Corporations Outline
Corporations Outline
Corporations Outline
Outlines
11-07
Blue Main Cases
Red Note Cases
Green Cases within main cases
Orange Restatement
I) Principles of Agency Law: Definition
A) Generally
1) Agency is the fiduciary relationship that arises when one person (principal)
manifests assent to another person (agent) that the agent shall act on the
principals behalf and subject to the principals control, and the agent manifest
assent or otherwise consents so to act. Restatement
2) An agent may bind the principal to contract, subject them to tort liability, and
in some circumstances criminal liability
3) Thayer v. Pacific Electric Railway
i) Agency arose in this instance when agent of the defendant annotated bill
of lading on behalf of the plaintiff. Essentially he functioned as the agent
of both
4) Thayer Notes and Questions
i) Fiduciary explored more closely
(a) By fiduciary, the restatement refers to a set of benefits and duties owed
to the beneficiary by the fiduciary
(b) These duties entail a duty on the part of the fiduciary to discharge his
duty with care and loyalty to the beneficiary
(c) The above implies an ongoing relationship, but it may exist for a
single action
ii) The Dual Agency Rule
(a) Generally
(1) An agent cannot act on behalf of an adverse party, with respect to a
transaction involving both parties, without the consent of the
principal
(2) A man cannot serve two masters at the same time; he will obey
the one and betray the other
(b) Voidabililty
(1) If the two principals are unaware of the dual relationship, the
transaction between them is voidable
(2) If one principal, aware of the agents relationship with another
principal, secretly uses that relationship, the unaware party can
either void or affirm the transaction
(c) Resolving conflict with Thayer opinion
(1) Restatement allows that an agent can deal with the other party, so
long as the transaction is not inconsistent with his other duties
(1) Generally To what extent can the parties contract around the
common law fiduciary duties?
(2) Restatement Principals Consent
(i) Conduct by an agent that would otherwise constitute a breach
of duty does not constitute a breach of duty if the principal
consents to the conduct, provided that
a. In obtaining the principals consent the agent acts in good
faith, makes a full disclosure, and deals fairly with the
principal
b. The principals consent concerns either a specific act or
transaction, or acts or transactions of a specified type that
could reasonably be expected to occur in the ordinary
course of the agency relationship
C) Vicarious Liability Principle
1) Generally refers to the imposition of vicarious liability on the part of the
principal for acts of the agent
2) Two Requirements:
i) Control
(a) The principal must exercise a degree of control or have the right to
exercise control over the agent
(b) The Restatement and courts often refer to this as an employeremployer relationship but this is problematic
(1) There are times when vicarious liability may be established
although in common usage no employer-employee relationship
exists
(2) E.g., a person helping another fix a car
(c) Kane Furniture v. Miranda
(1) Restatement (Second) Factors for Determining if Employee or
Independent Contractor:
(i) In determining whether one acting for another is a servant or
an independent contractor, the following matters of fact, among
others are consider:
a. The extent of control which, by the agreement, the master
may exercise over the details of the work;
b. Whether or not the employed is engaged in a distinct
occupation or business;
c. The kind of occupation, with reference to whether, in the
locality, the work is usually done under the direction of the
employer or by a specialist without supervision;
d. The skill required in the particular occupation
e. Whether the employer or the workman supplies the
instrumentalities, tools, and the place of work for the
person doing the work;
f. The length of time for which the person is employed;
g. The method of payment, whether by the time or by the job;
1) Akin to a limited partnership, but the general partner does not have personal
liability
III) General Partnerships
A) Definition
1) Generally
i) When two people gather together to carry on as co-owners of a business
for profit (intention is not relevant this might be wrong)
ii) It is also the default entity
iii) Although a default, it is primarily a contractual entity and may be altered
and amended according to the partners desires
(a) However, there are a few unwaivable provisions
2) Ziegler v. Dahl
i) One of the most important tests of whether a partnership exists between
two persons is the intent of the parties
ii) A partnership is created by the association of persons whose intent is to
carry on as co-owners of a business for profit, regardless of their
subjective intention to actually be partners
iii) Participants in a business must intend to be part of an association that
includes all the essential elements of a partnership for that association to
be a partnership
iv) Pertinent Facts:
(a) The parties did not file a partnership tax return
(b) Only one individual handled the administrative activities
(c) Each party provided their own equipment
(d) All the major decisions were made without the plaintiffs input
v) Co-ownership is the second necessary element to prove the existence of a
partnership
(a) An important caveat the person need not control the business, but
simply have the right to do so
vi) The sharing of gross returns does not, per se establish a partnership
B) When a Partner is Not a Partner
1) Serapion v. Martinez
i) Court attempting to discern whether a partner is an employee for Title VII
purposes. It declines to set a hard and fast rule given the liquid nature of
partners
ii) A court must peer beneath the label and probe the actual circumstances of
the persons relationship with the partnership.
iii) There are a number of tests to determine whether a person is an employee
or what the courts term a proprietor:
(a) Simpson (ADEA)
(1) The right and duty to participate in management
(2) The right and duty to act as an agent of other partners
(3) Exposure to liability
(4) The fiduciary relationship among partners
(5) Participation in profits and losses
(6) Investments in the firm
C) Partnership Property
1) Read it in the book, but do not believe we covered it in class (Page 66)
D) The Authority of Partners
1) Generally Partnership law draws heavily on agency law and the two are
quite similar
2) Actual Authority Didnt cover
3) Apparent Authority
i) RNR Investments v. Peoples First Community Bank
(a) Loan obtained by a partner who did not have actual authority to bind
the partners
(b) The extent to which the partnership is bound by the acts of a partner
acting without actual authority but within apparent authority is
governed by statute (in Florida)
(c) Even if a partners actual authority is restricted by the terms of the
partnership agreement, the general partner possesses apparent
authority when he is acting:
(1) In the ordinary course of partnership business; or
(2) In the business of the kind carried on by the partnership;
(3) EXCEPT WHEN:
(i) The third party knew that the partner lacked authority; or
(ii) The third party had received notification that the partner lacked
authority
a. A third party has notice if that party:
i. Knows of the fact
ii. Has received notification of the fact
iii. Has reason to know the fact exists from all other facts
known at the time in question
b. A third party is under no duty to:
i. Inspect the partnership agreement; or
ii. Otherwise ascertain the extent of a partners actual
authority
(d) Purpose of the notice provision:
(1) Attempts to provide protection to third parties against unauthorized
actions of rogue partners
(2) Partnerships should bear the weight of these actions
(e) The analysis of determining if a partner is acting with authority to bind
the partnership involves a two step analysis
(1) Determine whether the partner purporting to bind the partnership
apparently is carrying on the partnership business in the usual way
or a business of the kind carried on by the partnership
(2) The court never clarifies part two
ii) RNR Investments Notes and Questions
(a) RUPA (Revised Uniform Partnership Act) provides that if a statement
of partnership authority is recorded in the appropriate office for
recording interests in land, it can serve as notice of authority or the
lack thereof to persons dealing with partnership real property
(b) UPA (Uniform Partnership Act) has similar, but not identical language
(1) A partner under UPA binds the partner when is his act is for
apparently carrying on in the usual way the business of the
partnership
(2) Courts and the comments have not treated this as a substantive
change
E) Liability for a Partners Fraud
1) Rouse v. Pollard
i) Appeal by complainant from a final decree in chancery dismissing the bill
as to all of the partners formerly of the law firm of Riker and Riker except
Thomas Fitzsimmons against whom the decree ran as a judgment in the
amount of 20.5k with costs
ii) The suit effectively charged all the partners with embezzlement of the
complainants funds
iii) Because the payment of funds to Fitzsimmons was beyond the scope of
what he was doing as an attorney at the law firm, his partners would not be
liable for his actions
2) Rouse Notes and Questions
i) Partnership liability for fraud is not uniform
ii) Partners can incur liability as a result of the imputation of knowledge to
them. Thus if a partner is party to a breach of trust, knowledge of that
breach may be imputed to other partners, rendering them liable
F) Rights and Duties Among Partners
1) Duty of Care
i) Bane v. Ferguson
(a) Partners do not have a fiduciary duty to ex-partners
(b) Courts will apply the business judgment rule to partners actions
(c) Even if defendants had a duty to the plaintiff, the business judgment
rule would protect them from claims of mere negligence
ii) Bane Notes and Questions
(a) Business Judgment Rule - standard by which the judgments of board
of directors are evaluated by the courts
(1) Formulation: when a partner alleges another has violated his
fiduciary duty, the allegedly violating partner must show he acted:
(i) In good faith;
(ii) With the care an ordinarily prudent person in a like position
would exercise under similar circumstances; and
(iii)
In a manner the partner reasonably believes to be in the
best interest of the partnership
(2) EXCEPTIONS
(i) In Delaware the partners are presumed to have the protection of
the business judgment rule
(ii) The rule will not apply if the partner engaged in: self-dealing;
fraud; or other unconscionable conduct
(iii)
(d) Affirmatively state that in that instance, the promoter will no longer be
responsible
iv) ORorke Once a promoter is within the ambit of preincorporation rules,
they can do three things
(a) Act merely as a go-between
(b) Obligate themselves personally
(c) Provide in contract that party will look to corporation for performance
2) Liability on preincorporation contracts the corporations viewpoint
i) Corporations may become bound in two instances
(a) If they accept performance by a party under the contract
(b) Acquiescence if the corporation had knowledge and let time pass
G) Ultra-Vires Doctrine
1) Definition actions which are, or are alleged to be, beyond the powers of the
corporation
i) Any Lawful Purpose
(a) While providing a broad spectrum, a shareholder still might challenge
a general corporation if it goes into banking or insurance on the theory
that it did not exceed the purpose, but would still be an ultra-vires
challenge
(b) An illegal act can also fall within the ultra-vires challenge
(c) Frolic and detours can also be challenged under ultra-vires
2) Reasons stated for its decline
i) Judicial Hostility
(a) Corporations would use it as a means to limit performance of contracts
as outside the scope of purpose
(b) Courts stopped this by not allowing the ultra-vires defense when
substantial performance on the other side had been performed
ii) Broad Purpose Clauses
(a) Any lawful purpose
(b) No purpose clause required
iii) Ease of Amendment
(a) Alteration of voting requirements made it easier to get around purpose
objections
iv) Grants of Implied Power
(a) Judicial and legislative grants of implied powers legitimated activities
even though the corporations purpose did not enumerate it specifically
(b) Necessary and convenient to carry out business affairs MBCA
(c) Any powers incidental thereto DGCL
v) Statutes
(a) Legislatures adopted statutes that forbade the doctrine
(b) All modern corporation statutes have reduced its occasional use
3) Ultra-Vires Statutes
i) Total Access, Inc. v. Caddo Electric Cooperative
(a) A lack of capacity or power of a corporation may be asserted
(1) By a shareholder in an action enjoining the corporation not to do
the act
(a) Court uses the fact that the corporation was severely (if at all)
capitalized and found the attorney to be an active shareholder
ii) National Labor Relations Board v. West Dixie Enterprises, Inc
(a) Corporate Veil may be pierced when:
(1) There is such a unity of interest, and lack of respect given to the
separate identity of the corporation by its shareholders that the
personalities and assets of the corporation and the individuals are
indistinct; and
(i) Determined by:
a. The degree to which the corporate and legal formalities
have been maintained; and
b. The degree to which individual and corporate funds have
been comingled
c. Here, use of personal checks and credit cards for business
payments, and intermingling of personal property satisfied
this
(2) Adherence to the corporate form would sanction:
(i) A fraud
(ii) Promote injustice; or
(iii)
Lead to an evasion of legal obligations
(iv)The court, here, uses the fact that the husbands rent was paid
with the corporations funds, thereby diverting assets that could
have paid the tort claim
iii) Baatz v. Arrow Bar
(a) Court has sufficient reason to pierce when corporate fiction would
produce injustices and inequitable consequences. These occur when:
(1) Fraudulent representation by corporate directors;
(2) Undercapitalization;
(3) Failure to observe corporate formalities;
(4) Absence of corporate records;
(5) Payment by the corporation of individual obligations; or
(6) Use of the corporation to promote fraud, injustice, or illegalities
(b) Personally guaranteeing the debts of the corporation actually is
evidence that points towards not piercing the corporate veil
5) Individual Shareholder Piercing (Contract)
i) Brunswick Corp. v. Waxman
(a) Corporation was created as a dummy to filter liability, which plaintiff
was fully cognizant of, further plaintiff had full knowledge of
production capacities of the dummy corporation
(b) Court reasoned that the plaintiff received precisely what it bargained
for
6) Piercing Notes and Questions
i) Kinney Shoe Corporation
(a) Totality of circumstances
(b) Two pronged test:
(1) The unity of interest and ownership such that the separate
personalities of the corporation and the individual shareholder no
longer exist
(2) Would an equitable result occur if the acts are treated as those of
the corporation alone
(c) The court here was not in line with Brunswick in both there was a
dummy corporation setup in which no misrepresentation occurred
ii) Actual Fraud Some states expressly require a showing of actually fraud
in order to pierce
7) Business Enterprise Liability Doctrine (Generally)
i) Allege that the corporation in question is part of a larger corporate
organization and that the assets of the other related corporate entities
should be used to satisfy the other corporations debts
ii) Invoked in two different circumstances:
(a) When a corporation owns many subsidiaries (brother and sister
corporations); and
(b) When one corporation owns another in a parent-subsidiary relationship
8) Business Enterprise Liability Doctrine (Tort)
i) Walkovszky v. Carlton
(a) Majority found that in the taxicab industry, which commonly divides
the corporate entity into numerous corporations each with its own cab
or two, the statutory minimum amount of liability insurance would not
support piercing based on undercapitalization
(b) Dissent argues the statutory minimum was insufficient coverage, and
therefore there should be liability
ii) Gardemal v. Westin Hotel Co.
(a) Alter ego doctrine
(1) Subsidiary and parent are closely tied through stock ownership,
shared officers, financing arrangements and the like
(2) (Texas) Law provides that liability may be imposed on a parent
when the subject corporation is organized or operated as a mere
tool or business conduit
(3) When there is such unity between the parent corporation and its
subsidiary that the separateness of the two corporations has ceased
and holding only the subsidiary corporation liable would result in
injustice
(b) One Enterprise Doctrine
(1) Where corporations are not operated as separate entities but
integrate their resources to achieve a common business purpose,
each constitutent corporation may be held liable for the debts
incurred in pursuit of that business purpose
D) Reverse Piercing
1) Many jurisdictions hold that as an equitable remedy that a claimant may reach
the assets of a corporation to satisfy a claim against a corporate director or
officer
E) Deep Rock Doctrine
(a) Effectively this allows a board to take into account the effects of its
actions on various constituencies of the corporation such as
employees, suppliers, and communities
(b) Approximately thirty states have adopted such statues
B) Corporate Purpose
1) Dodge v. Ford Motor Co.
i) In the most extreme circumstances, the courts might require you to
provide a dividend
ii) In part, the court was not thrilled with Fords, pretty much blatant
disregard of the maximizing profits for shareholders and focusing on the
common man
C) Corporate Governance
1) Generally Refers to the allocation of power between and among the
corporate board and shareholders
i) Stockholders
(a) Right to vote on specific matters, in particular the election of directors
ii) Directors
(a) The power of managing the corporate enterprise
2) Note The articles of incorporation can allocate greater power to the
shareholders such as:
i) Approving particular transactions; or
ii) The exclusive power to amend the bylaws
3) Mount Manor Realty, Inc. v. Buccheri
i) The code required a corporation to have at least three directors at all times
ii) The code also required that a quorum be no less than 1/3 of the entire
board or two directors
iii) Defendant was left as sole director and appointed friendly directors
iv) The court reasoned this was ok given the language of the statute which
said a majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the board
D) The Board of Directors and its Committees
1) The Function of the Board
i) The board is responsible for managing the business and affairs of the
corporation
ii) The ordinary rules of agency are applicable in considering the actions of
the board of directors in relation to third parties
iii) The relation of the directors to the stockholders is essentially that of
trustee and cestui que trust
iv) Directors of a corporation are not agents of the corporation unless
specifically authorized by the board of directors to do so
v) Directors can only act in consort with the other directors
2) Board Structures
i) Under NASDAQ Rules a board member is not independent if:
(a) They have been employed by the company in the last three years
(b) The director or any member of their family has received in excess of
120k during any one of the last three years from the company
(c) The director has a family member who is an executive officer of the
company
(d) The director is, or has a family member who is, a partner or controlling
shareholder
(e) The director or family member is employed as an executive officer at a
company where the issuers exucitve officer is on the compensation
committee
(f) The director or family member is a current parner of the issuers
auditor
(g) In the case of an investment company, an interested person under the
ICA
ii) In re Oracle Corp the question of independence turns on whether a
director is, for any substantial reason, incapable of making a decision with
only the best interests of the corporation in mind
iii) SOX requires publically held companies to have an independent audit
committee that shall be responsible for things such as compensation
E) Removal of Directors
1) Generally
i) At common law, directors could be removed only for cause
ii) Modern statutes permit shareholders to remove directors with or without
cause, unless the articles require cause
2) EXCEPTIONS
i) Classified Board generally directors can only be removed for cause
ii) Cumulative Voting No director may be removed without cause if the
votes against his removal would be sufficient to elect him
3) Superwire.com, Inc. v. Hampton
i) Superwire was a principal shareholder of Entrata and sought to exercise its
voting power to remove directors
ii) Under the applicable Delaware law, if shareholders of the majority of
outstanding shares execute a written consent to a proposed action it takes
effect when the consents are delivered to the corporation
iii) Entrata sought to stop this by issuing additional shares and asking voters
to revoke their consent
iv) A for cause removal of a director requires notice of:
(a) Specific charges for his removal;
(b) Adequate notice; and
(c) A full opportunity to meet the accusation
v) The consequences (E.g., reputation) of for cause removal warrant this
4) Amotion Common law right of courts to remove directors for cause
F) Equitable Restraints on Board Action
1) An action taken by the board of the directors is effective and binding if:
i) A quorum of the board is present; and
ii) The action is approved by the affirmative vote of a majority of directors
present
iii) See MBCA 8.24
2) Note the articles of incorporation may vary these requirements
3) Presuming the board acts consistently with the bylaws, the articles of
incorporation, and statutes, its actions may not be challenged by the
shareholders or third parties, unless, in the case of shreholders, the claim is
made that the action is a violation of the boards fiduciary duties of loyalty
and care
4) One way to justify this is seeing the bylaws and the articles as a contract
between the shareholders and directors
5) Schnell v. Chris-Craft Industries, Inc.
i) Petition of stockholders fo injunctive relief to prevent management from
advancing the date of the annual stockholders meeting from Jan 1972, to
Dec 1971
ii) The conclusions of the trial court amount to a finding that management
has attempted to utilize the corporate machinery and Delaware law for the
purpose of perpetuating itself in office
iii) These are inequitable purposes contrary to established principles of
corporate democracy
iv) Inequitable action does not become permissible simply because it is
legally possible
v) In the absence of fraud or inequitable conduct, the date of a stockholders
meeting and notice thereof, duly established under the bylaws, will not be
enlarged by judicial interference at the request of dissident stockholders
solely because of the circumstances of a proxy contest
6) Blasius Industries, Inc. v. Atlas Corp.
i) Schnell stands for the proposition that directors hold legal powers
subjected to the supervening duty to exercise such powers in good faith
pursuit of what they reasonably believe is in the corporations best interest
ii) Even though the action was taken in good faith, the action constituted an
unintended violation of the duty of loyalty
iii) Although, in other instances a board may act paternalistically against a
shareholders idea, they may not do so with respect to who should
compromise the board of directors
iv) The motivation question is less clear: whether the existing members of the
board did so because they held a good faith belief that such shareholder
action would be self-injurious to the shareholders and they needed to be
protected from their own action
v) Analogous Example: a board may take certain steps such as the purchase
by the corporation of its own stock in defeating a threatened change in
control when those steps are taken:
(a) Advisedly
(b) In good faith pursuit of a corporate interest; and
(c) Reasonable in relation to a threat to legitimate corporate interests
posed by the proposed change in control
G) Board Committees
1) Committees may have broad authority to act
1) Proxy Voting
i) Solves some of the problem of widely dispersed shareholders
ii) Proxy Card authorizes someone, generally corporate manager, to vote
their shares
iii) Typically they are revocable and expire after a set time
iv) A shareholder, under SEC rules, may direct how the holder of a proxy is to
vote
2) Schreiber v. Carney
i) Reorganization of TIA into a holding company in which the shareholders
of the old corporation would have substantial shares in the new one
ii) In order to facilitate this, a solution provided one shareholder with funds
necessary to avoid tax consequences
iii) The arrangement was approved by independent directors and a majority of
the unaffiliated shareholders
iv) Plaintiff challenged on vote-buying grounds
v) Was the loan vote buying, and is vote buying, per se, illegal
vi) Defendants contend, in effect, that voting buying is not illegal per se
because the end justified the means
vii) Two principles from case law:
(a) Vote buying is illegal per se if its object or purpose is to defraud or
disenfranchise other shareholders
(1) Fraudulent purpose is classified as deceit which operates
prejudicially upon the property rights of another
(b) Vote buying is illegal per se as a matter of public policy, the reason
being that each stockholder should be entitled to rely upon the
independent judgment of his fellow stockholders
(1) The underlying purpose then is fraud here too, but viewed from the
sense of the duty of all stockholders owed to each other
viii)
Voting agreements, as a general matter, are not illegal per se,
unless the object is to defraud other stockholders
ix) The agreement was not void per se because its purpose was not to defraud
other stockholders, but it was voidable.
x) As a voidable act it was subject to the ratification of stockholders
3) Schreiber Notes and Questions
i) Empty Voting where shares are voted by person who have no economic
interest in the underlying shares they are voting
ii) A corporation may use corporate resources in re-election of incumbent
directors as long as:
(a) The contest posits policy differences and not just personality
differences among the directors
(b) The expenses must be reasonable and proper for solicitation
(c) If the insurgents prevail in election, they can obtain reimbursement for
their expenses from the corporate treasury, subject to shareholder
approval
C) Shareholder Inspection Rights
i) If the majority shareholders will not purchase the stock of the minority in
a closely held corporation, the minority can bring suit for involuntary
dissolution on the grounds of oppression. See MBCA 14.30(a)(2)(ii)
ii) The plaintiff shareholder must prove that:
(a) Oppression has occurred
(1) Generally not viewed as a single instance of misconduct but a
course of misconduct intended to harm the shareholder
iii) Dissolution extinguish the corporate existence and require winding up of
the corporate affairs, and liquidation
iv) Given this extreme remedy courts generally condition dissolution on the
majority purchasing the minoritys stock for a fair price
2) Modern Statutes Typically Include the Following
i) The directors are deadlocked in the management of the corporation, the
shareholders are unable to break said deadlock, and irreparable harm is
threatened
ii) The shareholders are deadlocked in voting power and have failed in two or
more annual meetings to elect successor directors
iii) The directors or those in control of the corporation have engaged in
conduct that is illegal, oppressive, or fraudulent
iv) The corporate assets are being misapplied or wasted
3) Gimpel v. Bolstein
i) Plaintiff brought a petition to dissolve the corporation
ii) Family corporation in which family members have always participated
iii) Plaintiff was alleged discharged due to embezzlement allegations
iv) After discharge he received no benefit from the corporation
v) Allegations of oppressive conduct
(a) Excluded from corporate participation
(b) The profits are distributed through salaries, and no dividend is
declared
(c) He was excluded from examination of the corporate books
vi) Oppressive Conduct Defintions
(a) Violation by the majority of the reasonable expectations of the
minority
(1) Has to deal with the expectations of the founders among one
another
(b) Burdensome, harsh and wrong conduct, a lack of probity and fair
dealing in corporate affairs; or visible departure from the standards of
fair dealing
vii) While neither test is satisfied here (given previous conduct) there is a limit
to what a shareholder can be forced to bear
viii)
The court therefore, requires to alter the financial structure or make
a reasonable offer on the dividends
D) Shareholders Agreements
1) Introduction
i) Many of the common difficulties experiences by shareholders can be
either avoided or resolved vy careful corporate planning
ii) However this requires knowing the usual and reasonable expecations of
shareholders and the development of control devices to frustrate those
expectations
(a) Membership in the board of directors;
(b) Voting rights proportionate to investment that can not be diluted by the
issuance of additional authorized shares
(c) The right to veto material changes to the structure and purpose of the
venture
(d) The right to veto or at least approve new owner-shareholders of the
enterprise
(e) Employment by the corporation as an officer or other primary
employee with reasonable salary and bonuses
(f) Liquidity rights that facilitate the fair value redemption of shares by
the corporation or other shareholders upon the occurrence of certain
triggering events
(g) The equal opportunity to participate in corporate benefits
(h) Various limitations on purpose and powers of the corporation
iii) The common control devices include:
(a) Agreements relating to preemptive rights
(b) Supermajority voting requirements
(c) Vote pooling agreements and voting trusts
(d) Irrevocable proxies
(e) Multiple classes of stock
(f) Limitations on purpose and power of the corporation
(g) Provisions facilitating liquidity
2) Preemptive Rights, Supermajority Voting, and Classified Stock
i) Preemptive Rights
(a) Rights to purchase pro rata share of additional shares offered by the
corporation (keeps the status quo)
(b) Under most statutes shareholders do not have such a right by statute
unless the articles specifically grant those rights
(c) Preemptive rights do not apply to shares issued as compensation to
directors, officers, or employees of the corporation, authorized shares
issued within the first six months of incorporation, or shares sold
otherwise than for money
(d) Preemptive rights are waivable by conduct making it necessary for
shareholders to be aware when new stock is issued
ii) Supermajority Voting and Quorum Provisions
(a) Amendments to the charter require a minimum quorum of a majority
of the shares entitled to be cast
(b) I.e., Majority of the voting shares outstanding must be present to
convene a meeting
(c) If this majority is present, therefore, only a plurality of votes need to
be cast to amend the bylaws
(d) This can be avoided by inclusion of supermajority voting or
supermajority quorum provisions
ii)
iii)
iv)
v)
(ii) However, by the time the person sough to sell, the share price
was much much higher
(iii)
Great difference between the sale price and the actual value
of the stock is insufficient to invalidate a restriction on
alienation agreement
IX) Fiduciary Duty
A) Introduction
1) Recognition of a relationship denominated as a fiduciary means that credible
legal authority has found that the person (the fiduciary) has control over, and
responsibility for, the will being and destiny of the other
2) Designation as a fiduciary requires that person to exercise a certain degree of
selflessness
i) The degree required varies by law
3) This chapter deals with five types of persons the law invariably denominates
as fiduciaries:
i) Partners;
ii) LLC managers
iii) Corporate directors
iv) Corporate officers; and
v) Controlling shareholders
4) While these people have duties on the up hill they are not equivalent to the
duties owed by people such as trustees or guardians
5) So, fiduciary duties are not the same throughout, but instead exist on a
spectrum
6) For Shareholders though
i) They can pursue their own self interest but could not go so far as to work a
fraud, commit an illegality, or reap a benefit to the detriment or exclusion
of the other shareholders
7) The Duties
i) Duty of care the amount of care exercised by persons in similar
circumstances
ii) Duty of loyalty place the best interests of the corporation over those of
self, family, friends, or other businesses in which they have an interest
8) Even though a director may exercise due care, and believe fervently that they
are acting in the best interest, it may still be against their best interest
9) States have been reluctant to find other duties, but recently they have found
that there may exist a duty of candor (disclosure)
B) Violation of Duty
1) Francis v. United Jersey Bank
i) Whether a corporate director is personally liable in negligence for failure
to prevent the misappropriation of trust funds by other directors who were
also officers and shareholders of the corporation
ii) Essentially, a dummy director should have been aware of fraud that was
being perpetrated by the other directors
iii) They dont need to knowing everything going on, but:
iv) The remedy will be a recission of the issuance of the stock acquired by the
director and given to the corporation
2) Hayes Notes and Questions
i) Harm to the Principal or Illcit Gain to the Director or Officer?
(a) A gain incurred while serving the best interest of a competitor or ones
self may be sufficient ground for an action
ii) Mechanical Rules
(a) Contracts and other dealings tainted with a duty of loyalty violation
are voidable, not immediately voided
iii) Pedestrian Cases
(a) The duty of loyalty also serves to vindicate things such as brazen
thievery, outright conversion, and destruction of corporate property
iv) Non-Shareholder Constituency Cases
3) DGL 144
i) Transactions shall not be void solely because a director who has a
conflicting interest voted for the transaction, if:
(a) The material facts are disclosed and a majority of the disinterested
directors approve;
(b) The material facts are disclosed and made known to the shareholders
who then approve the transaction in good faith; or
(c) The contract or transaction is fair at the time it is authorized
4) Usurpation of a Corporate Opportunity
i) Today Homes, Inc. v. Williams
(a) There must be some kind of corporate opportunity, otherwise there
isnt anything to argue about
(1) If the corporation could not have afforded the opportunity there is
no opportunity
(2) However, be wary however of the corporations ability to obtain
credit
(b) Its seems the courts will find a corporate opportunity when I dont
necessarily think its there
(c) What duty, if any
(1) A corporate officer or director is under a fiduciary obligation not to
divert corporate business opportunity for personal gain because the
opportunity is considered property of the corporation
(2) Good faith alone is not sufficient in the absence of full disclosure
and consent of interested parties to have an exception to the rule
(d) Prima Facie Case
(1) Show a corporate opportunity existed
(2) The corporate fiduciary appropriated it without disclosure and
consent
(e) The burden then shifts to the defendant to show why the taking of the
corporate assets was not a breach of the fiduciary duty
(f) Simple resignation does not stop liability if the opportunity arose while
the fiduciary was employed by the company
(1) There needs to be more than just sort of passing information about
the opportunity though
ii) Brandt v. Somerville
(a) Closely held corporation incorporated to manufacture a patented
bearing puller developed
(b) Four tests established for identifying a corporate opportunity:
(1) Line of business test
(2) Interest and expectancy test
(3) Fairness test
(4) ALI test
(c) Under any test, a corporate opportunity exists when a proposed
activity is reasonably incident to the present or prospective business
and is one in which the corporation has the capacity to engage
iii) Notes and Questions
(a) Unfairly Prejudicial Conduct
(1) Lawyer advice in the instance of a potential usurpation of a
corporate opportunity:
(i) Make full disclosure of both the officer/directors interest and
the corporations potential interest
(ii) Procure Two votes by disinterested directors:
a. That the corporation does not wish to avail itself of the
opportunity; and
b. That it is fair to the corporation for the director/officer to
pursue the opportunity
F) Directors and Officers Compensation
1) Ryan v. Gifford
i) Wall Street released an article about questionable compensation packages
ii) Back-dating
(a) Company issues stock options on one date, while providing fraudulent
documentation asserting the options were actually issued on another
day
iii) Derivative action filed by a shareholder
iv) Backdating of options may be one of those situations where the directors
are not entitled to the shield of the business judgment rule
v) The complaint here alleges bad faith and therefore a breach of loyalty
sufficient to rebut the business judgment rule
2) In re Tyson Foods
i) Spring-loading of options without explicit grant of the shareholders
clearly involves deception
ii) It is inconsistent to ask a shareholder to approve a directors benefit plan
that does not divulge all relevant information which these spring-loaded
options inherently do
iii) There may be some options where this would be ok
3) Notes and Questions
i) Legal Test
(i) Where the demand is properly excused, the stockholder does possess
the ability to initiate the action on his corporations behalf
(j) When, if at all, should a board committee be permitted to cause
litigation properly initiated by a derivative stockholder, in his own
right, to be dismissed
(k) Two phases:
(1) The stockholders right to compel the corporation to sue
(2) The corporations actual suit against itself (directors)
(l) Balancing point where a bona fide stockholders power to bring a
corporate cause of action cannot be unfairly trampled by the directors,
but the corporation can rid itself of determinmental litigation
(m)The question becomes simply, whether the committee had
independence, good faith, and conducted a reasonable investigation
(n) So, demand refers to the shareholders demand on the board to
initiate a suit
(o) This is a demand excused case
(1) A demand excused case is one where the demand need not be made
because it would be futile to do so
(p) When then, may a committee of the directors end the derivative suit
being brought by the shareholder in his own capacity?
(1) When the corporation can prove that the committee who deemed
the suit to imminicalble to the corporations interests can prove:
(i) The board was independent;
(ii) The decision was made in good faith; and
(iii)
There was a reasonable investigation conducted by the
committee
(2) This is counter to the standard business judgment rule which
presumes these things
(3) The next step (that no one has ever followed) is that the court must
make a decision using its own business judgment to determine if it
was a decision made in the best interests
(q) So, in a demand excused case, a corporation may end a shareholders
suit (brought in his own capacity) when:
(1) The company can establish business judgment standards
(i) The board that made the decision was independent;
(ii) The decision was made in good faith; and
(iii)
There was a reasonable investigation conducted by the
committee
(2) The court must then apply its own business judgment to the
situation and determine if it was in the best interests of the
company
(i) No one has ever done this
ii) Thompson v. Scientific Atlanta, Inc
(a) Discovery rights as to the Modified Business Judgment Rule laid out
in Zapata is not guaranteed by right but must be sought by the
shareholder
(f) A test suggested for futility whether the board, at the time of the
filing of the suit, could have impartially considered and acted on the
demand
(g) The business judgment comes into play in a number of areas in
derivative litigation:
(1) In addressing a demand;
(2) In the determination of demand futility
(3) In the efforts by independent disinterested directors to dismiss the
action as inimical to the corporations best interests; and
(4) As a defense to the merits of the suit
(h) In determining demand futility a court should decide whether, under
the facts alleged a reasonable doubt is created that:
(1) The directors are disinterested and independent; or
(2) The challenged transaction was otherwise the product of a vlid
exercise of business judgment
(i) The mere threat of personal liability, standing alone, is insufficient to
challenge either independence or indifference
(j) Independence is decided by the care attention, and sense of individual
responsibility to the performance of ones duties, not the method of
election
4) Avoiding Derivative Characterization Direct Versus Derivative
i) Tooley v Donaldson
(a) The issue of whether it is direct or derivative hinges on:
(1) Who suffered the alleged harm?
(i) The corporation?
(ii) The stockholders individually?
(2) Who would receive the benefit of any recovery or other remedy?
(i) The corporation?
(ii) The stockholders individually?
(b) Other available test Were they denied rights in conjunction with
shareholder ownership?
H) Dividends and Other Distributions to Shareholders
1) Most courts arent going to question a boards decision not to distribute
shares. Gottfried
i) These concerns may be especially pressing in close corporations, but
absence a reason to go around the businesss judgment. Miller v. Magline
ii) There does exist special common law to protect shareholders in closely
held corporations
2) However, in public corporations its going to be very rare for a court to require
the distribution of a dividend. But See Dodge v. Ford Motor
3) Limitations on Corporate Distributions Under Corporate Statutes
i) Policies Supporting Limitations
(a) Creditors have an interest in how much a corporation provides to its
shareholders through dividends because it will limit their available
recovery
(b) Corporate statutes, therefore, exist that place restrictions on how much
a corporate may distribute in dividends
ii) Balance Sheet or Capital Impairment Restrictions
(a) Delaware follows this and it addresses both share repurchases and
dividends respectively
(b) Distributions cannot generally exceed the amount of the corporations
surplus
(c) Shareholders equity or net worth is the amount of the difference
between total assests and liabilitys
(d) Shareholders equity is composed of three primary components
(1) Stated capital the arbitrary set par value, and an amount
arbitrarily allocated by the board to the stated capital account
(i) Under DE law it is this category of shareholders equity that
provides the equity cushion for creditors and cannot be
impaired by distrubtions
(2) Paid-in Surplus
(i) The consideration paid for the shares in excess of stated capital
(3) Earned Surplus
(i) The amount of earnings from operations retained by the
corporation
(e) The sum of these last two components is the surplus available for
distribution under DEs balance sheet approach
iii) Earned Surplus Restrictions
(a) This approach provides that a corporation may make distributions out
of its earned surplus which refers to the sum of its net profits and gains
over the years, less its losses and prior distributions to shareholders
iv) Solvency Restrictions
(a) The current version of the MBCA follows a double insolvency test:
(1) Distributions are prohibited if their payment would render the
corporation insolvent under equity or bankruptcy definitions
(2) Equitable Insolvency
(i) Whether the corporation is able to pay its debts as they come
due
(3) Bankruptcy Insolvency
(i) Whether a corporations assets at least equal the amount of its
liabilites
(b) Under the MBCA a corporation may not make a distribution to its
shareholders if, after giving it effect, the corporation would not be able
to pay its debtors during the usual course, or if the corporations total
assets would be less then the sum of its liabilities
4) Director Liability for Improp Distributions
i) Most corporate statutes set forth specific provisions imposing direct
personal liability on directors who voted for or assented to an improper
distribution
ii) Strict liability is not imposed an entity claiming liability must establish
that the directors did not comply with the statutory standards including:
good faith and due care
iii) Klang v. Smiths Foods
(a) Question of the actions of a corporate board in carrying out a merger
and self-tender offer
(b) Plaintiffs allege the corporations repurchase of shares violated the
statutory prohibition against impairment of capital
(c) Corporation hired an investment firm to calculate the transactions and
render a solvency opinion
(d) In cases alleging impairment of capital, the trial court may defer to the
boards measurement of surplus unless the plaintiff can show the
directors failed to fulfill their duty to evaluate the assets on the basis of
acceptable data and standards
5) Shareholder Liability for Improper Distributions
i) Shareholders are generally not liable for illegal distributions unless they
had knowledge
ii) Under the common law they may be liable to the extent of the distribution
X) Basic Corporate Changes
A) Overview
1) Changes to structure and governance of the corporation necessary or desirable
are alterations that typically enable, effectuate, or represent major corporate
transactions
2) Some are so fundamental they will require filing with the secretary of state
3) Basically the general changes available are:
i) Charter / Bylaw amendments;
ii) Statutory business combination transactions like mergers, consolidations,
share exchange transactions and dispositions of all or substantially all of
the corporate assets; and
iii) Dissolutions
4) Typically, the right to intiate amendments under modern statutes lies solely
with the board and shareholders cannot implement these basic corporate
changes on their own
B) Charter and Bylaw Amdendments
1) Charter (AOI) is the corporations constitution
i) As a general matter, both shareholder and director approval are required
ii) DE
(a) Requires the board first approve the amendment and declare its
advisability
(b) Amendment then put to shareholder vote
(c) Class voting of shareholders is required if the amendment would
increase or decrease the aggregate number of authorized shares of such
class; or increase or decrease the par value of the shares of such class,
or alter or change their powers and rights
iii) MBCA
(a) Proposed amendments to the articles be adopted by the board; and
2)
3)
4)
5)