DIR Return Create A Forum - Home
---------------------------------------------------------
Kanagaroo Kort
HTML https://kangarookort.createaforum.com
---------------------------------------------------------
*****************************************************
DIR Return to: Business Assoc.
*****************************************************
#Post#: 64--------------------------------------------------
Business Assoc. outline 1 [Maryland Law-Suggs]
By: Penny22 Date: February 17, 2011, 9:53 pm
---------------------------------------------------------
Business Associations
I. Introduction: the basic business forms.
A. LLC, LLP, LLLP, Partnership, Sole proprietorship,
corporation.
B. Default provisions: if you don’t provide for a set of
circumstances, then you don’t have a guarantee for any
contingency.
1. LLC provisions often don’t have default provisions. What
happens if yoou didn’t account for something in the agreement?
2. In creasing amount of variation in “uniform” laws as states
tinker with them.
C. All forms other than partnership require a filing with the
secretary of state. Therefore, if no filing, chances are you
hafve a partnership.
1. Sharing of profits is basis of a partnership.
2. W/out B, A has no business, b/c B runs day to day operations.
D. Partnership: two+ persons associated in business to make a
profit.
1. Juridical persons are included.
2. When you combine forms, you can have extremely complicated
structures.
3. In a general partnership, all persons are equally liable. A
is at as much risk as B, except that B is judgment-proof whereas
A is not (accdg to hypo).
4. Absent agreement to the contrary, general partners have equal
say. In hypo, A ceded day to day control to B, but expressly
kept veto power.
E. If they form a corporation (juridical entity) instead of a
partnership, where they wanted to split the profits 50/50, so
they each own 50% of stock.
1. What is day to day control?
a. Advertising?
b. Buying, selling?
F. How can juridical entities act? They act through agents.
1. Scope of agency limits authority.
a. Actual
b. Apparent
c. Express
d. Implied
e. Inherent
2. Concentual, voluntary relationship.
3. Two kinds of actual authority: express or implied.
a. Express appears in contract.
b. Implied comes from express authority.
4. Apparent authority: an agent cannot create her own authority.
5. How does the principal manifest to a third party that the
agent has authority, when the principal is a juridical entity?
With juridical entities things get messy b/c only agents can act
for them.
6. If A1 lies, creating apparent authority in A2, then TP can
rely on the agreement.
G. Key questions: Who is in charge? What are the limits?
1. Sole proprietorship doesn’t create governance problems.
2. When you have two people, you begin to have problems. What
are the obligations of one to the other?
3. Fiduciary duty attempts to deal with these concerns.
H. Classic Entities
1. Partnerships
a. General
b. Hallmark in liability is that it is not limited. Each
partner is personally liable Creditor can go against any
partner for balance.
c. Partner who pays can seek retribution from other partners.
2. Corporations
a. Only around for ~ 100 years.
b. Before, only for particular projects by petition.
c. Limited liability in corporations has existed for shldrs for
~ 200 years.
d. Piercing the corporate veil: when shldrs act beyond their
role and into the activities, they can be held personally
liable.
I. New forms:
1. Limited liability corporation (LLC)
a. Tax benefits: corporation does not pay tax. They file an
information return telling IRS how much they make. Then, shldrs
pay tax.
b. Info return allocates tax to partners; partners pay tax even
if they receive no money.
c. Corporation pays tax on income. Money, as it goes to
shareholders gets taxed. Shldrs pay tax only if they receive
income.
2. Limited partnership (not new)
a. General partner
b. Limited partner, liable only for capital investment. No
control of business affairs. Passive investor.
3. LLLP: general parnters have limited liability.
a. Extends the limitation of liability.
b. If the depts of the partnership exceed the accounts, the
general and limited partnerships are not held personally liable.
c. General partners have limited liability as well as the
partners.
d.
4. Limited Liability partnership (LLP)
a. There are no limited partners
b. There are only general partners with limited liability
regarding certain elements, e.g. malpractice.
c. There are no limited partners.
5. In legal setting, partnerships originally were for life. Law
firms were smaller. Now, partners might not even know each
other. Law firms had one office. Change in legal culture.
6. Only the LP is a general business form in most states. There
are no default rules for these other forms. You must negotiate
a personal guarantee, b/c there are no default rules.
J. What happens when you begin combining forms?
1. Each entity has the capacity to be shldrs in any of the
forms.
2. Structuring a transaction can be the most difficult element.
a. What fiduciary concerns do you have?
b. What happens if this company gets bought out?
K. Fiduciary duty
1. Corporations: officers, directors, shldrs owe f.duty to the
principal corporation.
2. Partnership: general partners owe f.duty to each other.
3. Closely held corp: participants may directly owe f.duty to
the shldrs.
4. In a public corporation, only controlling shldrs have f.duty.
Lesser holders owe nothing b/c they can’t do anything.
5. Closely held corp., even minority shldrs, owe fiduciary duty.
6. LLCs:
a. Member led.
b. Management led, where members designate authority to smaller
group.
c. No law about f.duty. Courts interpret them with unexpected
consequence. If therre are lots of profits, there are lots to
fight about.
L. Year: 1970. You want limited liability. How do you get
limited liability for everyone and pass through taxation?
1. Make corporation general parnter.
2. Allocate 1% of profits to GP and 99% to limited partner.
3. What happens if key people don’t want more than 1%? How do
you give management the lion’s share of the profets when the
corporation is getting minimal cashflow?
a. Make managers limited partners. As long as they do not
participate in control of company, they are not liable.
b. Courts can be wildcards, which is why it’s advisable to have
several layers of protection.
M. Personal liability: Model Act: § 6.22(b), ULLC § 303(A), UPA
(1994) §§ 306(A) and (C). Passthrough taxation falls under tax
code.
N. Continental Waste Systems v. Zoso:
1. not a limited partner if participate in management. C was
general partner. I acted through C, making I general partner
and personally liable. See ULP § 303.
2. Modern stat gives safe harbors and third party must
reasonably believe the LP is a GP, based on LP’s activity and
not on hwat other individuals may have told the TP.
O. In Re USA Cafes Litigation.
1. Beyond the simplest transactions, you often have
competing/conflicting fiduciary duties.
2. Many incentives for one side to be opportunistic in
expectation of disagreements.
II. Formation of the corporation, ultra vires, premature
commencement, defective incorporation, disregard for the
corporate entity.
A. Formation of corporation
1. Initial actor: incorporator. Decides board of directors.
2. BOD
a. Ultimate people in corporate hierarchy
b. First organizational meeting, adopt by-laws, hold elections
for officers.
c. Officers are typically f/t senior managers.
d. Adopt resolutions: specific delegations of authority to do
certain acts.
3. By-laws are similar to stats.
a. Specific delegations of authority from the board to the
officers.
b. Polit beureau style. If you don’t carry the board, you are
out of a job.
4. Directors will sissue shares for consideration to shldrs.
5. Same person as incorporator and director issues 100 shs to
himself for svcs provided….
B. Ultra vires: byond scope of power. Distinction between an
unauthorized act the could have been authorized and an
unauthorized act that could not have been authorized. For ultra
vires, authority does not exist for that act.
1. Kings Highway Corp.
a. Derivative suit:  wants to void lease…
2. Stanley v. Boss
a. In what capacity is a promotor doing business, when that
corporation does not exist? On what basis is Boss personally
liable? Who has the burden of proof?
b. The opinion suggests Boss would have escaped liability had he
formed the corporation.
c. Agency is consensual. When the principal doesn’t exist, it
can have no agent.
d. Promoter bears risk of breaching f.duty, b/c he must place
the right terms in the contract.
C. Defective incorporation
1. PL: both sides know corp. doesn’t exist. With defective
incorporation, at least one side thinks the corporation exists.
2. Robertson v. Levy.
a. Send off to state secretary of state for good standing
certificate to maek sure corporation exists.
b. § 204: liability for preincorporation transactions.
(i) Knowing aspect included to protect from inadvertent acts of
employees.
c. Levy purported to act on behalf of corporation he knew did
not exist.
d. Therefore, corporation by estoppel.
3. How is piercing the corporate veil different from defective
incorporation?
a. imposing liabilities on shldrs.
b. § 6.22: shldre becoming personally liable through his own
acts or conduct.
c. Defecting incorporation: did you purport to act as an agent
for a corporation that doesn’t exist?
d. Piercing the corporate veil doesn’t negate the corporation.
(i) tough to draw a line
(ii) enormous differences in context
(iii) When the shldr is another corporate entity, or when shldr
is an individual, courts don’t tend to make distinctions.
D. Piercing the Corporate Veil
1. Shldrs are exposed to liability. Natural individuals or
juridical entities can be held liable.
2. Bartle: parent company is not liable.
3. Dewitt: pierced the veil. Agent did not rely on formalities
of corporation. If you don’t follow the rules, you don’t get
the benefit.
4. Baatz: based on tort claim instead of contract claim, b/c
tort claimants have no oppty to negotiate.
a. Was the capital adequate for operating a bar responsibly?
b. Ct: yes. (principals escaped dramshop liability through use
of corporate form.)
c. Inadequate capitalization would occur when corporation did
not have enough resources to cover losses or indemnities.
5. Radeszewski v. Telecom Corp.
a. Why did legislatures abandon minimum capitalization? To
encourage corporate growth.
b. Placing min would be inequitable, b/c only certain businesses
could have limited liability. Unlimited personal liability
would be too high for people to start business.
c. Abandoning cap mins can be accepatable when risks can be
covered through security interests, insurance, and personal
guarantees.
d. With a wholly owned subsidiary what do you expect but
complete dominations. No one else has say.
e. Sufficient insurance trumped the undercapitalization.
6. Fletcher.
a.  alleged cash management system syphoned funds from
subsidiary to parent.
b. This system was part of Kodak’s system w/ all its
subsidiaries. This only reflected sound business policy.
c. Monies were never intermingled. No pierce.
7. Kaiser-roth
a. What policies exist that the Board exercises control over?
Not very much.
b. Inverted agency relationship. The corporation is really
acting as agent for the principal (parent subsidiary).
c. Alter-ego theory: when subsidiary has no separate existence.
E. Disregarding the corporate entity.
1. Pepper v. Litton
a. Litton’s claim for salary was subordinated by claims of
creditors.
b. Fiduciary cannot simply authorize a transaction. Must create
an armslength mechanism
(i) Bring in new director with authority to authorize
transaction.
(ii) Allow minority shldr to review and vote
(iii) Let court give declaratory judgment.
c. Litton did none of these, so he was subordinating. Equitable
subordination: Litton goes to the end of the line.
2. Stark v. Fleming
a. You qualify for social security if you are an employee.
b. Eleming was sued by secretary of state b/c corporation was a
sham.
c. Court: There was proper adherance to corporate routines.
Not a sham.
3. Roccogrand.
a. Policy reason for difference: it is much easier to abuse with
unemployment claims than social security.
b. In Fleming, the court checks for inflated salary.
c. As an entrepreneur, you could claim unemployment willy-nilly.
d. In Roccogrand,  tried to get gov’t to subsidize
vacation.
e. In Fleming,  performed all corporate tasks, etc.
4. Cargill
a. Normal peiercing imposes liability on shldrs.
b. Reverse piercing allows chldr to get benefit by piercing.
Shldr argues for piercing.
c. Fairly new doctrine; some courts don’t like it.
d. Ct used alter ego theory.
e. If corporation is not in financial position to pay
dividencds, some states permit creditors to go after directors
for declaring an illegal dividend.
III. Financing the corporation: public offerings, share
issuance, preemptive rights, and distributions.
A. Public offerings
1. Mix of debt and equity.
a. debt: contractual obligation to pay a specific amount.
b. Equity: no contractual rights.
c. Person who holds equity is a shldr. As a matter of gen’l
law, a shldr isn’t entitled necessarily to a dividend.
(i) Contract to receive dividend: preferred shldr.
(ii) You can vary stat default rules depending on juris.
(iii) Distributions are always discretionary decisions of the
board.
2. If a company is publicly held, it does not have to ever
declare a distribution, because its shares go up by not
distributing.
a. From a tax perspective, you are better off if a company does
not distribute.
3. As a closely held company, it matters a great deal whether
company distributes.
a. If you can sell control, you have a readily marketable asset.
b. But, if you dissolve the corporation as a 49% stockholder…
c. In a closely held corporation, the economic impact for being
a minority shldr is great on the shldr.
4. As an equity shldr, there is a class. Rights and
preferences. All the shs in a class must be treated the same.
You can have different classes with different rights and
prferences.
5. Shares must be issued for some consideration. Classes with
only votes and no dividend rights amount to the selling of
votes.
6. Preferred shs: right to stand in line in front of some equity
holder. Two lines:
a. Liquidation and distribution.
b. Participation and distribution.
c. Typically, shs with a preference have a reduced participation
in residual quality.
d. Common shldrs have a claim on residual equity. Preferred
shldrs get payed first, but that payment is capped.
7. Upstream conversions: debencher convertible into bonds.
Highly problematic. Common stock to preferred: highly
problematic but permitted in some jurisdictions.
8. Upstream/downstream refers to place in line. No cutting
permitted.
9. Nonvoting securities have voting rights if someone is going
to cut in front of them. B/c contract says where they are in
line.
10. If linecutting happens entirely in front of you, no
objection, b/c doesn’t alter your place.
11. Authorized but unissued shs have enormous control. § 6.21
MBCA.
a. Bd can only issue authorized but unissued shs. This can
affect the power balance.
b. Auth but unis. Isn’t always good bc of power struggles and
quorums
c. Change default rule:
(i) all board action must be unanimous
(ii) supermajority vote
(iii) change quorum number
12. Fiduciary duty: can shares be issued for purposes of taking
control? Self-dealing transaction. This could be the basis of
a challenge. Most cases are about f.duty.
B. Share Issuance
1. Par value
a. Not useful. The model act eliminates par value. Most
states, including MD and DE use par value. Tax assessed on … .
A high par value creates a higher franchise tax.
b. For out-of-state corporations, there is a process for
qualifying to do business. You have no recourse to the courts
unless you are qualified to do business there. If you have no
par value, i.e. PA, other states can designate a par value based
on value of shs. Under the Model Act, there is no liability for
issuing stock at less than par value.
c. In states that have not abolished p.v. you can issue shs
without p.v. or “no-par shares” but those states still
incorporate the concept.
d. If the juris has a p.v. requirement, and you issue shs for
less, then you are liable for the difference. Liability is to
the holder of shs.MBCA (1969): §§ 18, 19, 25.
2. Treasury share: one issued by corporation and subsequently
reacquired. The various rules and prohibitions for
value/consideration do not apply.
3. Watered stock: applies to stock issued for insufficient
consideration or consideration that is ineligible. The balance
sheet doesn’t balance.
4. Hanewald v. Bryan’s
a. : piercing the corporate veil.
b. Ct.: no par value. Liability b/c  didn’t pay par
value and by stat.  is laible.
c.  loses on pcv argument, but wins on par value.
d. Had  had adequate counsel at planning stage, the par
value would never have been set so high.
5. Eligible and Inegligible consideration
a. § 19, 1969 Act: cash, other property tangible/intangible,
labor, or past services. Promissory notes and future services
are not allowed.
b. § 6.21, MBCA, includes future services and promissory notes.
Makes much more difficult to bring a fraud claim: as long as you
have the board laible to its own actions, you don’t have to
worry about problems with issuing to TPs.
6. Vote dillution: shs are issued to change the balance of power
C. Public Offerings
1. Securities Act 1933: intended to eliminate lots of criminal
activities.
2. Securities Exchange Act 1934
3. Both acts require a great deal of expertise.
a. Exemptions from 33 act are available, but penalties can be
very Draconian. Strict liability on issuer and virtually stric
on officers and directors. Personal liability.
4. Was there a public offering? If yes, was there a
registration statement? If no, you are liable. If statement
inaccurate, then you are liable. Counsel may be personally
liable.
5. Ralston Purina.
a. Usually you need about 10mil for initial public offering.
6. Smith v. Gross (worms)
a.  sued on securities issue in federal ct b/c of strict
liability.
b. Only market for worms was dependent on investors going into
worm ranching. Those investors relied on  to develop
more investors.
c. To be legitimate, the profits must come solely from the
efforts of others and not from shldrs themselves.
D. Preemptive Rights.
1. Created by common law, entitle stockholder to retain
proportional ownership despite the issuance of new stocks.
2. Equity dilution: when per share price is unfair: if new shs
are issued at a price above value of existing shs, there is no
dillution. When issued below existing value, then equity
dillution. If issued with no voting rights, no vote dillution.
a. Issuing stock at book value is an example of e. dillution.
3. Vote dilution involves control. Stocks sold at fair price.
4. Stokes
a. Proposition to double capital of the company by bringing in a
new control group.
b.  had 4% interest diminished to 2%.
5. In a public corporation you don’t want preemptive rights b/c
they are a nuisance.
6. Since ~ 1930, stats have authorized a denial of preemptive
rights.
a. Older, p. rights exist unnless you opt out, i.e. “there will
be no preemptive rights.”
b. Newer, you must opt in.
c. § 6.30 of MBCA, set of default provisions.
(i) people with face value preferred “plain vanilla” nonvoting
don’t need preemptive rights, b/c they can’t have equity or vote
dilution.
(ii) Does no provide for nonvoting common stock or preferred shs
with voting rights. If you have either you have a conflict betw
vote dilution and equity dilution. You can’t grant p. rights to
one without incurring problems with the other.
7. Stokes v. Continental Trust
a. Rights of stockholder: power of individual stockholder to
vote according to his shares cannot be interrupted or prevented.
b. Rule: stockholder has a right to proportionale share when shs
are increased. And has a right to fixed cost not less than par.
c.  awarded diff of $450 sale price and $550 market
price.
8. Katzowitz v. Sidler
a. K: director and stockholder
b. S and L own remaining securities.
c. K,S,L make up board of directors.
d. Issuing stock below fair value dilutes shldrs interest in
surplus.
e. Corp’s directors must show issue price falls within
justifiable range.
f. There must be a valid corporate purpose for a bargain
purchase of stock.
9. Gottfried v. Gottfried
a.  want  to declare dividends on its common
stock.
b. Rule: directors may not withold dividends in bad faith. If
the causes listed aren’t motiviating ones for not issueing
dividends, then no bad faith.
c. Ct: dividends were paid in 1945. Good dividends; no bad
faith.
d. This burden is very hard for a plaintiff to prove.
E. Distributions
1. Model Act § 6.40(b): promissory notes, real estate,
redemption…
2. Bd declares distributions. § 6.40. There are instances
where districution may not be paid, but there is never a
situation where com. Must make a distribution.
3. In Gottfried, ’s ultimate problem was that he was
getting substantial money.
4. Ford v. Dodge: you can pursue all sorts of laudible corporate
goals so long as they benefit the corporation.
5. Wilderman
a. When a fiduciary is in a self-dealing situation, the
fiduciary must prove there wasn’t breach of duty.
b. For dividends, cts must ascertain business plan. Salary is
much easier to ascertain. Courts don’t want to choose
dividends.
6. Donahue v. Rodd Electrotype.
a. When are distributions lawfully payable?
b. What happens when they are not, and they are paid anyway?
c. Bd has power to redeem shs from whomever it wants. In terms
of legal authority of bd,  has no basis to challenge;
nothing illegal happened.
d. ’s basis of attack: breach of f.duty owed to corp.
The bd owes a duty to corp. If corp isn’t injured, how could
shldrs be injured?  only wanted an oppty to the price.
e. Ct: close corporation is more like a partnership, but with
the chance of freeze-out. In a partnership, a partner can
dissolve and get interest. Freeze-out: no dividends, no
employment, after buy-out at bargain rate. Buy-out is
culminatin of freeze-out.
f. There should have been a contractual corporate buy-out
provision.
g. The result in this case is limited to close-corp context b/c
of freeze-out possibilities peculiar to the close corporation
model.
7. Wilkes: current UPA cuts back on std of f.duty owed between
partners.
F. Dividends and distributions
1. There are lies, damn lies, and statistics.
2. Assets consist of cash, marketable securities, land, accounts
receivable, inventories.
3. None of these numbers are hard and fast.
a. Cash can include varying currencies at varying rates
b. Marketable securities fluxuate enormously
c. Land is difficult to evaluate
d. Machinery: cost less depreciation.
e. A/R: depends on credit worthiness of customers.
f. Inventory: how sellable is it?
4. Liabilities: accounts payable (bank loans, warranty claims,
etc.)
5. How does the Bd make a decision so as not to breach duty of
care? Traditional:
a. Look to avvailability of earned surplus
b. Is the corp. solvent, i.e. able to pay obligations as they
come due?
c. Current model act: § 6.40(c): solvemncy plus balance sheet
test.
6. § 8.33: liability for unlawful distribution
a. To avoid liability, a director must make sure his dissent is
recorded in the minutes.
b. A director held liable is entitled to contribution from each
director who could be held liable, and from each shareholder who
accepted the distribution knowing that it was made in violation.
7. Layer of federal law: if a company goes into bankruptcy,
distributions may be set aside by the bankruptcy trustee, either
as a matter of state or federal law.
IV. The roles of shareholders, directors, and officersl
authority of agents (and partners).
A. Smith v. Dixon
1. Apparent authority test: look to custom and course of past
transactions.
2. Agents cannot create apparent authority; an agent cannot
create her own authority. If there is another agent acting
within the scope of her authority, the acts may innure to the
credibility of the first agent, then apparent authority. If TP
reasonably believes.
3. Three prior real estate transactions, where W.R. Smith acted
on behalf of the partnership: two conveyances and one purchase.
4. In the opinion there is no indication that TP knew of this
course of practice. In a small community three prior
transactions may have indicated knowledge of TP.
B. Rouse v. Pollard
1. UPA § 14 (1914): when partnership is liable to TP when
partner “misapplies.”
2. Here,  doesn’t get her money back b/c  did
not act according to the custom of the partnership.
3. No apparent authority and therefore the partnership was not
bound.
4. Must confirm the agent’s assessment of authority.
C. Roles of partners and shldrs.
1. What are the default rules and how can the parties vary them?
a. Vary agreement in by-laws.
b. Vary agreement in shldr agreement (common way). Many courts
treat this with special regard to close corporations.
2. Who has a fiduciary obligation?
a. Traditionally, shldrs don’t while directors do.
b. The potential for inequitable conduct to go unsanctioned and
without remedy.
3. Nat’l Biscuit v. Strand
a. What is the responsibility of a partner? What is the power
of that role?
b. UPA § 9(1): every partner is an agent of the partnership.
c. Anything consistent with usual and customary will bind
partnership.
d. § 9(4): no act in controvention will bind.
e. § 18(e) and (h): with partnership of two, there is no
majority to contravene the other; the only remedy is
dissolution.
f. § 18(a): all partners share equally in the profits.
4. McQuade v. Stoneham
a. Shldr’s agreement: directors, salaries, etc, cannot be
changed w/out agreement by all three shldrs.
b. Traditionally, shldrs are not constrained by f.duties. Here,
by gutting the board and contraolling as shldrs the parties
potentially violate f.duties.
c. Ct: agreement preclueded the bd from exercising any contr9ol
and from exercising f.interests.
5. Long Park
a. MBCA § 7.32
6. Galler v. Galler
7. Zion v. Kurtz
V. Shareholder Voting and Voting agreements
A. Ch.7 of MBCA: shldr voting
1. The small, nit-picky isssues often determine the outcome.
Differences in result, even when the party in question “touched
all the bases.
2. Equal dignity doctrine: legal form of doctrine against
economic substance.
3. Record owner: on records of corporation, show that person as
being owner.
4. Beneficial owner: person entitled to economic benefit of
stock.
5. Quorum: 50% + 1.
6. § 7.25: majority of votes entitled to be cast constitutes a
quorum
7. § 7.27: articles may provide for a greater quorum
8. § 7.25(c): maj. Vote is by comparison to votes against, when
quorum is present. (Under old model act, you needed a majority
of the quorum).
B. Quorum can be a tactical issue.
C. Inspector of elections has a merely clerical task of matching
names on the record and persons showing up to meeting.
D. Supermajority: you can vary the supermajority. E.g., MD: 2/3
vote for all charter amendments.
1. In DE, you can enact a supermajority. Maintain control and
prevent minority interests from developing. A majoity can
impose a supermajority. Same 51% can delete a supermajority
unless you require supermajority to delete it.
2. MBCA § 7.27(b): you have to meet the requirements in effect
to make proposed change, whichever is greater.
3. In DE you could incorporate § 7.27(b).
E. Appraisal rights or dissenter’s rights: very difficult to
exercise unless one person owns a large number of shares.
F. § 7.28: cumulative voting: directors are elected by
plurality.
1. Cumulative voting gives minority shldrs a voice on the bd.
2. Information rights of a director as opposed to a shareholder.
3. In theory, a director has full access to company info.
4. Having this board member gives info power to minority shldr.
G. If by-laws provide, shldrs can remove directors with or
without cause. But see § 8.08(c).
1. Conventional wisdom: makes sense as governance device when
there is no majority, but lurality…
H. lkjlkj
I.
J. Staggered Bd.
1. Can be classified into two or three classes, one election
each year. Under MBCA, must have at least nine members. Del:
classified removal only for cause.
2. Provides a continuation of policy.
3. For cause = actual fraud.
4. Protects against takeovers.
5. Humphries: equal dignity doctrine
a. Staggering elections makes cumulative voting the same as
straight.
b. Ct: the right exists that shldrs have cumulative voting, but
the effects are not guaranteeed.
c. There are a number of ways to avoid cumulative voting
(i) change charter
(ii) change stock
(iii) with all these other ways jaround the effects it will not
be viewed as a guaranteed effective right.
(iv) § 8.25(a) and (d): committees. Allow minority bd rep to
handle charitable affairs, etc., i.e. bog him down with useless
functions.
K. Voting trust agreements.
1. control arrangements
2. Brown: voting trust agreement, arose during bankruptcy
reorganization of company.
a. Trustees have full f.duties.
b. Here, trustees elect themselves as directors of the company.
They elect to give voting rights to debt holders of the
corporation.
c. Ct: you cannot give voting rights to debentures. Why not?
d. Equitable trustees cannot impair the corpus of the trust,
particularly to their own interest.
3. Ringling. Proxy appointments.
L. Lehrman v. Cohen
M. Poison Pills
N. Ling
VI. Deadlocks
A. Collins v. Lewis
1. Partnership had term of 30yrs. Partnership can still be
resolved. UPA § 31(2).
2. Collins wanted judicial dissolution to avoid liquidation
rights. § 38(1) and § 38(2): damages for breach. Collins does
not want to dissolve in breach.
3. Jury rejected all of Collins’ arguments. Found factual basis
for Lewis getting judicial dissolution
a. Lewis had guaranteed Collins against loss to 100K. B/c of
Collins’ conduct he has no liquidation rights if he chooses to
dissolve.
b. Lewis has Collins locked in. No incentive to dissolve.
B. Gearing v. Kelly
1. Why should a court involve itself in a control fight?
2. The parties cannot work together. Are the courts even
commpetent to make decisions on business interest?
3. Suggs: cts should not have stepped in; two is not a quorum.
C. In re Radom v. Neidorff, Inc.
1. Ct refused to dissolve corporation b/c corporation was
profitable.
2. Bd is deadlocked over dividend and salary
3. Name of company and market position is value. In
dissolution, only assets are sellable. By witholding relief,
the parties must work out an arrangement, i.e. dividend for a
salary.
D. Ch. 14, MBCA, reqts for dissolution. Dif. Problem for
closely held than public corporation.
1. Close: dissolution is a way to get something for you shares
as a minority holder.
2. Public: sell your stock.
3. Three types of dissolution:
a. shldr vote
b. administrative: corp hasn’t paid taxes, etc
c. judicial: see Radom.
(i) § 14.30: discretionary. Criteria: (1) two-tier
director/shldr deadlock and (2) business cannot be carried on or
(3) illegal, oppressive.
4. Careful planning avoids problems with dissolution.
a. Give minority oppty to be bought out
b. Buy-back provisions.
5. Make dissolution more difficult b/c:
a. although corporation ceases to exist, the business does not
cease to exist. Only when assets are sold piecemeal does this
happen
b. a shareholder can use dissolution as a holdup device.
c. Most dissolution petitions don’t result in liguidations; one
of the parties often is bought out. See § 14.34(a).
6. Davis
7. Abreu: appointment of provisional director
a. Here, one side was bad actor.
b. Makes sense that good actor can appoint provisional director.
VII. Fiduciary duties: duty of care and the business judgement
rule.
A. Business judgment rule: A director or officer who makes a
business judgment in good faith fulfills the duty if the
officer:
1. Is not interested in the subject of the business judgment
2. Is informed with respect to the subject of the business
judgment to the extenet the director or officer reasonably
believes to be appropriate under the circumstances
3. rationally bleieves that the business judgment is in the best
interests of the coporation
B. Duty of care: a director or officer has a duty to the
corporation to perform the director’s or officer’s functions in
good faith, in a manner that he or she reasonably believes to be
in the best interests of the corporation, and with the care that
an ordinarily prudent person would reasonably be expected to
exercise in a like position and under similar circumstances.
This is subject to the business judgment rule pursuant to… 678.
C. Business judgment rule
1. The risk is borne by the corp. and the benefit is borne by
the corp. In torts the risk is borne by TP.
2. How can you have innovatin with the reasonable person
standard? If no one runs from the lion, you don’t either.
Innovation means risk-taking. Unsuccessful risk-taking looks
unreasonable only in hindsight.
3. Business judgment rule is not codified in a state or model
act. No one can reach agreement. The language used to express
this value is not helpful.
4. The rule protects directors from liability and protects the
transaction from being invalidated or enjoined. More than
anything, it establishes the process for judicial review. The
rule provides a rebuttable presumption of innocence for
.
5. The formulation changes.
D. Cases imposing personal liability on duty of care are few and
far between.
1. Van Gorkum
2. Linthicum
3. On the facts of each, hard to accept what the court was doing
on face value.
E. Every transaction is risky. Duty of care: how the Bd weighed
risk. The business judgment rule insulates the Bd from highly
risky transactions, provided that the board knew it was highly
risky. If the Bd invested in high risk, but thought it was low
risk, then prblems. The Bd must be careful in assessing risk.
F. Rebutting the Rule:
1. Van Gorkum
a. Presumptiion board acted ingood faith, informed basis, with
best interests of the corporation in mind.
b. “Informed”: how do you show board didn’t read documents?
c. Best avenue is to show biard didn’t acti in best interests,
by showing conflic of interests. Rule doesn’t cover breach of
duty of loyalty.
2. Structural bias:
a. Special itigation committee: directors who will decide
whether litigation should go forward are often picked by
 directors.
b. The claim in a derivative could be valid, but not in the best
interests of the corporation.
c. If majority of bd is “interested” in the claim, such a bd can
delegate to new directors or subset of directors that are not
defendants in the action.
d. Two scenarios in Delaware:
(i) Action filed and bd interested. Then, litigation committee.
It can dismiss accusation provided best interests, etc. Court
then makes its own finding as to best interests.
(ii) If Bd appoints litigation committee and rejects demand or
challenges the results,  has burden of showing that
board decision is tainted and not covered by business judgment
rule. (Difficult to prove, b/c this takes place prior to
discovery).
3. 7.44 Model Act, Dismissal: grounds for dismissal of
derivative proceeding.
4. If demand is rejected by majority of independent directors
and quorum, party making demand must show
a. Reasonable investment????
b. Good faith
c. Best intention of corp
d. And that majority of corp decision was not independent
directors.
5. Shifting burden: if independent directors not majority of
decision-making team, then bd must show good faith, etc.
6. Corporate law looks to financial ties or close family ties.
Usually the hallmark of dependence.
G. Cuker v. Mikalauskas.
1. In some ways a rejection of the Delaware approach, b/c it
allows courts to make ltd inquiry respecting disinterestedness.
 has the burden of showing the board is not
disinterested.
2. This model does not work very well in closely held
corporations. Generally, everyone knows what’s going on.
3. N.4, pg.75: it doesn’t make sense to litigate these
operations.
H. Deriviative Litigation
1. If not concerned enough about structural bias, then valid
complaints won’t go forward.
2. If too harsh on structural bias, more suits will be filed.
3. Business Judgment is duty of care.
VIII. Fiduciary duties: the duty of loyalty and conflict of
interest transactions; corporate opportunities; sales of
control.
A. Duty of Loyalty
1. Self-dealing transaction is a transaction between corporation
and some entity that is a fiduciary.
2. Not all transactions are self-dealing, for example a director
is sole sharholder and will reap a personal benefit.
3. When you owe a duty to buyer and seller corporation, what do
you do?
4. When there is potential for coercion, when  is shldr
of one and empee of other. Acting out of greed rather than
fear.
5. Duty of loyalty extends beyond transaction context.
a. Corporate opportunity doctrine: when F takes oppty intended
for corp., and takes it for herself, no self-dealing b/c absence
of transaction between corporation (principal) and TP.
b. If someone as the controlling shldr has corp. buy property
from herself as director,
(i) no business judgment rule, exept if transaction is
sanitized, i.e. approved by the Board.
(ii) Not all self-dealing transactions are bad. Need an
approval process for transactions that benefit the corporation,
or court approval, or shldr approval.
c. If conflict of interest or duty of loyalty claim,burden
shifts to fiducisary to show fairness.
(i) Fairness can mean “fair price,” “fair dealing,” or “fair
process,” or all three. Intrinsically fair. Entirely fair:
more than just fair price: fair price for the timing.
(ii) Does the timeing impact the buyer so that the price is not
fair?
d. This duty is not codified anywhere.
6. Once a transaction is sanitized, only then is it entitled to
the business judgment rule. At that point, under MBCA, cannot
be challenged under conflict of interest. Burden shifts back to
.
7. Meinhard v. Salmon
a. What is the scope of the venture?
(i) If limited to the contract between S and M, then S can
terminate M at the end of the contract.
(ii) However, M has an equitable interest in the lease. S would
have to offer M a chance.
(iii) If scope of venture determines f.duty, then length of
contract doesn’t govern.
b. Cardozo focuses on duties of coventurors. If has had told M
and given him a chance to compete, this would have been okay,
b/c nothing behind his back and nothing under the table.
c. In tough cases, its very difficult to draw a satisfying line.
8. Does the duty of loyalty continue even though there has been
a falling out?
a. UPA(1914) § 21: partner accountable as a fiduciary.
b. Among coventurors there is no co-ownership of property, as
aopposed to a partnership.
c. UPA (1994) § 404(b)
B. Conflict of interest.
1. Marciano v. Nakash
a. Stockholder made loans to corp.
b. At CL, conflict of interest transactions were voidable.
c. § 144 is not exclusive. Disinterested shldr votes are
required to ratify a transaction.
d. Can the case still be applied on certain grounds? Fn 40 (a)
pg. 718.
2. If conflict of interest rule is cured, duty of care is still
available, but for the business judgment rule.
3. Conflict of interest is a two-step process:
a. Must be approved by majority of quorum.
b. After interested directors are disqualified.
4. Burden of proof to show a transaction is fair is on the
fiduciary involved, as opposed to duty of care which falls on
.
5. Even if transaction sanitized,  can always claim no
disclosure, or disinterested Board member was in fact
interested. Burden is still on fiduciary.
6. MBCA § 8.62: Director’s action: conflicting interest
transactions…
7. Heller v. Boylan.
a. Is there any limit how much a corporation can pay a CEO?
b. By-law was enacted in 1910 when women and men didn’t smoke in
public. Not socially acceptable until WWI: in every day’s
ration a free pack of cigarettes. Combat conducive to smoking.
c. Revenues in 30s are attributable to decisions made in 1910.
(i) Waste, b/c the executives made those decisions twenty years
ago.
(ii) Another argument: when shldrs approved bylaw, execs didn’t
disclose that benefit would continue in perpetuity.
(iii)  couldn’t come up with a relevant argument and the
stat was struck down.
8. MBCA sub ch. F: 8.60-8.63: codification of conflict of
interest transactions
a. Does not cover opptys never reaching transactions, for
example misappropriated by fiduciary.
b. Consensual bilateral transactions.
(i) 8.60 defs
(ii) 61 jud.
(iii) 62 dir
(iv) 63 shldrs
c. If sanitized then immune.
d. If not within definition of conflict of interest, then cannot
be challenged as such.
e. 8.60(3) Related person: includes not just natural persons.
The child of a sibling is not a related person. A great
grandchild is not a related person. Nephew, niece, grandchild,
grandparent, not a conflict. Bright line rule.
C. Three types of situations
1. Greed: is fiduciary tempted
2. Competing f.duties to both sides of transaction?
3. Coercion: what if fiduciary coerced by other party to
transaction with corporation?
4. Certain categories of transactions:
a. Where director or related person is party to a transaction.
b. When director or related person has a beneficial interest and
that interest might influence b/c of financial significance or
where there is a direct link.
D. Hypotheticals
1. D is director of A and creditor of B. Contract between A and
B. Financial viability of B without contract. Need not come to
board to be a conflict, so longs as one of the above. This is
concerned primarily with greed.
2. D is director of C and A. Competing f.duties when C and A
are corporations.
a. If A is a general partnership, and another partner of A
engaged in Business with C, then he is acting in individual
capacity.
b. Partners, however, are generally liable to GP. This is and
indirect consideration. Better to have wealthy partners than
poor, as GP liability is joint and several.
3. If A is employer of D and D is employee of lawfirm. Coercion
scenario where D is director of C.
a. Issue: is the financial benefit of such significance to A or
is the interest significant to D?
b. Only when looking at conflict in A does it matter what A’s
significant interest is.
E. Sinclair Oil Corp. v. Levien.
1. Structure of relationships in this case that was basis of
litigation
a. Sinclair 97% owner of Sinven.
b.  3% owner of Sinven.
2.  felt dividend drained so much funds from subsidiary
that it would preclude future activities.
a. Dividends.
b. K self-dealing
c. Corporate opportunity
3. Directors of Sinven who approved dividends were also
fiduciaries of Sinclair.
4. Standard of intrinsic fairness. B/c no business judgment
rule applies in conflict of interest. The standard is very
favorable to s. Adopting this rule adds merit to lots
of suits.
5. Contract Issue
a. Sinclair and Int’l didn’t buty the minimum required.
b. Why is this a different scenario than dividends and corporate
opportunity?
c. Because, when Int’l breeches with Sinven, how is Sinclair
benefitted by allowing breech? Minority bears the cost of 3% of
breach, i.e. Sinclair gets 103% benefit through breach as
opposed to a dividend where everyone gets paid.
d. Were Sinven a wholly owned subsidiary no one could complain.
e. Major: is there a benefit to the majority from which the
minority is being precluded?
f. Sinclair Int’l didn’t pay on time and did not pay amount
agreed to. Sinclair wants to forgive damages as 97% holder.
Intrinsic fairness governs. How do you show fairness in
excluding minority from 3% damages? 3% shldrs will never see
any real benefit…lawyers’s fees etc.
6.  and  had different notions as to appropriate
standard.
a.  urged intrinsic fairness std.  has burden.
The fiduciary has burden. Rather than  prove 
guilty,  must prove innocence.
b.  urged busienss judgement rule, b/c then 
must prove guilt.
7. The court said business judgment rule applied. In order to
find self-dealing, you must look beyond existence of fiduciary
on both sides, unless the benefit of the transaction excludes
minority shldrs.
8. If there are two classes of stock pari pasu (of equal
status), declare dividend on majority class but not on minority.
Intrinsic fairness.
9. Does the same test apply if the two classes are not
identical? Business judgment rule?
10. Corporate opportunity is a business opportunity belonging to
Sinven.
11. Bus.judg.,  almost certainly will win.
12. Intrinsic fairness,  almost certainly will win.
13. Ct: were any opportunities at stake belonging to Sinven?
a. No, so business judgment rule applies.
b.  must show one of opportunities actually belonged to
Sinven.
14. If lower court had been affirmed, problems for Sinclair b/c
of 11 subsidiaries in other contries.
F. Arledge and Chiea used internal UOP info in making
feasibility study. Using UOP resources to make feasibility
study solely to benefit Signal.
1. The 50% premium looks wonderful except that they would have
paid 65% according to a separate study. Using UOP resources
mandated disclosure.
2. Self-dealing aspects:
a. Use of UOP resources.
b. Majority’s benefits to minority’s cash-out.
c. Lack of negotiation. Lack of bargaining. The only
negotiating occurred when Crawford stood up for empee stock
options and Lehman Bros investment fee.
3. This case rejected the business purpose test: purpose must be
for subsidiary’s benefit. Rejected, b/c it doesn’t allow
separation of abusive mergers from good mergers.
4. NY and Mass keep business purpose test.
G. Corporate opportunity: something belonging to the corporation
that is infungible. Something on its way to becoming valuable.
1. ALI approach
a. Looks to what resources were used to develop opportunity, or
b. How did fiduciaries get knowledge of the opportuniy and in
what capacity?
2. Should the financial capacity of the corporation be relevant?
If the oppty is lucrative, the corp. might be able to finance.
The fiduciary may be in a position to find ways to finance.
3. Issue of consent and institutional shldrs… see notes.
H. Northeast Harbor
1. How do you determine the scope of the business opportunity?
I. Litwin v. Allen
1. The loan was non-recourse secured: garden variety loan, made
by affiliates of JP Morgan. Very sophisticated bankers.
2. If the bonds go up in price, if there is any gain, the bank
doesn’t get it, b/c at par. However, the interest payment
insulates the bank against loss.
3. Economic history surrounding the case and the measure of
damages indicate more was going on than opinion indicates.
4. The case is more about defendants acting in the best nterests
of JP Morgan empire instead of the company.
J. Zetlin
1. Sale of control in Zetlin and corporate opportunity.
2. 44% in public corporation is probably a majority of those who
would turn out to vote. In some issues, 44% might not be
controlling, i.e. crisis situations.
3. In Kaplan, 3% was control, and ct refused to accept it.
4. Seriatum resignation and repalecement: replaces one control
group with another. Grey area in the law. Hard to figure out
when the working control actually shifts.
5. Buyer pays 100% premium on 44% of stock. , who owns
2%, wants a share.
6. The corporation cannot own an interest in itself.
K. De Baun
1. In commercial context, punitive damages in fraud violation is
BAAAD. Enormous red flag.
2. Bank failed to act in a timely manner.
3. Revocable inter vivos trust: created by living person
revocable at any time. Debtor buying corporation using the
corporation as collateral.
4. The bank agreed to the loan, and lied to the shldrs telling
them it waas for the protection of the corporation.
5. This is an extreme case. If a looter has no record, is
first-timer…. Here, looter has a record, and bank had duty…
6. Putting on notice
a. Nature of corporate assets: if illiquid, it’s hard to loot.
b. Here, the assets were cash and fungible goods. Easy to loot.
L. Perlman v. Feldman
1. Under Zetlin, you can sell control for a premium. Here,
fact-specific.
a. Korean War.
b. Steel was in demand.
c. Fixed prices. Customers couldn’t bid.
d. Customers decide to buy the company so they can sell it to
themselves.
2. Feldman: dominant shldr.
a. Feldman plan: customers could pay in advance for the amount
of steel they could use.
b. Feldman decides by selling control block, buyers would get to
choose who got steel.
3. Ct give damages to minority.
4. Feldman must pay minority directly. If it goes to corp,
buyers get a rebate on what they were willing to pay.
5. Feldman keeps the portion of the premium that didn’t go to
the minority shldrs.
6. Damage to company: loss of goodwill through Feldman’s sale of
control.
7. If Feldman were a passive investor and sold it to the same
party, he could still be liable because of the results.
M. Caplan: sale of an office has to be bad. The only way to get
return of an investment is through fraud.
IX. The large publicly held corporation, the issue of social
responsibility, the different roles in public corporation of
shldrs and directors.
A. Difficult policy choices if the voting system requires
notice, transparency.
B. Cts in the opiniions struggle with the various policy
choices.
X. Proxy regulation, shareholder proposals, shareholder
communications.
A. SEC Act of 1934, §§ 14(A), 12(A), 12(G): registration of
proxies.
B. Studebaker v. Gittlin
C. Caterpillar
1. Administrative proceeding brought by SEC b/c SEC wasn’t happy
with caterpillar’s disclosure.
2. MD & A appears in 10-K and 10-Q.
a. 10-K: annual report to SEC with audited financial statements.
b. 10-Q: quarterly report that is less detailed.
3. Item 303: unusual disclosure, b/c it requires discussion of
“liquidity, capital resources,” and other information,
future-oriented that might affect company.
a. SEC previously did not want future estimates b/c the picture
would be much too rosy.
b. 303 statements must be reasonable and in good faith.
4. 1995 reform act, safe harbor provision: item 303 requires
management to make certain disclosures.
a. “Management” doesn’t indicate very much. Under SEC, title
does not control. Who is management?
b. Disclosure is required unlesss the material effect is not
likely to occur.
c. The test uses communications to Board as relevant to what is
known to management andwhat is material.
5. Guidance of 303 is that it is supposed to allow Board to see
through management’s eyes. If this perspective isn’t shown to
shldrs, then problems arise. What management thinks and thells
the Bourd must be related to shldrs.
6. State law, federal law, and licensing obligations in both can
present quandaries: damned if you do, etc.
7. Elements of fraud
a. A false representation
b. Of a material fact
c. Where  misrepresents knowingly but makes it for
purpose of inducing ’s reliance.
d.  relies and suffers damages as a result.
8. Proxy is sent to 100,000 shldrs.
a. Flase, materiality, knowingly: not difficult to establish.
b. Reliance of 100,000 shldrs is difficult.
(i)  argues  did not rely.  closes
transanction and  returns, it is impossible to unwind
the transaction.
(ii) Enjoining the transaction before finalized kills the
transaction.
9. The best time to give relief is at the injunctive stage, but
don’t really know what to do b/c of difficulty of showing
reliance. Showing reliance later is difficult b/c of stock
changing hands, etc.: new innocent parties as stock gets traded.
10. Additional problem in securities context:
a. CL did not reach omissions.
b. Securities law does reach omissions. See:
(i) § 14: “or which omits to state any material fact.”
(ii) § 10B
c. In reliance, how do you inquire whether  relied to
detriment on omission of information regarding X?
11. Examples of fraud:
a. Ambiguous statement: “All directors who represent minority
shldrs have approved the merger,” when there are no such
directors.
b. Misleading half-truth: “Our proxy materials have been filed
at SEC and they have not objected,” when the qualification is
lacking … just because they haven’t objected yet doesn’t mean
the SEC will not.
D. J.I. Case Co. v. Borak
1. Still good law, although the holding is not used as
expansively.
2. An implied private rightof action exists
a. Various policy rationale:
(i) Legislative history
(ii) Protection of investors.
b. Objections to creating a private right of action?
(i) Potential for abusive suits
c. Screening abusive suits works best at injunctive phase.
3. Opinion shifts burden of litigation from state cts to federal
cts.
a. State law varies regarding remedies and disclosures.
4. Borak creates an incentive for private enforcement b/c SEC is
outgunned and outmanned.
5. How it works:
a. Lawyer/Firm looks for nonroutine transaction, proxy
transaction, etc. Find someone with a claim.
b. Cost/Benefit: If firm can get a fee award for success that
exceeds cost of time (risk adjusted for lost suits) then they
bring the suit.
c. Size of claim, type of violation colored differently from
counsel’s pov.
d. Goal: high likelihood of success. Finding case where can win
on motion for summary judgment is ideal, b/c less time invested.
E. Mills developed this approach.
1. A proxy fraud claim requires showing that  relied.
With 10,000 shldrs concerned, arriving at the truth is very
difficult.
2. Test: shldrs relied if proxy was used as an essential link in
the transaction for which the proxy was submitted.
a. In Mills, proxy statement did not make a key disclosure.
b. Essential link.
c. Did the defect cause reliance? There must be a causal
connection.
F. TSC Industries v. Northway
1. How defective must it be?
2. Test below: material facts include all facts which a
reasonable shldr might consider important.
a. If the defect was such, consequences flow.
3. If threshold is too low, too easy to sue, making arguably
minor issues material.
a. HUGE reports.
b.  council can prevail on motion ofr summary judgment
and fee application. Invested little time. Following
cost/benefit, more cases like this will be brought.
c. At remedy stage, the remedy will be “don’t do it again.”
4. If higher std of liability, as in TSC:
a. Needn’t work to change the vote.
b. Instead the defect must be important enough “that reasonable
minds cannot differ on the question of materiality.”
c. This test makes pursuit in ct much less profitable b/c
litigation will be less likely to result in dismissal.
5. Two aspects:
a. Materiality determines whether  relied. “Relied”
goes to whether material issue was central link in the
transaction.
b. Individual investors rarely read these materials b/c it is
too long and not really worth their time.
c. Institutional investors do. The policy assumption is that
the professional investment community drives the market. Eg, if
institutional investor reads proxy statement and objects, this
will enter the news and individual investors will find out.
G. Weinberger
1. State law was traditionally undeveloped. In 1970s after
refusal of applying 10(b)(5) liberally, state law developed.
2. Delaware: if material violation of federal securities law,
very easy to persuade state vioilations.
3. Ct: there was no causation even though there was material
violation.
4. Dissent: practical view of minority opinion is consequential.
Parent corp. doesn’t want public relations problem. Majority
dismisses this argument as too speculative.
H. Shareholder proposals
1. Pg 647, shldr has company put proposal on proxy statement.
Usually political questions
2. Against minimal shldrs (1% or $1000).
a. Allows individual to further political interests.
b. Usually, the issue is internal to the organization.
3. Of shldr proposals through 1981, only 2 ever passed.
a. 1987, CREF wanted shldr wove on poison pill placs.
b. None of the proposeals were enacted.
4. Issues that are fought over are looked at very quickly.
5. If dispute between proponent and issuer, company sends
no-action letter request from SEC.
I. Rauchman v. Mobil
1. Proposed amendment to bylaws
2. Not permitted, b/c the amendment related to an election (the
foreign director was up for re-election).
3. The bylaw would have taken the incumbent out of
consideration.
4. (c)(2) “violates the law” also means breach of contract.
5. To the extent that Mobil is a multi-national firm and Saudi
Arabia is an ally to America, the statement appears fraudulent.
J. (14)(a)(7) creates option for issuer.
1. Either provide list of security holders to requestor, or mail
the proposal to the security holders for the requestor and get
reimbursed.
2. Better to mail for requestor
a. Company keeps list.
b. 14(a)(8) goes with manager’s proposals
c. 14(a)(7) goes separately: these are insurgents. Materials go
out at their expense and they are responsible for producing
them.
d. Keeps opposition from identifying allies.
e. Mailing their docs gives company an advance notice of what
requestor wants to do. Also, company will be able to tailor its
campaign in response.
3. Model Act and DE Act: list can be made available to shldr as
long as for a proper purpose.
4. Proposals cannot be ablout election contests; 14(a)(7) is
about election constests.
K. Virginia Bankshares.
1. : Misleading statements in proxy solicitation were
materially misleading under 14(a).
2. Assuming materiality, can statements of reasons, opinions, or
beliefs fall under 14(a)?
3. Ct: mere disbelief or belief undisclosed does not meet
liability requirements under 14(a). The statement must
materially mislead.
4. Proxy solicitation as causal link in a transaction. Cf
Mills, minority proxies necessary and sufficient to accomplish
the transaction were affected.
a. VBI and FABI would have been unwilling to proceed without
minority approval: public relations argument.
5. Here, the allegations do not reach the muster of 14(a).
6. State remedies exist: breach of fiduciary duties.
XI. Fraud in the trading of securities, insider trading.
A. Rule 10B-5
1. State law is inadequate for certain transactions considered
bad for policy reasons.
2. No duty under statte law between management and shldrs. Even
if the corporation was damaged, even if you prove harm to corp,
individual shldrs cannot personally recoup loss.
3. Problem: if buying based on inside information, since inside
trader is only one who can be forced to disgorge, is digorgement
based on loss or gain?
B. Under Birnbaum,  need not have bought/sold anything.
1. Reputational injury (state law)
a. No duty to shldrs when buying from shldr.
b. When buy from shldr at time of transaction shldr doesn’t own
stock.
c. Any economic benefit would be shared among all shldrs.
(Result of derivative).
2. Rule 10B-5 has been inferred to provide a private right of
action.
a. The courts created wider and wider range of rules. Mid-70s
S.Ct. said enough was enough.
b. Now, much richer body of state law to deal with.
c. Congress has repeatedly enacted other provisions creating
private rights of action to build on 10B-5.
(i) CL approach: if you define insider trading, lawyers will
find loopholes.
3. Birnbaum rule:
a. Grew out of very special circumstance.
b. If someone can say “but for disclosure I would have bought,”
then its impossible to prove causation. Short of trying, who is
to say you are lying?
c. Settlement value: affect other kinds of transactions in ways
other claims do not.
d. Blue chip was a special situation, b/c of incentive to
depress purchasers. If the disclosure was accurate… According
to Suggs, this was unduly harsh.
4. Must be a purchaser or seller to bring a private right of
action.
a. If , no standing requirement, can be other than
purchaser or seller. Fraud must be in connection with actual
sale or purchase.
b. Standard for liability is intent (scienter). You must intend
to do what you did. (Intent to say what you did, but not
necessarilly to commit fraud.)
c. Fraud (two kinds):
(i) Deceit
(ii) Unconscionable (eg, promissory note at 25% interest a
week)
d. Fraud requirement for 10
#Post#: 80--------------------------------------------------
Re: Business Assoc. outline 1 [Maryland Law-Suggs]
By: Grandstarding Date: April 2, 2015, 3:18 am
---------------------------------------------------------
It is easy to understand and put to good education.
#Post#: 89--------------------------------------------------
Re: Business Assoc. outline 1 [Maryland Law-Suggs]
By: Wartking Date: May 11, 2015, 7:55 am
---------------------------------------------------------
There is no way I can deny this knowledge.
#Post#: 121--------------------------------------------------
Re: Business Assoc. outline 1 [Maryland Law-Suggs]
By: Sebeya Date: April 25, 2018, 12:21 am
---------------------------------------------------------
I still like this forum topic bong.
*****************************************************