Agency
Definition
Under Doty, agency has to have three elements:
1) the manifestation of one person (the Principal) to another (the Agent)
o intent shown by volunteering
2) the agent will act on his (the Principal’s) behalf and subject to his control
o e.g. you be the driver
3) and the Agent consents to so act: (the most important)
o consent to be controlled and directed.
 under Doty, an explicit written contract is not required. Agency may be implied. In addition, the
principal’s benefit may be intangible.
 Cf. the problematic fact in Cargill, Warren seems not to have consented.
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Forms:
o principal-agent, master-servant, employer-employee.
o marriage and joint ownership are not automatic agency; (control and consent not firm)
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Cargill
o Buyer-creditor turns into principal-agent when creditor takes de facto control over the
operation/business of the buyer.
o agency may be proved by circumstantial evidence.
o not supplier-purchaser relationship; the following were not present:
I.
receiving a fixed price for property irrespective of price paid by him. most
important.
II.
he acts in his own name and receives the title to the property which thereafter is to
transfer.
III.
that he has an independent business in buying and selling similar property.
o Consent must be based on near perfect knowledge from both parties.
o The nine factors in determining that Cargill is the creditor that has taken control are very
important:
1) Cargill’s constant recommendations to Warren by telephone;
2) Cargill’s right of first refusal on grain;
3) Warrant’s inability to enter into mortgages, to purchase stock or to pay dividends
without Cargill’s approval;
4) Cargill’s right of entry onto Warren’s premises to carry on periodic checks and
audits;
5) Cargill’s correspondence and criticism regarding Warren’s finances, officers’
salaries and inventory;
6) Cargill’s determination that Warren needed strong paternal guidance;
7) Provision of drafts and forms to Warren upon which Cargill’s name was imprinted;
8) Financing of all Warren’s purchases of grain and operating expenses, and;
9) Cargill’s power to discontinue the financing of Warren’s operations.*
*factors 3,4,9 common to a sympathetic lender, 1 and 5; a controlling creditor.
Liability of Principal to Third Parties in Contract
A. Agent’s Authority
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In an agency, we need to consider the nature and extent of an agent’s authority to assess whether that
agent’s action(s) can bind the principal. This assessment must be done in light of all circumstances,
from an objective point of view, and the nature of the job and the relationships of the parties.
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the extent of the agent’s authority,
 it’s more important to know what authority the agent enjoys as a result of express
circumstances or the situation the agent finds himself in.
 if significant, what is the legal consequence of that authority?
person alleging agency must prove it, though it may be circumstantial proof.
To analyze authority, consider all the circumstances, including what the standard of the industry is,
the nature of the job and relationships. Past experiences are important in this domain.
o the standard is from an objective point of view.
Agent’s Authorities
There are different types of authorities the agent may possess:
(1) Actual Express authority– where the focus is on agent-principal relationship
 the principal gives specific instruction, without any qualification or limitations.
 e.g. Caleb go buy me a Ferrari
(2) Under Hogan, Actual Implied Authority, (aka implied authority), is where the focus is still on
agent-principal relationship but are the authorities necessary incidental for the agent to posses.
 (e.g. practically necessary to hire help to paint the wall) ~ Hogan.
 necessary incidental, things we forget to tell, built-in assumptions.
 we must consider the nature of the task: implied may be necessary to implement the
express authority.
 principal gives instruction, forgets about necessary incidental instructions.
(3) Apparent Authority, where the focus is on the conduct between third parties and the agent (who
considers past practices), when a third party reasonably believes the actor has authority to act on
behalf of the principal and that belief is traceable to the principal’s manifestations and actions. (373
Leasing).
 Note: must consider the interaction between the third party and the agent.
o A principal is undisclosed if, when an agent and a third party interact, the third
party has no notice that the agent is acting for a principal.
 based on the appearances, it seems you have the power.
(4) Inherent Agency Power, (Fenwick)
 principal disclosed: Apparent Authority
 principal undisclosed
o undisclosed Principal is personally liable for debts incurred by Agent even when
agent’s acts are prohibited as long as those acts are within the scope of other agents
engaged in similar activities.
o protects innocent buyers; public policy consideration.
(5) Ratification,
 two questions: (1) what types of act are ratification by the principal? (2) what effect should we
give to that affirmation?
 express or implied; an authorized approach by a person to a third party that seeks to create an
opportunity for somebody. A decision to accept an unauthorized and unpermitted arrangement
by someone else (not an agent).
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
Ratification requires the principal’s acceptance of the results of the act with an intent to ratify
and with full knowledge of all the material circumstances at the time (important). ~ Botticello
o benefits obtained without full knowledge does not matter
(6) Estoppel.
 public policy matter, dereliction of duty of care by the way of estoppel:
 this fact pattern would be the category of Koos Brothers
 Three elements:
(1) Acts or omissions by the principal, either intentional or negligent, which create an
appearance of authority in the purported agent,
 e.g. they haven’t taken steps to ensure that authorized personnel are only working
there.
(2) the third party reasonably and in good faith (perception of it being true) acts in reliance on
such appearance of authority, and
 e.g. customer borrows money from the aunt.
(3) the third party changes her position in reliance upon the appearance of authority.
 she’s out of money now (she pays out money).
 this must be an affirmative response.
 Agent’s Liability on the contract

Atlantic Salmon
o “if the other party to a transaction has notice that the agent is or may be acting for a principal
but has no notice of the principal’s identity, the principal for whom the agent is acting is a
partially disclosed principal.” a person purporting to make a contract with another for a
partially disclosed principal is a party to the contract. It is the duty of the agent, if he wants to
avoid personal liability on a contract entered into by him on behalf of his principal, to disclose
not only that he is acting in a representative capacity, but also the identity of his principal.
o It is not enough that the other party has the means of ascertaining the name of the principal,
the agent must either bring to him actual knowledge or what is the same thing that which to a
reasonable man is equivalent to knowledge or the agent will be bound.
Fiduciary Obligations of Agents
Duties During Agency:
 duty of absolute loyalty
 act solely for the benefit of the Principal
 entitled to reasonable compensation
 but NO secret profits
 NO supplementary benefits
 must NOT put his interests or those of a third party above those of the Principal
 must NOT secretly conduct business with the Principal or deal with principal as an adverse
party.
There are two fiduciary duties an agent owes to a principal:
 (1) a duty of loyalty
o The agent must not put their own interest or anybody else above the principal. As the
agent, they serve the principal that demonstrates loyalty and fidelity. It’s a marriage
type of quality involved.
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(2) a duty of care.
o the agent must be carrying out his duties with a reasonable skill and care like an
individual in that similar circumstance.
the agent must not take advantage of principal-placed opportunity (Reading).
it’s not about enrichment, but about two things owed.
the agent must disclose potential areas of conflict, if not, the principal cannot have enough
information (full knowledge required) to consent, agency null and void. (Rash).
o dereliction of duty is a loyalty question, the result/consequence would be, at best, a
mere negligence.  don’t look at it from a duty of care perspective.
Duties during and after agency ends; (Grabbing and leaving)
 Duty of loyalty may indeed continue after termination of agency agreement (termination of
employment) (Newbery).
o Trade Secrets
 There must be a reasonable opportunity for a client to choose, to stay, or to leave.
Partnership
Must talk about Meinhard in every partnership question.
Under Fenwick, a partnership exists when two or more persons act as co-owners of a business for profit,
where they have control (right to management) and profit/loss sharing. Whether a partnership has been
formed must be determined in light of the totality of circumstances (Southex).
General Framework
Are they partners:
1. do they share profit?
2. do they have control?
Interests:
a. economic interests in the enterprise
b. equal right to participate in the management (default)
c. all partners are agents of the partnership and can bind others.
Elements:
I.
profit/loss sharing (non-profit org. excluded) (Fenwick)
II.
control over allocation (profit sharing) (Fenwick)
o Fenwick fails here (control solely to one person)
o End-around: “confer and control based on investment percentage”
o under Martin, a debtor-creditor relationship is not partnership, when control is
absent:
 Cargill is active participation, cf.
 Martin is all about passivity
 to avoid partnership pitfall:
o make intent clear in agreement (to become partners)
o no language on operation and business strategy
o Common law: “A partnership connotes coownership in the partnership property
with a sharing in the profits and losses of a continuing business.”
o partnership by estoppel: third party told of a partnership and must rely on that
image created.
 under Young, to prove partnership existence by estoppel, the plaintiff needs
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to prove a consensual relationship (it’s substance driven), by either showing
profit sharing or control and must show that they materially relied on the
representation of the partnership shown to them.
Fiduciary Duty
 under RUPA § 409, the fiduciary duties owed by the partners are: (1) the duty of care, and
(2) the duty of loyalty (Meinhard v. Salmon). Under Meinhard, partners have a fiduciary
duty of finest loyalty to each other, to share in any benefits that results from the parties’
joint ventures and disclose an opportunity in a partnership capacity.
o the duty of care is to essentially refrain from any gross negligence, reckless
conduct, or intentional misconduct; and
o the duty of loyalty is essentially to account to the partnership and hold as trustee for
it any property, profit, or benefit derived by the partner:
(A) in the conduct or winding up of the partnership’s business;
(B) from a use by the partner of the partnership’s property; or
 partnership properties belong to the partnership. (Fulton).
 intent of partners determines what belongs and what not.
(C) from the appropriation of a partnership opportunity;
 (side: fairness determined by subjective circumstances of the
partnership).
o the lesson from Meinhard, define business opportunity.
 It’s something that arises from the agreement. In other words, but for this
partnership’s involvement, the business opportunity would not arise when it
did.
 to refrain from dealing with the partnership in any adverse manner,
and
 to refrain from competing with the partnership in the conduct of its
business:
o disclosure requirement in this context requires partners to
organize their partnership functions in terms of
opportunities.
o no secrecy, no silence, no exclusion.
Grabbing & Leaving:
(Law Firm Setting) – Meehan: a partner has a fiduciary duty to provide, on demand of another
partner, true and complete information of all and any things affecting the partnership. Under Meehan,
it is un/acceptable to [plug from below]:
Acceptable practices:
o Solicit fellow partners to leave too
o Contact clients before leaving firm, so long as
 disclosed fact of leaving to firm
 Remind clients of right to have counsel of own choice
 Locate space etc....
Questionable:
o Take desk files
o Keep plans confidential
o Solicit subordinates
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Clearly improper:
o Take client files
o Contact clients before announce departure
o Not informing clients of the right to have counsel of own choice
o Lying about plans
Expulsion
Under Lawlis, when a partnership exercises its power under a partnership agreement to
expel a partner, it must be done in good faith and for a bona fide reason, otherwise the
agreement is breached.
Partnership Property
Under Fulton, partnership properties belong to the partnership and the intention of the parties as to the
division of assets and properties determines what property shall be considered partnership property.
Management
under UPA § 9(1): every partner is an agent of the partnership for the purpose of its business, and the
act of every partner . . . for apparently [constitutes apparent authority] carrying on in the usual way the
business of the partnership of which he is a member binds the partnership, unless the partner so acting
has in fact no authority to act for the partnership in this particular matter, and the person with whom
he is dealing has knowledge of the fact that he has so no such authority.
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I.
II.
Two very important principles you need to know as partner:
You have apparent authority with respect to the ordinary course of business,
you are bound by the acts and obligations of the partnership (joint and several
liability).
o can contract otherwise
Under Stroud, in a general partnership with two partners, each party has the power to bind the
partnership in matters pertaining to the partnership’s business. In other words, all partners are agents
of the partnership and can bind the partnership.
Under Summers, in a general partnership, each partner has an equal right in managing the
partnership’s business.
o Summers; the conduct is at issue; cf.
o Stroud; the ordinary course of the business is at issue.
Under Sidley, the decision of an executive managing committee is binding on all partners in a general
partnership, when they all have consented to the establishment of that committee. This concession
involves consideration of having consensus or authority approach in management.
Dissolution
Under Cohen, a court may order the dissolution of a partnership where there are disagreements of
such a nature and to such extent that all confidence and cooperation between the parties has been
destroyed or where one of the parties, by his misbehavior, materially hinders a proper conduct of the
partnership business.
under UPA § 32(1)(c) and (d), a partnership may be judicially dissolved where:
 Prejudice: a partner’s conduct prejudices the carrying on of the business, or
 Willful and persistent breach: the partner willfully and persistently breaches the agreement, or
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Impractical: the partner conducts himself in such a way as to make it impractical to carry on
the business with him.
o if a partner has engaged in wrongful conduct that adversely and materially affected the
partnership. Under Collins, a partner does not have a legal right to force dissolution of
a partnership if the other partner fulfills his or her duties under the partnership
agreement (you can’t benefit from your own wrongdoing).
o Owen v. Cohen: Under this case, if the purpose of making profit, which is an element
of partnership, becomes frustrated, it’s probably the case that impracticability has
occurred. It involved an implied term as to the continuance of operation which became
impracticable.
o Under Vasso, you cannot contract away partnership obligation in violation of laws.
Disassociation
Under Giles, disassociation is appropriate if a partner engaged in conduct relating to the
partnership business that makes it not reasonably practicable to carry on the business with
the partner. When a partnership is legally dissolved, any partner acting in good faith may
purchase the assets. (Prentiss).
Sharing of Losses
 service partnership involves one partner puts up money and the second partner put up the
work. Under Kovacik, in a service partnership, the service partner has no obligation of the loss
of the partnership because she has done nothing beyond giving her service. The services-only
partner does not share in loss of the amount initially invested by the capital-only partner.
 Under § 18(a): each partner, after liabilities, shall contribute toward the losses, whether of
capital or otherwise sustained by the partnership according to his share in the profits.
Under UPDA §40(b), debts to creditors other than partners are paid first, debts to partners for
contributions other than for capital and profits are paid second, debts owning to partners in
respect of capital contributions are paid third, and finally, debts owing to partners in respect of
profits are paid last.
Buy Out Agreements
Under Belman, a partner’s capital account is calculated by adding up the cost basis of all
contributions the partner has made to the partnership, then subtracting all distributions the partner
has received.
Types
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General Partnership characteristics (different types can have different characteristics):
o two or more people (e.g. marriage)
 relationship of equality
o may be implied
 no written agreement required (partnership should be determined from
conduct/ the totality of the circumstances)
 intention of the parties matters
o each partner assumes responsibility for debts and obligations of others
o partners may make decisions that bind other partners - disadvantage
o voting generally by majority
o partners act as agents for one another
Limited Partnership: at least one general partner is the managing partner.
o here you have both general and limited partners.
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o limited partners only provide money, nothing else.
Joint adventures, be careful of a fact pattern that is a business with a goal – may be JV
like partners, owe to one another, while the enterprise continues, the duty of the finest
loyaltyexcluding the chance to compete with him (Meinhard).
o Partnerships envisage a continuing relationship, a long-term relationship cf. joint
venture focuses on a short-term project for a specific purpose (limited duration).
o under Sandick, a joint purchase of a lease for the purpose of selling the lease for
profit can constitute a joint venture.
Miscellaneous
 Common Clauses in Partnership – See page 22 of long outline

Corporations
Basics

see page 53 of long outline.
Shareholder Actions
I.
Derivative: shareholders allege that some wrong/damage occurred to the corporation as a
result of mismanagement. Not damage to the shareholder personally, but the corporation itself.
II.
Direct Action: shareholder alleges harm to the shareholder itself.
 e.g. you expect dividend, but you don’t get it (a personal loss to you worth
pursuing).
Limited Liability (Piercing the Corporate Veil “PCV”)
PCV happens when two elements are met:
I.
there is no unity of interest: ~ alter ego theory: under this theory, PCV happens when
there is no observance of the separate entities of the corporation and the shareholders.
If the distinction becomes blurred, the protection does not extend; and
 Under Sea-Land, there are factors to determine absence of unity and court finding
that there is not a separate identify:
a) the failure to maintain adequate corporate records or to comply with corporate
formalities, (e.g. not complying with the articles of incorp.)
b) the commingling of funds and assets, (e.g. for personal expenses)
c) undercapitalization, and
d) one corporation treating the assets of another corporation as its own. (e.g.
moving money back and forth).
II.
that without piercing the veil, there would be fraud or injustice.
 injustice is some wrong beyond the harm to the creditor (not the mere inability to
collect your money).
o some legal obligation or rule would be undermined (e.g. unjust enrichment),
or
o some scheme to place liabilities and assets in different companies would be
successful.
 whenever anyone uses control of the corporation to further his own rather than the
corporation’s business, he will be liable for the corporation’s acts upon the
principle of respondeat superior applicable even where the agent is a natural
person.
 The fact that the fleet ownership has been deliberately split up among many
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corporations does not ease the plaintiff’s burden. (Walkovszky).
o inadequate insurance or complex structure is not sufficient.
Note:
In many situations, one corporation owns all the shares of common stock of another
corporation. The first corporation is the parent and the second is the subsidiary.
 parent is not liable for the debts of the subsidiary.
 Like an individual shareholder, a corporate shareholder must be aware of the danger
that if it is not careful, the creditors of the subsidiary may be able to pierce the
corporate veil of the subsidiary.
Role and Purpose
The Business Judgment Rule (“BJR”):
In order for the BJR to protect the directors, the decision must have a rational basis and have
considered the best interest of the business. (Ford) As long as a corporation’s directors can
show a valid business purpose for their decision, that decision will be given great deference by
the courts, which can be shown by producing expert verification of the information. (Wrigley).

A company cannot take actions that harm its shareholders and are motivated solely by
humanitarian concerns, not by business concerns. (Ford).
o look to individual facts, see if there is a business justification v. personal gain or
it’s arbitrary. “You cannot run a charity.”
 genuine mistake is okay
o failure to follow the crowd (industry) is not sufficient to pierce BJR. (Wrigley).
the stated rational basis by directors must have basis in facts, i.e. they must produce
expert verification of the information, that is reasonably chosen and selected.
LLC
Basics
it combines features of corporation (shields liability and less flexible for management) and
partnership (closer managerial structure for members like partners and no reach to partners’ assets)
for its members (investors in a partnership).
Sum: LLC is suited for authoritative methods but with shield from liability. i.e. more authority, no
liability. LLC lets you pick the style of management that suits you best. 61 of long outline.
Piercing the LLC Veil
Under NetJets, there is a two-prong framework for piercing the LLC veil, which are factors and need
be considered cumulatively:
1) whether the entity(s) in question operated as a single economic entity (a mere instrumentality
or alter ego of its owner, in that the owner and the LLC operate as a single unit)
here the focus of inquiry is whether
 the LLC was adequately capitalized?
 the owner siphoned LLC funds?
 the LLC operated as a façade for the owner? (most important); and
2) whether there was an overall element of injustice or unfairness?

to prevail under the alter-ego theory of piercing the veil, a plaintiff need not prove that
there was actual fraud but must show a mingling of the operations of the entity and its
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owner plus an overall element of injustice or unfairness (no need to be sustained).
Fiduciary Obligation
An LLC operating agreement may limit the scope of the fiduciary duties of its members. Under
McConnell, LLC members owe one another the duty of utmost trust and loyalty, but this must be
viewed in the context’s ability, pursuant to the operating agreement to compete with the company.
There is nothing wrong about dilution of the fiduciary duty to the extent it’s possible.
o Under McConnell, courts consider the language in your operating agreement as
something that you understood when you sign, so you cannot argue that there was no
meeting of the minds.
Additional Capital
 Under Racing, any assumption of personal liability, which is contrary to the very advantage of
LLC formation, must be stated clearly in unequivocal language which leaves no room for
doubt about the parties’ intent. See Racing as example.
Dissolution
Under New Horizons, dissolution of an LLC must be properly done in accordance with state law
requirements and upon liquidation of a dissolving LLC’s assets, a creditor may sustain a claim against
a member of the LLC if the creditor was not formally notified of dissolution procedures or schedule.
Director Duties
Per Van Gorkom, under the business judgment rule, a business determination made by a corporation’s board
of directors is presumed to be fully informed and made in good faith and in the best interests of the
corporation. However, this presumption is rebutted if plaintiffs can show that the directors were grossly
negligent in that they did not inform themselves of all “material information reasonably available to them.”
The two-principle fiduciary duty are:
(1) Duty of care: discharged by the board of directors, ensuring that they get all reasonably available
information material to them about the subject of discussion and they have time to deliberate and
consider the matter and they must make an informed judgment.
 Duty of Care is statutorily protected for directors under § 102(b)7 in Delaware. Absolves and
exculpates the directors from liability.
(2) Duty of loyalty: focuses on whether there is a conflict of interests or not.
Obligation to act in good faith is NOT a third element under the fiduciary duty. The Good Faith
obligation is underlying fore of the two elements of loyalty and care.
Directors will be only liable when directors have deliberately, intentionally, and consciously
disregarded their directorial responsibilities.
 No exculpation when loyalty violated. ~ oversight.
1) Duty of Care
BJR involved, absolves and exculpates under 102(b)(7).
Under Kamin, courts will not interfere with a business decision made by directors of a business unless
there is a claim of fraud, bad faith, or self-dealing. Under Van Gorkom, decisions must be informed
and rational. May be rebutted in case by case determination;
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
o lack of expert is problematic.
o director sophistication, age, does not matter.
See Caremark
2) Duty of Loyalty
Under Stone v. Ritter, BJR does not protect directors/managers for a violation of the duty of loyalty.
A. Directors/Managers
Under DGCL, as long as there is no fraud, no illegality, and no conflict of interest, the BJR applies to
everything the board does, as long as the duty of care satisfied, which is seen from a reasonable
person in ordinary circumstances. Under Bayer, if there is a conflict of interest, the BoD is absolved
and exculpated if fairness is shown. This fairness is subjective and is an individual examination of the
facts.
B. Corp. Opportunities (loyalty, loyalty requires disclosure)
Per Broz, under the corporate opportunity doctrine, it is not required that the director in question
formally present the opportunity to his BoD if the corporation does not have an interest in or the
financial ability to undertake. This duty is implicated when the fiduciary’s seizure of an op. results in
a conflict between the fiduciary’s duties to the corporation and the self-interest of the director, as
shown by the exploitation of the opportunity. Under Broz, there are four factors to be considered
using a totality of circumstances:
 whether the corporation is able to take up opportunity financially;
 whether the opportunity is within Corporation’s lines of business;
 whether the corporation has an interest or expectancy in the opportunity;
 whether by embracing the opportunity, the officer or director would create a
conflict between her self-interest and that of the corporation.
Under eBay, directors of a corporation are not permitted to personally accept private stock allocations
in an initial public offering of the corporation’s stock when the corporation itself could have
purchased said stock.
Dominant Shareholders
Fairness to minority shareholders. Sinclair.

Under Sinclair, when the situation involves a parent and a subsidiary, with the parent
controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting
shifting of the burden of proof, is applied as opposed to the BJR.
o this standard will be applied only when the fiduciary duty is accompanied by selfdealing–the situation when a parent is on both sides of a transaction with its subsidiary.
Self-dealing occurs when the parent, by virtue of its domination of the subsidiary,
causes the subsidiary to act in such a way that the parent receives something from the
subsidiary to the exclusion of, and detriment to, the minority stockholders of the
subsidiary.
o Absent fraud or overreaching, to achieve expansion through the medium of its
subsidiaries, BJR would be applicable in a parent-subsidiary setting.
o Acts of contracting with your dominated subsidiary may be self-dealing.
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
if you contract with your own subsidiary, you must comply with your contractual
duties.
 pay on time and uphold contract verbatim (see Sinclair).
Very important:
 The other way to look at this through the law of agency, the directors of Sinven can
be viewed as agents for Sinclair directors. Through that Sinclair would be
responsible.
Obligation of Good Faith
A. Compensation
Acting in good faith is an integral party of the duty of care and loyalty. This obligation can be
shown by producing data, showing the soundness of the decision-making process, and acting in
the industry best way. See Walt Disney (finding good faith in showing that lawyers and pay
experts were involved).
Under Walt Disney, Bad faith requires that individual directors to act in a deliberately
intentional manner that represents ultimately a reckless and conscious disregard of their
responsibilities. In other words, there has to be clear ill-intent. The corporate equivalent would
the wanton disregard of the corporate interest. This can be found when the director’s purpose is
other than to advance the best interest of the corporation, to violate any applicable laws, or
intentionally failing to act in the face of a known duty to act.
B. Oversight – always a duty of loyalty question
Under Stone v. Ritter, directors will be liable for failure to engage in proper corporate oversight
where: (1) they fail to implement any reporting or information system, OR (2) having implemented
such a system, consciously fail to monitor or oversee its operations. This second element requires
actual knowledge, which raises the bar for liability finding.
examples of violation can be the following:
o a form of misconduct that came into the attention of the director,
o a failure to resolve misconduct cases that comes within the attention of the directors
would lead to a viable cause of action, or
o failing to improve the system by introducing measures that would improve the
previous failures.
Shareholder Direct Claim
where the shareholder alleges a direct claim of harm to her (dividend denial, or refusal to inspect
company books and records). When shareholders show an injury that is not shared with the
corporation, the action is direct (consider who feels the remedy, focusing on exclusivity).
 when: (1) all shareholders share the same injury, (2) the shareholders would receive the benefit
of the recovery or remedy, and (3) the injury is not suffered by the corporation.
 shareholders do not need to get the approval of the BoD to bring suit.
 Examples:
o dilution of shares. Capital gain tax incurring.
Cf.
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Shareholder Derivative Actions
shareholder(s) alleging harm occurred to the corporation, as a result of:
 Examples:
o directorial mismanagement (a decrease in the corporation value, shareholders suffering
because the value of their stock reflects the value of the corporation).
o excessive salaries to officers, or
o directorial misappropriation of a corporate opportunity.
o reimbursement issues: (Medtronic)
 involves alleged waste of corporate assets and any monetary solution leads to
reimbursing the company.
 shareholders need to get the approval of the BoD to bring suit.

Demand on the Directors
Under Grimes, (DE) a demand on the BoD is to take an action, ensuring that the challenged
transaction is not a waste of corporate funds. When a board of directors reaches a disinterested
decision on corporate governance, the board’s reasoned business judgment will be given great
deference. Under Marx, (NY) demand is futile and excused when directors are not expected to
be fair, and three requirements must be satisfied by the plaintiff in deeming a demand as futile:
1) that a majority of the board has interest in the challenged transaction, i.e. a
showing of prejudice;
2) majority of the board is controlled by the wrongdoer, i.e. lack of
information, AND
3) the challenged transaction was not a product of valid biz. judgment, which
can be demonstrated when there is a lack of independence, financial stake
involved, or there is family relationship.
 Under Marx, plaintiff’s attempt to show that three of the BoD members were
interested did not rise to a futility claim.
 Grimes (compensation scheme), Marx (overcompensation scheme).
Special Litigation Committee
Is a committee of disinterested Board members, independent outsiders who are convened to
determine whether the litigation is in the best interest of the business. The decisions of the
committee are protected by the BJR, unless their conclusions are procedurally significantly
flawed, or their independence is questionable (bribery or fraud). (Bennett).
Effectiveness of Spec Lit Committee’s Decision:
Zapata:
Pre-steps:
 after an objective and thorough investigation of a derivative suit, an independent
committee may cause its corporation to file a pretrial motion to dismiss.
 the basis of the motion is the best interests of the corporation, as determined by the
committee.
 the motion should include a thorough written record of the investigation and its
findings and recommendations.
 The court should apply a two-step test to the motion:
First Step
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1) the court should inquire into the independence and good faith of the committee and
the bases supporting its conclusions.
2) the corporation should have the burden of proving independence, good faith, and a
reasonable investigation, no assumption of their existence should be made.
3) if any of these three standards are not found by the court, the court shall deny the
corporation’s motion.
4) If the court finds them satisfied under the standards of FRCP 56, then step 2 
Second Step
1) the court should determine, applying its own independent business judgment,
whether the motion should be granted.
 this balances the legitimate corporate claims and interests with the ones
alleged by the derivate stockholder suit.
Director Independence
This can come up in various topics: BJR, compensation, special litigation committee, dismissing
lawsuits, take-over defenses.
Under Stewart, to bring a shareholder derivative suit without first demanding that the board of
directors file the lawsuit, a shareholder must assert particularized facts creating reasonable
doubt about the board’s independence. all the particularized facts pled must be considered in
totality, not in isolation, and all reasonable inferences should be made in favor of the plaintiffs
(Sanchez).
Derivative Actions & Oversight Cases: derivative actions to show demand is futile and excused
Under China Agritech, boards would be liable in the absence of exercising good faith to make sure
their corporate governance is in compliance with the law and does not violate other duties, so as to
create a harm to the corporation. This can happen when board members stand at the opposite side of a
deal, or where there is a lack of proper procedure to comply with regulation.
In order to show demand futility, either of two tests, depending on the facts, can be shown to assess
board independence for purposes of demand futility:
The Aronson test applies when a director makes a decision and the question is whether that director
is interested (there is an interest conflict) that would implicate the business decision that director
made. So, a decision is made already, and you come and ask whether there is a conflict of interest
with the decision-maker. (challenged transaction).
Aronson Test:
 when a derivative plaintiff challenges an earlier board decision made by the same directors
who remain in office at the time suit is filed. (1) the first test examines the independence
and disinterestedness of the directors who remain in office at the time suit is filed. (2)
whether there would be a reasonable doubt that the challenged transaction was the product
of a valid exercise of business judgment.
Cf. Rales test applies where the board is faced with a shareholder presenting a demand and the
court asks whether there is a reasonable doubt as to the director faced with a demand. (i.e. a
decision on demand is not yet made, but it’s before the director, and you ask if that director can be
reasonably doubted. Under this test, we ask:
1. where a business decision was made by the board of a company, but a majority of the
directors making the decision have been replaced,
2. where the subject of the derivative suit is not a business decision of the board, and
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3. where the decision being challenged was made by the board of a different corporation.
If the directors are aware of fundamental issues and consciously disregard, then it’s a violation of the
duty of loyalty. If there is a deliberate or intentional harm done to the corporation, then the board is in
violation of the duty of loyalty.
All oversight cases are a duty of loyalty question.
Inside Information
Classical Theory: where a corporate insider misappropriates material nonpublic information for the
purposes of trading, in breach of a fiduciary duty to the shareholders of the corporation itself.


Individuals with knowledge of material inside information must either disclose it to the public
or abstain from trading in the securities concerned while such inside information remains
undisclosed: ~ Equal Access Theory (Texas Gulf)
Materiality: ~ probability/magnitude test: the materiality would be what a reasonable investor
would consider as altering the total mix of available information. (Texas Gulf)
Current Law – Chiarella
 The duty to abstain arises from the relationship of trust between a corporation’s shareholders
and its employees. Since there was no relationship of trust, there was no duty to disclose.
Tippee/Tipper Liability
Under Dirks, a tipper breaches her fiduciary duty if she discloses the material information, for
which she had a fiduciary duty to the corporation not to disclose. The tippee/recipient of the
information would be liable only if the tippee knew or should have known that the tipper was
acting in breach of his/her fiduciary duty. The tipper must receive a benefit. The tippee would be
liable if she knows or has reason to know that the tipper had violated a fiduciary duty when she
provided that information to the tippee. The tipee’s liability arises out of the tipper’s liability.
Under Salman, a tippee is liable for securities fraud if the tipper breaches a fiduciary
duty by making a gift of confidential information to a trading relative or friend. This
gift can include tangible or intangible benefit.
Misappropriation Theory: an individual misappropriates material nonpublic information for the
purposes of trading, in breach of a fiduciary duty to the source of the information. (O’Hagan).
 With the classical theory, we have insiders/temporary insiders and tippers/tippees.
Misappropriation may happen from printers, lawyers, etc.
Indemnification and Insurance
Under Waltuch, for purposes of indemnification, a defendant is “successful” in defense of the claim
against him if he assumes no liability and does not have to pay the settlement. § 102(b)(7) applies
only to “liability of a director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.”
Under Citadel, a director may be entitled to advance payment from a corporation for his legal fees
even if he is eventually not entitled to indemnification for those fees. These rights may be broader that
those set out in the statue, but they cannot be inconsistent with the scope of the corporation’s power to
indemnify under the statutes.
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Summary: what are some of the protections for a corporate officer? See page 83 of long outline.
Problems of Control
Proxy Fights
Use
Under Levin, using corporate funds to hire attorneys or a proxy soliciting organization in a proxy
solicitation contest is not illegal or unfair if the amounts paid by the corporation are not excessive.
(Levin).
Reimbursement
Under Rosenfeld, in a proxy contest over policy, corporate directors have the right to make reasonable
and proper expenditures from the corporate treasury for the purpose of persuading the stockholders of
the correctness of their position and soliciting their support for policies which the directors believe are
in the best interests of the corporation.
Shareholder Proposals
In light of the different results:
 If the fact of the case is on ordinary business matter  Lovenheim
 if the fact of the case is like Trinity  Trinity
34 Act Rule 14a–8: a company must generally include a shareholder proposal in its proxy materials
unless exceptions apply (Rule 14a–8(i)(7)); one such exception could be relation to the ordinary
business operations of the company.
Under Trinity, to determine whether a proposition relates to the ordinary course of
operations/business:
1) What’s the subject matter of the proposal?
 in Trinity: it’s managerial discretion and freedom
2) Does the identified subject matter “relate” to [touches upon] the company’s ordinary business
operations?
 relate means day to day matter. Relate to is broad and to the extent whether it
touches/there is some connection between, here, shelf stocking and managerial activity?
i.e. your bread and butter.
 Significantly related is not limited to economic significance (Lovenheim).
3) If so,
a. Does the proposal implicate a significant social issue or public policy; and
o significant is from a subjective stand-point. You know it when you see it.
b. Does the proposal’s subject matter “transcend” the company’s ordinary business?
A shareholder proposal does not “relate to an election” under the SEC’s rules for exclusion from a
proxy statement if it seeks to amend the corporate bylaws to establish a procedure by which certain
shareholders are entitled to include in the proxy materials their nominees for the board of directors.
AFSCME.
A bylaw is permissible if it defines the process and procedure by which a board of directors makes
business decisions. CA, Inc. A corporation’s board may not enter into a contract that requires it to
act in a manner that would violate its fiduciary duties. CA, Inc.
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Shareholder Inspection Rights
A stockholder may inspect the corporation’s list of stockholders to ascertain the identity of fellow
stockholders for the purposes of communicating a tender offer, unless the purpose is hostile to the
corporation. (Crane). Cf. Shareholders must have a proper purpose germane to their economic
interest in the corporation to inspect corporate records, (Pillsbury).
Production of an out-of-state corporation’s shareholder and NOBO lists to an in-state resident is
permitted when the corporation is doing business in the shareholder’s state, even when the
shareholder was not able to obtain the lists under the law of the state of incorporation. (Sadler).
Shareholder Voting Control
Under Stroh, a limitation on a class of stock that prevents the stock from receiving dividends does
not invalidate the stock.
Under Espinoza, a decision dominated by interested directors can gain the protection of the
business judgment rule, only if a fully-informed disinterested majority of stockholders ratifies the
transaction. There must be transparency regarding the decision and consent to such transaction
must be communicated to the opposing parties.
Control in Closely Held Corporations – Family Business/ Startups/ smaller corps.
Under Ringling, shareholder voting agreements between shareholders in a closely held corporation
is binding and enforceable as a contract.
 limit: Shareholders may combine their votes to elect directors, but they may not extend this
power to limit directors' authority to run the corporation, such as in the selection of officers or
fixing salaries. (McQuade). This rule extends to situations where many other shareholders would be
affected.
Cf.
Clark, If the enforcement of a contract between directors that are the sole stockholders in a
corporation damages no one, not even the public, it is not illegal. So, if you have an agreement by
parties that capture almost all the shareholders in the corporation, that’s fine.
Under Galler, in a close corporation, an agreement as to the management of the corporation agreed
to by the directors must be valid where there is no complaining minority interest, no fraud or
apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language.
 Silence to object to agreement is indicative of acquiescence for the court, in holding that the
agreement is valid and harms no one (similar to Clark, you have an agreement between all
parties, but the minority does not complain, here, silence = no complain).
Note:
Even if the entity is not a statutory closely held corporation, a vote pooling arrangement is valid
(Ramos).
Abuse of Control
Stockholders in a close corporation owe one another substantially the same fiduciary duty in the
operation of the enterprise that partners owe to one another, that is duty of utmost good faith and
loyalty.
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Under Wilkes, majority shareholders in a closely held corporation owe minority shareholders a
strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be
demonstrated to justify a breach of that duty. In essence, a plaintiff minority shareholder can prevail
if she can show that the controlling group could have accomplished its business objective in way
that could have harmed her interests less severely.
Under Ingle, a minority shareholder in a close corporation with a status resembling of an at will
employee, by that status alone, acquires no right from the corporation or majority shareholders
against discharge from his employment in the corporation.
Under Brodie, absent applicable language in a corporation’s articles of incorporation or bylaws, a
forced buyout of the minority’s shareholder’s shares would exceed the minority shareholder’s
reasonable expectations.
 including a buyback provision in the agreement is helpful. To help with fairness of the
valuation and allowing the minority to leave.
Under Smith, a minority stockholder in a close corporation that requires a unanimous vote for
corporate action may not repeatedly vote against an action for personal reasons if the action would
be in the best interest of the corporation.
 Minority shareholders can owe a fiduciary duty to majority shareholders including behaving
in a way that the business functions efficiently.
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