough -- must show both elements
Must show reasonable doubt that the board was not disinterested and independent (e. g. hand-picked or directors were appearing on both sides of the transaction)
substantive nature of challenged transaction
interested is defined as when the director will receive a personal financial benefit from a transaction that is not equally shared by the stockholders
mere threat of personal liability isn’t enough
benefit of the doubt goes to the board
Board did not follow adequate procedures in meeting their decisions (e. g. no reasonable inquiry)
Stock ownership alone isn’t enough to say domination or control (at least when it is less than a majority)
Board’s decision needed to be so irrational as to be out of the bounds of the business judgment rule
The business judgment rule might not apply when directors have abdicated or absent a conscious decisions, failed to act
Response to a demand
Directors have to figure out how to respond to demands, and do so reasonable an din good faith
Board must weight the alternatives, including corrective action
Decisions made by other board: Mere fact that a board was named by management, doesn’t mean it is controlled (an appointed board could be independent) -- e. g. futility test should apply if the business decision was made by a board of the company, subject of the derivative suit is not a business decision of the board, decision was made by a board of a different corporation
Other excuses as futile: Where a derivative stockholder complain creates a reasonable doubt that the board of directors could have properly exercised its independent an disinterested business judgment in responding to a demand,
Fast tracks to futility
Duty of loyalty (in Delaware) may now be easier
Insider trading may be a fast track (given a 35% share)
Financial interests or law firm doing business might be enough
The smaller the firm the bigger the interest
Breach of specific statute might be fast track n -- Illinois
If directors can’t be reimbursed for liability -- Florida (using Delaware)
Lawfirm that represented defendants in related criminal proceeds
Characterizing the suit as a derivative action will allow the board to take over the action
Demand upon board to sue
Court won’t interfere in a decision by a board of directors that establishes or caries out corporate policy
Shareholders must exhaust inter corporate remedies, unless futile (Plaintiff must plead that demand has been made or specifically state why demand is futile) in Delaware demand must be made in every case but bars a shareholder form bring suit for 90 days from the date of demand unless there was a rejection
Plaintiffs see the procedures as a way to hind things behind the futility rule
Futility may be inferred from something being a direct decision of the board
Board of actors can cause something to be dismissed as it is not in the best interest of the corporation
Corporations can’t stand neutral in the face of a derivative suit
Fairness will only become an issue if the business judgment rule is defeated
Answer by board
ALI: Board will always be required to respond to demand, and state why
If the board says why it can say that the statement is false
Does meet standard for business judgment rule
Standard other than business judgment rule applies
No particularized facts warrant dismissal
Ali defines interested as if the complaint is only based on the directors approval or acquiescence of the traction at issue, and does not allege particularized fact, that directors is liable to stockholders
Board must respond within "reasonable time" – one month not enough, unless the corporation doesn’t take action
Must be able to study matter
Case will be in suspended animation
RMBCA – 0- days
Stockholder must know what actions was taken
Acceptance means that the suit is barred
Refusal to sue – and the defendant waiting
Defendant
Will often recover his costs as well
Directors can recover expenses if they have not been adjudged to have breached any duties
Settlement
Security for expenses
confidentiality
Proceeds from suits
Go to corporations and to creditors and lawyers
Occasionally on a pro ratta basis to shareholders: (case of a premium paid to a person sold stocks), excessive salaries to deprive shareholders a judgment, successor stockholders purchasing stock with knowledge of what was paid to the controlling stockholders, wrongdoers were substantial shareholders, corporation a going concern
Plaintiff’s counsel’s compensation
Preclusive effect of the suit
Evaluation of demand
Board should appoint a disinterested committee to address questions
Policy; there could be judicial deference to the decisions of these committees
If a committee is disinterested in might not be compelled to decide
Board is usually entitled to business judgment rule and it will be respected unless it is wrongful
Delaware allows committees
Ohio doesn’t allow committees
Chancery should look to whether the committee was independent and acted in good faith
Must prepare a written report
termination
A court should Look to whether dismissing the suit would be in the best interests of the corporation -- directors have the burden to show (under fundamental fairness)
standard if fundamental fairness, and the directors have the burden
If the directors cant’ prove that this is fundamentally fair, than a committee could still bring this motion to dismiss, it is in the best interests of the corporation not to continue the litigation -- motion to dismiss must have affidavit
Plaintiff’s get to file response
The claim that the legal fees were too large
the board has to show, in order to defend this decision, in order to defend this decision to defend this action
the holding has to be that there was a risk to the corporation
that there was a threat after good faith
after reasonable investigation and that response to the threat was proportionate
movants on motion to dismiss will have the burden
If the directors do sustain this burden, it is not the end of the proceeding. The court now says they can exercise business judgment rule, plus factoring in public policy and law for the form (court has its own discretion) it looks at the substance and makes its own independent -- court can include a lot of stuff -- the trial court does
This isn’t adjudication on the merits: In determining whether or not to approve a decision , the litigating stockholder Plaintiff facing dismissal of a lawsuit ought to have sufficient status for strict court review
Courts inquiry
Independence and good faith of the committee (corporation has burden of proving independence)
Court can review, and use its independent business judgment to see whether a motion should be granted
Court can use equity
Issue of whether demand is required or not and dismissal
Demand excuse
Courts inquiry
Independence and good faith of the committee (corporation has burden of proving independence)
Court can review, and use its independent business judgment to see whether a motion should be granted
Court can use equity
Demand required
See Arronson (allegations of specific facts)
Act of appointing board
Once a demand is made, the question of whether demand is futile is moot
If the board appoints a litigation committee, it concerned that they were intercede in the transaction and not protected by business judgment rule
A committee that can only investigate recommend may allow the board to retain the power for itself
If a board response to a derivative suit by appoint a special litigation committee with sole authority to decide whether to pursue the litigation before moving to dismiss for failed to make demand, the board has concerned its disqualification and demand is excused
If a committee is established after the motion to dismiss is made, no concession is made
Delaware minority: shouldn’t take these things as seriously
NC: would not grant as much deference to derivative suits (including all derivative suits)
NY: hinges on independence of boards
boards who are appointed after the incidents get more deference (e. g. they must possess a disinterested independence) –
PA/ALI: courts shouldn’t be appealing their own business judgment rule]
ALI
Duty of care allegation
Court should uphold an allegation to dismiss a claim
Duty of loyalty
Stricter judicial scrutiny
Deciding whether they should warrant release
Burden of proof on defendants
CT: Special litigation committees are inherantly interested -- e. g. structural bias approach
Structural bias even of outside directors is ever-present -- Rejected in Delaware absent showing of specific facts
Committees will be biased because it is asking corporate brethren to kill each other
Corporate dealings and investment is no structural bias
Contributions to a University may be enough (rare) for bias in Delaware
Mass: because of the danger of structure bias judicial oversight is necessary
Independent must have no interest at all
Just because someone is elected by interested people doesn’t make them interest
If there is an Independent majority, Plaintiff’s have burden of proof of showing that the majority of the board isn’t independent, else other way around
Expenses
Some states: if the financial stake of Plaintiff is below a threshold, some state may be required to post expenses
Minimum amounts are in costs or percentage
Delaware doesn’t require bond
Expenses postings will be required in diversity suits
Corporate officers don’t like to circulate their alleged misdeeds
Federal question in Federal courts: will never be a security issue
Termination of suit
Courts factors in dismissal
ALI: Even in independence, a court can conclude that the committee was wrong
ALI: Court should look to the likelihood of a judgment in Plaintiff’s favor
RMBCA: dismissal if not in the best interests of the corporation
Determination must be made by a majority vote of either the independent directors constituting a quorum or a committee of two or more independent directors who were appointed by a majority of independent directors
Settlement
Judicial approval required
Factors are settlement amount, amount sought, cost, complexity, odds
Can be a violation of due process if a counsel argues that the case can be settled too easily
Adequate representation needs vigorous -- and needs a fair effort to settle a settlement claim
Delaware factors
Probable validity
Apparent difficulties in enforcing the claims through the courts
Collectability
Delay, expense
Amount of compromise in regards to the amount of the judgment
Views of the parties involved, pro and cod
Fairness is difficult when there are non-monetary gains to the corporation
ALI: court should review the real value of therapeutic relief (e. g. non-money is therapeutic)
The principal factor to be considered is how it will benefit the real party in interest
Will look at how the members of the class respond (they don’t all have to agree
Court may need to take a close look because many of the class aren’t intimately involved
Judicial approval comes in the face of a settlement that stockholders have already approved, and they may be reluctant to point it out
Courts sometimes appoint experts or ask the SEC for help
Courts may give the stockholders notice
Model: only notice when the settlement will substantially affect the interest of the shareholders
There have been examples of notice publication, or random notice
Notice may bring on a hearing
Stockholders lack information, and may have to challenge Plaintiff’s counsel
Mini-trials to evaluate settlement
Stockholders may not be able to introduce information in a min-trial
Mini-trials shouldn’t focus on the merits of the claim
Courts are reluctant to overturn
Corporations could always settlement directly
Will only be subject to clear error review
Attorney’s fees
There can be awards of attorney’s fees for dismissing a case, even if the litigation is moot, so long as there was a benefit to the corporation:
Benefit doesn’t have to be in economic terms, but simply something theoretical, like greater disclosure -- burden was put on Defendant
If there is no change, or overall, maybe no fees
Fee determination methods
Delaware doesn’t feel bounds by anything!
"Lodestar Test" employed by courts
fee determination
number of hours reasonably expended by counsel that created protected or preserved the funds
number of compensatable hours multiplied by a reasonable hourly rate (varies)
fee determination raised or lowered by a multiplier by the risk of the work
small multiplier for skill
will be preference for early settlement
20-35% when less than 1million, and 15-20 % when more
might reduce risk to counsels and the fees if things aren’t settled successfully
some courts have asked for a constant 30% of the fund
there is a risk of collusion
alternative forms
partnerships: 2 or more people – all are jointly liable for torts
risks
threat to dissolve
extortion of intra-team tort damages
risks between partners can be contractually modified – usually protect minority
dissolved in one pulls out
law presumes equal partners
no formalities
consensual
operation of law
votes of partners can be proportional (as per the shareholders agreement to their contribution)
LLP: limitations
general partners and limited partners
liability: general partners are treated the same as partnership partners
LLC:
Instead of shareholders there are members
Articles of organization
Member managed or non-member managed
Who has authority to act as agents
Corporations -- perpetuity of existence until dissolution (but can be modified by articles)
ownership and management can be divorced
formal creation
articles
limited liability
board of directors have centralized ownership
votes of partners can be proportional (as per the shareholders agreement to their contribution)
freely alienable
usaully protect majority
taxes
partnership: flows through (taxed at individual rates)
taxed on profits of business at individual level
deductions for debt that it pays but not for securities
corporation: taxed at both levels
S corporation -- complete flow-through
Income taxed to shareholders
Must be less than 35 shareholders
Individuals
Estates
Qualified trusts
Election must be made
Terminate if over and 3 year period more than 25% of the corporation gross receipts constitute passive investment income – or shareholders exceed, or non-resident aliens, or are not trusts
Taxing hybrids
"check the box" – they can be taxed as a partnership provided that the owners check the box
professional responsibility --
pre-incorporation
e. g. entity theory of the corporation (pre-incorporation activities of the promoters of the corporation will be deemed to be the activities of the corporation (e. g. reasonable expectations)
unsuccessful incorporation activities
if the attorney acts in a fiduciary relationship than he is acting as a lawyer in a fiduciary capacity
today: reasonable belief test vis-à-vis the client
about the same would apply for partnerships
if the corporation resembles a partnership in function the corporation’s duties may be taken differently
lawfirms retained for the purpose of defending a corporation are not the lawyers of the officers
partnerships will be treated as an entity, much as the corporation
situation analysis
if another client becomes an adversary of a client -- probably could be considered to be unethical
can be difficult if people are both individual and corporate clients
no disclosure except for authorization or implied authorization
must be consent
can represent parties to a negotiation with non-fundamentally opposed interests
would need full disclosure of corporation
cannot make decisions relating to the clients
Process of incorporation
Incorporator will probably have little to do with the corporation afterwards
Filing and start of the corporation
RMBCA: incorporation at filing
Others incorporation at acceptance
Articles
the corporate name (which must indicate "corporateness," e.g., "Inc.," "Co."; furthermore, the name can’t be confusingly similar to that of any other in-state corporation)
the number and types of shares the corporation may issue (e.g., preferred, common),
address of the corporation’s registered office,
the name of the corporation’s registered agent at the registered office, and
each incorporator’s name and address.
Types of stock
the types of stock the corporation is authorized to issue (e.g., preferred, common), and
the number of shares of each class of stock the corporation may issue. (Note that this should be more than the corporation initially plans to issue, in case it wants to issue more shares in future (e.g., to raise more capital). If the corporation doesn’t authorize more shares than it plans to issue, any increase in authorized shares requires an amendment to the articles and shareholder approval.)
One needs an organization meeting
Defective – e. g. investors believe, lawyers believe, and people doing business with the corporation believe
Estoppell argument, if one believes that one can’t deny (especially big corporation who could check)
Modern argument: one can recover from the people who failed to file the documents
RMBCA gives liability only to people who knew that the corporation didn’t exist -- but there needs to be some steps taken
De facto corporation (the corporation made a colorable attempt, in good faith, to organize for an authorized purpose under a valid statute, and it’s exercised corporate powers, but some defect in incorporation prevents it from being a proper, "de jure" corporation).
Corporation by estoppel (prevents people who’ve dealt with the corporation believing it’s a corporation from thereafter trying to deny the corporation exists in order to hold officers or shareholders personally liable on contracts. Even if the third party dealt with the corporation as a corporation, this defense isn’t available to shareholders who knew about the defect in incorporating; thus, it’s generally available to shareholders who relied on a third party, like a promoter or lawyer, to handle the incorporation).
The modern defense is: anyone who acts as a corporation without knowing of the defect can’t be liable personally for corporate obligations (and vice versa). The RMBCA view abolishes the de facto corporation doctrine and doesn’t recognize corporation by estoppel, but the result is frequently the same as at common law (since the RMBCA exonerates anyone acting as a corporation believing in good faith that the corporation exists).
Pre-incorporation remedies
Background: bound only promoters
Modern doctrine holds that a corporation may adopt the contracts signed before hand
Ratification
Adoption
Acceptance of a continuing offer
Novation
Fact inquiring into the circumstances surrounding the contract to determine whether a promoter is personally liable
Form of signature
Action of seller (did the seller look only to the corporation for payment): there is a warranty of the situation (e. g. that there would be a corporation)(
Non-existant corporation that people sign for that will exist in the future
No intention for promoted to be bound personally, but would use best efforts
Personal promoter liability until such time as they adopted the contract
If the third party intended only to bind the corporation, than only the corporation, would be bound – and no liability to promoter if it never exists
Promoter always liable, even if the corporation begins
Was there partial performance
Was there the beginning of novation
Courts will look to intention of parties to see if there was a novation
Creating a corporation isn’t enough, the corporation must adopt
Novation
If the promoter possesses knowledge it is imputed to the board, but this doesn’t necessary apply to
By state: It is an action by a state attacking the corporate status of a business. Note that de jure corporations are beyond attack by anyone, even the state. De facto corporations and corporations by estoppel, however, can be attacked by the state in a quo warranto action. w
State of incorporation
Registration (appoint a local agent for service of process)
Corporations cannot be discriminated against
If the intra-state transaction are an inseparable part of an interstate transaction, it may not be required to qualify as a foreign corporation because of the commerce clause
Choice of law:
Internal: Law of the state of incorporation will determine the laws of internal affairs of the corporation
External: governed by local laws
Both: securities laws, anti-trust
Pseudo-foreign corporations: some states designate DE corporations that do business locally as local corporations . California defines by a 51% rule
If there is significant contact with a state local laws about election of directors might apply -- court held that the burden wasn’t substantial (reverse under common law)
Relationships between stockholders and board will be governed by only one state’s law
What people think of
Tax rates
Simplicity of operation (e. g. can things be done by conference call)
Restrictions on dividends and other distributions
Shareholder rights
Indemnification of officers
Is there easier operation for closer corporation
Liability for wages
There can be discriminatory taxes on corporations
States compete for corporations
There is a race for the bottom – but this is not really true, because people might want it anyway
Risks
Diversification, non-controllable
Risk can be allocated
Legal capital – probably obsolete outside of Delaware. Legal capital is defined as the maximum number of dollars up to which someone might, in certain circumstance be able to sometime to hold some shareholders liable if the statements about the corporation are false.
Definitions of legal capital (all must be true)
In dollars
Initially the par value times outstanding shares
Not an asset, fund or collection of assets
Implies that a valuation of at least that amount was place upon some indeterminate assets that were transferred to the corporation at some indeterminate past time in exchange for shares
Legal capital -- when a corporation can sell stock and pay dividends (the benchmark below which assets can’t be distributed)
In the past, shareholders were making decisions about whether or not they could relinquish prior claim to debt to become stockholders
Creditor’s claims against a corporation’s income and assets have priority over the claims of equity security holders if
The debtor corporation has received all amounts it claims to have been paid for the equity securities
The corporation ins barred from jeopardizing the creditor’s interests
Lawyers have t render that a corporation’s stock is validly issued, paid,, and nonsassessible
Directors are liable if stock is issued that is not in line with statutory standards
Lawyers have to sign off (usually) on the legal capital position
Watered stock: stock that didn’t receive the full par value
In the past people would overvalue the capital contributed
Shareholders are liable for the difference where there is a statute
Value of property of the stock needs to be conclusive, absent fraud or "franchise free"
Future services can’t be included in the consideration -- a bonus on a future salary can be used
Where stock didn’t harm the credit of the corporation, and someone had accepted a job in reliance the stock was held to be unavoidable
Security of consideration of stock
CA: adequate security is okay to pay for stock
NV: ok if stock is sold for a debt, in which the down-payment price is the par value
Guarantee: person guarantee was okay
RMBCA: issuance of shares still requires consideration (future consideration is okay), but there is no and the consideration must be considered to be accurate
There is liability for fraud, but not under corporation statutes for overstating
Stated capital: the dollar number declared by the board about what is on the stated balance sheet as capital