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1. Course Intro
2. Chapter 1 “Business and Risk”
a. Problem: Of Grapes and Winemaking
i. Important to know why Julia bought the vineyard
1. Have to know your client b/c that helps you frame the nature of the
risk and alternatives about which you give advice
2. Julia lives in LA, making her an absentee owner, which changes
the structure of the enterprise
3. Have to look at controllable vs. uncontrollable risk
4. Need to know if Jonathan is someone Julia want to partner w/
a. Has equipment, expertise, desire
i. But need to find out about all 3: ex. Quality of
5. Law reduces transaction costs of negotiation and comes w/ its own
a. Leads to consistent, predictable results
ii. Employment Model
1. Jon and Jul have different interests
a. Have to give incentives to avoid shirking
b. Incentive would be “honey”
2. Clout of employer/employee agreement is the “whip”
a. But this comes w/ monitoring costs
iii. Tenancy Model
1. Less risk for Julia, but less reward
2. More incentive and risk for Jon
b. Risk
i. Categories
ii. Risk Preference
c. Allocating Risk
i. Non controllable risk
ii. Controllable risk
iii. Allocation to owner
iv. Allocation to employee
v. Middle ground?
3. Chapter 2 “Intro to Business Entities and Concepts
a. Taxonomy of Business organizations
i. Corporation
1. Form grounded in ability to aggregate capital for the purpose of
engaging in unified economic activity in which management can
be separated from ownership
2. Corps are double taxed
a. Corp taxed and divided paid to shareholders taxed
ii. S-Corp
1. Permits a flow through income so it is taxed only when distributed
to individuals
2. Not all corps can be S-Corps
iii. C-Corp
1. Taxed at both levels
2. This is most corps
iv. Non-Profit Corp
1. Still concerned about revenue, but not residual income and no
v. Closed v. Public Corp
1. # of shareholders is key
2. In closed, no public offering and restrictions on ways to transfer
3. Public= Nike, Apple, etc.
4. Differences determined by both statute and common law
vi. Transaction costs from running a corporation are one reason why ppl
chose other entities
1. Like: general partnership, limited partnership, LLC
2. GPs and most LPs aren’t separate legal bodies, they’re just a nexus
of ppl in common business pursuit
3. Partners are fully liable for their business, unlike LLCs and Corp
where liability in the extent of investment
vii. Limited Partnership
1. A general partner and a limited partner
2. Limited partners are passive investors and liability is only the
extend of investment
viii. General partnership
1. All partners are open to personal liability to creditors
2. Can be created w/o intent to do so
ix. Limited Liability Company
1. Easy to form and flexible relative to corps
2. No double taxation
b. Why do firms exists?
c. Agency Problem
i. The central legal issue re: corporate officers
ii. Not a matter of statutory law, but common law
iii. Laws vary from state to state
iv. 1st place to go when presented w/ agency problem =Restatement
1. Actual authority
a. Created when at the time of the act, the agent reasonably
believes the principal wishes the agent to act
b. Grounded in evidence of the agent’s understanding of the
course of dealing w/ the principal
c. 3rd party belief is irrelevant
d. 2 sub-parts
i. Express actual authority
1. What BoD tells agent to do
ii. Implied actual authority
1. From a course of dealing, or words of the
2. Apparent authority
a. Focus on the 3rd party
b. Reasonableness of belief of the 3rd party given the nature
of the manifestation of authority that is given by the board
i. ex: board appoints Sean Pié as President
3. Inherent agency power
a. The conduct was reckless, illegal, etc. but there is enough
authority that the risk of liability in that context given the
relationship between the principal, agent and 3rd party
militates in favor of pushing liability to the principal
i. Menard case
b. On whom is it most fair to allocate liability?
4. Estoppel
a. Equitable
b. Agent’s actions have induced 3rd party to change their
position to their detriment
c. Tends to apply when principal has obtained the benefit of a
bargain before is disavows
5. Ratification
a. Can be implied by estoppel
b. Can be explicit too
i. Ex: Sean shouldn’t have bought that yacht, but is
ok, don’t do it again
6. *Agency disputes are very fact intensive, require a balancing of
equities and even a slight change in facts can be the difference
v. Gay Jensen Farms v. Cargill
1. Group of farmers suing creditor of a bankrupt company
2. Doesn’t matter what relationship you think you’re in, your course
of dealing can lead to a principal/agent relationship
3. Cargill assumed large portion of control over Warren’s operations
and thus were liable to Warren’s customers
4. Cargill loaned money to Warren, then supervised Warren’s dealing
5. Court listed 9 key factors including
a. Constant recommendations to W
b. W couldn’t enter into mortgages, buy stock, or pay
dividends w/o C approval
c. Financing W’s operation and right to stop doing so
d. Agency Authority in non-corporate entities
i. P.34
ii. RUPA 304
1. In a partnership, each partner is an agent of the partnership
2. Have actual authority unless some agreement says otherwise
iii. ULPA 302
1. Limited partner does not have authority to bind the limited
1. Agency authority is vested in persons who manage the LLC, which
can be either members or managers
2. RUULCA 301 (a) says that a member is not an agent solely
because they are a member
e. Agency authority in corporations
i. Del 141 (a), RMBCA 8.01(b)
1. Vests in BoD power to manage business and affairs of corporation
2. But, it is the officers that bind corporations to 3rd parties
3. Reason for uniformity in names of corporate officers is agency law
a. Industry specific
b. Common law will generate what typical course of dealing
of various positions is
ii. Summit Properties
1. About apparent authority and ratification
2. Can be reduced to discussion about Coleman’s actions on p42-43
3. Newtech was owned by Coleman, sold to IES, but C stays as Pres
and treats company as if he owns it
4. Coleman negotiated lease w/ Summit and intimated that NewTech
and IES were the same
a. This was the key fact
5. Board had told C “No” but C didn’t listen
6. IES also didn’t monitor and condemn C’s actions
7. Another key was that IES derived advantage from the lease, in
addition to sitting on rights
iii. Menard
1. Case of apparent authority typically, but court doesn’t view it as
such b/c agent acting in opposition to Board’s wishes
2. Real estate deal
3. Sterling acted as he should have on 1st offer, but 2nd offer he
4. Everyone knew he didn’t have authority on 1st offer, but arguable
Menard thought 2nd offer would be different
5. Court said key was that Dage Board didn’t notify Menard that
Sterling had acted w/o its authority until 104 days after it learned
of Sterling’s actions
iv. *not every state has adopted inherent agency power, and instead think of it
as a species of apparent authority
v. Context is important
1. $100k purchase by Apple officer much different than $100k
purchase by Mom and Pop Inc. officer
f. Agency Problem
g. Overview of basic Attributes of Firms
i. Legal personhood
1. Firm is liable separate from its members
2. Depends on firm structure
3. Can sue and be sued; buy and sell property
ii. Limited liability
1. “asset partitioning”
2. Separation of liabilities
3. Equity holders are insulated from the debts of the enterprise
iii. Perpetual existence
1. duh
iv. Equity holders
1. Investors in firm entitled to firm’s equity
2. Equity is comprised of
a. Profits
b. Nets assets
3. Way to aggregate capital
v. Managers
1. General partnership: all partners are managers
2. LP: general partner is a manager, limited partner is not a manager
a. Limited partner’s price for protection form liability is lack
of control
3. LLC: can be member managed or manager managed
a. Changes rights of the equity holders
4. Corps: separate ownership from management
vi. Separation of ownership from control
1. Chesapeake Marine Problem
vii. Basic Terms and Concepts
1. Sources of law
a. US const
b. State statues
c. Agency codes and regulatory enactments
d. caselaw
2. Internal affairs rule
a. Law of state of filing governs internal affairs of the entity
Charter documents
a. Articles of Incorporation
i. Hard to change
b. By-Laws
i. Easier to change
Private ordering
a. Ppl relying on the entity aside from equity holders, like
employees, the community, creditors, etc.
Fiduciary duty
a. Bayer v. Beran
i. Loyalty, care, disclosure
ii. Corp ran a radio campaign featuring the president
wife, a pro singer
iii. Claim that this was a breach of fiduciary duty
iv. Fiduciary duty is a duty to exercise judgment that
one would exercise in similar situation to conduct
your own affairs
v. Decisions must be in furtherance of the interests of
the company even if such a decision would be a
personal detriment
vi. Hiring wife was a conflict of interest, but court
found no breach of fiduciary duty b/c evidence
showed that the program wasn’t designed to benefit
wife’s career
Equitable limitations
a. Schnell v. Chris Craft
i. Equitable estoppel of otherwise lawful action
ii. Board changed date and place of meeting to
Cortland, NY in the winter in order to subvert
attempt to elect a new board
iii. Act was technically legal, but court struck it down
b/c purpose was to impede shareholder participation
b. Bove v. Community Hotel Corp
i. Board wanted to change status of preferred
shareholders by changing nature of a transaction
ii. Doctrine of independent legal significance
1. Can choose an legal way to do something,
even if it is banned by other laws as long as
it is legal
2. Court held for the board
3. Said underlying purpose of a legal action is
4. Holding statute above policy
4. Intro into Statutes
a. Traditional: Delaware
i. Basic organizational forms
ii. The relationship between common law and statute
iii. Order of exposition
b. Contemporary: Revised Model Business Corporation Act
i. The important of definitions
ii. The role of official commentary
iii. The multiple variable of the RMBCA adopted by the states
iv. The role of judicial application (the power of interpretation)
i. Doesn’t have a definitions section
ii. If specific statutes don’t define terms, go to the cases
iii. Can also find definitions in corporate charters, by laws, etc
iv. Semicolons are bitches, means that anything before could be turned on its
1. Have to pause and make sure you understand what was written
before semicolon
v. Be aware of sentences beginning w/ dependent clauses
vi. Subchapter IV: Directors+Officers is the key chapter
vii. Subchapter V: Stock is all about money
viii. Things not covered by Del
1. Fiduciary duty, agency, veil piercing
i. More detailed than Del
ii. But permits a relatively free reign of interpretation
iii. RMBCA is an enabling code, so watch out for dependent clauses that start
5. Chapter 3: “Asset Partitioning and Veil Piercing”: limits to limited liability
a. Asset partitioning: separating assets into different places. Allowed by limited
liability. Makes it impossible for creditors to touch certain assets
b. Limited liability basic rule: shareholders are liable only for the amount of their
c. Veil piercing is the exception to this rule
i. Equitable concept: think Chris Craft
1. Look for evidence of wrongful conduct, fraud, deceit, control, alter
ego, etc.
2. Defrauding those who trusted in the corporate structure and had the
wool pulled over their eyes
3. Evidence is based on standards supplied by courts
a. Court standard create terms like alter ego and
4. You should always test piercing the corporate veil, especially in
closely-held corporations w/ a small number of shareholders
a. Can help you get broader discovery and increase chances of
ii. Theoretical justifications
1. Public versus closely held corps
2. Individual versus groups
iii. Tort versus Contract Creditors
1. Walkovszky
a. Example of a tort creditor
b. Taxi case where cab driver ran over someone. Carlton was
a stockholder in 10 cab corps, each comprised of two cars
that carried minimum liability insurance of 10k
c. Court says its important whether or not a stockholder is
operating a business in his individual capacity when
deciding whether to pierce the veil
i. Has to be control or domination and that control has
to have bad intentions, i.e. corporation formed to
defraud other into believing they were dealing with
the corporation
d. Walkovsky wants to vertically pierce veil to get to Carlton
i. Has to 1st pierce from Seon Cab Corp to Carlton’s
Corp, then pierce Carlton’s corp to Calrton
e. If W wanted to get to the 9 other cab corps, he would have
to horizontally pierce by showing that all 10 corps operated
as one subsidiary
i. Requires different evidence than piercing vertically
f. Here, no sufficient evidence that Carlton was conducting
cab corps in his individual capacity
g. “Undercapitalization”= not giving a company enough
capital to handle its day to day business
2. Radaszewski (improper motives; undercapitalization)
a. P didn’t allege that there was improper motivation in
addition to control, but instead argued that Contrux,
subsidiary of Telecom, was undercapitalized
b. In this case, the alleged undercapitalization was the liability
insurance purchased for Contrux
c. At the time that C injured P, it had $1M in basic insurance,
plus $10M in excess coverage, but excess insurance
company went out of business after the accident
d. Court said there was nothing wrong with the fact that the
excess insurance was purchased from another subsidiary of
e. “we think that the doctrine would largely be destroyed if a
parent corporation could be held liable simply on the basis
of errors in business judgement.”
iv. The problem of Vertical vs Horizontal veil piercing
1. Walkovsky
v. Contract Creditors
1. Freeman (equitable ownership)
a. Glazier developed software at Columbia, C3 was created to
market and develop the software. Glazier’s friend was the
sole shareholder
b. Glazier created Glazier Inc. which became a consultant to
i. Glazier had control over C3
c. G entered into agreement with Freeman to sell software,
then after another sale terminated the agreement and left F
out to dry Court said that through extended control, G was
the equitable owner of C3, even though he was not a
d. Remanded to see if G used his control to commit fraud of F
2. Kinney (due diligence requirements)
a. Due diligence requirements
b. Those who wish to enjoy limited liability under a corporate
umbrella should be expected to adhere to the corporate
structure of creating and maintain a corporation
c. Used two pronged test
i. (1) the shareholder must have failed to maintain the
separate character of the corporation, and (2)
refusing to impose liability on the shareholder
would cause “an inequitable result.”
vi. Parent-Subsidiary (to what extent is intent to defraud or abuse of corporate
franchise important)
1. Gardemal (alter ego doctrine)
a. A parent corporation is not liable for acts committed by its
subsidiary if the two corporations, although closely related,
keep their corporate entities separate.
2. OTR Associates (domination and control)
a. The corporate veil of a parent corporation may be pierced if
the parent: (1) dominates and controls the subsidiary and
(2) abuses the privilege of incorporation by using the
subsidiary to commit a fraud or injustice.
vii. Are LLC’s Different?
1. Net-Jets Aviation (transposition of corporate veil piercing rules—
alter ego theory
viii. Reverse Veil Piercing
1. Attempting to get to corporate funds to satisfy debts against
shareholder personally
2. Courts will allow this if person if hiding assets in a corporation
ix. Both reverse and normal veil piercing, start w/ assumption that corps and
LLCs are treated the same, but 1st step is to look at your state’s caselaw
x. No veil piercing w/ general partnership, but there is for limited partners
b/c limited partners give up control for a veil
6. Chapter 4: The business Entity and Legal Personality
a. Basic issues
i. Are corporations property in the hands of individual or an autonomous
institution partitioned from those w/ interests in its income, assets or
ii. What are the consequences of each of these views
iii. Corporations have property rights but don’t have right to not selfincriminate b/c they have no human dignity
iv. Corporate rights broken up into two categories
1. Politics and religion
v. If Corps are property in the hands of shareholders and this mouthpieces,
they could have better argument for having these rights
vi. If corps are autonomous, then they should operate in the best interest of
the shareholders no matter the political or religious stance
vii. Legislatures that see corps as property are more likely to enact laws
empowering shareholders
viii. Legislatures that see corps as autonomous more likely to enact director
friendly laws
b. Problem: Regulating Corporation Lobbying
c. Corporate Rights under the 1st Am
i. Belloti
1. Statute prohibiting corps from spending to influence referendum
proposals other than those that materially affected the property,
business or assets of the corp
2. Held invalid b/c it interfered w/ corporate ability to protect the
property that the state gave it: interfering w/ the legal rights of a
legal person
3. Specific issue was effect of personal income tax on the bank
4. Court said the attempt to protect shareholders didn’t matter b/c
corps are autonomous
a. Also shareholders have judicial remedy of derivative suits
ii. Austin v. Michigan Chamber of Commerce
1. Upheld statute banning use of corporate funds to make direct
contributions to campaigns or indirectly supporting a campaign
iii. Citizens United
1. Overruled Austin and held that BCRA regulation of independent
corporate expenditures to be violative of 1stA
2. Corporations have some speech rights as ppl b/c it shouldn’t matter
where speech comes from
3. Courts obligation isn’t to protect corps right to speak, but do
protect right to generate speech
4. Austin was anomalous and interferes w/ open marketplace of ideas
protected by 1stA
d. Separate Entity or Association of Individuals
i. Hobby Lobby
1. RFRA protection extends to corporations
2. Owners of Hobby Lobby felt their religious views should also be
expressed through their business
3. If religion of owners should apply to corps, then the corp must be
property and not autonomous
4. Nonprofit corp could be a “person” under RFRA so for profit corp
should be too
e. Consequences for Corporate Law
i. Property approach tends to produce shareholder protective statutes
ii. Entity approach tends to produce statutes that increase power of directors
7. Chapter 5: The Corporation and Society
a. Basic Issues
i. Who does the corporation serve?
ii. To what extent do courts mediate conflicts among corporate stakeholders
w/ respect to director decision making?
iii. What are the standards courts use?
b. Problem: Exogen Inc. Part I
c. Judicial Approaches
i. Dodge v. Ford
1. D sued F b/c F stopped paying special dividends
2. D needed $ to fund their own company
3. F wanted to expand production and create more jobs
4. D also argued F could be selling cars for much more but was
choosing not to
5. F also wanted to pay workers more, claimed it had a social respon
6. Court says a corporation’s purpose is primarily to make more
profit for shareholders
a. Shareholders can be defined as both current and future
7. Cant justify decision on worker or societal welfare, but can justify
based on long term gain over short term loss
ii. E-Bay Domestic Holdings
1. eBay a minority shareholder in Craigslist
2. C wanted to maintain a free, community based site, EBay wanted
to monetize
3. C created a new shareholder agreement w/ a poison pill clause in
order to maintain Craigslist culture in perpetuity
4. Court said this was not good b/c it didn’t maximize shareholder
5. Craigslist concerns about the future of the corp not good enough
reason to stifle shareholder gain
d. Historical View
i. Allen versus Strine
e. Multinational Corporations
i. Multinational Corporations, Transnational Law
1. Corps whose chain of production goes through multiple countries
2. Apex multinational corps sit at end of production chain at point
where the ultimate consumer comes in
3. Problem is who controls the chain
f. The Law of Corporate Charity
i. Problem: Union Airlines
ii. Judicial approaches
1. Theodora Holdings
a. Established test of reasonableness for charitable corporate
b. CEO and wife get divorced and wife wants to stop CEO
from donating parcel of land for a kids camp
c. Theodora Holding was ex-wife’s daughter, said gift was a
d. Court suggest the IRS Code is helpful in determining
reasonableness, though not definitive
e. If you fall within IRS guidelines, you save money on taxes
that can be distributed to shareholders
f. In this case the gift reduced the Alexander Dawson Inc
reserve for unrealized capital gains taxes by $130klmwhich
increased the net worth of stockholders
g. Also, gift was within the tax deduction limit of 5%,
meaning it cost stockholders 80k
i. So net gain of 50k
h. This numerical inquiry is the quantitative inquiry
i. Also have a qualitative inquiry
i. Looks at the recipient of the gift and the purpose
behind it
ii. Is the donation personal or justified institutionally?
iii. Qualitative test is a loyalty test and more lawyerly
2. Kahn v. Sullivan
a. Blueprint for this kind of thing right
b. Hired separate lawyers for the museum and for the board
c. Board named a special committee where everyone was
d. Have to maximize business, but some societal actions are
also good for business
e. Corps serve themselves by being socially responsible
f. Some states have passed laws that give BoDs discretion to
determine the social outcomes of decisions so long as they
also maximize the corp
i. Benefit Corps: allow for the declaration of a
purpose along w/ profit
iii. Perspectives at the outer limits of charity
1. Or back to the issue of corporate personality
8. Chapter 6: Planning for the Close Corporation
a. Model Standard Corporate Governance (Big Corp)
i. 3 critical internal stakeholders are officers, directors, shareholders
ii. Direction of corp is taken by and thru BoD. (MBCA 8.01, Del 141)
iii. Officers operate business day to day in accordance w/ actions of the board
iv. Shareholders vote. That’s all they do
1. Vote for board members, but in and out
2. Approve or disapprove board actions that the law requires the
board to submit to shareholders
a. Ex. Mergers, sale of assets, big stuff
3. Also anything enumerated in articles of incorp
v. Shareholders have no fiduciary duty
b. 3 ways to define Close Corp
i. Common law (Donahue v. Rodd)
ii. Legislative definition (CA, NJ)
1. Usually based on # of shareholders
2. Usually 35 or 50
iii. By looking to see if a state has enacted a close corp charter
1. Delaware has a close-corp opt-in
c. Donahue v. Rodd Electrotype
i. Defined close corp as
1. Small # of stockholders
2. No ready market for corporate stock
3. Substantial majority stockholder participation in management,
direction, operation
ii. Ruled that shareholders in a close corp owe strict duty of loyalty to each
MBCA 7.32
i. Governs shareholder agreements, which eliminates distinction between
directors and shareholder
Smith v. Atlantic Holding
i. When a shareholder effectively runs a company, they can be held liable
for actions in breach of fiduciary duty to other shareholders
Ways to protect Minority shareholders
i. Require everything to be voted on by shareholders
ii. Setting a high vote % for passage (supermajority voting)
Shareholder Voting Arrangements
i. Voting trusts, proxies, vote pooling
ii. Shareholders agreeing amongst each other to vote certain ways
iii. These shareholder agreements are subject to specific enforcement
iv. A way to secure agreement is to give each other an irrevocable voting
proxy subject to the agreement
v. Voting trusts are when shareholders transfer shares to the trust and the
trustee must vote shares in accordance w/ instructions
1. Those giving up the shares are beneficiaries of the trust
vi. Class Voting (p.233)
vii. Cumulative Voting
1. X=(s x d)/(D + 1) +1
a. X= # of share required to elect director
b. S=# of shares represented at the meeting
c. d= # of directors it is desired to elect
d. D= total number of directors to be elected
Dissension and Oppression
i. Investors in a close corp expect significant voice
ii. Common law approaches to dissension
1. Massachusetts
a. Wilkes v Springside Nursing Home (common law remedy)
i. Group bought a nursing home and all worked at it
ii. Group decided they didn’t want Wilkes to benefit
anymore and chose not to re-elect him to the board
as an officer after Wilkes announced his intention to
sell his shares
iii. Wilkes continued to do his job and did not do
anything wrong
iv. Group using the formalities of corporate law to
undermine the purpose (Chris Craft)
v. Court said majority must show a legitimate business
purpose for severing Wilkes
vi. Standard of “utmost good faith and loyalty”
vii. Cant frustrate the minority’s purpose for joining the
viii. 3 part test
1. Allegation of breach of good faith
2. Burden shifts to Ds who must show a proper
business purpose
3. If business purpose shown, burden goes
back to the P who must show there was a
less burdensome alternative that would have
met the business purpose alleged
2. Delaware
a. Nixon v Blackwell (Statutory remedy)
i. Del 341,342
ii. Owners of Class B- non voting stock on the wrong
end of a reorganization
iii. Employee stock ownership plan provided for some
owners, but not for Class B
iv. b/c the corp didn’t opt in to close corp statute, Class
B gets no relief
v. court says Class B chose to invest, even though they
knew they couldn’t get certain protections
1. could have also negotiated for the desired
b. Delaware a stricter approach b/c you have to opt in to close
i. Statutory scheme serves as a notice to 3rd parties
1. i.e. creditors, labor, banks
ii. once a 3rd party has notice, they can perform due
diligence – see Kinney Shoe case
c. RMBCA also has a close corp statute, but not all states
have adopted it
d. RMBCA 14.30, Del 342 et seq.
iii. Corporations end by voluntary or involuntary dissolution
1. Del 272-275: assumes dissolution is voluntary
a. But selling corp is way more common
2. RMBCA 14.30 provides for judicial dissolution based on claim
brought by shareholders if they can show oppression
3. “Oppression”
a. Majority perspective courts find oppression liability when
the majority’s actions are not justified by a legit business
b. Minority perspective courts fins oppression when majority
action, justified or not, harm the interests of a minority
i. Book p.251
iv. Kemp v. Beatley
1. Employees who owned shares frozen out by maj.
2. Court espoused reasonable expectation test
3. Also what majority knew or should have known were the
expectations of the minority
a. Standard is substantial defeat of expectations that were
central to the decision to invest
4. P has to show reasonable expectation, knowledge or imputed
knowledge, substantial defeat (not entire defeat), and that the
expectation was central to decision to invest
5. What is a substantial defeat?
6. There is a bad faith exception to this, though
a. Minority holder can’t threaten dissolution in bad faith
v. Remedies
1. If case made for oppression, court will order dissolution, provided
that parties get 30-120 or so days to come to an alternative
2. Settlements after judgment will be enforceable
a. Usually what winds up happening
vi. Transfer Provisions in Close Corps (p.237)
1. Right of 1st refusal
a. Changes who the 3rd party negotiates with in order to buy
b. Have to negotiate w/ the other shareholders who own right
of 1st refusal in addition to holder from whom you are
2. Consent
a. Consent provisions are weapons
b. Have to either pay more @ beginning to not have consent,
or pay later when seeking consent
c. Cheaper @ beginning (contingency discount) than at a later
3. Sale Option
4. Buy-Sell Agreement
5. First option
vii. Valuation of Restricted Shares (p.239)
1. Capitalized earnings is the “Maserati” of valuation of restricted
a. Book value not really used
2. Right of first refusal
3. Appraisal
4. Mutual agreement
5. Book value
i. Close Corp Summary
i. Wilkes Approach
1. Treat close corps as partnerships in terms of duty and loyalty in
order to protect minority shareholders from freezeouts
2. Shifting burden in order for P to recover
ii. Delaware (Nixon) approach
1. 2 options
a. Negotiate protections
b. Opt-in to close corp statute
2. If you choose not to do either, you’re out of luck
3. Delaware courts don’t create common law standards of duty
iii. Oppression= denial of your reasonable expectations. “Substantial defeat”
of expectations
9. Chapter 7: Partnerships (General and Limited Partnerships)
a. General Partnerships
i. Definitions (RUPA 101(6))
1. Association of 2 or more persons to carry on as co-owners of a
business for profit
ii. Formation
1. Partnerships can be formed even if the parties don’t intend to. Can
also intend to, but fail to do so in practice
2. If you receive profits, you’re presumed a partner, unless:
a. You get them to satisfy a debt
b. You get the for services as an independent contractor or as
wages or other employee compensation
c. You get the as interest or other charge on a loan, even if the
payment varies w/ profit
3. Partner can be a natural person or a legal person
4. In the end, courts decide what a partnership is
5. Martin v. Peyton
a. Rule: for a creditor to cross line to being a partner, the
creditor must be closely enough associated with the firm so
as to make it a co-owner carrying on the business for a
b. Here, the creditor was not a partner. Its actions were
reasonably taken to protect is loan, not to run the business
c. *fact dependent
iii. The partnership agreement
1. Default rules
a. Equal financial rights
b. Equal management rights
c. Transfer of equity interest
d. Dissociation
e. P.271-274
iv. Fiduciary Duty
1. Meinhard v. Salmon
a. Partners owe higher level of fiduciary duty then BoD of a
b. “not honesty alone, but the punctilio of an honor the most
v. Unlimited Liability
1. Incurred by GPs
2. Formal rule is fully liable, but in reality you go to a bankruptcy
lawyer and figure shit out
b. Limited Partnerships
i. Definition, Management Structure and Fiduciary duty
1. Control in GP: are you a partner or not?
2. Control in LP: are you a general or limited partner?
3. 2 differences from GPs
a. Filing requirements
b. Limited liability for limited partners
i. At least one partner MUST have unlimited liability
ii. Limited partner , in return for asset partition, gets
must less control than general partner
4. Good faith and Fair Dealing
a. Applies to reading of partnership agreement
b. Cant be read to subvert expectations of parties
c. Interpret contract based on the position of the parties at the
time of the agreement, not at the time of the dispute
d. Gerber v. Enterprise Products
i. “Court asks whether is it clear from what was
expressly agreed upon that the parties who
negotiated the express terms of the contact would
have agreed to proscribe the act later complained of
as a breach of the implied covenant of good faith,
had they thought to negotiate with respect to that
ii. Implied covenant looks to the past
iii. Purpose of good faith and fair dealing is protect the
essential points of the bargain
iv. Some commons terms are easily implied b/c the
parties must have intended them and have only
failed to express them because they are so obvious
e. Dieckman
i. IDK
5. Financial Rights and Limited Liability
a. RULPA 303 (p.296)
i. Lists things that limited partners can do w/o losing
their protection
b. Gateway Potato Sales
i. A limited partner may be personally liable for
partnership debts if the limited partner has
performed substantially the same role as a general
partner, even if the limited partner had no
interaction with the creditor.
10. Chapter 8: LLCs
a. Perhaps more than partnerships, the LLC for emphasizes the contractual
relationship among owners and the contractual flexibility of the form
b. As part of this, the LLC form can easily accommodate the broadest range of
governance structures, from the centralized authority structure of the corporation
to the communitarian approach of general partnerships
c. Issue is ALWAYS contract interpretation
d. Can be member-managed or manager-managed
i. Only need 1 member to form
e. Problem: Precision Tools Problem 6 (7 overall)
f. Organizational Matters
i. Membership/contracting
g. Fiduciary Duty
i. Members and Managers
1. LLCs allow member to define and limit fiduciary duty
2. In Delaware, you can entirely eliminate fiduciary duty
a. DLLCA 18-1101
b. But can’t eliminate the implied contractual covenant of
good faith and fair dealing
ii. Role of Contract: McConnell v. Hunt Sports
1. Wrote-out fiduciary duty w/ clause in contract that allowed
members to compete w/ the LLC
iii. Delaware: Norton v. K-Sea
1. Can contract out of fiduciary duties
h. Limited Liability
i. Cortez v. Nacco
1. Limited liability can hinge on control
2. Looked at whether the control expected by the manager of the LLC
was enough that a jury could infer they were responsible
i. Dissociation-Dissolution
i. Haley v. Talcott
1. A court may dissolve an LLC when it is not reasonably practical to
carry on the business in conformity with the LLC agreement and
the LLC agreement does not provide a sufficient exit mechanism
2. Judicial dissolution was appropriate b/c the exit mechanism in the
contract was inequitable in this case
3. Analogized to corporate law
4. Did here what was done in Chris Craft
11. Chapter 9: Financial Accounting and Valuation
a. Understanding the way that corporations represent themselves
i. Connection between shareholder/institutional welfare maximization and
financial statements
b. The lawyer and financial statements; gateway to understanding legal rights
c. Problem Precision Tools Part 7
i. Useful analytical tools for financial statement analysis: (1) working
capital; (2) current ratio; (3) liquidity ratio; (4) quick ratio; (5) debt-equity
ratio; (6) interest coverage ratio; (7) profit margin; (8) return on equity
d. Interplay of Balance Sheet, Income Statement and Statement of Cash Flows
e. 3 key financial aspects
i. Assets
ii. Liabilities
iii. Equity
iv. Basic premise is assets=liabilities+equity; assets-equity=liability
f. Industry is important to consider when reading financial statements
g. Enterprise valuation
i. Precision Tools Problem 8
h. What about non-balance sheet items
12. Chapter 10: Financing the Enterprise
a. Problem: Precision Tools Part 9
b. Del 102 (a)(4); 151-169, 221
c. RMBCA 202, 6.01-6.28
d. Introduction to Corporate securities
i. All securities are discrete combinations of rights to income, assets and
ii. Equity
1. Common stock v. Preferred stock
iii. Debt
1. Binds, indentures, (but not loans)
iv. 3 types of Securities
1. Common stock
2. Preferred stock
3. Debt
a. All contain legally binding understanding of right
v. Equity
1. Get paid last (residual holders)
2. Have bigger risk, but capture all the gain if company is successful
3. Also have greatest right to control
4. Common stock owners can elect and remove directors and can veto
transactions allow by law
5. Preferred stock gets paid before common stock
a. Gets a fixed preference w/ respect to assets and income
superior to common stock holders
b. Under classical model, have no control rights
c. Preference can be cumulative or non-cumulative
i. Cumulative is better
d. Participating vs Non-Participating
vi. Debt
1. Bears no risk usually (for sure the least risk)
2. Entitled to be paid first
3. Entitled to fixed interest and return (principal)
vii. These concepts can be flexible
viii. Equity can be separated into classes
1. Just required that all classes of equity together have full rights to
income, assets and control
a. Ex: Class A has right to vote, not income, Class B has no
vote, but income, Class C has ½ vote and income in certain
ix. Shares can be convertible
1. i.e. preferred stock to common stock or some other form of
preferred stock
x. **When companies issue stock other than common stock, they must
specify the rights in the Articles
1. Common stock needs just the # of authorized shares
2. RMBCA 6.01; Del 1.51
xi. Debt not really recognized on corporate law, but loan agreement and
contract law
xii. Corporate law recognizes debtholders only when creditors exert control
enough for courts to recharacterize a creditor as an equity holder for tax
and insolvency purposes
xiii. RMBCA 6.01
1. If you can split everything up, the sum of all types of shares must
receive full voting rights and full rights to assets
2. Aka cant withhold rights by splitting everything up but don’t need
one class that has full, traditional rights
e. Statutory elements
i. Authorization
ii. Placement in the articles of incorporation; board authority to set terms
iii. Contractual nature of preferences
f. Legal Capital and Constraints on Distributions
i. Concept of legal capital (Delaware)
1. Par value
a. Completely arbitrary number
b. Cant be greater than what is charged for the share
c. Cant sell for less than the par value
i. Corps usually make par value like 1 cent
d. Consideration for shares can be whatever the BoD deems
acceptable. Del 152.
i. Can be $, services, items, debt, anything
ii. “cash, tangible or intangible property, benefit to
iii. Determination of the board will be valid unless
there is fraud or bad faith
2. No par value shares
a. Allowed by Del 151
b. Can be issued for consideration as determined by the board
c. More flexible= can sell for anything (diff between 151 and
3. Del 151-154, 160, 170, 244
a. Read 151 in light of 102(a)(4)(provides that if you’re
issuing one class or series of stock, you just have to state
the # of shares and their par value)
b. 154
i. Corp can, by resolution, say that part of
consideration for stock is capital and the their part is
ii. But if any shares have a par value, the capital has to
be greater than the aggregate par value, unless all
shares have par value, then the capital account has
to be equal to the aggregate par value
1. Ex: if par value is 100 and sold for 100, all
100 has to be capital
2. If par value is 10 and sold for 100, at least
10 must be capital, but up to 100 can be
a. Up to 90 can go to surplus
3. If sold 2 shares, 1 w/ par value of 10 and 1/
0 par value, for 100 each, capital would have
to be greater than 10
a. Could be 10.01 up to 200
iii. If corp forgets to designate some amount as capital,
154 says either at issuance of security for cash, or
within 60 days if consideration is not all cash
1. Ex: when capital is not determined
a. All cash= statutes applies
b. $100 and 4 goats= 60 days to
designate capital
2. Mandatory provision says capital shall be
equal to aggregate par value of share w/ par
value, plus amount of consideration of
shares w/o par value
a. Ex: 2 shares sold for 100 each (1 w/
par of 10, 1 w/o par)
i. Mandatory designation would
be 110
3. Can move this around later, but this is the
initial designation
4. This is an inducement to get your business
together if planning to offer no par stock
c. Capital of corp can be increased or decreased by resolution
of the board
i. Increase can be whenever
ii. Decrease pursuant to Del 244
1. Says you can reduce up until the aggregate
par value. Just cant reduce capital below
minimum you had to put in capital account
at beginning
2. UNLESS, the company would be insolvent
by decreasing (244(b))
d. Surplus= consideration above capital
i. Normally used to pay dividends
e. Nimble dividend
i. Distributing divided out of net profits, not surplus
f. Can also distribute accumulated, banked funds
4. How is this reflected on the balance sheet
a. Klang v. Smith’s Food & Drug
i. Courts will defer to the board’s measurement of
surplus, absent evidence of bad faith or failure, on
the part of the board, to evaluate the assets on the
basis of acceptable data it reasonably believed
reflected current value.
ii. RMBCA Approach
1. 6.40
a. Balance sheet test
b. Insolvency test
13. Chapter 11: Forming the Entity; Internal Affairs Doctrine
a. Problem: Precision Tools Part 10
b. Advising the Entity
i. ABA Model Rules (p.435-)
1. 1.4: Communication
2. 1.6: Confidentiality of Info
a. Lawyer shall not reveal info relating to representation of a
client w/o client’s informed consent
3. 1.7: Conflict of Interest: Current Clients
a. Conflict of interest exists if the rep of one client will
directly adverse another client or there is significant risk
that the rep of one or more clients will materially limit the
lawyer’s responsibilities to another client, a former client,
or a third person or by a personal interest of the lawyer
4. 1.13: Organization as Client
a. Retained by org= rep the org
b. Serve best interests of the org
c. See sec. f
ii. Entity Theory of Representation
1. Danforth
a. Retroactively applied entity rule in a case where the lawyer
was retained for purposes of forming the entity
b. Pre-incorporation activity was deemed to be repping the
2. AZ State Bar Opinion
iii. Aggregate theory of representation
1. Represent all members of the entity at once
iv. Reasonable expectations test
1. Represent who you reasonably led to believe you represent
c. Choice of Entity and Formation
i. Forming a corp
1. Book a name
a. RMBCA 2.01(a)(2); Del 4.01
2. Find incorporators
a. RMBCA 2.01 says at least 1 needed
b. Can be either an individual or an entity b/c RMBCA
defines person as individual or entity
3. Create articles of Inc. and send it w/ money to wherever the statute
tells you to, usually secretary of state
a. Require certain things per Del 102 and RMBCA 2.02
i. Name
ii. # of shares
iii. Address of corp
iv. Name and address of incorporator
b. Easier to amend the by-laws than articles, so anything in
the articles should be much more concrete
c. Nothing beyond these 4 things are required
4. After incorporation, initial directors hold a meeting to appoint
officers, adopt bylaws, etc.
a. RMBCA 2.05
b. don’t have to name directors in articles, but you can
i. if you don’t then the incorporators hold a meeting
after incorporation to select initial directors who
will take care of the other stuff
5. By-laws are required, but RMBCA 2.06 doesn’t require anything
specific, as long as they aren’t inconsistent w/ the law or the
articles of inc
d. Planning and Structuring
i. Precision Tools part 11
e. Internal Affairs doctrine (p.488-503)
i. Constitutional doctrine or choice of law rule
ii. State of incorporation’s law governs the right of shareholders and other
corporate issues, even if suit is filed in another state
iii. Cal Corp Code 2115
14. Chapter 13: Role of Directors in Governance
a. Problem: Widget Corp
b. RMBCA 8.01-8.25 governs board actions
i. Actions that don’t comply are not binding on the corporation
ii. Boards manifest their will through resolution, in writing
iii. Resolutions can be written by a secretary, or by officers
iv. Per MBCA 8.40(c), an officer is responsible for maintaining and
authenticating records of the corporation
c. The Role of the Corporation director in the “standard model” or corporate
d. Formalities of corporate action
i. How does a board act? Collective vs individual action
1. Individual directors may not bind the corporation, only collective
BoD action
2. Directors CAN’T vote by proxy
3. Rule is you have to be able to hear each other for it to be a meeting
a. RMBCA 8.20(b): “any means of communication by which
directors participating may simultaneously hear each other”
4. BUT, corp can be bound on agreements never formally approved
at a formal board meeting if:
a. Unanimous director approval
i. When all directors separately agree, no meeting
b. Emergency
i. Situations where quick decisions must be made to
prevent great harm or take advantage of a great
ii. REAL emergencies
c. Unanimous Shareholder Approval
d. Majority shareholder-director approval
i. If directors who participate in the informal action
constitute a majority of the board and own a
majority of shares, the corp is bound
ii. Notice and quorum
1. MBCA 8.22
a. 2 days’ notice for special meetings
b. No notice for regular meetings
c. Action w/o notice is invalid
i. But valid notice can be waived by signing a waiver
(8.23(a)), or by attending the meeting and not
protesting the absence of notice (8.23(b))
2. Quorum
a. 8.24
i. Majority of board members is default
ii. Can be reduced to no less than 1/3 of the board
iii. Action w/o quorum is invalid
iii. Committees and the strategic use of corporate law
1. Executive committee is common because it can have full authority
of the board in all but a few essential transactions, such as
declaration of dividends or approval of mergers. MBCA 8.25(e)
2. MBCA 8.30(b) allows directors to rely on the reports of
committees or actions of committees on which he does not serve so
long as the committee reasonably merits confidence
e. Board Composition
i. NYSE Governance Rule 303A
1. Boards of listed companies must consist of at least a majority of
independent directors who meet regularly in executive session
without management
2. 303A.02 Independence Tests
a. Independent= no material relationship w/ company
b. Also not independent if been employee of company in last
3 years, or immediate family member was an executive
officer in last 3 years, received, or immediate family
member received 120K or more in direct compensation in
last 3 years, or if director is a current partner or employee
of internal auditor of listed company
ii. NYSE and NASDAQ require 3 committees
1. Audit
a. At least 3 members who are independent directors
2. Compensation
a. Solely independent directors
3. Nominating
a. Solely independent directors
f. Governance in the modern enterprise
i. “best practices”
1. See p.526-527
g. Social justice and boards of directors
15. Chapter 14: Shareholder Voting Rights; Shareholder Proposals
i. Del 141, 143-145, 211-233
ii. RMBCA 7.01-7.29, 8.03-8.07, 16.01-16.21
b. Mechanics of shareholders meetings
i. Calling the meeting
1. Del 211(d): only BoD or ppl authorized by art of Inc. or bylaws
can call a meeting
2. Del 228 allows shareholders to act by written consent
ii. Notice
1. Corp must give written notice of all meetings to shareholders
entitled to vote at meetings
2. “Record Date”= date that determines shareholders who can vote.
Only shareholders of “record” on that date may vote
3. Del 213(a): BoD can fix a record date for holders entitled to vote
no more than 60 days nor less than 10 days before, and another
record date for determining stockholders entitled to vote
a. This is about notice of the meeting
b. If you set this record date, then it is also the date that
determines who can vote, unless the board sets another
record date for who gets to vote, which can be up to the
date of the meeting
iii. Quorum
1. MBCA sets no min or max quorum, but says amendment is
required for supermajority quorum
2. Del 216 allows majority of shares to amend bylaws to increase
quorum or reduce to no less than 1/3
iv. Action by written consent
1. In lieu of voting @ meeting
2. MBCA 7.04(a) requires written consent of ALL shareholders
entitled to vote, even if there’s a supermajority voting requirement
3. Del 228 allows a MAJORITY of shareholders entitled to vote on
action by written consent
a. This is the default provision. Del corps may alter or
eliminate shareholders right to act via written consent
b. If there’s a supermajority voting requirement, need
supermajority of consen
v. Voting
1. Can be in person or by proxy, which can have discretion or
2. MBCA 7.22: validity of proxy limited to 11 months from
execution date, unless the appointment specifies a longer term
3. Del 212: no time limit for proxies
4. MBCA 7.25(c): votes cast for must outnumber votes cast against
5. Del 216: need a majority of the shareholders entitled to vote in
matters other than the election of directors
6. Majority voting is the default rules
a. Can make it a supermajority if you want (MBCA 7.27; Del
7. Shareholders vote on 3 things
a. Election of directors
b. Removal of directors
c. Key transactions
c. Election and Removal of directors
i. Election
1. Right belongs to shareholder, unless the seat is vacant, in which
case can be filled by shareholders or the board, depending on the
articles. P.542
2. Default rule is plurality voting, where candidate with most votes
a. Del 216 says that if shareholders adopt a bylaw specifying
the vote necessary for election, the board cannot amend or
repeal that bylaw
ii. Removal
1. RMBCA 8.08
a. w/ or w/o cause unless articles say only for cause
2. Can be done w/ or w/o cause (Delaware rule)
3. Campbell v. Loew’s
a. Right of due process are key in board removal
b. Have to give notice and a chance to defend
d. Inspection of books and records
i. Del 220, RMBCA 16.01ii. 220: presumption that shareholder is always entitled to a list of
shareholders, Burden is on the shareholder to show a business purpose for
records other than list of shareholders
iii. Pillsbury v. Honeywell
1. About what a business purpose is
2. Guy only got shares to protest napalm in Vietnam
3. Shareholders must have a proper purpose germane to their
economic interest in the corporation to inspect corporate records.
e. Shareholder Proposals
i. General standard: Auer v. Dressel
1. Board can’t remove for a ballot a shareholder resolution that has a
proper business purpose and is not otherwise limited by law
2. Even if shareholder resolution is passed, board as no obligation to
follow it
a. Board must be protected in its own fiduciary duty
3. But board would be smart to implement resolutions that are
popular b/c shareholders could always vote to remove directors
ii. Substantive grounds for exclusion
1. Rule 14a-8(i) specifies grounds for exclusion
a. P.578
f. Ordinary business vs public policy
16. Chapter 14/15: Shareholder Nomination; Shareholder Disclosure
a. Shareholder nomination of directors
i. Interplay of Federal securities laws (Proxy rules) and corporate law
a. Rule 14a-8(i)(8) applies only to a particular election
b. 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.
2. CA, Inc. v. AFSCME
a. The shareholder proposal requiring BoD to reimburse
shareholder nomination of potential board directors was (1)
a proper subject of bylaws under Del 109, but (2) b/c of
109’s interplay w/ 141 (board gets to run company) the
resolution would limit the board’s fiduciary duty and thus
violated Delaware law
b. 109 creates an unwaivable right of shareholders to amend
bylaws even if board also can
c. But shareholder primacy in bylaws is constrained by
Delaware’s decision to vest control of corp in BoD, thus
because of 141, there are limits on shareholder primacy of
d. Limit here was taking power from the BoD (fiduciary
e. If you want to limit board authority put it in the articles
3. Del Response to CA, Inc.: del 112-113
a. Allows shareholders to propose by-laws like in AFSCME
i. AFSCME not good law, but important in
demonstrating constraint of 141 on shareholder
bylaw primacy
b. 112 authorizes a corp to adopt a bylaw granting
shareholders the right to include their nominees in a
corporations proxy soliciting materials subject to certain
c. 113 codifies the decision in CA and permits a corporation
to adopt a bylaw providing for corporate reimbursement of
shareholder expenses incurred in connection with an
election of directors
b. Note on Say-on-Pay rules and advance notice provisions
i. Point to general issues of increased shareholder activism
c. Duty to disclose under state law
i. Delaware rule
1. Gantler v. Stephens
a. “it is well settled law that directors of Delaware corporation
have a fiduciary duty to disclose fully and fairly all material
information within the boards control when it seeks
shareholder action. That duty attaches to proxy statements
and any other disclosures in contemplation of stockholder
2. Courts apply duty of disclosure to directors or controlling
shareholders when they place the shareholders in a position where
they have to decide whether to sell their stock or seek appraisal
ii. Malone v. Brincat
1. If board doesn’t have to speak, but it does, it has to speak truthfully
and entirely
a. “”when directors communicate publically or directly with
shareholders about corporate matters the sine qua non of
directors’ fiduciary duty to shareholders is honesty”
2. If info is required for shareholders to vote properly, board is
obligated to full disclosure
iii. Application of Del 102(b)(7)
17. Chapter 16: Intro to Shareholder Litigation
a. Direct vs. derivative actions
i. Derivative:
1. Suit brought against 3rd parties, usually, officers and directors,
brought by a shareholder on behalf of the corporation
2. $ recovered is for the corp. not the shareholder
3. Corp is a nominal defendant
4. Counsel for Ps gets paid by corp
ii. ALI principles 7.01
1. Distinguishes direct and derivative actions
a. Derivative: action in which the holder can prevail only by
showing an injury or breach of duty to the corporation
b. Direct: an action to redress an injury to the shareholder, not
corp as a whole. An action in which holder can prevail w/o
showing injury or breach of duty to corp
iii. In derivative actions, all shareholders benefit equally
iv. In direct, only the injured shareholder benefits
v. Derivative actions only maintainable when board violates legal duty
vi. Tooley v. Donaldson, Lufkin & Jenrette
1. 2 part standard
a. Who suffered the alleged harm?
i. Corp or individual shareholder?
b. Who would receive the benefit of any recovery?
vii. Example of direct claims
1. Failure to enforce terms of a stockholder voting agreement
2. Discrimination against particular shareholder
3. Withholding of dividends
4. Deprivation of preferred stockholder contract-based rights
5. Interference w/ shareholder right to vote
6. Challenges to price and process in a merger
7. Abdication of a boards statutory duties
b. Who qualifies as plaintiff
i. Plaintiffs must be capable of adequately and fairly representing the
interests of the shareholders on whose behalf the suit is brought
ii. In re Fuqua
1. A plaintiff who understands the basic nature of a shareholder
derivative action brought in her name, but is unfamiliar w/ the facts
and exercises little control over the cases, is nevertheless an
adequate rep. of the shareholder class
2. Poor health doesn’t bar a P
3. Lack of proficiency in matters of law doesn’t bar a P
4. Just need competent support from advisor and attorney and have
no disabling conflicts
iii. Also need standing as a P
1. Contemporaneous ownership
a. Owned stock @ time of wrong and must retain the stock
throughout the litigation
2. Continuing interest
a. Have to remain a shareholder.
b. A shareholder of a corp that does not survive a merger
lacks standing to sue derivatively for misconduct that
occurred before the merger because the claim now is an
asset of the surviving corporation
i. Unless the merger is the subject of the derivative
3. Security ownership
a. Have to be the owner of record or beneficial owner of the
i. MBCA 7.40(e)
c. Inspection of books and records
i. Del 220; RMBCA ch.16
1. Important for derivative actions so that you can file the best
possible claim
2. Thus, a proper purpose for inspecting books and records is
investigation possible corporate mismanagement
ii. Saito
1. When a shareholder has a proper purpose to inspect, the right to do
so isn’t limited b/c there exists a secondary improper purpose or
b/c relevant documents were produced by a 3rd party
2. Also, Del 327, which deals w/ timing of ownership for derivative
actions, doesn’t affect Del 220
a. If proper purpose applies, shareholder can get all records
dealing w/ that purpose, even if the document is from
before the holder bough shares
iii. Seinfeld
1. A plaintiff must present some evidence to establish a credible basis
that the court could infer that the board did something wrong in
order to involve 220
2. Establishes a burden of proof for pre-litigation discovery
3. “Credible basis test”
d. Demand Requirement
i. Del Ch Rule 23.1; FRCP 23.1 (traditional); RMBCA 7.40-7.47 (modern)
1. Aronson v. Lewis (Delaware Approach)
a. Must make demand on board before filing derivative suit,
unless you can prove demand would be futile
b. Demand is excused if plaintiff alleges sufficient facts to
support a reasonable doubt that the challenged transaction
was the product of a valid business judgment
c. Court must decide whether a reasonable doubt is created
i. The directors are disinterested and independent;
ii. The challenged transaction was otherwise the
product of valid business judgment
1. **says “and” but other cases have said its
really “or” see Brehm v Eisner p.691
e. Interestedness: benefit or detriment related to transaction
that others in your class don’t receive
i. Ex: director gets a benefit from the transaction that
other directors do not
f. Independence: NOT found when you’re dominated,
controlled, beholden to by another or dependent on another
g. Demand is excused if a MAJORITY of board IS interested
OR NOT independent
h. In derivative suits there is tension between shareholders
rights to act on behalf of the corp and statutory grant of
control over corp given to the board by 141
i. Purpose of demand is the exhaustion of internal remedies
j. “Demand futility is inextricably bound to issues of business
k. Business Judgment Rule:
i. Presumption that in making business decisions,
directors act on an informed basis, in good faith,
and in honest belief that the action take was in the
best interests of the company (p.686)
1. “Its protections can only be claimed by
disinterested directors whose conduct
otherwise meets the tests of business
2. “to invoke the rule’s protection directors
have a duty to inform themselves, prior to
making a business decision, of all material
reasonably available to them”
ii. BJR respected absent an abuse of discretion
iii. Sets the burden of proof
iv. In other words, directors acted w/ care and good
faith (duty of care, duty of good faith)
1. Good faith is an intention to do right
2. 3rd duty is loyalty
3. So 3 duties are care, good faith, and loyalty
v. Presume that directors complied w/ their 3 fiduciary
vi. Only have to show that a majority of the board
members breached care, good faith, or loyalty
l. **Saying demand is futile is saying a future action of the
board will more likely than not be tainted b/c a majority of
the directors are tainted
i. i.e. decision whether or not to pursue the derivative
2. Rales v. Blasband
a. Under Delaware law, in a double derivative action, demand
on the parent company’s board is excused if there is
reasonable doubt as to whether a majority of directors can
exercise independent business judgment.
b. Case where demand is made on the board that did not make
the decision
c. 3 principle scenarios where a court should not apply
Aronson test for demand futility
i. Decision is made by the board of a company but a
majority of the directors have been replaced
ii. Where the subject of derivative suit is not a
business decision of the board
iii. Where, as in the case, the decision challenged was
made by the board of a different corporation
d. Instead of Aronson test, a court must determine whether or
not the particularized factual allegations of a derivative
stockholder complaint create a reasonable doubt that, as of
the time the complaint is filed, the board of directors could
have properly exercised its independent and disinterested
business judgment in responding to demand.
Modern Approach (RMBCA 7.40-7.47
1. No excusal of demand for futility
2. Always have to make a demand on the board, then if demand is
rejected, you attack the decision to reject demand on same basis
that you attack the yet-to-occur decision under the traditional
Difference between Delaware and MBCA approaches
1. Under traditional, demand may be excused if demand futility is
established. Demand futility est. when it is shown that a majority
of the board is either interested in the transaction giving rise to the
derivative suit, or is not independent. This is a prospective
challenge, saying that they would not be able to property consider
a demand because interested or not independent
a. If you fail to overcome the BJR on the prospective
challenge, then you can attempt to claim that the decision
to reject demand was done in violation of the board’s
fiduciary duties
2. Under the modern approach, must make a demand on the board. If
the board rejects demand, then you can try to show that the board
improperly rejected demand by showing that a majority of the
board members were either interested or not independent
a. I.e.: in Delaware, you say “demand will be futile because a
majority of directors are interested or not independent”.
b. Under RMBCA you say “my demand was rejected because
a majority of directors were interested or not independent”
Bylaw provisions
1. Compare 707-709 w/ CA, Inc. (p.601)
Termination when demand excused
1. Special Litigation Committees
a. Einhorn v. Culea
i. A corporation may create a special litigation
committee composed of independent directors to
determine whether a derivative action is in the best
interests of the corporation.
b. Usually formed by corps in response to derivative suits
c. Given authority by the board to investigate the derivative
claim and make a decision whether to go forward with the
suit or not
d. SLCs subject to judicial review
e. 2 factor test from Zapata (Del) p.709
i. Inquire into the independence and good faith of the
ii. Court then applies its own BJ, weigh and balance
equities between legitimate corporate claims in
derivative stockholder suit and a corporation’s best
interests as expressed by the SLC to determine
whether the motion to dismiss should be granted
1. In NY, there is a presumption against
overruling a lower court in the case of an
appeal from an SLC decision. Only overrule
is the lower court was totally wrong w/
weird reasoning
vi. Director independence
1. Ormond v. Cullman
a. “key issue is not whether a particular director receives a
benefit fro the challenged transaction not shared with the
other shareholders, or solely whether another person or
entity had the ability to take some benefit away from a
particular director, BUT whether the possibility of gaining
some benefit or the fear of losing a benefit is likely to be of
such importance to that director that it is reasonable for
the court to question whether valid business judgment or
selfish consideration animated that director’s vote on the
challenged transaction
b. Director can be dominated by another, or beholden to
c. Has to be some element of materiality
i. Ex: ability to fire, large portion of business, donates
to charity
2. In re InfoUSA
a. Crazy spending by the CEO and the board, that was
wasting corporate assets. i.e. giving corporate money to
b. P tried to show that a majority of the board was
interested/dominated by CEO Gupta
c. Have to show interestedness or lack of independence for
each board member, which P did
d. Gupta clearly interested
e. Kaplan not independent because his law firm’s business
coming from InfoUSA was so great
i. “the threat of withdrawal of one partner’s worth of
revenue from a law firm is arguably sufficient to
exert considerable influence over a named partner
that his independence may be called into question”
f. Raval, Prof. at Creighton. Board earnings more than prof.
salary, received 50k grant from Gupta and had social and
professional ties to Gupta
i. Board earnings is not enough standing along (In re
Walt Disney). But the grant obtained from
relationship was determinative
g. Haddix and Walker both received rent free office space to
operate their own businesses, this was enough.
3. Disney Litigation
a. Director’s earnings without more not enough to establish
b. Elementary school teacher on Disney board
4. Oracle Litigation
a. Dealt with the independence of an SLC that was 2 people,
one of who, was a Stanford prof w/ personal relationship w/
board members who donated to Stanford
b. Some prof. or personal relationship, which may border on
or even exceed familial loyalty and closeness, may raise a
reasonable doubt whether a director can appropriately
consider demand.
c. Not all friendships, or even most of them rise to this level
and the court cannot make a reasonable inference that a
certain friendship does without specific factual allegations
5. In re EBay
a. 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.
18. Chapter 17: The Duty of Care: Intro
a. Intro to Fiduciary Duties
b. Standards of Care
i. MBCA 8.30: Standards of Conduct for Directors
1. (a) each member of the BoD, ehn discharging the duties of a
director shall act:
a. (i) in good faith, and (ii) in a manner the director
reasonably believes to be in the best interests of the
2. (b) the members of the BoD or a board committee, when becoming
informed in connection with their decision making function or
devoting attention to their oversight function, shall discharge their
duties with the care that a person in a like position would
reasonably believe appropriate under similar circumstances
c. Business Judgment Rule
i. Scope: doesn’t apply when there has been no exercise of judgment
resulting in a decision, but intentional omissions are protected (p.751)
ii. Aronson is the key case
iii. Burden Shifting
1. P has initial burden of producing evidence which if believed and
uncontradicted would be sufficient to establish that the board
decision was not made within the duty of care, loyalty or good
2. If P meets this burden, burden shifts to board to challenge the
evidence or to show TOTAL FAIRNESS, which is fairness of
process and substantive fairness (price)
3. If board meets their burden, burden of persuasion shifts back to P
to claim there was waste
iv. A corps’ principle defense to such a claim is usually waiver of liability in
the articles of incorporation
1. Can waive duty of care violation, BUT NOT duty of loyalty
v. Del 144: all this goes away if a majority of disinterested directors, or a
majority of disinterested shareholders that are fully informed, ratifies the
vi. Shlensky v. Wrigley
1. Cubs BoD refused to install lights, thus no night games
2. Other teams did this and it was profitable
3. Court found not violation of duty of care
4. Need to show fraud, illegality, or conflict of interested in making
the decision
vii. Negligence
1. “due care in the decision making context is process due care only”Brehm v. Eisner
viii. Waste (p.758)
1. Should always include a waste claim in litigation
2. Del: there is waste only if “what the corporation has received is so
inadequate in value that no person of ordinary, sound business
judgment would deem it worth that which the corporation has paid.
Grobow v. Perot: “No Benefit Rule”
a. Look at where the benefit of the decision has gone
3. Usually on when the corporation has engaged in a transaction from
which it receives no benefit
4. Irrationality is the functional equivalent of the waste test- Brehm v,
a. “Irrationality Rule”
i. Look at the character of the decision
ix. Options Backdating (759-760)
1. One of the rare cases in which a transaction may be so egregious
on its face that approval cannot meet the test of business judgment
and a substantial likelihood of director liability exists- Ryan v.
a. Giving away value for nothing
x. Traditional Waste Standard
1. Rogers v Hill
a. “Gift as Corporate Waste”: if a bonus payment has no
relation to the value of services for which it is given, it is in
reality a gift in part and the majority stockholders have no
power to give away corporate property against protest of
the minority
xi. Executive Compensation
1. In re Walt Disney Litigation
a. Issue was severance package for failed director Michael
19. Chapter 17: Duty of Care: Duty of Oversight
a. Supervision of Ongoing Business
i. Francis
1. Determination of liability requires findings that a director had a
duty, breached that duty and the breach was the proximate cause of
2. Directors should
a. Acquire at least a rudimentary understanding of the
b. Have a continuing obligation to keep informed about the
activities of the corp
c. Attend board meetings
d. Remain familiar w/ financial statements
e. Inquire into issues that arise
3. A directors duties should be considered in relation to the specific
a. i.e. company, industry, director’s experience, etc.
b. Monitoring
i. Graham v. Allis-Chalmers
1. Imposed a duty of inquiry only when there are “obvious signs” of
employee wrongdoing
a. “Red Flag” test
ii. In re Caremark
1. Kind of overrules Graham
2. The directors of a corporation have a duty to make good-faith
efforts to ensure that an adequate internal corporation information
and reporting system exists
3. Says corp need some system of oversight, but the system is subject
to business judgment rule
4. Implementation and carrying out of program
5. “only a sustained or systematic failure of the board to exercise
oversight will establish the lack of good faith that is a necessary
condition to liability”-p.785
iii. In re Citigroup
1. Ps wanted to extend Caremark rule for legal risk to decision
involving business risk
2. Court declines to extend the rule. Says directors will only be liable
for failure to manage business risk in the case of gross negligence
3. Caremark didn’t create a new duty, duty to monitor is part of duty
of loyalty (quoting Stone v Ritter)
4. Important because lots of states have statutory waivers of duty of
care, not duty of loyalty
a. Del 102(b)(7) RMBCA 202
c. Where is the Business Judgment Rule
i. Ps have to overcome BJR initially by showing interestedness or lack of
ii. If they overcome BJR, burden shifts to board, who then must show “Entire
1. Entire Fairness: Fair dealing and fair price
a. Fair dealing relates to the process
b. Fair price relates to economic concerns
i. Range of values that 2 independent parties might
agree to in an arm’s length transaction-p.827
c. Had its origins in the duty of loyalty
d. “entirely fair” to the corporations
iii. But, a transaction can be ratified by the board, or by a majority of fully
informed shareholders
1. Then burden shifts to the Ps to show the board was not fully
20. Chapter 17: Duty of Care: Duty to become informed; avoiding liability
a. Problem: FiberNet Corp part 4
b. The Basic Rule
i. Smith v. Van Gorkom
1. Duty of care in transactions
2. Rule: there is a rebuttable presumption that a business
determination made by a corporations BoD is fully informed and
made in good faith and in the best interests of the corp
3. Standard of care in duty of care contexts is gross negligence
a. Have to show gross neg to show breach of duty of care
b. If you can show more, you move from breach of care to
breach of duty of good faith, which is an aspect of the duty
of loyalty (Stone v Ritter)
4. Have to make decisions w/ informed business judgment
5. Didn’t do that here for 3 reasons
a. Didn’t inform themselves as to Van Gorkim’s role in
forcing the sale and establishing the price
b. Were uninformed about the intrinsic value of the company
c. Were grossly negligent in approving the sale of the
company upon two hours consideration without prior notice
and without exigency or crisis
6. Presumption is rebuttable if the Ps can show that the directors were
grossly negligent in that they did not inform themselves of “all
material information reasonably available to them.”
7. But even if the board did not vote in a fully informed manner, a
merger can be sustained if approved by an informed electorate of
8. There was no issue that the directors relied on Van Gorkin’s
representations, but it was no ok that they didn’t have the
9. Experience of the board doesn’t influence the duty of care, except
it bears on what is reasonable in what they did
a. Here it didn’t matter what their experience was because
they literally did nothing
10. Legal opinions aren’t enough either, and neither are threats of suit
a. Suits are part of business
11. Normally would have to show that a majority of directors
participating in the decision breached their duty of care, like in
demand futility, but in this case this did not happened because the
board presented a unified defense
12. Key facts
a. Publicly traded diversified holdings company
b. VG met w/ senior management on his own and discussed
selling the company. But he didn’t have authority to do this
because only the board as a whole has this authority
c. VG came up with $55 per share by saying that’s what he
would sell his shares for
i. Issues: authority, duty of loyalty,
13. Focus on the facts when looking at duty of care in a transaction
c. The rest of the elements of liability
i. Reliance
1. Del 141(e): can reasonably rely on officers and employees
a. Look at the person relied upon and information relied upon
b. Can also rely on reports that are pertinent to the subj matter
upon which the board is called to act, and otherwise be
entitled to good faith, not blind, reliance
ii. Lack of objectivity
1. Kind of like independence, but the proof required is less than
a. P.822
iii. Causation
1. P.822
2. Need to show causation and loss, but causation can be inferred
iv. Rebutting the BJR
1. P.825-827
2. Cede v. Technicolor (Cede II)
a. If the BJR is rebutted, the burden shifts to the directors to
prove to the trier of fact the “entire fairness” of the
i. To rebut, have to present evidence
3. Even if you show breach, causation and damages, the board can
still say its within the best interest of the corporation, in exercise of
their role as fiduciaries, to bring the claim or not
d. Avoiding liability
i. Statutory exculpations (Del and RMBCA)
1. Del 102(b)(7) enables exculpation of director liability for breaches
of duty of care
2. RMBCA 202(b)(4): same
3. So, never bring solely an action for breach of duty of care. Always
bring a duty of loyalty claim, like domination and control
ii. Indemnification Del 145
iii. Insurance
21. Chapter 18: The duty of Loyalty: Self-Dealing
a. Problem Starcrest Corp
b. Director Self-dealing and conflicts of interests
i. BJR is at the center
ii. Current statutory approaches
1. Traditional: Remillard Brick Co.
iii. Contemporary
1. Del 144
a. Is an “or” statute
b. Informed board OR informed shareholders
2. Fliegler vs Marciano (p.853-853)
a. Fliegler requires disinterested shareholders vote
b. Marciano says that just showing board or shareholder
ratification doesn’t mean the litigation ends, but some
courts say that once you show ratification, the entire
fairness inquiry in precluded
3. BeniHana of Tokyo Inc (Director Ratification)
a. If an informed board ratifies a decision, its valid
4. RMBCA Subchapter F
c. What is fairness
i. Substantive fairness
1. Fair price
a. Look at price, need (business purpose), and ability to make
the transaction
b. Ex: even if RR paid a fair price for the yacht, they have no
need for it, so there is no fairness
ii. Process fairness
1. Fair dealing
a. Disclosure
b. Director ratification: independence, full disclosure and
good faith
c. Shareholder ratification and waste
22. Chapter 18: The Evolution of Good Faith
a. Ubiquity of good faith in fiduciary duty analysis
i. Dell 144; can cite in loyalty cases, not in good faith cases
1. Don’t get here until P has met burden of production showing that
an abuse of discretion has tainted a board decision
ii. BJR; independence in decision making; reliance on experts;
1. If the tainted decision comes from 11 ppl violating different
standards (care, loyalty, domination, etc.), P still has to meet
burden of production, and the Board has burden of showing entire
fairness, ratification by board, shareholders, etc. through either 144
(loyalty), business judgment rule (good care), or judicial standards
(good faith)
2. Burden of production for P—Board then has burden for entire
fairness—if Board meets burden, P has to resort to showing waste--even then, board can say “eh, this action isn’t in the best interest
of the corp”
b. The concept of good faith
i. Abuse of discretion
1. Director decision that violates conduct norms
2. The source of all this stuff. Every shareholder complaint comes
from a director’s abuse of discretion
3. Used to be only about breaches of duty of care
ii. Misfeasance
1. Failure to act in good faith
a. E.g. Disney Case
iii. Nonfeasance
1. Failure to monitor
a. E.g. Caremark
c. The cases (standards, tests and application)
i. Disney
1. Subjective bad faith (actual intent to do harm)
2. Negligent bad faith (more than gross negligence)
a. Intentional dereliction of duty
b. A conscious disregard of one responsibilities
3. A failure to act in good faith requires conduct that is qualitatively
different from, and more culpable than, the conduct giving rise to a
violation of the fiduciary duty of care
ii. Stone v. Ritter
1. Standard
2. Duty of good faith is found within the duty of loyalty
3. Breaching duty of loyalty by failing to act in good faith
4. “Liability requires a showing that the directors knew that they were
not discharging their fiduciary obligations. When directors fail to
act in the face of a known duty to act, thereby demonstrating a
conscious disregard for their responsibilities, they breach their duty
of loyalty by failing to discharge their fiduciary obligation in good