CORPORATIONS
Gold 2022
TOPIC
TEST(S)
Franco
POTENTIAL FACTS
CASES
INTRODUCTION TO BUSINESS ORGANIZATIONS
MANIFESTATION
OF AGENCY
RELATIONSHIP
ACTUAL – Restatement §§2.01, 3.01
APPARENT –Restatement §§2.03, 3.03
INHERENT – gap-filler from court
Partnership is:
(1) Association of two or more persons
(2) To carry on a business
(3) For profit
(4) As co-owners
PARTNERSHIPS
Courts consider the nature of the
relationship:
(1) Control of the parties
(2) Agreements to divide profits/losses
(3) Duties of the parties
(4) Intent of the parties
! Employee deals with a third-party
Blackburn v. Witter
(client, supplier, etc.)
Sennott v. Rodman
! Potential agent acting on behalf of
principal
! Whether two people formed a partnership
(i.e., intended to be co-owners)
Byker v. Mannes
Hyansky v. Vietri*
! Joint Ventures
Kovacik v. Reed
Shamloo
! Capital vs. Labor Contributions
Meinhard v. Salmon
Vigneau v. Storch
! Profit and Loss Sharing (*default rule)
Covalt v. High
Starr v. Fordham
! Partners owe each other fiduciary duties
Ferguson v. Williams
P.A. Properties
! Equal management rights
Haymond v. Lundy
! One partner binds the partnership (agent)
CORPORATIONS
DIRECTOR
REMOVAL
Shareholders may remove directors by
majority vote with or without cause unless
Delaware GCL §141(k) exception applies
! See Question 3 on 2021 exam
! Director removed (not president, CEO,
etc.)
Alderstein v. Wertheimer*
CORPORATIONS
Gold 2022
Franco
TOPIC
TEST(S)
POTENTIAL FACTS
CASES
SHAREHOLDER
PROPOSALS
(amending bylaws,
other proposals, etc.)
Securities Exchange Act 14a-8 – qualifying
shareholders can submit proposals for
effective consideration unless an exception
applies (14a-8(i))
! Publicly held company (SEC law must
apply)
! Shareholder proposal for annual meeting
! Amending bylaws
Lovenheim v. Iroquois
CA v. AFSCME Employees*
CORPORATIONS
Delaware – rationally related benefit
BUSINESS
JUDGEMENT
RULE
DUTY OF
LOYALTY
Exceptions:
! Fraud
! Illegality
! Conflicts of Interest
(+ Waste and Corporate Opportunities)
Corporate Opportunities
Delaware – see “Delaware Approach”
MBCA – Corporate Opportunity Doctrine
Conflicting Interest Transactions
Was there self-dealing?
YES – fairness test
NO – BJR
DUTY OF CARE
BJR applies, but can be rebutted
! business decisions in managing the
company
DOES NOT APPLY WHERE:
!board is not acting illegally
! corporate opportunities
! breach of the duty of loyalty
! Director has a side hustle/gig
! Potential conflicts and personal
relationships
! Director/Officer on both sides of
transaction
! Making decisions with incomplete or
inaccurate information
Shlesky v. Wrigley
Dodge v. Ford Motor Co.
Northeast Harbor v. Harris
Broz*
Globe Woolen v. Utica Gas
Sinclair Oil*
Smith v. Van Gorkum*
Malpiede v. Townson*
CORPORATIONS
Gold 2022
TOPIC
DUTY OF GOOD
FAITH
DEMAND
REQUIREMENT
TEST(S)
Franco
POTENTIAL FACTS
Bad Faith Behavior
(1) Subjective bad faith or conduct motivated
by an intent to do harm
(2) Lack of due care (gross negligence)
without malevolent intent (alleged here)
(3) Intentional dereliction of duty or
conscious disregard of one’s
responsibilities
DEMANDS ARE REQUIRED UNLESS
Refusal ! BJR
Futile !
Aronson – former approach
Rales – when board has been replaced
Zapata – SLC
Zuckerberg – combines Aronson + Rales
CASES
! Failure to Monitor
! Built in consideration for all fiduciary
duty breaches
! See Ques on 2 on 2021 exam
! Derivative litigation
In re Walt Disney*
Stone v. Ritter*
Aronson*
Zapata*
Rales*
Zuckerberg*
In Re Limited*
CLOSELY HELD CORPORATIONS
FREEZE-OUTS
What jurisdiction? – States have different
approaches
! NY (applying DE law) = CC requirements
do not have to be met
! Closely held corporations
! CA = pooling agreements are fine
! MA = balancing test
! Majority is doing whatever they can to
! OR = BJR
remove the minority (i.e., gaining control)
! DE = entire fairness
ti
Ex ante or ex poste solution?
Zion v. Kurtz
Ramos v. Estrada
Zidell
Donahue
Wilkes
Nixon v. Blackwell*
CORPORATIONS
Gold 2022
TOPIC
INVOLUNTARY
DISSOLUTION
TEST(S)
Franco
POTENTIAL FACTS
Courts can compel dissolution where
controlling majority engages in illegal,
fraudulent, or oppressive behavior
! plaintiff petitions to compel dissolution
after freeze-out
Oppressive Behavior – reasonable
! court is considering dissolution as a
expectations + important factor in decision to remedy
invest (or inherently oppressive)
CASES
In re Kemp v. Beatley
Gimpel v. Bolstein
CREDITOR RIGHTS
! likely closely held corporation
PIERCING THE
CORPORATE
VEIL
(1) Evidence of complete domination of the
corporation by an individual or another
corporation (control)
(2) Control has been used to commit fraud
(injustice), and
(3) Control caused the plaintiff’s injury
(causation)
! trying to hold shareholders or owners
personally liable
! parent-subsidiary relationships
! tortious conduct or breach of conduct
Consumer’s Co-Op
K.C. Roofing v. On Top
Western Rock
Baatz
Craig v. Lake Asbestos
US v. Bestfoods
! BJR DOES NOT APPLY
FRIENDLY MERGERS
STATUTORY
MERGERS
Delaware GCL §251 – (a) plan or
agreement, (b) directors must adopt that plan,
(c) shareholders must approve the merger and
the plan of merger must be filed with an
appropriate state official
Delaware GCL §262 – Appraisal right for
dissenters (or all in cash-out merger)
! There’s someone who voted against the
merger
! Both boards want to merge with each
other
! Something looks so much like a merger,
but it isn’t called one
Hewlett v. Hewlett-Packard
Applestein
Hariton v. Arco Electronics*
CORPORATIONS
Gold 2022
TOPIC
TEST(S)
Franco
POTENTIAL FACTS
CASES
*Jurisdiction Matters
CASH-OUT
MERGERS
MA – defendant bears the burden of proving
! legitimate business purpose and entire
fairness to minority
DE – entire fairness only (fair dealing + fair
price)
! minority shareholders are required to
give up shares for cash
! might look like a freeze-out, but can be
publicly held
Coggins v. Patriots
Weinberger v. UOP*
HOSTILE TAKEOVERS
DEFENSIVE
TACTICS
Threshold ! BJR – board has the burden to
demonstrate:
(1) Threshold There were reasonable
grounds to believe there a threat proven
! Avoiding change of control
by a reasonable investigation in good
faith
! outsider wants in
(2) BJR applies: Response was reasonable in
relation to the threat posed
! company has a preferred buyer/partner
Where break-up or change of control is
inevitable, board’s duty changes from
maintaining viability of company !
maximizing shareholder benefits (Revlon)
SECURITIES FRAUD: SECURITIES ACT §10(b) and RULE 10b-5
Unocal Corp.*
Revlon v. MacAndrews*
CORPORATIONS
Gold 2022
TOPIC
ELEMENTS TO A
10b-5 CLAIM
TEST(S)
(1) Manipulation or Deception caused by
the material misrepresentation or
omission by the defendant
(2) Scienter – defendant had the intent to
deceive, manipulate, or defraud
(3) In connection with the purchase or sale
of a security
(4) Reliance – Did the fraud cause the
transaction to be made?
(5) Economic Loss + Loss Causation –
sometimes there’s a knowingly false
statement that is material and shareholder
reliance, but no actual loss was suffered
Franco
POTENTIAL FACTS
CASES
! See Question 3 on 2021 exam
! Publicly held company (SEC law must
apply)
! Public statements from directors or
officers
! Insight to company plan to tell or not tell
shareholders something
Blue Chip Stamps
Santa Fe
Basic v. Levinson
Ernst & Ernst v. Hochfelder
Tellabs (SCOTUS)
Tellabs (Remanded)
Gold 2022
CORPORATIONS
PARTNERSHIPS
OVERVIEW
(1) Association of two or more
persons
(2) To carry on a business
(3) For profit
(4) As co-owners
WHO IS
INVOLVED
Co-owners (factors to consider
nature of relationship include):
(1) Control
(2) Division of profits/losses
(3) Duties
(4) Intent
CORPORATIONS
CLOSELY HELD
Privately held
company which does
not offer or trade its
company stock to the
public
DIRECTORS –
major shareholders
LLCs
PUBLICLY HELD
Company whose ownership is organized Corporation-like limited liability
via shares of stock which are intended to + partnership-like governance
be freely traded on a stock exchange
inside director(s) (e.g., CEO) balanced
with outside directors
OFFICERS
SHAREHOLDERS
Requires statutorily specified
manifestation of consent, but
does not require written
agreement or government action
Articles of Incorporation filed w/state
Bylaws adopted at first meeting
Determining shares to issue
RELEVANT LAW
Uniform Partnership Act
(UPA)
Other jurisdictions
MBCA
Delaware GCL ****
SEC Act + Rules
DEFINING
TRAITS
! Strong Equity Norms
! Profit/Loss Splitting
! Joint and Several Liabilities
! Unanimity for extraordinary
decisions or changes to
partnership agreement
! Often small and closely held
! Intimate
Enterprises
! No specialization
of function
! No existing market
for ownership interests
! Limited liability
! free transferability of shares without
co-owners’ consent
! Majority vote for most decisions
! Indefinite permanence
! Specialization of function
FIDUCIARY
DUTIES
Loyalty
Care
Candor
Good Faith
Partners owe each other and the
partnership fiduciary duties
In some circumstances, directors owe
Courts may apply
fiduciary duties directly to the
ordinary corporate law shareholders
or create a partnership
analogy
In most circumstances, directors owe
fiduciary duties to the corporation
COMPARISON
! Easier to dissolve
! Emphasis on co-ownership
FORMATION
Franco
! Entity is legally separate from its
investors and managers
MEMBER MANAGED –
default rule; members = managers
MANAGER-MANAGED –
allocating management functions
to members or non-members
Filing chartering document w/
state
Operating agreement re: who will
own and manage
Delaware LLC Act
Jurisdiction matters*
! Planning Allocation of
Functions
! Limited Liability
Delaware allows LLCs to contract
around certain fiduciary duties
Members only have fiduciary
duties to LLC where membermanaged
! Like corporations re: liability
! Like partnerships re:
governance
Gold 2022
SPECIFIC
CONSIDERATION
S
! People can easily monitor
each other
! Formation may be unclear
! Liability
CORPORATIONS
! Freeze-Out
Problem
! Compulsory or
Involuntary
Dissolution
! No personal liability
! Can easily buy and sell your interests
(ordinarily)
! Centralized decision-making
authority
Franco
! Whether it resembles a
partnership or corporation will
change the legal analysis
! Jurisdiction matters*