AGENCY

BACKGROUND
1. Rest. 2nd of Agency
2. Principal & Agent
a. Agent acts on behalf of Principal w/ 3rd parties
b. Principal can be BA, need Agents to act
3. Consequences of having an Agency
a. Fiduciary Duties attach (to both) §13
b. Agent has power to Bind Principal §12
4. Agency law governs both relations b/ween people w/in firm, & b/ween firm & 3rd parties

CREATION
1. “Manifestation of Willingness/Consent” by both parties for Agent to act on
a. Principal’s Behalf AND
b. Subject to Principal’s Control
2. Agency is Consensual Relationship (Mutual Consent)
a. Doesn’t req written document & A written document does not necessarily mean it is an agency.
b. Manifestation must go both ways
i. Can be oral or by conduct
ii. Usually manifestation of principal & consent of agent.
3. Examples of Not Agency
a. Franchise of KFCHas control, but not on behalf of
b. TrusteeHas on behalf of, but not control.
4. Employee v. Independent Contractor
a. Employee always Agent if in scope of employment
b. Independent Contractor can be agent or not.
i. NotesDistinction based on physical control (tell what to do, how to do it, etc. the more likely an employee)
5. Agency Relationship can be for Broad or narrow Scope
a. Can be agent for some things & not for others
b. Thus, question of agent always depends on exact facts/issue

TERMINATION
1. All that is req.d to terminate is a Removal of one of the Essential Elements
a. Thus can be to stop the manifestation/consent
2. Thus, Termination can be:
a. At-Will of either party §§118-119
b. By Terms of Agreement §117
3. Noteyou can terminate agency at anytime, but that does not relieve you from any contractual duties/breaches you might have done with
agency relationship existed.

FIDUCIARY DUTIES
1. Duties of Agent to Principal (§§376-396) (3)
a. Three Generally (two affirmative duties, one negative(no self interest)
i. Due Care
1. Must be R prudent & use appropriate skill
ii. Full Information
1. Must inform Principal (total candor)
2. Must account for prop/profits
iii. No Self-Interests (Duty to absolutely serve P’s Interest over Agent’s own)
1. No Competition (on own or w/others)
a. Can’t create own business or work for competitor
b. Can’t get in business, even if person approaching would have never considered principal for the job
c. Cannot hire away employees or talk to clients until after agency ends
2. No taking of Opportunities that belong to Principal
a. Can’t use Company time or prop (even just phone list) to benefit self
i. However, if public information then fine
3. Obey all of P’s instructions
4. Maintain Confidentiality
a. Keep quiet what should be kept quiet
b. Don’t tell trade secrets
b. Exception/Qualifications to avoid duty
i. Is Agent outside scope of agency
ii. Did they agree otherwise/Alter by Contract
iii. Making Logistical Arrangements is OK (not competing)
1. Such as arranging financing & leasing office space

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 c. Fiduciary duties remain until the agency ends
i. Thus, if agency ends on certain date, you cannot compete until after that date, even if you know it is coming.
ii. Non-compete clauses can extend it longer.
d. Non-Compete Clause Issue
i. Courts frown on these clauses, & will only enforce if reasonable based on:
1. Duration
2. Geographical coverage AND
3. Nature of the employer’s risk from the competition
ii. NoteCan always keep general knowledge, but not trade secrets given on the job.
e. Use of Information after Termination
i. Can take w/you general information (not given to you as part of your job) you remember (customer names), absent a non-
compete clause
ii. But you cannot take a customer list, or use special information
Cases:
CCS v. Reilly, 4th Cir., 1963, 16
- Reilly was a sales director for CCS, which conducted fund-raising campaigns for the Catholic Church. Sometime in late 59, D stopped filling
daily reports with his boss in NYC as required. In January, 60, D informed P that he needed to resign for personal reasons.
- P later found out that during the last month of D's employ, he was setting up personal contracts with many dioceses that he had come in contact
with through the course of his employment with CCS
- Rule:
o Former employee may compete with his former employer after terminating his employment with said employer, but may not use trade
secrets, in order to diminish the competitive advantage of the employer
- Holding:
o D competed with his employer prior to the termination of his employment and thereby breached his fiduciary duty with the employer

Hamburger v. Hamburger, Superior Court of MA, 1995, 19

- David worked for the family wire company during high school and after his college graduation in the warehouse and then as a salesman and
manager
- He grew the business, doubled in size
- His uncle and father owned the business, his uncle and father did not get along, and as a result his uncle resented David's power in the business
and attempted to fire him. It was also made known that should David's father die before his uncle, David would be terminated
- David decided to start his own company
o He obtained financing from a client
o He organized corporation
o He quit his job
o He then actively solicited the customers of his previous employer
- Rule:
o Cannot use trade secrets
o Remembered information is not a trade secret
o Customer lists are not trade secrets
- Importance:
o If Uncle didn’t want David to do what he did, then sign non-compete

2. Duties from Principal to Agent (3) (§§438-440)

a. Compensation
b. Indemnification
i. (pay back for expenses incurred for P in scope of employment)
c. Duty not to Interfere w/Agent’s work

ABILITY OF AGENT TO BIND PRINCIPAL

1. In Contract
a. Three Current ways to Bind
i. Actual Authority (§7)
ii. Apparent Authority (§8)
iii. Some other theory for DIRECT LIABILITY of Principal
b. What is Authority
i. Authority allows the agent to bind the principal
1. Agents bind their principals not themselves Normally
ii. Rest. 3rd says there is only Actual & Apparent Authority Now & Michael agrees (& inherent isn’t really authority either)
1. However, need to understand Inherent & Incidental also
2. However, you can work all claims of inherent & incidental authority into the real two
iii. Manifestation is “spoken, written or conduct,” which includes that failure to secure
1. Thus, can be leaving something unattended & no notice of timing.
c. Types of Authority
i. Actual Authority §7
1. Reqs a Manifestation & Consent from Principal to Agent
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 2. Can be Expressed or Implied
a. Expressed is oral, written or by conduct
b. Implied is implied from the express grant (Comment C). You imply it from something the principal said
to the agent.
i. ExGranting authority to sell house gives the implied actual authority to pay fees & other
necessary items to sell house.
ii. However, new view says this is just expressed authority also.
3. Knowledge by the 3rd party of the actual authority is irrelevant.
ii. Apparent “Authority” §8
1. Reqs a Manifestation from “Principal” to 3rd Party
a. Means you have given a manifestation to a 3rd party that a person is your agent & the 3rd party
reasonably relied on it.
i. Reasonableness is based on 3rd party, not whether principal was reasonable. There doesn’t
have to be a relationship b/ween the principal & 3rd party
ii. Reasonableness is Subjective (in eyes of that 3rd party)
b. Keyif 3rd party knows person doesn’t have authority, or was unreasonable in relying on
manifestation, then not apparent authority
c. Key”Agent” cannot create his own authority
i. Thus, stolen uniform is not a manifestation.
ii. “Agent” saying he is authorized means nothing
d. Can have Anti-Manifestations so that people cannot reasonably rely otherwise (such as sign when open).
2. Defthe power to affect the legal relations of another person by transactions w/3rd persons, professedly as agent
for the other, arising from & in accordance w/the other’s manifestations to such 3rd parties.
3. Don’t call a principal & agent because that not right.
4. Examples
a. Leaving a Night desk unattended (manifestations is having the desk there)
b. Can be by signs or advertising
c. By appointing someone as President. (that giving of a label can be a manifestation)
d. Letting someone have an office in your space.
5. Notewe don’t really know if “agent” is also bound for this. Probably yes, just like a undisclosed principal
iii. Inherent “Authority” §8A: derived from the agency relation itself
1. Normally occurs when an agent does an act he is not authorized (thus not an agent for it) to do.
a. From the desire to protect the reasonable expectations of outsiders who deal w/an agent.
2. Key—It stems from the expectations people have about a person has in a certain position (such as CEO).
3. Ex—President can bind a corp in ordinary course of business
a. Thus, even if no actual authority, can apply
4. Really just actual or apparent authority now
iv. Incidental “Authority” §161
1. Allows “agent” to bind Principal if he is an agent for other purposes & does conduct that he is not actually an
agent to do & 3rd party reasonably believes & has no notice otherwise, that “agent” is authorized.
a. Again just a desire to protect 3rd party.
2. Key—It stems from granting certain authority, that other authority must have been granted too.
3. ExSelling a home & doing all the stuff necessary to sell it.
4. Really just implied actual authority, thus actual authority
v. Implied “Authority” (part of §7)
1. This is an “authority” that is no longer so. (see above)
d. Is the Agent Bound by the K also (§§320-322)
i. If principal is disclosed, Agent not bound
1. Thus, agent is contracting as agent for principal
ii. If partially disclosed principal, agent is bound/party to contract
iii. If principal undisclosed, then agent is bound/party to contract
1. You claim to be acting on own account, but really for principal
e. KeyWhen something really matters, Insist on Proof of Actual Authority.
2. In Tort
a. Authority doesn’t generally matter in tort (maybe apparent authority)Switches from the Principal/Agent terminology to
Master/Servant. Every employee is an agent; every agent is not an employee. You can be an agent for some purposes & not for
others. YOU MUST SAY THIS AGENT IS A PHYSICAL EMPLOYEE, in order to BIND THE EMPLOYER-vicarious
liability.
i. Servant is person whose physical conduct in the performance of the services is subject to the other’s control or right
of control
ii. Factors to consider to determine if Servant: §220(b)
1. Extent of control of master over work,
2. Whether or not person is engaged in a distinct occupation,
3. Kind of occupation,
4. Skill req.d or occupation,
5. Who supplies the tools,

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 6. Length of time for employment
7. Method of payment (salary or per job)
8. How often use/employed
9. Whether they believed they were servant or not,
10. Whether Principal is in a business or not.
b. TESTMaster liable for Torts of Servent when: §219
i. Master is liable for the torts of his Servant in the course & scope of the employment (Respondeat Superior). Not
apply to an independent contractor; independent contractors are NEVER employees.
ii. Master not subject to liability for torts of servant outside course/scope unless:
1. Master intended conduct or consequences,
2. Master was negligent or reckless (failure to supervise)
3. Conduct violated a non-delegable duty of the master, OR
4. Servant was aided in accomplishing the tort by the existence of the agency relationship.
iii. & Direct Liability possibly
1. Example is committing fraud themselves because Co. knew about it
2. Note—When an agent has knowledge of something, the principal is deemed to have knowledge of it
c. KeyNo fault is req.d by Master/Principal except for direct liability
d. Special Rule for Fraud (2nd Rest. of Agency, §261)
i. A principal who puts an agent in a position w/apparent authority & allows the agent to defraud a 3rd party is liable
to 3rd party. §261
ii. Thus, this is outside the Master/Servant distinction, & back to just plain Principal/Agent.
e. Note
i. Every Master is a Principal
ii. Every Servant/Employee is an Agent.
1. Employee is an agent over which employer has physical control
iii. Independent K is not a servant & not subject to Respondeat Superior
f. Agent/Servant always also bound/liable in tort, thus agent cannot make principal liable in tort, & not be personally liable in
tort.
g. Restatement 3d §7.08 “A principal is subject to liability for tort committed by an agent in dealing or communicating w/a 3rd
party on or purportedly on behalf of the principal & actions taken by agent w/apparent authority constitute the tort or enable
the agent to conceal its commissions.”
h. CASES
i. Blackburn v. Witter
1. Facts: Respondent sued brokerage company of Mr. Long. Respondent invested money w/Mr. Long. He
misappropriated the money by keeping for himself. Respondent sues the company that employed Mr. Long under
apparent (ostensible) authority. Ostensible authority is such as a principal, intentionally or by want of ordinary
care, causes or allows a 3rd person believe the agent to possess.
2. Holding: “A principal who puts an agent in a position that enables the agent, while apparently acting within
his authority, to commit fraud upon 3rd person is subject to liability to such 3rd persons for the fraud.”
The manifestation was that the brokerage placed Long in front of Blackburn to make investments as an agent.
Liability is based upon the fact that the agent’s position facilitates the consummation of the fraud, in that from the
point of view of the 3rd person the transaction seems regular on its face & the agent appears to be acting in the
ordinary course of the business confided to him.” 3RD PARTIES SHOULD BE GIVEN REASONABLE
PROTECTION IN DEALING W/AGENTS
a. This is not actual, because Long was not allowed to misrepresent the company. Long never had that
authority; rather, it was apparent.
b. Long was an agent (never addressed if he was a liable). This is not actual or respondeat superior.
ii. Sennott v. Rodman & Renshaw
1. Facts: Jordan Rothbart used to work for Rodman & Renshaw; he was fired, but his father still works there. He
becomes friends w/plaintiff. He engaged in trades w/plaintiff, plaintiff uses his father’s brokerage to process the
trade. Eventually Jordan gets plaintiff to invest in an fake IPO, & now plaintiff complains & sues Rodman &
Renshaw
2. Holding: There was no apparent authority. Jordan did not work for the firm. However, firm did contact plaintiff
& said they were not responsible for Jordan’s conduct & don’t tell compliance people about anything. However,
while some of the type of implied agency may well have existed as to other transactions, there was no
reliance upon this agency in the transaction regarding the fake IPO.
a. Record is silent as to if father (Rodman & Renshaw) knew about Jordan’s illegal fake IPO trade.
b. Plaintiff testified that he did not think trades were coming from Rodman & Renshaw.

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 BUSINESS ASSOCIATIONS

INTRO
1. We have BAs for two Reasons:
a. Shield Liability (separate Legal Existence)
b. Raise Capital/Multiple Owners
2. We want (i) limited liability; (ii) favorable tax & (iii) flexible management & ownership.
3. Types of BAs
a. General Partnership
i. Equal sharing of ownership & management (meaning) - Default Rule
1. All are residual claimants
2. All have full power to participate in management
3. All have right to act as agent-all can bind principal
ii. Individual adaptability favored over continuation. The partnership is a personal arrangement. Can be dissolved very
easily
iii. No limited liability
iv. Extensive Fiduciary duties
v. No written agreement req.d
vi. Statute UPA(1914) or RUPA(1997)
b. Limited Partnership (LP)
i. Rare
ii. Def—A general partnership w/at least one limited partner (investor)
iii. Limited partner is limited in their:
1. liability
2. management rights
iv. There is no flexible management & ownership. These partnerships have to be very limited.
v. Statutes: RULPA (1976 w/amendments). Now there is a Re-RULPA (2001); changes most of the rules but limits types of
LPs. Today there is usually only real estate limited partnerships or family limited partnership (for estate planning).
c. Limited Liability Company (LLC)
i. Limited liability w/favorable tax treatment
ii. Complete flexibility in:
1. Types of ownership AND
2. Style of management
iii. Statute: not uniform, ULLCA is good model.
d. Limited Liability Partnership (LLP)
i. Just like a LLC, but needed because some profession cannot be a LLC (such as lawyers/accountants). The State Bar set this
rule in order to not completely limit liability.
1. Note—Can’t limit liability for malpractice.
2. It is very similar to a General Partnership, but you sign a form saying you don’t want to be liable like a General
Partnership.
e. Limited Liability Limited Partnership (LLLP)
i. rare
ii. For LP that existed & wanted to convert, without have to dissolve & start over.
f. Closely Held Corp
i. Corp w/favorable tax treatment (no corporate tax)
ii. It is taxed like a partnership (S Corp)
g. Public Corp
i. Taxed as an entity. (C Corp)
ii. Files own tax return.

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 PARTNERSHIPS

FORMATION
1. DefAn association of two or more persons to carry on as co-owners of a business for profit whether or not the persons intended to
form a partnership (RUPA §202(a) & UPA §6(1))
a. Parts
i. 2 or more person
ii. Carrying on as co-owners
iii. For profit
b. KeyExpressed correctly or implied
i. Doesn’t have to be in writing
2. Key Rules/Assumptions (RUPA 202(c) & UPA §7)
a. Joint ownership without more is Insufficient
b. Sharing of returns without more is Insufficient
c. Sharing of Profits creates a Rebuttable Presumption for Partnerships
i. Thus it shifts burden to other side to prove not a partnership & can be struck down by showing profits were received as:
1. Creditor
2. Employee
3. Landlord
4. Retiree
ii. If presumption fails, burden to prove by definition again
3. A partnership is not formed if some other BA is actually formed (by filing) (RUPA 202(b)
4. Substance over Form
a. Name called is irrelevant, you can call the arrangement whatever, & it will not be determinate.
b. ExA creditor that is too involved can create a GP
i. Even calling it a partnership does not make it so, but strong evidence for it.
5. Factors to Consider
a. Share Profits,
b. Roles in Management (co-owners?),
c. Contributions of capital
d. Intent to be co-owners
i. KeyTo form a partnership, parties must merely have an intent to carry on business for profit, not a subjective
intent to create a partnership.
e. UPA §202(c) lists factors: (i) share prop – but mere co-ownership alone is insufficient; (ii) sharing of returns – alone is insufficient;
(iii) sharing of profits – is sufficient, unless it is proved to be something else.
6. MY PROCESS
a. First ask if “partners” are sharing Profits
i. If yes, probably a P’ship but look for rebuttal
ii. If no, go on
b. Second, Ask if they were carrying on as co-owners of a business for profit
i. Consider the above factors & ideas
7. Duration of Partnership
a. Can be At-will partnership OR
b. Partnership for a Term
8. Cases
a. Martin v. Peyton
i. Facts: Company wants to borrow securities from Peyton. Defendant provided loan & (i)receives securities from Company;
(ii)40% of the profits (iii)loan was not to be intermingled w/Companies money; (iv)must be advised as to the conduct of the
business & consulted as to important matters.
ii. Issue: Are the lenders partners? If they are partners then they have liability.
iii. Holding: An arrangement for sharing profits is to be considered. It is to be given its due weight. But it is to be
weighed in connection w/all the rest. It is not decisive. It may be merely the method adopted to pay a debt or wages,
as interest on loan or for other reasons.
1. Being informed on business matters is a proper precaution to safeguard the loan. They can even veto any business
they think highly speculative or injurious (THIS IS A FORM OF NEGATIVE CONTROL, it merely allows a veto
but does not allow trustees to enter into business transaction). As well as insurance on Mr. Hall.
2. The trustees cannot bind the firm by any action of their own.
3. To be partners – Peyton would have to do more than safeguard the loan. They can’t enter any transaction
– they can’t act as an agent of the firm, or bind the firm in anyway.
PROFITS & LOSSES
1. Statutory Rules are the Default Rules & all can be changed
2. Capital Accounts (RUPA §401)
a. Each partner has a capital account that is:
i. Increased by contributions & profits AND
ii. Decreased by losses & withdrawals
b. Keyonly cash & prop count as contributions, NOT services

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3. The Statutory/Default Rules (RUPA §401 & §807(b)) & (UPA §18)
a. Profits Shared Equally (meaning equal per person, not per proportionate to contribution)
b. Losses shared the same as Profits
c. P’ship must pay interest on loans from Partners (no interest on capital contributions though)
d. Partners get no payment for services in partnership
4. Settlement of Accounts Among Partners on Dissolution (§807(b) Settlement of Accounts Among Partners)
a. Overall Process
i. First pay Creditors
1. Note there is always Joint & several liability & cannot get out of paying creditors.
ii. Second pay Partners
b. Default Rule Process RUPA §807(b) (Ruthless Rule—Pay other partners)
i. First determine if you have a profit or loss (calculate)
ii. Share the profit/losses according to the agreement
iii. Then add to or subtract from the amount from the partner’s capital account for each.
iv. If a positive amount, that is the paid amount
v. If a negative amount, that is due by you
vi. UNDER THIS RULE, REED WOULD OWE $4180 to KOVACIK AFTER DOING ALL THE WORK. Courts want
to AVOID this result.
c. Gentle Rule in Equity for Partner who contributes only Services (MINORITY RULE)
i. Says if one partner only contributed services, other partners cannot recover losses from him (or at least until all capital is
spent)
ii. However once all capital is lost by all, seems they again share losses (additional amount to be paid out of pocket) in the
appropriate proportion.
iii. Note—No certain rule on how you divide if more than one partners left to carry extra amount?
iv. Note, you can still K around this minority rule
5. Cases
a. Kovacik v. Reed
i. Facts: Kovacik entered into parternship w/Reed. Kovacik would give money, $10K, & Reed would give services, they
would split profits 50/50. They loose $8,640. Kovacik thinks that Reed should pay for ½ the loss.
ii. Holding: Where one partner contributes the money capital as against the other’s skill & labor, all the cases cited, &
which out research has discovered, hold that neither party is liable to the other for contribution for any loss
sustained. This Court went against the statute RUPA §401 & §807 – but that happens all the time. This is the default
rule.
1. Where one party contributes money & other contributes services, then in the event of a loss each would lose
his own capital the one his money & the other his labor.
2. In accounting terms Kovacik contribute $10K; Reed $0. Kovacik lost $8360 & Reed $0. Therefore Kovacik due
$1320 & Reed $0.
a. Can’t give Reed a $10K on the onset, because this gives many problems.
b. Shamloo v. Ladd
i. Facts: Mr. Ladd put in $75K in contribution & $75K in loan to a business w/Mr. Shamloo. Mr. Shamloo agreed to give
service. The partners never made money, & now the partners want to dissolve the partnership.
ii. Holding: (i)Mr. Shamloo gets nothing – absent an agreement, a partner is not entitled to compensation for rendering services
for partnership other than profits. A partner is only entitled to compensation where the evidence discloses an express or
implied agreement that such partner will be compensated. (ii) a partner who makes payments or advances beyond the
amount of capital which he agreed to contribute shall be paid interest from the date of the advance BUT interest is not due
on a capital contribution.

FIDUCIARY DUTIES
1. Common Law
a. Cardozo says fiduciary duty owed b/ween partners for all partnership matters is a higher standard of duty than just Honesty (“the
punctilio of an honor the most sensitive”) (pg.69 from Meinhard Case)
i. Thus, it is more than market morals, more like trustee
ii. Can always be the tie breaker
b. Still big argument over scope of duty.
2. Statutory (Two Fiduciary (loyalty & care) & two others)
a. Duty w/Respect to Information (RUPA §403(c))
i. Partner shall furnish
1. Without Demandinformation req.d for partner to exercise their rights/duties
2. On Dem & (reasonable request), any other information reasonably requested about partnership affairs.
b. Duty of Loyalty (RUPA §404(b)) (Very similar to what Agent owes to Principal)
i. Profits from partnership prop belong to partnership (includes accounting for it & not taking opportunity)
ii. No adverse Interest (could you represent both at trial) ***BIG ONE***
1. THERE CAN BE NO SELF-DEALINGS.
iii. No competition in Partnership business until partnership is dissolved.
c. Duty of Care (RUPA §404(c))

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 i.Only means refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of the law.
ii. Thus, negligence alone is not enough, that is the risk of having a partner.
d. Obligation of good faith & fair dealing in carrying out duties to p’ship & other partners. (RUPA §404(d))
i. However, this adds nothing since already the rule.
e. RUPA §404(e): It means nothing or everything. Either it restates everything else, or it means nothing.
3. Non-waivable Provisions (RUPA §103)
a. Cannot unreasonably restrict access to information/books,
b. Cannot eliminate duty of loyalty
i. However you can qualify it in saying was not violate in some cases
c. Cannot unreasonably reduce the duty of care
d. Cannot eliminate the obligation of good faith/fair dealing
i. However, you can give standards to judge by
4. Damages for Breach of Fiduciary Duty
a. Only get damages caused by the breach
i. Include profits as a result of the breach
b. No forfeiture of capital contribution
5. Burden of Proof
a. Burden of proof is on the party claiming they have met their fiduciary duty (once the other party has proven a fiduciary relationship
does exist)
6. NoteTerm “partnership Business” is very important because its definition has a huge impact.
7. CASES
a. Meihnard v. Salmon
i. Facts: Salmon & Meihnard had a partnership, & Salmon was going into a new deal & never informed Meihnard. Entered
into a K w/a set time-period
ii. Holding:
1. Cardozo & Andrews disagree as to the relationship b/ween the new venture & prior ventures.
a. Cardozo said there was a nexus of relation; Andrews disagrees.
b. Vigneau v. Storch
i. Facts: Plaintiff involved in self-dealings w/partnership. Defendant says that since plaintiff broke fiduciary duty, then
defendant does not owe plaintiff his value of partnership. Plaintiff denies breaching fiduciary duty, because there was no
actual damage.
ii. Holding: The fact that defendant suffered no injury as a result of the plaintiff’s disloyalty is of no consequence & act as no
excuse. Therefore, there was a breach of fiduciary duty. But, defendant can’t keep plaintiff’s partnership. Disloyal
partners are entitled to their interest in the partnership’s reserve & capital accounts and in the partnership income
earned but not distributed.

MANAGEMENT
1. Authority (RUPA §301(1))
a. Partners can bind the partnership by Actual & Apparent Authority
b. Actual AuthorityPartner is an agent of Partnership for any act in the ordinary course of the partnership business. There is
manifestation b/ween the principal & agent & a transaction b/ween the agent & 3rd party.
i. Thus, it is default rule that this gives actual authority for ordinary course of partnership business
ii. ExceptionPartner didn’t have actual authority for that act, & 3rd party had notice that partner lacked authority
c. Thus, Apparent AuthorityIf partner doesn’t have actual authority to act in ordinary course, but 3rd party does not have
notice of limitation. When there is no manifestation b/ween Principal & Agent, but rather b/ween Principal & 3rd Party. Still a
transaction b/ween agent & 3rd party.
i. Thus, it’s hard to remove partner’s right to bind partnership
d. Summary
i. Every act by a Partner in the ordinary course of the partnership business is binding (by actual or apparent authority), unless
he didn’t have actual authority & the 3rd party had notice that he had no authority.
ii. Acts outside ordinary course of the partnership business is only binding if partner had actual authority.
e. NoteIn some cases courts (& Rest. 3rd) might say there is authority by estoppel or restitution, even if no actual or apparent authority,
because that is what “justice req.s”
f. If a partner breaches a Partnership Agreement, he can become liable to the other partners (Haymond v. Lundy).
g. Limited Partners can bind a partnership just like a general partner
i. It doesn’t insulate the partner who made the mistake, it doesn’t insulate the firm (they are req.d to carry insurance), but it
does insulate the other attorneys.
1. If the firm puts the partner in the position to commit the tort (malpractice), then the firm is bound either because
he is authorized to do it or the firm put the partner in the position to commit the fraud.
ii. Limited partner status only prevents a partner from being liable for the obligations of the partnership, it does not change
anything such as how a partner can bind the partnership.
1. Notelimited liability can be partial shield (like case) or full shield (like RUPA §306)
iii. If a partner commits a malpractice the partnership is bound according to §301(1). After the other partners that did not
commit the wrong are no longer liable.
h. NoteLabel of Managing partner can increase the possibility of apparent authority because it is reasonable to rely on the title

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 i. Filed statement of Partnership Authority (RUPA §303)
i. 3rd party can rely on a filed GRANT of authority (unless revoked by a later filed limitation)
ii. However, 3rd party is not bound by a filed LIMITATION of authority unless
1. it revokes a prior grant,
2. Filed w/title to real prop, OR
3. 3rd party actually sees/knows it.
j. Note—Possible for Partner/agent to bind the partnership to only a certain extent (the 10K was that in ordinary course, seems must be
based on actual authority then).
2. Changing Course (RUPA §401(f) & (j))
a. Each partner has equal rights in management (§401(f))
b. Changing Course (Default Rules, can be modified by K because §103 doesn’t say otherwise)
i. Change in ordinary course of business, need MAJORITY of partners.
1. Noteyou can start something in the ordinary course w/just one person, but need majority to change
2. thus, big power to start.
3. Covalt v. High
a. Facts: One partner wanted to raise rent, other said no. Need majority, & since only two partners, one
partner isn’t enough. Additionally, the conflict of interest was well known by both parties at the
beginning, therefore Covalt can’t complain now, because it was agreed upon - §404(b).
ii. Change in extraordinary course or Amendment of agreementneed Unanimous of partners
3. Duty of Care (RUPA §404(c))
a. To not be grossly negligent, reckless, or engage in intentional misconduct or a knowing violation of the law.
b. See Fiduciary Duties above.
c. CHECKIn limited partnership, general partners owe limited partners a duty of care, but do general partners now owe other general
partners a duty of care????
d. Ferguson v. Williams
i. Facts: Ferguson was negligent on 6 different accounts. Ferguson & Williams were partners.
ii. Holding: Negligence in the management of affairs of a general partnership or joint venture does not create any right
of action against that partner by other members of the partnership. It is only when there is a breach of trust, such as
when one partner or joint venturer holds prop or assets belonging to the partnership or venture, & converts such to
his own use, would such action lie.
1. If they were not partners, then negligence would award damages to investors. However, a partnership is different,
because partners should check on other partners. Because, each partner has an equal say in management &
conduct of partnership business; each partner could have been active, here Williams CHOSE not to be.
4. Note on Complete Discretion
a. Seems you can give someone complete discretion, but that does not remove fiduciary duties.

DISSOLUTION/DISSOCIATION
1. Generally
a. Dissolution/Dissociation deals w/a partner leaving the partnership
b. There are different effects of leaving (p’ship continues or not & is liquidated)
i. Key is liquidation gives everyone the right to try to buy the assets, but otherwise it only lets the partnership buy it out.
c. The leaving can be wrongful or not.
d. Also some fiduciary duties in process
e. Overall: You can get out of a partnership whenever you want.
2. UPA’s Dissolution v. RUPA’s Dissociations
a. Under UPA, after dissolution, the partnership was forced to wind up(UPA §29), but RUPA fixes this & says partnership continues
unless certain things happen (§601 & §603)
i. Thus, under UPA there is always are right to liquidation, but not so under RUPA
ii. Key, under UPA you always get a new partnership after dissolution, but RUPA allows the same partnership to stay
1. UPA dissolves the partnership, where as under RUPA the partnership is not dissolved, but a single partner
dissociates – therefore under RUPA the partnership may continue as a legal entity.
b. RUPA has a more limited definition of “wrongful”
3. Events Causing a Departure
a. Under UPA §31 & 32Events of Dissolution(6, but remembered as 5)
i. (1)By express Will, expulsion if in agreement, end of term in agreement
1. (a) Without violation of the agreement
2. (b)In contravention of the agreement
a. Difference b/ween a & b is (a) is not in violation of the agreement & (b) is in contravention of
agreement (this part really only applies to express will issue)
ii. (2)By Illegality of Business (became illegal to continue)
iii. (3)By Death of any partner
iv. (4)By Bankruptcy of a partner or the partnership
v. (5)Decree of the Court in §32
1. Partner unsound mind,
2. Partner incapable,
3. Partner guilty of conduct that prevents carrying on the p’ship

9
 4. Partner willfully or persistently commits breach of agreement & not reasonably practicable to continue
5. P’ship could only continue at a loss
6. Any other equitable reason.
b. Under RUPA §601Events of Dissociation (10, but remembered as 5)
i. (1)By Express will (when p’ship gets notice)
ii. (2)By the agreement (set out in it on date or certain event)
iii. (3)By Expulsion (3-5)
1. (a)Pursuant to Partnership agreement
2. (b)By unanimous vote of the other partners in some cases
3. (c)By Judicial Determination
a. Partner engaged in wrongful conduct that adversely & materially affected the partnership business,
b. Partner willfully or persistently committed a material breach of agreement or a duty owed to p’ship
c. Partner engaged in conduct relating to p’ship business that makes it not reasonably practical to continue
p’ship w/the partner.
iv. (4)By Bankruptcy of the Partner
v. (5)By Death, Incapability, or Termination of Partner(7-10)
1. Means death, guardian, judicial determination of not capable, termination of trust, estate, or BA.
4. Consequences
a. Under UPA §38(1) & §42
i. GenerallyOn dissolution, partnership continues until wound up, meaning partnership ends called terminated. Key is you
can liquidate or pay off & continue the business, but it is as a new partnership.
ii. §38(1)If non-wrongful dissolution, then any partner can dem & liquidation.
1. Outcome varies if wrongful because wrongful dissociating partner losses right to dem & liquidation.
iii. §42 say if partnership continues (although as a new partnership), then dissociating partners interest should be
bought out.
1. Occurs when a partner dies.
b. Under RUPA §603
i. On dissociation, the partnership continues under §701 unless the partnership is liquidated under §801
1. KEYevents under §801 are mandatory liquidation if occur.
2. Liquidation: reduce the partnership to cash, pay creditors, & distribute to partners the value of their
respective interest.
ii. §801Events of Dissolution/Liquidation/Winding up
1. (1) If p’ship at will, & partner makes express will to dissociate (thus by §601(1)) This is when it continues –
otherwise it is liquidated.
2. (2)In a p’ship for a term or particular undertaking
a. By express will of majority of remaining partners to wind up within 90 days after a wrongful
dissociation or a dissociation by death, bankruptcy, incapability, or termination of partner
b. By express will of all partners to wind up.
c. Upon expiration of term or finishing of undertaking.
3. (3)By event agreed upon causing winding up in agreement
4. (4)By event that makes it unlawful to continue P’ship business
5. (5)By Judicial determination at partner’s request that:
a. Economic purpose of P’ship is unreasonably frustrated.
b. Another partner’s conduct makes it not reasonably practical to carry on p’ship w/that partner
c. Not otherwise reasonably practicable to carry on the p’ship business in conformity w/the p’ship
agreement.
6. (6)By judicial determination at request of transferee of p’ship interest:
a. To wind up at end of T/PU, if it was a T/PU at time of transfer.
b. To wind up at anytime, if it was a at will partnership at time of transfer.
iii. §701Continuing the Partnership
1. Says if partnership is continued, the dissociating partner’s interest shall be purchased at the buyout price from
§701(b)
2. Notes on Buyout payment
a. Can offset damages from Wrongful dissociation §701(c)
b. If no agreement made on price after 120 days, p’ship must pay interest on amount §701(e)
c. If wrongful dissociating from P’ship for T/PU, then p’ship doesn’t have to pay until T/PU is done
§701(h)
5. Effect of Wrongfulness
a. Definitions of Wrongful
i. Under UPA §38(2) & §32(1)(c & d)
1. Problem is it uses “in contravention” & “wrongful” so not certain if the same, thus it now seems wrongful expands
the definition of “in contravention”
2. Wrongful means:
a. In contravention of agreement AND
b. §32(1)(c & d) meaning court ordered dissolution of a partner:
i. (c)conducts himself to affect prejudicially the carrying on of the business

10
 ii. (d)Willful/persistent breach of agreement; or conducts himself so that it is “not reasonably
practicable to carry on the business”
ii. Under RUPA §602
1. Dissociation is wrongful ONLY IF:
a. In breach of express provision of agreement (usually only a notice provision works here), OR
b. In a partnership for a Term/ParticularUndertaking:
i. By express will (if not within 90 days of exception)
ii. By Judicial Expulsion under §601(5)
iii. By Bankruptcy
iv. Termination of Non-human partner
2. Thus, there is basically no wrongful dissociation in an At-will partnership (except maybe a notice provision).
iii. Seems UPA is broader because there is more ways to be wrongful in an at-will p’ship
b. Consequences of Wrongful (roughly same)
i. Under UPA §38
1. Wrongful partner subject to damages for breach of agreement.
2. Wrongful partner may not continue the business or call for liquidation
3. Other partners still have choice
ii. Under RUPA §602(c) and
1. Wrongful dissociating Partner is liable for damages to P’ship & other partners §602(c)
2. Wrongful partner may not continue the business or call for liquidation §701(a) [§801]
3. Other partners still have choice
c. Generally
i. Note even wrongful dissoluter/dissociaters get their contribution to the partnership paid back
1. Cannot reduce their past pay unless they did their job wrong
ii. If you take the change of seeking judicial dissolution/dissociation, you run the risk of dissolution/dissociation yourself &
thus having tables turned on you.
6. Note for RUPA
a. Be careful in court when you ask for Dissociation by §601(5) because it is similar to §801(5) for liquidation & could accidentally
force liquidation when you just wanted to force person out by dissociation.
7. Fiduciary duties in Dissolution/Dissociation.
a. Taking Partnership Opportunities
i. Cannot dissolve a partnership to gain the benefit of the business for himself
1. Fiduciary duty to not take the good times without giving the opportunity to the other partner also.
2. It attaches when the prospective profits is on the Horizon (start to be seen)
a. Thus, to avoid breach of fiduciary duty for this once the future prospects increase you need to come
clean & let the other side know, which will make you have to pay more for buy out.
b. Expulsion §31(1)(d) / §601(3)
i. If p’ship agreement says any partner can be expelled, then any partner can be expelled for any business reason, such as to
preserve client relations, etc.
1. Key, best to add in there expelled for cause only.
ii. Only fiduciary duty owed in Expulsion is not to act in bad faith, which means you cannot expel a partner for your own gain.
c. Voluntary Withdrawal
i. Burden on withdrawing party to show no breach of fiduciary duty.
ii. Asking others if they will leave w/you is not a breach unless sneaky/malicious conduct gets involved. Logistical
arrangements including leasing building, preparing a list of client’s the expect to leave w/them, & obtaining financing is
allowed.
1. If client’s go w/you, you get to keep their business you can keep the money you make, provided you give the old
firm an agreed charged.
iii. Cannot go after clients until after you dissociate (Meehan v. Shaughnessy)
1. Key you have to give the clients the choice.
iv. Forfeiture of a capital account if someone leaves partnership (whether in K or not) is likely NEVER enforceable.

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 ETHICAL ISSUES

1. Ethical Issues in Representing a Partnership/Entity

a. You cannot represent multiple parties if there is a “concurrent conflict of interest (what is this)
i. The representation of one client is “directly adverse” to another client
1. These are legal interest as in fighting in court, not business interests in that who gets more money.
ii. There is a significant risk that representing one client will “materially limit” ability to represent your other client.
b. Even w/“concurrent conflict of interest,” can represent if:
i. Lawyer reasonably believes can give competent services
ii. Representation not prohibited by law
iii. Not against each other in same tribunal
iv. Each affected client gives informed consent in writing.
2. Other points
a. Remember, all partners have a right to know all partnership information, thus you cannot keep it from them.
b. Can come a future time will have to withdrawal counsel because cannot maintain confidences in suit by partners against partnership.
3. Note if you represent a BA, you represent the entity, not the partners individually

CORPS GENERALLY

INTRO
1. Three Constituent Groups
a. Shareholders: Owners w/limited power
i. Usually passive investors w/limited powers
ii. Powers (reactive mainly, & must be in group) (VOTE, SHARE, & SUE)
1. Elect Directors
2. May propose & amend bylaws (tough to do)
a. Rarely happens because it must be on agenda & directors decided agenda & officers tell them what to
put on it.
3. Vote on matters that are referred to them by Directors
a. Such as mergers, or anything that changes their shares
4. Can call special meeting, but tough to do
iii. Not powers
1. Cannot propose amendment to articles, can only approve changes.
2. Cannot do anything that is management that Directors should do
iv. Act by MAJORITY Rule
v. Act together at a meeting
b. Directors: Non-owners w/plenary powers
i. Have Plenary powers to run corp as a board on the whole
1. They run & they are the corp
ii. Act by MAJORITY Rule
1. No real power individually
iii. Include insiders & outsiders, owners & non-owners
iv. Powers
1. Appoint Officers
2. General/large management (policy decisions)
a. Proposing mergers, amendment to articles
b. Deciding Dividends
c. Amended Bylaws (default rule)
v. When board of directors act, they ARE the corp, not acting on behalf of the corp
vi. Directors act together at a meeting. DIRECTORS CANNOT ACT UNLESS THEY ACT TOGETHER AT A
MEETING. Individually directors can do nothing, there needs to be a properly called meeting. However, they can
act TOGETHER by all signing the same piece of paper (don’t have to have an official meeting).
c. Officers: agents of the corp
i. Agents of the Corp
ii. Powers & Duties as specified in the their agency relationship w/corp as principal
1. Day to Day management
iii. Can act as an individual.
d. KeyPerson can be more than one
e. Note -- board & shareholders must act on majority Rule.
2. Three Basic Documents
a. Articles of Incorp (also called certificate/charter)
i. Filed w/state, its adopted by the Incorporator
ii. Amended by proposal of Directors & approval of Shareholders (req.s action by both) §10.03
iii. Think of this as the “Constitution”

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 b. Bylaws
i. Includes
1. Basic rules for governance (how people can act)
2. Says who selects officers (normally BOD)
ii. Usually written by BOD
iii. Can be amended by Directors OR shareholders §10.20, unless the Articles reserve the power solely for Shareholders
iv. Think of this as the “statute” written by legislature
c. Resolutions & other Actions by the BOD
i. Done by BOD
ii. Odd stuff like pension plans
d. NoteChoice b/ween putting something in the Articles or Bylaws matter as to if they can be easily changed.
3. Hierarchy of Rules
a. Federal Law (but not much here)
b. State Law and/or Stock Exchange Standards
i. Main two (state then Stock exchanges)
c. Articles (articles control bylaws if the two conflict)
d. Bylaws/Resolutions

ORGANIZATION/FORMATION
1. Selection of State of Incorp
a. First try your state, but if not favorable
b. Second, Delaware (favorable law & case law)
2. Articles (MBCA §2.01 & §2.02); Del§102
a. Filed w/Secretary of State in order to Create the Corp
b. Req.ments that MUST be included §2.02(a):
i. Corporate Name
1. Must be in accordance w/§4.01
a. Include Inc, corp. etc.
b. Not already in use
c. Not misleading as to purpose
ii. Number of Shares authorized to Issue
iii. Street address of the corp’s initial registered office & agent at that office
1. Must be in state
iv. Name & address of each incorporator.
c. Items needed to be included to be Effective:
i. Removing Directors only for cause
ii. Types of Class of stock
iii. Limiting Liability of Directors
iv. Staggered Board
d. Items that CAN be Included:
i. Purpose of the Corp (otherwise deemed to by any lawful business)
ii. Defining powers of people (makes tougher to change)
iii. Name of Initial Directors
e. Can only be amended on Directors proposal & shareholder Approval.
3. Organizational Meeting under MBCA §2.05
a. Issue w/ Directors
i. If already named in Articles, they hold an organizational meeting
ii. If not already named, incorporators hold organizational meeting & elect Directors
iii. Then Directors carry on rest (but can be incorporator)
b. Directors Adopt Bylaws (§2.06) (includes officers)
i. Includes creation of Offices & people are appointed.
ii. Req.d to be had, but no req.d information to be in them.
1. Just managing information not in conflict w/Articles
iii. Trumped by Articles if conflict
iv. Can be amended by Directors or Shareholders
c. Then Sell Shares (§6.01) (creates Shareholders)
i. Stock is equity ownership, & the Board of Directors has the authority to authorize the sell of stock, but they must list the #
of shares authorized.
ii. Default rule is all shares have same rights (payment & voting)
iii. Shares are sold for consideration. However, owners of stock are not subject to liability from company’s creditors.
1. States that have “PAR VALUE” in state statutes, must give value for a share of stock. “Par Value” actually means
nothing. Del§153 req.s Corps in Par Value. Corp. set this amount in trivial amounts.
a. This PAR VALUE is what creditors can get at.
2. MBCA §6.21(c): whatever the directors decide is fair payment for the shares. The determined value is conclusive
so far as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued,
fully paid, & nonassessable.

13
 3. Shares can be issued for any consideration. Doesn’t have to be money, can be services, tangible goods, services to
be performed in the future.
iv. May have different classes, but must be set forth in Articles
1. Must be at least one class that has unlimited voting rights,
2. Must be at least one class that are residual claimants.
v. Types of Preferred Stock
1. In Dividends
a. Cumulative (get paid all past before common gets any) or
i. However preference accumulates before common share holders get something
1. EX: $5 a year dividend, but directors say no 3 years later, board owes $15 before
the common share holders get anything.
b. Participating. (?)
c. Dividends are discretionary at the board of directors.
2. In Liquidation
3. Convertibility
a. Can convert preferred into common at rate.
4. More Voting power
a. Certain directors only elected by them
5. Anything you want
vi. Allowed to authorize for about any consideration
vii. However, to be listed for public trade, must have one vote per share.

SELECTION OF DIRECTORS
1. Election of Directors
a. At least some directors must be elected every year
b. Types
i. Straight Voting
1. Each Spot is voted on Separately (each voting right gets one vote on each spot)
2. Thus, 51% of share can elect ALL Directors
ii. Cumulative Voting
1. Each Shareholder has one vote per share per position, but can be allocated in any fashion
a. Can put all votes on one person or divide them among people.
2. Thus, allows substantial ownership (but less than 51%) certain to elect at least some directors
3. Formulatells # of shares needed to elect one director (SEE HANDOUT)
a. N > S/(D+1) What you need to elect one director
i. N=Number of Shares Needed
ii. S=Number of Shares Voting (not just total outstanding)
iii. D=Number of Directors to be elected (at that meeting - if it is in the articles)
1. So if staggered board of 9 – it’d be 3. See problem 3-8 (pp180).
b. Pp155 problem 3-5
c. Thus, remember this is shares needed, not number of votes.
d. Note if tie, then no tied person gets in unless bylaws give a tie breaker
4. It is authorized by State statute.
c. Classified Shares
i. Can classify that a certain class of stock elects certain directors (Dual Class Voting Scheme)
1. ExClass A stock elects 4 directors, & Class B stock elects 5 directors.
ii. Restrictions
1. Class must be created in articles
a. Note to change to Give a Class more power than another, you must get approval of Majority of that class
so tough.
2. Stock within Each class must have same rights/powers/privileges. (MBCA §6.01(a))
a. §6.01(c)(1) can give “special” voting rights.
3. However, to be publicly traded must be one vote per share thus cannot have classes?
iii. S Corps are a corp that wanted to be treated like a partnership. The corporate income tax may be avoided, but only if the
corp has only one class of stock.
1. Used for Small Corps.
iv. In publicly traded corps, stock exchange rules prohibit DUAL-CLASS capitalization. (One share – one vote).
d. Classified/Staggered Board (MBCA §8.06)
i. Why have staggered Board
1. Adds stability to board (never all new directors). It provides “continuity.”
a. Incumbent re-election rate for directors is higher than for members of Congress.
2. BetterAnti Take over Device (Real reason there are staggered boards)
a. Prevents new majority of taking over control for at least 366 days.
i. If you newly own a majority of stock, you can only get a majority of board members for that
year, & you’d have to wait at least a year to control the entire board.
b. Limits the effect of cumulative voting.

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 c. \However Game EffectNew Majority can call special meeting & amend rule or remove directors
i. Can prevent by removal of directors only for cause & putting in articles to make harder to
change (since directors must propose)
ii. Process for Staggered Board (MBCA §8.06)
1. Can have 2 or 3 equal groups (thus 2 or 3 year terms)
2. Must be In Articles to be Effective
iii. Reduces the effect of cumulative voting
e. Req.ment of Meeting?
i. Yes, meeting is still req.d under MBCA §8.03
1. Thus, meeting is not satisfied by written consent, unless there is UNANIMOUS CONSENT.
a. An annual meeting serves several purposes other than just mere voting. It allows for
discussion/deliberation among shareholders.
ii. But in Delaware, no longer req.s an annual meeting.
1. Shareholders can act by written consent if a majority of shareholders sign the consent (because they constitute a
quorum). (Hochsett v. TSI)
2. KY rule req.s that 80% give written consent.
iii. Agenda is chosen by management.
f. Special Meetings
i. MBCA states that 10% of shareholders may hold a special meeting. It req.s a letter to the secretary & states we want to have
a special meeting for THIS PURPOSE. Must state the purpose of the special meeting.
2. Removal of Directors
a. Removal by Shareholders (MBCA §8.08)
i. Default Rule is removal w/or without cause
1. To make only for cause must be in Articles
ii. Statutory Protections from Removal
1. Staggered Boards in Delaware ONLY
a. Can only be removed for cause (DGCL §141(k))
b. No restriction in MBCA
2. Directors elected by Cumulative Voting
a. Cannot be removed if number of votes sufficient to elect him under cumulative voting vote against
removal
3. Directors elected by a “Group”
a. If elected by a group/class, only those in the group/class can vote on removal
iii. Alberstein v. Wetheimer
1. Alberstein initially had voting share to remove all other directors. But the other two directors called a meeting &
at this meeting they voted Alberstein out. He knew there was a meeting but was unaware it was for his removal.
Court ruled that Alberstein needed to be given notice so that he could prepare his defense.
a. You can’t take his rights directly & you can’t take them indirectly.
b. Removal by Judicial Proceeding (MBCA §8.09, not in KY)
i. Court may remove direct on finding that Director
1. One of these Three,
a. Engaged in fraudulent conduct in respect to Corp or shareholders, OR
b. Grossly abused position, OR
c. Intentionally inflicted harm on Corp.
2. & removal is in Best interest of corp.
c. Doesn’t seem other directors can remove a director unless provided in the bylaws/Articles

ISSUING SECURITIES
1. Registration under the Securities Act of 1933
a. GREvery offer or sale of a security must be registered w/the SEC (§5)
i. If not, then anyone who bought them has right to refund
b. Problemregistration is complicated, potential liability (§11) & expensive so want to avoid it.
i. You can’t afford registering a security unless you are trying to raise a minimum of $10,000,000.
c. Sale of an unregistered security gives each purchaser the right to rescind the sale up to three years afterwards (§12(a)(1))
d. Willful violations are a criminal offense (§24)
e. Avoid it by:
i. Selling something that is not a “security”, OR
ii. Find a Exemption (§3 & §4)
f. Key purpose of act is disclosure
2. Definition of “Security”
a. Statutory List in §2(a)(1) of Securities Act
i. Any note, stock, . . . bond, debenture, evidence of indebtedness, certificate of interest or participation,. . . , investment
contract, . . .”
1. Investment Contract: “Catch all Phrase” – applies to a lot of things. If you can prove it was security, then you can
get your money back if it was never registered. (§12(a)(1))
b. Present Howey test to determine if Investment K(need all three)

15
 i. Investment of Money,
ii. In a common Enterprise, &
iii. W/profits (Predominately) from efforts of others.
c. Exan investment scheme promising a fixed rate of return can be an investment K& thus a security. (SEC v. Edwards)
3. Exemptions (under Securities Act of 1933)
a. Private offering §4(2) & Rule 506
i. Statute“Transactions by an Issuer not involving any Public Offering”
ii. Common Law
1. Public v. Private distinction depends on the amount of information the buyer has, not the number of buyers.
a. Thus, depends on facts of every case just to make certain knows enough.
b. Not the best exemption to go for.
iii. BetterRule 506
1. Req.ments for Exemption
a. No Dollar Limit
b. Less than 35 non-accredited investors
c. Addition Information Statement is req.d by Rule 502(b)
d. Additional Qualifications by Purchaser by Rule 506(b)(2)(ii)
i. Req.s that person must know what he is doing & must be able to underst& the information.
2. Thus, allows a large amount in, but have the burden of the additional qualifications.
3. Key You cannot have 1 person without the information
b. Intrastate Offering §3(a)(11) & Rule 147
i. Statute“Offered & sold only to persons resident within a single state, where the issuer is a resident & doing business
within such state”
1. Rule 147 deals w/where everyone is resident
2. Be careful w/integration
3. Special ProblemAny resale of security within 9 months must not ruin the intrastate aspect. (risk of resale)
c. Limited Offering §3(b)
i. Really by SEC rule, so long as the amount of the offering is less than $5,000,000
ii. Regulation D (Rules 504 & 505)
1. Rule 504
a. Req.ments for Exemption
i. offering is less than 1 Million
b. Best Rule & other stuff irrelevant.
i. No limit on purchasers, information statement or qualification of purchasers.
ii. Seems you can even generally solicit some
2. Rule 505
a. Req.ments for Exemption
i. Less than 5 million
ii. No more than 35 non-accredited Investors
iii. Addition Information Statement is req.d by Rule 502(b)
iv. No additional qualification for purchaser.
b. Slightly better than Rule 506 because no additional qualification for purchaser.
iii. Regulation A (beyond our class) (req.s substantial disclosure & without many exemptions)
d. Other Notes/Issues
i. On Counting Purchasers (Rule 501(e))
1. Do not count Accredited Investors (includes:banks any person who on of such factors as financial sophistication,
net worth, knowledge, & experience in financial matters, or amount of assets under management qualifies as an
accredited investor under rules & regulations which the commission shall prescribe… )
a. Institutional Investors (i.e. banks)
b. Very Wealth People
ii. What is the additional information req.ment? Rule 502(b)
1. Means you have to send them Non-financial & financial information for them to look over.
iii. What does Addition Purchaser Qualifications Mean Rule 506(b)(2)(ii)
1. Req.s that each non-accredited investor:
a. Have such knowledge to know what he is doing & must be able to underst& the information/evaluate
risks
iv. Aggregation
1. Only applies to Rule 504 & 505 since the only ones w/dollar limits
2. Must include in amount all offers in the last 12 months that were issued under:
a. Rules 504,
b. Rule 505,
c. Under Regulation A, AND/OR
d. In violation of the Statute
3. DO NOT include offers/amount under intrastate exemption.
4. Note, you can have exactly the amount, cannot exceed.
v. Integration (in note of Rule 502(a))

16
 1.
Determines if “separate offerings” will be considered separate or will be forced to be considered as one.
a. Keyif you consider one, it could destroy the exemption (such as one person out of state)
2. First6 Month Safe Harbor
a. If more than 6 months apart, will not be integrated
3. Integration Factors
a. Same plan of financing
b. Same Class of Securities
c. At or about the same time
d. Same type of consideration received
e. Same general purpose.
i. The more “yes”s you get the more likely to integrate, no exact rule to get.
e. KEYThese Rules explain ways to comply w/Statutory Exemption, meaning they are just safe harbors, so you can satisfy
Exemptions otherwise.
4. Note On SecuritiesThese ends the Federal Inquiry, but you could still have State law issues (Blue Sky laws)

Regulation D
RULE Stat Dollar # of Informatio Additional
Basis Limit Purchase n Qualifications
rs Statement of Purchasers
Req.d? Req.d?
504 § $1 M No Limit No Limit No Limit
3(b)
505 § $5 M No more Yes No
3(b) than 35 (502(b)) if
(non- any non-
accredited accredited
Investors) investors
506 §4(2) None No more Yes Yes (506(b)(2)
than 35 (502(b)) (ii))—
(non- sophisticated
accredited investor
Investors

DIRECTORS DUTIES
1. Director’s duties are NOT agency standards, tort standards, fiduciary standards – because when good business decisions go bad then they’d
resemble negligence. We don’t want directors to be subject to this liability.
a. Many Court call director’s “fiduciary duty” but they are NOT like the fiduciary duties of a trustee (a director is similar to a trustee).
2. Intro/Generally
a. Two Types of Lawsuits
i. Derivative Litigation
1. Suit in Corp’s Name/on its behalf
a. Can be by directors
b. More likely by Minority shareholder
2. Any damages rewarded must go to Corp., not shareholder
3. NoteShareholder can only bring if he has already demanded the corp to do it first, & they failed
a. If the corp refused to sue its directors, then this a separate kind of business judgment than can also have
consequences.
ii. Direct Litigations
1. By a Shareholder for a Direct wrong
a. When the director owes the shareholder a duty
2. Damage paid directly to shareholder
b. Basics of MBCA §§8.30 & 8.31
i. Standard of ConductMBCA §8.30 (IRRELEVANT)
1. Must act in Good Faith
2. Must act w/reasonable belief the action is in the Corp’s best interests.
ii. Standards of LiabilityMBCA §8.31Business Judgment Rule
1. KeyPresumption that the action of a director is fine (in accordance w/duties of care, loyalty & good faith).
a. THUS, BJR is a rebuttable Presumption for Director
i. Directors are better at making business decision that Judge
2. MBCA §8.31(a)(2)Burden on P to show Director was NOT acting w/ (rebut by:) Sets forth the Standards of
Liability – not yet adopted by many states. Very similar to Business Judgment Rule
a. (i)Good Faith
b. (ii)(A)Reasonable Belief in Corporate Best Interest.
c. (ii)(B)Reasonably Informed
d. (iii),(v)Not self-interested

17
 3. C/L Business Judgment Rule says (Delaware Supreme Court in Aronson):
a. Good Faith
b. Honest belief in Corp’s best interests
c. Informed Basis
d. Without self-dealing or personal interest (Gries) ***NOT SURE IF ACTUALLY PART OF BUSINESS
JUDGMENT RULE*** Regardless, directors still have to show it was FAIR.
i. If the presumption is overcome, was the decision being challenged WHOLLY FAIR to the
Corp, now the defendant has to prove what it did was FAIR.
4. Noteall of these seem pretty easy to prove, especially best interest test (just have to mention long term “planning
for best interest”)
c. Why we have BJR?
i. Judges are not business experts so don’t want to make business decisions.
ii. Courts don’t want to make long term business decisions & will not weight return now over return in future
d. Statutes can give Directors the right to “MAY” consider other interests such as community, supplies, etc, but not allowed under
MBCA
e. Generally—Fiduciary Duties
i. Duty of loyalty is to prevent self interest
ii. Duty of care is in managing/running business
1. Individual transactins
2. General Oversight
f. CASES
i. Shlensky v. Wrigley
1. Facts: Plaintiff contends that Cub’s should install lights, so that Cub’s could play baseball at night.
2. Held: Not a breach of fiduciary duty. The response which courts make to such applications is that is it not their
function to resolve for corps questions of policy & business management. The directors are chosen to pass upon
such questions & their judgment unless shown to be tainted w/fraud is accepted as final.
ii. Dodge v. Ford Motor
1. Facts: Minority shareholders assert that Ford continue to pay dividends to stockholders & not cut prices.
2. Held: Court ordered payment of dividend. A business corp is organized & carried on primarily for the profit of
the stockholders. The power of the directors are to be employed for that end. The discretion of directors is to be
exercised in the choice of means to attain that end & does not extend to a change in the end itself, to the reduction
of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.
a. Court points out that directors can have goals that at the short term appear detrimental but in the long
run these can be very good business decisions – therefore much deference is given to the board in
making these decisions.
3. General Process
a. Seems BJR applies & Presumed Director is Fine
b. However, rebut presumption by, or Show lack of good faith, informed judgment or not in best interests.
i. Then shifts to D to prove entire fairness
c. Keyseems Duty of care is almost irrelevant now since Director limited from liability from it if in Articles
d. Thus,
4. Duty of Loyalty
a. Intro
i. Key to duty of loyalty is serving the interests of the Corp over your own interests.
ii. Plaintiff must allege a taking of a corporate opportunity or a interested director transaction (No BJR application)
b. Corporate Opportunities
i. GenerallyYou cannot take a Corporate Opportunity
ii. Process
1. Is it a corporate opportunity
2. Can I take it in rare cases
iii. ALI’s Principle of Corporate Governance Test §5.05
1. Applies to Directors & Senior Executives/Officers
a. Note part a rarely matters since usually after the fact.
2. ALI Test §5.05 (pp252)
a. (a)—Cannot take a Corporate Opportunity Unless:
i. Discloses it & conflict to Corp. AND
ii. It is rejected.
b. (b)—Definition of Corporate Opportunity
i. Any opportunity in which Director or Senior Executive became aware of by:
1. Learned about it on the job, or the offer was expected/intended to be offered o the
corp. OR
2. Using Corp. Information/prop in getting it & “of interest” to corp (objective test).
ii. Any opportunity of which a Senior Executive becomes aware of in any fashion & is “Closely
Related” to business of Corp. (Only applies to senior executives NOT directors)
c. Notes
i. “Of Interest” is broader than “Closely Related”

18
 ii. Req. Strict Disclosure
iii. Burden of Proof on Party Challenging the taking of corporate opportunity
3. CASE: Northeast Harbor Golf Club v. Harris (S.Ct. of Maine)
a. L& was suppose to be referred to the corp, but defendant bought it instead. Defendant received the
offer, because defendant was president of the club. The second piece of prop she found out through a
friend. Regardless, it was a corporate opportunity & under §5.05(a) she must disclose the opportunity to
the Country Club – she did not do this, therefore, defendant breached fiduciary duty of loyalty.
iv. Delaware Test (Guth v. Loft Test: Pepsi Cola v. Coke case)
1. Balancing Test of Eight Factors all of which must be considered
a. The more Yes you get the stronger that side.
2. MAY NOT Take Corporate Opportunity If:
a. Financial Ability (corp has ability)
b. Line of Business (of corp)
c. Interest/Expectancy (of corp)
d. Direct Conflict (puts you in direct conflict from corp)
3. MAY Take Corporate Opportunity If:
a. Personal Capacity (came in your personal capacity)
b. Not Essential (to corp.)
c. No Interest/Expectancy (of corp)
d. No use of Corporate Resourses (to get it)
4. CASE: Broz v. CIS
a. Fact: Broz buys a cellular phone company, & is sued by CIS which is trying to buyout a company he is
on the board of.
b. Held: Court applied the Guth test.
i. The fact that the another company had planned to acquire the company in which Broz is a
board member, & that company wanted CIS, it is immaterial. Broz was not under a duty to
consider interests of the company planning to acquire his company.
v. MBCA §8.70
1. Mix of ALI & Guth Test.
2. Director may take a business opportunity if it is referred to the corp. & is rejected
c. “Interested Director” Transactions
i. Intro
1. Original they were wrong no matter what, but now some of these transaction are allowed because all not wrong.
2. No business judgment rule here since there is some self dealing (on both sides)
ii. Issue Spot
1. Issue when you Find a Director on both sides of the deal/table
iii. Common Law Rules
1. Black Letter LawInterested Director Transactions are void unless “Fair & Just” (In Delaware Intrinsic Fairness
Test)
a. Thus, should fully disclose, but will not happen/practicable, AND
b. Thus, comes down to “fair & just”
i. Ask if parents gets something out of the detriment of the subsidiary. (Sinclair Oil v. Levien)
2. Process under C/L
a. P has burden to prove “Interested Director” on both sides.
i. Thus, removes business judgment presumption & now void/voidable.
b. Burden on D to prove Fairness Test. (Fair & Just)
3. Globe Woolen Co. v. Utica Gas & Electric Co.
a. Held: A trustee may not cling to Ks thus won, unless their terms are fair & just, because there can be
unfair bargaining.
iv. Statutes
1. Includes
a. Old MBCA §8.31 (KY Law)
b. DGCL. §144
i. Includes transactions w/officers too.
c. MBCA Subchapter F §§8.60-8.63
2. Statutes say “Interested director Transaction is Not void/voidable for having an interested director if:
a. Transaction is approved by disinterested (except Delaware) directors
b. Transaction is approved by the Shareholders, OR
c. Transaction if Fair to Corp.
i. However, C/L says you always have to have the 3rd one, thus statutes only effect burdens.
ii. EX: If a director is on both sides, then plaintiff can invoke common law & now directors must
prove that it was fair. However, it then shifts burden to proof to plaintiffs, because it was
directors that made judgment, therefore Court applies Business Judgment rule.
3. Key Process Overall
a. P must be a prima facie case of interested Director transaction (on both sides)
i. Thus, Burden shifts to D to prove Fairness

19
 b. But, if D proves transaction approved by disinterested directors or by shareholders, then shifts burden
back to P to Unfairness.
i. Thus, Seems P now has to prove unfairness by gift or waste (need more help/why not just
fairness, or are these two just part of fair dealings)
ii. Seems to force them to prove Lack of fairness (Lack of Fair Dealing or a Lack of Fair Price)
4. Important notes
a. For Approval by Disinterested Directors or Shareholders to work, they must be Fully Informed
i. Burden on party relying on vote to prove informed.
ii. Req.s complete & all relevant information disclosure (on both sides etc)
b. Whoever gets stuck w/Burden usually Loses
c. Interested Director can be in the form of business/financial or familial relationship which is reasonably
expected to affect his judgment. (MBCA, but Delaware is different, tougher to be interested)
5. How Statutes Vary
a. Who is Covered?
i. Delaware includes Transactions w/Officers,
ii. Others do not.
b. Which Shareholder may Vote?
i. Most (including MBCA) says Interested Shareholders do not vote
ii. Delaware has “cleansing” saying even interested shareholders get to vote.
v. Cash-Out Mergers (subset of Interested Directors Transaction)
1. Overview on Merger
a. Allows two Companies to converge (A & B), & result is A, B, or C (new).
b. MBCA Chapter 11: Any two corps so they chose may merge. A plan then is drafted to constitute what
happens.
c. Process
i. Reach a Plan of Merger,
ii. Approved by Both Set of Directors
iii. Approved by Both Set of Shareholders,
iv. Then Plan takes effect
d. Dissenters can dem& to be paid in cash the “fair value” of their share.
i. Conflict seemed to be that parties forced out in Merger seemed only to have an Appraisal
Remedy Only (cash-value).
e. NOW, CLASS ACTIONS CAN CHALLENGE FOR “FAIRNESS” & “BUSINESS PURPOSE”
f. History
i. Used to be governed by BJR, but now just entire fairness
2. Business Purpose Test (Only good in Massachusetts)
a. FAIRNESS REQ.MENT
i. Burden initially on directors
ii. Shifts to plaintiff if transaction approved by directors or shareholders.
b. FirstReq.s a Legitimate Business Purpose for ousting the minority Shareholder
i. Key is it needs to be for business reasons, not personal reasons
1. Such as wanting to all ownership
ii. Not good enough that business runs more efficiently w/no minority shareholder (Coggins)
c. Secondreq.s transaction to be fair in the circumstances also
d. KeyBurden on Majority for Both to LGP & Fair
i. However, it is first the burden on the plaintiff attacking the merger to demonstrate some basis
for invoking the fairness objection
e. Doesn’t Work too well because not really clear & can be manipulated.
f. Coggins v. New Engl& Patriots Football Club, Inc.
i. The duty of a corporate director must be to further the legitimate goals of the corp. Here there
was NO legitimate purpose, rather, defendants purpose was personal so that he could obtain a
loan & pay it back without having to pay dividends. Defendant couldn’t prove a valid
business purpose.
3. “Entire Fairness” Standard (Weinberger) : DELAWARE TWO PART TEST (I)FAIR DEALING &
(II)FAIR PRICE
a. Weinberger v. UOP, Inc.
i. Facts: Signal buys 51% of UOP. Signal places it employees on the board. The other 49% is
owned by minority stock holders. Signal later wants to buy the 49% minority shareholder
interest through a merger. Therefore, Signal wants to merge UOP & Signal. Signal can do
this buy forming acquisition subsidiary of Signal (really small short lived company whose
only purpose is for merger) & that will merge w/UOP & form a new corp - likely UOP will be
the surviving name of merged company because nothing has really changed. Signal’s
acquisition sub paid UOP $21 a share which enabled Signal to own 100% of UOP. Minority
shareholders vote & agree on merger. Now, minority sues claiming $21 was too low.
ii. Held: UOP never received a report by a UOP director (also employee of Signal) about a $24
fair value purchase price. However, Lehman issued a $21 fairness opinion which occurred

20
 only over 4 days & had executives on UOP’s board. When directors are on both sides of a
transaction, they are req.d to demonstrate their utmost good faith & scrupulous inherent
fairness of bargaining. So, by not giving the report, this was in an unfair dealing.
b. Notes
i.Everyone Else Uses This
ii.Moves away from Business Judgment Rule because there is interested directors here.
iii.Actual Case said approval by disinterested directors & shareholders was no good since not
fully informed (as to top price of $24 it would pay)
c. What is Weinberger/Entire Fairness
i. Fair Dealing & Fair Price = ENTIRE FAIRNESS
1. Must consider both & weigh both
ii. How do you do Fair Dealing (3 from case)
1. KeyNo Self Dealing/On Both Sides
a. Need to be truthful also
2. Def “fraud, misrepresentation, self dealing, deliberate waste of assets, or
gross or palable overreaching”
3. Remove the Two-siders that are on both boards for those discussions (no
involvement on either end)
4. Two-siders could actual resign from one board before starting
5. Just only deal w/the independent directors of the other board (subsidiary board in
case) (thus interested ones only get involved w/the parent, & sit on the subsidiary)
iii. Factors
1. What was the Timing of the Transaction
2. How was it initiated
3. How was it structured
4. How was it negotiated
5. How was it disclosed to directors
6. How was approval obtained
7. Disinterested Parties
8. Did they make a reasonable investigation
9. Was there waste
iv. How do you do Fair Price
1. Fair Price is whatever the approved method of valuation is. It is more liberalized.
a. Did they get highest/max value
2. Just a “battle of the experts” & does not req. any misconduct on the director’s
part.
3. Remedy: You can bring in an appraisal proceeding. You only get $$$, you
can’t rescind the merger.
4. Remedy Issue For Wrongful Merger
a. Generally Now
i. If you only problem is “fair price,” you use the statutory appraisal proceeding (difference in
stock price)
ii. If you are concerned w/“fair Dealing,” court decides whatever remedy is equitable.
iii. NoteYou don’t have to choose up front, thus can bring both,
1. however, you can only recover on one
b. Coggins Case
i. Normally get Rescission (Coggins)
ii. If too late, can get Rescissionary Damages
1. This is value of stock today, not value on date of merger, which is appraisal value.
vi. KEYSeems proving Weinberger Fairness Removes Taint of Interested Director Transaction.
vii. Note Seems that anytime Fairness is mentioned now it should be Weinberger Fairness. Is this Right?
5. Duty of Care
a. BasicallyOwe a duty to exercise reasonable care in performing their duties w/respect to the corp’s affairs. Directors must display
duty of care in making decisions.
b. Intro
i. Generally, Duty of Care is Protected by BJR, so tough to find Directors Liable.
ii. Thus, P’s prima facie case is rebutting the BJR presumption by showing lack of good faith, lack of informed judgment, lack
of best interests of corp
c. General Process
i. Still Presumption of Directors Acted Fine (BJR)
ii. If P proves requisite failure of care, shifts burden to D to prove entire fairness.
d. In Making Decisions
i. Generally it is duty to act in an informed business judgment (BJR)
ii. Business Judgment Rule Applies(Van Gorkom/ Common Law; Delaware Ct.)
1. Recap BJR Means
a. Good Faith

21
 b. Honest belief in Corp’s best interests
c. Informed Basis (Gross Negligence Standard)
i. Needs to be fully informed.
2. Standard of Care: GROSS NEGLIGENCE.
3. Thus, we presume fine unless prove Bad faith, not in best interest of Corp, or not informed.
4. How to make Certain Fully Informed?
a. Make Expert explain reasoning for opinion. (question him)
b. Make Board go over actual document
c. Get independent Evaluation of what a Fair Price is (“Fairness Opinion”)
d. Not enough to rely on Background Education of Directors
5. Problemsometimes you will be sued either way so leave paper trail.
6. Case: Smith v. Van Gorkom
a. Facts: Plaintiff, minority shareholders, sue because shareholder get less than they thought they deserved
in a corporate buyout. Pritzker decided to buyout Trans Union. He agreed to buy 1,000,000 shares of
Trans Union at its current stock price & have an option to get complete control of the company, by
buying stocks at a set price.
b. Held: Minority shareholders won. The shareholders vote was not enforceable because the board failed
to turn over information & therefore the shareholders were not fully informed.
i. Additionally, the directors themselves were not fully informed.
ii. An outside fairness opinion is not necessary, but the Court should have still made their own
opinion.
iii. Statutes (Del. §102(b)(7) & MBCA §2.02(b)(4))
1. All Statutes eliminate/limit the personal liability of Directors to Corp or Stockholders for Money damages or
breach of fiduciary duties.
a. KeyYou must opt in by putting in Articles
b. Below is each statute & Action which Liability CANNOT BE LIMITED/ELIMINATED
c. NoteYou can still bring injunctive action, but rarely occurs.
2. Key Process
a. Look to see if Violation of Fiduciary Duty.
b. Then look for statutory protection (limited liability allowed in Articles
c. Check exemptions to make certain doesn’t apply.
3. Del. §102(b)(7)
a. Breach of Duty of Loyalty
b. Acts not in Good faith, intentional misconduct, or knowing violation of law,
c. “Improper Personal Benefit”
d. Unlawful Distribution
4. MBCA §2.02(b)(4)
a. No provisions about duty of loyalty (thus can limit/eliminate)
b. Intentional infliction of harm on Corp or Shareholders, or Intentional Violation of Law
c. Financial Benefit to which he/she is not entitled
d. Unlawful Distribution
5. KRS §271B.2-020(2)(d)
a. Personal Financial Interest in conflict w/Corp/shareholders (like no self dealing)
b. Acts not in good faith, intentional misconduct, or knowing violation of law,
c. “Improper Personal Benefit”
d. Unlawful Distribution
6. NoteDirectors are allowed to rely on Experts or high employees under MBCA §8.30(f) & Del §141(e)
e. In General Oversight/Duty of Attention
i. OVERALL: Regardless of state statute, the directors cannot act in bad faith.
ii. Generally it is duty to know what is going on.
iii. Breached by a “Sustained or Systematic Failure” (Caremark)
1. Thus, problem here is Director made no decision at all.
2. What do you need to Prevent this Finding (FACTORS)
a. Must be some thing to make/req. Director action.
b. Must then Take some action
c. Must follow up to some extent to make sure working/complying
d. Need Some Independent Auditor (helps)
3. KeyDon’t have to spy on them, but do have to check on management.
iv. There has to be BAD FAITH.
v. Now also have Compliance w/SarsBanes- Oxyley now to fix this problem after Enron, but it is overkill & a waste of
resources
1. Req.ments of SBO
a. Must have an audit Committee (committee of board) made of all independent members,
i. At least one must be a financial expert (rules define what an expert is),
b. Committee hires the Auditors that must make certain reports.
2. Thus, if you comply w/SBO, hard to breach duty of care in general oversight/duty of attention.

22
6. Good Faith
a. Possibly a Separate Req.ment from Duty of Care (after Eisner Case)(from Delaware)
i. Might have separate req.ment to get around Statutes limiting liability for due care
1. Del. §102(b)(7) says you cannot limit/eliminate act in good faith.
ii. Not as Relevant in MBCA, because duty of good faith is not exempt, & thus if fails just like duty of care if directors have
opted-in to protection
iii. Thus, this extra req.ment only helpful in Delaware.
b. Components of Bad Faith:
i. Motive other than advancing the corp’s interests
ii. Violation of positive law,
iii. Intentional Failure to act “conscious disregard” for duty
c. Brehm v Eisner
i. Facts: Stockholders sue Disney over the hiring/firing of Ovitz. (i)Ovitz was hired & his Kgave him many benefits for
termination without cause; (ii)New Board should have not paid the entire termination without cause because there was
cause.
ii. Held: The Old Board exercised no business judgment, they made no decision, they basically rubberstamped the hiring
without expert opinion, a lengthy interview ect. The New Board also failed to act, they didn’t look to implications of a no-
fault termination & they never questioned this no-fault termination. Overall, both boards didn’t exercise a business
judgment at all. NO BUSINESS JUDGMENT AT ALL IS NOT A LACK OF GOOD FAITH. Lack of business
judgment is gross negligence. A LACK OF GOOD FAITH IS NOT ENOUGH TO OVERTURN THE BUSINESS
JUDGMENT, BUT YOU MUST PROVE THEY ACTUALLY ACTED IN BAD FAITH.
1. There was NO TIME ISSUE which differs this from VanGorkon.
7. Improved Business Judgment Rule
a. In good faither/honest belief in the corps best interest.
i. Intential Conduct
ii. “Conscious Disregard” of duty
iii. BUT NOT “Gross Negligence”
b. Act on a reasonably informed basis (due care)
c. Not in a conflicting-interest transaction.
8. Indemnification (& Insurance)
a. Intro
i. Why need Separate Law
1. Agency law doesn’t work since Directors are not agents they are the Corp & they want to be paid back from
lawsuit defenses also.
ii. Why Insurance Included
1. Because insurance policy (Director & Officer Liability Policy) only pays if you are legally supposed to indemnify.
iii. Issue Spotting
1. Easy to see because it will be a follow up question & Someone (Director) will be wanting to be paid back
iv. General Elements
1. Is it Req.dif Yes stop & do it,
2. Is it ProhibitedIf yes stop & don’t do it.
3. Is it PermittedIf yes move on, if no don’t
4. Who Decidesfigure out.
v. Note Directors can be indemnified to same extent in MBCA, & also have agency law.
b. When is it Req.d (MBCA §8.52, Del. §145(c))
i. If “wholly successful on the merits or otherwise” MBCA
ii. If “successful on the merits or otherwise” Del.
iii. What is Wholly Successful v. Successful
1. Courts are split if a settlement is successful on the merits?
2. “wholly” under MBCA seems to req. a finding of nonliability so better claim that settlement would be NO.
a. However, Del. Seems it still easily be.
3. Acquittal of a criminal charge is successful.
c. When it is Prohibited (MBCA §8.51(d) , Del. §145(b))
i. Derivative suit i.e corp suing the board, liability (but permits legal expenses)or settlement (judgment against you for
harming corp)
1. But you are still permitted for expenses.
ii. Judgment is given in favor of Corp against Director
1. But MBCA adds “for financial benefit to which he is not entitled”
d. When is it Permitted (MBCA §8.51(a)(1) , Del. §145(a)
i. General Rule (same sections) (GenerallyBJR less info req.ment of being fully informed)
1. Acted in Good faith, AND
2. Acted in (or not opposed to) the corp’s best Interests AND
3. No cause to believe conduct was unlawful (for criminal Suits)
4. Noteit does not req. you to be fully informed.
ii. However, can Give Broader indemnity (mandatory or permitted) by saying so in Articles (w/only limited exception in
MBCA §2.20(b)(5))

23
 1. MBCA §8.51(a)(2)
2. Del. §145(f), larger unknown limits, can be in bylaws, agreements, anything.
a. However, in Delaware “good faith” still req.d. (Owens Corning).
3. Noteif you say in Articles that you will give indemnity to the broadest extent allowed by law, then must
indemnify unless prohibited.
e. Who Decides? (all provisions tell how also)
i. Corp (2 Step Process)
1. Determination (MBCA §8.55(a-b), Del. §145(d))
a. Means Should X be Indemnified?
b. Cannot be predetermined because determines on facts of the case.
2. Authorization (MBCA §8.55(c))
a. Means Do we write the check?
b. This is Business Judgment Decision
c. Can Preauthorize (MBCA §8.58(a), Del. §145(f))
i. Meaning you put it in the articles/ bylaws/agreement & once you determine to indemnify then
you must pay (allowed by Delaware Act but not Model).
ii. Courts (MBCA §8.54, Del. §145(b)
1. Director can petition court to make Corp pay indemnification or advance of expenses.
2. Not, can even order it where expressly prohibited.
a. Seems MBCA is a little broader authority than Del.

24
 CLOSELY HELD CORPS

INTRO
1. Closely held Corps are different because the shareholders are normally in control & there is no real market to sell the shares.
a. In a public corp: majority rules & directors have supremacy. There is separation from ownership & control. There is a perpetual
life for the business & a market for shares. Additionally, there can be a discharge of officers & directors at will.
b. In a closed corp: Traditionally, there is a consensus decisionmaking, combined ownership & control, need for exit/lack of market
for shares, expectation of permanent employment.

SHAREHOLDER AGREEMENTS
1. Intro
a. Shareholder agreements attempt to alter the Corporate norms to make/allow closely held corps to work such as limiting the power
of the Directors or limiting how Directors are elected
b. Usually happens in two Areas
i. Controlling Director Action
ii. Controlling Director Election
2. Regarding Director Action
a. Under Common Law
i. McQuade Case said you couldn’t alter the way Directors run the business.
ii. BUT Clark v. Dodge said Shareholder Agreements are Permitted if: (basically No Harm no Foul)
1. Unanimous Agreement of the Shareholders
2. It is only a “slight invasion” of Directors’ powers
3. No other entity is harmed (i.e. a creditor)
b. Under Statutes
i. Intro
1. Statutes clearly gave power to do change these norms
2. Some States even have separate closely held corp laws
ii. Types
1. Said you can modify the corporate norms by putting in the Articles
a. Del. §141(a)
b. Old MBCA §8.01 (KY), cuts off at 50 shareholders.
2. Have Special Closely Held Rules to Follow
3. MBCA §7.32 (BEST)
a. Can modify anything, even if against Corporate norms as long as not contrary to Public Policy.
i. Can eliminate directors, establish who will run the corp, govern or authorize the making
of distribution…
b. Req.ments Though:
i. Written
ii. Signed by All
iii. Evaporates upon becoming a public corp (sold on exchange)
iv. In articles or bylaws, or shareholder agreement & All Know.
iii. EffectZion v. Kurtz
1. Statutes are JUST SAFE HARBORS
a. If you met them, you are fine
b. If you don’t, can still be OK by Common Law above
c. Notes
i. Be Careful how amended (in bylaws only majority, in S/A then unanimous
ii. Does there have to be a Unanimous Decision to create a Shareholder Agreement
1. Statutes/Safe Harbor Rules say yes
2. Common law says it doesn’t have to be, but it is only enforceable against the people that have signed it.
a. Mainly an issue of new shareholders coming in after.
d. Bylaws v. Shareholder Agreement
i. Bylaws
1. Need majority vote to amend.
2. They are adopted by directors (or shareholders)
ii. Shareholder Agreement
1. Need Unanimous Consent to amend.
2. They are adopted by all parties to the agreement.
iii. Blount v. Taft
1. Facts: An executive committee has been hired to approve hiring decisions under the bylaws. Now, one of
the parties disagrees to the bylaws; however, to change bylaws it needs majority vote by directors.
a. Argued it was a shareholders agreement by not an amendment to the bylaws, therefore requiring
unanimous consent.
3. Regarding Director Election
a. Intro
i. Dealing w/ways to vote/elect other than single vote at meeting.

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 ii. NoteVoting Trusts & Voting Agreements matter a lot because it is a way to bind parties without having all
shareholders having to agree,
1. A & B get together to make certain they have power over C.
b. Proxies MBCA §7.22 / Del. §212
i. Intro
1. A proxy is a “written authorization signed by a shareholder giving another person or persons power to vote
w/respect to the shares of such shareholder.”
a. Like an agent, but not
ii. Default Rule is you can Vote by Proxy (can remove if wish)
iii. Req.ments
1. Must state who can vote
2. Must be signed by person giving right
iv. Limitations
1. You can give it away, but you cannot sell proxies
v. Duration
1. Usually Less than 1 Year
a. MBCA less than 11 months
b. Stock Exchange req.s only good for 1 year
vi. Revocability
1. Generally Revocable
a. Thus Revocable at Will
b. If you give two, then later one prevails
2. When Irrevocable
a. “If coupled w/an Interest”
b. MBCA §7.22(d) gives lists of good enough interests:
i. Pledge (example you borrowed money on stock & bank wanted proxy to take it so they
can vote & you cannot revoke)
ii. Person purchased it,
iii. Creditor of corp that extend credit requiring appointment,
iv. An employee of the corp whose employment Kreq.s the appointment, OR
v. Party to a voting agreement (under §7.31)
c. Voting Trusts MBCA §7.30 / Del. §218(a)
i. How Works
1. Create a trust & transfer all your share to the trust & give the trust instructions on how to vote them. (key
trust becomes legal title holder of shares
ii. Req.ments
1. Must be Written
2. Usually req.d to be filed w/corp
3. Must make beneficiary of trustee known to public record.
iii. Duration
1. Default rule is good for 10 years, unless otherwise noted.
d. Voting Agreements MBCA §7.31 / Del. §281(c)
i. Shareholders make an agreement to vote the same, without transferring to a trust (just a Contract)
ii. KeyMBCA says courts will specifically enforce these agreements (such as force you to vote accordingly, or even sell
your shares)
iii. KEYMust put in the Agreement what happens if agreement is not followed (forced or vote or forced to sell normally).
e. Sword v. Shield (only applies to Voting Trusts)
i. More successful as a shield (saying it is good & all have to follow) then a Sword (claiming it was not done right & we
don’t have to follow).

FIDUCIARY DUTIES IN CLOSELY HELD

1. Intro
a. Remember General Rule is “Majority Rule” & Majority Shareholders have not fiduciary duty to minority shareholders
i. However, we have worked one in because this is like a partnership, & in it partners owe each other fiduciary duties (the
utmost sensitive duty stuff)
b. THUS, these the FIDUCIARY DUTIES OF MAJORITY SHAREHOLDERS (that exist if any)
2. Dealing w/Minority Shareholders
a. FirstDuty of Good Faith
i. Seems this is what Zidell v. Zidell case gets at. You can freeze them out for a little while but eventually you cross the
line to bad faith. Business judgment rule normally applies, unless the plaintiff can show “bad faith.”
1. Facts: Plaintiff is a minority shareholder in a closed corp. He is not given a pay raise & resigns from his
position. He is not given dividends. Plaintiff sues for dividends.
2. Held: Court ruled corp did not owe a duty to pay higher dividends. The Corp stated that they could only
afford moderate dividends. Plaintiff did not carry his burden of proving a lack of good faith of the Board.
ii. Thus, challenge shareholder action by claiming bad faith
b. SecondDuty of Equal Opportunity

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 i. From Donahue & also Wilkes cases
ii. Majority Shareholder owes a duty to give equal opportunity to minority shareholder (i.e. in that you have to give them
the same chance to sell their shares at the same price)
1. Donahue (Equal Opportunity Rule) Massachusetts Court. This Does NOT apply to ANY OTHER
CORP.
a. F: Board paid $800 a share for stock from former board member. Plaintiff(s) assert this price was
entirely too high.
b. H: This is similar to a partnership because they are all co-owners, all have management rights, all
have similar fiduciary duties to each other. If the stockholder whose shares were purchased was a
member of the controlling group, the controlling shareholders must cause the corp to offer each
stockholder an equal opportunity to sell a ratable number of his shares to the corp at an identical
price.
2. Wilkes v. Springside Nursing Homes (Defendant must show a legitimate business purpose & plaintiff may
rebut w/‘less harmful alternative.’)
a. F: Four men formed a partnership. Each partner will take ¼ income if they all actively participate.
This is a closed corp.
b. H: The Court asserts that if there is a legitimate business purpose, then the offer does not have to
be equal among everyone, basically, Wilkes does not adopt Donahue.
i. The Corp must have a legitimate business purpose & the action must be narrowly
tailored. The minority shareholders must demonstrate that the same legitimate objective
could have been achieved through an alternative course of action less harmful to the
minority’s interest. If called on to settle a dispute, our courts must weigh the legitimate
business purpose, if any, against the practicability of a less harmful alternative.
iii. Process/Burdens
1. P claims it is not strict good faith/being frozen out, or some self interest maybe (not clear)
2. D then has to prove a legitimate business purpose, (Like BJR but not it)
3. P then gets change to prove a less harmful alternative
4. D then stuck will having to prove good faith/fair
iv. Notea normal way to show a less harmful alternative is by showing there is a ton a cash laying around & you could
have paid a dividend w/no harm.
3. Sale of Control
a. Intro
i. Controlling stocks are valued more than non-controlling shares.
ii. We are dealing w/someone selling control in the company without a merger, just in a separate transaction
iii. Duties w/Sell of Control can be even when less than a majority interest is sold, just must be a Controlling Interest (as
low as 28% has been allowed), but just depends on how many shareholders there are & how many are needed for
control
b. Sale at a Premium
i. A controlling shareholder is free to sell & a purchaser is free to buy, that controlling interest at a premium
price.
1. Fact of life that selling a majority share/interest w/control is worth more than other shares.
ii. Majority/Control holder owes not duty to minority to say that he thought he could get a better deal. However, cannot
be done in bad faith or fraud.
1. “The mere fact that a man accepts the position of a director or an official in a corp should not as rule deprive
him of his right to dispose of his stock as he sees fit & to make any profits that he might gain, provided in the
sale of that stock he has done nothing to injure the corp & its stockholders.” Tryon v. Smith
iii. Opponents to this want a tender offer. Sell every single share of a corp for a set price.
c. Transfer/Sale of Control
i. Control can be sold by selling majority/controlling shares, but cannot just be sold by Directors (selling their
office/position)
ii. Arranging for Directors’ Resignation is Allowed
1. Thus, after major share, directors just resign one at a time & new directors of the New Majority are
appointed.
a. These directors must resign on their own accord, the majority shareholder can’t force them to
resign. A director can state it is his fiduciary duty to remain for his appointed period, even if the
party that appointed him by voting based on number of shares has sold their stock.
2. Duties w/Sell of Control can be even when less than a majority interest is sold, just must be a Controlling
Interest (as low as 28% has been allowed), but just depends on how many shareholders there are & how
many are needed for control
a. Look to size of % the party owns. Can’t be as small as 3%, but 28% is close enough.
b. Plaintiff is req.d to show that there was at the time of the Ksome other organized block of stock of
sufficient size to outvote the block of stock the new party was buying, or else some circumstance
making it likely that enough of the holders of the remaining stock would b& together to keep new
buyer from control. This is effective control.
i. There is no reason why a purchaser of majority control should not ordinarily be permitted
to make his control effective from the moment of the transfer of stock.

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 iii.Issue w/Looter (Looting is criminal, but often can’t find the looter)
1. Majority Shareholder has a duty not to sell to someone they know, reasonably believe, or should have
reasonably believed to be a Looter (was going to come in & sell apart company). Majority shareholder
cannot knowingly sell to a Looter.
a. Problem this borrowed theory from tort law is wrongly just assuming there is a duty to begin with.
b. Harris v Carter (Delaware)
i. Applied reasonable prudent person duty to NOT harm anyone else & applied it to
corporate law.
2. Factors to consider is the history of the seller.
iv. THUS, THERE IS NO FIDUCIARY DUTY OWED IN SELLING CONTROL THROUGH MAJORITY SHARES W/THE
EXCEPTION OF THE LOOTER ISSUE
d. Perlman v. Feldman (2nd Circuit, 1955) Similar to Donahue – Mass. Case. It is a corporate opporunties case – supposibily
Feldman took an opportunity for himself instead of giving it to the Company. A merger was likely to happen where
everyone would have benefited, but Cotrolling Shareholder said NO, & sold shares instead.
i. If someone wants to buy a corp., the majority shareholder can’t say, “Why don’t you just buy my shares at an inflated
price, & then you’ll still have control of the corp., but for less than it would cost to buy all the shares.”  Perlman 
you have to let the other shareholders have the opportunity to have their shares bought as well
ii. Seems to be based on taking a corporate opportunity & the fact that Perlman was the majority shareholder, director &
officer. NOT COMPLETELY CLEAR

DISSOLUTION
1. PROCESS
a. Voluntary MBCA §14.01/14.02
i. Rare
ii. Just agreeing to dissolve (proposed by directors, approved by shareholders
b. Administrative MBCA §14.20
i. Rare
ii. Based on you failing to pay you necessary nominal fees; if you fail to pay the fee the secretary of state can
administratively dissolve your partnership.
c. Involuntary MBCA §14.30
i. Can be by Judge on petition of: (MAY, not req.d)
1. Attorney General (1)
a. Usually for non-profit corportations
2. By Creditors (3)
3. By Shareholder petition****FOCUS ON THIS (2)
2. What is By Shareholder Petition
a. Deadlock MBCA §14.30(2)(i) & (iii)
i. (i)Cannot go on because Directors are deadlocked in management of the corp & shareholders cannot break the tie &
it has caused irreparable harm
ii. (iii)Deadlock in that shareholders cannot elect directors in the past two annual meetings.
b. Non-Deadlock MBCA §14.30(2)(ii) & (iv)
i. (iv) Corp. Assets being misapplied or wasted
ii. (ii)Directors OR “those in control” are acting in a manner which is illegal, oppressive, or fraudulent
1. KEYMust be a Director or someone in Control to use this so Have to make it person in CONTROL.
2. Note—KY law does not include oppressive part, or the provision about waste (only deadlock or
Illegality/fraudulent)
3. What is Oppressive? (use in order)
a. First Definition, Reasonable Expectations(BETTER)Conduct which substantially defeats expectations (objectively viewed)
that were both reasonable & central to party’s decision to join the Venture. (In re Kemp & Beatley, Inc.)
i. CBC determination
ii. If the corp has always been paying dividends & elects to stop paying dividends once two share holding employees no
longer work at the corp, but there was no expectation that the shareholders had to be working in order to receive a
dividend therefore this is OPPRESSIVE.
b. Second Definition, UnfairnessConduct which is “burdensome, harsh, & wrongful conduct, a lack of probity & fair dealing in
the affairs of a company to the prejudice of some of its members. (Gimpel v. Bolstein). When there is visible departure from the
standards of fair dealing, & a violation of fair play on which every shareholder who entrusts his money to a company is entitled
to rely. (similar to a fiduciary duty).
i. Applies in Two Cases: (USUALLY THE LAST OPTION)
1. When no Expectations, since inherited or otherwise obtained.
2. When person has acted so wrong that there is no more expectations, such as they have stolen.
4. Effect if Found Oppressive
a. Corp is Dissolved OR
b. Majority (directors or shareholders) can Elect to buy out (buy the shares) of the minority MBCA §14.34, instead of
dissolution (only majority has this right not minority) Modeled off NY provision. (Gimpel v. Bolstein)
i. Election trumps courts right to give equitable relief

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 ii. Notethis is stated in the answer to the complaint & changes the case from about dissolution to a fair price
determination.
iii. Thus, don’t bring suit unless you are willing to be bought out.

STOCK REPURCHASE AGREEMENTS/RESTRICTIONS ON TRANSFERS

1. Intro
a. It is the shareholders deciding up front how a shareholder can get out, including price to buy out.
b. Can be in Bylaws, Articles, or Shareholder Agreement
c. GRCourts will generally enforce these agreements even if the purchase price is substantially less than FMV, unless
there is some equitable reason not to.
i. In drafting Kspecificy that old provisions stay in effect unless they all jointly agree. If meeting isn’t held, state old
provision & stock price will remain the same.
2. Price
a. Inadequacy/Excessiveness of Price is not enough to prevent enforcement
b. Will only step in for fraud, overreaching, undue influence, duress, or mistake at the time of the agreement
i. Court will not step in just because it turned out to be a bad deal
3. Fiduciary Duty
a. The agreement/Kdefines the scope of the fiduciary duty
b. Do not mix fiduciary duties from employee relationship to that of the shareholder relationship.
i. It adds nothing either way, employment does not change your shareholder rights, & repurchase rights do not change
your employment rights.
1. In an at-will employment, an employee can be fired without reason unless either the K or a law (such as fired
for race, religion) specifies otherwise.
c. Note on Damages
i. Right to buyout price does not limit right to other damages.
ii. Courts look to culpability.
1. Gallagher v. Lambert
a. Plaintiff was fired 20 days before agreed upon date stated in mandatory buyback provision. As
such, employer paid small price for stocks, its initial value, as stated in the mandatory buyback
provision.
b. Court upheld Mandatory Buyback Provision even though it appeared unfair. We Kfor certainty,
& basically any price will be upheld. Will only step in for fraud, overreaching, undue
influence, duress, or mistake at the time of the agreement.
2. Pedro v Pedro
a. Plaintiff got more than what security retirement agreement stated, because the defendant was
FORCED to retire. This is because the agreement was when the employee (i)wished to retire &
(ii)wished to sell his stock. Here, he was FORCED.
i. Awarded atty fees, lifetime employment, & full stock price.
4. Req.ments for Restriction on Transfers
a. Purpose MBCA §6.27(c)
i. It must be for a reasonable purpose including
1. to maintain the corp’s status when it is dependent on the number or identity of shareholders
2. To Preserve Exemption under Federal/State law
3. See note in Supplement pag. 34.
b. Reasonableness MBCA §6.27(d)
i. Tells what restraints are reasonable/allowed
1. Restriction may obligate person to give corp/other shareholders to offer to the right of first refusal
2. Could obligate the corp/other shareholders to buy the shares.
3. Req. Corp/other shareholders to approve the sale, but req.ment cannot be unreasonable
4. Can prohibit sell to particular people or group as long as manifestly unreasonable.
c. Notice MBCA §6.25 & 6.26
i. MUST HAVE NOTICE
ii. Restriction on transfer must be conspicuously noted on the front or back of the certificate.
iii. If not so noted, then only enforceable against people w/actual knowledge of the restriction.
d. Delaware: Unless noted conspicuously on the certificate representing the security or, in the case of uncertifcated shares,
contained in the notice, a restriction, even though permitted by this section, is ineffective except against a person w/actual
knowledge of the restriction.

SHAREHOLDER LIABILITY FOR CORPORATE OBLIGATIONS

1. Veil-Piercing for KCases (Often on the Bar Exam)
a. Intro
i. There is nothing you can do to draft around this.
ii. Can NEVER pierce the veil of a public company
1. Shareholders are not liable for the death of the corp unless they did something which makes them personally
liable.

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 iii. Remember
1. If shareholder did the wrong personally, then he is personally liable, but this is stretching liability when he
wasn’t directly involved.
iv. General Process for Both
1. Do Powell Test
2. Do WRGO Test
b. Powell Test (3 Factors) (AKA Instrumentality/Alter Ego Rule)
i. To Pierce the Veil need all of: (w/Elements, non determinate)
1. Control Prong the shareholder completely control & dominate the corp (MUST BE BIG control)
a. Lack of Formalities
b. Commingling (mixing personal & business assets)
2. Injustice Prongthe shareholder’s conduct in using the subsidiary was unjust, fraudulent, or wrongful
towards the P, AND
a. Undercapitalization (inadequate assets at formation or at any distinct change for business risks)
b. Fraud/Constructive Fraud/Fraudiness
i. Including using corp. as device for fraud
3. Causation Prong P actually suffered some harm as a result
a. Waiver/Estoppel will prevent it
b. Fraud/Constructive Fraud/Fraudiness
i. Including using corp. as device for fraud
c. What is Really Going ON:
i. Fraud/Fraudulent Transfer is the KEY/ESSENTIAL
ii. What can Fraud Be:
1. Actual Fraud (fraud w/the INTENT) OR
2. Constructive Fraud (fraud without intent) (UFTA
a. UFTA provides that a transfer of prop is recoverable by a creditor if (i) made w/intent to defraud
the creditor or (ii) no equivalent value was received & the transfer made the transferor insolvent.
iii. What is Fraud
1. Transfer:
a. Made w/intent to defraud the creditor (actual fraud) OR
b. No equivalent value was received & the transfer was made while the transferor was insolvent.
(constructive fraud)
2. You cannot take money for yourself when it is owned to your creditors. This is FRAUD.
d. Cases
i. Consumer’s Co-op v. Olsen
1. Facts: Olsen & parts established a corp, ECO, which took a loan from Consumer’s Co-op. Olsen never
repaid loan & now Co-op wants to pierce the cooperate veil & sue Olsen personally because the ECO corp is
not bankrupt.
2. Held: Court Applied the Powell Test, & held that plaintiff could not pierce the defendant. Ultimately, the
plaintiff actually waived their right to claims, because they continued to loan money to the plaintiff after they
knew the plaintiff was indepth.
a. Control: Olsen never mixed personal interest w/cooperate interest which establishes that he didn’t
completely control & dominate the corp. However, there was no FORMAL control, even though
there were meetings, these weren’t formal, but court said it didn’t really matter.
b. Injustice:
i. Undercapitalization is inadequate assets or at & distinct change for business. Here, the
company had 7K at start which could said was adequate – because it shows that
individuals put their own assets in the company.
c. Causation Prong
i. Here, defendant did continue to take loans, but the lender knew defendant was already in
depth & thus is also liable. Additionally, defendant never used fraud.
3. KC Roofing Center v. On Top Roofing
a. Facts: D took out loans, didn’t repay. Lender sues.
b. Held: Apply Powell Test. Court determine that the plaintiff can pierce the veil of the company.
i. Control: He was solely in control. There were no formalities.
ii. Injustice
1. He let creditors think they’d be OK, when he knew they wouldn’t. Defendant
committed fraud. He has setup multiple companies over several years & would
switch companies after the former went bankrupt, while continuing to advertise
w/the consumer by the same business name. Additionally, defendant also took
high salaries when each company was in dept.
a. Plaintiff could have just sued for FRAUD.
2. Veil Piercing for TORT Cases
a. Intro
i. Tougher because they cannot be based on fraud like contracts because there is no reliance anymore.
ii. Real problem is Piercing the Veil really has nothing to do w/Corporate Law, more tort/fraud/other stuff.

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 iii. Remember, the agent/actor is always still liable for the tort.
b. Test is still the Powell TEST
i. But doesn’t make a lot of sense
c. What is Really Going On?
i. Use of the corp as an “Instrumentality” or “device” to do wrong, BUT probably just the next reason
ii. Evaluate against tort policies of Compensation & Deterrence. The defendant created an “instrumentality & device”
which harmed my client, & the defendant is better off to compensate my client for his loss than the corporate shell, &
they are liable under tort law.
d. Western Rock Co. v. Davis
i. F: Plaintiff sued for damage from defendant’s using dynamite.
ii. H: D was dominating force behind Corp, a shell corp, which had no assets & was in financial difficulty. That corp.
served as a device though which defendant could carry on destructive blasting at the expense of the plaintiffs, & at the
same time be personally insulated from legal & financial responsibility against wrongs which were knowingly
permitted, directed & controlled by them through the corp device.
1. If defendant had actually done the blasting then he would personally be liable & a tort claim could easily be
made against him.
3. Promoter Liability
a. Promoters are acting knowing there is no corp & planning to do so soon.
b. Intro (back to agency law)
i. You cannot be an agent for a nonexistent principal, thus you cannot be an agent until the corp is formed
ii. Keyagents for nonexistent principals are personally liable because they are not agents & there is an inference that a
person intends to make a present contract.
c. Thus, it is the problem of making deals before the corp is formed.
d. Promoter Liability General Rule
i. A promoter will be held personally liable on contracts made by him for the benefit of a corp he intends to
organize.
1. ExceptionUnless the other party agrees to solely look to the corp alone for responsibility
2. KeyThere is a presumption for liability for Promoter, unless clearly otherwise.
ii. Keyeven if corp is alter formed, the Promoter remains liable until the other party EXPLICITLY releases him
e. Best Approach
i. You can make a Kthat is a presently binding obligation, binds the corp when organized & releases the promoter upon
adoption, BUT it is better to wait & just form the corp first.
f. This whole same idea can happen again if the corp stops existing for sum reason (such as by judicial dissolution §14.20), but if
you fix problem within 2 years, it allows you to act as if you were always a corp.
4. Defective Incorp
a. Intro
i. Occurs when we have tried to incorporate first, but have failed & thus do note have a corp going, & thus the “agent” is
not an agent.
b. Two Approaches
i. MBCA §2.04
ii. Estoppel
c. RuleMBCA §2.04
i. “All persons purporting to act as or on behalf of a corp knowing there was no incorp are liable” are jointly &
severally liable
ii. KEY PARTS
1. “purporting to Act” means Investment + Active Participation
a. Just being an investor is not enough
2. Knowing there is no corp.
3. Thus, focus is on the Corporate D’s actors
iii. Assuming this incorporates all meaning from old MBCA saying Assume to act.
d. Thus, this is harsher than the old De Facto Corp rule because it is so easy to incorporate so do it right.
i. De Facto Corponly req.d a statute authorizing the creation, an good faith attempt to incorporate, & actual se of the
corporate franchise to avoid liability
e. Rule 2Corp by Estoppel “The parties who thought there was no corp may not recover against individuals when it
turns out there was no corp”
i. Focus is on the other party from the corp
f. Noteif Both rules apply, MBCA trumps, because Estoppel is just extra filler.

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 LIMITED LIABILITY COMPANIES (LLCs)
INTRO
1. Gives you Limited Liability & Pass through tax treatment
2. Basics
a. You are allowed to choose your tax treatment & the way it runs
3. For Tax Treatmentyou CHECK THE BOX of tax treatment you want
a. Like a partnership w/pass through tax treatment most likely
4. These rules are just default rules & most start out as the Partnership default rules because that is how LLCs evolved first.
5. KEYJust about All Rules can be Changed (see §103 for nonwaivable provisions which are a lot like RUPA), but basically you can
always pick b/ween like a Partnership or like a Corp
a. Thus, immutable rules are like Partnership
6. EVERYTHING IN STATUTE EXCEPT §103 is GUIDANCE/DEFAULT – so an OPERATING AGREEMENT CAN CHANGE THE
RULES ANYWAY YOU WANT.
FORMATION
1. More like a Corp
2. Must file Articles of OrganizationULLCA §202
a. Like articles of incorp
b. It must included ULLCA §203
i. Must include whether it is member or manager managed
3. Operating Agreement
a. It is like the bylaws/Shareholder agreement
b. Req.d in some states not in others.
c. Want it to be written even if not req.d, & not req.d to be filed
d. If Conflict b/ween Articles & Operating Agreement, Operating Agreement trumps as to manager, members, & member’s
transferees, but Articles trumps as to 3rd partiess §203(c)
4. If you filing wrongly, can have defective organization issues just like Corps & defective incorp ULLCA §202(b)
a. KeyMost courts treat them the same even though they have to read in something like MBCA §2.04 as being implied from
MBCA §2.03, but most do it.
b. ULLCA §207: Articles of correction are effective retroactively on the date of the record they correct ex cept as to the persons
relying on the uncorrected record & adversely affected by the correction. As to those persons, articles of correction are
effective when filed.

OPERATION (AUTHORITY/FIDUCIARY DUTIES)

1. Generally
a. If Member-Managed LLC then like a Partnership
b. If Manager-Managed LLC, then like a Corp
2. AUTHORITY ISSUE ULLCA §301
a. ULLCA §301(a) is for Member Managed LLCs
i. Says it is just the same authority as RUPA
1. All Members are agents & bind in ordinary course UNLESS the member had no actual authority & person
w/whom he was dealing new he had no authority
2. Members only bind outside the ordinary course is they have actual authority.
b. ULLCA §301(b) is for Manager Managed LLCs
i. Member has not authority/not an agent of LLC
ii. Manager is just like the member in member managed above.
3. FIDUCIARY DUTY ISSUEULLCA §409
a. ULLCA §409(a) is for Member Managed LLCs
i. Says members owe same fiduciary duties as General Partners in a Partnership (see RUPA above)
b. ULLCA §409(b) is for Manager-Managed LLCs
i. Member owes no fiduciary duties to the LLC just from being a member.
ii. Manager is Held to the Same standards as Member in Member LLC above
1. Thus, this seems to add the Partnership Fiduciary duties to Managers,
2. But Michael says it is Like a Director/Officer
c. SUMMARY
i. Member in Member-Managedlike Partner in p’ship
ii. Member in Manager-ManagedLike a shareholder in Corp
iii. Manager in Manager-ManagedLike director/officer in corp
1. But debatable based on the Language of §409(h)(2)
4. MANAGEMENT RIGHTSULLCA §404
a. ULLCA §404(a) is for Member Managed LLCs
i. Each member has equal rights in the management/conduct of business & generally decided by majority Rule
b. ULLCA §404(b) is for Manager Managed LLCs
i. Each manager has equal rights in management/conduct & generally items are determined exclusively by the majority
rule of the managers
c. ULLCA §404(c) applies to Both LLCs
i. List 12 items which req.s the consent of all members to be done

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PROFITS/LOSSES
1. GenerallyCan be Variable (like p’ship) or Fungible (like corp.)
2. Sharing Profits/Losses ULLCA 405(a) §405 Distribution Interest
a. Default rule is more like Corp in that distributions must be in equal shares.
i. However, KY default rule is like partnership.
3. Payout on Winding Up §806
a. Default rule more like Partnership on Contribution repayment because you get all your contribution back first, then you share the
rest equally.
i. However, contribution repayment is only for cash/prop value contribution, not services)
ii. Seems then that you could have to pay other member then.
1. Note—Could say after paying creditors all are paid out equally instead of based on contribution.
iii. Not certain if you have to pay out of pocket.

EXIT & LIQUIDATION

1. Generallycan be at Will (like a p’ship) or not (like a corp.)
2. ABILITY TO LEAVE §602(a)
a. Default rule is like a partnership
b. RuleYou can dissociate at any time (rightfully or wrongfully).
i. However, you can change to otherwise in the operating agreement
3. TRANSFERING YOUR INTERESTULLCA §501-503
a. More like a Partnership
b. Partnership
i. Partner can transfer his distributional interest, but no management rights go w/it & old partner is still liable because he
is still a partner
c. Member Managed LLC
i. Can transfer distributional interest, but cannot transfer management rights/liabilities
ii. Transferee only becomes a real member on consent of other members.
d. Corp
i. you can completely sell your interest & be completely done w/it.
e. But can change to make like a corp also
4. DISSOLUTION/WINDING UPULLCA §801
a. More like a Partnership, plus one Corporate option
i. Exception, is if it is a manager managed LLC you can use corporate law stuff about oppression to dissolve.
b. Thus you have RUPA plus oppressive

LIMITED LIABILITY
1. More like a Corp
2. ULLCA §303 says Members & managers have Limited Liability
3. However, piercing the corporate veil can apply just as it does in corps.

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 PUBLIC COMPANIES

DEFINITION OF PUBLIC COMPANY

1. Public market is semi-strong efficient (meaning everything that the market knows as of this moment is reflected in the price. As soon as
more info is disclosed, the price will immediately change). Additionally, there are “influential institutional shareholders” who own many
shares & thus has a sizeable influence on a company. We have a reliance on substantial public disclosure (the market is efficient because
there is always the latest information).
2. By Securities Exchange Act of 1934 (SEA)
a. Listed on a Stock Exchange OR
b. Greater than $10 Million in Assets & Greater than 500 Shareholders
i. (& doing interstate commerce)
3. Public Companies must file: proxy solicitation, annual & periodic (quarterly) reporting, current reports (if certain events happen), insider
trading reports/restrictions (e.g. a director or officer can’t buy shares within 6 months and make a profit, if he does, the profits go back to
the company), tender offers (by taking controlling interest of shares of company), Corp governance rules - Sarbanes-Oxley certifications
(as a result of Enron) – it greatly increases the cost of running a company. (must have directors that???, must have a financial expert, etc)
a. As a result of Enron, Sarbanes-Oxley was adopted. It makes corps do a lot of extra work, which has shifted the market to
PRIVATE EQUITY, because they are NOT liable for Sarbanes-Oxley test – which keeps the costs down.
b. Thus, all this stuff applies to Public Corps
4. ANTIFRAUD RULES APPLY TO ALL TRADES OF SECURITIES

PROXY REGULATION SEA §14(a) (Proxy Fraud) (Because of time constraints, we’re only talking about proxy regulation)
1. §14(a) gives Commission power to regulate proxies
a. Purpose is supposed to be on “protection of investors” It has a disclosure req.ment.
2. There is a Private Right of Action under 14a-9
3. What is Req.d by Commission (SEC):
a. Disclosure Req.ments
b. Antifraud (substantive regulations)
4. What is Disclosure Req.ments w/Proxy:
a. Must provide Annual report & proxy statement 14a-3, 14a-5
i. Proxy statement says why I am asking for your vote & what I plan to do.
ii. Annual Report showing how you are doing
b. Form of Proxy Rule 14a-4
i. Rules for what is on proxy form
ii. Says you have to have authority to vote for each person (not just your power to vote generally)
c. Contested Elections Rule 14a-11
d. Shareholder Initiatives Rule 14a-8
i. Guarantees shareholder the right to put a statement on the shareholder ballot & force them to vote on it. (p.212)
ii. But the rarely ever work, but req.d by SEC Rule. Because people that own the shares like the company & generally
don’t want change.
5. What is Antifraud Req.ment:
a. Rule 14a-9, has a private right of action (if you’re going to solicit a proxy, you can’t lie or tell half truths)
b. KeyProhibits fraud (false or misleading statement or omission or failure to correct) in connection w/the solicitation of
proxies
i. Basically saysyou cannot lie or mislead/tell have truth.
1. No solicitation shall be false or misleading w/respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not false or misleading, or fail to correct an earlier
statement which has become false or misleading.
c. Private Right of Action Elements to Violate 14a-9: Private parties have a right to bring suit. (J.L. Case v. Borak)
i. Misstatement
1. Can be a lie/misstatement, a half truth (or omitted fact, because there is always a duty to speak in proxies)
a. i.e. Price was really lower
2. CANNOT BE Disbelief or undisclosed motivation, standing alone, is insufficient to satisfy the element of
fact that must be established under §14(a) (Virginia Bankshares)
3. Thus, needs to be something that is provable
ii. Materiality (Northway Case)
1. It is an OBJECTIVE test (reasonable investor)
2. Three definitions of Materiality Must be a Substantial Likelihoods that:
a. reasonable shareholder would consider it important in deciding how to vote
i. It does not req. proof that the shareholder would actually change his vote, but ….
b. It would have assumed significance in the deliberations of a reasonable shareholder
c. It would have altered the total mix of information made available.
d. *A court will pick of any of these to use since they essentially say the same thing.
e. * A question of materiality is going to get to trial because it is a question of both law and fact.
3. VA Bankshares, Inc. v. Sandberg
a. The proxy stated “The plan of Merger has been approved by the Board of Directors because it
provides an opportunity for the Bank’s public shareholders to achieve a high value for their shares.”

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 i. This statement could be wrong or false in two different ways. (i)Value wasn’t high or
(ii)if directors had other reasons for approving the merger or did not have this reason.
1. Only the first one is actionable because it can be proved. If they plead the
second argument it can’t be proved. Belief of the directors will not have any
proof.
a. This is an OPINION/BELIEF, therefore, we don’t know what the
board was thinking – as a matter of judicial policy, it won’t allow
these frivolous litigations (bluechip).
b. They way we distinguish btw an opinion and an actionable claim is
whether or not we can prove it.
iii. Scienter (intent) – (probably) (deliberate & knowing)
1. Seems to be Req.d
2. Seems to Req. Intent, but not really ever a concern
3. Might even just be negligence by 2nd circuit.
iv. Reliance/Causation (first 3 rules, the Mills test is now used)
1. “But for” the misstatement, the vote would have turned out differently. (i.e. the outcome would have
happened)
a. However, this can scarcely be inquired into.
2. Fairness of the merger is a defense to any misstatement
a. However, not intended by Congress in §14a. So, even if it was fair, it is not a defense.
3. Modern Test Mill’s Essential Link Test
a. If the solicitation was req.d/needed to do what you wanted to do, then we are going to say there is
causation
i. Basically Assumes Reliance/Causation, if proxy was needed. If he solicitation was an
essential link (i.e. but for the solicitation, the merger wouldn’t happen) in the
accomplishment of the transaction, causation exists.
1. Rationale: Use of a solicitation that is materially misleading is a violation of the
law. So if the solicitation was an essential link in the accomplishment of the
transaction, causation exists.
b. Also, Mills Essential Link Test might be satisfied if the proxy caused a loss of a state law remedy,
but uncertain & tough
i. Caused only to get appraisal rights, thus loss other remedies by voting yes
ii. Wilson v. Great American Energy
1. Facts: Material misrepresentation.
2. Held: Plaintiff lost opportunity for state appraisal which could yield a greater
value than the price they received. This was a lost state remedy.
4. Virginia Bankshares, Inc. v. Sandberg
a. Facts: Parent company already owned 80% of shares, therefore minority vote meant nothing.
i. Plaintiff asserted that transaction wouldn’t have occurred without minority vote for pubic
relation reasons.
b. Held: Shareholder approval was not a condition of the merger. The merger could have been
consummated had minority voters all voted “no.” Plaintiff PR complaint is too shallow.
i. The only reason why they got a shareholder vote was because they were self dealing on
both sides. ,
ii. *Loss of a state remedy is another way to establish mills causation. On different facts,
shareholders would have been able to allege loss of state remedy (bc they voted yes, they
lost the state right to get appraisal.)

v. Damages (Mills p. 918)

1. Must have suffered Damages
2. Any appropriate relief may be awarded:
a. Injunction (tough)
b. Rescission (tougher)
c. Money Damages: recoverable if shown.
3. Can be a problem because w/reliance/causation assumed, there can often be no damages. I.e. You can win in
the Mills sense and have an essential link, but the test is unhitched from causation. So you can win, and get
no damages.
4. Attorney fees may be appropriate even on an interim basis.
a. So often times proxy fraud suits are monetarily unprofitiable. The whole pupose of talking about
this is so we can advise future clients on how to properly solicit proxies. Not every proxy fraud
cases is damage free, but most of them are.
5. Problem 9-3, p. 921- You know this is a proxy cause question because they are soliciting proxy frauds. So
under the misstatement prong, we analyze whether the statement made was a lie or half truth. It’s def not a
lie, but the question becomes if it’s a half truth. In this case they offered $21 but are willing to go as high as
$25. It can go both ways. It can be showed that by not stating they were willing to go up 25, it was half truth.
Or it can be argued that omission of the hightest price is not a mistatement. Under the materiality prong, it

35
 would be considered material bc a reasonable shareholder would us the information in making a decision.
They could get $4 dollars. Under the causation link…????No solicitation problem because they already
owned a majority of the subsidiary so they did not need to solicit any proxies. They would be entitled to what
money damages they can prove. This question should also alert you to Weinberger fairness. So the P’s could
sue under duty of loyalty. Two prongs: fair dealing, fair price.
6. NoteThis Proxy Regulations stuff overlaps w/State Fiduciary Duties a lot, but Ps always pick Federal Proxy Regulation avenue, because:
a. Avoid state procedural req.ments like security for expense statutes
b. Advantage of Federal Procedure like Nationwide Service.

TRADING REGULATION SEA RULE 10b-5 (Securities Fraud) pp927(Rule is on)

It shall be unlawful for any person to (i)employ any device, scheme, or artifice to defraud, or (ii) to make a misstatement, or (iii)to engage in any act
or practice which would operate as a fraud on the purchaser in connection w/the purchase or sale of any security. THE PLAINTIFF MUST BE
A PURCHASER OR SELLER.
1. Intro
a. Exact Language of SEA §10(b) & Rule 10b-5 is irrelevant because we have stretched it.
b. KEYThere is a private right of action under Rule 10b-5. You can’t defraud people w/ respect to the purchase or sale of
any security (it doesn’t matter if the stocks are registered). (This created a private right of action)
c. Applies to all Purchase & Sales of Securities
i. Securities act covers fraud in offers
d. Must be Brought in Federal Court (exclusive jurisdiction)
i. Better anyway since you get nationwide services
e. Two Main Parts of Securities Fraud under Rule 10b-5
i. Security Fraud by Corp under Elements
ii. Insider Trading
2. Antifraud under Rule 10b-5
a. Seems a lot like Proxy Regulation Private Right of Action
b. Limitations (apply to all, including insider trading)
i. Plaintiff must be an ACTUAL purchaser or seller (Blue Chip)
1. Rule: In order to be a 10b5 plaintiff you must be a purchaser or seller.
2. Cannot say I would have bought or would have sold.
a. It would lead to excessive litigation – causes settlements that shouldn’t occur.
3. KEYD doesn’t have to be an actual purchaser/seller
4. Thus, we always have depressing disclosures because there is no liability for running people away
ii. Must be (allege) Manipulation or Deception, not enough just some State Fiduciary Duty Claim (Santa Fe Inc. v.
Green)
1. Not enough to claim breach of duty of loyalty, must show some manipulation/deception by artificially
affecting Market Conditions( like a wash sale or fake activity)
a. An unfair price that is adequately disclosed is not a violation
b. Manipulation is a term of art. Refers to (wash sales or fake activity)
2. Seems deception must be not coming clean, because if you give price & say it is too low but offer it anyway
there is no deception
3. This is the informal dividing line between federal and state law.
4. Problem 9-4
a. State Law Claim-Interest director transaction.
b. Fed Law Claim-There was no manipulation. But How can the corporation be deceived when 3 of
the directors obviously knew. Very difficult to bring in federal law.
5. Limitation that state law claims are left to state court, and plaintiff must be a purchaser or seller.
3. ELEMENTS of Private Right of Action for Securities Fraud:
a. Misstatement
i. Same as proxy Fraudcovers lies & half truths, plus omission when duty to disclose/speak
ii. What is Silence
1. Silence (or No Comment) without a duty to disclose is not actionable. You can remain silent & say “no
comment” until there is a req.d disclosure (usually the quarterly reports).
a. However a duty to disclose is always only a short time away
2. Silence is not a misstatement without duty to disclose, regardless if rumors or true or not.
3. But everyone knows “no comment means yes,” so this strategy doesn’t work.
iii. When is there a Duty to Speak
1. Stock Exchange Regulation
a. Must release quickly to the public any news or information which reasonably might be expected to
materially effect the market for its security
2. Securities laws
a. Initial issuance of securities
b. Proxy solicitations,
c. Periodic (quarterly & annual) reporting,
d. Insider trading,
e. Making a tender offer or acquiring 5% of a company.

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 3. Other
a. A duty to disclose arise whenever secret information/later event renders prior public
statements materially misleading, not merely when that information completely negates the
public statements
b. Exyou announcing you are pursuing a particular goal/method, might have a duty to
speak/disclose when you seriously consider new goals/methods
b. Material Fact/Materiality
i. Test is same OBJECTIVE materiality from proxy fraud “substantial Likelihood a reasonable investor would
consider it important in deciding to purchase/sell, AND
ii. TestProbability & Magnitude Weighing Test for Negotiations/Contingencies
1. Balancing of both the indicated probability that the event will occur & the anticipated magnitude of the
event in light of the totality of the company activity & decided on CBC basis
2. What is Probability Test “indiciar of interest”
a. Look at Top Executive Action, how likely
3. What is Magnitude Test “size of companies or premiums
a. Size of the companies matter (not certain if relevant or absolute)
b. Size of the premium (higher the premium the bigger the magnitude then more likely material.
iii. Basic v. Levison- You can lie about immaterial misrepresentation.
iv. In re Time Warner Inc. Securities Litigation
1. Facts: Time needed money. Could have raised it by selling stock. But instead bought Warner, which put them
in debt by $10billion. Didn’t disclose bc they wanted to go ahead w/ the merger. Plaintiffs bought stock in
Time Warner, and had they have been told the truth, they wouldn’t have bought.
a. Figure out who would have been harmed.
b. Should have been silent.
v. Safe Harbor Rules
1. Congress wrote rules that protect large companies who make forward looking meaningful cautionary
statements identifying important factors that could cause actual results to differ materially.
c. Scienter “intent” (Ernst and Ernst)
i. Definitely Req.s Scienter
1. Means “intentional”
a. From definitions of manipulative/deceptive
2. However, recklessness can be enough for most courts (knew something but disregarded).
ii. PSLRA – SEA §21D State of Mind & Pleading (1995): must plead particular facts giving rise to a strong inference
that the D acted w/the req.d state of mind or talk about which statements were misleading and the reason why. EX:
Misstatement: must state he statements which are misleading & the reasons why “w/particularity.”
1. Strong Inferences is often:
a. Concrete Benefit to person that acted
b. Deliberately illegal conduct,
c. Failure of duty to monitor
2. Don’t have to reveal confidential source, just his relations.
3. Req.s “w/particularity” for other elements also
iii. Ernst & Ernst v. Hochfelder: A 10b-5 req.s a manipulative or deceptive device, there must be some intentional act,
therefore negligence is NOT enough for action.
iv. Basic v. Levinson
1. Facts: Basic made material lies stating they were not engaged in “merger talks,” which the company clearly
was. Here, former shareholders believed lies, & sold their shares as a result at a lower price.
2. Held: This was a material lie. It was a presumption that the misstatement affected the stock price. Because
most publicly available information is reflected in market price, an investor’s reliance on any public
material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action.
a. It is not practical to take the deposition of everyone in the class.
b. There is clearly something wrong is there is change in stock price like this.
d. Reliance/Causation (Transaction Causation)
i. Rebuttable Presumption of Reliance just by relying on the integrity of the Market/participating in the market at
that time.
1. Fraud on the Market TheoryCausal connection is based on reliance on the market, is the same as relying on
a direct lie (this is because you assume the market price is correct).
ii. How do you rebut the Presumption (you can rebut the presumption individually or class)
1. Anything that severs the connection b/ween the misstatement & the decisions or the misstatement & the effect
a. Show they sold for a different reason/would have traded either way
b. Market didn’t accept the lie & thus no effect in price.
i. How do you show it didn’t effect anything is by showing after the truth came out, no
change occurred.
e. Damages (Loss Causation)
i. There must be loss/damages & the misstatement must have caused them.
ii. KeyJust have to allege that misstatement caused you loss

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 1.
Thus, alleging inflated price is not enough, must alleged the drop off happened while you still own the stock
& then sold or bought, to get loss. (Dura Pharmaceuticals v. Broudo – Held: something must happen, you
must be damaged to get damages).
a. In setting forth the judicial consensus, a person who “misrepresents the financial condition of a
corp in order to sell its stock becomes liable to a relying purchaser “for the loss” the purchaser
sustains when the facts…become generally known & as a result share value depreciates. There is a
need to prove proximate cause, losses do not afford any basis for recovery if brought about by
business conditions or other factors.”
b. So for example, if on the date of purchase 9/11 occurred, the entire market would have dropped, not
just individual companies. So you have to have prove that the truth impacted the market price net of
anything else going on in the market.
iii. PSLRAput cap on damages for 90 days after revealing truth
4. Special Notes
a. WE have a safe harbor rule for Projections, in that if you make disclosure that it is just forward-looking information & not
guaranteed, then OK.
b. KEYthe drastic change in price after the truth is going to satisfy/prove most of these elements (material, reliance,
damages).
c. You have a suit anytime there is a Big drop in Stock Price
5. Insider Trading (Special Subset of 10b-5) (SEC v. Texas Gulf Sulphur Co.)
a. Intro
i. Like above, but not suing the Corp, just an insider who had more information than rest & used it for his own profit.
1. The duty of Insiders to traders is DISCLOSURE, simply because it is unfair not to.
2. Duty of insiders to corp. It is the corp’s info not the insiders.
ii. Problem under State Law
1. Insider has no duty to people they were trading with.
2. Insider has no breach of duty w/Corp because not injury since Corp couldn’t use info anyway.
iii. 10b-5 does NOT apply because there is NO MISTATEMENT. Therefore, there needs to be a duty imposed in order to
make the silence actionable.
iv. Key insider information is information meant for corporate purposes, but taken for personal.
v. KEYStandingSEA §20Aany person who violates the Act by trading while in possession of insider
information shall be liable to contemporaneous traders.
b. Result of Finding Insider Trading
i. Must abstain from Trading OR
ii. Disclose the Nonpublic Information
1. When can Insiders Trade
a. When you EFFECTIVELY DISCLOSE
i. Uncertain meaning But you must wait until the market has digested the
information, not just that you have told the public
1. Thus might have to wait until price stabilizes, or maybe earlier. (all the
advantage has to gone). This is bc fairness is what we’re after.
a. Most lawyers will advise not to trade at all, bc they can’t promise
when it is a good time.
2. No Certain time
b. Thus, seems insiders can trade right after a Annual/Quarterly Report, because there should be no
inside information at that point.
c. 10b5-1a- it’s illegal to trade on the basis of nonpublic info
i. 10b5-1b- “on the basis” means “had”
1. 10b5-1bc- unless you can show you bought this stock pursuant to a plan (e.g.
every two months you sell stock).
c. FIRSTTraditional Insider Theory
i. GR A corporate Insider (a fiduciary position in company & thus owes a fiduciary duty to trader) who has
material Nonpublic information about the enterprise is under a duty either to abstain from trading OR disclose
the nonpublic information (SEC v. Texas Gulf Sulphur Co.)
1. Based on Duty owed to the Trader because of being in a fiduciary position in the company whose shares are
being traded. Basically this rule give equal access to all traders.
ii. Key Parts
1. Must be an “insider” (which owes a fiduciary duty of DISCLOSURE to trader)
a. Director/High Officer/Majority Shareholder/some employees
b. Sometimes Lawyer/Accountant, etc. (constructive/temporary insiders)
2. Must have Material nonpublic information
3. Must then either:
a. Abstain from Trading OR
b. Disclose
iii. Key Points
1. Thus, No duty arises just by having nonpublic information (thus must be an insider)
iv. CALL OPTION: a right to buy a number of shares of a particular stock at a fixed price.

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 1. EX: Stock $10, but you can buy an option to buy a stock at stock price of $9 at a later date – so you pay
$1 for option.
a. Options magnify the risk.
d. SECONDExtension of the Theory—Derivative Duty
i. Old GR Recipient of insider information does not have a duty to disclose or abstain, unless they have a duty to
speak to being with. THERE MUST BE A SPECIFIC RELATIONSHIP. The Breach of duty by an insider can
be inherited by tippee.
1. Chiarella v. US: There was no fiduciary duty b/ween defendant & company, this duty arising from a
relationship of trust & confidence b/ween parties. He was allowed to use this information.
a. Thus, it’s kinda modified the previous rule. It’s more about fiduciary duty, not “equal access to
information.”
2. Dirks v. SEC: Tippee assumes a fiduciary duty to the shareholders of corp. not to trade on material non-
public information only when the insider has breached his fiduciary duty to shareholder by disclosing the
information to the tippee & the tippee knows or should have known there was a breach.
a. An insider breaches his duty when he personally benefits either directly or indirectly & includes:
pecuniary gain, reputational gain, ect.
b. Here, Dirks was not a tipper, because he didn’t owe the market at large to refrain from leaking this
material information. He is an analyst & found this information through talking to Secrest. Secrest
was NOT receiving a personal benefit by giving him this information. All tipping is NOT illegal, it
is necessary to make market effecient.
ii. When does the Fiduciary Duty pass w/the Information: (Dirk v SEC)
1. Insider is breaching his fiduciary duty by telling:
a. Test for breach is some improper personal benefit
i. Can be a gift, reputation, money, etc.
ii. Keyit is a fiduciary duty not to use information for an improper personal benefit.
2. & Tippee Knows or should know there has been a breach
iii. Can be Passed over & over.
iv. Regulation FD Solution for Selective Disclosure
1. Solves the Analyst Problem, of them finding out information & profiting from it, thus we threaten the issuer
to prevent Analyst from profiting.
2. If information is disclosed to someone by an issuer, THEN it must be followed “Promptly” by public
disclosure
a. If it was intentional disclosure, then must make public disclosure immediately
3. End Resultsays if you disclose to one person, you must disclose to rest.--> no favored positions for analyst.
v. Problems
1. 11-1- Person overheard corp exec talking about merger. Traded stock. Was not illegal. This is fine. IF you
can’t show quid pro quo for the tip…you have have to show the fiduciary duty was inherited by tipee.
2. 11-2- Yes this could violate 10b5 if father got a personal benefit. A personal benefit can be a gift. However,
this real case held that it wasn’t a violation of 10b5 bc son and father was having a normal conversation with
his dad.
3. 11-4-violated FD rule bc he didn’t promptly disclose after he talked to analysts.
e. 3RDMisappropriation Theory
i. Based on a Fiduciary Duty owed by the Misappropriater to the Source of the Information
ii. Req.ments
1. A duty is breached owed to the source of the information AND
a. Breach is just using the information for personal gain
b. Thus, if disclose intention to sell to source, & they say fine, you don’t breach
2. The information has value “ordinarily” in a securities trade.
iii. When is there a Fiduciary Duty
1. Must have:
a. Discretionary Authority AND
b. Dependence.
2. Family Relationship alone is not enough (but SEC presumes family relationship is good enough by rule
unless rebutted)
3. Cannot be Unilaterally Imposed (meaning Fiduciary duty is not imposed by just saying “don’t tell)
iv. Examples of Fiduciary Duty
1. Employer-EmployeeYes
2. Wall ST. JournalProbably
3. Psychiatrist-patientYes
4. Government Official-ConstituencyN/A
5. Father-SonYes, but can vary on the facts
6. Husband-WifeNO, not a fiduciary duty
f. FOURTH The Duty Free Liability
i. From Rule 14e-3Prohibits using information if it is obtained from an offering person/(tender offer)
1. Seems to apply to anyone that acquires the information about a tender offer.
2. Would apply to printing press employee

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