Overview of Business Associations
I.
History
a.
b.
II.
Definitions
a.
Historical forms of associations: Sole proprietorship, the general partnership, and corporation.
U.S. added limited partnerships, limited liability companies, other business associations
i. Maybe too many
Business:
i. A business is a collection of assets and a set of real-world activities
ii. Can’t own “business” ->one owns the assets that form the business, which includes not only chattel and real property
but also ... intellectual property, etc.
b. Corporation
i. : is an abstract legal reference point [that is, a legal entity or person] to which we assign those assets
c. Capital Structure (amount of debt and equity)
i. Debt
1. Definition:
a. money borrowed from lenders that include banks and other financial institutions. Debt may take the
form of a loan or another financial instrument such as a bond or debenture. Debt holders are also
known as lenders or creditors
2. Lower risk/reward
a. Can lower risk by getting security (collateral)
b. Get paid first- often fixed rate
3.
ii. Equity
1. Definition
a. is an ownership interest. Equity holders are owners; depending on the type of association, they may
also be stockholders/ shareholders (in the case of corporations) or partners (in the case of general or
limited partnerships) or members (in the case of LLCs
2. High risk/high reward
a. Get paid after debt holders
III. Applicable Law
a. DCGL [Delaware General Corporation Law]
b. Majority of corporations incorporated in Delaware
IV. Types of Business Associations
a. Sole Proprietorship
i. Definition: “single person operating their own business”
ii. Law: Common Law association
iii. Creation: operation of law -> no legal formalities needed
iv. Liability: Owner= liable for all losses
v. Governed: Owner= manager and receives all profits
vi. Not separate legal entity
vii. Pros: no conflict/fighting Cons: cant diversity risk of loss/get more money to grow
b. General Partnership
i. Definition: “Two or more persons agree to act as co-owners of a business for profit”
ii. Law
1. UPA [Uniform Partnership Act of 1997]
a. Adopted by most states
2. Used to be common law -> now governed by statute + CL
3. Statutes establish default rules, but generally governed by partnership agreement
iii. Creation: by operation of law -> exists when definition defined by state statute is satisfied
iv. Liability: Jointly and severally liable for all partnership debts/liabilities
v. Governed: Partners govern
vi. Separate legal entity
vii. Pros: Good for small businesses/pass-through taxation | Cons: Liability
c. Limited Liability Company
i. Definition: Hybrid between corporation and general partnership
ii. Law
iii. Creation: File with Secretary of State
iv. Liability: Limited liability (liable for associations debts to the extent of their investment in the association- may lose
investment in co., but not personal wealth)
v. Governed
vi. Pros: Used by private equity firms / pass-through taxation
d. The Corporation
i. Definition
ii. Law
1. DGCL [Delaware General Corporations Law​]
a. Delaware Court of Chancery
i. Exercises equitable jurisdiction
b. Most corporations are incorporated in Delaware, and subject to DGCL
iii. Creation: File with Secretary of State (or equivalent)
iv. Liability: Limited Liability for owners
v. Governed
1. Owners
a. Shareholders or Stockholders
2. Board of Directors (BOD)
a. Appointed by SH to manage the co.
b. Oversee officers and make decisions about direction of the co.
c. Inside Directors
i. Directors that are also officers
d. Outside/Independent directors
i. Not officers
3. Officers
a. Appointed by the BOD to manage day-today operations
vi. Pros: Cons: No pass-through taxation-distributions to SH taxed twice
vii. Facts: Most commonly used-> most firms listed on stock exchanges are corporations
V.
Themes
a.
b.
Agency Theory (economic)
i. the interests of two groups inevitably diverge (under the assumption that all individuals are self-interested).
ii. Control vs. Ownership
1. SH need to delegate control b/c of collective action issues
iii. Corporate governance
1. Rules designed to ensure managers act in interests of owners
2. Agents acting selfishly= increased agency costs
iv. Legal rules are designed to decrease agency costs
Agency Law (english law)
i. Governs relations between “agents” and “principals”
ii. Sets out rights/obligations v/t Agents and Principals
iii. Determines liability to 3P
Agency Law
I.
Overview
Purpose
i. Business associations are a “fiction”- in reality natural people must act on behalf of the corperation, and these people
are often legal agents.
b. Function
i. Governs relations between “agents” and “principals”
ii. Sets out rights/obligations b/t Agents and Principals
iii. Determines liability to 3P
c. Law
i. CL
ii. Restatement 3​rd​ of Agency p.
iii. Not subject to contract law- no requirement of exchange of consideration
1. BUT, can have K, and often do
Agency [​R 3​rd​ §1.01​]
III. §1.01 ​Agency Test​[ ​Gorton v. Doty + Gay Jenson Farms v. Cargill​]
a. (1) mutual manifestation of assent (by the P and A);
i. Look at acts and words
1. Ex.​ ​Gordon ​– ​volunteered car (prima facie case of agent)
2. Ex. ​Cargill​- made A accept “recommendations” for company, and A consented
a. Can be oral, unless statute of frauds
b. (2) that the A will act on the P’s behalf
i. Designation
1. Ex.​ ​Gordon ​– ​designated him to drive even though she could have with express condition that he drive the car
2. Ex.​ Cargill​ – A procured gain for Cargill, who paid for it
c. (3) subject to the P’s control. [​Gordon]​
i. "De facto Control”
1. “​the point at which the creditor becomes a principal is that at which he assumes de facto control over the
conduct of his debtor”
2. Control over day-to-day operations. [​Cargill​]
a. Ex.​ Cargill​ controlled operating grain elevator
b. factors 2 (having a right of first refusal), 6 (decision to give “strong paternal guidance”), 7
(allowing Warren to use drafts with Cargill’s name), and 8 (financing ALL Warren’s purchases and
financing
IV. §​1.02 ​Mandatory if ​§1.01​ Test Met
a. Cannot K out of agency
a.
II.
Saying no I am not your agent doesn’t matter→ only relevant consideration is whether elements are satisfied,
because agency is not contract law
ii. Ex. ​Gorton​ ​-> Agreement between parites irrelevent-> agent if 1.01 test met
V. Relationship (status, not K)
a. Employee
b. A franchise agreement creates an employer-employee relationship when it gives the franchisor effective control over any aspect
of the franchisee’s operation ​ee ​R(3) Section 7.07(3)(a).
c.
VI. Cases
i.
=
VII. Policy
VIII. Why is agency determination important?
a. Consequences that flow from agency relationship
i. Is A enters into K w/ authority-> P is party to K
ii. If A is agent for disclosed P, A isnt bound, and P is (P may be liable for tort or K)
IX. Why Mandatory Rules?
a. Liability
i. “Principal cannot disclaim the vicarious liability for torts or contracts, and while the parties can modify the agent’s
fiduciary duties it is unlikely, they could extinguish them entirely.
b. Agency= Mandatory if​ R§1.01​ satisfied
X. Flexibility
a. Can still K terms, R(3) §6.01, 7.03
XI. When should we impose liability on one party for the misconduct of another?
a. When recognizing an agency relationship compensates an uncompensated victim (not a good reason)
b. Culpability
i. If potential agent is blameworthy, should be liable/ not compensated
c. Deter Wrongdoing
i. If someone has control over resource/benefits, should also bear liability for resource
ii. Threat of liability increases precautions/awareness
Authority
I.
Rules
a.
b.
c.
d.
e.
II.
Cases
a.
Authority
i. Definition: ​R 3​rd​ §7 Authority
1. The power to affect the legal relations of another person
Actual Authority
i. Definition ​R3 §2.01 +3.01
1. Authority A reasonably believes he has based on P’s actions
2. “Actual authority ...principal actually intended the agent to possess and includes such powers as are
practically necessary to carry out the duties actually delegated” [​Hogan​]
ii. Express Actual Authority
1. Written or spoken expressions
iii. Implied Actual Authority​ R2nd §35 + R 3​rd​ §3.02
1. Manifestations such that a reasonable A would think he has authority
a. Past conduct/manifestation [​Hogan​]
b. Task is reasonable [​Hogan]​
c. Cannot have if P expresses that A does not have authority [​Ampex]​
2. Implied authority to do what is necessary/inherent in a job [​Hogan​]
3. Incidental Authority R2 ​§35f
Apparent Authority
i. Definition​ R3 §2.03 + 3.03
1. Authority 3P reasonably believes A has based on P’s manifestations to 3P
ii. Factors
1. “usual and proper to the conduct of business A is employed to conduct”
a. P holding out A as someone who would generally have authority [​Ampex​]
b. P did not specify who had authority to act [​Ampex​]
iii. Questions:
1. Letter giving authority received, then another letter revoking authority doesn’t reach 3P
a. P still liable, because original letter granted authority
Inherent Authority
i. Definition
1. Even if principal is undisclosed and there is no actual/apparent authority, Agents can still have inherent
authority if the action is in the type usually given to the A. [​Fenwick]​
2. Beerhouse -<
Ratification
i. Definition
I.
Ratification
Rule​ [​§4.03]
II. Test for Ratification: ​“Acceptance of the results of the act with an intent to ratify, and with full knowledge of all material circumstances”
[Boticello]
a. 1) Act done on P’s behalf
i. Ex. ​Boticello->​ Walter did not purport to act on Mary's behalf, so even if Mary wanted to ratify and had knowledge,
cannot
b. 2) Manifestation of assent by that other person that prior act will bind them
i. Objective evidence [words and conduct]
1.
acceptance of the benefits of the contract can be a ratification, provided it was “purported to be
done on account of the principal.” ​Boticello
Can be silence
a. “Delay in expressing an objection to an unauthorized act may result in ratification, depending on
the length of time that elapses between the time the principal learns of the unauthorized act and the
time the principal manifests an objection. It is a question of fact in the particular circumstances
whether the lapse in time is sufficient to constitute ratification.” R(3)
3. Manifestation can be to anyone (not just 3P or A)
4. Need to have option of declining benefits to accept them
c. Also need the P to have been fully informed​ §4.06
1. Ex. ​Boticello ->​Mary not fully informed
2. Unless​ ​on notice: -> they knew that they lacked material facts. ​§ 4.06
d. Manifestation must apply to entire prior act ​§4.07
e. Adverse and inequitable effects
1. on Ted. See ​§ 4.05
III. Effect of Ratification
a. Creates Actual Authority ​§4.02
i. As if prior act had actual authority when done
b. A is no longer liable under ​R3§ 8.09 ​for acting without authority
IV. Cases
2.
Estoppel
I.
Rules
a.
R 3​rd​ §2.05​ Even if no Agency- P may still be liable IF
i. P Acts
1. P acts intentionally and carelessly in causing 3P to hold belief of agent relationship
2. P fails to take reasonable steps to disabuse 3P of belief agent relationship
3. Hoddeson v. Koos Bro
ii. 3P is justifiably induced
iii. 3P has detrimental change in position
1. an expenditure of money or labor, an incurrence of a loss, or subjection to legal liability,​not the loss of the
benefit of a bargain
2. Loss of opportunity to contract not valid claim (need real damage)
Doctrine is narrow, because only applies if no other agency (such as apparent authority)
b.
II. Cases
Hoddeson v. Koos Bro
I.
Principal and Agent Contract Liability
Rules [​R 3​rd​ §6.01 §6.02 §6.03​]
d. Disclosed Principal​ ​R§6.01
i. Definition: Agent or 3P has notice A is acting for P and indentity of P is disclosed
1. Can be unindentified?
ii. Liability of Principal
1. Actual Authority
a. P is bound to 3P
2. Apparent Authority
a. P is bound to 3P
iii. Liability of Agent
1. Unless otherwise agreed, Agent not bound
e. Unidentified Principal ​R§6.02
i. Definition
ii. Liability of P
1. Actual Authority ->P and A are both bound to 3P
2. Apparent Authority
iii. Liability of A
1. > A is liable, unless otherwise agreed [​Salmon ​v. Curran]
f.
b.
c.
d.
II.
Cases
a. But, can sue for indimnification
Undisclosed Principal ​R§6.03​ +​ §2.06
i. Definition
1. No apparent authority with undisclosed P
ii. Liability of P
1. Actual Authority: P liable
2. Apparent Authority
3. No Authority §2.06
a.
test for P's liability is whether the agent's act is within the authority usually given to that type of
agent. [​Watteau v. Fenwick]
i. Liability of A
1. Actual Authority
a. A liable unless agreed
2. Apparent
a. No
Nonexistent P​ ​§6.04
i. If P does not exist or lacks capacity, A liable
A has no power to bind P
i. A liable for breach of implied warranty of authority ​§6.10
ii. Ex. At​lantic Salmon v. Curran
A acts without Authorit​y
i. A liable to P for breach of duty. ​§8.09
Tort Liability
Corporations Class #4 Notes
Recap
Ways for P to be liable
Identified Ps
Liable for contracts entered into by their A if A had apparent/actual authority
Undisclosed Ps
Liable for Ks entered into by A if A had actual or apparent authority § 6.03
Watteau
A acts with inherent agency power (but without actual authority)
6.01–6.03 are not exclusive means of liability
E.g. ratification, estoppel (rare)
A may also be liable and treated as a party to the contract
6.01: generally not (P is disclosed)
Atlantic Salmon:​ guy tried to argue he was an A and thus not liable (court doesn’t agree; basically, a nonexistent
P)
6.02: unidentified Ps
6.03: undisclosed Ps (​Watteau v. Fenwick)​
A is party thus also liable unless agreed otherwise
3Ps can also be held liable.
Liability of Principal to Third Parties in Tort
If P commits a tort ​→​ P is liable.
If A commits a tort ​→​ A is liable. § 7.01
Is P ​also​ liable for A’s tort ​→​ it depends on direct or vicarious liability, plus if the A is an EE.
Direct liability: P authorizes tort.
Vicarious liability: P is liable by virtue of conduct by A: arises automatically (sometimes)—not because of P’s conduct
but because of A’s conduct
P is liable when A is A and an EE
R(3)=EE; R(2)=servant
When does that ER-EE relationship arise?
From R(3) 7.07(3): the P controls or has the right to control the manner and means of the A’s work
How​ the A shall work
Hypos from Supplement
A is liable because liable for own torts; no agency relationship
A is liable because A is liable for own actions (§ 7.01); Ace Trucking is likely also liable through vicarious liability because A is
EE of Ace (probably—can assume so)
A isn’t party to the K because disclosed P and unless agreed otherwise.
Lawyer is liable for own actions; law firm—depends on the facts and terms of employment/controls lawyer’s manner and means.
It would not be assuming too much that there was control, so law firm is liable.
Humble Oil
Mrs. Love doesn’t use emergency brake; neither do workers. Car runs down hill and injuries plaintiff. Plaintiffs sue Mrs. Love,
gas station owner, and Humble Oil Company (big guy)
Humble says not responsible for actions of Schneider and his EEs.
Humble is vicariously liable, focusing on the ​master-servant relationship,​ because Humble ER of Schneider EE.
Primary factor—degree of control
“Right or power of Humble to control the details of the station work”
Other courst refer to “day-to-day” operations; here, it’s the ​details​ of the work; manner & the means
Heightened degree of control:
Schneider had very little business discretion (among other things)
Humble owned everything and controlled hours.
Public Policy Argument
We need to have a deep pocket who can absorb the loss and compensate the victim.
If you are reaping the benefit from the activity, you should be responsible for things that go wrong.
Do we agree with the conclusion?
Either going to be the oil company or victims
Oil company does control Schneider
Hoover v. Sun Oil
Should Sun Oil be vicariously liable for the tort committed by Barone? Again, it’s a question of control.
“Day-to-day operations”
“Right to control the details of the day-to-day operation” (41)
What is to be done is not enough
Sun Oil is not liable because Barone is an independent contractor/landlord-tenant
Asking if there is an employment relationship
Close Case
Went to gas station owner school
Certain products placement
Schneider kind of like a store clerk paid on commission vs. Barone suffers profits and losses—he alone assumes overall profit &
loss
Seems Barone had more control
Difficult to distinguish the facts of the cases
If we were to look just at the doctrine, courts are stating the same test—in ​Sun Oil​, less right of Sun to control (so we can
distinguish, but close)
Consider the two different business relationships
Schneider operating as a clerk; not really paying expenses
Much more arms-length; Barone suffers losses and gets benefits
Court is looking for proxies for control:
Hard to manipulate who bears the burdens, so be sure to look there
Murphy v. Holiday Inns
Benefits of control
Uniformity/standardization
Test is “regulates the activities of the franchisee” (45)
Relationship may arise even if parties expressly deny it
“Control or right to control the methods or details of doing the work” (45)
No control over day-to-day operations
No power to control daily maintenance of the premises
Betsy-Len suffered losses and enjoyed profits
Case is trying to show how fact-intensive these questions are and to suggest there is some rationale here
P is not vicariously liable for an A without an employment relationship, so 3P shouldn’t be able to recover from P
Solution to “shallow pockets”?
Insurance company?
Legislature may intervene and thus require insurance
And insurance can require careful work by raising premiums ​→​ efficiency/resource allocation
Ira Bushey—
​ Judge Friendly
a. “conduct of a servant is within the scope of employment if … it is actuated, at least in part, by a purpose to serve the
master.”
Drunk sailor case
Illustrating that ERs are not strictly liable for torts of EEs
ER is liable for EE if committed within scope of employment
When is tort within scope of employment?
ER is liable
Harm was foreseeable, even if this precise harm was not foreseeable
Not the law but gets us thinking about crafting a rule that holds ERs responsible for EE torts
R(2)--§ 228, p. 6 of R(2)
Scope of employment includes actuated, at least in part, by a purpose to serve the master
Friendly thinks this is unfair
R(3)--§ 7.07(2), p. 24 of R(3)
“…or course of conduct subject to the ER’s control”
Not within scope: occurs within independent course of conduct not intended by ER to serve any purpose of ER
● Unclear about the difference between the two; law varies by jurisdiction
1.
2.
3.
4.
5.
6.
7.
8.
Agent’s Fiduciary Obligations
Overview
Definition
I. Agency= Fiduciary Relationship R 3​rd​ ​§1.01
II. Fiduciary owes duties to other party
III. Fiduciary duties are pro-active
IV. K defines scope of agency relationship, and court look at K to determine application of fiduciary duties §8.01
i. “fiduciary obligation, although a general concept, ... var[ies] depending on the parties’ agreement and the scope of the
parties’ relationship.”
V.
COA for breach of duty is a tort claim
I. A fiduciary who commits a breach of his duty is guilty of tortious conduct to the person for whom he should act.
II. Fact-intensive inquiry
K defines scope of agency relationship, and court look at K to determine application of fiduciary duties §8.01
Policy
I. Economist view
i. Agency costs arise when A act on own behalf-> fiduciary duties help fix this
Rules
Duties Owed to who?
I. Duties owed to P
Duties
I. Duty of Care
i. General ​§8.07-8.11
II. Duty of Loyalty
i. General Duty (prescriptive)
1. R3§8.01​: A must act for P’s benefit in all matters connected with agency relationship
ii. Specific Duties (proscriptive)
1. §8.02​: If A is forbidden from getting a material benefit for their position, they are prevented from having
incentives​ that would get them a material benefit
a. Factors
i. Control of company assets/ company facilities/position he occupies
ii. Connection because material benefit and use of job-> needs to be ​because of ​job.
iii. Ex.​ ​Reading​: “​An agent has a duty not to acquire a material benefit from a 3P in
connection with transactions conducted or other actions taken on behalf of P or otherwise
through A’s ​use ​of A’s position”- Key is use of the position
b. Remedy​: give back benefit earned from use of position to P [​Reading]​
2. §8.03 ​: [Adverse Party/Conflicts of Interest]
a. Cant represent an adverse party, because it gives incentive to be disloyal
b. Conflicts of Interest-> circumstances where fiduciary has incentives to be disloyal
c. Mere fact that incentives exist is enough to create conflict of Interest
3. §8.04 ​[Unfair Competition]
§8.05​: [Confidential Information]
a. An agent's duties concerning confidential information do not end when the agency relationship
terminates. [​Town and Country ]​
b. An agent is not free to use or disclose a principal's trade secrets or other confidential information
whether the agent retains a physical record of them or retains them in the agent's memory.
c. If information is otherwise a trade secret or confidential, the means by which an agent appropriates
it for later use or disclosure should be irrelevant.
Informed Consent/Waiver
1. §8.06 ​[Informed consent]
a. Full disclosure required
i. Ex. ​Rash :​ full disclosure= need to disclose absolutely everything: like how much $ he
will make, etc.
b. Permission must come from someone who has authority to give consent
4.
iii.
9.
Cases
Partnerships
General Overview
a. Definition: “Two or more persons agree to act as co-owners of a business for profit”
b. SOL: Partnership agreement + RUPA
i. Partnership Agreement
1. Governs unless rules in RUPA are mandatory (rare) ​RUPA §105
ii. RUPA [Revised Uniform Partnership Act of 1997]
1. Adopted by most states
c. Creation: by operation of law -> exists when definition defined by state statute is satisfied, even if unintentional
d. Liability: Jointly and severally liable for all partnership debts/liabilities​ RUPA §306(a)
i. Contracts: Only if entered into with actual or apparent authority ​RUPA §301
ii. Tort: Liable if committed by partners within the ordinary course of partnership’s business §305
e. Taxation: Pass-through taxation
f. Governed: Partners govern
g. Separate legal entity-> ​RUPA §20​1 =
i. Pros: Good for small businesses/pass-through taxation | Cons: Liability
II. Default rules ​for when Partnership agreement is silent ​RUPA §105(b)
a. § 401(a) ​All partners share equally in profits and losses regardless of how much they contributed to the partnership.
b. § 401 (g)​ Partners cannot posess partnership property for non-partnership purposes
c.
d. § 401 (h​) Every partner may participate equally in management.
i. Not compensated for services performed for partnership, except reasonable compensation for winding up the
partnership
e. § 801(1)​ Every partner may unilaterally cause the dissolution and liquidation of the partnership.
III. Mandatory Rules​ ​§105
a. Standards of care + ​Fiduciary Duties ​§409 - §105(a)©(d)
IV. Fiduciary Duties ​§409 - §105(a)©(d)
a. General
i. Partners are fiduciaries of ​each other
ii. May not vary law under ​§104(1)/110/207
iii. May not alter the duties of loyalty or care ​§409
iv. Must be clear link b/t partnership and opportunity (​Salmon)​
b. Duty of Care​ §404
i. Limited to gross misconduct/negligence
c. Duty of Loyalty ​§404(b)
i. Can’t act against- for adverse purpose/compete w/ partnership
1. Salmon ​: account for benefits arisingout of conduct of a partner
ii. Jointly and Severally Liable​ § 401(b)
d. Used to be common law -> now governed by statute + CL
V. Rules
a. Partnership Factors [​Fenwick]
i. Agreement/ intention of parties (not conclusive)- RUPA§ 202 – can be formed without intent
ii. Right to share in profits -> §202(c)(3) = now presumption of partnership, unless profit share was for services
iii. Obligation to share in losses
iv. Ownership and control of partnership property
v. Community of power in administration/control of management
vi. Conduct toward 3P-> hold themselves out as partners (can lead to estopell)
vii. Right of parties in dissolution
b. Fiduciary Duties
i. Mandatory in some cases
ii. Must be clear link b/t partnership and opportunity (​Salmon)
VI. Cases
I.
Corporations Class
I.
Overview
c.
d.
Definition:
SOL: ​DGCL [Delaware General Corporations Law​]
1. Delaware Court of Chancery
a. Exercises equitable jurisdiction
2. Most corporations are incorporated in Delaware, and subject to DGCL
a. Because Delaware courts want to keep businesses incorporated in Delaware, the court is very
friendly to businesses. ​See B
​ oilermakers
b. “multiforum litigation”-> in class action, you can sue in multiple states to get court that is friendlier
to plaintiffs than Delaware (business friendly), but companies get around this by including a
forum-selection clause​. ​Boilermakers
e. Creation: File with Secretary of State (or equivalent)- deliberate act by incorporators
i. Incorporator duties: naming BOD-> if named in charter, incorporator is irrelevant (paralegal)
ii. After incorperation-> The board will appoint officers, adopt bylaws, authorize the sale of shares, and designate a
corporate bank account.3 ​MBCA § 2.05
f. Liability: Limited Liability for owners (SH/stockholders)
g. Pros:
h. Cons: No pass-through taxation-distributions to SH taxed twice
i. Also: worried about huge companies with direcotrs not acting in interests of the owners -> e.g.tesla investing in a
corporate responsibility
ii. Agency problem: worried about conflicts of interest
i.
Facts: Most commonly used-> most firms listed on stock exchanges are corporation
VI. Closely Held corp. Vs. Publicly Held corp
a. Closely Held
i. Less common-> 3,600ish
ii. 4,000,000 complaines are closely held (more common)
iii. Few SH
iv. SH generally = managers
v. shares have not been offered for sale to the public and are not traded on a securities market
vi. Example
1. Uber/Airbnb
b. Public
i. Securities are open for sale to public-> traded on securities exchange
ii. Subject to Federal Securities Laws
1. Must “register” their securities for public sale with the Securities and Exchange Commission (SEC)
2. Must disclose wide-raging information to prospective SH/ potential investors.
iii. Separate control between BOD and SH-> SH cannot tell BOD what to do
iv. Example: dropbox-> recently went public
II. Purpose of Corporations
a. Right to incorporate is a ​right -​ > used to just be granted by government to buisnesses
i. Ultra vires (​ outside of power/purpose) conferred by government-> power revoked
b. Purpose= “any lawful business” ​DGCL § 102(a)(3)
i. gave corporations broad powers DGCL § 121, 122)
c. Can be philanthropic ​smith v. Barlow
VII. Funding [Capital structure]
a. Debt: borrow money from lenders
i. Overview
1. Creditors/lenders/debtholders
2. Interests can have different forms: contract, bonds, etc.
3. Every healthy company has debt
ii. Terms
1. Amount of debt= “leverage”
2. Maturity date= date debt must be repaid
a. Failure to repay= default
iii. Pros
1. Safer than equity-> get first amount of money
2. Tax-deductible
b. Equity: Borrow money from investors
i. Overview
1. Shareholders/equity holders
2. Focus is on interests of equity holders
ii. Cons:
1. Shareholders have higher risk because face the risk that company won’t be making any money
c.
d.
2. Equity is more expensive than debt ​→ ​why companies prefer debt
Company takes “optimal mix” of the two
i. Value Securities/Investments
1. Why: when companies raise money, they’re selling stock in themselves and we need to know what that stock
is worth
Dividends
i. Paid out of profits, not tax-deductible
III. Rules
a.
Philanthropy/ Charity
i. DGCL 122(9)​-> express power of corporation to make philanthropic donations
ii. DGCL §124​: ​ ​Ultra Vires no longer good claim, so TODAY→ would claim it was a breach of fiduciary duty
under
iii. Smith :​ Donations are okay.. so long as it is in the companie
iv. Dodge c​ ase: with shareholder’s interests
1. Can do humanitarian work as long as it is not the main interest
2. Business judgment rule applies
a.
Purpose:
i. set the operating rules for governing the corporation’s internal affairs, such as rules for meetings of boards and
shareholders and the obligations of officers. See ​DGCL § 109(b)
Scope:
i. Number and qualifications of directors, board vacancies, quorum and notice requirements for meetings of the board and
shareholders, any special voting procedures, and titles and duties of the corporation’s officers. KRB 191.
Who can adopt/amend bylaws? [​DGCL § 109​: shareholders can make bylaws; Board can only if permitted by charter]
i. Board​ can unilaterally adopt/amend bylaws IF charter gives BOD power ​Boilermakers
1. Board has power to amend and write bylaws (If charter gives board that power)
ii. §109 (a)→ Shareholders can adopt bylaws, and cant be divested of that power
iii. § 109 (a) SH can confer power to unilaterally adopt by managers ​boilermakers
iv. § 109 (b​) b​ ylaws can cover procedural/process rules-> traditional/ not substantive rules
1. Boilermakers ​-> forum selection clause okay because the rule was procedural (where suit brought, not
whether it could be brought)
Limits of BOD changing Bylaws
i. SH can’t be divested of their power to change bylaws
ii. SH can remove BOD
iii. Fiduciary duties of BOD
Policy: Power by BOD to unilaterally change bylaws affecting SH rights is okay because of limits
IV. Bylaws
b.
c.
d.
e.
V.
Charter
Creation
i.
b. Amendment
i. DGCL §242 → board + SH both need to be involved in amending charter (suggested by board and adopted by
SH)
c. Will include
i. : corporate name, number of shares authorized to be issued (that is, the corporation’s capital structure), the address of
the corporate registered office, and the name of each incorporator.
d. Can include
i. : the names of the directors of the initial board, the powers to be exercised by the corporation, and limits on directors’
liability.
VIII. Types of Governance
i. Traditional
1. SH
a. own Co., but elect/remove BOD to “manage” corp., and oversee BOD
2. BOD
a.
makes policy decisions, and selects and monitors officers, whose role is to implement the board’s
policy choices.
3. Rules
a. SH and BOD must act in groups
b. Mechanical rules about voting, etc
c. Officers
i. do not operate in groups. Individual officers – like the [chief executive officer, chief
financial officer, and secretary] ... – are ​agents ​of the corporation. Agency law... governs
the relationship between the principal (the corporation) and the agent (the officer). Stated
another way, the question of whether an officer’s act binds the corporation is determined
by whether [they] had agency authority to do so.
b. Owners
i. Shareholders or Stockholders
a.
1.
Rights
a.
to vote, to sue, and to sell.
IX. Board of Directors (BOD)
a. Power: Managerial
i. DGCL § 141(a)​ provides: “The business and affairs of every corporation ... shall be managed by or under the direction
of a board of directors, except as may be otherwise provided in this chapter or in its [charter].”
ii. Appointed by SH to manage the co.
iii. Authority is as a group, but can appoint a director
iv. NOT AGENT of SH-> SH not agent of BOD
b. Who?
i. Must be natural people
ii. Authority is as a group
c. How?
i. Majority vote at meetings (normally once a month)
1. may meet by conference call rather than in person.
ii. When BOD acts, it acts AS the corporation
d. What? [​DGCL § 141(a).​]
i. Makes policy decisions
ii. Appoints/manages officers
iii. Initiated/approves
1. amendments to the charter, mergers, sales of all the corporation’s assets, and dissolutions
iv. See bylaws above a​ nd ​charter
v. Declares/pays dividends ​Dodge v. Ford
e. Types
i. Inside Directors
1. Directors that are also officers (Agents of the corporation)
2. Executive directors: has a position at the company—also an officer of the company
ii. Outside/Independent director
1. Not officers (so not agents)
2. Can be employed by another corporation
3. Pros
a. Dispassionate/independent (don’t just want management)
b. B/c board is acting on behalf of the shareholders
c. More likely to whistleblow
d. More diverse expertise
iii. Ex. ​Facebook
1. Has both inside AND outside directors
f. Terms
i. Usually one year
ii. Unitary=
1. all directors come up for election at the same time/ in the same yea
iii. Staggered / classified boards.
1. ​DGCL § 141(d)​, they elect to be divided into classes (in Delaware, up to three classes), with one class of
directors coming up for election every two years (if two classes) or three years (if three classes).
2. Pros
a. Sense of continuity: Bd can’t be overturned at once
b. Experience of directors
c. Selfish motive: each director definitely has job for 3 years so not up for election every year
d. For SH: sense of continuity; is difficult to get rid of/get rid of policy
e. Good for incumbent S
3. Cons
a. Not good for new SHs
b. Afraid of losing control of company—Bd may entrench themselves, so could hold it up for up to 3
years
c. The staggered makes it far less desirable to take over the company because you can’t mess with
the BD
X. Officers
a. Agents of the corporation, but NOT agents of the BOD or SH
e. Appointed by the BOD to manage day-today operations
VI. Shareholders
VII. SH Right to Vote
a. Rights
i. Elect the BOD/ Charter Changes/ Dissolutions/ Mergers
b. Meetings
i. At least annual ​DGCL § 211(b)​;
ii. “special meetings” called by the BD, among other​s. DGCL § 211(d
iii. Procedural Rules (Set out in bylaws, subject to DGCL limitations)
c.
d.
e.
f.
VIII. Inspect
a.
1. Notice
2. quorum,
3. Voting
Proxy ​DGCL § 212​ (b)
i. SH can vote by proxy
ii. If proxy voting is allowed, then subject to “proxy rules” in the ​Securities and Exchange Act of 1934
1. Purpose= make sure SH is fully informed (corp. has to give SH info)
Voting for BOD
i. Plurality (not majority)
ii. Straight
1. Each share gets one vote for each open BOD spot->
2. Majority SH can elect every member of the BOD
iii. Cumulative ​DGCL § 214 (must be in charter)
1. Each share gets one vote per slot, but can cast them all for the same person
2. Allows minority SH some recognition of interests
3. Power offset if the board is Staggered
Voting for non-BOD
i. Votes tallied, must exceed prescribed threshold ​(in bylaws?)
Removal of directors
i. DGCL § 214
ii. Unitary Boards
1. SH may remove individual directors or even the entire BD,​ with or without cause​. ​DGCL § 141(k).
iii. Classified/ staggered BD,
1. SH can remove directors only​ with cause ​(unless the charter provides otherwise). ​DGCL § 141(k)​. What is “
iv. Cause= “fraud or unfair self-dealing” but probably excludes poor business judgment
SH can inspect the books and records of a corporation “for any proper purpose,” that is “a purpose reasonably related to such
person’s interests as a [SH].” See​ DGCL § 220
IX. SH Right to Sell
a. usually unfettered, except in close corporations which may restrict SH selling rights.
X. SH Right to Sue
[Prima Facie Presumption → directors are proper people to bring suit on behalf of corporation→ therefore, demand required
unless excused or futile]
a. Direct vs. Derivative Action
i. Injury and Remedy Test [​Seitz]​ [​Medtronic​]
1. Who suffered the injury?
a. Corporation= Derivative
i. Ex. Breach of fiduciary duty or harms imposed by 3P BOD fails to remedy
b. SH= Direct
i. Ex.: action by the BD to strip an individual SH or class of SH of rights to which they are
entitled under the charter, bylaws, or statute
ii. Ex. ​Grimses: ​Abdication of power by board
2. Who is entitled to the recover?
a. SH personally recover damages ($) OR
b. BOD is enjoined from taking action
b. Direct Action [injury/remedy suffered by the SH]
i. Ex. ​Van Gorkem→
​ SH suffered injury, would receive remedy
c. Derivative Action [Injury and remedy suffered by the company -> recovery goes to company]
i. Injured party
1. Corporation is injured
a. Medtronic ​[compensating officers/BOD is waste of company resources]
ii. Remedy
1. Corporation recovers (with small exceptions)
a. Why SH sue: cost/benefit + plaintiff's attorney's incentive to bring suit
b. Collective action issues→ overcome by plaintiff attorneys
c. Benefit→ for corporate actions, no benefit for BOD/officers to sue themselves
iii. Procedural hurdle→ Demand Requirement [​Zapata 385​]
1. [​Aronson​] → Must make demand to the BOD that they bring the suit, UNLESS
a. SH is ​excused​ from making demand (demand today would be futile) ​Grimes
1. Must be BEFORE demand made
ii. Majority of BOD has material financial/familial interest
iii. Majority of BOD is incapable of independence
1. [π must plead particularized facts that, when considered in π-friendly light,
create ​reasonable doubt​ about independence]
2. Personal + financial interest considered together. ​Delaware County Employees​
a. Personal Relationship
i. Close friend for 50 years
b. Financial interest
i. 30-40% of income from company controlled by ∆
iv. Underlying decision is not valid exercise of business judgement
b. OR, Board ​wrongfully refused​ pre-suit demand
i. Wrongful rejection decision→ BJR protection, so must rebut BJR (unlikely)
ii. Rebut BJR by raising reasonable doubt that board is entitled to BJR
1. Not good faith/informed, or
2. conflict of interest (could also use independence)
iv. Dismissal of suit by Company if Demand Excused
1. Independent Committee (generally 2 directors) formed by BOD, decides to terminate claim in good faith, and
made a reasonable investigation ​Zapata
a. § 141 (a) → BOD decides whether to litigate/terminate litigation
b. Independent Committee?
i. SLC has the burden of establishing its own independence by a yardstick that must be
“like Caesar’s wife”—“above reproach.
1. Shifts availability of discovery into various issues, including independence.
ii. Delaware County Employees v. Sanchez
1. Reasonable doubt the committee is capable of making an independent decision
2. Court reviews committee decision
a. Investigation was independent, in good faith, and reasonable ​Zapata
i. Ex. ​Oracle ​→ Stanford and members of the SLC were too close due to relationship
ii.
b. Court uses independent business judgement to decide whether to grant motion to dismiss
v. Recovery
1. SH wins
a. Goes to corporation
b. SH recovers litigation costs from liable party(filing fees, etc. But ​not a​ ttorney’s fees)
i. BUT, recovers attorney’s fees from corporation’s recovery by vindicating the claim
ii. If equitable relief-> still recovers from company if conferred benefit on corp.
2. SH loses
a. SH pays own fees and companies litigation costs
b. Court may order SH to pay def.’s attorney’s fees, if sued “without reasonable cause or for an
improper purpose”
c. Judgment on the merits is entitled to claim preclusion (res judicata)
vi. Policy
1. Cons
a. SH may be subject to plaintiffs attorney whims
b. SH may not know what is in the companies best interests
2. Pros
a. BOD may not always have incentive to sue (when against BOD)
b. Plaintiff’s attorneys encourage accountability
If 102(b)(7) doesn’t exist (​analysis chart​):
Did director exercise BJR?
Yes: Can π show fraud, gross negligence, self-dealing?
Yes: Can ∆ show ​entire fairness​?
Yes: not liable
No: liable
No: Not liable (BJR applies)
No: Was duty breached and, if so, was it the proximate cause of the harm?
Yes: liable
No: not liable
I.
Fiduciary Duties: Board of Directors
Overview
a. Directors
i. fiduciaries of the Corporation-> NOT individual SH
ii. Owe duties to principles
b. Enforcement
i. Not self-enforcing
ii. Enforced by SH suing
iii.No regulating body
c. Jurisdiction
i. Duties are equitable, so can be heard in the Court of Chancery
II.
Duty of Care
a. Overview
i. Definition: Failure to exercise due care
1. Decisions
a. Failure to exercise due care
b. malfeasance
2. Failing to make decision
a. (inattentive/inactive when they should have made decision)
b. Nonfeasance
ii. No set Rule
1. Courts won’t set rule, because of the BJR
2. Closest thing to rule: “discharge their duties with the care that a person in a like position would reasonably
believe appropriate under similar circumstances.”
b. Business Judgement Rule
i. Definition
1. Presumption that when BOD make a decision, they act “on an informed basis, in good faith, and in the
honest belief that the action was taken in the best interests of the company.” ​Van Gorkem
a. Shlensky v. Wrigley​(1968) KRB 225 ​(baseball lights)
i. “The decision is protected in the absence of fraud illegality or conflict of interest"
b. Kamin v. American Express Company(​ 1976) KRB 27​7
i. BJR protects because there is no fraud, and the decision was not arbitrary or
uninformed
ii. Distribution of in kind dividends instead of cash was stupid financially, but still protected
ii. Purpose
1. Courts don’t know as much about business as businessmen
2. Courts have limited resources
3. More uncertainty if no BJR. Don’t want to chill decision making of BOD.
iii.Effect
1. Relieves BOD of breach of duty of care->​Cinerama v. Technicolor
2. Exception: ​Waste​ ​"rare, unconscionable case where directors irrationally squander or give away corporate
assets" → no business purpose ​Disney
c. R​ebutting the BJR​ ​[not I​nformed (gross negligence), bad faith, or Fraud]
i. Failing "reasonably informed" Test
1. Tecnicolor
a. Rebut BJR by providing ​evidence​ of breach of duties
b. Show lack of care (uninformed decision) (​Disney)
c. Show lack of good faith (bad faith)
i. Subjective bad faith (acts to cause harm)
ii. Intentional Dereliction of duties or conscious disregard for responsibilities
1. Gross negligence (uninformed decision)
2. ​Smith v Van Gorkom (​ 1985) KRB 281
a. “prior to making a business decision, of all material information reasonably available to them."
b. Didn’t know Van Gorkum’s role in forcing the sale/Didn’t know intrinsic value of company /Two
hours of consideration was insufficient
3. Francis v Jersey Bank [​
a. No Basic understanding of the business (at the outset + keeping informed)
i. Francis: ​never visited offices/read financial reports
b. General monitoring (not detailed inspection of day to day activities)
i. Francis: ​Would have discovered wrongdoing if reviewed
c. Regular review of financial statements (No need to prepare financial statement)
i. BUT→ can have someone else review/advise them ​DLGC §141(e)​ [Directors can rely in
good faith on reports made by officers]
ii. Fraud
1. Kamin v. American Express Company ​(1976) KR
d. Effect of Rebutted BJR
i. Creates voidable act. Court looks at intrinsic fairness to the corporation and the corporation’s minority [SH]
e. If uninformed, can still use​ §144(a) s​afe harbor, BUT duty of disclosure to SH before vote
f. § 102(b)(7)
i. Enacted after ​Smith v. Van Gorkom
ii. Protects Directors from breach of DOC claims
iii.Allows companies to adopt charter provisions that protects directors from monetary liability of breach of the duty of
all care
iv.All companies have something like this
v. Purpose= encourage risk-taking by BOD
III. Duty of Loyalty
[No BJR protection for Duty of Loyalty claims-> Voidable if unsanitized, unfair transactiona. No "Unfair" Self-Dealing
i. Self-Dealing: when one person is on both sides of the transaction
1. Deal b/t company and company which boards directors are also directors or have a financial interest in.
2. Examples
a. A D or O borrows money from the corporation – or lends money to the corporation
b. A D or O sells their own property to the corporation – or buys property from th corporation.
c. A D or O of one corporation is also a director or officer of another corporation (or even owns
another corporation) that does business with the first corporation.
d. A D votes in favor of a lucrative employment contract with the corporation for their child
3. BUT→ if the interest is too small (ex. 1 %) then immaterial
4. Unclear whether not participating in decision absolves liability→ most likely still breach, unless safe
harbor
ii. Effect: Void or Voidable, unless BOD or Officers show entire fairness to the corporation
b. Entire Fairness: demonstrate “utmost good faith and most scupelous inherent fairness of the bargain”...careful scrutiny by the
courts.
i. Temrs= Fair
Ex. ​Bayer v. Beran​ – s​ inger in company ad campaign is CEO’s wife. Self-dealing, but fair because -> Miss
Tennyson can sing./ Not paid an outsized amount/ Campaign designed to serve company’s interests; didn’t
give her undue prominence/ Cost of program was reasonable/ Paid less than the others
2. Fairness requires market price.
ii. Process= “arms-length”
BUT Safe Harbor [​DE 144(a)]
1. Directors:​ [The transaction was fully disclosed​ ​to and approved in good faith by a majority of ​d​isinterested
directors​]
a. Fully Informed
i. Ex​.​ Benihana​→ fully informed= not explicitly stated, but BOD knew about Abdo’s
involvement, and knew material facts.
b. Disinterested Directors
i. Can be present, but could affect good faith of other directors
ii. Majority= over 50% (fleig mlar)
c. Must be before transaction
2. SH​: The transaction was f​ully disclosed ​to and approved in good faith by ​SH​;
a. Fully disclosed
i. all facts germane to a transaction ​Van Gorkum
b. Good Faith
i. Must be “disinterested” shareholders ​Fleigler
ii. Interested SH votes disregarded
c. Shifts burden of proof to plaintiff to disprove entire fairness
3. Fair: The transaction was otherwise ​approved by directors or SH and was fair​.
a. Proof of fairness [​Bayer v. Brenan]
i. Legitimate purpose/price
ii. Company received full benefit
1. Arms length
ii. Remedy→ If void/voidable, then breach of fiduciary duties
1. If not void/voidable, then no breach
2. Generally, transaction is not voided, only voidable, and damages are awarded
Corporate Opportunity Appropriating
i. Corporate​ ​opportunity? ​Broz ​Test [financial opportunity to make money]
1. Financial capacity to undertake opportunity
a. Broz​: ​: ​no
2. Line of business
1.
c.
d.
b.
a. eBay​→ broader line of business definition→ same technology
b. Broz​: Yes
3. Interest in opportunity
a.
​Broz​: No
4. Create Conflict of Interest? Arms length or nah?
a. Would taking opportunity compromise loyalty of director
b. Broz​: No, because Broz was competing with an outside company, not CIS
5. (separate factor) personal or professional capacity
a. Broz→If personal capacity, less likely company can reasonably expect the opportunity
b. If other people refuse to work with company, only director, more likely to be personal capacity
ii. Presented to board and granted approval?
1. Needs to be formal presentation to entire board, not just one at a time (​Broz​)
2. Fully infomed
3. After-event approval→ not technically approval, but consistent with fiduciary duty doctrine, where
authorization cleanses transaction
iii.Officer + agent -> Iut Broz is an officer of CIS, in addition to being a director. How does this change the analysis?
1. As an agent of CIS, he would probably owe the duties of an agent (per eBay; eg R(3) § 8.02) as well as those
of a director. As an agent
a. he cannot get material benefit arising out of position w/out informed consent – § 8.02
b. he cannot compete with P w/out informed consent – § 8.04
c. he cannot use confidential info for own benefit w/out informed con
iv.Remedy
1. remedy for appropriating corporate opportunities is for courts to require the D or O to
2. (1) hold the opportunity in trust and
3. (2) account to the corporation for any profit earned.3
Duty of Good Faith/oversight
v. Bad faith ​Disney ​ [Intent to harm of conscious disregard of duty]
1.
Test
a.
b.
#1 conduct motivated by subjective bad faith (i.e., an actual intent to do harm)
#2 “intentiona​l dereliction of duty, a conscious disregard for one’s responsibilities.”
c.
i. NOT just gross negligence
where the fiduciary acts with the intent to violate applicable positive law.” Disney
Disney
a. “consciously and deliberately failed to satisfy obligations”
2. Caremark
a. Need to have oversight/system of reporting
2. Stone v Ritter
b. Only liable when bad faith (conscious disregard for responsibility or intent to harm)
Policy: getting to horrible conduct, around ​§102(b)(7) ​(exculpation clause)
1.
ii.
iii.
Fiduciary Duties: Controlling Shareholders
I.
Majority Shareholders
a. Overview
i. Dominant/Controlling SH
1. (maybe)
a. Shareholders holding more than 50% of the are ​de jure​ controlling shareholders and, thus, should
assume that all their transactions with the company will be evaluated under the entire-fairness
standard./
b. Shareholders holding a significant block amounting to less than 50% of the vote should consider
whether they have sufficient influence over the board that they may be deemed ​de
factoc​ ontrolling shareholders, likewise subjecting their transactions with the company to
entire-fairness review.
2. Doesn’t have to be 50%. Enough votes that the SH can appoint a majority of the BOD, and thereby control
how the company is managed
3. Obtain control by paying a “control premium” ​Smith v. Van Gorkem
ii. Dominant SH owe fiduciary duties to company and minority SH.(if 100% SH, no fiduciary duties)
1.
b.
c.
d.
e.
f.
c.
There are no fiduciary constraints for SH unless they are controlling SH because they influence board
direction.
iii. Only duty is loyalty (no self-dealing)
iv. Duty of Controlling Shareholder is to act in ​disinterested fashion
Duty: No ​Unfair ​Self-Dealing
i. Self-Dealing
1. Definition: when a controlling shareholder received something from a subsidiary to the exclusion/detriment
of the minority shareholders ​Sinclair
a. Sinclair​: ​Choice to pay dividends was fair, even if it hurt the company, because minority SH also
received the dividends.
b. Zahn​: ​Self-dealing, because class A stock was treated differently than class B, and the minority SH
were not informed of the ability to convert to B, which benefitted the Controlling SH.
2. Zahn​: ​Controlling SH wasn’t transparent and didn’t fully disclose the true value of assets
ii. If Self -Dealing, look at intrinsic fairness of transaction
1. Controlling SH bears burden of proof
2. Unfair->
Safe Harbor (ish)-> only shifts burden to P for entire fairness standard (No BJR protection)
​144(a)
i. Void or voidable unless safe-harbor made out under ​144(a)
1. Approval by disinterested directors
2. Approval of majority of the minotiry shareholders
a. Requires good faith vote by shareholders after material facts related to interest disclosed
Wheelabrator
b. Majority of disinterested (minority) shareholders (​Fliegler v. Lawrence)​
ii. Result ​(W
​ heelabrator​)
1. Test is ​Sinclair ​fairness, but ratification shifts burden of fairness proof to plaintiff
a. If transaction gets votes of majority of disinterested SH, burden shifts, and plaintiff has to prove
transaction is ​unfair.
Policy: Majority SH more powerful, and interested so more concerned about SH
Breach
i. If self-dealing, and fails fairness test, and no Safe Harbor under 144(a)
ii. Liability provision: under common law of fiduciary duty
iii. Remedies
1. Rescission (void/voidable): transaction is unwound
2. Damages
)
Indemnification
I.
Articles
a. 145 (a) ​Grants Power to Indemnity (if GF)
i. Waltuch​[ Lost b/c Company did not have power to indemnify, unless officers acted with good faith-Waltuch hadn’t
established that he acted in good faith] So decision to indemnify would not be protected by BJR
ii. 145 (a) can be mandated in bylaws, but still need GF
b. 145 (b​) Grants power to Indemnity [unless adjudged liable] Can just settle to get out of.
c. 145 (c) ​Grants Right to Indemnity, if D/O won suit
i. Summary [even without proof of GF]
ii. W​altuch ​[won on 145 (c) because he did not have to prove good faith]
iii. Eliminates factual issue -> successful on merits, generally means you acted in GF
d. 145 (f) [limits]
i. Summary​: Indemnification granted by a/b not exclusive of other rights,, BUT
1. Cannot be inconsistent with the scope of companies' power to indemnify (ex. GF requirement)
2. Waltuch​ [uses 145 f-> claims that Bylaw article 9 grants separate right to indemnify]
a. Fails, because cannot be inconsistent with the scope of companies' power to indemnify
b. 9​th​Article cannot get rid of GF requirement
ii. Policy:
1. Permits corporation to make mandatory what is simply permissible by statute
2. 145 (a) can be mandated in bylaws,
e. 145 (E) Advancement of Expenses
i. Summary​: Entitlement to advancement of expenses CAN be granted in Bylaws.
1. Entitlement is separate from whether indemnification will be granted.
ii.
iii.
Purpose
1. Because he is going to have to repay advancement
2. Ability under 145 (e) granted
Limitations
1. Citadel v. Roven(​ 522)
2. “expenses” only includes “reasonable expenses”
Alternatives: Insurance
a. Permitted by ​DGCL § 145(g)​]
b. The language of D & O policies varies considerably from issuer to issuer.
i. no standard-form policy for D & O insurance.
c. Generally, covers
i. negligence, misconduct not involving dishonesty or knowing bad faith. alse or misleading statements in disclosure
documents
d. Does NOT cover
i. Deliberately wrongful misconduct, dishonest acts, acts in bad faith with knowledge therefore, or violations of
statutes…
e. expenses advanced by the insurer reduce the amount of insurance coverage provided
II.
Piercing the Corporate Veil
[When you can impose liability on SH for debts of corporation]
Overview
a. Generally, SH Liability limited to investment in company ​DGCL § 102(b)(6)
i. Shares may become worthless, but you personally wont have to pay more money
b. Rare
c. SH face liability-> directors/officers do not
d. Courts have never pierced veil of public corporations (only private)
e. Confusing case law
II. Pros/Cons
a. Pros
i. Encourages capital formation (few people willing to risk personal wealth)
b. Cons
i. Can lead managers to take excessive risks
ii. SH may monitor managers less
iii. Unjust for tort victims (can’t protect themselves from dealing with corporation)
III. ​Rules
Walkovszky v. Carlton
Facts: Taxi driver hits someone->
Issue: Did π fail to state a cause of action by claiming Δ was individually liable
Rule: New York Law-> either go to SH, or Enterprises
Can pierce veil to “prevent fraud or to achieve equity”
1. Agency​[Use general rules of agency -​respondeat superior - ​to determine liability
● If corporation is an agent of an individual, then individual can be liable for negligence
● If SH is (in reality) conducting business in individual capacity, liable
● If someone is using corporation to further personal gain, can be personally liable
●
2. Enterprise Liability
● Hold all corporations liable, not just “fragment” of substantively single corporation
Irrelevant Considerations
1. Deliberate planning to cabin liability
2. Assets distributed to SH once accumulated
3. Carried minimum insurance required
Holding​: In order to find ∆ liable, π needed to allege that Seon’s business was being conducted by the SH, Carlton, in his individual
capacity.
● Π needed to allege that Δ Corp. was a “dummy”, which he did not prove
Dissent​:
1. Corporations were ​intentionally undercapitalized​, to avoid responsibility for debts.
Tuch​: formal approach-> in order to allege COA, need to allege formal distinction-> need evidence on its face, not substantive.
I.
Sea Land v. Pepper
Facts:​∆ defaulted on payment-> π sued for break of K -> ∆ dissolved/insolvent
Issue​: Can π “pierce corporate veil” and recover from Δ corporation’s owner (Marchese)?
Rule​: If veil pierced, owner liable, and then “reverse piercing” means individual’s other corporations can be used to satisfy judgement.
Van Dorn Test
1. Unity of Interest/Ownership​[similar to majority test in Walkovsky]
Failure to maintain corporate records/corporate formalities
i. Sea Land​-> no articles of incorporation/bylaws/same office for all corp.
b. Commingling of funds/assets
i. Sea Land​-> borrows $ from other corp. interest-free/ used $ for personal expenses
ii. Walkovsky -​ > no allegation that ∆ treated bank account as his bank account
c. Undercapitalization
i. Walkovsk​y-​ > taxi company undercapitalized
d. One Corp. treating assets of another Corp. as its own
i. Sea Land​-> borrows $ from other corp. interest-free/ used $ for personal expenses
Public Policy ​[Additional requirement to Walkovsky]
a. Sanctioning of Fraud
i. Sea Land​-> unsatisfied judgement not enough
b. Promotion of Injustice
i. Sea Land Examples (208)
1. individual claiming adverse possession of land owned by corporation he owns = injustice
2. Two Cosigners on a debt formed corp., which paid off note and then sued 3​rd​co-signed for amount of the
debt= Injustice
i. Holding: Court found injustice (eventually)
a.
2.
Mergers and Acquisitions
Types of Transactions
1. Purchase of Assets ​[A buys all/substantially all of T’s assets]
a. Transaction
i. Co. A gives Co. B $/Shares in exchange for B's Assets.
b. After
i. If Cash Used→ A + T's assets = 1 Company | T - Assets = Other Company
ii. If Shares Used → A + T's Assets
c. § 271 (a)
i. SH of acquired company must approve
ii. Just Board of acquiring company must approve (no SH approval needed)
d. Result
i. Assets changed from T to A
ii. T continues, owned by former SH->assets= cash or shares A gave in exchange
b. Pros: A not subject to T’s liabilities
2. Private Purchase of Control Shares​ [Offer to buy controlling # of shares]
[​Zetllin​ | ​Perlman​] [Comparison to ​Sinclair – ​SH exercising right to sell shares, not duty of loyalty]
a. Transaction
i. A buys controlling block of shares from controlling SH
j. After
i. If shares
a. T is unchanged, only controlling SH of T changes (A.now)
b. A is controlling SH of T→ controlling SH of T is also SH of A.
i. If Cash
c. T's controlling SH is A
d. A is still owned by same A SH
a. Result
i. Change of control
ii. Hostile takeover→ target board approval not needed
b. Issues
Controlling SH may not sell
a. Benefits
i. Private benefit of control
1. Increase wealth at expense of minority SH
b. Public benefit of control
1. Purpose of becoming controlling SH is to increase profitability of the entire company
b. Rule
i. Market Rule (U.S.) [​Zetlin v. Hanson]​ [Rights and duties b/t parties, but not SH]
1. Acquirer can offer premium solely to SH needed for controlling shares (absent bad faith)
BUT softened b/c
a. Generally, → because Acquirer will go to BOD to get nonpublic info, BOD will advocate for
minority SH
b. §​ 203 (a)(1)
ii. Benefits
a. Easier to buy control
b. Cheaper/Efficient
Equal Opportunity Rule (Europe) [​Perlman v. Feldmann]​
1. Acquirer must offer premium price to all SH, not just SH needed for control
2. Discourages more good transactions AND more bad transactions
2.
ii.
Tender Offer​ [Offer to buy all shares @ premium -> conditioned on getting controlling %-> no BOD necessary (hostile)]
a. Transaction
i. A offers to buys shares of T, if A gets certain %.
b. Approval
i. BOD approval not necessary-> Hostile
c. Regulation
i. Regulated by Federal Securities law (​WIlliams Act​)
a. Regulates tender offers for more than 5% of securities of a company
b. §14(d)- Disclosures required by acquirer
2. Early Warning System​ Williams Act §13(d)
a. Alerts public/company managers when anyone gets more than 5% of co’s voting stocl
3. Disclosure Williams​ §14(d)(1)
a. Identity/financing/future plans of tender offeror
b. Includes plans for going-private transaction
4. Antifraud Provision ​Williams §14(e)
a. Prohibits misrepresentations, nondisclosures, and “any fraudulent, deceptive, or misrepresentative
practices”
5. Term Regulation Rules ​Williams §14(d)(4)-(7) and 14(e)
a. Dozen rules regualting substantive terms of tender offers
b. Ex. How long offers must be left open/ when SH can withdraw tendered shares/how bidders must
treat SH
c. 14(e)(1) ​tender offers must be left open for minimum of 20 business days
d. 1​4(d)(10​) Bidders must open tender offers to all SH and pay all who tender same “best” price
d. After
i. Shares
1. T owned by T SH who did not sell→ A owns stock of SH that DID sell, and A/T SH that did Sell
2. A owned by A SH and T SH who DID sell to
ii. Cash
1. T owned by T SH that did not sell
2. A owned by A SH
b. Result
i. If enough shares are purchased, control transferred
ii. Causes market price for stock to rise, due to speculators (arbitrageurs) buying and selling
2. Compulsory Share Exchang​e [Acquirer gets all shares in one transaction-> negotiated w/ BOD]
[​not in Delaware​]
a. Transaction
i. A negotiates w/ BOD. BOD recommends plan to SH. SH approve in majority vote.
ii. A acquirers majority, remaining SH are required to tender shares. Shares are distributed to A’s SH pro-rata.
b. Approval Required
i. Majority of SH must approve, then minority forced to sell
j. After
i. If Stock
2. T→ owned by A→ owned by A SH/T SH
i. Cash
3. T→A→ASH
3.
a.
4. Wholly-owned subsidiary
Differs from Tender offer b/c A entirely owns T
Merger​ [one company merges into another co.-> not hostile- A assumes rights/liabilities]
a. Transaction DGCL ​§259(a)
i. T merges <-> into A
b. Result
i. A inherits the assets and liabilities of T
ii. Shares
1. A (+ T's assets/liabilities) → owned by A SH and T SH
ii. Cash
1. A (+ T's assets/liabilities) → owned by A SH
b. Approval (DGCL = baseline, Charter can require higher voting requirements)
i. For T
1. BOD ​§251 (b)
2. Majority of SH ​§ 251 (c)
a. Don’t need all SH, so controlling/majority SH can take over company by merging with subsidiary
b. BUT SEE appraisal→ equivalent of damages
ii. For A
1. BOD ​§251 (b​)
2. Majority of SH ​§ 251 (c)
a. Unless→ §251 (f)
i. Charter not changed
ii. Securities not changed
iii.
Outstanding stock of survivor increased by <20%
1. Purpose→ rights not affected enough
b. Controlling SH
i. Can merge with corporation to gian 100% ownership- folding in of corporation into its subsidiary
c. Regulatin
i. By Federal Securieties law
1. Information disclosure= strict burdens
2. Ensure SH receive full/accurate info . so they can vote informed whether to approve
d. Short-Form Merger DGCL §253
i. 90% of SH can buy out minority SH
ii. Right of appraisal §262
1. Appraisal is ONLY remedy (no recission)
2. Combined Transactional Forms​ [not tender offer]
[Deleware alternative to compulsory share exchange]
a. First step tender offer, followed by second step, Merge
b.
§ 251 (h) -> ​Facilitates second step merger to quickly follow first-step tender offer
5.
Merger Freeze-Outs
I.
Freeze-Outs (AKA Going-Private) (Controlling mergers)
a. Definition
i. Controlling SH gets full control over corporation by merging w/ corporation for cash. (Cash-out merger)
ii. Co. Becomes wholly owned//closely held
b. SH Duty of Loyalty [
i. Always implicated by Freeze-outs
1. Because SH will be “cashing out” minority SH, thus treating them differently
ii. Sinclair​-> controlling SH owes duty of loyalty to minority SH (no self-dealing)
iii.
iv. SH has BOP to show deal is intrinsically fair to corporation
c. Kahn Safe Harbour (BJR if Met)
i. The controlling stockholder conditions the procession of the transaction on the approval of both a special committee
and a majority of the minority stockholders;
ii. The special committee is independent
d.
iii. The special committee is empowered to freely select its own advisors and to say no definitively;
iv. The special committee meets its duty of care in negotiating a fair price;
v. The vote of the minority is informed; and
vi. There is no coercion of the minority stockholders
Non-Kahn Test (Entire Fairness Standard of Review)
i. #1 Fair dealing [Procedure= arms length] ​Weinberger
1. Test
a. how and when it was initiated,
b. where it was negotiated,
c. how it was approved.
i. Must be fully informed vote by SH ​Weinberger
ii. Independent negotiating committee of outside directors
2. Purpose
a. duty of loyalty, as manifested by a showing of good faith and candor, is inherent to fair
dealing. When directors or controlling shareholders are on both sides of the transaction,
it is difficult to show that the transaction is indeed one at ​arms-length.
3. Planning: Directors can try to meet their burden by setting up an independent negotiating
committee of outside directors.
4. NOT business purpose test
ii. #2 Fair price
1. terms of the deal. To determine whether there was a fair price, all relevant factors that may
affect a company's stock value are considered.
iii.
Remedies
1. Failure of entire fairness
a. Recission
b. Recissionary Damages
i. Financial equivalent of what recission would bring, if possible
ii. Can bring as a class action, (SH don’t have to prove they dissented from merger)
2. Appraisal DGCL § 262
a. Purpose: to counteract the right for mergers to get less than unanimous approval
i. (Prior reason) Provides liquidity event for SH who didn’t want to be in new companybut now liquidity not normally a concern
ii. Modern Concern is for
1. companies not traded on exchange, or
2. SH vote is affected by conflicted controlling SH
iii. W/out conflicts of interest, arms length mergers achieve roughly market price, so
disagreements arent worth adjudicating
b. BOP
i. Minority SH need to show they ​properly dissente​d from the transaction to seek
appraisal
ii. Don’t need to show proof of fiduciary duty breach
c. Qualifying Mergers
i. Corporate mergers
d. Charter
i. Charter can include provision granting SH appraisal rigghts in other circumstances
ii. Ex. Sale of substantially all assets \ charter amendments
e. Remedy
i. Right to be bought out at fair value
ii. a pro rata share of the value of the company without regard to any gain caused by the
manager or its expectatio
iii.
Revlon Duties
Trigger Point​ (pg. 821/ ) (application of Uncoal enhances scrutiny standard under Uncoal)
1.
Break up [When corporation takes action which will caus​e break-up​ of corporation] ​Time​ 820
a. Initiates active bidding process (​Time p. 820)
abandons long-term strategy in response to bid ​(Time​ p. 820)
Ex. ​Revlon → Change was when price shifted to $50/$53
Ex. ​Paramount v. Time p. 820→
​ no, bc didn't abandon long-term strategy due to bid that will break up company
Ex. ​Omnicare , Inc. v. NCS Healthcare Revlon duties not triggered, because long-term strategy to merge with Genesis not
abandoned
Change of Control [When corporation undertakes (embarks on) action which will cause ​change of control] ​QVC​ p. 831
a. Ex​. ​Paramount v. Time
i. Being "in play"/up for sale insufficient
1. Lyondell
ii. Defensive strategies insufficient
b. Ex. ​Paramount v. QVC
i. Control of public SH (current majority) to new majority = ∆ of control
b. Will SH continue to own company= relevant question.
c. Question 1 pg. 834
i. Depends on whether there is a change of control
ii. 51% Paramount 49% Viacom (owned 85% by redstone)
1. So, likely that 40% owned by Redstone is the majority, because of dispersed 50% shares among other
SH/maybe non-voting
b.
c.
d.
e.
2.
Revlon Duties
1.
Duty to get Best value Reasonably available to SH
a. Process
i. Up to the board
1. Auction, private negotiations
2. One-on-one auction + market check
3. Lyondell v. Ryan →
​ no set course of conduct for BOD, multiple ways to fulfill
ii. Ex. Paramount v. QVC
b. Value
i. Value can include more than just cost
ii. SH only consideration (​Revlon​)
1. Consistent w/​ Dodge v. Ford
ii. Can consider likelihood deal will close
iii.
Stock may increase in value more with one company
Unocal Duties → Defensive Mechanisms [DGCL §160] [​Unocal​ analysis]
[Enhanced Scrutinuy→Intermediate standard [No need to show fairness of transaction, BUT BJR not automatic→ in
between BRJ and normal standard]
●
1.
Because concern BOD may be interested is "onmipresent"
Step 1: Board reasonably believed the bid poses "legally cognizable threat" (danger to corporate policy and effectiveness)
a. Reasonable investigation
i. Advice by legal/financial advisors ​Airgas, Inc.
1. 3 outside/independent financial advisors more than sufficient​ Airgas, Inc. / Unocal
b. Acted in good faith
i. Approval by majority of outside/ independent directors ​Airgas, Inc.
1. Because omnipresent specter of self-dealing directors
b. Legally Cognizable Threat [need to actually discuss threats in board meetings/deliberations]
i. Substantively Coercive
1. Inadequate Value
● ($54 of securities in ​Uncoal​ doubted to be worth $54 because “junk bonds”)
● "The risk that [Airgas's] stockholders might accept [Air Products'] inadequate Offer
because of ‘ignorance or mistaken belief’ regarding the Board's assessment of the
long-term value of [Airgas's] stock."
● Paramount → not inadequate
● Omnicare, Inc. v. NCS Healthcare ​→ ​without defensive measures-might lose genesis
offer and be left with no comparable transaction
SH Mistaken (stupid)
● Fear SH will mistakenly reject BOD's correct view of companies value because of limited
capacity or mistaken belief BOD is inaccurately valuing company
● Ex​. Paramount → threat is that SH will accept bad offer/ be wrong/stupid
ii. Structurally Coercive
1. “the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender
decisions.” ​Unocal “​ Compelled to tender to avoid being treated adversely in the second stage”
● Back end would get junk bonds if they didn’t tender early) ​Unocal
● Incentivizes SH to sell early/front end
● Ex. Paramount → all cash/call shares not coercive offer
● Not structurally coercive-> ​Airgas
ii. Opportunity Loss [not enough time for better offer to emerge]
● “hostile offer might deprive target stockholders of the opportunity to select a superior
alternative offered by target management or ... offered by another bidder.”
a. SH will choose inadequate offer because better offer hasn’t been presented
b. Issue of timing→ worried if offer had severe time limit
c. Ex. ​Airgas 1​ 6 months long enough-> no opportunity loss risk
Step 2: Reasonable response to reasonable harm (see pg. 799 for list of harms considered)
a. Enhanced Business Judgement Review
i. Balancing test
ii. Interests other than SH can be taken into account (under
b. Reasonable Response [Draconian? (​Unitrin​ p. 835)]
i. Not Coercive
1. "coercive if it is “aimed at ‘cramming down’ on its shareholders a managements sponsored
alternative.” ​Airgas ​(maintaining the staus quo for long-term management not coercive)
2. Ex. ​Unitrin→
​ change of control from proxy battle still possible
3. Ex. ​Omnicare , Inc. v. NCS Healthcare
● Enforced management-sponsored deal on minority SH
4. Airgas ​(maintaining the staus quo for long-term management not coercive)
ii. Not Preclusive
1. Does defensive measure prevent deals?
2. "preclusive if it “makes a bidder's ability to wage a successful proxy contest and gain control [of
the target's board] ... ‘realistically unattainable.​’ Airgas
3. If deal is realistically attainable, defensive measures are not preclusive ​Airgas
4. Ex. ​Airgas​→ change of control from proxy battle still possible
● Court says even though poison pill can’t be redeemed for 2 years because of staggered
board, still not preclusive
● Reasonable response
2. Ex. ​Omnicare , Inc. v. NCS Healthcare
● "Alternative deal not realistically attainable"
i. Because §251 (must present deal to SH) + SH voting agreement (mandatory
vote in favor) + No fiduciary duty out
ii. "Within the range of reasonableness" ​QVC
1. If within range, better option not relevant
2. Ex. Uncoal Discriminatory self-tender offer designed to protect back end = reasonable
3. Ex. Paramount→ Board has long-term strategy, and executing that strategy, so course
reasonable
● If BOD cramming
IF intermediate standard passed
i. BJR protection applies
Concern: board may be blocking offer because they want to keep their jobs:
2.
2.
c.
ii.
Reasonable belief bid was a threat to corporate enterprise
Defensive Measures (​Paramount v. QVC)​ (​Airgas​)
1.
Poison pill
a. Purpose
i. Makes purchase prohibitively expensive
ii. Allow board to use as negotiating device to get more money
1. Board can redeem pill if super high price offered
b. Mechanisms
i. After set percentage (ex. 20%) of stock purchased→ SH other than 20% rights get activated- right to
buy stock in same company at cheap price
ii. Makes 20% owner percentage much lower, because new stock issues dilutes 20% stake
iii.
Kills deal, because uneconomic to still acquire company
b. Limits
i. Time
1. Cant block bid forever → purpose is to encourage greater price
2. Because duties change during transaction from defending company to Revlon auction price duties
b. Response
i. Proxy contest→ get SH to replace the board
1. Because acquirer cannot become majority SH, response is to replace the board
a. BUT staggered board means board could take years to replace through annual meetings,
so…
ii. Call special meeting→ BUT ​§ 141 (k) = Staggered BOD cannot be removed without cause unless charter
provides otherwise
1. Ex. ​Airgas
a. St​ aggered board, BUT charter provided that staggered board could be removed without
cause
b. Needed 67% of all outstanding shares to vote→ highly unlikely
b. Best Option:
i. Staggered board + Poison pill almost impossible to overtake
f.
Ex. Revlon Unocal Test
a. Reasonable threat? Yes→ at time of enactment, $47.50 was undervalued bid, and pill was reasonable response
b. Redeeming pill during offer w/ white night was in line w/ fiduciary duties was timely removal
Dead-Hand Pill p. 836 ​Toll Brothers
i. Only current BOD can redeem pill→ not newly elected Directors
5. Unreasonable Under Uncoal
a. Coercive
a. Forced SH to reelect incumbent directors
b. Cant give some directors more rights than others
b. Preclusive
a. Made takeover prohibitively expensive/impossible
b. Disenfranchises SH wo want to elect new board to redeem pill
Notes w/ covenants
a. Power?
i. Yes, under §141/160(a)
b. Reasonable belief of threat?
i. Yes, on Aug. 26 reasonable threat
b. Reasonable response to threat?
i. Yes- because redeemed before revlon duties triggered
Lock-Up
a. Definition: Agreement to sell crown jewels to other party (white knight) no matter what
b. Issue: May deprive SH of right to vote on transactions
c. Example:​ Revlon Breach→Put in place after revlon duties triggered, so impermissible
b.
2.
2.
Example: ​Omnicare , Inc. v. NCS Healthcare
i. Lock-up maybe irrelevant, because fiduciary-out clause means that you can still get out
ii. Dissent in Omnicare→ value maximizing deals may not occur without Lock-Up
No Shop Provision
a. Prevents itself from further negotiation with 3rd party
b. Breach→ ​Revlon​ Put in place after Revlon duties triggered, so impermissible
c. Get around it by putting in fiduciary duty carve-out
Cancellation Fee
a. Reasonable because wont make bid if they don’t get compensated if it falls through
b. Market practice→ generally allowable
c. 3-4% of deal value common
d.
2.
2.
If breach of duties→ no BJR protection, so enjoined
Cases
Authority
​Mill Street Church of Christ v. Hogan ​(1990) [KRB 13] ​[Implied Actual Authority]
Facts​: Bill (A) is working for P painting church. A hires his brother, Sam. Sam is injured. P did not tell A he could hire Sam, but A had previously
hired Sam.
Issue​: Did Bill have authority to hire Sam, such that P is liable for Sam's injuries?
Rule​: ​Implied Actual Authority​= authority to take action, implied in manifestation, and includes acts necessary or incidental to achieving P's
objectives
§ 3.02 → Implied Actual Authority
Holding: ​Implied Actual Authority exists:
Past conduct/manifestation
Past authority to paint and engage help
Task
Painting job required two people
Th
​ ree-Seventy Leasing Corp v. Ampex Corp (​ 1976) [KRB 16] ​[Apparent Authority]
Facts​: 370 (3P) Ks with Kays (A), who is a sales agent of Ampex (P)
Offer to buy is made, on credit.
A sends letter confirming shipment.
A is expressly prohibited from entering into K's on A's behalf.
Issue​: Does Kays have authority to enter into K on behalf of Ampex?
Rule​:
Actual Authority = when A reasonable believes he has authority
Apparent Authority =
Holding​: Actual Authority→ No, because A is expressly prohibited from signing K.
Apparent Authority→ Yes
A was held out by P as a salesperson, and generally salespeople can enter into K's
Ampex allowed A to send K to 3P, and K did not specify who could sign K
II. Questions
a. 1. A is the Chief Executive Officer of P Corporation, which manufactures aircraft engines in two factories in upstate New York.
Purportedly on behalf of P, A enters into a contract with a developer of theme parks to convert one of the factories into an
amusement park for children, claiming that it will be operated by P Corporation. P Corporation has no comparable business
operations, nor do other members of its ind
i. Actual authority. The issue is whether someone in A's position would reasonably believe (§ 2.01) P wanted A to act
that way. Unlikely, because it falls outside the standard (or even risky) operations for a company of P's type. Caveat: if
it was extremely profitable, could argue it.
ii. Apparent authority: Yes- because P made A CEO, so belief A can act on behalf of P is reasonable → but maybe
not,
b. 2. P Corporation owns several breweries, one of which is managed by A. P Corporation's executives tell vendors that A has
authority to buy supplies for the brewery “as A determines necessary, based on A's superior knowledge of local conditions.”
Disenchanted with A's decisions but not wishing to terminate A, P Corporation's officers send a letter to all 2,000 known vendors
to the brewery stating that ​A's authority to purchase supplies in excess of a stated amount now requires the approval ​of P
Corporation's newly appointed Vice President for Production Management. P Corporation sends the letter through the U.S. Postal
b.
Service and, additionally, faxes a copy of the letter to all known vendors. The posted letter and the fax reach all vendors with the
exception of T, a bottle vendor. Neither reaches T as a result of the postal authorities' misdirection of the posted letter and an
unnoticed and inexplicable malfunction in telephonic transmission of the fax. T does not otherwise have notice of the limit placed
on A's unilateral authority. A enters into a contract with T to buy bottles in a magnitude in excess of A's unilateral authority. Is P
Corp. bound by the contract?
Yes, because A had apparent authority (§2.03) to make the purchase. (P's original letter gave A authority)
Ratification
Boticello v. Stefanovicz​ p. 25
Facts​: Disputed real property sale agreement. One party w/ undivided half interest Walter) agreed to sell, the other (mary) didn’t. Buyer thoguht
Walter had power to sell, executed K. Later, Buyer wanted to excersize option to buy property, but Walter/Mary refused to honor K
Issue:​ Is K valid even though Mary did not agree to K?
Rule: Ratification requires intent/ manifestation by P to ratify + full knowledge
Receipt of benefits does not equal ratification without knowledge/manifestation of assent
Held​: Mary did NOT ratify by remaining silent after Walter signed lease
In executing the lease and option to purchase, was Walter acting as A for Mary?
§1.01 No, because W never represented that he was acting for M . M did not manifest assent. W not subject to M's control (maybe price)
By her conduct afterwards, did Mary ratify the agreement entered into by Walter?
No, because 1 Conduct pruportedly on behalf of another 2)) no intent to ratify §4.01(2) 3) No manifestation of assent 3) no knowledge of
material circumstances §4.06 4) No partial ratification possible
§ 98 acceptance of benefits not enough → didn’t assent to K to lease w/ option to buy
What could the plaintiff have done to prevent the outcome in the case?
He could have made sure W had the power to K. was the sole owner of the land
V. Questions
a.
P owns an advertising agency and employs A to service existing accounts by purchasing space in advertising media. A does not
have authority to set terms with clients. A executes an agreement with T that commits P to develop a new advertising campaign
for T. P learns of the agreement and then receives payment from T for advertising services that P has ​provided previously.​ Does
P's receipt of payment for prior services ratify the unauthorized agreement made by A?
i. Actual authority? Not setting new terms, just previous terms?
ii. No, because P has still not agreed to the new terms. No manifestation of assent to new agreement. (Correct)
b. ·2. Same facts as above, except that P accepts and retains ​advance payment m
​ ade by T for the new advertising campaign. By
accepting and retaining the payment, has P ratified the \ unauthorized agreement made by A?
i. Yes, because A acted on P's behalf, and the receipt of payment manifested assent that P would provide the
advertisement (or justifies an assumption by T that P will provide the service).
ii. Assuming that P knows the terms and doesn’t (Correct)
c. P deals in components of disassembled buildings and employs A to purchase such components on P's behalf. P tells A to pay no
more than $1000 for any single component, which is the standard limit in P's industry for agents like A. On P's behalf, A enters
into a contract to buy, for $10,000, a large chandelier from T, who has purchased an abandoned mansion and is disassembling it.
A does not tell P about the contract. T contacts P to make arrangements for delivery and tells P the terms of the contract,
including the origin of the chandelier. P asks T to deliver the chandelier the next day. Has P ratified the contract?
i. Yes, because P has full knowledge, and manifests assent/ causes T to reasonably assume that P will go through w/ K
ii. Accepting delivery= may
Agency Law
Gorton v. Doty
Facts: ​Doty (R) lends Garst her car to drive students to the game. Garst crashes, Student (P) is injured.
Issue: ​Is Garst the agent of Doty when he drove her car to and from the game?
Rule: ​Agency Requires ​[R§1.01​]
1. Mutual manifestation of assent?
Yes, because she volunteered her car
2. A acting on P's behalf?
Yes, because she could have driven the car herself, but designated Garst w/ express condition he drive.
3. A subject to P's control? [​Garst​]
No. Court found she had control, but in reality the condition that Garst drive the car was insufficient
Holding: ​Yes, agency. But control was weak, and most likely considered the fact that Doty had car insurance
Dissent→ insufficient control to constitute agency relationship
Difference in definition of Agency relationship- Dissent= Agency requires a request instruction or command
Majority
Conclusion: ​Dissent's statement of the law is incorrect, but likely that relationship didn’t rise to level needed for control prong.
Policy​: When should we impose liability on one party for the misconduct of another?
When recognizing an agency relationship compensates an uncompensated victim (not a good reason)
Culpability
If potential agent is blameworthy, should be liable
Deter Wrongdoing
If someone has control over resource/benefits, should also bear liability for resource
Threat of liability increases precautions/awareness
Tort→ Tuch: agency law could be used to compensate a sympathetic party
A Gay Jenson Farms Co v. Cargill, Inc.
Facts​: Breach of Contract: Warren Grain owes money to Jenson Farms, goes bankrupt-> Warren severely in debt to Cargill when they fail-> Cargill
had right of first refusal/ contract with Warren Grain-> Warren Grain gave Cargill control over policies, due to severe debt to Cargill
Issue​: Agency relationship or Lending relationship? Does the contractual relationship between Warren and Cargill create an agency relationship such
that Cargill would be liable for Warren's debt to Jenson Farms?
Rule​:
Mutual manifestation of assent?
Yes, because warren allowed Cargill to instruct them and control company policies
A acting on P's behalf?
Cargill lent money
Interference with internal affairs which = de facto control over company
A subject to P's control?
Holding​: Relationship between Cargill and Warren extended beyond the normal lender-debtor relationship-> yes agent
Conclusion:​ Distinguishing agency relationship from Control
Policy​:
1. Advice
Avoid risk of agency relationship by following formal, standard procedures, keep relationship minimal
Cargill had active control over warren, could have monitored them to make sure they paid Jenson for grain
Or could have paid more for the grain
2. Economic Perspective
Internalize externalities
“Under this, we would want a person that controls an activity (and that thereby enjoys the benefits of that activity) to face the costs that the activity
imposes on others. Otherwise that person may engage in the activity in socially harmful ways – by enjoying its benefits but imposing its losses on
someone else. This is why we want the owners of factors to pay for the pollution they produce; having to bear the cost of the pollution, they will
minimize it. Otherwise, they might simply run their factory as often as they like, enjoying all the benefits of the factory, while leaving others to bear
the costs. These third party harms are called externalities.” - Tuch
“So, as a policy matter, we might think that because Cargill controls Warren and enjoys all the benefits of controlling Warren (cheap grain) that
Cargill ought also to bear the costs that Warren imposes on others. Cargill wants the benefits of that close, controlling arrangement, does it? Then it
should bear the costs, not because it is “right” or “fair,” but because if Cargill bears the costs it has incentives to minimize the harm that Warren
imposes on third parties (the farmers).”
Party best able to avoid loss should bear it, so they are incentivized to prevent loss in the future
Cargill:​ “Warren causes a loss. Either Cargill or the farmers have to bear the loss. Which party should? The farmers might have protected themselves
by ensuring they got paid in cash or insisting on a bank check. But they may have lacked the bargaining power to negotiate either. They could instead
have tried to check that Warren had the capacity to pay them, although Warren might have been unwilling to disclose its finances. What could Cargill
have done to avoid the losses? It had significant power over Warren Grain. It had access to its financial accounts. It provided it with funding. It could
much more easily have prevented the loss by ensuring that Warren Grain had the capacity and did in fact pay its bills. So we think the loss ought to
fall on Cargill, giving it incentives to prevent the loss, rather than putting the loss on the farmers, who had limited capacity (by contrast) to prevent
the loss.”
​Gorton v. Doty:​ Garst caused harm. Should Doty (the teacher) or Gorton (the student) bear that loss? Well, who was best able to avoid the loss?
There was probably little that the student could have done. It’s not entirely clear what the teacher could have done, but she could probably have done
more than the student – for example, by at least paying some regard to Garst’s ability as a driver and the condition of her car. It’s a very close call,
but we might agree with the result that Doty should have been liable. Note here that we think the court’s analysis is wrong – it’s tough to see what
control Doty exercised over Garst.
XI. Questions
XII. 1. P owns a shopping mall. A rents a souvenir retail store in the mall under a lease in which A promises to pay P a percentage of A's
monthly gross sales revenue as rent. The lease gives P the right to approve or disapprove A's operational plans for the store. Is A P’s agent
in conducting her souvenir business?
XIII. 2. Same facts as 1 except that A additionally agrees to collect the rent from the mall's other tenants and remit it to P in exchange for a
monthly service fee. Is A P’s agent in dealing with other tenants?
a. Yes, most likely, because an arrangement like this often includes an element of control
XIV. 3. Same facts as 1 except that the agreement under which A agrees to collect rent for P provides that “A acts as an independent contractor
and not as an agent.” Is A P’s agent?
a. 1.02→ only consideration, separate agreement does not matter.
XV. 4. Same facts as 1 except that JP Morgan lends money to A which A does not repay. Is P liable for that debt?
a. No, because there is no agency relationship at the time A borrowed money from JP Morgan
Estoppell
Hoddeson v. Koos Bros ​p. 29
Facts: X pretended to be a salesman and collected payment from a customer
Issue: Is P estopped from asserting lack of agency relationship as a bar to liability to 3P?
Rule: Where P in dereliction of duty enables non-agent to conspicuously act as an agent and transact with patron....”the law will not permit the
proprietor defensively ro avail himself of the imposter’s lack of authority and thus escape consequential loss thereby sustained y the customer”
Held: No apparent authority, because P did not manifest anything about X. BUT estoppel because store had obligation to protect customers
III. Questions
a.
A, who is impecunious, borrows an expensive necklace from P. Wearing the necklace, A enters an art gallery owned by T. T
believes the necklace to be P's, having seen photographs of P wearing it. A purports to buy an expensive painting on credit on P's
behalf. A takes the painting and disappears with it. T sues P to recover the purchase price of the painting, consistent with the
credit terms to which A agreed.
i. Answer: No estoppel; that is, P would not be estopped from denying that A was acting as P's agent. Either P’s action
did not cause T to believe that the purported agent has authority or T’s action in detrimentally changing her position
was not justified/ reasonable.
Principle/Agent K Liability
Watteau v. Fenwick (​ 1892) [KRB 20] [Principal’s Liability]
Facts: Wattau (P) is undisclosed. Humble (A) is apparent owner. Fenwick (3P)
Issue: Undisclosed Principal + no authority ​6.01
Rule​: When undisclosed principal, and no actual authority, the test for P's liability is whether the agent's act is within the authority usually given to
that type of agent.
Holding: Even though A acted without apparent or actual authority, with an undisclosed P, P is still liable if authority is type usually given to A.
Atlantic Salmon v. Curran (1992) p.​ 32
Facts: ∆ represented himself as agent of corporation P, but P did not exist
Issue: Is A liable for “P” not preforming K?
Rule: A is party to K because partially disclosed P. -> Equtable breach of warranty action
Held: when P doesn’t exist, or authority doesn’t exist, A can be personally liable on warranty or individual action liability gorunds
Agent’s Fiduciary Duties
Reading v. Regem​ -good law
Facts​: Soldier (EE/ agent) earned money escorting... during his job.
Rule​: If money is obtained BECAUSE OF job→ unjust enrichment (similar to §8.02)
Material benefit through ​use of ​position
No harm calculation→ any benefit must be handed over
Straight rule→ material benefit →given up to P
Policy: Rule exists to discourage temptation/reflect seriousness law treats
Questions
What could: Soldier have done to avoid liability
Changed his uniform/ not breached his duty
Informed consent §8.06 prior to act, all material facts known
Rash v. JVIC
Facts:​ Officer repeatedly chooses his own scaffolding buisness as subcontractor, even after company starts scaffolding.
Issue:​ #1 Duty not to choose his own buisness? #2 disclosure to president= waiver?
Rule​: #1: Not 8.02, because material benefit didn’t come from 3P, but from P. BUT breach of 8.03 and 8.04
Town and Country
Facts: ​Cleaning crew leaves co. And sets up rival and steals customers
Issue: Duty not to use information after leaving business?
Rule: YES-> Agency duty not to use confidential information extends beyond the end of the agent relationship
Partnerships
Fenwick v. Unemployment Comm’n ​(1945)
Facts​: Receptionist and Owner create profit-sharing agreement -> I
Issue​: partnership formed?
Rule​: No, because receptionist didn’t control partnership property at all. Need joint association, co-owners, and business for profit
Martin v. Peyton
Facts​:
Issue​: Is relationship between lenders and firm owners a partnership?
Rule​: Agreement and protections were meant to protect lenders, not indicitive of partnership. Because lenders only had passive control of the firm
Meinhardt v. Salmon
Facts​: Gerry-> (lease) to Salmon and Meinhard (partnership with a profit sharing plan)
Issue​: Do partners owe each other fiduciary duties?
Rule​: Partnership is a fiduciary relationship requiring duty of loyalty + Must be clear link between partnership and opportunity
Held​: Duties violated when salmon used partnership to obtain business opportunity without informing his partner
● “Excluded his partner from any chance to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by
virtue of his agency”
Corporations/Bylaws/Overview
Boilermakers v. Chevron​ ​[Scope of Bylaws/ SH vs. BOD Bylaws]
Facts​: Chevron adopts forum-selection bylaw
Issue​: Scope of bylaws? Can forum selection bylaws be made?
Rule​: Procedural/process-oriented rules can be covered by bylaws​. DGLC §109 (b)​/ traditional subject matters only
● Incorperat
Holding:​ Because forum-selection bylaw here is regulatory, not whether the
Bylaws can be developed by SH, but power had been conferred to managers
On its face→ contractually valid, so no contractual invalidity
Shareholders agreed in advance that corporation can unilaterally change bylaw (without shareholder approval)
● By buying the shares, they agreed to everything in the bylaws
● Issue= lack of meaningful choice (could just not buy shares)
● BUT, SH can unliterally change the bylaws
Fiduciary Duty
Charter provisions require acceptance by board AND shareholders
§109 → Shareholders can adopt bylaws
Board has power to amend and write bylaws (If charter gives board that power)
● No unilaterally amending of charter, but can unilaterally amend bylaws
Smith Mfg. v. Barlow ​[Philanthropic donations vs. Ultra vires]
Facts: Princeton Univ. needed money. Corporation wanted to promote democracy and benefit humankind.
Plaintiffs says it was ​ultra vires s​and beyond their powers
Before DE statute allowing philanthropic
Held​: Court says the donation was permissible
Public policy: good for corporation to give to charity
Corporations helped during WWI and employment during Great Depression
Can’t rely on private charity—corporations need to step into that role
In the corporation’s interest to make smart people and future EEs, good will
No statutory provision (it was adopted after the corporation was formed)
Rule​: Donation is okay because:
1. In the company’s interest
1. Broadly interpreting power ​→​as long as it is in the “broad interest” of the corporation, it is okay
2. Companies have power to make philanthropic donation ​←​shareholders argue it was never applied to them
1. Court: it doesn’t matter! Can postdate it. The public policy is strong enough that we make this apply to the bylaw.
Factors
● Not supposed to give to director’s pet charity, p. 217
● Must be in corporate, not personal interest
● Must have a connection (e.g. interest in having smart future EEs)
● Modest in amount
● Aid public welfare
● Advance self-interests in community
Do we have the issue of ​ultra vires t​ oday?
In general, no.
§ 124 of DGCL: ​ultra vires i​ s mostly abolished
§ 122(9) of DGCL: express power of corporation to make philanthropic donations
Analysis, p. 218
Q1: Corporations have implied power to make philanthropic donations provided they further the interest of the corporation
P. 220 problem, revenue was 20M, CEO donated 100K to good friend’s organization anonymously
Pet charity; anonymous (not getting public welfare/self-interest out of it​→​not furthering)
Today, shareholders would claim breach of fiduciary duty rather than ​ultra vires
Dodge v. Ford Motor​ ​[Charitable giving = okay + BOD w/in power]
[​#1 charitable giving is okay b/c of public policy, BUT primary purpose has to be for SH interest, must be incidental giving. #2Board is
acting within power because Board has power to pay the dividends- Generally has the discretion to pay it or no​t]
Facts:​Ford was making a ton of money: paying regular and special dividends
Regular dividends would continue but special dividends would be used to do more work (build new manufacturing plant)
End special dividends/ Build new plant->Dodge Brothers sued
Issue:​ Acting in the interest of parties other than shareholders
Held​: Court says that as a director, his duty was to act in the interest of shareholders
Some gray area-> But you can’t just refuse to do it because such a large amount of extra money
Did the directors exercise their powers in a way that amounts to fraud or breach of bad faith
Must operate primarily for interests of shareholders and corporation
Rule​: Can do charitable works but must be in the interests of shareholders and corporations (bottom of p. 224)-> need to be ​incidental t​ o SH interest.
The main reason this works in this case is because of the Buisness Judgement Rule
● You can exercise humanitarian motives as long as it is incidental to the main interests of the corporation
● Not clear that the smelting project is contrary to shareholders, so court doesn’t decide​—business judgment rule ​in action
● Lack of dividends is not okay
●
●
o Company has primary interest for shareholders
o Can do charitable stuff if​ incidental​ to shareholders’ interests
o Can’t act for EEs and public at expense of shareholders
Only decision where a no dividends payment has been a breach
Ford was pretty clearly acting “to do good”
o If he’d given different answers, may have been a different result
o This case is an aberration
o Dodge Bros. also had questionable motives.
Facebook​ [Example of Pubic Corp.]
1. Inside AND outside directors
a. Outside→have other jobs, b/c board is not day-to-day governance (includes non-employees)
Dispassionate/independent (don’t just want management
2. Charter/Certificate of Incorporation
a. Charter gives BD power to adopt/amend/repeal bylaws
b. Gives corporation a staggered board
3. Bylaws
a. §2.1 = don’t have to hold shares of corporation
b. §2.8 if unanimous, BD can give consent electronically
FB charter Incorporated in DE
Art. V: Bd can adopt, amend, or repeal bylaws-> Allowed by DGCL § 109
Doesn’t necessarily strip shareholders of that same power
Art. VI: Not staggered—only become staggered if the voting threshold date has passed
When B (mark Zuckerberg) no longer has control over the company
Makes a takeover unappetizing by staggering the Bd
Art. IX: Yes—should be in DE unless corporation consents in writing to an alternate forum
FB Bylaws
§ 4.1: CEO, President, Secretary, Treasurer, maybe COO etc.
§ 2.1: No, don’t need to hold shares
§ 2.8: Yes, electronic consent permitted
Breach of Duty of Care Class 10
F​Francis v. United Jersey Bank (1981) KRB 296
Facts​: Mom (Director) has two sons, sons steal money from the conmpany and run it into the ground
Issue​: Was Pritchard (mom) personally liable for breaching duty of care?
Rule​: Director's duty of care→ affirmative obligation of "reading ad understanding financial statements, and making reasonable attempts at
detection and prevention of the illegal conduct of other officers and directors…duty to protect the clients…against policies and practices that
would result in the misappropriation of money they had entrusted to the corporation"
Duties of Care
XVI. Basic understanding of the business (at the outset + keeping informed)
XVII. General monitoring (not detailed inspection of day to day activities)
XVIII.
Regular review of financial statements (No need to prepare financial statements)
BUT→ can have someone else review/advise them
Applicatio​n: D breached duties, because if she had reviewed financial statements, then a reasonable person would have discovered the indiscretion.
(breach + proximate cause)
· Why didn’t the BJR apply to protect Mrs. Pritchard from breach of fiduciary duty?
· If the BJR does not apply, what next step of analysis does the court apply?
● Proximate cause
· How might Mrs Pritchard have discharged her duties?
● Could have actively voted against the course of conduct
● Should have gotten legal advice/brought an action
● Should have resigned
If shareholders had sued?
● Same analysis on 298
● BJR wouldn’t have applied, because the issue was nonfeasance/lack of decision making, NOT a wrong decision
BJR is presumption → is rebuttable
Rebutted by
● Fraud
● Uninformed decision
Shlensky v. Wrigley (1968) KRB 225
Facts​: Board chooses not to install lights at Wrigley field, so no night games
Issue​: Was decision not to install lights a breach of fiduciary duty? (claim=negligence)/ does BJR protect?
Rule​: BJR protects the board's decision.
"The decision is protected in the absence of fraud illegality or conflict of interest"
BUT court's still looked at the business decision on the merits
Kamin v. American Express Company (1976) KRB 277​
Facts​: Company distributes shares in kind instead of selling them then distributing cash→ could save more money by selling the stocks and
recording them as a loss
Issue​: Does the BJR protect their bad decision?
Rule​: BJR protects because there is no fraud, and the decision was not arbitrary or uninformed.
Holding:​Even though 4 shareholders had an interest in keeping company from showing a loss, court finds that finding self dealing would be
speculative, because only 4/20 had interest, and those 4 didn’t control the others. They considered the other option, so action was not arbitrary.
Policy​: Don’t want to chill decision making (would chill risky decision making)
Shlensky v. Wrigley, p. 225
Example of malfeasance in earlier decision
BD decision for no home lights and thus only day baseball games; claim was brought by minority SH after trying to change BD’s mind
Court’s approach is to say: whether the decision was protected
No breach
No negligence
P. 228-29: “No fraud, illegality, or conflict of interest in their making of that decision” àBJR applies to BD
P. 229: “Even if” argument àeven if not going into decision, court outlines why it still wouldn’t rebut the BJR presumption
Here, BD is protected by BJR: made the decision appropriately, but still:
Night games may not be the reason for other teams’ successes
Ongoing cost of lights may outweigh potential profits
Why is ​Dodge v. Ford ​relevant?
Plaintiff cited it because court does intervene in that case. Plaintiff says court can second-guess.
Court distinguishes because no evidence that Wrigley didn’t have best interest of corporation at heart.
Court says ​Dodgec​ an be explained through BJR àthat court must have thought there was fraud.
In ​Dodge,​ the BJR was rebutted.
The decision to expand business in that case did not rebut the BJR, so the court didn’t address it.
Was there no conflict on interest by Shlensky?
Wrigley is self-interested by making day games and with kids.
Courts say that doesn’t amount to much.
Kamin v. American Express, p. 277
Example of malfeasance in a later decision
AmEx buys shares in investment bank ($30M) in DLJ. DLJ loses money. AmEx decides to cut losses and give shares to SH.
Court applies BJR – formulation 3 different times on p. 278
No fraud, bad dealing, oppressive conduct, bad faith, illegality, collusion, destruction of rights of SHs, dishonest dealings, or
unconscientious execution.
BJR is applied and not rebutted.
Nothing problematic
Is there self-interest?
Yes. 4/20 of BD were inside directors àcould affect their jobs/salaries/affected compensation which means there are
incentives for self-interest
However, ​no conflict of interestb​ ecause no evidence that the 4/20 played a larger role; every decision affects compensation;
not enough to stand on its own
BJR may have been rebutted because “arbitrary action” may have been important
May have been uninformed decision
No enough to rebut the BJR, so directors are still protected.
Is the BJR a good idea? Justifications:
BD are the experts, so let them make the decision unless there’s another reason to doubt it.
Courts have limited resources and don’t want to waste time second-guessing business decisions.
More uncertainty on how business decisions may come out. We want to encourage some level of risk and courts shouldn’t chill risk-taking by
directors.
On the other hand, courts step in on other cases (like torts). Either way, there are questions (Tuch doesn’t find 1 & 2 persuasive).
Smith v. Van Gorkom
See handout
DE BJR: directors have a duty of careàpresumption that in making a decision the directors acting on an informed basis, in good faith and in the
honest belief that the action was taken in the best interest of the company.
Concepts: informed, good faith, best interests
On Sept. 20, was BD adequately informed?
No: BD didn’t know VG’s role (initiated sale and suggested the sale price of $55); didn’t know intrinsic value of the company; met for
two hours total
Post Sept. 20 conduct did not make up for BD’s action on that day
Market test: no real public action so not enough—did not cure defects
Arg.: good sale because was selling for $37/share and sale prices was $55/share. But, $37/share doesn’t have the holder Bd control
Collective experience of BD?
Not enough given the way they acted
Upshot: not a clear articulation of BJR; suggestion of what BDs should do when selling a company. Corporate community was shocked because
this was the first time BJR didn’t protect the BD. In reaction, they changed the law àDGCL § 102 (b)(7)
Virtually every public company has one that protects director from personal liability for breach of fiduciary duty. Companies basically
don’t have to worry about BJR because 102 (b)(7) protects them.
​Duty of Loyalty (Directors)
Bayer v. Beran,​ 1944, p. 303 (​personal opportunity​)
Company calls product “Celanese” aka rayon. Government calls it rayon. Company thinks it is more special than that and wants an ad campaign.
Ad campaign: $1 million/year
Dignified radio program for classical music
One of singers is CEO’s wife
Court doesn’t really distinguish between duties of care and loyalty.
Sets aside conflict of interest and wants to see if BJR would protect this decision àyes
Making decision for radio ads is a business
No basis for alcohol/small business, etc.
P. 306 àcomes back to question of self-dealing
BJR is rebutted here
When allegation is one of disloyalty/self-dealing, BJR provides no basis here
Standard is “high scrutiny”
Really looking at Board’s analysis
Test: D​GCL § 144(a)​: no contract or transaction should be voided solely for conflict of interest if
(1) Board/committee authorizes it
(2) Shareholder approval
(3) Board authorizes
All material facts must be disclosed
Sets up safe harbors to cleanse a transaction
Court is getting at fairness: bottom of p. 303​–04
Transactions are examined with “scrupulous care”
Self-interested transactions are voidable unless they’re fair
Factors that look at if something is fair:
Miss Tennyson can sing.
Not paid an outsized amount
Campaign designed to serve company’s interests; didn’t give her undue prominence
Cost of program was reasonable
Paid less than the others
Essentially, it’s fair.
How do we characterize this?
There is a conflict of interest
Concern that director will act selfishly on behalf of this salary
Skew decision-making
What sort of decision-making do you want?
Someone completely biased in favor company
Fairness requires market price.
Authority, p. 308
Board makes decisions collectively.
Benihana of Tokyo v. Benihana​, 2006, p. 309
Rocky takes people out of will to leave it to his new wife. Directors displeased because worried about upheaval and future of company.
Company needs money so they sell preferred stock. First, they appoint a broker. Ultimately, they decide to issue stock. Other options to make money:
selling stock, issuing stock, borrowing debt.
Company decided to issue Class A stock. There was a conflict of interest with Abdo (who was a fiduciary). Abdo was a director and vicechair and
also director of BFC—the company that was going to get securities from Benihana.
§ 144(a) applies
Conflict of interest because Abdo on both sides
Transaction is voidable unless safe harbor
§ 144 (a)(1): approval by disinterested directors
Requires that other disinterested directors are ​fully​informed (like informed consent)
Π argues that directors weren’t fully informed, but court disagrees.
Board knew about Abdo’s involvement
Because material information to the transaction
Never explicitly said but directors knew about it àthat’s enough for 144(a)(1), so transaction isn’t voided – BJR protection applies
Why do we have safe harbor rule?
Companies want access to talent and don’t want to de-incentivize people from being a director
Freedom of corporations to make own decisions (if fully informed); may still be the best decision for company àwant access to deals ß
Broz v. CIS, Inc.(​ corporate opportunity)
Broz owns RFBC and is board of CIS. There was a cell phone license for sale. The seller contacts Broz.
Timeline
June: Broz asks CIS if interested; CIS says no. Pri-C also interested in license.
August: Broz asks another director at CIS; they say no. Pri-C gets conditional agreement to get license.
September: Broz asks 3​rd​time from CIS.
November 14: Broz/RFBC gets license by offering more.
November 23: Pri-C buys CIS.
Is this a corporate opportunity? Test:
Financially able
Line of business
Interest or expectancy
Conflict because self-interest and duty of loyalty
Applicationàbalancing test
How did he get the opportunity?
From an outside source – not as a director of CIS
Not one of the factors but relevant
CIS financially able to take opportunity? No.
Was CIS in the same line of business as this opportunity? Yes.
Does it have an interest/expectancy in the opportunity? No.
By embracing opportunity, was Broz brought into conflict with CIS? Did it skew how he performed his duties? No, because Broz was
competing with outside company, not CIS.
Legal effect of Broz asking CIS directors?
Didn’t have to present it but presenting it would create a safe harbor. He didn’t present it but likely would’ve needed a collective decision
of the Board. If he disclosed all facts, and they said, okay, and it would’ve been okay. Here, no corporate opportunity because of balancing
test, so no breach of loyalty
Questions on p. 319
Closer call because balancing test – maybe no change
RFBC could complain of breach if he doesn’t pursue the opportunity—would need to present to both boards in full.
Ebay​, p. 320
Goldman Sachs ought stock they expected to increase in price
Breach of fiduciary duty
∆ argues that these benefits are unconnected to their positions of directors/officers
Uses ​Broz’​ s factors
Financially able? Yes
Company in same line of business (to buy stock in companies that were going public)? Yes (surprising decision)
Reasonable expectancy for interest? Yes
Question of fact
Court is reverse-engineering result
Conflict of interest?
To act disloyally – yes
Why might we think that this transaction is bad? Potential disloyalty
Because may act in best interest of stock prices, not to the company/their fiduciary duty
“Underwriting”: company sells securities to an investment bank, and the bank (acting as an insurer) sells them to the public
Always have a financial advisor handy
Concern that they’re being blind
R(2) 8.02: no material benefit from position also agency law
Even if the directors were outside directors, would agency law still apply? Are they still under agency law?
No, because they aren’t agents to the company. Inside directors are. Agency law wouldn’t apply to ​an outside director but
fiduciary/corporate law may and does.
Fiduciary Duties: Duty of Loyalty II & Ratification
Dominant/Controlling Shareholders
Do they also owe a fiduciary duty?
Yes, in general to the company and to minority SHs.
There are no fiduciary constraints for SH unless they are controlling SH because they influence board direction.
S​inclair Oil Corp. v. Levien,​ 1971, p. 325
Sinclair owned 97% of shares in its subsidiary Sinven (3% of other SH) and 100% of its subsidiary of Sinclair International.
All board of Sinven were Sinclair people
Law: controlling SH of fiduciaries of company and minority SH
All transactions are void/voidable if there is self-dealing ​andf​ ails intrinsic fairness test.
If there is self-dealing, the transaction is subjected to intrinsic fairness, and the controlling SH bears the burden.
Onlyi​ f there is self-dealing àintrinsic fairness test
If unfair àbreach of fiduciary duty
Payment of Dividends
Sinven paid out more dividends than what was brought in
No breach
Allowed to pay out dividends
Minority SH also received dividends
No self-dealing
Occurs when parent receives something from subsidiary to the exclusion of and the detriment to the minority SHs
Minority SHs got their $
No fairness test needed to be applied because no self-dealing
BJR applies instead àno breach because no rebuttal (similar to ​Benihana​)
Business Opportunities
Sinven specifically in Venezuela
No self-dealing because no proof that Sinclair appropriated Sinven opportunities
Doesn’t explicitly apply ​Broz​factors
Does reference “ability” to finance àexpectancy
Looks at if the opportunities were Sinven opportunities àNo, because offers to drill in other countries; Sinven doesn’t operate in other
countries, so no opportunities
Contract with Sinclair International
Sinclair International is 100% owned by Sinclair
Entered into contract with Sinven
International breaches contract with Sinven
Sinven doesn’t enforce contract against International
Breach by Sinven SH by not enforcing contractual breach against International?
Self-dealing
By virtue of entering intoa contract with a wholly owned subsidiary
Benefits that Sinclair gets out of this contract isn’t shared with minority SH
Was that self-dealing transaction intrinsically fair?
Breach of original contract: late payments and minimum and maximum prices
If there is late payments àdoes that make it unfair?
In theory, not all self-dealing transactions are unfair. In practice, it is a much more difficult case
Still a question of fairness
Questions
Classic self-dealing transaction involving directors?
Breach under § 144(a)?
On both sides of transaction but not necessarily a breach (could be)
But, Court is going to treat it under SH breach of fiduciary duty
Ultimately want a fair transaction (arms-length transaction)
May appoint an independent board to handle this stuff
Ultimate advice to Sinclair?
Buyout the 3% of minority SHs
Zahn v. Transamerica​, 1947, p. 330
Company has complicated structure: preferred, Class A, Class B
Problems
Question​ 1
As: $4000
Bs: $2000
Question 2
$6000
B must sell for $60; if less than $60, Bs won’t want to redeem because then won’t get anything
Question 3
A: $20,000
B: $10,000
Question 4
$6000; $24,000; no
Situation in ​Zahn
A: will convert to B, meaning As are now Bs àwhen company liquidates, they’re all going to get $15,000
The structure means it has high value
Zahn​: gets rid of As at $60 and Bs liquidate, getting a huge windfall. As complained
Is that a breach?
Imputes the Board’s conduct to the controlling SHàthey should act in a disinterested manner
How would an independent 3​rd​party have acted?
Aftermath: As would have redeemed at $60
It did breach its duties:
Redeemed at $60 but As didn’t convert because they didn’t have the sufficient information to know to convert
Should have had sufficient information that the Board was going to liquidate and the true value of the tobacco
Didn’t convert because Board screwed up
Getting at fair market based value
Disinterested conduct was required: As would have been redeemed and converted
Sinclair: same result: failure to disclose
Fliegler v. Lawrence ​(Del.1976)– Ratification, only in dominated corps…
1.Director attempted to sell land to his corporation through a corporation that he formed. Ds claim that shareholder vote ratified their interested
transaction and so they are relievedof the burden of proving fairness
.2.Did shareholder vote ratify the transaction? Eliminate need to prove fairness? NO.
But Ds ultimately proved intrinsic fairness of transaction
1.Ratification of interested transaction by disinterested shareholders shifts the burden of proof to the plaintiff to show the transaction amounted
to a gift or waste
.2.Because interested shareholders voted, the vote does not immunize interested directors from total (intrinsic) fairness examination. Interested
shareholder votes don’t help.
3.General Rule – s’holder vote won’t really ratify a transaction if it is not a disinterested s’holder vote
.1.If court is going to apply a standard based on s’holder approval court will look at s’holders, insist on disinterested approval64
Inre Wheelabrator Technologies, Inc​. Shareholders Litigation (Del.Ch.1995)– Ratification, not a dominated corp so Fliegler doesn’t apply
1.Can a majority vote of disinterested s’holders ratify a transaction? YES.
1.When a controlling shareholder is involved in a transaction, ratification of a ‘majorityof the minority’ does not eliminate the ‘total fairness’
examination. It simply shifts the burden of proof from defendant to plaintiff.
2.BUT w/o a controlling shareholder, ratification of interested transaction triggers only business judgment rule (plaintiffs have burden of proof).
1.Disinterested vote immunizes directors against both loyalty (interested transaction) and care (waste) claims.
2.General Rule: Independent ratification by majority vote satisfies the duty of loyalty:
1.Burden of Proof issues - now on the person opposing the transaction on the basis of waste/unfairness to prove that the transaction was outside
business judgment.
2.If there’s majority disinterested approval burden on objectors3
.If there’s no majority approval burden on directors
Fliegler v. Lawrence​,​ 1976, p. 336
Agau looking at investment opportunity and decided another close-held corporation should do it. Agau had option to purchase
Issue: Problematic conduct by Agau directors who are also directors of USAC
2 alleged breaches: 1. Corporate opportunity2. Basic self-dealing by the directors (who are on both sides)
If self-dealing ​→​ 144(a) s​afe harbors __
1. Approval by disinterested directors
Remedy: ​Benihana—
​ BJR protection subject to “waste”
2. pproval by disinterested SH
Remedy: p. 337, ​Gottlieb​—like ​Benihana​, BJR protection subject to “waste”
3. Fairness
Remedy: protected
Waste rarely occurs, so protection is likely to occur through BJR
Virtually as good as complete protection from intrinsic fairness (which is from 144(a)(3) and common law
Opening words by 144(a): means safe harbor is relevant
Self-dealing because corporation and another corporation with shared directors
So, does 144(a) apply?
(1) doesn’t
(2) no because not enough disinterested SH voted ​→​ must have a good faith vote and we can’t tell of majority of
disinterested SH approved
(3) intrinsic fairness – no
No liability; no breach of fiduciary duty
Questions:s, p. 338
1 & 2: § 144(a) sanitizes self-dealing transactions from the effects of self-dealing
Tennyson case: 144(a)(2) would have worked—SH approval
Obligation of Good Faith
Walt Disney​, 2006, p. 341
Facts: Disney needs a new CEO—Michael Ovitz
Eisner thinks Ovitz will be a good fit
Parallel negotiations
● Eisner trying to recruit Ovitz
● Compensation committee negotiating with Ovitz
Several draft employment agreements and consolidated
● NFT: no-fault termination—couldn’t terminate without cause (malfeasance or gross negligence)
● Related to his position as an officer (was also a director)
Why have this? Because giving up a good job at CAA
Compensation: takes form of options/ Ability to buy stock in company/ Can buy at a low price even when it goes up and then could sell at a high
price
After a few months, Ovitz needs to be gone. Eisner doesn’t want him around anymore.
Severance: $130M to leave rather than keeping him around somewhere
P. 344(IV): Claims against Disney
In hiring him
Rule: ​BJR and ​Van Gorkum​: BJR can be rebutted if breach of 1) fiduciary duty of care, 2) or loyalty, or 3) acted in bad faith
Confusing because purpose of BJR rebuttal is to show duty was breached
To rebut, you need to provide evidence of lack of care, good faith, or loyalty – not breach of those duties
If there is a rebuttal, the burden shifts to the director ∆ to show that the transaction etc. was fair to the corporation
Court says, instead, you should show lack of information and lack of good faith
Was BJR rebutted by uninformed decision by the compensation committee
Not uninformed: “they did know stuff”
Best practice: would have gotten a spreadsheet for a director
Why is court giving us best practices? Future guidance & they like giving their opinion
BJR rebutted by bad faith?
What is bad faith​?
Intentional bad acts – subjective bad faith
Would rebut the BJR
Lack of due care ​→​ usually uninformed decision ​→
Can rebut the BJR
Not bad faith
It’s a spectrum
Intentional dereliction of duty
Rebuttal of BJR
102(b)(7) allows companies to exempt/protect directors from certain breaches of fiduciary duty—including bad faith conduct and loyalty
Approval of NFT payout
Ovitz didn’t have malfeasance and not grounds to suggest bad stuff
Waste in rebuttal to BJR
Rare unconscionable case where directors​ irrationally squander or give away corporate assets
No waste in this case ($140M)
Rare that a court finds it
Analysis
To rebut BJR, you show evidence of lack of care, loyalty, good faith
Lesser evidentiary onus
“irrationality is the outer limit of the BJR”
Questions:
a. yes, b. not clear, c. not clear
Yes, p. 354 in ​Stone​ (quote from ​Disney​)
Make a spreadsheet
Stone v. Ritter, 2006,​ p. 351
Caremark ​rule: if predicate is ignorance of liability: only a sustained or systematic failure of the board to exercise oversight will establish lack
of good faith
Failure to have a reporting system
When bad faith with reporting system? No oversight – ​utter failure
Bad faith: intentional failure to act in the face of a known duty to act
Conscious disregard for his duties
Lack of good faith is not a separate duty—under a duty of loyalty
No liability: because they had a reporting system and they weren’t an utter failure in oversight
Indemnification
Waltuch v. Conticommidy Services Inc.
I:
Rule​:
Indemnity-> Depends on Bylaws Used
Q 1. Waltuch Lost b/c Company did not have power to indemnify, unless officers acted with good faith (Waltuch hadn’t established that he acted in
good faith)
Q 2. Unclear whether he would have succeeded under the charter if he had acted in good faith -> Need to see -> cannot be liable (adjudged liable =
by court) so when one settles, not liable for 145 (b)
Q 3. Issue is whether they have the power to indemnify, unless GF [145(a)] ->
Q 4. 145 a/b both require GF to indemnify 145 c = MUST indemnify
● If SH decide to indemnify, still liable
● Maternalistic approach by legislature-> bad faith shouldn’t be indemnified
Citadel Holding Corporation v. Roven
Facts: Acgtion by company against director-> director breached SEC action
∆ wants advancement of expenses upfront (to pay legal fees/ expenses)
Issue: Is ∆ director’s entitlement to advancement based on possibility of eventual indemnification?
Rule:
145 (E) Advancement of Expenses
● Summary​: Entitlement to advancement of expenses CAN be granted in Bylaws.
● Entitlement is separate from whether indemnification will be granted.
● Purpose
1. Because he is going to have to repay advancement
2. Ability under 145 (e) granted
● Limitations
● Citadel v. Roven(​ 522)
● “expenses” only includes “reasonable expenses”
Piercing the Corporate Veil
[When you can impose liability on SH for debts of corporation]
Basic Rules
2. Rare
3. SH face liability-> directors/officers do not
4.
5.
Courts have never pierced veil of public corporations (only private)
Confusing case law
Walkovszky v. Carlton
Facts: Taxi driver hits someone->
Issue: Did π fail to state a cause of action by claiming Δ was individually liable
Rule: New York Law-> either go to SH, or Enterprises
Can pierce veil to “prevent fraud or to achieve equity”
2. Agency​[Use general rules of agency -​respondeat superior - ​to determine liability
● If corporation is an agent of an individual, then individual can be liable for negligence
● If SH is (in reality) conducting business in individual capacity, liable
● If someone is using corporation to further personal gain, can be personally liable
●
2. Enterprise Liability
● Hold all corporations liable, not just “fragment” of substantively single corporation
Irrelevant Considerations
4. Deliberate planning to cabin liability
5. Assets distributed to SH once accumulated
6. Carried minimum insurance required
Holding​: In order to find ∆ liable, π needed to allege that Seon’s business was being conducted by the SH, Carlton, in his individual
capacity.
● Π needed to allege that Δ Corp. was a “dummy”, which he did not prove
Dissent​:
2. Corporations were ​intentionally undercapitalized​, to avoid responsibility for debts.
Tuch​: formal approach-> in order to allege COA, need to allege formal distinction-> need evidence on its face, not substantive.
Sea Land v. Pepper
Facts:​∆ defaulted on payment-> π sued for break of K -> ∆ dissolved/insolvent
Issue​: Can π “pierce corporate veil” and recover from Δ corporation’s owner (Marchese)?
Rule​: If veil pierced, owner liable, and then “reverse piercing” means individual’s other corporations can be used to satisfy judgement.
Van Dorn Test
3. Unity of Interest/Ownership​[similar to majority test in​ Walkovsky]
a. Failure to maintain corporate records/corporate formalities
i. Sea Land​-> no articles of incorporation/bylaws/same office for all corp.
b. Commingling of funds/assets
i. Sea Land​-> borrows $ from other corp. interest-free/ used $ for personal expenses
ii. Walkovsky -​ > no allegation that ∆ treated bank account as his bank account
c. Undercapitalization
i. Walkovsk​y-​ > taxi company undercapitalized
d. One Corp. treating assets of another Corp. as its own
i. Sea Land​-> borrows $ from other corp. interest-free/ used $ for personal expenses
4. Public Policy ​[Additional requirement to ​Walkovsky]​
a. Sanctioning of Fraud
i. Sea Land​-> unsatisfied judgement not enough
b. Promotion of Injustice
i. Sea Land Examples (208)
1. individual claiming adverse possession of land owned by corporation he owns = injustice
2. Two Cosigners on a debt formed corp., which paid off note and then sued 3​rd​co-signed for amount of the
debt= Injustice
Holding: Court found injustice (eventually)
Mergers and Aquisitioins
Zetlin v. Hanson Holdings, 1979, p. 712
Gable, 2% holder; Hanson & Sylvestri have 44% and control ​→​ they sell at a premium
Buyer didn’t have to offer premium to Gable ​→​ controlling SH can sell at premium price while minority SH can’t if it wants
Absent fraud, bad faith, etc.
Application of the market rule
Perlman v. Feldman, 1955, p. 712
Feldman is director, controlling SH, CEO. He is selling to a syndicate.
Market rule doesn’t apply here. Minority SH challenges the transaction, claiming that he’s deserving of the premium price.
Court said Feldman was selling a “corporate asset/advantage” to buyers during period of extreme steel shortage, and that wasn’t okay.
Opportunity was to benefit from steel shortage
Unethical to just increase the price
Buyers giving interest-free advances and company could use to modernize factory
Also increase business in local area
Accused of taking these opportunities away
Before the sale, apparently corporate opportunities and company could get ahead with interest free advances and curry favor with local
businesses.
Instead, Feldman sold and corporate opportunities were lost but unclear why the sale to new buyers will end the opportunities (dissent
disagrees—says the opportunities won’t go away)
Unclear why the advantage has been lost
This “loss” creates a breach of fiduciary duty by Geldman as a director and controlling SH
Dissent says unclear whether these duties arose as Director, controlling SH, or combo of the two
Unclear if this is inconsistent with market rule or if it just falls through one of the exceptions
Bit of an outlier
In practice, the market rule applies, but BD negotiates stuff for minority SH
§ 203(a)(1)—places restrictions on controlling SH to sell unless those restrictions are met
softens market rule—fewer impediments to buyer control
Equal opportunity rule is used elsewhere
Market rule; encourages more transactions because cheaper because only buying controlling shares; encourages efficient and inefficient
transactions
Equal opportunity rule; discourages both good and bad transactions
Unocal Corp. v. Mesa Petroleum​, 1985, p. 793
Facts
T. Boone Pickens—President/Chair of Mesa: likes windfarms and acquiring corporations
Mesa owned 13% of Unocal stock—a publicly-traded company
Would know of ownership stake because must disclose to SEC if you own more than 5% under the Williams Act
April 8: Mesa makes two-tier “front loaded” cash tender offer for 64 million shares
Hostile takeover
Front-end: $54/share cash for 37% of company
Back-end: A$54/shares in securities
Junk bonds: high risk securities; unsecured bonds; debt instrument and nothing more than a promise to pay by someone who
has a lot of debt
April 8-April 13: Unocal Board meets (8 outside directors, 6 inside directors)
Outsider: considered to be more independent because not employed by company
Court finds it important that majority of Board were outsiders
Board decides to defend company by making conditions:
If Mesa acquires the 37%, Unocal will buy additional 49% of stock for $72/share.
Not offering this price to Mesa; it is a self-tender offer. It will offer this price to all SHs except Mesa
The Court says that if Mesa has to be included in self-tender, then it would effectively be helping Mesa complete the buy-up of Unocal.
This self-tender gives SHs the option to hold on to it.
These conditions are an effective defense against tender offer because makes the company makes less attractive to T. Boone Pickens (and
elsewhere).
Does a Board have the power to adopt a defensive mechanism?
Yes
DGCL § 160: Board can deal in its own stock
§ 141(a): Board manages business and affairs of company
Was it proper? Standard of review?
BJR?
Concern about Board acting in its own interests: Board may want to entrench itself in office
Does this concern require fairness review? Enhanced burden but not fairness – “intermediate standard”
Must instead prove Board reasonably believes that the bid poses a danger to the corporate policy and effectiveness AND that
a response is reasonable to that danger/threat
If satisfied, Court will grant BJR (which could still be rebutted)
How does a Bd show that it had a reasonable belief that the bid is dangerous to the corporate policy?
Good faith and reasonable investigation
Majority of outside independent directors made the decision—helpful
Application of Facts:
$54: inadequate price
Junk bonds ​→​ coercive to SH because back tier is so unappealing – risk?
Reasonable in response? Yes – defensive measure was designed to protect the back end
Sometimes called “enhanced BJR” – if threat is reasonable, do a balancing test to determine if threat was
reasonable
Analysis, p. 803
No, Board must establish reasonable belief that there was a threat and that response was reasonable ​→​ BJR
Relevance of “greenmailer” – banned now; would take a stake and threaten to acquire via junk bonds; yes, relevant because his
reputation preceded him; maybe not legally relevant
Relevance is to threat posed; under-priced offer and structurally unsound
See other factors in IV.B
Unlikely that threat still posed except maybe under-achieved price (?)
Revlon, inc. v. MacAndrews & Forbes Holding,​ 1985, p. 804
Poison Pills: selective self-offers aren’t permitted
Background
Perelman (uncouth) and Bergerac (fancy) don’t get along.
Perelman foreshadows hostile tender offer for purchasing Revlon.
August 19: Revlon gets advice and decides to make defensive moves:
Repurchase up to 5 million of 30 million outstanding shares
Note Purchase Rights Plan: every SH other than Pantry Pride would get note. If threshold is reached (here, set at 20%), all
other SHs get right to buy stock in diluted market
Precursor to poison pills
Poison pills carry out a transaction
Not meant to block deals forever—some limits on them
August 23: Pantry Pride offers $47.50/cash, conditioned on getting cash and redeeming poison pill
August 26: Board meets and rejects PP offer; adopts exchange offer of newly issued notes.
September 16: PP decreases offer to $42.50/cash
September 24: Revlon rejects PP offer and wants to find a “white knight” (third party to rescue)
September 27: PP offers $50/cash
October 1: PP offers $53/cash
October 3: Forestmann offer: $56/cash with conditions
October 7: PP offers $56.25
October 12: F offers $57.25
Lockup: crown jewels to F
No shop: not negotiating with others
Dismantling Notes and pill
Cancellation fee
Defensive Measures by Revlon
Poison pill
Notes with covenants
Lockup
No shop
Cancellation fees
Were those defensive measures a breach of fiduciary duties?
Poison Pill
Adopted 8/19
Not ​per se i​ nvalid to adopt
Unocal duties apply: must establish reasonable belief that threat existed and reasonable response
YES, reasonable belief with good faith after reasonable investigation
YES, reasonable response
No breach at this point because believed company was worth significantly more
Poison pill redeemed/removed: consistent with fiduciary duties ​→​ no breach
Effect of poison pill isn’t to block a bid forever; it’s to encourage a greater price
No breach b/c pill redeemed
Dismantling notes and covenants
Did D/O have reasonable belief to threat/reasonable belief
Reasonable response to issue notes in relation to avoid a takeover
BUT, when it became obvious that a takeover was going to occur, Board’s duties changed: from defending to maximizing safe price
Board’s duties changed to auctioneer around that back-and-forth between PP’s increasing offers in August
“Enhanced ​Unocal​ duties”/Revlon duties ​→​ question of defensive measures is moot when sale becomes inevitable
Notes/covenants – no breach because the defensive measure had not been redeemed
Lockup, no shop, cancellation fee ​→​ Breach
Company isn’t maximizing sale price in these measures
Auction: ends sale without maximizing price
Cancellation fee: forcing someone to pay a fee acts as a disincentive to someone joining
Analysis
Explains cancellation questions
Offers an inquiry
Revlon​ duties triggered around certain time: difficult to know when they are triggered; it depends
No, only duty to SH
Has different take on importance of non-SH opinions – maximize to ​Revlon
Limited advantage because others can just infer by their offers what the confidential information was
Unocal Corporation v. Mesa Petroleum Co.
Facts​: T. Higgins owns Mesa. Mesa is 13% holder in Unocal.
Mesa makes two-tier front loaded cash tender offer
● High risk unsecured loan (junk bonds)
If mesa completes first step→ Uncoal will buy its own shares (self-tender offer) on discriminatory basis (excluding mesa-owned shares) because
Uncoal doesn’t want to pay inflated share price to mesa.
● This works because stock value goes down→ less valuable to Mesa
● Distribution of cash to SH to make Co. less valuable
Issue​: Does a board have power/duty to oppose hostile bid?
1. Power?
a. Defensive strategy of buying own stock
i. Permitted [DGCL §160]
ii. § 141 (a)
2. Duties?
a. Intermediate standard​ [No need to show fairness of transaction, BUT BJR not automatic]
i. Board reasonably believed the bid poses danger to corporate power and effectiveness (harmful)
1. Reasonable investigation
2. Acted in good faith
3. Approval by majority of outside directors​ [AUTOMATIC OR JUST ANOTHER FACTOR IN BALANCE?]
4. Bid
a. Inadequate/undervalued
i. ($54 of securities in ​Uncoal​ doubted to be worth $54)
b. Coercive
i. People prefer front end ($54 cash) to back end ($54 securities)
ii. Incentivizes SH to sell early/front end
ii. Reasonable response to reasonable harm (see pg. 799 for list of harms considered)
1. Enhanced Business Judgement Review
a. Balancing test
b. Interests other than SH can be taken into account
2. Ex. Uncoal Discriminatory self-tender offer designed to protect back end = reasonable
b.
ii.
IF intermediate standard passed
i.
BJR protection applies
Concern: board may be blocking offer because they want to keep their jobs:
Questions:
1. BJR protection from outset?
a. No→ BOD also needs to establish reasonable grounds that there was a threat, and response was proportional before BJR
applies
2. "greenmailer" reputation/threat?
a. Pretend to take over, so Company will use discriminatory self-tender offers to buy back shares of acquiring co.
i. In this case, Uncoal decided to buy back all shares BUT mesas
2. If Pickens had rep. as liquidator?
a. Threat was underpriced offer/structurally coercive
2. L
a.
Unlikely threat→ may be undervalues price
Revlon v. MacAndrews & Forbes Holdings
Facts:
June → π asks for friendly transaction
Aug.
● 14: π foreshadows hostile TO
● 19: Poison pill adopted
● After set percentage (ex. 20%) of stock purchased→ SH other than 20% rights get activated- right to buy stock in same
company at cheap price
● Makes 20% owner percentage much lower, because new stock issues dilutes 20% stake
● Kills deal, because uneconomic to still acquire company
● 23 PP offers $47.50 cash
● 26: Revlon issues notes w/ covenants
Sep.
16: PP decrease offer to $42.50
24: ∆ looks for white knight
27: π offers $5o cash
Oct
1: π offers $53 cash
3: F (white knights) offers $56 w/ conditions (including supporting debt → notes w/ covenants)
7: π pffers $56.25 w/ covenants/defenses removed
12: F offers $57/25 + lockup/no-shop + dismanteling defense mechanism + cancellation fee
● Lock-up
● Essentially crown jewel
Questions:
1. ;
2. Revlon duties triggered Sep. 27-Oct. 1 (when price reached certain point)
3. No duties owed to creditors→ only SH
a. Once Revlon Duties invoked→ exclusively SH interest to maximize profit
Paramount Communications v. Time Incorporated (unocalrevlon duties)
Facts​: Time contracts with warner to merge→ K includes defenses against other companies
Paramount hostile tender offer for Time.
Time wants maintain journalistic integrity
Time offers all cash acquisition of Warner→ BUT Time restricted the merger to deny their SH to vote on acquisition
Paramount increases offer
Time rejects paramount's offer
820
Issue​: Revlon/Unocal duties triggered?
Questions​:
1. L
2. Yes, because warner SH control company now, Time SH no longer have control, so cant sell it
3. Say that the action was to carry out previous long term plan→Any response reasonable in response posed.
Paramount v. QVC (unocal/revlon)
Facts: Paramount enters into deal w/ viacom
Two-step cash tender merger offer
Viacom
Issue: Defensive measures reasonable?
● No, Revlon duties meant need to secure best price, and defensive measures kept board from getting the best price
Questions
1. Revlon duties→ triggered when change of control. Depends
a. Depends on whether there is a change of control
b. 51% Paramount 49% Viacom (owned 85% by redstone)
1. So, likely that 40% owned by Redstone is the majority, because of dispersed 50% shares among other SH/maybe
non-voting
2. Should still be​ enhanced scrutiny​ because even independent directors may still have some desire for entrenchment/ remain as board
i.
Can have
2. Fiduciary carveout→ we wont solicit interest/negoaiate with others. UNLESS fiduciary duties require it
i.
QVC→ even if carve-out, may still be struck down if inconsistent
2. Compares to Revlon
i.
§6.02 c
1. Burden of Proof shifted from ∆ to π under ALI rule
b. More discretion given to BOD
1. Interests other than SH can be taken into account, if legitimate concern, if doesn’t negatively impact SH long-term
1. Employees
2. Creditors
3. Consumers
b. Greater discretion for BOD "reasonable response to offer", instead of duty to get most money
● Appeals more to popular opinion→ because allows companies to take consumer opinion into account→
● Products change
● Overall, no conclusive evidence that mergers create value
● Often aquirers overpay→
● Managerial hubris
● Empire building→
Air Products & Chemicals, Inc. v. Airgas, Inc. ​[Current Unocal Doctrine]
Facts:
Lyondell Chemical Company v. Ryan​ (2009) KRB 838
Facts: COA: Acquiring company sues Lyondell (target) for money damages for breach of fiduciary duty of loyalty (Bad faith)
2006: Basell (acquirer) buys some stock in Lyondell→ company officially "in play"
● Lyondell adopts "wait and see" approach
2007: Offer
● negotiate some back and forth
Issue: Did BOD breach fiduciary duty of loyalty (good faith)?
● Chose this claim because 102(b)(7) clause in charter protects BOD from duty of care claims, but cant get out of Loyalty claim.
Rule:
Breach of Good Faith= intentional disregard/dereliction of duties
● Revlon duty breach of good faith
● Need utter failure to try to maximize sale price
Holding:
1. BOD conduct did not rise to standard required for breach of good faith
● Did negotiate higher offer
● Did
● When they adopted wait-and-see approach, not yet subject to Revlon duties
2. Revlon analysis incorrect→ good faith analysis
Questions:
1. How incompetent?
a. No market research
b. Accepting 1st offer/ no negotiation (​Disney)​
2. No
a. Breached when failure to maximize
b. Revlon Duties
2.
Inevitability
Omnicare , Inc. v. NCS Healthcare, INC.​ Del. 2003 p. 845
Facts​: NCS= failing healthcare company
Omnicare→ intitial offer→interested in buying NCS less than debt outstanding → SH would receive nothing
Genesis→ begins negotiations
Omnicare→ increased offer
Genesis→ board approves merger after increased offer when Omnicare gives offer
Merger Agreement With Genesis
● Deal protection
i.
Board promised to let SH vote, even if they withdrew recommendation
1. DGCL § 251(C)​ ;​ § 146
a. Majority SH's (Ocalt + Shaw) promised to vote for merger
b. Termination fee
2. 6 Million Dollars
a. No-Shop Clause
3. Cant speak with competing bidders, BUT WAIVED by Genesis (because unenforceable anyway)
v. No Fiduciary Out Clause
4. Allows BOD to escape from merger if required to do so by Fiduciary Duties
Issue​: Were Unocal Duties breached by §251 provisions + fiduciary out + SH agreement
Holding​: Breach of Unocal b/c preclusive + coercive
Dissent​: Context in this case is key→ without defensive measures, there would have been no deal at all. Genesis was the only reasonable bidder
Therefore, defensive measures were reasonable in context\
Questions:
1. Yes- may cause corporations to miss out on value-maximizing deals
2. Yes→ Majority "shamed" directors
3. BUT majority SH only breach fiduciary duties when self-dealing
●
Valuation of Securities #8
Overview
a. Debt: borrow money from lenders
i. Creditors/lenders/debtholders
ii. Interests can have different forms: contract, bonds, etc.
iii. Every healthy company has debt
b. Equity: Borrow money from investors
i. Shareholders/equity holders
ii. Focus is on interests of equity holders
iii. Shareholders have higher risk because face the risk that company won’t be making any money
iv. Equity is more expensive than debt ​→​why companies prefer debt
c. Company takes “optimal mix” of the two
i. Value Securities/Investments
ii. Why: when companies raise money, they’re selling stock in themselves and we need to know what that stock is worth
II. Time Value of Money: Money is worth more today than it is in a year’s time because if you have the money today, you can use it today
and it’ll gain value over time
a. Looking at money in and money out
b. We want more money coming in than going out!
c. Convert the future money to the present value or vice-versa (otherwise apples & oranges
III. Future value = present value (1 + discount rate); FV = PV + PV x r
a. PV = FV/(1+r) ​←​single time period
I.
PV = FV (1+r)​n
i. Calculating n
1. 2 years: FV=PV(1+r)(1+r)=PV(1+r)​2
2. 3 years: FV=PV(1+r)(1+r)(1+r)=PV(1+r)​3
IV. Discounting Exercises
● 1. PV = FV/(1+r)
● FV = $1.10
● PV = 1.10/(1 + .05)
● PV = 1.10/1.05
● PV = $1.05
● 2. R = .10 (10%)
● PV = ?
● FV = $1
● PV = FV/(1+r)​n​=1.00/(1.10)​10​=1/2.594=$0.39
● Higher discount rate, the lower the FV will be; Lower the discount rate, the higher the PV
● FV=PV(1+r)​n
● 7% will give it a higher discount rate.
● 8% = 100/1.08=92.59
● 7%=100/1.07=93.46
● 120=150/1+r
● Discount rate=1+r=PV/FV
● 1+r=(150/120)=1.25=1-r=0.25=25%
● Discount factor=1/(1+r)=0.8
● Don’t worry about this as much
Net Present Values
● PV of $ received (minus) PV of $ invested
● PV of $10850
● 7%
● PV =1/(1+r)=10850/1.07=10140
● 8.5%
● PV=1/(1+r)=10850/1.08=10000
● 10%
● PV=1/(1+r)=10850/1.10=9863.63
● 8.5% interest rate
● net present value of $10000?
● NPV = PV of $ in – PV of $ out
● Money in today: 10000
● Money out in a year: 10850
● PV of 10850 = 10140
● 10000-10140 ​→​negative NPV
● discount rate is 7% here
● NPV = PV of $ in – PV of $ out
● Money in today: 10000
● Money out in a year: 10850
● PV of 10850 = 10000
● 10000–10000​→​neutral NPV
● discount rate is 10%
● NPV = PV of $ in – PV of $ out
● Money in today: 10000
● Money out in a year = 9864
● 10000 – 9864 = 136 ​→​positive NPV
● The return one earns is not necessarily the discount rate
● Interest rate​: interest rate that an investment earns
● Discount rate​: amount that reflects what an investor would expect to earn on that type of investment given market conditions
● Incorporates some measure for the value of money (sort of like inflation)
● Can reflect an attitude of risk aversion
● Which is what most people are
● Some element of risk aversion is built into the discount rate
VI. Risk and return
a. Risk aversion: most investors don’t want to take a bet
b.
V.
b.
c.
d.
Expected variability of returns – p. 150
i. Can estimate return and probability of that return (e.g. $1 at end of year)
You don’t know what an investment will do
How to calculate expected value of investment:
i. Add two forms of return for each probability
ii. Multiple together by corresponding probability
iii. Add results for all probabilities together
Most investors are risk averse
Investment returns aren’t certain but can calculate the expected return
e.
f.
VII. Question
● Nominal interest rate
● Repayment = principal + interest on principal
● 11.3M = 10 + I x 10
● 1.3 = I x 10
● 13% = I
● Expected return is less than 11.3 because must weigh the percentages of the outcomes (chance that lender will go bust)
● 11.3 x 0.95 = 10.735
● 0 x 0.05 = 0/10.735
● We can’t know if $10.375 is a good value unless we convert it to today’s value
● NPV = depends on the discount rate
● Given a discount rate of 6.5%, then 1.065
● PV = 10.735/1.065 = 10,079,800 = positive NPV
● What if discount rate should be 8.5%
● PV = 10.735M/1.085 = 9,894,000=negative NPV, so you don’t want to do this because you want more money in than going ou
DGCL [Delaware General Corporations Law