Table of Contents
Agency Law ................................................................................................................................................. 3
IS THERE AN AGENCY RELATIONSHIP?..............................................................................................................................3
WHAT FIDUCIARY DUTIES DOES THE AGENT OWE TO THE PRINCIPAL? ....................................................................................3
When is the Principal Liable for the Agent’s Actions? ..............................................................................................3
Partnerships ................................................................................................................................................ 5
GENERAL..................................................................................................................................................................5
FORMATION .............................................................................................................................................................5
DUTIES ....................................................................................................................................................................5
LIABILITY TO THIRD PARTIES .........................................................................................................................................5
Corporations (General) ................................................................................................................................ 7
GENERAL..................................................................................................................................................................7
INCORPORATION ........................................................................................................................................................7
FINANCING ...............................................................................................................................................................7
MANAGEMENT ..........................................................................................................................................................8
THE CORPORATE OWNERSHIP PROFILE ............................................................................................................................9
METHODOLOGY TO AMEND CORPORATE CHARTER .............................................................................................................9
PREEMPTIVE RIGHTS ...................................................................................................................................................9
TAXATION OF BUSINESS ENTITIES ................................................................................................................................. 10
PIERCING THE CORPORATE VEIL ................................................................................................................................... 11
Corporations (BOD) ................................................................................................................................... 12
FIDUCIARY DUTIES.................................................................................................................................................... 12
1.
2.
3.
DUTY OF CARE ....................................................................................................................................................................... 12
DUTY OF LOYALTY ................................................................................................................................................................. 13
STANDARDS OF REVIEW ....................................................................................................................................................... 14
Corporations (Shareholders) ...................................................................................................................... 16
MAJORITY/CONTROLLING FIDUCIARY DUTIES ................................................................................................................. 16
1.
2.
MAJORITY SHAREHOLDERS: .................................................................................................................................................. 16
CONTROLLING SHAREHOLDER TRANSACTION ...................................................................................................................... 16
VOTING ................................................................................................................................................................. 17
2.
SHAREHOLDER PROPOSALS .................................................................................................................................................. 17
PRIMACY NORM ...................................................................................................................................................... 17
DIRECT V. DERIVATIVE SUITS....................................................................................................................................... 18
b.
Procedural Obstacles ............................................................................................................................................................ 18
DEMAND REQUIREMENT ............................................................................................................................................ 18
a.
2.
Demand Futility Requirements ............................................................................................................................................. 19
THE SPECIAL LITIGATION COMMITTEE ................................................................................................................................. 19
Limited Liability Company .......................................................................................................................... 21
GENERAL................................................................................................................................................................ 21
FORMATION ........................................................................................................................................................... 21
MANAGEMENT ........................................................................................................................................................ 21
FIDUCIARY DUTIES.................................................................................................................................................... 21
LIABILITY ................................................................................................................................................................ 22
Friendly Mergers and Acquisitions ............................................................................................................. 23
DEFINITIONS ........................................................................................................................................................... 23
RATIONALES ........................................................................................................................................................... 23
STRUCTURING AN ACQUISITION (GENERAL) .................................................................................................................... 23
MERGERS/CONSOLIDATIONS ...................................................................................................................................... 23
APPRAISAL ............................................................................................................................................................. 24
FIDUCIARY DUTIES IN FRIENDLY TRANSACTIONS ............................................................................................................... 24
Hostile Takeovers, and Defending Against Them ........................................................................................ 25
GENERAL................................................................................................................................................................ 25
DEFENSIVE ACTIONS ................................................................................................................................................. 25
Agency Law
IS THERE AN AGENCY RELATIONSHIP?
1. Definition of Agency: Agency is the fiduciary relationship that arises when one person (a principal)
manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject
to the principal’s control, and the agent manifests assent or otherwise consents so to act.
a. Requires: (i) mutual assent; (ii) for the benefit of the principal, (iii) under the principal’s control.
2. Agent Action
a. Employees: is always an agent. (causes the principal to be liable for a contract or tort based on
respondeat superior
b. Independent contractor: only has a relationship with third party, no liability for the Principal based
on the actions of the independent contractor (unless there is apparent authority [see below])
WHAT FIDUCIARY DUTIES DOES THE AGENT OWE TO THE PRINCIPAL?
1. DUTIES: “An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected
with the agency relationship.”
a. “the general fiduciary principle requires that the agent subordinate the agent’s interests to those of
the principal and place the principal’s interests first as to matters connected with the agency
relationship.”
2. BREACH OF DUTIES (Food Lion v. Capital Cities): “employees are disloyal when their acts are inconsistent
with promoting the best interest of their employer at a time when they were on its payroll, and an
employee who deliberately acquires an interest adverse to his employer. . . is disloyal.”
a. Breach may in three ways:
i. Competition
ii. Misappropriation of profits or opportunities
iii. Disclosure or use of confidential information.
3. DUTIES WHEN THERE ARE TWO PRINCIPALS: “an employee does not commit a tort simply by holding two
jobs or performing the second job inadequately. An agent who acts for two principals has a duty to:
a. Deal in good faith with each principal
b. Let each principal know of the other principal
c. Disclose to each principal all facts that would reasonably affect the principal’s judgment.
When is the Principal Liable for the Agent’s Actions?
1. AUTHORITY: Agents bind principals by acting with authority (actual or apparent)
2. SOURCES OF AUTHORITY:
a. Actual: “an agent acts with actual authority when, at the time of taking action that has legal
consequences for the principal, the agent reasonably believes, in accordance with the principal’s
manifestations to the agent, that the principal wishes the agent so to act.”
i. Express Authority: “actual authority that the principal has stated in very specific or detailed
language.”
ii. Implied Authority: comes from “either:
1. To do what is necessary, usual, and proper to accomplish or perform an agent’s
express responsibilities, or
2. To act in a manner in which an agent believes the principal wishes the agent to act
based on the agent’s reasonable interpretation of the principal’s manifestation in
light of the principal’s objectives and other facts know to the agent.”
b. Apparent: one person may bind another in a transaction with a third person, even in the absence
of actual authority, when the third person reasonably believes (based on manifestations by the
purported principal) that the actor is authorized to act on behalf of the principal.
i. Arises in two circumstances:
1. One person appears to be an agent of another, even though no agency relationship
exists
2. An actual agent exceeds the scope of his or her authority
ii. Keys to finding apparent authority:
1. The manifestation must emanate from the principal and must be received by the
third person.
a. Can result from direct or indirect communications.
b. Can result simply from someone being placed in a position.
2. The scope of the agent’s apparent authority depends on the third person’s
reasonable interpretation of that manifestation.
c. Ratification: agent acts without authority from principal and principal ratifies the agents action
giving him authority.
i. if an agent signs a contract that the principal then ratifies, the principal cannot later claim
that the agent did not have authority in order to get out of the contract.
3. JOINT EMPLOYMENT (Courtland v. GCEP -Surprise; BWW case): Two or more employers may be joint
employers if both control the terms and conditions of employment.
a. A franchisor is not a joint employer (and thus not liable for employment discrimination) unless the
franchisor “exerts daily control over the hiring, firing, and supervisions of franchisee employees.”
Partnerships
GENERAL
1. Advantages: simple to form, flexible and informal, and “pass through taxation.
a. Permits two people to operate as “co-owners” not principal and agent
2. Disadvantages: No limited liability
a. Dissolution: “dissolution of the partnership does not itself discharge the existing liability of any
partners.” (In Re Keck)
FORMATION
1. DEFINITION: A partnership is “an association of two or more persons to carry on as co-owners of a
business for profit.”
2. INTENT: partnership may be formed “whether or not the persons intend to form a partnership.
a. Partners must intent only “to do the things which constitute a partnership” (many partnerships are
inadvertent).
b. Things that constitute a partnership:
i. Profit sharing** (Holmes v. Lerner, Urban Decay Nails case)
1. “An express agreement to divide profits is not a prerequisite to prove the existence
of a partnership”
2. Look to other evidence of an agreement to share profits:
a. Partners working without expectation of pay while building company.
b. Role of sophistication of the parties (unsophisticated taken advantage)
DUTIES
1. Partners owe a duty of loyalty and care to the other partners. “a partner does not violate a duty . . . merely
because the partner’s conduct furthers the partner’s own interest.”
a. Duty of Loyalty may be breached by (RUPA):
i. Anti-Theft – every partner must account for any benefit derived from or pertaining to the
partnership (explicitly includes “appropriation of partnership opportunity”)
1. (Meinhard v. Salmon)
ii. Prohibition against self-dealing (partner cannot be on both sides of a transaction)
iii. Prohibition against competition (before dissolution)
b. Duty of Care: may be breached if partner engages in “grossly negligent or reckless conduct.”
i. Excludes ordinary negligence
2. ALTERATIONS THROUGH CONTRACT:
a. Loyalty: partners may specify acceptable activities through contract “if not manifestly
unreasonable”
b. Care: partners may not “unreasonably reduce”
c. Obligation of good faith and fair dealing is not waivable (RUPA 404(d))
LIABILITY TO THIRD PARTIES
1. GENERAL PARTNERSHIP LIABILITY
a. Partnership Liability: a partnership is liable for loss or injury caused to a person, or for a penalty
incurred, as a result of a wrongful act or omission, or other actionable conduct, or a partner acting
in the ordinary course of business or the partnership or with authority of the partnership
b. Joint and Several Liability for each Partner: “all partners are liable jointly and severally for all
obligations of the partnership unless otherwise agreed by the claimant or provided by law.”
i. A person admitted as a partner into an existing partnership is not personally liable for any
partnership obligation incurred before the person’s admission as a partner (RUPA 306(b))
ii. (In Re Keck) partners are liable, jointly and severally, for claims arising during their time as
partners, but not for claims arising afterwards.
1. “where, by any wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership, loss or injury is caused to any person, the
partnership is liable therefor to the same extent as the partners so acting or omitting
to act.”
c. Exhaustion: a creditor or a partnership may not satisfy the judgement from a partner’s personal
assets unless there is also a judgment against the partner
i. Creditor cannot seek assets of a partner before exhausting the assets of the partnership or
liability is imposed on the partner by law or contract independent of the existence of the
partnership
d. Dissolution: of the partnership does not of itself discharge the existing liability of any partners.
(Partners cannot release one another from liability to third parties – this would be a breach of
contract with the third party)
2. LIMITED LIABILITY PARTNERSHIPS
a. Formation: Registration with state provides limited liability (if formed in accordance with standards
in UPA or RUPA)
b. Justification: encourages investment from those who would not otherwise be willing to take on the
risk at a cost to the creditor who bear the burden.
c. Liability Shield: “An obligation of a partnership incurred while the partnership is an LLP, whether
arising in contract, tort or otherwise, is solely the obligation of the partnership. A partner is not
personally liable, directly or indirectly, by way of indemnification, contribution, assessment or
otherwise, for such an obligation solely by reason of being or so acting as a partner.”
d. RUPA standards: Duty of Loyalty and Duty of Care
i. Duty of Loyalty: in three areas just like General Partnership
ii. Duty of Care: limited to “engaging in grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law.”
3. LIMITED PARTNERSHIP
a. Type of organization in which there is at least one general partner (who manages the partnership
and has full liability) and other limited partners who act as passive investors
i. LPs can become too involved with management and thereby lose their status as an LP, thus
removing limited liability.
b. Especially important for investment funds (especially for non-US owners/investors)
Corporations (General)
GENERAL
1. Introduction: what is a corporation – everyone that a partnership is not:
a. Limited liability
b. Centralized decision making (owners [shareholders] delegate decision-making to a board of
directors)
c. Perpetual existence (does not dissolve when an owner sells shares)
d. Free transferability of ownership (default is that shares are freely tradeable, sold on public or
private markets)
INCORPORATION
1. The Incorporation Process
a. Delaware: one or more persons may incorporate by filing a Certificate of Incorporation with the
secretary of state
i. Charter must include 6 things: (1) names of directors, (2) addresses of directors, (3) purpose
of corporation, (4) classes of stock, (5) name and address of incorporator, (6) corporations
name and address.
b. MBCA: one or more persons may act as the incorporator by delivering articles of incorporation to
the secretary of state:
i. Corporate existence begins when the article of incorporation is filed
ii. Charter must include name, number of shares, registered office and agent, and
incorporator’s name and address.
FINANCING
1. Equity: connotes a power to control
a. May have different classes with different rights
b. “Capital Stock” is all equity interests together
c. “Shares” individual unit of Capital Stock
i. Outstanding while shareholders hold them
ii. Treasury shares while the corp holds them
iii. Charter should set forth the total number of shares the corp is authorized to issue
d. Common v. Preferred
i. Common: (1) unlimited voting rights, and (2) right to residual assets. Corporation must have
at least one at all times. (this is the lowest level of equity share)
ii. Preferred: priority or preference in payment over common shares
2. Debt: Connote some fixed obligation of repayment independent of the success or failure of the business
a. Done Contractually, not set forth in bylaws or charter.
b. Bonds (publicly traded version of a loan) refer the holder of the bond to a K which sets forth an
indenture between corporation and a trustee, who acts on behalf of bondholders.
i. Registered v. Bearer: registered makes payments to name on registry, bearer to whomever
holds the bond.
ii. Redemption: right to call bonds
iii. Priority: senior, subordinated, or senior subordinated (affects interest rate(risk)
iv. Conversion: gives debtholders option of converting the debt into equity at a price
v. Ratings
c. Why issue bonds and acquire debt?
i. Leverage
ii. Tax benefits:
1. Interest payments are tax deductible, but dividends are not
2. Repayment of principal is nontaxable, but dividends are ordinary income to the
investor
iii. If company fails, bad debt is an ordinary loss not a capital loss to the investor. Individuals
want ordinary loss
iv. Downsides:
1. Must make regular payments on debt
2. Increase risk of bankruptcy
3. Dividends and Repurchases
a. Dividend: Timing and amount decided by board
i. Taxable to shareholders at dividend rates
b. Repurchase: corporation buys back its own stock to reduce number (but not percentage) of
outstanding shares
i. A corporation may not repurchase its share if it would cause an impairment of capital.
Impairment exists if funds used in repurchased exceed the amount of surplus
4. Limits on Distribution: Cannot distribute where Assets>Liabilities
a. Solvency Test: payment of a dividend in such a circumstance would result in fraudulent conveyance
b. Balance Sheet Tests:
i. DGCL “impairment of capital test”: permits distribution out of “surplus” (Net assets in
excess of aggregate par values of the issued shares)
1. Distribution<=(net assets – liabilities)
ii. MBCA prohibits distribution that would result in total assets being insufficient to pay the
sum of corporations liabilities and any liquidation preference of shareholders.
MANAGEMENT
1. Relationship between Directors and Shareholders: how do make sure that those who control the
corporation act in the best interest of those who own it?
a. Stockholder: “Owners” who hold important control rights including:
i. Electing directors,
ii. Voting,
iii. The rights to the corporations assets upon liquidation
b. Directors are elected by Shareholder to supervise the officers (generally no authority to act
unilaterally): DGCL §141(a): business affairs of every corporation shall be managed by or under the
direction of the board of directors.
i. General Duties: hiring, supervising, and firing the officers
ii. Inside v. Outside:
1. Inside are hired full-time and always include the CEO (may also include other
officers)
2. Outside directors do not work for the corporation (no financial relationship =
independent)
iii. Term: elected yearly in annual meeting unless terms are “staggered” or “classified”
1. Staggered: (default is removal only based on cause)
2. Classified:
iv. Removal: default rule is that shareholders can remove with or without cause.
v. Vacancies and Decisions: vacancies are filled by either the remaining board or the
shareholders depending on the Bylaws.
vi. Meetings: meet 4-10 times a year and set forth decisions in writing (can be held outside
state of incorporation and/or remotely)
1. Directors must be given notice of meetings
vii. Committees of the Board (MBCA §8.25): Generally, actions that will need to be put to a
shareholder vote may not be delegated to a committee
c. Officers: like the CEO, CFO, etc. are in charge of day-to-day operations
THE CORPORATE OWNERSHIP PROFILE
Relationship btw. owners,
directors, and officers
Application of federal
securities law
Market for Corporate
Control
Publicly Held
Privately Held
Owners, directors, and
officers are typically three
distinct sets of people.
Separation between
ownership and control.
Subject to a demanding array
of disclosure requirements
under federal securities laws.
Overlapping accountability
mechanism with corporate
law.
Can be taken over by another
company buying a majority
of stock—the threat of a
hostile takeover is another
accountability mechanism.
Roles may overlap, with
individuals as owners,
directors, and officers.
Contractual governance
through s’holder k.
With the exception of rules
against fraud, federal
securities laws largely silent.
Shares are not publicly
traded, and so changes of
control must be negotiated.
METHODOLOGY TO AMEND CORPORATE CHARTER
1. Proposed amendment approved by shareholders
a. Holders of outstanding shares shall be entitled to vote upon a proposed amendment, where the
amendment would increase or decrease the aggregate number of authorized shares of the voting
class, or alter the powers of such class such that the class is adversely affected (DGCL 242(b)(2))
2. Merger
a. In the case of the merger, the surviving corporation’s charter shall automatically be amended to
the extent that changes in the certificate of incorporation are set forth in the agreement of merger.
(No class vote required)
b. Benchmark – must set forth protections against potential, negative effects of a merger specifically
in K so that a merger cannot alter the class rights of shareholders. General language alone granting
preferred stockholders a class vote on certain changes will not read to require a class vote on a
merger.
i. Protective provisions for preferred stock must be explicit and not presumed. (from long line
of Delaware Precedent)
PREEMPTIVE RIGHTS
1. Preemptive Rights – Rights of a shareholder to subscribe to the portion of any increase in a corporation’s
capital stock necessary to maintain the shareholder’s relative voting power as against other shareholders
a. Default rule is that there are no preemptive rights, and they must be negotiated.
b. Pros v. Cons:
i. Pros – allows existing owners certainty in retaining control.
ii. Cons – increases cost of capital because new investors won’t bother, cannot bring in new
investors, and difficult to get rid of problematic investors already in.
c. Kimberlin – Duty of good faith cannot be relied upon to alter terms of an unambiguous agreement
that waived preemptive rights. In other words, a waiver of preemptive rights can be upheld if it is
not ambiguous.
1. DISSOLUTION: Deadlock – standstill between shareholders when the vote is evenly divided, and often leads
to dissolution. (Filing of articles of dissolution, or perhaps even judicial dissolution)
a. May be a result of failure to plan, but often intentional.
b. Conklin v. Perdue – A deadlock between former business members of a closely held corporation
brought claims against each other. The court, through judicial dissolution, decided to find that the
corporate entity was dissolved through deadlock at an earlier time.
TAXATION OF BUSINESS ENTITIES
1. ENTITY TAX CLASSIFICATION: three major classifications: (i) corporation, (2) partnership, and (3) nothing
(“disregarded entity”)
a. Default Classification: Businesses are given a “default” tax classification, and must literally check
the box to opt into another form.
b. When are entities not eligible for a specific classification?:
i. A corporation under state law, if called a corporation, are treated as such. (the name is all
that matters)
ii. Domestic Eligible Entities: never classified as a corporation by default.
1. # of members is important:
a. 2+ members is a partnership unless elects for corporation status
b. One member is a disregarded entity absent an election to be treated as a
corporation (never a partnership)
iii. Foreign Eligible Entities: classified as a corporation if all members have limited liability (so
foreign equivalent of an LLC would default to a corporation)
1. # of members:
a. 2+ members is classified as a partnership, unless it elects otherwise. (as long
as at least one of the members does not have limited liability)
b. One member: disregarded, so long as the member does not have limited
liability (in which case it defaults to corporation)
2. Foreign entities can be defaulted into a corporation, so more common for them to
elect out of the default (through IRS form 8832)
2. TAX CONSEQUENCES OF CORPORATION V. PARTNERSHIP:
a. Corporation: (i) double taxation, (ii) simple tax consequences for investors (only pay taxes on
receipt of dividends or when they sell, deferral of second level of taxation)
b. Partnership: (i) Single taxation (pass through); (ii) complicated tax consequences for investors
(taxed yearly on partnership income, must file tax returns everywhere partnership earns income,
and phantom income)
i. Issues created by partnerships:
1. Income retains its character in a pass-through entity:
2. State and federal filing requirements
3. Different partners with different tax profiles
ii. Non-US partners:
1. Investment income tax exempt; however taxed on effectively connected income
2. Non-US investors required to pay tax in the US on income that is effectively
connected to a US trade or business at normal US rates.
3. TAX EXEMPT ENTITIES: 501(c)(3) organizations, endowments, and pension plans
a. General not taxable on gains, interest, and dividends (however taxable on UBTI)
b. Consequences of Tax Exemption:
i. Tax liability for otherwise tax exempt entities
ii. Possibly increased audit exposure
iii. Additional filing obligations
iv. Theoretical loss of status.
4. LLC IMPLICATIONS: LLCs are classified as corporations or partnerships, or sometimes “tax nothings”.
Generally classification is elective.
PIERCING THE CORPORATE VEIL
1. DEFINITION: requiring shareholders to pay the entire amount of a judgment beyond the amount of
investment.
2. STEPS TO CONSIDER:
a. Check first for direct liability
b. Look to corporate formalities (failure to follow these formalities are cited by courts as evidence,
but not enough on their own)
i. Does a corporation have enough assets or insurance to cover risks
ii. Meetings, records, separate bank accounts (look to whether the individual and the
corporate entity operated as separate individuals)
iii. If corporation is used as an alter-ego, then courts will be more likely to pierce the veil
iv. No need for causal link between the formalities and the harm.
c. Inequity: consider fairness – courts require a showing of injustice.
i. Did someone profit unfairly (unjust enrichment
ii. Insufficient capitalization (see (i) above)
3. CASES:
a. (Walkovszky v. Carlton)
i. Takeaway: “Courts will (broadly speaking) pierce the corporate veil whenever necessary to
prevent fraud or to achieve equity”
ii. Dissent: “if capital is illusory or trifling compared with the business to be done and the risks
of loss, this should be a ground for denying the separate entity privilege.”
Corporations (BOD)
FIDUCIARY DUTIES
1. DUTY OF CARE (waivable): Primarily a procedural duty to make high level, lawful decisions in a well
informed and careful manner. If a director is informed, independent, and disinterested, there can be no
liability for corporate loss, unless the facts are such that “no rational business person” could authorize
such a transaction (waste).
a. Directors in performing their duties may rely in good faith on information, opinions, reports,
statements, etc. prepared or presented by other directors, officers, employees, a director’s
committee, or a profession in a particular field of expertise.
b. (Wheelabrator): Disinterested and informed shareholder approval can extinguish a duty of care
claim.
c. (Gagliardi v. Trifoods): Where a director is independent and disinterested, there can be no liability
for corporate loss, unless the facts are such that “no rational business person” could possibly
authorize such a transaction.
d. MBCA §8.30: (a) each member of board shall act (i) in good faith, and (ii) in a manner the director
reasonably believes to be in the best interests of the corporation. (b) the directors shall discharge
their duties with the care that a person in a like position would reasonably believe appropriate
under similar circumstances. (directors may reasonably rely on others such as managers or
professional advisors.
i. Breach:
1. Gross Negligence (ordinary negligence=no liability):
2. Waste: “No rational business person could authorize such a transaction”. (Gagliardi)
a. Plaintiff must show that the exchange was “so one sided that no business
person or ordinary, sounds judgment could conclude that the corporation has
received adequate compensation” (In Re Walt Disney)
e. The Business Judgment Rule: protects corporate directors from liability for corporate loss, unless
there is waste. (use of corporate funds that lack any rational business purpose would be
considered waste). Courts will not hold a director liable for a business decision that was informed,
made in good faith, and had a rational basis.
i. This is a presumption that must be rebutted by the party wishing to show a breach of this
rule.
ii. BJR is almost not rebuttable but may be rebutted by a showing of waste (In Re Walt Disney)
1. Then the rebuttal is pushed to the defendant to show that the challenged
transaction was entirely fair
a. Entire Fairness Review (Weinberger): burden holder must show:
i. Fair Dealing: look to – (i) which party initiated the merger; (ii) were
there time constraints; (iii) was an independent committee
established by the target to consider the merger; (iv) was
independent legal and financial advice given to the board; (v) has all
info been conveyed to the independent directors and the minority
shareholders?
ii. Fair Price:
2. DUTY OF LOYALTY (cannot waive): While the DoC applies to high-level decisions, DoL requires that BoD set
up procedures and oversee them to ensure that the low-level decisions of employees are supervised and
do not lead to actions dangerous to the Corporation, and to also avoid conflict of interest transactions.
Requires that the director serve in the interest of the corporation and not their own interest. Includes duty
of good faith, oversight and director’s conflicts of interest.
a. A director’s obligations include a duty to attempt in good faith to assure that a corporate info and
reporting system, which the board concludes is adequate, exists and that failure to do so may
render a director liable for losses caused by non-compliance with this standard. (In Re Caremark)
b. MBCA §8.31: Director shall not be liable to the corporation or its shareholder for any decision to
take or not to take, or any failure to take any action, as a director, unless the party asserting
liability . . . establishes that the challenged conduct consisted or was the result of a sustained
failure of the director to devote attention to ongoing oversight of the business affairs of the corp.
c. Breach of Oversight: (In Re Caremark) Standard of liability - “a sustained or systematic failure of the
board to exercise oversight, such as an utter failure to attempt to assure a reasonable information
and reporting system exists, will establish the lack of good faith that is necessary to create
liability.”
i. (Graham): “absent cause for suspicion there is no duty upon the directors to install and
operate a corporate system of espionage to ferret out wrongdoing which they have no
reason to suspect exists.”
ii. Only liable if:
1. Director must have utterly failed to implement any reporting system or controls, or
2. Having implemented a system, consciously failed to monitor it. (Stone v. Ritter)
iii. What is “Bad Faith”: (Stone v. Ritter) the “intentional dereliction of duty, a conscious
disregard for one’s responsibilities.” The requirement to act in good faith “is a subsidiary
element, i.e. a condition, of the fundamental duty of loyalty.”
1. Something more than gross negligence that would give rise to liability under duty of
care, but something less than an actual intent to do harm (In Re Walt Disney)
2. Failure to act in good faith may result in liability under the duty of loyalty
3. Three Scenarios/Candidates for defining “Bad Faith”: “(1) where the fiduciary
intentionally acts with a purpose other than that of advancing the best interests of
the corporation, (2) where the fiduciary acts with the intent to violate applicable
positive law, or (3) where the fiduciary intentionally fails to act in the face of a
known duty to act.” (In Re Walt Disney)
a. Subjective bad faith: intent to do harm to the company
b. Lack of Due Care: conduct that creates a violation of due care, does not
necessarily create a showing of bad faith (requires something more)
c. An “intentional dereliction of duty, a conscious disregard for one’s
responsibilities”
i. “A claim that directors are subject to personal liability for employee
failures is “possibly the most difficult theory in corporation law upon
which a plaintiff might hope to win a judgment” (In Re Walt Disney)
ii. “a bad outcome does not necessarily equate to an action of bad faith”
(Stone v. Ritter)
d. Conflict of Interest: (Wheelabrator): COI involve two types of claims: (i) transactions between the
corporation and an “interested director,” or (ii) transactions between the corporation and a
controlling shareholder (see section below)
i. “Interested Director”: Arises when the director has interest other than the interest of the
corporation that affect his or her judgment.
1. Defining a lack of independence in DOL claims: whether a director is, for any
substantial reason, incapable of making a decision with only the best interest of the
corporation in mind.
a. Interested: do they have an conflict or other interest in the transaction?
b. Independence: are they beholden to the controlling shareholder or
conflicted director such that their independence is sterilized?
c. “Inside Directors”: under (Aaronson) an employee director is not
independent for pre-suit demand.
2. Disinterested and Independent = disinterested from the conflict/underlying claim
and independent from the individual with the conflict. Look for any “substantial
reason” that the board is incapable in acting in the best interest of the corporation.
a. If a disinterested, informed shareholder vote ratifies the transaction, then
the approval invokes the BJR and shifts burden of rebutting the BJR to the
plaintiff (see graphic below).
3. DGCL §144: a transaction between corporation and director/officer with a financial
interest is not void or voidable (will be upheld) if:
a. Material facts as to relationship are disclosed and affirmed by a majority of
disinterested directors, or
b. Material facts are disclosed and approved in good faith by vote of
disinterested shareholders, or
c. the transaction is actually fair.
3. STANDARDS OF REVIEW
a. The Business Judgment Rule: protects corporate directors from liability (duty of care violations) for
honest mistakes made by independent and informed board. (use of corporate funds that lack any
rational business purpose would be considered waste). Courts will not hold a director liable for a
business decision that was informed, made in good faith, and had a rational basis.
i. This is a presumption that must be rebutted by the party wishing to show a breach of this
rule.
1. Steps to show that Director was Informed:
a. The directors actually made a business decision,
b. The directors inquired, were informed, and deliberated their decision,
c. Directors were disinterested with regard to the decision, and
d. Directors were unbiased and motivated by the welfare of the corporation (in
good faith)
ii. If rebutted by a showing of waste (In Re Walt Disney) the rebuttal is pushed to the
defendant to show that the challenged transaction was entirely fair
b. Entire Fairness Review (Weinberger): burden holder must show:
i. Fair Dealing: look to – (i) which party initiated the merger; (ii) were there time constraints;
(iii) was an independent committee established by the target to consider the merger; (iv)
was independent legal and financial advice given to the board; (v) has all info been
conveyed to the independent directors and the minority shareholders?
ii. Fair Price: was it a fair price based on the market?
Corporations (Shareholders)
MAJORITY/CONTROLLING FIDUCIARY DUTIES
1. MAJORITY SHAREHOLDERS: have a fiduciary duty to other shareholder because a shareholder who has
control of the voting power essentially has control of the corporation.
a. Test for control (Williamson v. Cox):
i. A Shareholder who has more than 50% of voting power; or
ii. A shareholder who exercises actual control over the business affairs of the corporation
1. Some factors for actual control: (i) appointing directors to the board, (ii) personal
relationships of a substantial nature, (iii) veto power.
b. In a Conflict of Interest transaction between the corporation and controlling Shareholder:
i. (Wheelabrator): If a disinterested, informed shareholder vote of the majority of the
minority ratifies the transaction, then the approval invokes the “entire fairness” review and
shifts that burden to the plaintiff.
2. CONTROLLING SHAREHOLDER TRANSACTION:
a. In the Merger Context (Weinberger v. UOP): When directors of a Delaware Corporation are on both
sides of a transaction they are required to demonstrate their utmost good faith and the most
scrupulous inherent fairness of the bargain. Where one side stands on both sides of a transaction,
they have the burden of establishing its fairness in terms of fair dealing and fair price.
i. Fair Dealing factors to consider: (a) which party initiated the merger; (b) time constraints
and who imposed them; (c) was an independent committee established by the target, to
consider the merger; (d) was there independent legal and financial advice; (e) was all info
conveyed to the target’s independent directors and minority shareholders
ii. Fair Price: look to economic and other consideration.
b. Cases:
i. (Khan v. Lynch): Burden shifting in a Cash-out Merger w/ Majority or controlling shareholder
(See chart above)
1. Initial burden: party with conflict must prove fairness
2. Shifted burden: if independent committee or a majority of minority shareholders
approve, burden of proving unfairness shifts to the plaintiff.
a. However, Simply appointing an independent committee is not enough to
shift the burden. Two things must be shown:
i. The controlling shareholder did not “dictate the terms”, and
ii. The committee had authority to negotiate at arm’s length.
ii. (Rabkin v. Olin Corp.): Independent committee approval
VOTING
1. GENERAL: “The responsibility of shareholders and its capability to correct errors (actions of the BoD)
should not be such as to destroy the genuine values of authority (powers of the BoD). Otherwise, control
and ownership are not truly separated.” – Kenneth Arrow.
a. Vote on Directors:
b. Meetings/Consent:
i. Notice of Meetings (Alderstein)
2. SHAREHOLDER PROPOSALS: appear on the company’s proxy card
a. SEC regulates when the company must allow a shareholder proposal to be put to a vote
i. Companies don’t easily surrender control of their proxy statement and lean on SEC rules to
justify excluding certain shareholder proposals.
b. Key Proposal Questions:
i. Who is eligible to submit proposals?: must have held $2000 or 1% of company’s securities,
and hold for one year and through the date of the meeting.
ii. How many proposals can a Shareholder submit?: one for each Shareholder meeting, per
person
iii. How long can my proposal be and how far in advance must I submit it?: it can be no longer
than 500 words and must be filed 120 days prior to the annual meeting (for other meeting
just a reasonable time).
1. The proposal’s drafter must be present or send a representative or the company
may omit it.
c. Can company still exclude the proposal? (Rule 14a-8)
i. Yes, if they show the proposal is
1. Improper under state law;
2. Violation of law/proxy rules;
3. A personal grievance;
4. Lacks relevance;
5. Absence of power/authority
6. Addressing ordinary business operations (Trinity v. Walmart)
7. Elections;
a. Director Elections: Rejection if proposal would –
i. disqualify a nominee;
ii. remove a director before his or her term expired; or
iii. questions the competence of nominee or director.
8. Seeks to include a specific individual in the company’s proxy materials;
9. Conflicts with company’s proposals;
10. Resubmissions;
11. Requesting specific amount of dividends
d. Procedures for exclusion of a proposal:
i. File documentation with the SEC
ii. If issued, a “no action” letter comes from the SEC staff
PRIMACY NORM
1. TO WHOM DO DIRECTORS OWE THEIR DUTY OF CARE?
a. (Dodge v. Ford): “A business corporation is organized and carried on primarily for the profit of the
stockholders. The powers of the directors are to be employed for that end. The discretion of
directors is to be exercised in the choice of means to attain that end, and does not extend to a
change in the end itself, to the reduction of profits, or to the no distribution of profits among
stockholders in order to devote them to other purposes.”
DIRECT V. DERIVATIVE SUITS
1. CONTEXT:
a. Direct: (i) typically brought as a class action, (ii) involve claims by shareholder who suffered
damages directly, (iii) damages awarded go directly to the shareholder (example: infringement of
shareholders’ right to vote on a given matter).
b. Derivative: (i) involve claims of the corporation, not shareholders directly, (ii) brought when harm is
indirect to shareholders, (iii) may be brought as class action, (iv) have substantial procedural
hurdles, and (5) damages go to corporation (example: board violates fiduciary duty).
i. Distinctions (Tooley): Plaintiffs bring claims due to loss from time value of money that came
from a delayed merger.
1. Rule: when distinguishing between direct and derivative suits actions it is necessary
to ask:
a. Who suffered the alleged, direct harm; and
b. Who would receive the benefit of recovery.
2. Reasoning: show that the harm and remedy run exclusively to the shareholder in
order to bring a direct claim. Must be independent of any alleged injury to the
corporation.
2. DETAILS OF DERIVATIVE SUITS:
a. Issue: When directors breach their fiduciary duties, the company is harmed. But who will bring the
suit because normally the directors and officers would file such a suit.. So shareholders sue on
behalf of the corporation generally against the board, and the recovery goes to the corporation.
i. Normally shareholders would have less incentive to bring the suit, so attorney’s fees are
granted as part of damages for derivative litigation to encourage attorneys to take on the
suit.
b. Procedural Obstacles:
i. Plaintiff’s must have been shareholders at the time of alleged breach
ii. Plaintiff’s must remain shareholder throughout the litigation (this can pose an issue for
potential plaintiffs that need liquidity)
iii. Shareholders must “demand” that the board take action before the shareholders assumes
control of the litigation (“Demand Requirement” – see below)
iv. Once derivative claim is filed, court must approve any settlement.
DEMAND REQUIREMENT
1. DELAWARE V. MBCA
a. MBCA §7.42 Universal Demand Requirement: plaintiffs are required to first bring a demand to the
board, then if the board does not act within 90 days, the plaintiffs can proceed with litigation
i. The board’s decision not to act does not evoke the BJR.
b. Delaware:
i. (Martha Stewart quoting Aaronson): a stockholder may not pursue a derivative suit to
assert a claim of the corporation unless (i) she has first demanded the directors pursue the
corporate claim and they have wrongfully refused to do so, or (ii) such demand is excused
because the directors are deemed incapable of making an impartial decision regarding the
pursuit of litigation (“demand futility”).
1. If under (i) above the board decides not to act, then its decision is reviewed under
the BJR (this incentivizes plaintiff’s to make a claim of demand futility.
a. Demand Futility Requirements: the Court of Chancery must decide whether
there is a reasonably doubt created that:
i. The directors are disinterested and independent, or
ii. The transaction was a valid exercise of business judgment.
b. (Martha Stewart): Because it is presumed that a board acts in a
disinterested, independent matter, the plaintiff must plead particularized
facts creating reasonable doubt that they are interested.
i. Personal Friendships must rise to a level above mere friendship,
there must be something substantially more in order to establish that
a friendship tie raises a reasonable doubt of independence. (even
friendship with a 94% equity owner did not rise to this standard)
ii. Showing a lack of independence requires that they director was
sterilized by some personal relationship, interest in the company,
officer position, etc.
iii. A director is interested if there is “a potential personal benefit or
detriment to the director as a result of the decision”.
iv. In pre-suit demand, the court must ask whether the director is, for
any substantial reason, incapable of making a decision with only the
best interests of the corporation in mind.
2. THE SPECIAL LITIGATION COMMITTEE (SLC):
a. What is it?: a mechanism by which the company may regain control of derivative litigation if
Demand Futility is found.
b. Who is in it?: composed of the boards most independent directors and top flight counsel is
retained to advise the claims
c. When is it formed?: Typically, after a complaint is filed, standing is determined, and demand has
been excused or exercised.
i. The board will still want to take control of litigation so they delegate power to the SLC and
the SLC must decide whether it is in the best interests of the company to proceed with
litigation (rarely decide to proceed).
d. Case Law:
i. (Zapata: Rule of SLC independence):
1. The court must inquire into the independence, good faith, and the bases supporting
the conclusions of the SLC (procedural inquiry)
a. The burden is on the board to prove independence.
b. Permits limited discovery into the Board’s independence, which is more than
in futility analysis.
2. The court should determine, applying its own independent business judgement,
whether the motion to dismiss should be granted (substantive inquiry).
ii. (In Re Oracle: Application of the Zapata Standard):
Limited Liability Company
GENERAL
1. INFORMATION AND BACKGROUND
a. Purpose: a form of organization that receives limited liability of a corporation, but enjoys tax status
or a partnership.
b. History:
i. Began in Wyoming in 1977
ii. IRS issues favorable revenue ruling in 1988, leading to states adopting LLC statutes in 1996
iii. Characterization depended upon the Kintner factors (continuity of life, centralized
management, free transfer of ownership, and limited liability)
iv. IRS then does away with these and makes tax treatment elective
FORMATION
1. REQUIREMENTS: Formed through a formal filing of certification with the state (Certificate of Formation).
a. Contain only minimal information about the company
i. Name, Street address, and a statement to elect members.
b. Further details are set forth in the Operating Agreement
MANAGEMENT
1. DECENTRALIZED (member managed like a partnership)
a. Default in Delaware (DLLCA 18-402)
b. Members vote are proportional to their interest in the LLC
c. Benefits: unanimity in voting gives member a veto right.
2. CENTRALIZED (Non-member managed like a Corporation)
a. Default under the RULLCA
b. In Delaware, operating agreement must state if the LLC is to be managed by a manager.
c. Benefits: (i) unanimity is cumbersome; (ii) veto protection unjustified since liability is limited; (iii) a
member can easily exit (because they are not managing the LLC).
FIDUCIARY DUTIES
1. GENERAL: Duty of loyalty and care apply in the LLC context just like a partnership.
a. RULLCA §409: a member of a member-managed LLC owes to the company and . . . the other
members the fiduciary duties of loyalty and care.
i. RULLCA §409 Duty of Care: refrain from engaging in grossly negligent conduct, willful or
intentional misconduct, or knowing violation of law.
ii. RULLCA §105 Duty of Loyalty: (i) account to the company for any property or profit derived
by member; (ii) refrain from dealing with the company in an adverse party; and (iii) refrain
from competing with the company.
b. Alteration in the Operating Agreement:
i. RULLCA §105:
1. May alter or eliminate aspects of the duty of loyalty;
2. Identify specific types or categories that do not violate duty of loyalty;
3. Alter duty of care, but not authorize bad faith conduct; and
4. Alter or eliminate any other fiduciary duty.
ii. Delaware permits operating agreement to waive duties except good faith and fair dealing.
LLC fiduciary duties come entirely from Common Law.
1. However, Delaware Court of Chancery has interpreted a “core of default fiduciary
duties, although waivable by an express contract, when an agreement is silent.
a. If there is a gap in the operating agreement, courts will step in and fill the
gap with traditional fiduciary duties. (i.e. Silent=default core, voice=waive
rules)
LIABILITY
1. PIERCING THE VEIL
a. (Netjets v. LHC Comm.): Two-pronged (“or”) test for piercing (evidence for one prong does not
preclude its usage in the other prong):
i. Alter-ego: (i) mingling of the operations of the entity and its owner plus (ii) “overall element
of injustice; or
ii. Fraud Injustice: whether there was fraud (mislabeling of loans that should have been capital
contributions)
b. Because of the inherent informality of an LLC the piercing factors of lack of formalities are not
grounds for imposing liability.
Friendly Mergers and Acquisitions
DEFINITIONS
1. TARGET: business being bought
a. Seller: the owner of target
b. Acquirer: the entity seeking to buy the target
2. POSTURE: may be friendly, hostile, or somewhere in between
3. CONSIDERATION: what is being given by the acquirer for the target
a. Stock, cash, or a mixture
RATIONALES
1. ECONOMIES OF SCALE: what is the optimal scale at which to produce a single product?
a. Exists if the cost of producing a given unit decreases as output increases
2. MINIMIZE TRANSACTION COSTS: is it more efficient to organize production through the market or through
internal control?
a. Transaction-specific assets create the opportunity for hold-up problems:
i. Solution:
1. Integration;
2. Long-term contracts;
3. Reputational sanctions;
4. Joint ventures;
5. Cross ownership
3. ECONOMIES OF SCOPE: what is the optimal combination of different products?
a. Exists when it is cheaper to produce two products together than separately.
b. Two different products may use the same machinery, the same channel, the same know-how, etc.
i. So combining production can be optimal.
STRUCTURING AN ACQUISITION (GENERAL)
1. PROCEDURE/PROCESS
a. Both boards approve merger agreement
b. Shareholder of the target vote on the merger, whereas acquiring company shareholders don’t
generally vote.
i. No voting by acquiring shareholders so long as the merger does not “fundamentally alter
the business.”
1. No charter amendment;
2. No change in stock terms; and
3. New shares comprise no more than 20% of those outstanding prior to the merger.
ii. Short-Form Merger: exception to the requirements that target shareholders vote on a
merger.
1. Under DGCL §253, a subsidiary merging into its parent who holds at least 90% of
subsidiary’s shares.
2. Minority shareholders get some protections
a. Notification and
b. Right to appraisal.
MERGERS/CONSOLIDATIONS
1. MERGER OR CONSOLODATION:
a. Consolidation: when two companies use the statutory merger procedure to combine to form a new
company.
b. Merger: Surviving company subsumes the target company (one company survives)
2. WHAT CURRENCY IS BEIGN USED TO ACQUIRE THE TARGET
a. Cash: payments in cash are taxable to the shareholders of the acquired company
b. Stock: payments in stock dilute the buyer’s ownership of the combined company
3. BUYING STOCK V. BUYING ASSETS
a. Asset Purchase (Buyer prefers): the selling company’s assets and liabilities do not transfer
automatically but are instead individually negotiated for.
i. Not usually preferred by the target shareholders because they must recognize the gain on
the sale of assets and the Shareholders will be taxed on that gain if cash is received as
consideration.
ii. If “substantially all” of the target’s assets are being sold, then it is roughly treated as a
merger and the Target Shareholders have a right to vote.
1. MBCA 25% rule: if the Target keeps less than 25% of its assets, then a shareholder
vote is required.
2. Delaware: “substantially all” is when the asset sale is quantitatively vital to the
operation of the corporation and is out of the ordinary and substantially affects the
existence of the corporation.
3. If not “substantially all” then no vote by target shareholders.
b. Stock Purchase (Seller prefers): debts, property, contracts, rights, litigation, etc. all transfer
automatically to the Acquirer as part of the purchase.
i. This can be good in a Target has contracts (such as government) that cannot be transferred
APPRAISAL
1. DGCL §262: minority stockholders receive “fair value” for their shares. Available in most mergers (where
vote is required), or where it is a privately held share, but not for a sale of assets (unless “substantially all”)
2. QUALIFICATION OF STOCKHOLDER:
a. Must demand appraisal;
b. Continuously hold shares through the effective date; and
c. Must not have voted in favor of the merger
3. PROCESS:
a. Corporation notifies Shareholders of appraisal rights;
b. Stockholder must demand appraisal before shareholders vote on the merger;
c. If merger approved, corporation notifies the shareholders who have mad demand that appraisal
rights are available;
d. Shareholder makes a second demand for appraisal; and
e. Shareholder or surviving corporation may petition court for appraisal.
i. Appraisal not automatically available for publicly traded shared
1. They don’t need the same protection because they can just sell their shares on the
open market
2. Must show some wrongdoing to get appraisal remedy (Weinberger)
4. CASES:
a. (Weinberger v. UOP, Inc.)
b. (Khan v. Lynch)
c. (Rabkin v. Olin Corp.)
FIDUCIARY DUTIES IN FRIENDLY TRANSACTIONS
1. The board must take reasonable steps to get the best deal for the shareholders (highest price)
Hostile Takeovers, and Defending Against Them
GENERAL
1. OVERVIEW: By acting to remain independent, were the directors acting in the interests of the corporation
and its shareholders or were they acting to entrench themselves?
a. Hostile Takeovers are concluded through either a Tender Offer, or a Proxy Contest.
i. Tender Offer: Simply an offer made directly to the shareholders (bypass the board) to buy
shares at a premium.
1. The goal is to purchase enough shares so that you can elect a new board that is in
favor of the takeover.
2. Regulated by the SEC act of 1934: requires that bidders must buy all shares at the
highest price in the tender offer.
ii. Proxy Contest: Hostile seeks proxy voting authority from enough shareholder to put its slate
of directors in power on the board.
1. Prerequisite: “toe hold” – hostile bidder buys a percentage of the target and
therefore an advantage in future proxy test.
a. This is a hedge as the bidder can raise price of shares, thus the bidder
probably turns a profit even if they are unable to make the merger happen.
DEFENSIVE ACTIONS
1. BENEFITS
a. Benefits of defensive measures: might serve to increase the bidding by increasing the leverage with
bidder.
i. Costs: might actually scare off bidders and keep the company independent and lose a
premium.
2. CAN THEY BE EXERCIZED
a. (Unocal) Central Question: Are directors trying to entrench themselves or are they acting in the
best interests of the shareholders and therefore exercising their duty of care?
i. Delaware’s Intermediate Scrutiny of Defensive Measures: Shareholder who had proposed a
two-tiered merger that would allow it to purchase 37% of shares at current price ($54) and
then have a back-end which gave the remaining Shareholders “junk bonds” through a
security exchange, was challenged by the board’s own offer (“self-tender”) and power to
oppose and offer funded through debt.
1. Issue: Did the Unocal Board have the power and duty to oppose a takeover threat it
reasonably perceived to be harmful to the corporate enterprise, and if so, is its
action here (providing a self-tender offer and exchange to those back -end
shareholders harmed by the junk bonds) entitled to the protection of the BJR?
2. Holding: there was directorial power to oppose the tender offer, and to undertake a
selective stock exchange made in good faith and upon reasonable investigation. The
selective stock repurchase plan chosen by Unocal is reasonable in relation to the
threat. Thus the board’s action is entitled to be measured by the BJR.
3. Rule: Intermediate Scrutiny – because of the omnipresent specter that a board may
be using the defensive actions in its own interest, there is a threshold question that
must be answered before the BJR is conferred.
a. Two-Pronged Test: before decision of board;s defensive action is subjected
to BJR you must determine: (i) was there a perceived threat; and (ii) was the
response of the board Proportional. If satisfied then BJR remains the
standard, if the test fails, then subject to entire fairness.
i. Threat Analysis: Did the board act in good faith and pursuant to a
reasonable investigation in determining if there was a threat?
1. Burden is on the defendant (the board)
2. There must have been a majority of independent directors
ii. Proportionality Review: the “measure must be reasonable in
proportion to the threat posed.”
1. Look to whether the challenged defensive action was coercive
or preclusive,
2. if not then look to whether it falls within a range of
reasonableness
b. (Revlon) Boards must take “reasonable steps” to get the best deal.
i. Revlons board was confronted with an interesting takeover situation. A hostile bidder
originally sought the company at a price the board was convinced was inadequate. The
initial defensive response was to the benefit of the shareholder (a poison pill that raised the
prices) as well as the second defensive measure (a self-tender that further raised the price).
However, in granting an asset option lock-up to another bidder (with no significant benefit
to the shareholders) the board let other considerations cloud their judgment. As such, the
board breached its duty of care and was not entitled to the business judgement rule:
1. Rule: the Revlon standard contemplates a judicial examination of the
reasonableness of the board’s decision-making process. Boards must make
“reasonable steps” to get the best deal.
a. When “it became apparent to all that the break-up of the company is
inevitable . . . the duty of the board changed from the preservation of Revlon
as a corporate entity to the maximization of the company’s value as a sale for
the stockholders benefit”
b. Directors were concerned about themselves (rather than the shareholders)
in favoring Forstmann: “the principal benefit went to the directors, who
avoided personal liability to a class of creditors to whom the board owed no
further duty under the circumstances.”
i. Which then triggers the next duty:
1. Revlon Duty: obtaining the highest price for the benefit of the
stockholders should have been the central theme guiding
director action.
2. Thus (Unocal) only applies up until the sale of the company is
inevitable, at which point (Revlon) duties take over.
c. “In our view, lock-ups, no-shop, break up fees and related agreements are
permitted under Delaware law when their adoption is untainted by director
interest or breaches of fiduciary duty. The actions taken by the Revlon
directors, however, did not meet this standard.”
i. the goal of any restrictions should be to induce bidding, not foreclose
it.
3. TYPES OF DEFENSIVE ACTIONS
a. Poison Pills (Shareholders Rights Plans because they involve the issuance of “rights” to buy shares)
i. Goal: to make the Target expensive or unappealing due to exercising the right
ii. Mechanics of the Modern Pill:
1. Pills can often be adopted by the target board without shareholder approval
a. In 2015, only 8% of the S&P 1500 had a pill in place
b. But boards can easily implement a pill on short notice by:
i. Making a resolution that issues Rights to all shares of the company
ii. These Rights give shareholders the ability to purchase shares of
preferred stock of the issuer
iii. Target board retains the right to redeem the pill
iv. So effective that the pills are pretty much never actually triggered
2. Bidders can respond by launching a proxy contest (to elect a new board that would
redeem the pill) followed by a tender offer.
a. To combat this some corporations have classified Boards:
i. Classified Boards: instead of the typical election of directors each
year at annual meetings, directors terms can be staggered, so that
the entire board is not up for re-election at any time.
1. This makes it so that multiple proxy fights over a number of
years are required to gain a majority of the board and redeem
the pill.
2. Trend is moving away from classified boards as it looks more
like a mechanism for board members to entrench themselves
rather than simply fulfilling their duty of care.