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#Post#: 47--------------------------------------------------
Business Associations Outline 2
DIR By: SunsetSailor
Date: February 17, 2011, 4:17 pm
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Economic and Legal Aspects of the Firm
1. Introduction to Business Associations
1. Factors Involved in Choice of Organizational Form
1. Making the investment decision
1. If you’ve got money in your pocket,
there’s a lot you can do with it
2. It is assumed you’d want to make the
most from it
3. Rate of return
1. Low risk/low return and vice versa
4. You should split up your investment –
diversify
2. Two main kinds of capital
1. Money capital
2. Human capital
1. Brains, muscle, time, willingness
to work
3. Transaction cost factors
1. Bounded rationality
2. Opportunism
3. Team-specific investment
2. Agency Law
1. Principle of agency
1. There are lots of relationships that fall into
this category
1. At least two people (principal and
agent)
2. Employment relationship
2. Deals with two kinds of relationships
1. Relationship among people inside the
business association
2. Relationship between business
association and third parties
2. Agent’s Fiduciary Duty
1. Fiduciary limits on agent’s right of action
1. The agent is to prefer the principal’s
interests to his own
2. The duty substitutes for an express
contractual specification of exactly what an agent may or may
not do
2. Fiduciary duty
1. Imposes a general obligation to act
fairly
2. Obliges the fiduciary to act in the best
interests of his client or beneficiary and to refrain from
self-interested behavior not specifically allowed by the
employment contract
3. Socially optimal fiduciary rules
approximate the bargain that investors and agents would strike
if they were able to dicker at no cost
3. Duty of loyalty
1. It’s a one way duty
1. The agent owes it to the principal
but the principal doesn’t owe it to the agent
2. The law describes the relationship in
broad terms
1. You have a duty to be loyal to the
principal
[Community Counseling Serivce, Inc. v. Reilly: After Reilly
decided to quit but before he actually stopped working for CCS,
he went out and solicited current and potential CCS clients for
his future similar business. There was no explicit contract
saying he couldn’t do this. Court held that he breached his duty
of loyalty to CCS.]
4. Employment at Will
1. Default rule - employer can fire at any
time for any reason
2. In the employment context, factors apart
from consideration and express terms may be used to ascertain
the existence and content of an employment agreement, including:
1. The personnel policies or
practices of the employer,
2. The employee’s longevity of
service,
3. Actions or communications by the
employer reflecting assurances of continued employment,
4. The practices of the industry in
which the employee is engaged
[Foley v. Interactive Data Corp.: IDC had written termination
guidelines that set forth express grounds for discharge and a
mandatory seven-step pretermination procedure. It was Foley’s
understanding that the guidelines applied to him as well as
those he supervised. After Foley blew the whistle on his
supervisor, he was moved from position to position before being
given the option of resigning or getting fired. Foley brought
suit for wrongful termination, alleging the guidelines altered
the at-will employment relationship. Appellate court allowed
breach of employment contract claim to proceed to trial.]
3. Vicarious Liability: Firm’s Relation to Outsiders
via Agents
1. The agent’s actions will bind the principal
only if the principal has manifested his assent to such actions
1. Actual authority
1. The principal manifests his
consent directly to the agent
2. The manifestation of consent may
be implied by the conduct of the principal
3. If actual authority exists, the
principal is bound by the agent’s authorized actions, even if
the party with whom the agent deals is unaware that the agent
has actual authority and even if it would be unusual for an
agent to have such authority
2. Apparent authority (also known as
ostensible authority)
1. When the principal intentionally
or negligently causes or allows a third party to reasonably
believe the agent possesses the authority
2. A third party will be able to bind
the principal on the basis of apparent authority only if the
third party reasonably believed that the agent was authorized
1. If the third party knows the
agent has no actual authority – no apparent authority
2. If the principal’s
manifestations constitute an insufficient foundation for forming
a reasonable belief that the agent is authorized – no apparent
authority
3. Inherent authority
1. Springs from the desire to protect
the reasonable expectations of outsiders who deal with an agent
2. A gap-filling device used by
courts to achieve fair and efficient allocation of the losses
from an agent’s unauthorized actions
2. Disputes between principals and third parties
over the authority of agents – two categories:
1. Cases in which an agent exceeds her
authority in an attempt to further the interests of the
principal
2. Cases involving totally opportunistic
action, where the agent intentionally misleads both principal
and the third party
[Blackburn v. Witter: Long, an agent of Dean Witter, advised
widow Blackburn to invest in a nonexistent company. B brought
suit against W under a vicarious liability theory. The court
entered judgment in favor of B on the theory of ostensible
(apparent) authority.]
General Partnership and Other Noncorporate Business Associations
3. Overview
1. From Sole Proprietorship to Joint Ownership
1. Sole Proprietorship
1. One person owns everything and runs
everything
2. External relations – owner pays taxes
and is liable for debt
1. Entitled to all the profits
3. Owner has residual claimant status
4. This is the default if one person is the
owner
2. General Partnership
1. Default rules (can be changed by
contract)
1. Profits/losses/control split
equally
2. Withdrawal at will
1. If one partner withdraws,
the partnership is over
2. Great deal of flexibility
for partners to exit
3. Fiduciary duty owed between and
among partners
2. External relationships
1. Agency relationship – vicarious
liability between partners
2. Unlimited personal liability
1. Creditors can go after
personal assets of partners
3. The default rule is that if you are
co-owners of a business, you are partners
1. Joint ownership is equally sharing
profits/losses/control
3. Limited Partnership
1. To be in an LP, you have to formally
declare it and register with the state
2. Internal Relationships
1. The relationship between members
is different
2. Two kinds of partners
1. Limited partners
1. One step removed from
partners (less identified with the business)
2. Can withdraw without
dissolving the partnership
3. Have rights to profits
and losses but no right to control
4. Fiduciary duties don’t
really apply to limited partners because they are forbidden from
controlling the partnership
5. Passive partner
2. General partners
1. If the general partner
withdraws, the partnership is over
2. Like a partner in a
general partnership and has rights to profits/losses/control
3. Owes fiduciary duties
to the limited partners
1. Has
responsibility to run business for the benefit of the
partnership
3. External relationships
1. Limited partners have limited
personal liability
1. Liability for the amount of
money they put in
2. If limited partner takes
part in control, they give up their limited liability
3. If you want to act like a
general partner, you have to accept the terms
2. General partner has unlimited
personal liability
4. Joint Venture
1. A partnership for a limited purpose
2. The same things apply but the scope of
the partnership is limited
3. Think car companies getting together and
working on fuel cell technology off of I-80
1. If Ford wants to work on a solar
car, Toyota is not liable for that – only the fuel cell stuff
2. Choice of Standard Forms
1. For organization, states have provided
standard forms of governance rules
1. Corporation
2. General partnership
3. Limited partnership
4. Limited liability companies
5. Limited liability partnerships
2. Analogize these as form contracts
1. These forms of organization have default
aspects and mandatory or immutable aspects
1. Default aspects
1. Have to abide by them unless
you change them
2. Mandatory (immutable) aspects
1. Have to abide by them
regardless – can’t change them
2. Usually for public policy
reasons
3. Different business entities are taxed differently
and that can affect what type of business is chosen
4. Fiduciary Duty of Partners
1. Traditional Framework
1. Fiduciaries must carry the burden of proving
by clear and convincing evidence that they have fulfilled their
fiduciary obligations
2. In a limited partnership, the general partner
will have a heavier duty of loyalty because she will control the
information and the business
[Meinhard v. Salmon: M and S had a de facto limited partnership
in a building lease with S as the managing partner. As the lease
neared its end, S secretly negotiated with the owner for a new
lease excluding M. When M discovered the plan, he insisted on
being part of it but was refused, so he brought suit. Court held
that S breached his duty of loyalty and awarded M ½ interest in
the venture.]
2. Standard Duties and Partnership Agreement
1. The partnership agreement will determine the
extent of disclosure required between partners and whether a
failure of disclosure constitutes fraud or breach of the
agreement
1. Partners may alter the standard form
fiduciary duties to suit their particular relationship
2. Some jurisdictions say you can’t opt out of
fiduciary duty but trend is towards allowing opt out
[Exxon Corp. v. Burglin: Limited partnership in AK oil drilling
with E as general partner and B and others as limited partners.
Partnership agreement required E to disclose only
nonconfidentail information. One of the well results looked
promising and E offered to buy limited partners out. Offer gave
option of independent consultant to make assessment of offer.
The limited partners accepted without getting the evaluation.
The results turned out to be extremely productive and the
limited partners brought suit alleging E breached its fiduciary
duty by failing to disclose all information. Court held for E
because of partnership agreement.]
3. Fiduciary duty has two aspects
1. Duty of loyalty
2. Duty of care
3. Duty of Care
1. There is a duty of care but it only extends to
gross negligence or intentional conduct
2. Negligence in the management of the affairs of
a general partnership or joint venture does not create any right
of action against that partner by other members of the
partnership
3. Limited partners are owed more of a duty of
care from general partners
[Ferguson v. Williams: F&W purchased two buildings with the
intention of making a profit. When they were running low on
cash, they got Williams to invest of ¼th interest. He helped
them getting an initial loan and offered his employees to get
the project ready. When final funding fell through and the
venture was abandoned, Williams sued F&W to recover his losses
on allegations of negligence. Court held that it wasn’t a
limited partnership and negligence didn’t create right of
action.]
5. Power of a Partner to Manage and Bind the Partnership
1. External – authority to bind the partnership
1. Partners are jointly and severally liable for
the tortious acts of other partners if they have authorized
those acts or if the wrongful acts are committed in the ordinary
course of the business of the partnership
2. The partnership is liable for the acts of the
partners that are done in the scope of the partners’ authority
3. The ability of a partner to bind the
partnership is great
4. Apparent Authority
1. A partner acting in the apparent scope
of the partnership is within the authority (RUPA § 301)
1. Then the partnership is liable
unless there is no actual authority and the other party knew
there was no authority
2. If a third person reasonably believes
that the services he has requested of a member of the
partnership is undertaken as a part of the partnership business,
the partnership should be bound for a breach of trust
[Roach v. Mead: M and B formed law partnership. M handled R’s
business deals and B did R’s tax returns. When R sold his
business and had $20K to invest, he sought M’s counsel. M
offered to take the money at 15% and R agreed. R considered M’s
advice to be legal advice. When M defaulted and declared
bankruptcy, R sued partnership, so liability would fall on B.
Court found for R under apparent authority doctrine.]
2. Internal – power to manage and control
1. One partner, one vote
1. Problem when there is an even number of
partners
2. Favors status quo
2. Partner doesn’t always have to vote for
something that would benefit the partnership
[Covalt v. High: C and H were corporate officers and
shareholders in CSI. They orally agreed to form a partnership
and bought real estate upon which they constructed an office and
warehouse. CSI leased the building from the partnership for a
5-year term. Upon the expiration of the term, CSI remained a
tenant and orally agreed to certain rental increases. C resigned
from CSI but remained a partner with H. C demanded that the
monthly rent for CSI be increased $1K. H did not agree and took
no action to renegotiate the amount of the monthly rent payable.
C brought suit. Appellate court held for H because conflict of
interest known at formation of partnership.]
3. Limited Partner’s Role
1. Limited partners are passive investors more
akin to lenders than to general partners
1. As long as they act like lenders and not
like general partners, limited partners are not personally
liable for the firm’s debts
2. A limited partner shall not become liable as a
general partner, unless, in addition to the exercise of his
rights and powers as a limited partner, he takes part in the
control of the business
3. RULPA § 303
1. Was there control?
2. Did the creditor reasonably rely on the
belief that the limited partner was actually a general partner?
1. States that haven’t adopted RULPA
don’t have this second step
[Holzman v. De Escamilla: R, A, and D formed a limited
partnership for a farm business with D as general partner and R
and A as limited partners. The three conferred as to what crops
to plant. R and A overruled D as to certain crop choices. D had
no power to withdraw money without the signature of either A or
R. When the partnership went bankrupt, the trustee went after R
and A as general partners. The court held that R and A were
general partners because they took part in the control of the
business.]
6. Dissolution
1. Leaving and ending a partnership
1. A partnership agreement may specify terms of
dissociation or dissolution
1. Ex. partnership will last 5 years or
partnership will last until such and such is completed
2. Absent such provisions, the partnership
is at will
1. Free to dissociate
2. Don’t need a reason
3. Have right to force judicial sale
2. Dissociation
1. Leaving the partnership
2. Default rule – partnerships are at-will
and one can disassociate whenever he feels
3. Lawful dissolution gives each partner
the right to have the business liquidated and his share of the
surplus paid in cash
4. Default rule – dissociation leads to
dissolution
1. Can contract around this
2. Can waive right to force
dissolution and termination
5. Dissociation by death does not cause a
dissolution of the partnership and does not trigger wind up or
sale of partnership assets
6. If a partner is dissociated from the
partnership without resulting in a dissolution and wind up of
the partnership business, then the partnership must purchase the
dissociated partner’s interest at a statutorily defined buyout
price
3. Dissolution
1. When one partner dissociates, it
triggers a dissolution
2. This is a phase not an event
3. Partnership exists during dissolution
but only for wind-up business
1. Because it exists for winding-up,
you’re still partners and own fiduciary duties
[Hurwitz v. Padden: H and P formed a two-person law firm, but
failed to enter into a written partnership agreement. They
shared all firm proceeds on a 50-50 basis and reported all
income as partnership income. After 5 years, P notified H that
he wanted to dissolve their professional relationship. They
successfully resolved all business issues involving their
relationship, except for the division of attorney fess from
several of the firm’s contingency fee cases. Court held that
pre-dissolution contingency fee files remain assets of a law
firm following its dissolution in the absence of a contrary
agreement.]
4. First you have to marshal the assets and
most likely to be liquidated and divided
1. Throughout the process, you keep
track of what each partner has contributed and/or owes the
partnership (partnership account)
1. Don’t forget human capital
[Kovacik v. Reed: K was a licensed building contractor and R was
a job superintendent and estimator. K told R that he had a job
in San Francisco. He would put up $10K if R would do the work.
Profit would be split 50/50. There was no discussion about loss.
R agreed and contributed only his labor. K maintained all the
financial records. After some time, K told R that the venture
wasn’t profitable and demanded that R take on a half share of
the losses. R refused to pay and K brought suit. Appellate court
held for R, stating that by their agreement to share equally in
profits, agreed that the value of their contributions – the
money on the one hand and the labor on the other – were likewise
equal.]
2. Creditors get paid first
3. What is left over after creditors
and settling partnership accounts, is profit and is split
between partners
1. If nothing is left over or
if there are still losses – that is split between partners
4. Default rule is to split profits
and losses equally
5. Cash v. in-kind distribution
1. Default = everyone has right
to equal share in cash
1. Partners have to agree
to in-kind distribution
2. In-kind distribution absent
an agreement by all partners is limited to situations where:
1. There are no creditors
2. Ordering a sale would
be senseless since no one other than the partners would be
interested in the assets of the business
3. It is fair to all
partners
[Dreifuerst v. Dreifuerst: Three brothers formed partnership to
operate two feed mills. The plaintiffs served the defendant with
a notice of dissolution and wind-up of the partnership. The
parties were unable to agree to a winding-up of the partnership.
The defendant requested that the partnership be sold such that
the plaintiffs could bid on the entire property and continue to
run the business under a new partnership and the defendant’s
partnership equity could be satisfied in cash. The trial court
denied the request and instead divided the partnership assets
in-kind according to the valuation presented by the plaintiffs.
The appellate court reversed, holding court could not order
in-kind distribution without agreement among all partners.]
4. Termination
1. End of partnership
2. End of dissolution process and wind-up
is done
4. Wrongful Dissolution and Continuity
1. If a partner dissociates from the partnership
before completion of the agreed term or undertaking, such
dissociation will be wrongful
1. Under RUPA, the partnership is not
dissolved
2. Non-dissociating partners have the
option of continuing the partnership’s business without the
consent of the wrongfully dissociating partner
1. Still have to pay off the guy
leaving
3. The wrongfully dissociating partner must
compensate other partners for damages resulting from the
wrongful dissociation
2. RUPA defines ‘wrongful’ as including
dissociation that is in breach of an express provision of the
partnership agreement
3. All partnerships are ordinarily entered into
with the hope that they will be profitable, but that alone does
not make them all partnerships for a term and obligate the
partners to continue in the partnership until all of the losses
over a period of many years have been recovered
[Page v. Page: The parties were partners in a linen supply
business. Within the first two years, each contributed about
$43K for business expenses. For the first 8 years, the business
was not profitable, losing about $62K. The partnership’s major
creditor is a corporation, wholly owned by  that
supplies the linen and machinery necessary for the day-to-day
operation of the business. This corporation holds a $47K demand
note of the partnership. The partnership turned its first profit
in 1958. Despite this improvement,  wanted to terminate
the partnership. Court held it to be a partnership-at-will.]
4. RUPA § 602 was drafted after Page and has
different take
1. Makes it harder to find wrongfulness in
a dissociation or dissolution
2. Dissociation is wrongful only if:
1. Breach of express provision of
partnership agreement
2. In a partnership for a term or
undertaking…
1. Leaving early
2. Get expelled by judicial
determination (§ 601[5])
1. Partner does bad
things
1. Other partners
go to judge to get the bad guy kicked out
3. Bankruptcy
4. If corporate partner
dissolves
3. Rejects idea that there is a general
duty to do good
[Monteleone v. Monteleone: N, L, and J formed an oral
partnership to own and operate an automobile body repair
business named Monte Auto Body Shop. There was a dispute as to
whom among them caused the dissolution. J brought suit
requesting dissolution and judicial sale and alleging that N and
L failed to conclude partnership business but rather were
operating the shop under a new partnership. N and L
counterclaimed alleging that it was J’s wrongful conduct that
had caused the dissolution of the partnership. They requested
that they be permitted to purchase J’s interest and to continue
the partnership business. Appellate court remanded for trial on
issue of J’s wrongful termination.]
3. Contractual Approaches to Dissolution Issues
1. Expulsion
1. No clean rule on how to get rid of lousy
partner
2. You can contract regarding expulsion
3. Partnership may expel a partner for
purely business reasons.
4. A partnership can expel a partner to
protect relationships both within the firm and with clients.
5. A partnership can expel a partner
without breaching any duty in order to resolve a ‘fundamental
schism.’
6. The fiduciary duty that partners owe one
another does not encompass a duty to remain partners or else
answer in tort damages.
[Bohatch v. Butler & Binion: After Bohatch brought forth
allegations that the managing partner was overbilling a major
client, the firm voted to expel her. Court held that the
fiduciary relationship did not create a whistleblower exception
with regard to expulsion from the at-will nature of
partnerships.]
2. Contracting to prevent opportunistic
withdrawal
1. Meehan v. Shaughnessy – see class notes
pg. 20
Corporate Form and the Separate Roles of Shareholders and
Managers
7. Introduction to Corporate Form
1. General corporation characteristics
1. Separates ownership and management functions
1. Directors
1. Agent of shareholders
2. Owe fiduciary duty to shareholders
3. Make major policy decisions
4. Acts as a unit via majority rule
2. Officers
1. Execute the policies of the
directors and provide day-to-day management
3. Shareholders
1. Owner and principal
2. Provide capital and elect
directors
3. No management role
4. Acts as a unit via majority rule
2. Limited liability
1. Shareholders’ liability limited to
investment
2. Convinces shareholders to give up
control
3. Adaptability/durability
1. Adaptability of corporation: separate
functions, officers make decision and shareholders have no
control
2. Durability of corporation: shareholders
can not dissolve the corporation, but the shareholders can
dissociate easily by selling their rights to someone else on the
open market
4. Legal deference to directors
1. Courts generally don’t question if
decision made in good faith—business judgment rule – courts
won’t ask if it was a good business decision
2. Rules for corporation
1. Corporation code
1. Law of state of incorporation
2. Default law
3. Courts look to the laws of the
incorporating state to determine the basic rights and duties
applicable to a particular corporation
4. One shareholder meeting per year
1. Default rule that cannot be
changed
2. Articles of incorporation/corporate
charter/certificate
1. Private contract, set out at the outset
2. Think of it as a constitution, difficult
to change, public document
3. Not required to do anything but create
the corporation
4. Can say other things and vary the
background law but it doesn’t have to
3. Bylaws
1. Private K,
2. Specific re: implementation, easy to
change, private documents
3. Think of this as legislation
4. Can also vary the background laws but
not all of them
5. The bylaws may contain any provisions,
not inconsistent with law or with the certificate of
incorporation.
6. Where a bylaw provision is in conflict
with a provision of the charter, the by-law provision is a
nullity
3. The law recognizes the corporation as an entity
separate from the directors, officers, and shareholders who make
it up
1. A corporation will be granted the same legal
rights and responsibilities as a person
2. Has the potential for perpetual duration, at
least until a majority of directors and shareholders decide to
end its existence
8. Corporate Form and the Stock Market
1. Shares of stock
1. Corporate ownership is broken up into little
pieces (and a whole lot of them)
2. Entitle the holder to a certain percentage of
the firm’s profits and net assets when the corporation dissolves
and winds up its business
3. Purchaser inherits all voting power and other
rights possessed by the selling shareholder
4. Creating classes of shares
1. There must be a class of shares that
carry authority to elect directors and exercise all other
shareholder voting rights
2. There must be a class of shares that
entitles the bearer to receive the corporation’s net assets upon
dissolution
3. All shares of a given class will be
fungible
1. They will have identical rights,
preferences, and limitations which supports an expectation that
the common shares of all corporations will possess similar
rights
2. Fungibility + active trading =
liquidity = reasonable valuation
4. Common shares
1. Shares that combine both residual
claimant status and voting rights
5. Preferred shares
1. Might be granted a dividend or
liquidation preference over common shares
2. Often coupled with a limitation or
denial of voting rights
5. Consequences
1. Very easy to get people to invest in the
corporation
2. Can buy and sell them very easily
2. Proxy
1. The legal relationship under which one party
is given the power to vote the shares of another
2. The person or entity given the power to vote
3. The tangible document that evidences the
relationship
3. Securities market
1. Centralized matching of buyers and sellers
2. Three important services
1. Liquidity
2. Valuation
3. Monitoring of managers
3. Reduces transaction costs to near zero
4. Efficient Market Hypothesis
1. Weak form efficient
1. Current stock market prices
instantaneously reflect all relevant information that can be
gleaned from studying past prices
2. Semi-strong form efficient
1. Stock markets instantaneously reflect
all publicly available information relevant to the value of
traded stocks
2. This is what economists and
policy-makers have believed that our securities markets are
3. Strong form efficient
1. Stock market prices instantaneously
reflect both publicly available and non-publicly available
information about traded securities
9. Shareholder’s Role in Corporate Governance
1. Shareholder role in governance
1. Election (and removal) of directors
2. Approval (not initiation) of
1. Article amendments
2. Fundamental changes
1. Ex. mergers, dissolution
3. Amendments of bylaws
1. But can’t interfere with management
4. Nonbinding suggestions (“precatory proposals”)
2. Corporation as Political Forum
1. State corporate law statutory norms entrust
management of corporate affairs to the directors
1. Shareholders do have the right to
suggest that the directors take a particular action or adopt a
new policy
2. Both the MBCA and the Delaware law
require that amendments to the articles be initiated by the
board of directors
2. Shareholder role in corporate governance
analogous to role of a voter in a democracy
3. One shareholder gets a vote per share
1. If you’ve got a large chunk, you get a
large say
4. Required to have an annual meeting of
shareholders for election of directors
1. Can’t contract around – mandatory
2. The purposes served by the annual
meeting include affording to shareholders an opportunity to
bring matters before the shareholder body
5. Judges exercise equitable power to prevent
management from manipulating corporate procedures or from
unfairly disenfranchising shareholders (see squib cases – pg. 28
reading notes)
[Hoschett v. TSI Int’l Software Ltd.: TSI had never held an
annual meeting because it had received written consent from a
majority of its shareholders to elect the slate of directors. H,
a stockholder, sued to compel TSI to hold an annual meeting. The
trial court held that TSI was required to hold an annual
meeting.]
3. Election of Directors
1. Normal rule
1. Directors are annually elected by
plurality rule, according to votes cast on a one vote per share
basis
2. Straight voting
1. A shareholder has one vote per
share or such other number as may be permitted
2. The shareholder can cast his total
number of votes for as many candidates as there are seats to be
filled
1. Ex. 100 shares and three
directors – 100 votes each for three candidates
2. Modification of defaults
1. Classes of shares with different voting
power
1. Voting classes – some classes get
more/less voting power for their shares
2. Variations from plurality (majority)
rule
1. Supermajority
2. Cumulative voting
Formula to determine
> SX / (D+1)
S = total number of shares being voted
X = total number of seats you want to control
D = total number of seats up for election
1. A shareholder can cast a
total number of votes equal to the number of shares multiplied
by the number of positions to be filled, and these votes can be
spread among as many candidates as the shareholder desires
1. Ex. 100 shares and 3
directors – 300 votes to be divided among however many
candidates he chooses (300 to one or 150 to two or 100 and 200
to two, etc.)
2. Creates the possibility for
the minority shareholders to select directors
3. Not a winner take all system
4. In CA cumulative voting is
the default rule (with some modifications)
1. Staggered terms (“classified board”)
[Centaur Partners, IV v. Nat’l Intergroup, Inc.: N amended its
articles to stagger the board and require an 80% supermajority
to amend. C didn’t like the way the business was being run and
wanted to amend the bylaws to add 6 more board members so that
at the next election it could elect a new majority. C wanted to
do this with written consent of a majority of outstanding
shares; argued a supermajority was necessary. Court held Board
couldn’t be enlarged without an 80% supermajority.]
4. Removal of Directors
1. Normal rule
1. Removal (without cause) by majority of
all shares entitled to vote
2. Exception to default rule
1. Staggered (classified) Board
1. Can be removed by a majority but
only for cause
2. Board elected by cumulative voting
1. The majority can remove the entire
board but there are limits on removing individual director
1. If ‘no’ removal votes would
have been enough to elect the single director, he gets to stay
3. If a director has actual or implied notice
that his right to hold office may be extinguished, he has no
vested right in his position
[Roven v. Cotter: R was a member of Citadel’s classified board
of directors. The initial bylaws of Citadel, rather than its
certificate of incorporation, provided for a classified board of
directors. Soon after he was reelected for a three-year term, a
rift developed between R and a majority of the board. At a
special board meeting, a resolution was adopted recommending
that the shareholders amend the certificate of incorporation to
allow for directors to be removed without cause. Shareholders
would be able to vote to remove the current directors and/or
declassify the board when the charter amendment became
effective. Court held the action proper.]
[Dolgoff v. Projectavision, Inc.: The seven-member board was
classified into three classes with D in Class 3. By 1995, the
relationship between D and M had soured to the point where D’s
employment at P was terminated. The board proposed to have the
1996 meeting in February nominating a replacement for D. The
proxy statement was disseminated to shareholders. D brought suit
claiming the s inequitably manipulated the electoral
process in their effort to remove him from the board. Court held
that the refusal of the board to renominate him is not legally a
‘removal’ and does not implicate the provisions of law dealing
with the removal of directors from a staggered board.]
10. Shareholder Proposal and Other Shareholder Communication
1. Overview of Federal Regulation
1. SEC rules seem designed to ensure that the
proxy process allows shareholders to communicate with each other
and the corporation as through all of the shareholders were
gathered in a large town hall on meeting day
2. The main idea behind the statutes is
disclosure
1. Looking for informed voters/investors
2. Disclosure, disclosure, disclosure
3. Rules Primarily Regulating Shareholder Access
to Effective Means of Communication with Other Shareholders
1. 14a-7 – requires a corporation that is
itself soliciting shareholders in connection with a meeting to
provide specified proxy solicitation assistance to requesting
shareholders
1. Two options
1. Provide the requesting
shareholder with an accurate list of those shareholders and
financial intermediaries from whom the corporation intends to
solicit a proxy
2. Directly mail the requesting
shareholder’s proxy material to shareholders and financial
intermediaries
2. Shareholder must defray the cost
of postage and handling
2. Socially Significant Proposals
1. 14a-8 – a qualifying shareholder may require
her corporation to include a shareholder proposal and an
accompanying supporting statement in the company’s proxy
materials
1. Qualifying shareholder – owns at least
$2K of stock or 1% of company for at least one year
2. Attempts to accommodate proposals from
shareholders primarily interested in reform of the corporation’s
management practices or structures, as well as proposals from
shareholders interested in broader social goals
2. Rule 14a-8(i) (“Question 9”)
1. On what grounds may corporation
management refuse to include a shareholder proposal in the
corporation proxy?
1. (1) Beyond shareholder power under
state law
1. Ex. enact article
2. This is the reason why
proposals are precatory
2. (5) <5% of assets and of earnings
and is “not otherwise significantly related to the company’s
business”
3. (6) Would be beyond management’s
power
4. (7) Relates to “ordinary business”
&nb
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