Types of Authority Agency Law NOTEà Actual RTA §2.01à the A (1) reasonably believe (at the 5me of the K/ac5on), based on P’s conduct/
manifesta5ons, that (2) the A was ac5ng on P’s behalf, and (3) subject to P’s cntrl **NOTE: you can have an agency rel NWS a lack of a fml 5tle (Cargill; RTA§1.02) Express P & A explicitly agree than A has power to act of P’s behalf AND is subject to P’s control RTA §2.02 (scope)—an A has authority to do acts necessary or incidental to achieving P’s objec5ves (Mills St. Church—hire bro in past) Apparent RTA §2.03—A has apparent Implied (thru conduct RTA§1.03) Rela5onship such that person in A’s posi=on would reasonably infer (RPP) that P was delega5ng authority to act on P’s behalf, subject to P’s control, AND A consents to delega5on (Cargill-­‐broke Warren; Dweck-­‐long-­‐term lawyer rel) authority if (1), based on P’s conduct, a (2) RPP in the 3P’s posi=on would believe that A is P’s agent [(a) that A is ac5ng on P’s behalf and (b) that A is subject to P’s control]; and (3) in some jx (CA & DE) there was detrimental reliance by 3P (Lind-­‐ salesman’s salary; 3-­‐70 Leasing-­‐confirm from salesman for comp equip) on A disclosure) (1)  Fully disclosed P [RTA §6.01-­‐no5ce & iden5ty]àP has full L (2)  Undiscl P [RTA§6.03
(2)-­‐no no5ce of a P]
àA has full L (3)  ParRally discl P [RTA§6.02-­‐no5ce, but NO iden5ty]
àBOTH P & A have L (Atlan=c Salmon) Apparent Auth P is liable to 3P, BUT P can seek indem. from A RaRficaRon (1)  If P exists/has pwr at T1, then w/ rat, both P and 3P are bound to K →A is NOT liable (2)  If P doesn’t exist at T1, then w/ “rat” A is the only one liable on the K with 3P→P could later indemnify A, but A can’t be released from liab Inherent Agency Pwr (TORT or K) To ra=fy, you need… RTA §4.01(2)—P w/ knowledge of material facts must either (a) expressly affirm the A’s conduct by manifes5ng an intent to treat the A’s conduct as authorized; or (b) engage in conduct that was jus5fiable only if P made such an inten5on (implied raRficaRon) + RTA §4.04(1)—to ra5fy P must (a) have existed at the 5me of the act; and (b) had the capacity to ra5fy at the 5me of the act Liability in K w/ 3P Actual Auth (based Ra=fica=on (ALT) If ini=ally A entered into a K purportedly on P’s behalf, BUT without actual or apparent authority, and P subsequently decides to adopt the K, then P is bound and so is 3P. Liability in Tort w/ 3P (only for M/S rel) Inherent Agency Pwr P is liable to 3P, BUT P can seek indem. from A Apparent (ostensible) m/s rel? (if P reps A as his servant and causes a 3P to rely) RSA §267; McDonald’s Y LIABILITY! Encompasses respondeat superior (m/s rel) RSA §220(1)—A m/s rela5onship exists where the S has agreed to: (1)  work on behalf of the M; AND (2)  to be subject to his cntrl (or right to cntrl) the physical conduct of the S -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Factors that make m/s rel [RSA §220(2)]—(a) extent of P’s cntrl (or incen5ves) over work details; (b) P & A’s beliefs abt the rel; (c) tax status of the A; (d) term/length of the rel; (e) loca5on of the work; (f) whtr A’s work is part of P’s reg biz; (g) whether A has a dis5nct biz; (h) who provides the tools/supplies; (i) the trade prac5ce of supervision; (j) skill required of the A; (k) is A paid per job or w/ wage?; (l) amt of business risk borne by ea. (goes to incen=ves to cntrl) M/S relaRonship? (see above) Humble/McDonald’sàYes (D2D + incent to cntrl) Hoover/MurpheyàNo (risk w/ franchee, less incent to cntrl) N Y Was the act done within the scope of employment? Y N NO LIABILITY, UNLESS: (1) M intended the conduct/
consequences; (2) M himself was negligent; (3) The conduct violated a non-­‐delegable duty of M; (4) S purported to act or to speak on behalf of the M and there is reliance upon the apparent authority Oglesby—CorporaRons (Arlen, Spring 2011) Fiduciary Obliga5on of Agents (EMPLOYEES) Oglesby—CorporaRons (Arlen, Spring 2011) Centralized Mgmt SHAREHOLDERS BOARD OF DIRECTORS Mee=ngs & Vo=ng q  SH mtgs must be held (§ 211-­‐date specified in cer5ficate or bylaws; Airgas-­‐ct (of equity) won’t allow gaming of system) q  Need quorum to have valid mtg (§ 216-­‐cert may specifiy quorum, BUT must be at least 1/3rd of outstanding shrs) q  Default VoRng rules: (a) for directors—plurality vo5ng unless changed in cert/bylaws; (b) for most other maeers-­‐maj of shares present (contrast mergers) q  CumulaRve voRng (§ 214) o  Ea. shr gets a pool of votes (e.g. 1 vote/bd member up for elec5on) and can allocate as he chooses o  Must be in cerRficate o  Most effec5ve when a lot of bd members are up for elec5on o  Formulaà # dirs elected= [(#Shrs-­‐1)x(#Dir +1)]/(Shares vtng @mtg) q  Bd ClassificaRon [§ 141(d)] o  Separates bd into diff grps which come up for elec5on at diff 5mes o  ≤ 3 classes, each serving same yrs as # of terms (3 classesà3 yr terms) o  Can be classified in bylaws (SH ini5ated) or cer5ficate (BUT should be classified in cer5ficate) •  If in bylaws, can be recinded (UNLESS you have bylaw that requires a supermaj vote to declassify, AND another bylaw to say supermaj to change supermaj requirement.) o  Effec5ve classified bd: (1) classified in cert; (2) fix number of bd members in cert; (3) eliminate § 228 in cert. POWERS Can Can’t q  Elect Bd Members (§ 216 by plurality (default) of votes at mee5ng/via proxy) ü  One sh/one vote (default)-­‐§ 212(a) ü  Proxy vo5ng-­‐§ 212(b); make it irrevocable [§ 212(e)] q  Remove Bd dirs ü  § 141(K)—if unclassified bd, w/o cause; if classified bd—removal req cause ü  Removed by maj vote, UNLESS cum vo5ng ü  If cum voRng + less than en5re bd is removed, can’t remove a dir w/o cause if votes cast vs removal would be enough to elect dir at an elec=on of all bd members q  Make SH agmts (§ 218 (c) about how to vote, and can delegate right to vote) q  **Vote by wrieen consent (§ 228-­‐can act by wc on any maIer that they are en=tled to act on) w/ WC, you need maj of outstanding shrs; NOTE: can be repealed in in cert. q  Amend bylaws (§ 109 Bd doesn’t have to propose, unlike cer5ficate; right is inherent); **can’t be repealed by the Bd** q  Approve amendments to cert (§ 242-­‐but can’t propose – bd proposes; just have veto right) ü  Need a maj of outstanding shrs [§ 242(b)] q  Approve mergers (§ 251-­‐bd must vote/propose) ü  Need maj of outstanding shrs q  Approve sale of substan=ally all assets (§ 271 but can’t propose) q  Access SH list (§ 219-­‐if germane to mtg) q  Access books/records (§ 220-­‐for proper purpose related to SH interest; not Honeywell) q  Tender Offers: private tranx, don’t need Bd approval to sell shares, normally q  **Direct Mgt Decisions [§ 141(a)-­‐see Manson] q  Normally (unless via bylaw) elect officers (§ 142) q  Decide acquisiRons of other companies (bd does) q  Call special mtgs (default, bylaws can change) [§ 211(d)] q  **Are not agents of SHs, but are agents to the firm (UNLESS Revlon du5es)** q  Composed of one or more ppl [§ 141(b)] q  Quorum for mtgs/approval=majority of bd (§ 141(b)-­‐ default, cert or bylaw can increase, but can’t be less that 1/3rd) q  Can rely on reports in good faith (§ 141(e)-­‐in gf, reasonable belief in expert’s comp, selects w/ care) POWERS Can Can’t q  **MANAGE THE FIRM (§ 141(a)-­‐the bd “shall manage) ü  CANNOT be usurped (Manson) q  Can delegate certain decisions (not mergers, pwr to amend cert, give dividends, stock rightsàunless in charter) to a commieee (§ 141(c)-­‐e.g. SLCs) q  Amend bylaws (§ 109-­‐IF authority to do so was given in bylaws) q  Propose merger (§ 251-­‐SHs must approve) q  Propose the sale of subt. assets (§ 271-­‐SHs must approve); OR can acquire assets (inc. other companies) (BJR-­‐no SH vote req). q  Call a special mtg (default) (§ 211(d)-­‐cert can specify that officers/SHs could do it also; if asked by SHs for special mtg, need pro-­‐firm reason for refusal) q  Set record date (§ 213-­‐if Bd doesn’t then SHs can also) q  Fill director vacancies (default rule) by a maj of dirs, or by sole director (§ 223); if SHs remove, then “off to the races” q  As bylaws (normally provide), can choose officers (§ 142); and officer vacancies are handled p/t bylaws [§142(e)] q  Amend SH-­‐
adopted bylaws Oglesby—CorporaRons (Arlen, Spring 2011) Corp. Ltd Liability and Veil Piercing §  Rule of Ltd Liability—SHs of a corp aren’t personally liable for the debts incurred or the torts commixed by the firm o  Veil Piercing—SHs in corp are made personally liable for its debts. (i.e., liys corporate veil of limited liability) ²  Veil piercing is the EXCEPTION, not the rule and is RARELY applied ²  Not liable even if it is foreseeable that corp won’t be able to pay debt and SH is sole SH/director/officer of firm, or SH is parent corp (Walkovsky—under cap cab co) ²  Three types: q  Ver5cal (backwards) q  Horizontal (sideways) q  Reverse ²  Two Approaches q  Alter Ego (CA/IL and VA versions) q  Instrumentality (Principal/Agent) ALTER-­‐EGO APPROACH (Sea-­‐Land I/II) INSTRUMENTALITY (P/A) APPROACH (Walkovsky; Zaist) Ver=cal (Backwards) • Horizontal (Sideways) • Reverse Piercing (1) Was there a unity of interest and ownership? [(a) lack of corp. formali5es; (b) commingling of assets; (c) severe undercapitaliza5on] NOTE re: Reverse piercing—Must backwards pierce first. The “piercing” has to follow the injus5ce/unjust enrich. (arg NOT the case is Sea-­‐
Land w. Tie-­‐Net). If you CAN reverse pierce then other SHs are subordinated! (equity?) NO PIERCING! Y N (2) Would refusal to pierce sancRon fraud OR promote injusRce? (TEST: more than π not getng paid, there has to be some unjust enrichment of the ∆ (fake loans, misappropria5on of funds, etc) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ (NOTE: VA vers req element of ac5ve or inten5onal misconduct by ∆) Y PIERCE! Ver=cal (Backwards) Piercing N N (1) Did ∆ have complete cntrl over corp? NO PIERCING! Y (2) Does the cntrling arrangement promote ∆’s interest at the expense of the corps? [TEST: whether an obj disint BoD seeking max profit would make that decision in the best interest of the firm?] (Zaist—yes! No free work for other sub!; Walkovsky—no!; under cap cab) N Y (3) Zaist—the cntrl and breach was the proximate cause of π’s injuries? N Y PIERCE! Oglesby—CorporaRons (Arlen, Spring 2011) Corporate Fiduciary Du=es: Overview Duty of Care: Regulates thoroughness and diligence in delibera5ons BJR protecRon IntenRonal derelicRon of duty (Nonfeasance) Duty of Loyalty: Regulates diversion corporate assets, opportuni5es, or informa5on for personal gain at expense of corp. Duty of Good Faith (Stone) Corporate Opportunity doctrine (NO BJR protec5on) No Self-­‐dealing Duty not to Waste: Regulates decisions that destroy corporate assets Subjec5ve bad intent Egregious (beyond gross negl.) process failure BJR protecRon BJR protecRon Oglesby—CorporaRons (Arlen, Spring 2011) Back to BJR BJRàgoverns affirmaRve acts by the BoD 3 Rebueable PresumpRons that π has to overcome (π has burden) Cleansing by maj of FI (mat facts and c/i), disint. SHs? [§144(a)(2); Wheelabrator-­‐FI SH ra5fictaion gets you back to BJR; Fleigler—
said 144a2=”dist.”SHs!] Bo∆ Y Prong 1: Self-­‐dealing by at least 1 dir (Non-­‐CS)**? N Cleansing by maj of FI (mat facts and c/i), disint. Dirs (Benihana-­‐Abdo’s ac5ons cleansed)? [§144(a)(1)] Bo∆ To rebut: (1) dir. obtains disproporRonate financial gain; (2) director dominated by someone who gets such a gain; OR (3) director owes a fiduciary duty to serve someone who gets such a gain (e.g., officer of other corp) Y N Prong 2: Failed to take due care? Ra5fica5on by a maj of FI (mat facts), disint SHs? If vote reqàsep mtg (Gantler) NOTE: (1) §141(e) (expert rpts (a) reliance in gf; (b) belief in competency of expert; (c) expert selected w/ res. care)àSafe Harbor; ALSO (2) §102(b)(7) in chtr; eliminates liab for breach of DoC for directors only (does NOTcvr DoL breaches)àSafe Harbor Y: π looses | N: π wins [UNLESS 102(b)(7)] N N FAIRNESS Bo∆ (CInerama) Prong 3: Waste? To rebut: “agreement so one sided that no business person of ordinary, sound judgment could conclude that the corporaRon received adequate consideraRon.” (Dodge-­‐Ford; not Disney—jus5fied EC; Kamin-­‐dividend; Wrigley-­‐lights/Barlow-­‐Princeton!) Y No BJR; fairness π WINS Ra5fica5on by a UNANIMOUS vote of FI (mat facts) SHs? FAIRNESS Reviewàfair dealing/fair price (balance) Cinerama factors: fair dealing: aggressive bargaining by fid; (fid’s knowledge of the biz; whether outside valua5on advice sought; magnitude of premium over mkt price; fair price: Assets, market value, earnings, future prospects, intangible benefits π LOOSES π looses—BoD ac5ons are protected Y N Y N **CSH SD transx (inc. mergers)? Cntrlà(a) maj. ownshp; OR (b) de facto cntrl (beholden to CSH) (Kahn) SDànot dividends, but detriment of minority SH! (Sinclair-­‐97% ownr Sinven, so Sd=fairness std) Back to BJR Y Y FAIRNESS! Wheelabrator (dicta); Weinberger—Boπ (shit!) (But see, Rabkinàw/ sitng on K; if bad faith, NOT fair NWS full disclosure) Y Apprvl by bd bargaining cmtee that is (1) dist & FI; AND (2) had arms-­‐lngth bgng pwr (a. CSH no dictate terms & b. cmtee has real bargaining pwr/
can say “no”) (Kahn) Bo∆ Y N Back to BJR N FAIRNESS [§144(a)(3); Bayer-­‐opera wife hired] Bo∆ Y: π looses | N: π wins + tranx=vd; no damage protecRons To rebut: show GROSS NEGLIGENCE (Van Gorkom-­‐re5ring CEO’s last act) in decision process (not Disney—sloppy, but not GN) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Y Cleansing by maj of FI (mat facts and c/i), disint. min. SHs? Bo∆ Y: π looses | N: π wins + tranx=vd N Weinberger factors: Fair dealing: includes a duty of candor, amt of 5me to nego5ate, amt of nego5a5ons, and who is nego5a5ng (int dirs?; Fair price: any valua5on deemed ‘generally acceptable in the financial community’. FAIRNESS Bo∆ Oglesby—CorporaRons (Arlen, Spring 2011) Corporate Opportunity Doctrine **NOT under BJR!** NO BREACH! (NWS fid’s ac5ons) (Broz-­‐cell license; Beam-­‐Martha Stewart qua SH sold her shares) TQ: Was the opportunity a corporate opportunity? NO BREACH Balancing factors ① Guth test—is opp in same LOB? [a. Fndmtl knwldge/ pract exp/ or ability to pursue (fin=more than no cash!)? See eBay w/ IPO $$/insurance model; b. Adaptable to biz?; c. W/in reasonable expansion goals?] ②  Trad factors: Does corp have an: (a) interest (firm has k right)?; (b) reasonable expectancy (sth corp would expect to get)?; (c) necessity (opp vital to corp –e.g. factory land)? ③  Sourced through biz (Gen. Automo=ve) or as ind.? [e.g.OD (Broz-­‐cell license)—less N Does the fid appropriate the opp? N Y N Does the fid disclose (formally, Broz
—too informal)? likely coming to firm; ID(CEO)—more likely (obligated to ac5vely seek opps.)] ④  Far removed from core economic acRviRes? ⑤  Was corp info used to get opp? NOTE: This concept exists in agency law as well (RSA §388) An agent w/o consent (RTA§8.06) (Reading-­‐army mis-­‐used uniform; General Automo=ve-­‐machine shop experts runs side business) Does corp (maj FI dist dirs or SHs—
144 by analogy) reject opp? NO BREACH N N Y BREACH (eBay-­‐
Goldman IPOs/
insurance) Unless Is there a DGCL § 122(17) clause that addys this CO (renounced) Y Does the fid appropriate the opp? Y BREACH Y NO BREACH! (NWS fid’s ac5ons) Oglesby—CorporaRons (Arlen, Spring 2011) Nonfeasance: IntenRonal DerelicRon of duRes/deliberate indifference **NOT under BJR (no biz jdgmt exercised!)** Francis is the baseline (what is the least that we expect) DoC àGet rudimentary understanding of business; Keep informed abt corporate ac5vi5es, etc. Was there a knowing failure (of a duty) to implement a monitoring system? (Caremark {Allen}-­‐DoC w a subj std of liab (gf)/
Stone-­‐DoL) **more than gross negligence** Liability Y Was the lack of a system the proximate cause of the harm? (Caremark; aff’D in Cede) N
NO Liability Y Liability Y N Was there a knowing/conscious failure (of the duty) to monitor/oversee the exis5ng system (thus disabling themselves from being informed of risks req their axn) (AIG-­‐sham systm/
rampant fraud)? (Caremark/Stone) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ NOTE: the level of detail for the system is a maxer of business jdgmt (BJR) (Ci=group-­‐subprime risk system) Was the knowing failure to monitor the exis5ng system the proximate cause of the harm? (Caremark; aff’D in Cede) Y N
NO Liability N
NO Liability Oglesby—CorporaRons (Arlen, Spring 2011) SH Enforcement of Fiduciary Du5es: Direct v. Deriva5ve Suits Is the ac5on direct or derivaRve? -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Tooley test (DE test)—status of suit turns on: (1) Who has suffered the harmàcan SH injury to self w/o injury to corp? a.  Yes (e.g. denied/abridged the right to vote; based vote on BoD misinforma5on)?àdirect b.  No?àderivaRve (2) Who would receive the benefit from recovery? a.  Monetary v. Non-­‐monetary (non-­‐
monetaryàderiv) b.  Damages paid to corpàderiv c.  Damages paid to SHàdirect (usually) DERIV. “You’ve hurt the firm (thru breaching of Fid Duty)!” •  Firm (usually) gets the award; firm pays aey fees if successful •  Normally a mgmt. decision [141(a)] •  Procedural impediments (to stop “strike suits”—
mgmt inclined to sexle!) o  Standing: (1) fairly represent the firm (i.e. not a compe5tor; (2) SH thru-­‐out suit (con5nuous ownership rule); (3) SH at 5me of wrong (contemporaneous ownership rule) o  Bonding req (for smaller SHs): not in DE, but in some other states (NY/NJ) (Cohen) o  **Demand unless fu5le o  **SLCs formed whether or not demand is excused DIRECT “You’ve hurt us as SHs!” •  SHs get reward and SHs pay aey fees •  Oyen in the form of class acRons NOTE: See flow chart on demand req/
SLCs Oglesby—CorporaRons (Arlen, Spring 2011) SH Enforcement of Fiduciary Du5es: Demand Requirement/SLCs SUIT MOVES FORWARD IN NAME OF CORP Y Y BoD/SLC [p/t §141(c)] rec’s suit? N SH cannot proceed unless suit is wrongful (protected by BJR) (Grimes-­‐no go given BJR) Boπ DEMAND REQ. OR EXCUSED?? NOTE: The policy behind either test is to give the bd the chance to manage its suit under (DGCL 141(a)!!!!!!!!) Is >50% of the BoD the SAME as when the harm occurred; OR does suit challenge BoD biz decision (NOT Corp opp/Caremark claim)? Yes No Aronson test (from Grimes)
àDemand is fuRle if π can allege parRcularized facts (usually material financial) crea5ng a reasonable doubt (civ std: more likely than not) that: (1)  Maj of dirs are independent and disinterested (and not dominated) in the underlying/original transac5on (turns on fin. InterestàBeam-­‐MS; soy rel, NOT suff in Aroson context); OR (2)  Challenged transac5on was a product of a valid exercise of business judgment (If merely breach of DoC, w/ a §102(b)(7) → demand not excused b/c no threat to BoD) Rales test—
Demand is fuRle if π can allege parRcularized facts (usually material financial) crea5ng a reasonable doubt (civ std: more likely than not) that: (1)  Maj of the dirs are disinterested and (not dominated); OR (2)  Maj of BoD is not vulnerable to (interested in) the lawsuit or dominated by someone who is (would have a prb with suing-­‐soy rela5onships) REQ Demand Made/
Pled? N SUIT MOVES FORWARD IN NAME OF CORP SUIT IS DEAD EXCUSE IS WAIVED! (Grimes) Suit moves forward UNLESS it passes Zapata test (to dismiss per SLC rec) àlooks beyond “domina5on & cntrl” model Y N EXC (demand is fuRle) Demand Made/
Pled (1)
N Suit Proceeds (you get immediate discovery; beyond DGCL§220) SLC [p/t §141
(c)] moves to dismiss suit? Y (2)
-­‐-­‐-­‐-­‐-­‐ Did SLC act independently, in gf w/ reasonable inves5ga5on? (NOT ltd to mat fin. Interestsàsoy rel counts! Oracle {Strine}-­‐Stanford; London-­‐-­‐∆ is cousin’s w/ wife!) Bo∆; AND Ct. (of equity) does ind analysis to see if it agrees w/ SLC (oyen goes w/
SLC if sa5s BJRàAuerbach-­‐NY; SLC ind + no process failingsàsuit dismissed) ü
NOTE: the ct does incorporate policy considera5ons ü
Deriva5ve suits do have to have teeth, BUT have to look at bigger pic to see if truly in the best interests of the firm (TB>TC) Oglesby—CorporaRons (Arlen, Spring 2011) Proxy Contests! -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ SH Proposals DGCL §212(b)àea SH is en5tled to vote via proxy; proxy could be irrevocable if agreed upon [DGCL §212(e)] NOTE: “publicily traded”àSEC governs! SH InspecRon Rights Federal State (DE) Rule 14a-­‐7: SHs en5tled to ask mgmt for SH listàmgmt may (1) give it to SHs, OR (2) may mail materials themselves at SH’s expense. SH List—DGCL §219 At least 10 days before mtg (not enough 5me!), firm is required to post list of SH open to any SH ‘for any purpose germane to the mee5ng.’ [purpose=relates to the economic interests of SHs (Yes—
Crane takeover; No—Honeywell moral wrongs of weapons, π should have reframed). **BoBd to prove purpose isnt proper Other corp records—DGCL §220 Any SH shall have the right to inspect and copy “for any proper purpose” the corp’s stock ledger, a list of SH & other books and records. **BoSH to prove purpose is proper Access to Bd Proxy Federal State (DE) Rule 14a-­‐8—allows SHs to submit proposals in bd proxy mailed at expense of firm. [ELIGIBILITY: (b) 1% owner/$2k wrth at least a yr b4; (c) 1 prop/
mtg; (d) 500 wds max (mgmt: unltd)] Exclusion 14-­‐a8(i)—(1) improper under st law (141a—need a fid. out, see CA v. AFSCME); (2)
illegal act; (3) misleading stmts; (4) personal grievances; (5) small stakes maxers (<5% of total assets/revenue; ethical issues related to biz OK—Lovenheim geese); (8) relates to an elecRon OR electoral procedure (AFSCME v. AIG) a SH in axendance at an annual mtg may offer a proposal for SH vote so long as the proposal involves a proper subject on which SHs may vote RECORD DATE (DGCL §213) àThe BoD selects a date that fixes the iden55es of those allowed to vote in the nxt SH mtg (e.g., if record date is Oct 1. A SH on Oct 1 can vote in a Dec mtg, even if that SH has sold ALL the shares NOTE: NO backda=ng of the record date allowed before the bd mee=ng adop=ng the record date (***Shouldn’t be used as a weapon!) Federal State (DE) Rule 14a-­‐11 Gives SHs ability to nominate short slate (specifically <25% of bd) in BoD’s proxy Subject to: (1) SHs w/ ≥3% of stock ownership for ≥ 3yrs (not good for hedge funds); (2) yhe BoD collects the votes; (3) 500 word ltd for SHs statement in favor of candidates (mgmt has unltd space to respond) DGCL § 112 Allows SHs to include individuals for elec5on w/ Bd proxy, assuming there is the proper bylaw Subject to: (1) Number/% shares owned by nominee or dura5on of ownership; (2) Info that the nomina5ng SH must submit abt nominees; (3) Ltds on # or % directors nominated; (4) IndemnificaRon to corp in case of any L (for false, misleading info) ANNUAL/SPECIAL MTG (DGCL § 211) PROXY SOLICITATION PROCESS Proxy Exp Reimbursement BoD SHs Incumbant Bd (Levin)—
en5tled to remb itself exp if: 1) Dirs act in gf contest over policy (not purely abt pers pwr); AND 2) Exp must be reasonable and proper (bigger firmà$
$$) NOTE: Strong policy in favor of keeping SHs fully informed (serves a corp purpose—NOT ultra vires) DGCL§ 113—the bylaws may provide for the remb of expenses incurred by a SH in solici5ng proxies wrt dir elec5on. Can be S/T: 1) Number or propor5on of persons nominated by the SH 2) Propor5on of votes cast in favor of slate NOTE—axempts to address collecRve acRon problem among SHs Insurgernt Bd (Rosenfeld)—
can be reimbursed (but not en5tled to) for exp if: 1) Insurgents act in good faith in a contest over policy; AND 2) Expenses are reasonable and proper; AND 3) Insurgents win seats on the board; AND 4) **They get reimbursement approved by a majority of disinterested SHs (cleansing) àdate of annual mee5ng specified in cer5ficate or bylaws. (Airgas Special mee5ngs -­‐DGCL § 211 (a): held at 5me/place specified in cert or bylaws OR if not so specified, at 5me determined by bd -­‐DGCL § 211 (d): bd has default pwr to call, but can be delegated to an officer/SHs in cert. Oglesby—CorporaRons (Arlen, Spring 2011) Proxy Fraud -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ q  Remedy Could be either prospecRve OR retrospecRve (Borak) ü  Enjoin the proxy vo5ng ü  Enjoin SHs mtg ü  Void tranx ü  Award $ damages ü  Axy fees paid (if win(-­‐-­‐for either direct or deriv. (Mills) **Damages need to be equitable –have to show act harm (Mills) Rule 14a-­‐9: Principal An5-­‐Fraud provision – disallows false/misleading (including omissions) statements in proxy solicita5on materials Has an implied right of acRon (Borak) NOTE: proxy fraud → c/a in a 14a-­‐9 ac5on could be either direct (Ind/class ac5on-­‐you lied to me and I was hurt) Or derivaRve (you lied to SHs and SHs overall/the firm was hurt). Borak. q  Breach of cognizable securiRes law duty ①  False or misleading statement of material fact, OR ②  An omission of a statement that is necessary to make the statement not false or misleading NOTE: If there is no duty to disclose, omission is not a breach, even if material q  Materiality (TSC v. Northway) + SubstanRal likelihood that reasonable SH would have considered it important in deciding vote at the =me of the transx (i.e. would have altered the “total mix” of informa5on available) + q  Scienter (must have had intent/knowledge) VA BanksharesàIf suing on the basis of a false or misleading statement of belief (opinion), it is necessary to establish BOTH: ①  SubjecRve falsity—that Δ did NOT believe it (i.e., subjec5ve belief), AND ②  ObjecRve falsity—that IN FACT there was something false or misleading about the subject maxer Effect: e.g., BOD subjec5vely believes firm worth $60, lies and says that $40 is a fair price, but their actual belief was wrong, and the firm is really only worth $40 → NO breach of cognizable duty. + q  TransacRon CausaRon (Mills-­‐proxy stmt failed cnflt of interest) You need: ①  Materiality (see ß) ②  Proxy was an essenRal link to the transac5on (Must be necessary for transac5on, NOT just useful to avoid future li5ga5on (“sue facts”) or reputa5onal shame (“shame facts”) as in VA Bankshares) NOTE: reliance of ind. π NOT necessary. The harm is not one running to the individual SH suing (their individual vote likely has no effect on the transac5on), but rather to the company as a result of misinforming the SHs as a whole. +
q  Loss CausaRon Just a determina5on that the lie/misstatement resulted in a loss for SH (systema5c risk/
loss is NOT recoverable) Oglesby—CorporaRons (Arlen, Spring 2011) SH & Board AcRons and DuRes Selling Cntrl of firm CSH No-­‐
CSH The CSH has Perlman duRes, BUT is otherwise en5tled to cntrl premium (no EO for MSH—Zetlin) Bd. DOES NOT have Revlon du5es If a bd is selling cntrl/breaking up firm and there is no CSH, the the bd has Revlon/QVC duRes Merging firm Friendly Self-­‐Merger T/Oà Self-­‐Merger
(Hos=le) If CSH is comple5ng merger w/ sub then it has Weinberger/Kahn duRes If CSH is ini5al5ng a T/
Oàmerger w/ sub then it has EITHER: Cox, Pure Resources {Strine}, OR Soloman duRes -­‐-­‐CNX SH Threat NO SH Threat If there is a threatening offer from a SH, then the bd has Unocal/
Time Warner duRes If there is not a SH threat, the the bd’s ac5ons are protected by the BJR Oglesby—CorporaRons (Arlen, Spring 2011) CSH Sale of Cntrl DE has rejected the Equal Opportunity Rule (Zetlin) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Policy: we want SHs to be free to transfer ownership and “get out” BUT Perlman test… q  Step One: Would buyer be liable for breach of DoL [(a) loo=ng of corp. assets, or (b) has commission of fraud/other acts of bad faith]?—e.g. the “Feldmann Plan” as a CO; AND q  Step Two: Did SH/would RPP in SHs posi5on know that buyer would breach his DoL? N CSH is en5tled to their cntrl premium (Zetlin) Y CSH is liable for damages (A CSH, cannot knowingly profit from selling to someone who he knows will use their mgmt. pwr to loot the firm)
(Perlman-­‐”Feldman plan”) Oglesby—CorporaRons (Arlen, Spring 2011) CSH Mergers OpRon 1: FRIENDLY MERGER w/ CSH DGCL § 251 governs mergers—req: ①  BoD MUST recommend to SHs; AND ②  SHs must ra5fy by maj of outstanding shrs (inc. CSH) N Deal Dead Y CSH?àKahn ①  Maj stk owner; OR ②  De facto cntrl of bd Y N ALL SHs must turn in their shares in accord w/ the merger agmt UNLESS SHs decides to perfect appraisal rights (DGCL §262) ①  Must hold shares on date that demand is made; ②  Must not sell shares un5l merger complete ③  Perfect appraisal rights q  File no5ce of dissent from merger b4 merger q  Must NOT VOTE for merger •
**If SH votes for merger ayer filing demand, then stuck w/ merger q  File for appraisal post-­‐merger APPRAISAL DAMAGES q  Ct. via DGCL § 262(f)—
gives “fair value” sans synergies/premiums q  If ct val < merger value◊stuck q  Use any “gen acct methods” (DCF); not just “DE block” Normally, §262 appraisal is sole remedy (statutory); IFF fraud, misrepresentaRon, self-­‐dealing, deliberate waste, then SHs can have a direct class acRon in lieu of appraisal (equitable) Weinberger—on both sides/used tgts data; Rabkin—inxlly waited for K to exp for lwr px; Andra—stock buy back w/ lacking proposal) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ ①  STD= enRre fairness (see CSH SD transx slide) w/ rebuxable burden shiying (Weinberger; Rabkin) ②  More favorable w/ aey fees (bigger pot) FID DUTY DAMAGES (flexible) q  Fair price—claim to benefit of the merger q  Recission q  Val. of of alt bid (if there was one) q  Lwrs π risk b/c if loose ac5on, NOT cut out of merger OpRon 2: CSH (HOSTILE)T/OàMERGER CSH?àKahn (Maj stk owner; OR De facto cntrl of bd) Unilateral Two-­‐step Freeze Out Merger q  Step 1: CSH makes T/O to get to 90% threshold (front end) q  Step 2: CSH invokes DGCL §253 (Short Form mergers) •  W/ 90% threshold the CSH, can effect merger of the whole company w/o the approval of the MSH (back-­‐end) Problem ①  Worry abt inherent coercion by CSH over MSH to accept front-­‐
end bid (otherwise may be stuck w/ poten5ally worse back-­‐end bid) ②  Normally the BoD protects (e.g. poison pill), but may be rendered ineffec5ve by a CSH •
Even w/o sufficient ownership to make SF, CSH can s5ll dominate MSH through subtle reprises (e.g., no dividends) •
REMEMBER: when a SH controls a bd (maj ownership is sufficient), then it inherits the fiduciary responsibili5es of the BoD to the MSH No uniform DESC std of review in these situa5ons (In re CNX)—3 tests Pure Resources std (Strine) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Cox std -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ As a CSH, you can do a t/o w/o fairness rvw IFF: ①  T/O recc’d by duly pwrd cmtee of ind. dirs; AND ②  T/O is condi5oned on apprvl by “maj of min” NOTE: supposed to simulate a 3P arms length transx > As a CSH, you can do a t/o w/
o fairness rvw if: ①  T/o has non-­‐waivable “maj of min” prov; AND ②  CSH promises to do SF w/ same price as front end if >90%; AND ③  CSH has made no retribuRve threats; AND ④  Ind. dirs. have free rein/
Rme to react (get ind advice; advise SHs, etc) to t/o Soloman std -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ > As a CSH, you can do a t/o w/o fairness rvw if: ①  Tender not structurally coercive; AND ②  CSH does not mislead the MSH NOTE: the offer does not have to be fair; SH ac5ng qua SH can be defeated by ac5ve bd or by impwrd MSH Oglesby—CorporaRons (Arlen, Spring 2011) Protected by BJR Contest for Cntrl: Bd DuRes Y TQ: Is Revlon std triggered? -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Protected by BJR (Time deal # 1) N Was bd ac5on in response to a hosRle threat? Y N Yes, If: ①  Corp ini5ates and ac5ve bidding process seeking to sell itself/break-­‐up the firm (Revlon) ②  In response to bidder’s offer, target firm abandons long-­‐term strategy and seeks alt transx to break up firm (Revlon) ③  Sale of control (**No CSHàCSH): board alienates control premium. (QVC, Van Gorkom)àlast bite at apple §
NOTE: cntrl = Kahn std (>50% OR De facto bd cntrl) §
NOTE: if acquirer has dispersed ownership, even if exis5ng SHs end up w/less than a majority of shares in stock for stock deal, cntrl premium has not been alienated. (Time. Contrast QVC) -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ NOTE: theore=cally, once Revlon du5es have been triggered, it is possible to un-­‐trigger the Revlon du5es, IF there was a good faith decision by the board to no longer alienate the cntrl premium. Y **FDs are to the SHs (NOT the firm itself)
àobliga5on now is to max(SH value) in short term -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Did the bd… q  Van Gorkom std (gross negligence): Conduct adequate decision-­‐making process and inves5ga5on (nego5ate!); AND •  Can only consider synergies to the extent that they increase SH value (e.g. if the SH are owners of new firm) •  Look for independent dirs** q  Was ac5on of the dirs reasonable (and not “draconian”) under the circumstance •  E.g., measures to “level” the bidding playing field (reimbursement of expenses) SaRsfied Unocal std applies **FDs are to the firm [bd can look to “4 corners” to max (long run firm value); arg paternalis5c] BJR Prong 2 (DoC) rebueed (Van Gorkom) BoBd N NOTE: Theore=cal possibility for SH cleansing if sep vote (b/c this one is req
—Gantler) Likely outcome: a ct will enjoin the ac5on b4 SHs could vote to cleanse Bd ac=on protected by BJR Not SaRsfied Bd ac=on will be enjoined Was there a threat to corporate policy AND effecRveness ? a)  Bd has to iden5fy a recognized threat in good faith—
(Structural Coercion; Wan5ng to change the firm in some way that hurts it (“culture” in Time); Paying too low a price (and the price is non-­‐nego=ableàCf. QVC-­‐price was nego5able); Quality of instruments exchanged; Ques5ons of illegality) b)  Reasonable invesRgaRon: Bd has adequately inves5gated the threat (ex-­‐ante inves5ga5on OKàTime w/due dil research b4 threat) NOTE: Doesn’t maIer if the ct doesn’t buy reasoning, as long as the bd acted in gf w/ its inves=ga=on Bd ac5on must be reasonable (propor=onal) in rela5on to the threat posedàUnitrin std a)  A defensive measure cannot be Draconian→either coercive (effec=vely forces SHs to take a mgmt-­‐sponsored alt to Hos=le bid) OR preclusive (prevents hos=le from succeeding no maIer what he does i.e. “not no, but never”) b)  If a response is NEITHER coercive nor preclusive, then if the response is w/in the “range of reasonableness,” the measure is acceptable (very deferen=al/broad) NOTE: SH discrimina5on may be legi5mate to protect long run interest of firm (SHs as a whole) (Unocal) q
q
AND Oglesby—CorporaRons (Arlen, Spring 2011)