1. Reduction of Agency costs
    1. unsystemic risks (unique to individuals)
    2. systemic risk: moral hazard
      1. remedies when corporation is improperly used
        1. Derivative actions
          1. Benefits
            1. could reduce systemic (market) risk by reducing agency costs -- but this would assume that shareholders are fully diversified
        2. Piercing
          1. Managers seem to be able to exploit shareholder disunity to entrench -- and maybe judicial is the only rational means to distribute corporation assets
          2. Parties who piercing has effect on
            1. Employees
              1. It wouldn’t be so bad, except if liability were joint and several
              2. Some would rather have pro-rated share
              3. Alternative viewpoint: Agency theory: benefits of agency exceed the costs
                1. Direct costs
                2. Costs of controlling managerial assets
                3. Shareholders may vote to do things that are irrational because of the control of the corporation
                  1. If the firm was a true contract there would be true-opting out of things that enabling things allow
                  2. Fiduciaries get a fixed amount, and they don’t get any more
                4. 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
            2. Shareholders:
              1. Optimizes investment decisions
              2. The relationships between shareholders and management seems to be vaguely strutted by the laws, and these laws have changed politically
                1. Evolution of corporations
                  1. Chaos: hard to predict exactly where they go
                  2. Path dependence: corporations may adapt to threats that stop existing: could be reason for strong managers and week owners, but there other alternatives
                  3. Modern evolutionary theory: no assurances that a destroyed group will reappear
                2. Difficult to tell which is always efficient
                  1. There are few inequalities between markets for corporate control
              3. Things might be better if firms had more choice of organization
            3. Managers: can act efficiently because of liquidity
              1. Close corporations aren’t as efficient
              2. Mangers seem to be able to exploit shareholder disunity to entrench -- and maybe judicial is the only rational means to distribute corporation assets
            4. Voluntary creditors can bargain to protect themselves
              1. Courts pierce most often in contract cases
              2. Reasons for piercing – Federal courts will only have jurisdiction under tort if there is a piercing issue -- burden of proof is on Plaintiff
              3. Some say that There can be statutory insurance or bond requirements
              4. Alternative Maybe the best time is when creditors are mislead
            5. Outside director is defined as not part of, or have strong ties to the management
              1. Reasons
                1. Can reduce agency costs, but differences as to how long their scope should be -- ALI recommends mostly outsiders
              2. problems
                1. Outside directors may still be reluctant to displace an incumbent CEO
                2. Outsiders aren’t good monitors, because of limited information
                3. Directors have other demands
                4. Lack experience in that business (s)
                5. Few financial incentives
                6. Not much time devoted
                7. Most of the stuff doesn’t require the board of directors anyway
                8. Business people are not lawyers who will peruse a right answer like lawyers
                9. Boards make take an overly non-legal holistic view
                10. There may be few decisions made
                11. Board doesn’t necessarily control agenda
                  1. Board may want to maintain a management
                  2. Board may want to main control and information systems
                  3. Board may be unable to ignore trouble
                12. Possible, in hindsight to always second-guess a board
                13. Board won’t be devoted to researching
                14. Attendance might not be all telling
                15. People may unjustly place reliance on directors with certain expertise
                16. Delegation to certain members of the board might not be the best solution
                17. Decision making may be political in nature -- and may defer to management, anyway
                18. May hesitate to rock board
              3. Most boards have a majority of outsiders
                1. "significant relationship with senior executives
                2. has never worked for the corporation or subs
                3. not a relative
                4. proves no services
                5. not employed by a firm providing services to the company
                6. receives no compensation other than directors fees
              4. still may be structural bias -- could be a "do unto others rule"
                1. there may be too many shared perspectives
                2. still might work
                3. Structural bias even of outside directors is ever-present -- Rejected in Delaware absent showing of specific facts
                  1. Committees will be biased because it is asking corporate brethren to kill each other
                  2. Corporate dealings and investment is no structural bias
                  3. Contributions to a University may be enough (rare) for bias in Delaware
                  4. Mass: because of the danger of structure bias judicial oversight is necessary
                  5. Independent must have no interest at all
                  6. Just because someone is elected by interested people doesn’t make them interest
                  7. 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
              5. perhaps board should include employees and other constituencies
                1. having ethnic diversity might limit talent pool
                2. still open as to whether special interests should be on board
                3. perhaps professional directors (maybe institutional investors)
                  1. a market for it might be more efficient -- but expertise is finite, and much of it may be inside
              6. Professionalism: independence, integrity, competence
                1. Might be a need to limit number of years
              7. Check this – go back to ch. 15
            6. Board committees – usually to deal with technical work
              1. Audit
              2. Nominating
              3. Compensation
              4. For derivative suits
              5. NACD: suggests oversight "governance" committee
          3. Choice of law to piece -- states can’t place their corporate creatures above congress
            1. NY: law of incorporation would govern
            2. Not uniform
            3. CERCLA has lead to shareholder liability
          4. Who the court looks at when deciding whether to piece
            1. Bankruptcy
              1. Fraudulent conveyances: but there are federal bankruptcy laws that will do the same as piecing
              2. 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.
                1. Loans to close people – ultra vires
                  1. Old: need approval from stockholders
                  2. New: what is reasonably expected to benefit
              3. corporate control: totality of the circumstances
                1. theoretical criteria for mere conduit status
                  1. unity of interest
                  2. separate personalities of corporation no longer exist
                  3. usually governed in the sate in which the transferor sits
                2. specific things that are indicative of being a conduit
                  1. directors, departments, tax returns, finance, caused the incorporation, capital, salaries, exclusive business, use of property formalities)
                  2. Not paying attention to formalities
                  3. Abuse of corporate entity
                  4. Common office space
                  5. Degree of discretion shown by the alleged dominated corporation
                  6. Payment or guarantee of corporations debts by entity
                  7. Intermingling of debts
                  8. MO variant: control (complete), fraud, proximate caused by the fraud of the injury
                  9. 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
                3. Tests for subsidiaries: Equitable ownership: Courts have used the "mere instrumentality’" test about subsidiaries -- and representations
                  1. If the corporation is a fragment of a larger corporation there is no piercing to hold individual shareholders liable
                  2. Arbitration: When things are pieced, people can be held to contractual duties
                4. things that along are not enough
                  1. just sharing cash management system isn’t enough
                  2. requiring approval might not be enough to pierce
                  3. literature might not do it
                  4. Self insurance may be possible (or by subsidiary) based on market convention
            2. 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.
            3. 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.
        3. Market for corporate control means that things should not be pierced
          1. pro
            1. Stock market tender offers: efficient market may cause the firm to become more efficient
              1. Firm’s assets are worth more in the hands of the new mangers
              2. There are legal restrictions on this market for corporate control
              3. Tender offers create wealth
                1. Could be from production and distribution economies of the corporations
                2. Technology transfers
                3. Cost reducing
                4. Assets shifted to higher valued losses
                5. Gains from improved management
                6. Operating synergies
                7. Desire to increases the equity share price, in fact motivates the acquisition
                  1. Wealth maximizing
                  2. Efficiency
                  3. Wealth transfer or expropriation
                  4. Market inefficiency
                  5. Non-wealth maximizing
                8. Tax benefits may be canceled out
              4. Takeovers make society worse off because it makes corporations willing to terminate implicit long term contracts
              5. In general, efficient market aligns management interests with that of shareholders
              6. No direct evidence that anti-takeover measured caused the decline
            2. Market prices will reflect information about value of firms
              1. Markets may serve to constrain managerial discretion
            3. Identity and wealth of investors is irrelevant
              1. good things about the fact that markets could get around everything: Shareholders really are separate (Bearle)
            4. Can be efficient diversification of investments `
          2. Problems with free market for corporate control
            1. Corporate legal duties may be necessary to deal with things that the market doesn’t have time to respond to
            2. Control usually lies in the hands of those who select the proxy committee, as the stockholders have very little sway
              1. There is no pressure to disclose exactly how much discretion a manager has
            3. Ownership is widely distributed: Separation between people and the equity they control: now passive ownership is the norm
              1. Wall-street rule: investors are rationally ignorant: "rational ignorance" presents managers with power
              2. Shareholders might be rationally apathetic, be ignorant, or take a "free ride in corporate decision making" - - proxy statements are not viewed as real votes
                1. There is opportunity cost in complex statements
                2. 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
            4. Institutional investors
              1. Note: in Japan there is far more inter-corporate equity holding
              2. Institutional investors might create a bit more – economies of scale that speak to activism.
                1. Exponential incentive for institutional investors to be informed, diversification may also create economies of scale in monitoring,
                  1. Large investors may be constrained by SEC rules (e. g. short-swing forfeiture) ,
                  2. Risk of being deemed to be a control person,
                2. There is a fiduciary duty on pension plans to act on behalf of beneficiaries, but this might not be enough to get pension active
                  1. Investment advisors have to produce profits
                  2. Some argue that institutions owe a duty to smaller shareholders to oversee
                  3. Institutions may wish more liquidity that oversight -- and there is not enough incentive to monitor
                  4. If the exit is blocked than one may be better sought to be diligent
                  5. Passive institutions may be more competitive -- more conflict of interest with money managers, and they won’t
                3. Mutual funds raise their own issues of corporate governance -- conflict of interest, conflicts of scale, and regulatory concerns
                  1. Controlling shareholders may divert funds at expense of others
                  2. This is still an issue of agents watching agents
                  3. Reputation of money mangers might be the only check
                4. In America there is not the degree of institutional control of corporations, but there is some institutional voice
                  1. Legal rules today put institutional investors toward the passive end
                5. 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
            5. Restrictions on self dealing are somewhat less slack than under contract
        4. 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
          1. Alternative: State imposed rules could be mere background rules
            1. Revisionist theory of contracts looked not at unfair wealth transfers but there was misallocate gains
          2. There might be actually bargaining over the terms of their relationship
          3. Some corporate rules cannot be bargained around and the contracts may be hard Rules can be hard to determine in the first place
            1. 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
          4. The contractualists would not say that the inter-corporate arrangements are presumed to be efficient
          5. These aren’t real contracts because they are enforced by the market, not legal mechanisms
    3. external risks
      1. corporate form
        1. risk reduction
    4. risks
  2. 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
    1. Absent directors not liable
    2. Good faith reliance can be a defence
  3. Agency
    1. Some statutes requires certain officers – RMBCA doesn’t like
    2. Types of authority
      1. Express: must be bylaw or resolution -- but the secretary of the corporation is allowed to sign for it
        1. Board meetings
          1. Directors have one vote and can’t vote by proxy unless bylaws provide for it
          2. Must be a majority to pass, and must have a quorum
        2. Intent of the law is to get the directors to act as a collective
        3. Abnormal situations
          1. Telephone is okay, but must be able to here each other
          2. Informal, but unanimous written consent is okay
            1. In some states, it is okay when they are not present, but written
            2. With conference call: hence, a director can veto just by withholding consent
          3. Proxies: Board members can’t give proxies
          4. Emergency: corporation may proceed based on contact only with the directs that contact was made
          5. Shareholders present
            1. If it is made with all shareholders present it will probably be binding
            2. Even if informal meeting g of shareholders could be ok
          6. Tradition: when the legislature specifies the means by which directors act, and they do contrary to that by tradition, it may be struck down
            1. Long time Vacancies may be a place where customary practices are upheld
        4. Notice -- must be given or invalid
          1. Directors must get notice of regularly scheduled board meetings
            1. Directors can waive
            2. Showing up at a meeting to protest is not a waiver
        5. Sub-committees of board
          1. Executive committee will have full authority except for dividends, and merger
            1. Audit committee (required by NYSE and NASD)
            2. Finance
            3. Can have temporary committees
          2. Directors can rely on reports of committees
          3. Can’t have committee declare a dividend
          4. Can’t have committee declare fundamental change
        6. Shareholders giving authority
          1. Elect board members
            1. Annually
            2. Staggered -- or a classified board
              1. Multiple types of stock as classified in the articles of incorporation
            3. Vacancies on the board
              1. Directors can fill
              2. If the size of the board increased
                1. Majority: only the shareholders
              3. Minority: everyone
          2. Usually need the approval of all present, or present by proxy (directors can’t vote by proxy)
          3. at common law, one shareholder could block – this was based on a contractacian view
          4. appraisal and opt-out rights: if there is a fundamental change, and the shareholder dissents, the stockholder can invoke the appraisal rights
            1. some says that it is like a veto rights
          5. shareholders can’t assert dissenters rights
      2. Actual
        1. Inherent: (not really agency) but enough of a relationship to make one liable under respondeat superior doctrine
        2. 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
          1. Will depend not just on the nature, but on who is doing it
          2. Exceptions: extraordinary nature rule
            1. If consideration or reliance is given, courts are willing to find authority
          3. Things to look for
            1. Statutory provision
            2. Articles of incorporation
            3. Bylaws
            4. Resolution of board of directors
            5. Evidence that the corporation to act in similar matters and had recognized, approved and ratified
            6. A failure to repudiate
        3. 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
        4. Implied: inferred from the circumstances
          1. An gent is vest with the implied authority to do all those things necessary or incidental to the agency assignment
          2. Third party must reasonably rely
        5. Limited authority: corporation is liable if there is no actual authority given or apparent authority is manifested to the third party
    3. Few rules with respect to which officers can bind the corporation
    4. By statute authorization is required for large, or fundamental transaction
      1. Bylaws can be amended to change what the responsibility is
  4. Procedures
    1. Actual voting – shareholder vote is sacred, and the business judgment rule won’t cover attempts to manipulates
      1. Disparate voting right plans
        1. but not under state law -- the SEC wants to prevent the deprivation of voting rights once a stock has been purchased
        2. re-capitalization plan are not a type of proxy -- this is not an issue of disclosure or proxy.
        3. The SROs not have voting rights rules
      2. Someone who wants to gain control of the board of directors will usually be grated the right even if not directly a proxy
      3. proxies
        1. Defining proxies
          1. 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
            1. Newspaper ads information the public in general might not be
              1. A specific newspaper ad, is a proxy -- could be first amendment issue
            2. An influenced brokerage firm report would be
          2. Tension between speed of informing, and slowness of proxy process – may give the benefit to news releases
        2. Exceptions from proxy rules
          1. 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
          2. Exempted: announcement of how people intend to vote
        3. Required proxy content
          1. Details for what it included in scheduling of proxy material
          2. Requirement that management explain changes in company
          3. Must be an opportunity to vote for or against a given matter or withhold vote for directors
            1. Preliminary proxy materials are public
      4. Shareholders meeting
        1. 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
          1. Notice: corporation must given written notice to all shareholders -- and only matters within the purpose of the notice may be considered
            1. Shareholders can waive
            2. Timing requirement may be a big deal
            3. Quorum must be a majority of shares entitled to vote
          2. Can be proxies or by consent
        2. Once a year, in the spring, after financial documents there is an annual meeting of shareholders
          1. Calling: Can be called by the board of directors, or owners of 10% of the stock
            1. DE: one doesn’t need to own stock
            2. 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)
        3. 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
          1. Directors can be removed without cause
            1. In general, power to remove directors can’t be restricted
            2. At common law was with cause
            3. Courts can remove directors for serious cause
        4. Proxy
          1. Corporations have to attempt to communicate with beneficial owners, and brokers will vote the proxy in an uncontested matter unless told otherwise
          2. Costs of proxy
            1. Cost is born by company except if no issue of policy is involved
          3. Defenses to negative proxy material: directors who shareholders are solicited against have a right to a defense statement
            1. In Delaware law there is no statute which specifically goes into the removal by stockholder action
          4. there is no requirement to make predictions of whether you will make a proxy contest
          5. criteria for including shareholder proposals
            1. within the shareholders concern and benefits (audit)
            2. specific right provided by state law (e. g. change bylaws)
            3. "no logical basis for not including" (e. g. not reporting on the meeting to shareholders)
            4. there has been shareholder social activism
          6. reasons for excluding
            1. preventing abuse of shareholder proposals
              1. proper subject for action by security holders
              2. can omit proposals that are about ordinary business operations -- especially if they are just a report on ordinary business operations
                1. if the matters are mundane and don’t involve substantial policy or business, one can omit them
                  1. cracker barrel (overruled) held that employment was an ordinary matter
            2. changing public and shareholder concerns have changed the way that the SEC Will consider policy
              1. not significantly related to company’s actions
              2. economic significance : things that don’t exceed 5% of sale, assets or earnings, but they still may be significant
                1. just becomes things are under the threshold, they can still be considered -- the "otherwise" language can force inclusion
              3. political causes used to be excludable
                1. nothing wrong with asking for assurances
            3. 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
              1. a resolution condemning a political action (Dam) might be excludable
            4. adjudication of proxy issues
              1. propriety of proposal under state law -- SEC will adjudicate state (DE law)
                1. federal law, (e. g. compliance with EEO)
                2. some states won’t allow bylaw generating committees
              2. 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
              3. deference will be given to no-action letters by courts
                1. there was an SEC ruling saying it wouldn’t consider employment an issue
              4. courts hold that employment is nt excludable -- especially if it just a report
          7. 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
            1. staff can find a middle ground – and can note that the defect can be cured
            2. no action letters aren’t binding
          8. SEC could seek injunctive relief to compel
        5. Counting votes
          1. Sometimes proxies can be revoked
          2. Sometimes unofficial voting rules between parities
        6. Disclosure
          1. People in the same family who go over the threshold for disclosure are consider to be one person
        7. shareholder proposals
          1. proxy soliciting process is the surrogate for the meeting
          2. a solicitation that doesn’t include information is misleading
      5. remedies: Court can use equity to deal with improper board of directors manipulation
    2. Voting methods
      1. 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
      2. 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))
        1. If the board is divided, than the board decisions could be left to managers
      3. Staggering: will lower the total number of votes in a given year for each shareholder
      4. Class voting: shares elect defined block of directors
        1. Could be a problem if the person who fulfills the vacancy is the sole holder of the stock
      5. Non-corporate arrangements
        1. Voting trusts
          1. Shareholders convey legal title to a trust, and get beneficial ownership. The ‘trust certificates" are transferable
          2. Arrangements that create constructive trusts are also considered to be trusts
        2. Irrevocable proxies (give someone else the power to vote) – ordinary proxies can be revoked at any time
          1. Prohibition of voting trust
            1. Definition of voting trust
              1. Voting right s of the stock are separate from the attributes of ownership
              2. Voting rights are intended to be irrevocable for a definite period of time
              3. Principal purpose of the grant of voting rights is to acquire voting control
            2. 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
            3. Might need a residual interest to remain
            4. No voting trust created if failure to comply with non-illusory voting trust provisions
            5. A voting trust is not a voting trust if it is illusory, or if more is required than an arbitrator’s decision
            6. Giving a nominal class of shares, with voting agreements to a third party is not a voting trust -- can’t be a delegation
          2. Can make grant subject to conditions
          3. Granter must have an interest in an irrevocable proxy
            1. Minority: interest must be in the stock itself
            2. Sometimes have been upheld where the irrevocable proxy has been given as an inducement for the holder to furnish money to the corporation
            3. Courts have held that inducement to buy stock, creating a future interest, might be creating a proxy
            4. States have said that mutual promises might be all that is necessary, because it is what could make the corporation secure
            5. In closed corporations, some states have eliminated the need for an interest to maintain a proxy
        3. Pooling agreements
          1. Remedy: Specific performance might be the only remedy
          2. Restrictions
            1. Powers delegated to non-directors by a voting agreement between two shareholders are be too braud
              1. Pooling agreements are okay
              2. Directors will act in every way as if they own it, but the directors do not own the corporation’s property
            2. It is possible to have a contractual arrangement to vote, provided there is no oppression against other stockholders
            3. Stockholders can do as they wish with corporate assets provided they don’t screw the creditors
            4. Stockholders can’t make agreements to keep one another in office (they can’t limit the ability of each other to select agents)
              1. It is okay to have an agreement that the directors will keep each other in office
              2. Shareholder agreements can agree to infringe "slightly" on the statutory authority
            5. Cannot completely delegate the power to clark
          3. Invalidity and illegality – conditions on shareholder agreements are separate
          4. 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)
            1. There is a notice requirement of unorthodox management structure (e. g. directors do not have that much control)
        4. Voting requirements
          1. Unanimous requirements
            1. Common law: unanimity requirements are outlawed
            2. Under Statute are okay -- or provision that it is required to transact any business
          2. Quorum (can serve the same purpose): must be a majority, or else otherwise specified in the voting rules
            1. If a director stays away from the meeting, he loses his right to complain
            2. In a closed corporation, a bylaw that allows all shares to vote by be acceptable
          3. Veto rights
            1. Easy way to say that an extraordinary number of shareholders must approve a certain transaction
    3. Some states require mandatory cumulative voting, some have opt-out provisions
    4. shareholders votes
      1. influencing shareholder votes on board decisions (e. g. primary purpose) not allowed
        1. extended time to consider is okay
        2. recapitalization won’t impede stock holder votes
      2. a vote which would remove from judicial scrutiny unilateral board action might not be allowed
  5. close corporation
    1. 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
      1. Generally not enforceable as they may bind future generations of directors
        1. Editors of newspaper may be given an exception (granted specific performance)
        2. Most courts would award only contracts damages
      2. Solution may be to agree to employ the employee, though not as an officer
      3. 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
        1. Other courts follow a different path
      4. 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)
        1. Fiduciary duty not to waste corporate assets on people close to them
        2. Minority can block only if waste or the like
          1. Cannot show bad faith in scheduling a meeting
    2. 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
      1. 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
  6. 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
    1. Definitions
      1. Oppression is defined as NY: frustrating the reasonable interests of the minority -- can give an equitable remedy which include a buy-out
        1. Courts can dissolve if there is deadlock, failure to elect directors, waste, or illegality
          1. Supreme court can create a trustee
      2. Must be balance with the business judgment rule
      3. Shareholders bind together to vitiate the voting power of certain parties
        1. Courts have held that in small corporations the stockholders have to treat each other as partners
        2. Minority: patricians adopt the corporate form, they also agree to be bound by the tradition norms of corporate form
      4. Freezing out (salary and dividends) of certain stock -- some have looked at it as a tort
        1. When normally business judgments rule duties (e. g. excessive salaries) are tied to a freeze-out, it won’t stand
          1. Would have to have the conduct that was tied to a freeze-out that froze the minority out form all beneficial interest
        2. There is a fiduciary duty to inform people who have resigned from the board but are now in a minority position
        3. Deadlock
          1. 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
            1. 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
      5. Reasonable expectations theory
        1. 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
          1. Expectations can include retirement allocation (and things that are inherited from death)
          2. If Plaintiff’s are not active participants, the only thing that they can rationally expect is the payment of the dividends
      6. Shareholders have to have a large measure of discretion nevertheless
    2. Remedies
      1. Buyout may be necessary
    3. Remedies
      1. Dissolution
      2. Entry of an order that the company will be dissolved, but at a future date if things aren’t resolved
      3. Appointment of a receiver, until differences are resolved
      4. Appointment of a fiscal agent to tell the court about the minority’s stockholders plight
      5. Ordering accounting by majority in control about the funds that have been misappropriated
      6. Injunction against the oppressive acts
      7. Ordering of affirmative relief (e. g. distribution of capital)
      8. Ordering one side to purchase the other’s stock
      9. Letting the minority purchase more stock
      10. Award of oppression tort damages
      11. Looking at the fiscal condition of the parities and deciding who should buy the other out
      12. Majority to repurchases shares from minority
      13. Appointing independent director
      14. Shareholder agreements might not effective equitable buy-outs
      15. Some courts see only legal (not equitable remedy)
  7. Restrictions on transfer of shares
    1. Partnerships and close corporations
      1. Partnerships can veto the entry of other partners – delectus personae
      2. Close corporation: need to maintain balance and control and handle restriction due to death
        1. Buy out provisions will provide a measure of liquidity
        2. Modern exceptions: they may be required for closed corporations
    2. Rules
      1. American: unreasonable restrains are void
    3. 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
      1. transfer restrictions not valid against people who don’t know knowledge, or are not conspicuously noted
      2. restrictions are only binding upon those who consented
    4. Limitations on holder to transfer stock
      1. Corporation or remaining shareholders might have the option to repurchase the stock
        1. NY: repurchase have to be out of surplus
        2. DE: can’t impair capital
        3. Treasury shares
          1. Old: Reacquired shares are called "treasury shares"
            1. Preemptive rights
            2. there are no preemptive rights on treasury stock. If they are sold, the restrictions on surplus when purchased is eliminated
          2. RMBCA: shares revert to the status of authorized, but unissued stock
            1. In some states a new issuance will not include the sale of authorized, but unissued shares or the sale of treasury shares
            2. At common law: were presumed to be available, in some state they exist until they have been eliminate
            3. Even at common law there were no common law rights for non-cash issurance of stock
          3. Repurchase of shares by company
            1. NY: repurchase have to be out of surplus
            2. DE: can’t impair capital
            3. Treasury shares
              1. Old: Reacquired shares are called "treasury shares"
                1. Preemptive rights
                2. there are no preemptive rights on treasury stock. If they are sold, the restrictions on surplus when purchased is eliminated
                3. RMBCA: shares revert to the status of authorized, but unissued stock
                4. In some states a new issuance will not include the sale of authorized, but unissued shares or the sale of treasury shares
                5. At common law: were presumed to be available, in some state they exist until they have been eliminated
              2. Even at common law there were no common law rights for non-cash issuance of stock
      2. "buy-sell agreement " -- remaining shareholders have to purchase the stock upon the occurrence of triggering events
        1. can be activated on death
      3. right of first refusal
        1. before selling it to someone else the shareholder must first offer the stock to the corporation
      4. first option provision
        1. the price is fixed by arrangement at which the shareholder must sell the shares to the corporation
      5. there can be a consent provision, whereby the disposition is condition upon the consent of the corporation
    5. valuing shares
      1. book value: accounting term that may or not included intangibles
      2. capitalized earnings
        1. establishing of a formula that includes capitalized earnings
      3. right of first refusal (only for third parities)
      4. appraisal
        1. often including arbitration
      5. mutual agreement
        1. psychological problems
    6. funding repurchase and buy-sell agreements
      1. could be the establishment of a sinking fund in which the corporation regularly sets aside money for the purpose of buying things back
    7. contractual construction: will look to the face of the contract, and refrain from considering intent of the parties
      1. strict construction may mean that if there is no provisions for the death of a party, may terminate alienation restriction
      2. 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
  8. dividends
    1. 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
      1. Hostility and tension doesn’t constitute bad faith (especially if bonuses and corporate funds were normal practice).
      2. If the is a conflict between bonuses and dividends, the court might intervene
      3. A complaint will be dismissed if it simply states that a dividend was not paid other than pursuing another course of conduct
        1. Some argue that fiduciary duty should include maximization of a corporation’s intrinsic value
        2. Agency cost: shareholders will prefer dividends, managers will have to issue stock – and this might lower the agency cost because there is closer monitoring
      4. Dividends should reflect only long term corporate outlook
        1. Debt-holders may signal to shareholders about the credit feelings
        2. Managers may wish to retain cash to keep their capital market independence
        3. Management inadvertently may wish to increase company size beyond most efficient
          1. There are biases towards corporate growth, since managers are rewarded with bonuses
        4. Corporations are more highly leveraged than before
        5. Debt may be better for discipline
        6. Debt may not be as harsh as equity
        7. Debt can cause change
        8. LBOs aren’t the answer because the debt makes companies unstable
          1. Free market may do the job
        9. Debt can be disciplining
    2. cash dividends
      1. regulatory scheme
        1. majority: dividends can be paid out of surplus whether earned or not
          1. 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
            1. directors face personal liability of wrong – "big bomb"
            2. RMBCA: says this is a case of the business judgment rule
          2. The test can be made with either balance sheet tests, or other method of valuation
            1. California: must use GAAP
        2. some states only allow dividends to be paid up to where has "earned surplus"
          1. will define how earnings have to be looked at
        3. Nimble dividends : dividends that can be paid where such payment impair the state capital
      2. 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
      3. Absent bad faith, the company can revalue its assets
    3. Stock dividends (not included in distribution)
      1. Additional shares of stock are distributed -- the par value of theses stocks has to be added to the stated capital
    4. If a corporation lack cash, it doesn’t need to pay the dividends, it can sell securities or pay the dividends
    5. Liability
      1. Directors face liability if there is a loss to creditors
        1. Liable directors have action for contribution against the stockholders who received
      2. Shareholders cannot exculpate a director for a breach of duty to creditors
  9. Duties of shareholders
    1. Hurting the other shareholders
      1. 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)
        1. "only if the defendant had be able to complete able to negate any possibility of gain by Newport could they have prevailed
          1. could test by plummeting shareprice
      2. 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
    2. 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
  10. Duties of directors: originally care and loyalty were apart, now blurred
    1. Duties of directors: manage the company, and have all corporate powers
    2. 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
      1. Monitoring
        1. Directors have to be attentive to graft of others
          1. Need rudimentary understanding of the issues
        2. Day to day inspection not necessary
        3. Should at least read the annual report
      2. age, sex, inactivity are not excuses -- unsound mind isn’t liability
        1. director who sold his shared and remained on board not liable
      3. People have the duty to either inquire to the best of their knowledge (e. g. even without technical knowledge, people are on notice)
        1. There needs to be proof that directors knew of graft in complex corporation -- this was extended to anti-trust activity (where things were decentralized)
          1. Consent decrees of other directors are not dispositive even for inquiry
      4. Duty to install corporate reporting system -- but there might be a problem with allowing ill-equipped courts to second guess
        1. This might be encouraging a corporate system of espionage
          1. Could be negligence
          2. Could be a lack of attention
        2. This would be very clear in the case of rogue traders
        3. Directors duty includes a duty to be assured that a system exists
        4. Could show
          1. Directors knew
          2. Should have know
          3. Took no steps
          4. Failure caused the loss complained – could be affirmative defense
        5. Minority: no liability for ignoring obvious red flags
        6. There is a question as to whether inquiring and monitoring is really business judgment rule
        7. Only 4 states have inquiry statutes
      5. Criminal liability
        1. Strict liability for some things (mislabeled drugs, rodents in food
        2. There are now incentives for corporate officers to implement control programs
        3. Willful ignorance is still bad
    3. 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
      1. There may be problems, because consent of shareholders is fictional: perhaps fiduciary norms should govern
        1. Contract duty isn’t enough because of breach possibility
        2. 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.
          1. There might be concepts of waste and unconscionability
        3. There are serious differences in information in interested transactions
      2. Originally things were voidable if there was an interest (in1880s), later it ha d to be approved by a majority
      3. Ultra vires and the corporate giving
        1. Corporate giving has to be reasonable
      4. Can show that the deal is fair or that he got approval from majority of disinterested directors or shares
        1. In the past, the common law was automatic voidability
    4. Rule with exceptions: Unfair transaction between corporations and common directors will be voided
      1. Will be subject to closes scrutiny but it is possible -- and it can’t be waste and no personalismo allows
        1. Common law rule was that the shareholders first now statutes allow for the community’s interest to be taken into account
        2. Corporations can allow shareholder choice
        3. Derivative suits must be based on fraud, not choice of business
        4. Maybe corporations shouldn’t be charitable
        5. Altruistic capitalism
          1. Could alter the way the business do business
      2. Corporate objective and cooperate conduct can be divorced
      3. Constituency statues mean that there could be unwanted takeover
    5. Would have to be approved by an independent and disinterested majority
    6. Contemporary view
      1. Mere disclosure of interest in not enough: Directors would need consent of all of those effected
        1. Not telling about the interest is a problem
      2. Fairness
        1. Procedural fairness
          1. Approval by shareholder’s can make it okay -- or the board
            1. Shareholder ratification can shift the burden of proof
            2. Where directors own the majority of shares there is no shifting
          2. It is now common to get majority of minority approval
            1. Interest shareholder is defined as part to transaction action or an interested director
          3. 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 )
            1. Party to the transaction
            2. Pecuniary relationship
            3. Director is controlled by
            4. Familial relationship
              1. Courts have found, even in the absence of marriage
              2. Friendship might not be the issue
              3. Exchange of board membership might be
              4. Review of compensation might be
              5. Just receiving director’s fees isn’t enough
          4. Even if legally disinterested, a director could still be dominated
            1. Being a dominant shareholder the other company might be domination
          5. In the absence of dual interests, unbiased is presumed
          6. State law
            1. Model: Majority of disinterested directors needed to approve
            2. NY: if there are insufficient disinterested directors under normal quorum the transaction can be approved by a unanimous vote of interested
            3. DE: affirmative vote of the disinterested even if disinterested is less than quorum
          7. There could be four effects under Delaware law of ratification
            1. Could be a defense to breach of duty
            2. Shift the judicial review
            3. Shift burden to Plaintiff
            4. No assurance of true assent
              1. If shareholder votes are necessary for transaction than there this is not ratification
              2. Ratification might be subject to collective action disabilities
              3. Ratification could be really just the shareholders approving of a director
            5. There could be problems with director ratification
            6. Waste might not come into context in the courts alone (ill-fitted)
        2. substantive fairness Factors or whether another, independent corporation would do it
          1. financial gain on the part of shareholders that is different than the others may make a director interested
            1. being an outside counsel might not be so bad -- and the presence of outside directors enhances truthfulness
            2. fees aren’t necessarily dependent on transaction
          2. it is the actions, not the method of election that might touch one the ability to judge fairly
          3. Corporation received full value
          4. Need for the property
          5. Ability to finance
          6. Whether at market price or below
          7. Was there a detriment
          8. Was there a possibility of corporate gained siphoned off
          9. Was there a full disclosure
          10. There is no such thing as shareholder waiver to dishonesty
        3. There may only be judicial consideration of fairness if there has been no prior approval
        4. Courts have not found that the relationship between the directors (structural bias) is domination
      3. Alternative: a contract won’t be void just because of an interest
    7. Some courts have held that there needs to be a majority of the disinterested sharheolder for there to be consent
      1. Deadlock could be viewed as approval
    8. "key to decision making might be approval of a neutral board of directors": could be approved by any of the shareholders, directors or courts
    9. modern cases might just shift the burden to the director
    10. Corporate opportunity (inverse of loyalty)
      1. board of directors
        1. 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
          1. could test by plummeting share price
        2. court must ensure its managers and resources are devoted to furthering its business interests
        3. management might be cordoned off from doing thing they would like to do
        4. society benefits when people can take advance of things
        5. 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
          1. just a failure to refinance is not asset to allow a corporate opportunity
        6. tests
          1. inters or expectancy
            1. vague: less than ownership – something necessary for growth of expansion
            2. questions is how they learned of the business interest, and whether they gave them a chance
          2. line of business: prior claim better, would encounter problems as corporations are dynamics – courts may determine on a case by case basis
            1. 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
          3. fairness – would they have acted lie together
            1. 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
        7. RMBCA: must first offer and be rejected fairly, or in advance, and is ratified
          1. Information obtained through the use of a corporate position is always a corporate opportunity
            1. Good faith, but defective disclosure can be ratified
            2. There can be special rules for delay
          2. Burden of proof usually on Plaintiff
        8. ALI: if impossible, there may be no need to disclose
          1. Some courts have allowed retention of opportunity if there was not enough liquid funds, and the director is under no obligation to advance funds
          2. Counter: the possibility of potential profits, might generate more funding
        9. Formal discussion might not be necessary, to get assent
          1. There may be an argument for the director being too disadvantaged
        10. remedies
          1. amount of damage
          2. imposition of constructive trust
    11. controlling stockholders duties of loyalty: stockholders haven’t contracted with the minority stockholders
      1. usually stockholders can vote as they please
        1. DE: nothing
        2. ALI:
          1. if the transaction is fair to the corporation when entered into
          2. or entered into in advance
      2. some courts have seen their role as similar to directors
      3. 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
        1. intrinsic fairness is defined as shift in BURDEN OF PROOF and a high degree of fairness
          1. must prove that the deal was "intrinsically fair" to stockholders
        2. the business judgment rule will apply to questions as to which subsidiary an opportunity should be shared
      4. 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
  11. Business judgment and a breach of fiduciary duty -- applies to directors and to transactional justifications
    1. Directors owe a duty of care – must do what a prudent person would do (state)
      1. Good faith
      2. Manner that they reasonably believe to be in the best interest of the corporation
      3. 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
        1. E. g. the corporation enters into an agreement which the director would have know is bad
    2. 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
      1. Business judgment doctrine -- shield against second guessing but not where a corporate decision lacks a business purpose
        1. 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
        2. Sword that can be used to dismiss
      2. Shareholders undertake the risk of bad business judgment
        1. Litigation isn’t a good way to make decisions
        2. Potential profits correspond to potential risk, it isn’t a good idea to be too cautious
    3. Two different standards – could be negligence or gross negligence
      1. Fraud
      2. Illegality
      3. Conflict of interest (Plaintiff will have initial burden of showing the director’s breach of the duty of loyalty)
        1. E. g. waste
        2. Courts show deference to the board
    4. 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
      1. Plaintiff May need to prove causality, but gross negligence in not reading reports may draw inference
      2. Courts may be confusing procedural with substantive outcomes
      3. Tort doctrine might not be completely applicable:: but compound breach of duties could vitiate the business judgment rule
    5. Elements and exceptions
      1. Procedural due care
        1. If the directors appear to be going too fast, the rule may be excluded or not informed themselves
        2. No protection form unintelligent or unadvised judgment
        3. Isn’t available, when a corporate officer hasn’t fully informed himself
          1. Directors are granted the idea that a report by one means that the others can trust
            1. Relying on one director might not be enough especially if oral an informal
              1. Can’t really have blind leading blind
          2. Inadequate price of a subsidiary may be because the board wasn’t given enough data to know
        4. Good faith is the standard, not blind reliance
          1. Usually can rely on information from other board of directors
          2. Reports prepared by people who have a stake (especially employees) require closer scrutiny)
          3. Reliance on counsel generally accepted -- directors need to make a judgment as to reliability
          4. Can rely on committee if the director thinks the committee merits confidence -- slightly different than reliance on expert
        5. Someone who is retained to do something specific is usually held to a high standard, and those who retained them are as well
        6. Prudence requires more than 11th hour vigilance (e. g. by failing to curb risk investments)
      2. Substantive due care
        1. Directors can cure any business judgment problems by trying to repair
        2. The presence of a premium or a spread doesn’t lend credibility in and of itself
          1. The price of a stock is a value of the minority position, because there is no control, and no control premium
          2. Outside valuations are not necessary
        3. Directors may want to inquire into the source of number
          1. Market texts and auctions are a mechanism of price discovery
        4. Corporate lawsuits are a fact of life, and don’t change anything
      3. Inquiring into the business judgment rule is done irrelevant to the litigation risk of derivative lawsuits
      4. Bad decisions can only be ratified by a fully informed electorate, and the defendant has the burden of proof
      5. Doesn’t matter how distinguished to the board of directors is
      6. Fraud, immorality: no business judgment rule if there is bad intent
        1. Collection of debts is an example of what could be termed fraud (could be a disguised election contribution)
        2. Acts that are against public policy might vitiate the business judgment rule -- proof is only required later
      7. Burden shifting isn’t liability per se, but a shift of the burden
        1. 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
        2. If a breach of the business judgment rule exists: The business judgment rule is then examined under fairness standard -- elements are considered holistically
          1. Fair dealing: usually the range of values agreed to in an arms-length transaction
            1. Timing
            2. Initiation
            3. Structure
            4. Negotiated
            5. Disclosed
            6. procedure
          2. Fair price
            1. Economic and financial conditions
            2. Earnings future prospects
    6. 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
    7. Due care seems to be affirmative defense for business judgment rule
    8. Some say that by definition the business judgment rule is due care
    9. Statutory protections for directors: the risk shifting may cause people to act irresponsibly (permissive and mandatory provisions)
      1. Adoption of charter provision eliminator or reducing personal liability of directors for monetary damages in due care cases -- if the corporations put in chargers
        1. Can’t exclude liability for improper financial benefits, intentional infliction of harm on shareholders, and criminal law
        2. No exculpation for unlawful deacons
        3. equitably relief is always available for breach of fiduciary duty
      2. Change in standard liability to requires a higher degree o fault than ordinary negligence
      3. Limit on monetary amount -- usually to suits by third parties
        1. DE:
          1. Permits indemnification of officers, directors, employees and agents for attorney’s fees in third party civil cases
            1. DE: includes indemnification for attorney’s fees
            2. There is a ‘non-exclusivity" clause which has been argued may be tempered by public policy concerns
              1. Indemnification can carry beyond those rights provided for in the statute
          2. There must be consistency between treatment of Plaintiff directors and defendant directors -- indemnification rights can’t be inconsistent with the scope of those powers.
          3. 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
            1. Payment can be otherwise authorized
          4. 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
          5. Settlements of claims must be indemnified if it is in the charter
            1. Even if against the CFTC
            2. Commodities regulation can be defined to be in good faith
          6. 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
            1. E. g. no contest may be consideration vindication (not court’s business to inquire as to why the result was reached)
          7. In the past there was a requirement for directors to pay a bond
        2. RMBCA: Court can order indemnification, and directors can be indemnified for third part and derivative suits
        3. NY: Courts should offer protection against personal risk
        4. VA: a limit can be placed on liability either in bylaws, $100k, or amount of compensation except in cases of willful misconduct
        5. There may also be indemnification insurance
          1. 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
          2. Most statues expressly authorize
          3. Parts of insurance
            1. Reimburse corporation for lawful expenses in indemnifying
            2. Reimburse individuals
              1. Payment of fines are excluded
              2. There are troubling ideas about indemnification
        6. Other alternatives (consistent with DE statue, but beyond the statues
          1. Mandatory indemnification unless provided by statutes
          2. Mandatory advancement by statute
          3. Accelerate procedures for determination
          4. Litigation appeal rights
          5. Procedures under which a favorable determined will be 2deem to have been made under circumstances where the board refuses to act
          6. Funding mechanisms
      4. RMBCA (11 states): no exceptions for duty of loyalty or acts not in good faith
        1. 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
      5. 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
      6. 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
      7. Limits
        1. DE: amounts paid in settlement from expenses that can be indemnified in a derivative suit
          1. Courts refrain from blocking payment of attorney’s fees as an "undertaking
          2. If there are specific limits on the subject matter of the indemnification, it seems like the courts will interpret these limits widely
          3. Could be seen as an advancement of credit
        2. RMBCA: no difference between indemnification and the right to receive expenses proved the activity was not opposed to the activities of the corporation
          1. Will allow a court to award expenses
        3. 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
      8. Probably the indemnification isn’t unlimited
      9. Who decides the subjective questions
        1. RMBCA: disinterested directors not a party, or connected
        2. Some states have states for completely ignorant law first to decide, or someone else
      10. Fees for fees: not entitled to fees when trying to get the fees
  12. Changing hands of corporations
    1. Negotiated
      1. Definition Tender offer: will get ownership: there are issues of market efficiency
        1. Can be done in secret
        2. Can acquire undervalue stocks on the stock market
        3. Can be two-tier tender offers (later people would get bonds) creating a proxy contest
        4. 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
          1. Must be open to all holders
      2. Defenses
        1. Defenses to tender offer: board cannot act to perpetuate itself, and reports of offeror past behavior can be taken into account
        2. Board may use company funds if motivated by a proper business purpose -- companies can use their funds to purchase stock
        3. Must be for Proper business purposes
        4. It is possible to pay more than original market price because of "control premium"
          1. Control can usually be sold at a premium price
          2. Cannot sell corporate office
            1. An officer who owns stock cannot couple a sale of minority stock with a promise to reign
            2. In order to be in control, there has to be real control
          3. Someone who owns a large block of shares (though less than a majority) might have de facto control
          4. Managers usually have de facto control
          5. Some stock may have different value than others because of the position of it
            1. There could be exploitation by the control parties especially when stock is not sold in the open
            2. Must have exercised domination or control in the past
        5. Burden of proof: -- initially presumption of good faith exists, but there can be a conflict of interest
          1. 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
            1. this is not the same as if there was an interested transaction
          2. 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
          3. directors can satisfy this burden by showing good faith and reasonable investigation
        6. tactics
          1. 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
            1. flip-over
              1. stops second-step mergers
              2. 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
            2. flip-in
              1. allows the holders to purchase stock of the target company at a below market price
            3. back-end:
              1. 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
              2. 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
            4. continuing director
              1. the pill can only be redeemed by the directors who made the pill
          2. corporate machinery
            1. staggered votes for board of directors
            2. super-majority requirement
          3. corporate restructuring
            1. can give shareholders an extraordinary dividend, making the stock worth more
            2. will raise debt levels
            3. will raise duty of loyalty issues
          4. defensive mergers (white knight)
            1. more palatable partner
            2. often in haste
          5. issuance of stock
            1. can be through the employee stock ownership plan
            2. enjoined
              1. primary purpose was to prevent transfer of control to a suit who had acquired more than 50% of common stock
              2. grossly inadequate information on the part of directors may cause enjoyment
            3. not enjoined
              1. principal motive was not related to control, and the effect on control was negligible
              2. when due to timing, fairness, etc. Things don’t constitute an insurmountable obstacle to bid
            4. may be conflict of interest because management controls the stock plan
          6. share redemption
          7. corporations will have power to repurchase their own stock so long as it doesn’t violate legal capital rules
            1. could facilitate an auction
          8. two times for enhanced scrutiny
            1. behavior with things up for control
            2. adoption of defensive measure
            3. can be brought on by a judicial determination of the adequacy of decision
            4. judicial examination of reasonableness of director’s actions – directors have burden
        7. judging behavior in the face of a takeover attempt
          1. Unocalland: Coercive tender offers
            1. reasonableness of defensive maneuvers
            2. tactics: usually, business judgment rule, but if conflict shown, than burden of proof on directors
              1. inherent conflict between whether a change in control is in corporation’s best interest, on the other, there is a job interest
              2. "fairness" might not be the best tactic to consider
              3. if the other stock ownership threatened corporate policy, than the could would not second guess
              4. 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
            3. discriminatory defensive tactics -- people with reputations as greenmailers make ironic claims
              1. there will be enhanced scrutiny of the good faith an reasonable investigation
              2. things have to be a good faith concern for the maintenance of the corporation
              3. could violate a fiduciary duty to some shareholders to save the company and the way that the company does business -- provided reasonable response
              4. can’t entrench themselves in office
              5. Business Judgment Rule will apply during takeover, in that the directors acted in the best interests of the corporation
              6. has to be reasonable and proportionate to the threat posed
            4. Other corporate constituencies may be considered: provided these are rationally related to the stockholders
              1. all cash offers are usually not coercive (but they could be a threat) if it was for an inadequate price
            5. 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"
              1. Two triggering things
                1. Corporation initiates inactive bidding process to sell itself or effect a business reorganization
                2. Corporation abandons a long-terms strategy and seeks an alternative transaction also involving the breakup of the company
              2. Concern for the long run attributes when the board reaches a decision to sell
              3. For sale, in Revlon is defined as "the moment that the breakup appears to be inevitable"
                1. Things don’t necessarily have to be "shopped" around, but they do have to informed as to people’s options
                2. When there is enough evidence they don’t have to shop
              1. 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
                1. 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
                2. 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
                  1. A bust-up plan can be said to be a danger to corporate policy
              1. Some lockups (LBOs) might be good for the auctioning process, some might be bad
              2. Preference to noteholders is not a fiduciary duty to shareholders
              3. Auction
                1. Supposed to get the best price reasonable available for the shareholders
                  1. Doesn’t have to be the highest nominal value for the shareholders -- there just needs to be no breach of duty of loyalty
                2. The board will be responsible for the auction, even if it is delegated
                3. 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
                4. Redeeming poison pills: if the offer is coercive, they don’t need to redeem them, but otherwise they do
              4. Decisions to "just say no" or LBOs -- Delaware has no constituency statue
                1. "in some cases, JSN was considered acceptable, if the board granted an other capitalization plan"
                2. if an offer is coercive or inadequate, a decision not to redeem a poison pill will stand
                3. there might be a time when poison pills should be swept away if the best management can do is for a time delayed offer
                4. continuing director pills
                  1. GA: continuing director pills might always be okay
                  2. NY: Might restrict the director’s ability to manage the corporation
              5. Might be an exception for Newspapers and "quasi-public institutions"
              6. Boards can’t really trade future current value for current value
              7. Boards must consider alternative transactions
              8. Stock for stock mergers don’t necessarily constitute a change in control
              9. A possibility of future financial results going down might constitute a threat
              10. Decisions not to redeem pills are usually no coercive
              11. Business Judgment Rule can be applied to defensive measures, if the board feels that a threat to the corporate policies are at stake
                1. Even if the shareholders are foreclosed out of a control premium
              12. Lockup clauses, no-shop clauses etc. Might not present sufficient evidence
              13. A reorganization could be subject to the business judgment rule, if it has to protect culture
              14. Just because something is all cash doesn’t mean it isn’t threatening
              15. A change of control doesn’t exist where there is a fluid aggregation of stockholders
              16. In footnotes court may be giving additional authority to board and the JSN defense
              17. NV: Plan that would deny shareholders their rights and give others a seat on the board is preclusive and violates Unocal
            1. QVCland: Enhanced scrutiny will exist when control is transferred for less money
              1. Court will probably act to protect stockholder rights especially if there is no controlling stockholder
              2. Board’s
                1. Obligation to be diligent
                2. Act is good faith
                3. Get information on rival offers
                4. Negotiate actively and in good faith
                5. Consideration
                  1. Adversely effect value provided to shareholders
                  2. Inhibit or encourage alternative bids
                  3. Were enforceable
                  4. Advance or retard the obligation of directors to the shareholders
              3. Allowing long term ideas to dominate might not be in line with fiduciary duties
            2. 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
              1. side payments to some directors, and later offers could be included as one tender offer
            3. tender offers follows by mergers and their defenses
              1. responses can’t be preclusive -- ‘American options’ might be going to far
                1. e. g. a repo plan which prevented any future tender offers
              2. response can’t be "coercive" – e. g. forcing the shareholders to accept management’s plan
                1. legal strategies designed to end the shareholders vote are not allowed
              3. plan that would was the most valuable of corporate assets to make the company unattractive might not be allowable
            4. stockholders who vote to have their stock change form when sold in a recapitalization plan will have their feeling founds to be dispositive
              1. check Williams and Unitrin
              2. 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
                1. the burden rests on the shareholders to say that the shareholders were informed
              3. overall fairness is general standard, the burden is on the defendants to show unfairness
              4. if a majority of the minority approve, the burden is on the defendants to show unfairness
    1. Proxy contest: who will get managerial control
      1. Difficult to arrange in secret due to federal laws due to potential filing
        1. Management knows how the shareholders are, management can finance litigation from treasury, bidders have to solicit
      2. Ok to use company funds to perpetuate board !!
      3. SEC rules say that the names have to be released
        1. Election contests there are rules which include details about biographical data
    2. A contract for sale, can include resignations of management (e. g. a transfer of a controlling interest
    3. types of mergers -- -- page 378 for graph of merger stats.
      1. Estoppell issues
        1. 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
        2. 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
        3. divisions: no approval needed to sell off a small division -- the question is whether it is a large transaction or not
          1. 51% of assets and 45% of sale might be enough
        4. non-shareholder third parties cannot take advantage of de facto merger doctrine
          1. maybe for fraud
        5. 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
          1. would include merger, consolidation, issuance of voting equity, sale of assets that would leave the business without a continuing business, issuance of securities
          2. would not include transaction where the shareholders, as a result would own at least 75% of the voting company
      2. statutory merger
        1. board’s duties
          1. both board of directors designate which corporation will survive
          2. describe terms
          3. describe the basis on which one’s shares will be converted into share or other property
          4. sets for any necessary amendments to articles
        2. shareholders
          1. a variety of the shares of P and T are entitled to vote on the merger
        3. after finished filed with the secretary of state
        4. shareholders losing rights can seek appraisal
        5. exceptions
          1. in a widely help corporation, dissenters rights are not available to shareholders
          2. small scale merger: one that doesn’t increase by 20% the acquirer’s voting stock
          3. short-form: if one owned at least 90% before, no vote is needed – no dissenters rights
      3. triangular merger
        1. buying company creates a shell company all of its assets, as does the other company
        2. 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
      4. statutory share exchange -- not in DE
        1. approval of the board needed
        2. functionally the same, but the voting status of the shareholders changes
      5. exchange of stock for assets
        1. buying all the assets of one with stock from other other
        2. result will be a corporate structure similar to a merger
        3. can retain sufficient liquid assets to pay off liabilities
      6. tender offers
        1. can make a tender offer without vote by shareholders
        2. if a majority of sharholders tender then there is a merger
      7. acquisition of one of the assets of another
    4. Hostile
      1. Cash-out
      2. Appraisal rights: Forcing people to sell (cash out mergers) corporate stock is a create of state law -- check cash out mergers
        1. Cash out issues are state law unless fraud or manipulation brings them under securities law
        2. Cash out merger made for the sole purpose of freezing out minority shareholders is an abuse
          1. Burden of proof
            1. Burden of proof is on majority shareholders to demonstrative the fairness
        3. Merger agreements that are approved by a majority of shareholders are binding on the other shareholders
          1. Usually there is a new shell corporation in which stock is transferred into
          2. Owners of the majority causes the board of directors and the majority of stock holders to enter into the agreement
            1. No legal control by de factor control
              1. Sales of less than 50% mean that the question of control is one of factor
            2. Possibility for oppression and real lack of information and bargaining power
          3. Issues
            1. Proper purpose
              1. NY: Freeze-out may be a breach of fiduciary duty: e. g. can’t effectuate a merger to pay personal debt
            2. Remedies for Dissent to merger agreements (appraisal rights)
            3. What procedures would make it fair
            4. How the court would appraise
            5. What factors would constitute in the court’s terms the fair market value
        4. Minority shareholder who is dissatisfied has some avenues
          1. Singer Remedies -- criticized
            1. Business purpose test -- not criticized
            2. Filled out complain alleging that the cashout merger was to eliminate minority shareholders at a grossly inadequate price
            3. Could be a class action
          2. 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
          3. A cashout deal approved by a majority of the minority shareholders can be challenged, on a fairness
            1. Fair dealing: need full information: e. g. complete candor
              1. When on both sides of a transaction board members have to demonstrate their utmost good faith -- even in a parent-subsidiary context
              2. Duty of candor
              3. Timing
              4. Initiation
              5. Structured
              6. Negotiated
              7. Disclosed
              8. Methods of approval
            2. Fair price - "more liberalized and less rigid framework" – the old method was an average method of valuation, formerly employed in appraisal
              1. Assets
              2. Market value
              3. Earnings
              4. Future prospect
              5. Other elements
            3. Might have been more fair, if there was an independent negotiating committee to negotiate at arm’s length
          4. Appraisal remedy is last ditch effort -- but in many states is the only effort unless the action is unlawful
            1. Could be personal action for breach of fiduciary duty
            2. 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)
            3. Merely getting a lower price isn’t enough
            4. Absent deception, it isn’t unfair (and a full scale takeover isn’t deception)
          5. Could be private right of action under securities laws, which would raise the issue of valuation
            1. Loss of a state-law remedy could be a cause of action
          6. Fraud can be another issue
    5. Possibility of looting: Selling a subsidiary
      1. May be a fiduciary duty between board members of a parent corporation and a child corporation being sold
        1. This is unclear if it is a management or a board duty
        2. Sellers are liable when the buyers loot the corporation
          1. There seems to be a duty to look reasonable
        3. This could be grounded in tort law
      2. Questions may be "should the controlling shareholders see a duty to other shareholders"
      3. could test by plummeting shareprice
  1. Direct actions
    1. What the usually are
      1. Enforce the right to vote
      2. Protect preemptive rights
      3. To prevent improper distribution of voting rights
      4. Enjoin improper voting of shares
      5. Compel dividends
      6. Protect accrued dividends arrearages
      7. Using stock for a wrong purpose (e. g. perpetuate management)
      8. Oppression of minority shareholders
      9. Actions to compete dissolution
      10. Appointment o f receiver
      11. Challenging the improper expulsion of shareholders
      12. Reactions to inspect corporation. Books
      13. Actions to require the holders of a depress meting or the sending of notice thereof
      14. Actions to hold controlling shareholder liable for act undertaken in their individual capacities that depress the value of the minority’s shares
    2. Class action suits
    3. Even though there may be a derivative action, an individual stockholders isn’t precluded from bringing an action based on the same injury
  2. 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
    1. Properly structured suit attributes
      1. Enhance capabilities of shareholder and market forces
      2. Provide for remedy that does not depend upon the ability of widely disposed shareholders to take coordinated action
      3. Protect the market for corporate control from unreadable interference
      4. Risks
        1. Could reduce incentive on management to take business risks
          1. On the other hand could allow risk-taking law firms to take the risk to improve the companies
        2. Nuisance suits
        3. Inadequate settlements that don’t accomplish corporate goals
      5. Usual actions that can be sued for on a derivative basis -- something that injures the stockholders indirectly
        1. Misfeasance or misappropriation of corporate property
        2. Action for enforcement of corporation contracts with third parties
        3. Actions against corporate directors for competing with the corporation.
        4. Suits alleging excessive salaries -- courts refrain
        5. Third party torts against corporation
        6. Actions to correct false entries in records of corporation
    2. Legal or equitable (jury trial or not)
      1. Determining the "per-merger" (of law and equity)" way that this was dealt with
      2. Remedy sought
      3. Practical abilities and limitations of juries
      4. Specific things
        1. Breach of contracts and gross negligent might entitle them to a jury trial
        2. Actions based solely on fiduciary are not legal, and only liable to chancery
    3. Plaintiff’s attributes
      1. Must fairly and adequately represent the interest of the shareholders
      2. Could be describes as a fiduciary
      3. New shareholders might benefit differently, as the ownership of companies is fluid
        1. Could create a risk of repetition and could depress stock price
      4. Standing by law
        1. 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
        2. Usually no allegations of corporate mismanagement possible when someone purchased stocks from those who participated in the alleged wrongdoing at a fair price
          1. Things that are tainted by fraud or deceit are different
        3. If a corporation did things to itself, a later owner can’t sue (dissent, it is in the public interest to have efficiency
        4. Ownership of stock
          1. Must have owned the shares for a year (or have them willed o by operation of law to the Plaintiff)
            1. Has been relaxed if the Plaintiff acquired the shares before there was a disclosure
            2. A qualified shareholder can intervene to maintain
            3. Continuing wrong doctrine
              1. A Plaintiff who purchased shares after a wrongful taking of pro, but remained a shareholder while the wrongful holding contained wasn’t barred
              2. "contracts inferred before shareholders purchase but under which payments are still being made"
              3. requirements
                1. must attack original transaction
                2. but not permitted to recover for anything that occurred before the purchase
                3. what if there was an acquiring of shares that discounted due to the harm
            4. must maintain interest in shares throughout the litigation
              1. exceptions: merger is a subject of fraud claim, or where it is reorganization does not affect the Plaintiff’s ownership
              2. if the transactions was structured as a sale of assets by a dissolution, the shareholders had standing under NY law to sue previous directors
              3. could be equitable exception to contemporaneous ownership requirement
              4. ALI: Elimination of ownership due to voluntarily merger would be standing
            5. Buyout of injured company
              1. 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
          2. Deterrence: any Plaintiff willing to file a complaint will do
          3. Can be held in street name
            1. Brokerage firms have to comply with SEC requests -- and non-objecting beneficial owners to a corporation that requests
            2. Depository trust will compile a list of institutions
          4. Ownership in holding companies (e. g. double and triple derivative) is acceptable, opposing view is that there must be a de facto control
            1. 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
        5. Ownership of debt
          1. Usually only stock
          2. Convertible debt
            1. No standing
            2. Could be one because an equity security included convertible debentures according to the 1934 act
          3. There is argument for a more relaxed rule because smaller creditors don’t have the economic leverage
        6. Who has best interest
          1. 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.
          2. Maybe others than shareholders should be allowed to bid
          3. Maybe the courts should auction the litigation rights, that than to the claim
          4. Drawbacks are the question of agency cost
      5. Making demands on the directors to sue
        1. Usually: business judgment rule are not present (self dealing, biased decision maker, transaction that creates waste)
        2. 1st circuit: undirected to a corporate purpose
        3. Alabama: if they directors are the wrongdoers, the demand could be futile
        4. ALI: where demand could cause ireprable injury to the corporation
          1. Wants to reduce threshold litigation
          2. Demand could be a form of ADR
          3. Demand is easy and adds little
        5. Federal: (e. g. under Investment Company Act) – must apply the law of the defendant corporation state of corporation to decide the futility exception
        6. Model Code: Demands Mandatory
        7. NY:
          1. 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
          2. 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)
            1. Even if the unaffiliated directors didn’t personally profit, it doesn’t end the question of their potential liability to the corporation
          3. Could be excused if
            1. Majority of the bard is interested,
            2. Director with no interest is controlled by the directors is
            3. Demand is exercised (if pleaded with particularity) if the directors didn’t reasonably inform
            4. Transaction egregious
        8. Delaware: must allege specific facts demonstrating the futility of such demand.
          1. Obtaining information
            1. Inspection rights : there is an unresolved question of the lesser inspection rights being not as good as discovery
              1. Must do for a proper person
          2. Mere naming of all directors will not excuse demand
            1. Fact that they may be exercising fiduciary obligations not to take the suit (even if prior challenge) doesn’t excuse demand
              1. Some states limit which rights – some limit to stockholders of record others to amount
              2. Remedy: write of mandamus
            2. Proper purpose
              1. Must have to do with their action as a stockholder
              2. Harassing not allowed no for person profit (e. g. if there is already a judgment
            3. It might be okay if obtaining the stockholder list is to warn of the danger
          3. failure to oversee: would need to allege bad faith, and ignorance of obvious signs -- check Caremark
          4. No conclusionary allegations allowed – e. g. saying that majority ownership was control is not enough -- must show both elements
            1. 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)
              1. substantive nature of challenged transaction
                1. interested is defined as when the director will receive a personal financial benefit from a transaction that is not equally shared by the stockholders
                  1. mere threat of personal liability isn’t enough
              2. benefit of the doubt goes to the board
            2. Board did not follow adequate procedures in meeting their decisions (e. g. no reasonable inquiry)
              1. Stock ownership alone isn’t enough to say domination or control (at least when it is less than a majority)
            3. Board’s decision needed to be so irrational as to be out of the bounds of the business judgment rule
            4. The business judgment rule might not apply when directors have abdicated or absent a conscious decisions, failed to act
          5. Response to a demand
            1. Directors have to figure out how to respond to demands, and do so reasonable an din good faith
            2. Board must weight the alternatives, including corrective action
          6. 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
            1. 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,
          7. Fast tracks to futility
            1. Duty of loyalty (in Delaware) may now be easier
              1. Insider trading may be a fast track (given a 35% share)
              2. Financial interests or law firm doing business might be enough
                1. The smaller the firm the bigger the interest
            2. Breach of specific statute might be fast track n -- Illinois
            3. If directors can’t be reimbursed for liability -- Florida (using Delaware)
            4. Lawfirm that represented defendants in related criminal proceeds
      6. Characterizing the suit as a derivative action will allow the board to take over the action
      7. Demand upon board to sue
        1. Court won’t interfere in a decision by a board of directors that establishes or caries out corporate policy
          1. 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
            1. Plaintiffs see the procedures as a way to hind things behind the futility rule
            2. Futility may be inferred from something being a direct decision of the board
        2. Board of actors can cause something to be dismissed as it is not in the best interest of the corporation
        3. Corporations can’t stand neutral in the face of a derivative suit
      8. Fairness will only become an issue if the business judgment rule is defeated
    4. Answer by board
      1. ALI: Board will always be required to respond to demand, and state why
        1. If the board says why it can say that the statement is false
        2. Does meet standard for business judgment rule
        3. Standard other than business judgment rule applies
        4. No particularized facts warrant dismissal
      2. 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
      3. Board must respond within "reasonable time" – one month not enough, unless the corporation doesn’t take action
        1. Must be able to study matter
        2. Case will be in suspended animation
        3. RMBCA – 0- days
      4. Stockholder must know what actions was taken
    5. Acceptance means that the suit is barred
    6. Refusal to sue – and the defendant waiting
    7. Defendant
      1. Will often recover his costs as well
      2. Directors can recover expenses if they have not been adjudged to have breached any duties
      3. Settlement
      4. Security for expenses
        1. confidentiality
    8. Proceeds from suits
      1. Go to corporations and to creditors and lawyers
        1. 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
      2. Plaintiff’s counsel’s compensation
    9. Preclusive effect of the suit
    10. Evaluation of demand
      1. Board should appoint a disinterested committee to address questions
        1. Policy; there could be judicial deference to the decisions of these committees
        2. If a committee is disinterested in might not be compelled to decide
        3. Board is usually entitled to business judgment rule and it will be respected unless it is wrongful
          1. Delaware allows committees
            1. Ohio doesn’t allow committees
          2. Chancery should look to whether the committee was independent and acted in good faith
        4. Must prepare a written report
    11. termination
      1. 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)
        1. standard if fundamental fairness, and the directors have the burden
          1. 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
            1. Plaintiff’s get to file response
          2. The claim that the legal fees were too large
          3. the board has to show, in order to defend this decision, in order to defend this decision to defend this action
            1. the holding has to be that there was a risk to the corporation
              1. that there was a threat after good faith
              2. after reasonable investigation and that response to the threat was proportionate
            2. movants on motion to dismiss will have the burden
          4. 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
      2. 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
      3. Courts inquiry
        1. Independence and good faith of the committee (corporation has burden of proving independence)
        2. Court can review, and use its independent business judgment to see whether a motion should be granted
        3. Court can use equity
      4. Issue of whether demand is required or not and dismissal
        1. Demand excuse
          1. Courts inquiry
            1. Independence and good faith of the committee (corporation has burden of proving independence)
            2. Court can review, and use its independent business judgment to see whether a motion should be granted
              1. Court can use equity
        2. Demand required
          1. See Arronson (allegations of specific facts)
        3. Act of appointing board
          1. Once a demand is made, the question of whether demand is futile is moot
          2. If the board appoints a litigation committee, it concerned that they were intercede in the transaction and not protected by business judgment rule
              1. A committee that can only investigate recommend may allow the board to retain the power for itself
          3. 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
          4. If a committee is established after the motion to dismiss is made, no concession is made
      5. Delaware minority: shouldn’t take these things as seriously
      6. NC: would not grant as much deference to derivative suits (including all derivative suits)
      7. NY: hinges on independence of boards
        1. boards who are appointed after the incidents get more deference (e. g. they must possess a disinterested independence) –
      8. PA/ALI: courts shouldn’t be appealing their own business judgment rule]
      9. ALI
        1. Duty of care allegation
          1. Court should uphold an allegation to dismiss a claim
        2. Duty of loyalty
          1. Stricter judicial scrutiny
            1. Deciding whether they should warrant release
          2. Burden of proof on defendants
      10. CT: Special litigation committees are inherantly interested -- e. g. structural bias approach
      11. Structural bias even of outside directors is ever-present -- Rejected in Delaware absent showing of specific facts
        1. Committees will be biased because it is asking corporate brethren to kill each other
        2. Corporate dealings and investment is no structural bias
        3. Contributions to a University may be enough (rare) for bias in Delaware
        4. Mass: because of the danger of structure bias judicial oversight is necessary
        5. Independent must have no interest at all
        6. Just because someone is elected by interested people doesn’t make them interest
          1. 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
    12. Expenses
      1. Some states: if the financial stake of Plaintiff is below a threshold, some state may be required to post expenses
        1. Minimum amounts are in costs or percentage
      2. Delaware doesn’t require bond
      3. Expenses postings will be required in diversity suits
      4. Corporate officers don’t like to circulate their alleged misdeeds
      5. Federal question in Federal courts: will never be a security issue
    13. Termination of suit
      1. Courts factors in dismissal
        1. ALI: Even in independence, a court can conclude that the committee was wrong
        2. ALI: Court should look to the likelihood of a judgment in Plaintiff’s favor
        3. RMBCA: dismissal if not in the best interests of the corporation
          1. 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
      2. Settlement
        1. Judicial approval required
          1. Factors are settlement amount, amount sought, cost, complexity, odds
            1. Can be a violation of due process if a counsel argues that the case can be settled too easily
            2. Adequate representation needs vigorous -- and needs a fair effort to settle a settlement claim
            3. Delaware factors
              1. Probable validity
              2. Apparent difficulties in enforcing the claims through the courts
              3. Collectability
              4. Delay, expense
              5. Amount of compromise in regards to the amount of the judgment
              6. Views of the parties involved, pro and cod
            4. Fairness is difficult when there are non-monetary gains to the corporation
              1. ALI: court should review the real value of therapeutic relief (e. g. non-money is therapeutic)
          2. The principal factor to be considered is how it will benefit the real party in interest
          3. Will look at how the members of the class respond (they don’t all have to agree
        2. Court may need to take a close look because many of the class aren’t intimately involved
          1. Judicial approval comes in the face of a settlement that stockholders have already approved, and they may be reluctant to point it out
            1. Courts sometimes appoint experts or ask the SEC for help
            2. Courts may give the stockholders notice
              1. Model: only notice when the settlement will substantially affect the interest of the shareholders
            3. There have been examples of notice publication, or random notice
          2. Notice may bring on a hearing
            1. Stockholders lack information, and may have to challenge Plaintiff’s counsel
          3. Mini-trials to evaluate settlement
            1. Stockholders may not be able to introduce information in a min-trial
            2. Mini-trials shouldn’t focus on the merits of the claim
            3. Courts are reluctant to overturn
          4. Corporations could always settlement directly
        3. Will only be subject to clear error review
    14. Attorney’s fees
      1. 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:
        1. Benefit doesn’t have to be in economic terms, but simply something theoretical, like greater disclosure -- burden was put on Defendant
      2. If there is no change, or overall, maybe no fees
      3. Fee determination methods
        1. Delaware doesn’t feel bounds by anything!
        2. "Lodestar Test" employed by courts
          1. fee determination
            1. number of hours reasonably expended by counsel that created protected or preserved the funds
            2. number of compensatable hours multiplied by a reasonable hourly rate (varies)
          2. fee determination raised or lowered by a multiplier by the risk of the work
          3. small multiplier for skill
          4. will be preference for early settlement
        3. 20-35% when less than 1million, and 15-20 % when more
          1. might reduce risk to counsels and the fees if things aren’t settled successfully
        4. some courts have asked for a constant 30% of the fund
      4. there is a risk of collusion
  3. alternative forms
    1. partnerships: 2 or more people – all are jointly liable for torts
      1. risks
        1. threat to dissolve
        2. extortion of intra-team tort damages
      2. risks between partners can be contractually modified – usually protect minority
      3. dissolved in one pulls out
      4. law presumes equal partners
      5. no formalities
        1. consensual
        2. operation of law
      6. votes of partners can be proportional (as per the shareholders agreement to their contribution)
    2. LLP: limitations
      1. general partners and limited partners
      2. liability: general partners are treated the same as partnership partners
    3. LLC:
      1. Instead of shareholders there are members
      2. Articles of organization
      3. Member managed or non-member managed
        1. Who has authority to act as agents
    4. Corporations -- perpetuity of existence until dissolution (but can be modified by articles)
      1. ownership and management can be divorced
      2. formal creation
        1. articles
      3. limited liability
      4. board of directors have centralized ownership
      5. votes of partners can be proportional (as per the shareholders agreement to their contribution)
      6. freely alienable
      7. usaully protect majority
  4. taxes
    1. partnership: flows through (taxed at individual rates)
      1. taxed on profits of business at individual level
      2. deductions for debt that it pays but not for securities
    2. corporation: taxed at both levels
    3. S corporation -- complete flow-through
      1. Income taxed to shareholders
      2. Must be less than 35 shareholders
        1. Individuals
        2. Estates
        3. Qualified trusts
        4. Election must be made
      3. 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
    4. Taxing hybrids
      1. "check the box" – they can be taxed as a partnership provided that the owners check the box
  5. professional responsibility --
    1. pre-incorporation
      1. 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)
      2. unsuccessful incorporation activities
        1. if the attorney acts in a fiduciary relationship than he is acting as a lawyer in a fiduciary capacity
        2. today: reasonable belief test vis-à-vis the client
        3. about the same would apply for partnerships
        4. if the corporation resembles a partnership in function the corporation’s duties may be taken differently
      3. lawfirms retained for the purpose of defending a corporation are not the lawyers of the officers
      4. partnerships will be treated as an entity, much as the corporation
    2. situation analysis
      1. if another client becomes an adversary of a client -- probably could be considered to be unethical
    3. can be difficult if people are both individual and corporate clients
    4. no disclosure except for authorization or implied authorization
    5. must be consent
      1. can represent parties to a negotiation with non-fundamentally opposed interests
      2. would need full disclosure of corporation
    6. cannot make decisions relating to the clients
  6. Process of incorporation
    1. Incorporator will probably have little to do with the corporation afterwards
      1. Filing and start of the corporation
        1. RMBCA: incorporation at filing
        2. Others incorporation at acceptance
      2. Articles
        1. 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)
        2. the number and types of shares the corporation may issue (e.g., preferred, common),
        3. address of the corporation’s registered office,
        4. the name of the corporation’s registered agent at the registered office, and
        5. each incorporator’s name and address.
        6. Types of stock
          1. the types of stock the corporation is authorized to issue (e.g., preferred, common), and
          2. 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.)
      3. One needs an organization meeting
    2. Defective – e. g. investors believe, lawyers believe, and people doing business with the corporation believe
      1. Estoppell argument, if one believes that one can’t deny (especially big corporation who could check)
      2. Modern argument: one can recover from the people who failed to file the documents
        1. RMBCA gives liability only to people who knew that the corporation didn’t exist -- but there needs to be some steps taken
        2. 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).
        3. 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).
        4. 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).
    3. Pre-incorporation remedies
      1. Background: bound only promoters
      2. Modern doctrine holds that a corporation may adopt the contracts signed before hand
        1. Ratification
        2. Adoption
        3. Acceptance of a continuing offer
        4. Novation
      3. Fact inquiring into the circumstances surrounding the contract to determine whether a promoter is personally liable
        1. Form of signature
        2. 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)(
        3. Non-existant corporation that people sign for that will exist in the future
          1. No intention for promoted to be bound personally, but would use best efforts
          2. Personal promoter liability until such time as they adopted the contract
            1. 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
          3. Promoter always liable, even if the corporation begins
        4. Was there partial performance
        5. Was there the beginning of novation
          1. Courts will look to intention of parties to see if there was a novation
          2. Creating a corporation isn’t enough, the corporation must adopt
          3. Novation
            1. If the promoter possesses knowledge it is imputed to the board, but this doesn’t necessary apply to
      4. 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
    4. State of incorporation
      1. Registration (appoint a local agent for service of process)
        1. Corporations cannot be discriminated against
        2. 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
      2. Choice of law:
        1. Internal: Law of the state of incorporation will determine the laws of internal affairs of the corporation
        2. External: governed by local laws
        3. Both: securities laws, anti-trust
        4. Pseudo-foreign corporations: some states designate DE corporations that do business locally as local corporations . California defines by a 51% rule
        5. 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)
        6. Relationships between stockholders and board will be governed by only one state’s law
      3. What people think of
        1. Tax rates
        2. Simplicity of operation (e. g. can things be done by conference call)
        3. Restrictions on dividends and other distributions
        4. Shareholder rights
        5. Indemnification of officers
        6. Is there easier operation for closer corporation
        7. Liability for wages
      4. There can be discriminatory taxes on corporations
      5. States compete for corporations
        1. There is a race for the bottom – but this is not really true, because people might want it anyway
  7. Risks
    1. Diversification, non-controllable
    2. Risk can be allocated
  8. 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.
    1. Definitions of legal capital (all must be true)
      1. In dollars
      2. Initially the par value times outstanding shares
      3. Not an asset, fund or collection of assets
      4. 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
    2. Legal capital -- when a corporation can sell stock and pay dividends (the benchmark below which assets can’t be distributed)
      1. In the past, shareholders were making decisions about whether or not they could relinquish prior claim to debt to become stockholders
      2. Creditor’s claims against a corporation’s income and assets have priority over the claims of equity security holders if
        1. The debtor corporation has received all amounts it claims to have been paid for the equity securities
        2. The corporation ins barred from jeopardizing the creditor’s interests
      3. Lawyers have t render that a corporation’s stock is validly issued, paid,, and nonsassessible
        1. Directors are liable if stock is issued that is not in line with statutory standards
        2. Lawyers have to sign off (usually) on the legal capital position
        3. Watered stock: stock that didn’t receive the full par value
          1. In the past people would overvalue the capital contributed
          2. Shareholders are liable for the difference where there is a statute
        4. Value of property of the stock needs to be conclusive, absent fraud or "franchise free"
          1. Future services can’t be included in the consideration -- a bonus on a future salary can be used
          2. 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
          3. Security of consideration of stock
            1. CA: adequate security is okay to pay for stock
            2. NV: ok if stock is sold for a debt, in which the down-payment price is the par value
          4. Guarantee: person guarantee was okay
        5. RMBCA: issuance of shares still requires consideration (future consideration is okay), but there is no and the consideration must be considered to be accurate
          1. There is liability for fraud, but not under corporation statutes for overstating
  9. Stated capital: the dollar number declared by the board about what is on the stated balance sheet as capital

Back to the Law Outlines of CASE.TM