[Alan: I tightened up some of the formatting, mostly to keep spacing consistent]
Primary Sources Used in this Chapter
 DGCL § 211. Meetings of Stockholders
 DGCL § 222. Notice of Meetings and Adjourned Meetings

Bayer v. Beran

Schnell v. Chris-Craft Industries, Inc.

Stahl v. Apple Bancorp, Inc.
Concepts for this Chapter
 Corporation as “private constitution”

Basic corporate vocabulary o corporate categories o corporate characteristics o organic documents o corporate actors o corporate securities o fiduciary duties (derivative suit) o corporate law vs. other law

Corporate Powers o change annual meeting o equitable limitations
Introduction
This chapter explains some fundamental notions about corporations (what they are, what shareholders do), walks through some basic vocabulary, and applies that vocabulary using a basic corporate fact pattern: a board’s decision to change the time and location of the corporation’s annual meeting.
Question: Why focus on corporations? Why not partnerships? Or LLCs?
Answer: As explained in the breakout box on page 25, there are more than 13 million business firms registered in the 50 U.S. states, and most are small entities, closely held by their private owners. Only about 8000 of those entities are publicly traded corporations which have their shares listed on stock markets like the New York Stock Exchange.
1

Nevertheless, corporations are the dominant structure through which joint business enterprise is conducted in the United States and throughout the world.
Of course, the book also covers partnerships and LLCs.
Note: The “13 million” estimate was produced by finding the number of limited-liability entities
(LLCs, LLPs, LPs, and corporations) organized in North Carolina and, assuming it is a typical state, extrapolating for the country as a whole based on population.
A. Corporation as Private Constitution (with Fundamental Rights)
Question: What is a corporation?
Answer: There is no one definition of a corporation. There are instead a number of overlapping ways to understand them:

Legal entity: a corporation can own property, enter into contracts, sue, be sued and make certain political contributions (see the discussion of Citizens United in Chapter
5)

Team of people: a corporation includes suppliers of money (e.g. shareholders) and labor (e.g. management), who work together to earn a return on their investments

Web of contracts: a corporation is created by contracts between investors, employees, customers and the community

Investment vehicle: a corporation is simply a way to invest money in order to earn a return

Drama: a corporation is a series of interactions among a set of standard players
(shareholders, directors, officers and other employees) as they work through conflicts that result from their different incentives, investments and goals.
The Corporation as Private Constitution
The corporation is a “private” constitution that allocates powers and immunities, rights and duties, and risks and rewards among its constituents.
Question : What is the law of a corporation?
Answer : The law of a corporation includes a number of overlapping public and private corporate legal documents: statutes, case decisions, articles, bylaws, board resolutions, etc.
The hierarchy is:

U.S. Constitution, the “supreme law of the land,” and the relevant state constitution.
↓

Relevant state statute (such as the Delaware General Corporate Law (DGCL)), which authorizes and specifies the content of the private articles of incorporation and bylaws.
↓
2


Articles of incorporation
↓

Bylaws, which detail the corporate functioning (the how and where of shareholder and board meetings, the titles and functions of corporate officers, the responsibility of the corporation if directors or officers are sued, etc).
Court decisions are also a huge part of corporate law, sometimes interpreting statutes, articles, bylaws but often defining shareholder fundamental rights and enforcing the duties of directors/officers to the corporation and shareholders.
Many cases come down to recognizing and applying the hierarchy: the Constitution trumps statutes (see Citizens United in Chapter 5), corporate statutes trump articles of incorporation and bylaws (see Quickturn in Chapter 14), corporate case law trumps bylaws (see Blasius in Chapter
14), articles of incorporation trump bylaws (see DGCL and MBCA).
Question: What rights do shareholders have in a corporation?
Answer: The governing documents for the corporation allocate rights and responsibilities among the corporation’s “citizens” and “officials.” The shareholders (as principals) appoint members of the board of directors (as agents) to act on their behalf. The directors further delegate responsibilities to the corporation’s officers and directors (also agents).
As a result of this structure, the shareholders retain only limited rights, having elected representatives (the corporation’s directors) to make business decisions and act on behalf of the shareholders. It is analogous to a representative democracy.
Shareholders are left with three fundamental rights:

Vote: shareholders may elect directors, vote on specified transactions and voice concerns at shareholder meetings. (This is covered in Module VI – Corporate
Governance.)

Sue: Shareholders may file litigation claiming that the corporation’s directors or controlling shareholders have breached their duties. (This is covered in Module VII –
Fiduciary Duties)

Sell: Shareholders may sell their shares in the market or to an acquirer in a corporate takeover. (This is covered in Modules VIII and IX – Stock Trading and Corporate
Deals.)
Question : If you are a shareholder and you do not like how the managers are running the corporation’s business, what should you do?
Answer: You might try to influence the directors and officers by speaking out, sponsoring a shareholder resolution, attending an annual shareholders meeting or even mounting a voting contest to replace the directors. Traditionally “voice” has been a costly path; not worth it for investors who own a relatively small number of shares.
However, technological advances have brought some costs down, and some institutional investors do own a sufficient number of shares to make exercising their voice worthwhile.
3

Your other option is simply to sell your shares. Exit is often the cheapest option. Of course, if everyone who is concerned about management’s practices sells, the corporation will be left with shareholders who are unaware of or unable to help with its problems.
Question: Is the decision to sell shares a matter of loyalty?
Answer: Probably not. People do not tend to feel loyalty toward economic organizations. In contrast to small groups such as families or other organizations, corporations do not inspire loyalty. There is a discussion on p. 28 of Adam Smith’s observation that a person dealing with strangers would be more disposed to cheat them than a person dealing with neighbors in repeated transactions. Shareholders may not feel accountable when the issue involves a seemingly anonymous investment in a non-local entity.
B. Basic Corporate Vocabulary
1. The Corporation
Question: What are the typical characteristics of a corporation?
Answer: Typical corporate characteristics include:

Separate entity (from its managers and investors)




Perpetual existence (although the managers and shareholders may change)
Shareholder liability limited (to the amount paid for the shares)
Centralized management (board of directors)
Transferability of ownership interests (shares)
Of course, most of these are default arrangements and, except for being a separate entity, are not mandatory. In many cases, corporate actors may agree to alter or customize these arrangements to suit their particular circumstances or goals.
Question: What is the difference between a “for-profit” and a “non-profit” corporation
Answer: A “for-profit” corporation is established primarily to generate wealth. A “nonprofit” corporation is a corporation without shareholders (persons having a financial interest in surplus funds) dedicated to some educational, religious or charitable purpose
(e.g. hospitals, universities, charities).
Question: What is the difference between a public corporation and a close corporation?
Answer: A “public corporation” refers to a for-profit corporation created under state law whose ownership interests (shares) are owned by a large group of shareholders who trade their shares on stock markets open to the public – thus, making it publicly owned.
Shareholders of public corporations can typically sell their shares easily. Shareholders of public corporations do not usually have a relationship with the corporation and are not
4

involved in the management of the corporation. A public corporation cannot be one that is non-profit.
In contrast, a close corporation is a for-profit corporation created under state law whose shares are not publicly traded, but closely held. There is no ready market for the shares of close corporations. It is typical for the participants in a close corporation to play more than one role (e.g. directors and officers with ownership stakes, owners involved in the management).
So what is a “private corporation”? As explained in the breakout box on p. 29, “private corporation” is sometimes used to mean a corporation that is not part of the government, i.e., either a publicly-held or closely-held corporation.
2. Articles of Incorporation (also called “Certificate of Incorporation” and
“Corporate Charter”) and Bylaws
The articles of incorporation are filed with the appropriate Secretary of State, Corporations
Division, by the people who are forming the corporation. If the articles of incorporation are in order, and the required fee is paid, then the Secretary of State then accepts them for filing.
The required contents of the articles of incorporation are laid out in the particular state corporation statute, and usually include:

The name of the corporation

The agent and address for service of process

The number of authorized shares
The corporate bylaws are drafted at the same time as the articles of incorporation, but are not filed with the state. The bylaws include the rules for how the corporation will operate. For example:

Powers of directors and officers

Procedures for electing directors and filling director vacancies

Procedures for calling and holding shareholder meetings
Question: Which “trumps”: the articles of incorporation or the bylaws?
Answer: The articles of incorporation.
3. Corporate Actors
Shareholders (also called “Stockholders”)
The shareholders contribute capital to the corporation in exchange for “common shares,” which represent a divided ownership stake in the corporation. The shares typically confer certain claims on the corporation’s income.
5

The shareholders usually have the right to vote to elect the board of directors, and the directors then hire the corporate officers. Shareholders must also, after board initiation, vote on certain fundamental transactions such as amendments to the articles of incorporation or a merger with another corporation.
Board of Directors (also called “the Board”) made up of “Directors”
The members of a corporation’s board of directors are elected by the shareholders and are responsible for managing or supervising the corporation’s business. The directors owe duties to act on behalf of the corporation, and to represent the interests of the corporation.
Officers
The officers of a corporation are employees chosen by the directors. The directors delegate responsibility to the officers for the day-to-day operations of the corporation. The officers typically include:
 the Chief Executive Officer
 the Chief Financial Officer
 other officers (e.g. Executive Vice-Presidents, Secretary, Treasurer, Controller)
Note:
In this book, the term “management” refers to both directors and officers.
Question: Which are employees of the corporation: directors or officers?
Answer: The officers of a corporation are employees by virtue of their positions.
Directors may or may not be employees. If a director also happens to be an employee, he/she is known as an “inside director.” If a director is not an employee of a corporation, he/she is known as an “outside director.”
Question : Which is better for a corporation, an inside director or an outside director?
Answer: Both. Inside directors may offer detailed knowledge of the workings of the corporation. Outside directors offer a more objective perspective on the corporation, and knowledge of the industry or economy as a whole.
Question: Who else has a stake in a corporation?
Answer: Other corporate stakeholders include:

Creditors

Employees

Suppliers and customers

Community
Question: For whose benefit should the corporation be run?
6

Answer: The question of who the corporation serves is a fundamental one. Several possible interests include:

Only the shareholders

All of society

The stakeholders
For now, a discussion of the possible choices is enough. This question will be explored more fully in Chapter 4 (Corporate Social Responsibility).
Bonus Question: Can shareholders decide to sell the corporation?
Answer: No.
Shareholders own shares, but not the corporation. The sale of the corporation (either all its assets or in a merger) requires action first by the board of directors and then (sometimes) approval by the shareholders. Under corporate statutes, the power to initiate a sale of the corporation rests exclusively with the board.
This question illustrates that shareholders are not really “owners” in the usual sense of the word.
What about a tender offer? Shareholders can sell to an outside bidder (hostile to incumbent management), but this is not the sale of the corporation, but merely its shares to a new shareholder. Of course, once somebody controls a majority of shares that person can elect a board that can initiate a sale.
4. Corporate Securities
The typical characteristics of the three basic categories of securities are:
Debt

Least risk

Lowest expected return

Fixed interest payments over a set term

Priority in liquidation of corporate assets
Equity: Common Shares

Greater risk

Greater expected return

Dividends (at board discretion)

Vote

Residual financial rights to assets
Equity: Preferred Shares (generally)
7


Risk level between debt and common shares

Senior right to dividends (still, at board discretion)

Less risk than common shares, but more risk than debt

Lower expected return than common shares, but higher expected return than debt

Priority over common shares if corporation becomes insolvent
Question: What do the typical characteristics of the three categories of corporate securities suggest about the relationship between risk and return?
Answer: As securities become riskier, investors demand greater returns. The breakout box on page 36 provides a real world illustration of this in the form of the 2009 expected returns on General Electric securities:

Short-Term Corporate Debt: 4.1% interest

Preferred Shares: 10% dividend rate

Common Shares: 24.4% returns
Increasing risk, increasing expected return.
The breakout box at the top of page 37 clarifies the different names used for debt and equity instruments:
Equity:
Debt:
Stock, Shares
Bonds, Debentures, Notes
Corporate shares can occupy three stages:
“ Authorized shares”
refers to how many shares the articles of incorporation authorized the company to issue.
“ Issued shares” refers to how many of those shares the corporation has sold to investors
“ Outstanding shares”
refers to how many of the authorized shares are owned by shareholders
In addition,
“treasury shares ” are shares that the company has bought back so they are issued, but not outstanding.
The breakout box at the bottom of page 37 provides a good example for working through share status:
Example 2.1
Question: The XYZ articles of incorporation authorize the issuance of 100 common shares. The board approves the issuance of 80 shares. XYZ sells 80 shares to investors. How many shares are authorized? Issued? Outstanding?
8

Answer:
100 authorized
80 issued
80 outstanding
(leaving 20 authorized but unissued)
Question: XYZ then repurchases 10 of the 80 shares that were issued and outstanding. How many shares are authorized? Issued? Outstanding?
Answer:
100 authorized
80 issued
70 outstanding
10 treasury (repurchased and unissued) [[IS THIS CORRECT?]] ALAN: YES – from what I remember of Manning on Legal Capital
20 authorized but unissued [and my understanding is that the MBCA would say that after the repurchase there are now 30 that are authorized, but unissued]
5. Corporate Fiduciary Duties
The Business Judgment Rule
Corporate managers have significant discretion in making corporate decisions, and courts often defer to management judgment. Courts presume that director decisions:

Are informed

Serve a rational business purpose (i.e. do not constitute waste)

Are disinterested

Are made independently
The “business judgment rule” creates a presumption that directors (and other corporate decision makers) perform their duties in good faith. The rule is really an abstention principle of corporate law that says to judges: hands off!
Fiduciary Duties
The basic fiduciary duties owed by directors and officers to the corporation are the duty of care and the duty of loyalty.

Duty of Care The duty of care requires managers to be attentive and prudent in making decisions. To allow risk taking and strategic moves, judges will not find a breach of the duty of care unless the decision makers’ behavior is egregious – completely uninformed or without business justification for what they were doing.
9


Duty of Loyalty The duty of loyalty requires managers to put the corporation’s interests ahead of their own. The duty of loyalty is not subject to the business judgment rule.
Judges will jump in to scrutinize business decisions if the decision makers had conflicts.
Unlike the duty of care, issues arising under the duty of loyalty raise questions of loyalty and conflicts of interest, not business acumen. Directors and other decision makers breach their duty of loyalty when they shortchange the corporation for personal gain.
Bayer v. Beran, 49 N.Y.S. 2d 2 (Sup. Ct. 1944) (Example 2.2, p. 39)
Facts: The Board of Directors of Celanese Corporation decided during WWII to spend $1 million to sponsor a variety radio show as part of an advertising campaign. The company hired the wife of the company president (Miss Jean Tennyson) as one of the performers on the show.
Shareholders of the company brought derivative suits against the board for violating their fiduciary duties.
Issues: Did the directors violate
(1) their duty of care for spending so much without clear marketing benefits?
(2) their duty of loyalty for spending money on a show for the benefit of the wife of the company president?
Held: Complaint dismissed.
(1) No duty of care violation.
The business judgment rule creates a presumption that the directors’ decision met their duty of care.
(2) No duty of loyalty violation. Although the conflict of interest means that the business judgment rule does not apply, the directors met their burden of showing the transaction with the president’s wife was fair (pay not unreasonable etc.).
Reasoning: The Court laid out the business judgment rule, the directors’ duty of care and the duty of loyalty as follows:

Business Judgment Rule (BJR)
“Questions of policy of management … are left solely to their honest and unselfish decision … and the exercise of them for the common and general interests of the corporation may not be questioned.”

Duty of Care
The court explained the duty of care as
“[A director] is called to use care, to exercise judgment, the decree of care, and the kind of judgment, that one would find in similar situations to the conduct of his own affairs.”
The court ruled that the BJR creates a presumption that directors have met their duty of care:
10

“the character of the advertising, the amount to be expended therefor, and the manner in which it should be used, are all matters of business judgment and rest peculiarly within the discretion of the board of directors. … [I]t is not, generally speaking, the function of a court of equity to review these matters or even to consider them.”

Duty of Loyalty
The court explained directors’ duty of loyalty as
“[P]ersonal transactions of directors with the corporations … may tend to produce a conflict between self-interest and fiduciary obligation, are when challenged examined with the most scrupulous care.”
The court ruled that the BJR does not apply to conflicts of interest. Operating with a presumption against such transactions, the court nevertheless founds no duty of loyalty violation:
“The evidence fails to show that the program was designed to foster or subsidize ‘the career of Miss Tennyson as an artist’ or to ‘furnish a vehicle for her talents'. That her participation in the program may have enhanced her prestige as a singer is no ground for subjecting the directors to liability, as long as the advertising served a legitimate and a useful corporate purpose and the company received the full benefit thereof….There is no suggestion that the present program is inefficient or that its cost is disproportionate to what a program of that character reasonably entails. Miss Tennyson's contract with the advertising agency retained by the directors was on a standard form, negotiated through her professional agent. Her compensation, as well as that of the other artists, was in conformity with that paid for comparable work.” http://web2.westlaw.com/find/default.wl?rs=WLW11.07&rp=%2ffind%2fdefault.wl&vr=2
.0&fn=_top&mt=208&cite=49+N.Y.S.2d+2&sv=Split
Question: What’s the difference between a board decision to sponsor a show and a board decision to sponsor a show where the company president’s wife is one of the performers?
Answer: This is the key to the “duty of loyalty violation” claim. It is unclear whether the connection with the company president’s wife constituted a conflict of interest for all of the board, or just the company president.
Liability to the Corporation and the Shareholders
Fiduciary duties are owed sometimes to the corporation, sometimes to shareholders, and sometimes to both – resulting in different kinds of enforcement actions. Corporate litigation procedures are covered in more detail as part of the module on fiduciary duties -- Chapter 17
(Shareholder Litigation) – but below is a basic introduction to derivative suits and class actions.

Derivative Suits
11

Derivative suits serve to enforce duties that corporate fiduciaries (directors, officers and controlling shareholders) owe to the corporation. The corporation is a nominal defendant, with a shareholder representing the corporation.
Question: What problem does the derivative suit solve?
Answer:
The board of directors runs the corporation’s business, including bringing and authorizing lawsuits on behalf of the corporation. A derivative suit is how a concerned shareholder can circumvent a recalcitrant board and sue on behalf of the corporation to enforce corporate fiduciary rights.
Question : If the board of directors wielded sole control of the authority to bring lawsuits on behalf of the corporation, how would corporate fiduciaries be accountable?
Answer: No means would exist to enforce fiduciary duties on behalf of the corporation.
Question: Where do derivative suits come from?
Answer: The derivative suit derives from equity jurisdiction. Delaware’s Court of
Chancery is an equity court that sits without a jury – just a Chancellor or Vice Chancellor that decides all questions of fact and law
Question: Who recovers in a derivative suit?
Answer: Because a derivative action enforces corporate rights, recovery in successful derivative litigation goes to the corporation. The shareholder bringing the action benefits from the suit only to the extent all shareholders do: she benefits in that her shares increase in value because of the corporation’s recovery. The shareholder who brings the suit can recover her attorneys’ fees from the corporation if successful.
It is as though the shareholder (and attorneys) become temporary in-house litigation counsel and are paid for their efforts on behalf of the corporation.
12

The Bayer v. Beran case is an example of a shareholder derivative suit. Corporate managers who breach their fiduciary duties can be held liable for the losses they case the corporation. In a derivative suit the shareholders bring an action in equity on behalf of the corporation against the corporation for not going after a third party (the manager).

Class Action Suits
Question: How is a class action different from a derivative action?
Answer: Unlike a derivative action, where a shareholder sues on behalf of the corporation, a shareholder bringing a class action sues in his own capacity on behalf of the class of fellow shareholders. A class action consolidates the individual actions of all the members of a class in one large direct action. Instead of going to the corporation, as in a derivative action, recovery in a successful class action suit goes to the shareholders.
Both class actions and derivative actions can be used to enforce fiduciary duties. In a derivative suit the corporation recovers any damages; in a class action the class members recover.
13

“With great power comes great responsibility.” 1 An important point from the cases is to distinguish between corporate power and corporate duties
Shareholder Duties
Unlike directors, shareholders generally do not owe fiduciary duties. Simply owning shares (and not also serving as a director, for example) will not result in the imposition of fiduciary duties, unless the level of share ownership is sufficient to confer control of the corporation. Controlling shareholders owe fiduciary duties to other (minority) shareholders.
6. Corporate Law vs. Other Areas of Law
Corporations are legal entities created pursuant to state laws. There is no uniform corporate law
– unlike partnership and LLC law. Instead, each state has a statute that best fits its perceived needs. The most well-known state corporate law, and the one that is most important to the law of
1 Uncle Ben to Peter Parker (Spiderman’s alter ego), Spiderman (2002).
14

public corporations, is the Delaware General Corporate Law (DGCL). http://delcode.delaware.gov/title8/c001/index.shtml
. Nevertheless, most corporations are incorporated in the state where the corporation does most of its business. Page 31 of the casebook also includes a link to the DGCL that enables students to browse the DGCL table of contents to understand its basic structure.
The Model Business Corporation Act (MBCA) is a model law for states to adopt/revise as they choose. It is drafted by the Commission on Corporate Laws of the Section of Business Law of the American Bar Association (ABA). It is followed by more than 35 states. [[CAN/SHOULD
WE PROVIDE A LINK TO THE MBCA HERE? THE ONE IN THE EBOOK LINKS TO THE
ABA PAGE WHICH REQUIRES A LOG IN]] [This is something we should talk about. It’s been a tough question from the beginning of this book. My website includes an earlier version of the MBCA that I use in class and for my exam. Other professors use it.]
The MBCA actually follows the structure and much of the approach of the DGCL. But recently, many MBCA provisions on such matters as derivative suits and director transactions with the corporation have taken a decidedly non-Delaware approach. It is useful to notice, throughout the course, the similarities and differences between the DGCL and MBCA.
Corporate law is primarily judge-made law, with much of it following the precedent of the
Delaware courts (Court of Chancery and Delaware Supreme Court). It is also a product of each state under choice of law principles.
Question: What is the “internal affairs doctrine”?
Answer: the internal affairs doctrine provides that a corporation should use the law of its state of incorporation to govern its internal affairs. Accordingly, a court review of those affairs would also apply the law of the state of incorporation. The internal affairs doctrine results in some corporations “shopping around” and incorporating in states with favorable and/or well-developed corporate law (i.e., Delaware).
C. Basic Corporate Law Question: Changing the Annual Meeting
Answering the question “Under what circumstances may the board change the timing or location of the annual shareholders meeting” illustrates how some of the “corporate basics” operate in practice.
Question: Why is the annual meeting important?
Answer: The annual meeting is the opportunity for the shareholders to exercise their right to vote for the election of directors. If shareholders are unhappy, and planning to replace the board, then the board may find it to their advantage to change the date of the meeting.
The provisions from the DGCL governing annual meetings, and the notice required,
15

 DGCL § 211. Meetings of Stockholders
 DGCL § 222. Notice of Meetings and Adjourned Meetings are reprinted on p. 43.
Question:
How do the DGCL provisions limit the board’s ability to change the timing or location of the annual meeting?
Answer:
The DGCL provisions limit the board’s ability to change the meeting by:

Allowing the place of the meeting to be designated in the certificate of incorporation or the bylaws

Providing that the time and date of the meeting shall be designated in the bylaws

Requiring the board to provide written notice of the place, date and hour of the meeting, not less than 10 and no more than 60 days prior to the meeting
Question: Why does the structure of the Delaware courts that hear corporate law cases contribute to its “business friendly” reputation?
Answer: As explained in the breakout box on p. 44, the Delaware courts that hear corporate law cases are very simple. Cases are filed with the 5-person Court of
Chancery. Appeals go directly to the Delaware Supreme Court, which is made up of 5 justices. The lack of a jury at the Court of Chancery level contributes to the speedy resolution of most cases (including the Schnell case, below)
Schnell v. Chris-Craft Industries, Inc. 285 A. 2d 437 (Del. 1971)
Facts: A group of shareholder plaintiffs planned to wage a voting insurgency to replace the incumbent board of directors. The shareholders were unhappy with Chris-Craft’s economic performance. They planned to elect a new board of directors at the company’s next shareholders meeting scheduled for January 11, 1972). On October 16, 1971, the shareholders filed documents announcing their plans with the Securities and Exchange Commission, as required by federal law.
Chris-Craft’s board met two days later and on October 18, 1971, amended the corporate by-laws to hold the meeting “ in the two month period commencing December 1 and ending on January
31 and at such time as shall be designated by the board
.” At the same meeting, the board then set the meeting for December 8, 1971, at 9:30 AM in Cortland, New York. The board cited
January weather conditions in Cortland as the reason for the change, as well as the fact that holding the meeting before Christmas would avoid problems with the mail.
Issue: Was the amendment of the by-laws regarding the timing of the annual meeting a permissible action by the board?
16

Holding: No. Even though management complied with the DGCL regulations in amending its by-laws, the inequitable purpose of changing the annual election date to an earlier period to prevent an incumbent from gearing up for their campaign is impermissible action by the board.
Reasoning: The Delaware Supreme Court found that the board’s actions were designed to obstruct the insurgent shareholders attempts to gain control. Stating that “(m)anagement has attempted to use the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office . . . for the purpose of obstructing the legitimate efforts of dissident stockholders,” the court concluded the actions were for “inequitable purposes, contrary to established principles of corporate democracy.”
The court readily acknowledged the board’s power to change the date under section 211 of its
General Corporations Code. The rule emerging from Schnell, however, is that the board of directors may not advance the annual meeting date if it would burden the insurgents in a pending proxy contest. Such manipulation of the voting system is inequitable, and a presumptive breach of fiduciary duty.
Question: What is a proxy contest?
Answer: As explained in the breakout box on p. 46, a proxy contest takes place when an insurgent group of shareholders dissatisfied with current management seeks to replace the current directors. The insurgent group seeks voting authority (“proxies”) from other shareholders to vote their shares for new directors. Proxy contests are covered in chapter
14.
Question: What duty did the directors violate: care or loyalty?
Answer: Loyalty, because the directors were protecting their own incumbency.
Question: What about the BJR?
Answer:
It doesn’t apply when the directors have a conflict of interest.
Schnell v. Chris-Craft Industries establishes the importance of unimpeded board decisions, and illustrates how the Delaware judiciary acts.
Question: How quickly the Delaware judiciary decided the case?
Answer: It took less than one month from the time the complaint was filed to a final decision by the state’s supreme court . Schnell demonstrates why business people like
Delaware’s corporate law – a “product” that includes a quick dispute resolution mechanism.
Board timeline - 1971

Sep 17 - Shareholder insurgent group forms
17





Oct 18 - Board meeting amending bylaws
Oct 27 - Shareholder group learns of new meeting date
Dec 08 - Proposed new date for meeting (Cortland, NY)
Jan 11 - Original date for meeting (bylaws)
Court action – 1971




Nov 1 - Shareholders group files action
Nov 10 - Chancery Court grants access to shareholders' list
Nov 18 - Chancery Court denies preliminary injunction
Nov 29 - Supreme Court remands case to postpone meeting
Stahl v. Apple Bancorp, Inc.579 A.2d 1115 (Del. Ch. 1990)
Facts: Stanley Stahl, a 30% shareholder of Apple Bancorp, Inc. (“Bancorp”), announced a public tender offer for all remaining shares of the company’s stock on March 28, 1990. In a tender offer, a hostile bidder attempts to purchase a controlling block of shares at above-market prices, on the condition that a minimum number of shares are tendered within a specified period.
Prior to this announcement, Stahl had communicated to Bancorp’s board his intention to wage a proxy contest.
In response to the announcement of tender offer, Bancorp’s board of directors decided on April
10, 1990, to defer the company’s annual meeting from its originally intended date in mid-May to an undetermined date. It announced an exploration of the possibility of an extraordinary transaction, including sale of Bancorp.
The chronology of the case was:
September 1986 Stahl buys 20% of outstanding Bancorp shares
November 7, 1986 Stahl reaches 30.3% ownership
November 22, 1989 Stahl proposes bylaw change and board-packing plan
March 19, 1990 Board fixes record date for April 17, but no meeting date
Stahl starts tender offer at $38 cash, provided gets board majority March 28, 1990
April 9, 1990 Special board meeting, financial advisors say tender offer is unfair; board withdraws record date to look for alternatives
May 9, 1990
May 14, 1990
Stahl sends out proxy materials
Stahl seeks preliminary injunction requiring shareholders meeting
18

Stahl (a single shareholder) filed suit on April 12, 1990. He sought an order to compel the annual meeting be held on or before June 16, 1990. Unlike Schnell, Stahl did not bring his action under section 211 of the DGCL, which allows shareholders to demand the holding of a shareholders’ meeting if one has not been held within 13 months of the previous annual meeting (which apparently was held in May 1989). This would have meant waiting until June 1990 to file suit and then another 30 days, as specified by statute.
Question:
What was the plaintiff’s claim?
Answer: Stahl argued a theory of inequitable conduct: deferring the meeting was inequitable in that it sought to protect no legitimate interest of the corporation: its primary purpose was to entrench the board of directors in office. Bancorp, Stahl contended, had intended to hold the meeting in May, and had only deferred the meeting when it appeared likely his proxy contest was likely to succeed.
Question: What was the board’s argument?
Answer: The Bancorp directors argued that their action was taken not in response to a possible proxy contest, but to protect the corporation against a coercive tender offer made at an inadequate price. Bancorp’s financial advisors informed the board that Stahl’s offer,
17% over market price, was inadequate and unfair to shareholders financial interests. The advisors stated that alternative strategies could obtain greater value for the shareholders, but that more time was needed than was available before the original spring meeting.
Issue:
Was the board’s decision to cancel the record date improper action to the shareholders right to vote?
Holding: No. The court concluded that the board had not taken action for the purpose of impairing or impeding the effective operation of the corporation where no meeting date had yet been set nor proxies solicited. It stressed that those cases concerning fiduciary duties “ are inherently particularized and contextual
.” Decisions involving impediment to the shareholder vote, the court said, must be made on a case-by-case basis.
Reasoning: The court applied the following analysis:
1.
Is the principal purpose of the board action to impede or disenfranchise the shareholder’s voting rights?
2.
If it is, is there a compelling justification that supports the board action?
If the principal purpose of the action is to impede voting rights, the burden shifts to the board which loses its business judgment rule protection. They must then show a compelling justification (strict scrutiny) for their action(s).
In this case, Chancellor William Allen found:
19

 “Fiduciary duties constitute a network of responsibilities that overlay the exercise of even undoubted legal power.”
 “Where directors exercise their legal powers for an inequitable purpose, their action may be rescinded or nullified by a court at the instance of an aggrieved shareholder.” (stating the well established principle developed from Schnell).
 “In my opinion, one employing this method of analysis need not inquire into the question of justification in this instance, for I cannot conclude that defendants have taken action for the purpose of impairing or impeding the effective exercise of the corporate franchise.”
 “Deferring this company’s annual meeting where no meeting date has yet been set and no proxies even solicited does not impair or impede the effective exercise of the franchise.”
 “Plaintiff has no legal right to compel the holding of the company’s annual meeting or right in equity to require the board to call a meeting now.”
Question: What is a tender offer?
Answer: As explained in the breakout box on p. 48, a tender offer is a publicized offer to purchase some or all of shareholders’ shares in a corporation, typically so that the offeror can acquire a majority of the voting shares. The specified price is usually at a significant premium over the market price of the target corporation’s shares.
Question: What is the difference between a voting insurgency and a hostile tender offer?
Answer: The tender offer first involves shareholders selling their shares and only afterward the successful bidder (now majority shareholder) voting to replace the board.
Question: Why was Stahl v. Apple Bancorp, Inc ., decided differently
Answer: Stahl v. Apple Bancorp, Inc., was very similar to Schnell v. Chris-Craft
Industries , but with different result. In Schnell, the board has power -- but it is inequitable to change the meeting date and impede the voting insurgency. In Stahl, the board has the power -- and it is equitable not to set the meeting date and thus impede insurgency/tender offer
The cases differ in terms of which court decides the case, and the date. However, they are similar in that they were both in Delaware, they were both derivative actions, and they both involved challenges to voting obstructions.
Side by side, the two cases show how fact dependent Delaware cases are
Schnell Stahl
20

Shareholder Action
Context
Proxy contest
Annual meeting date set, proxy votes solicited for voter insurgency
Hostile tender offer
Annual meeting date not yet set , proxy votes not yet solicited
Board Action
Test for “Inequitable
Purpose”
Advanced date of annual meeting
Was board’s action taken for the principal purpose of impeding the effective exercise of the stockholder franchise
Board has power to change the
Deferred date of annual meeting indefinitely
Same
Holding date of the annual meeting, but it is inequitable to change the meeting date and impede a voting insurgency
Board has the power to set the date of the annual meeting and it is not inequitable to not set the meeting date, even though not setting the meeting date impedes insurgency/tender offer
Ultimately it came down to the action/inaction distinction in the law. Notice that even though the board’s motives might be questioned in each case (to preserve their incumbency), one court was willing to STOP an inequitable action of the board, while the other court was unwilling to COMPEL an equitable action. That is, corporate law judges are reactive, not proactive. Remember the basic tenet of the BJR: hands off.
Summary
The main points of the chapter are:

The structure of corporate statutes identifies the main points of corporate law o Basic structure o Financing o Creditor protection (externalities) o Governance (internal allocation) o Fiduciary duties o Liquidity rights o Change relationships (deals)

Public v. close corporations: the distinction is based on shares trading in public stock markets

Corporations have separate identity, limited liability, centralized management, and transferable shares

Hierarchy: Corporate statutes, then articles of incorporation, then bylaws, then board resolutions
21


Analogy to public constitution: Shareholders (citizens), board of directors ( legislatures), officers (executive bureaucracy)

Financial interests: equity (shares profits), debt (principal and interest)

Fiduciary duties (care, loyalty) and the business judgment rule presumption

Shareholders can enforce corporate rights (a derivative suits) or their own rights (direct class actions)

Corporate law is set by state law, and respected in other jurisdictions under the internal affairs doctrine

Corporate power are tempered by equitable principles (fiduciary duties) o Schnell : board cannot change meeting date to avoid shareholders insurgency o Stahl : board can choose not to set meeting date to pursue alternatives
22