CORPORATIONS:
STATUTES, RULES, ETC.
RESTATEMENT OF AGENCY 2D.
s 376. GENERAL RULE
The existence and extent of the duties of the agent to the principal are determined by the
terms of the agreement between the parties, interpreted in light of the circumstances
under which it is made, except to the extent that fraud, duress, illegality, or the incapacity
of one or both of the parties to the agreement modifies it or deprives it of legal effect.
s 377. CONTRACTUAL DUTIES
A person who makes a contract with another to perform services as an agent for him is
subject to a duty to act in accordance with his promise.
s 379. DUTY OF CARE AND SKILL
(1) Unless otherwise agreed, a paid agent is subject to a duty to the principal to act with
standard care and with the skill which is standard in the locality for the kind of work
which he is employed to perform and, in addition, to exercise any special skill that he
has.
(2) Unless otherwise agreed, a gratuitous agent is under a duty to the principal to act with
the care and skill which is required of persons not agents performing similar gratuitous
undertakings for others.
s 381. DUTY TO GIVE INFORMATION
Unless otherwise agreed, an agent is subject to a duty to use reasonable efforts to give his
principal information which is relevant to affairs entrusted to him and which, as the agent
has notice, the principal would desire to have and which can be communicated without
violating a superior duty to a third person.
s 382. DUTY TO KEEP AND RENDER ACCOUNTS
Unless otherwise agreed, an agent is subject to a duty to keep, and render to his principal,
an account of money or other things which he has received or paid out on behalf of the
principal.
s 383. DUTY TO ACT ONLY AS AUTHORIZED
Except when he is privileged to protect his own or another's interests, an agent is subject
to a duty to the principal not to act in the principal's affairs except in accordance with the
principal's manifestation of consent.
s 385. DUTY TO OBEY
(1) Unless otherwise agreed, an agent is subject to a duty to obey all reasonable directions
in regard to the manner of performing a service that he has contracted to perform.
(2) Unless he is privileged to protect his own or another's interests, an agent is subject to
a duty not to act in matters entrusted to him on account of the principal contrary to the
directions of the principal, even though the terms of the employment prescribe that such
directions shall not be given.
s 387. GENERAL PRINCIPLE
Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the
benefit of the principal in all matters connected with his agency.
s 388. DUTY TO ACCOUNT FOR PROFITS ARISING OUT OF EMPLOYMENT
Unless otherwise agreed, an agent who makes a profit in connection with transactions
conducted by him on behalf of the principal is under a duty to give such profit to the
principal.
s 393. COMPETITION AS TO SUBJECT MATTER OF AGENCY
Unless otherwise agreed, an agent is subject to a duty not to compete with the principal
concerning the subject matter of his agency.
s 394. ACTING FOR ONE WITH CONFLICTING INTERESTS
Unless otherwise agreed, an agent is subject to a duty not to act or to agree to act during
the period of his agency for persons whose interests conflict with those of the principal in
matters in which the agent is employed.
s 395. USING OR DISCLOSING CONFIDENTIAL INFORMATION
Unless otherwise agreed, an agent is subject to a duty to the principal not to use or to
communicate information confidentially given him by the principal or acquired by him
during the course of or on account of his agency or in violation of his duties as agent, in
competition with or to the injury of the principal, on his own account or on behalf of
another, although such information does not relate to the transaction in which he is then
employed, unless the information is a matter of general knowledge.
s 396. USING CONFIDENTIAL INFORMATION AFTER TERMINATION OF
AGENCY
Unless otherwise agreed, after the termination of the agency, the agent:
(a) has no duty not to compete with the principal;
(b) has a duty to the principal not to use or to disclose to third persons, on his own
account or on account of others, in competition with the principal or to his injury, trade
secrets, written lists of names, or other similar confidential matters given to him only for
the principal's use or acquired by the agent in violation of duty. The agent is entitled to
use general information concerning the method of business of the principal and the names
of the customers retained in his memory, if not acquired in violation of his duty as agent;
(c) has a duty to account for profits made by the sale or use of trade secrets and other
confidential information, whether or not in competition with the principal;
(d) has a duty to the principal not to take advantage of a still subsisting confidential
relation created during the prior agency relation.
MERGERS AND OTHER “FRIENDLY” CONTROL TRANSACTIONS
1) Introduction
a) Friendly transactions are those supported by the directors of the corporation
experiencing the change in control
b) Unfriendly takeovers are those where outsiders by a controlling amount of a
corporation’s stock over the objection of that company’s directors.
c) Our focus in this chapter is the legal form used to carry out these friendly
transactions—the statutory merger
2) Mergers and Dissenter’s Rights
a) A statutory merger is a transaction whereby two or more corporations are
combined into one of the corporations, usually referred to as the surviving
corporation.
b) When the merger is effected, the legal existence of all constituent corporations
(except the surviving corporation) ceases. By operation of law, the assets and
liabilities of all constituent corporations pass to the surviving corporation, and the
outstanding shares of stock in the disappearing corporations are canceled.
c) Corporation codes explain the roles of directors in initiating and approving a
merger.
i) First, the BOD of each constituent corporation must adopt a plan of merger
that specifies the terms of the merger, including what consideration will be
paid to the shareholders of the disappearing corporations in exchange for their
shares, and what changes, if any, will be made in the articles of incorporation
of the surviving corporation.
ii) Normally, the BOD of each corporation then submits the plan of merger to
their respective shareholders for approval.
iii) After requisite shareholder approval is obtained, the plan of merger is filed
with the state corporations commission, and the merger becomes effective as
set forth in the merger plan
iv) The terms apply to all shareholders, not just those who voted for the
transaction.
d) In the archetypal merger, shareholders of the disappearing corporation receive
shares of the surviving corp. in exchange for their canceled shares. However,
modern corp statutes generally allow any form of consideration, including a
mixture of stock, notes, cash, or any alone, a flexibility that leads to cash-out
mergers.
e) States very between needing unanimous, two thirds, or majority shareholder
approval to approve a merger. There are exceptions to the norm that shareholders
must approve a merger: the ‘de minimis change’ exception and the ‘short form
merger’ exception.
i) De minimis: The de minimis change exception denies voting rights to SH’s of
the surviving corporation in a merger the terms of which will not significantly
affect the pre-merger shareholders’ voting or equity rights, nor require a
change in the corp’s articles of incorporation.
ii) Short form: The short form merger is a procedure that allows a corporation
that owns MOST of the shares of another corporation (the ‘subsidiary’) to
merger with that subsidiary by director action alone.
(1) Short form mergers not merely based on futility of minority shareholder
votes; % needed for this kind of merger usually much higher than
majority.
(2) Short form mergers save time and meeting expense. Nonetheless,
corporations often avoid the short form procedure in order to give
minority shareholders a right to approve or dissent.
3) Dissenters’ Rights
a) If a SH dissents when asked to approve a merger or other covered transaction, and
if the transaction nonetheless obtains the requisite SH approval, the dissenter may
demand that his shares be repurchased by the corp for fair value.
b) If the SH and corp can’t agree to a price in the parameters given by the appraisal
statute, fair value will be determined in a judicial procedding. These rights—
‘appraisal rights—are tied to the relxation of SH’s ability to limit a corp’s
adaptability. Appraisal rights are a trade-off for the loss of the veto, providing
SH’s with an ‘out’ should they want it.
c) Before a SH elects to pursue appraisal, he must weigh the costs and benefits of the
proceeding. How likely will the courts find a fair value? What happens if I’m
disappointed? Who’ll pay for the costs of the proceedings?
d) DGCL 262 offers little comfort to a risk averse SH considering appraisal in lieu of
the terms offered in the merger approved by the corp. The SH will receive
judicially determined fair value, plus interst, even if that amount is less than what
the corp offered to shareholders as part of the terms of the merger. Moreover, the
court is empowered to assess the corporation’s expenses if equitable.
e) When should appraisal rights be available?
i) First, the proposed transaction either will require the shareholder to invest in a
fundamentally different enterprise or will constitute a cash-out and final
settling of the SH’s investment
ii) Second, other protective devices (market or fiduciary litigation) are likely to
be ineffective or more costly in protecting the SH’s investment expectations.
f) With respect to mergers, most statutes proved that appraisal rights exist only
when voting rights exist.
i) One important exception: the SH’s of a corp merged out of existence via a
short form merger still receive appraisal rights.
ii) Another exception: “Market exception”” DE denies appraisal rights for most
publicly traded shares, if the merger consideration received in exchange is
also publicly-traded stock.
DELAWARE GENERAL CORPORATE LAW
§ 251. Merger or consolidation of domestic corporations and limited partnership.
(a) Any 2 or more entities existing under the laws of this State may merge into a single
corporation, which may be any 1 of the constituent entities or may consolidate into a new
corporation formed by the consolidation, pursuant to an agreement of merger or
consolidation, as the case may be, complying and approved in accordance with this
section.
(b) The board of directors of each corporation which desires to merge or consolidate
shall adopt a resolution approving an agreement of merger or consolidation and declaring
its advisability. The agreement shall state: (1) The terms and conditions of the merger or
consolidation; (2) the mode of carrying the same into effect; (3) in the case of a merger,
such amendments or changes in the certificate of incorporation of the surviving
corporation as are desired to be effected by the merger, or, if no such amendments or
changes are desired, a statement that the certificate of incorporation of the surviving
corporation shall be its certificate of incorporation; (4) in the case of a consolidation, that
the certificate of incorporation of the resulting corporation shall be as is set forth in an
attachment to the agreement; (5) the manner of converting the shares of each of the
constituent corporations into shares or other securities of the corporation surviving or
resulting from the merger or consolidation and, if any shares of any of the constituent
corporations are not to be converted solely into shares or other securities of the surviving
or resulting corporation, the cash, property, rights or securities of any other corporation
or entity which the holders of such shares are to receive in exchange for, or upon
conversion of such shares and the surrender of any certificates evidencing them, which
cash, property, rights or securities of any other corporation or entity may be in addition to
or in lieu of shares or other securities of the surviving or resulting corporation; and (6)
such other details or provisions as are deemed desirable, including, without limiting the
generality of the foregoing, a provision for the payment of cash in lieu of the issuance or
recognition of fractional shares, interests or rights, or for any other arrangement with
respect thereto, consistent with § 155 of this title. The agreement so adopted shall be
executed and acknowledged in accordance with § 103 of this title. Any of the terms of
the agreement of merger or consolidation may be made dependent upon facts
ascertainable outside of such agreement, provided that the manner in which such facts
shall operate upon the terms of the agreement is clearly and expressly set forth in the
agreement of merger or consolidation. The term "facts," as used in the preceding
sentence, includes, but is not limited to, the occurrence of any event, including a
determination or action by any person or body, including the corporation.and
(c) The agreement required by subsection (b) of this section shall be submitted to the
stockholders of each constituent corporation at an annual or special meeting for the
purpose of acting on the agreement. The terms of the agreement may require that the
agreement be submitted to the stockholders whether or not the board of directors
determines at any time subsequent to declaring its advisability that the agreement is no
longer advisable and recommends that the stockholders reject it. Due notice of the time,
place and purpose of the meeting shall be mailed to each holder of stock, whether voting
or nonvoting, of the corporation at the stockholder's address as it appears on the records
of the corporation, at least 20 days prior to the date of the meeting. The notice shall
contain a copy of the agreement or a brief summary thereof, as the directors shall deem
advisable. At the meeting, the agreement shall be considered and a vote taken for its
adoption or rejection. If a majority of the outstanding stock of the corporation entitled to
vote thereon shall be voted for the adoption of the agreement, that fact shall be certified
on the agreement by the secretary or assistant secretary of the corporation. If the
agreement shall be so adopted and certified by each constituent corporation, it shall then
be filed and shall become effective, in accordance with § 103 of this title. In lieu of filing
the agreement of merger or consolidation required by this section, the surviving or
resulting corporation may file a certificate of merger or consolidation, executed in
accordance with § 103 of this title, which states:
(1) The name and state of incorporation of each of the constituent corporations;
(2) That an agreement of merger or consolidation has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations in accordance with
this section;
(3) The name of the surviving or resulting corporation;
(4) In the case of a merger, such amendments or changes in the certificate of
incorporation of the surviving corporation as are desired to be effected by the merger, or,
if no such amendments or changes are desired, a statement that the certificate of
incorporation of the surviving corporation shall be its certificate of incorporation;
(5) In the case of a consolidation, that the certificate of incorporation of the resulting
corporation shall be as set forth in an attachment to the certificate;
(6) That the executed agreement of consolidation or merger is on file at an office of the
surviving corporation, stating the address thereof; and
(7) That a copy of the agreement of consolidation or merger will be furnished by the
surviving corporation, on request and without cost, to any stockholder of any constituent
corporation.
(d) Any agreement of merger or consolidation may contain a provision that at any time
prior to the time that the agreement (or a certificate in lieu thereof) filed with the
Secretary of State becomes effective in accordance with § 103 of this title, the agreement
may be terminated by the board of directors of any constituent corporation
notwithstanding approval of the agreement by the stockholders of all or any of the
constituent corporations; in the event the agreement of merger or consolidation is
terminated after the filing of the agreement (or a certificate in lieu thereof) with the
Secretary of State but before the agreement (or a certificate in lieu thereof) has become
effective, a certificate of termination or merger or consolidation shall be filed in
accordance with § 103 of this title. Any agreement of merger or consolidation may
contain a provision that the boards of directors of the constituent corporations may
amend the agreement at any time prior to the time that the agreement (or a certificate in
lieu thereof) filed with the Secretary of State becomes effective in accordance with § 103
of this title, provided that an amendment made subsequent to the adoption of the
agreement by the stockholders of any constituent corporation shall not (1) alter or change
the amount or kind of shares, securities, cash, property and/or rights to be received in
exchange for or on conversion of all or any of the shares of any class or series thereof of
such constituent corporation, (2) alter or change any term of the certificate of
incorporation of the surviving corporation to be effected by the merger or consolidation,
or (3) alter or change any of the terms and conditions of the agreement if such alteration
or change would adversely affect the holders of any class or series thereof of such
constituent corporation; in the event the agreement of merger or consolidation is
amended after the filing thereof with the Secretary of State but before the agreement has
become effective, a certificate of amendment of merger or consolidation shall be filed in
accordance with § 103 of this title.
(e) In the case of a merger, the certificate of incorporation of the surviving corporation
shall automatically be amended to the extent, if any, that changes in the certificate of
incorporation are set forth in the agreement of merger.
(f) Notwithstanding the requirements of subsection (c) of this section, unless required by
its certificate of incorporation, no vote of stockholders of a constituent corporation
surviving a merger shall be necessary to authorize a merger if (1) the agreement of
merger does not amend in any respect the certificate of incorporation of such constituent
corporation, (2) each share of stock of such constituent corporation outstanding
immediately prior to the effective date of the merger is to be an identical outstanding or
treasury share of the surviving corporation after the effective date of the merger, and (3)
either no shares of common stock of the surviving corporation and no shares, securities
or obligations convertible into such stock are to be issued or delivered under the plan of
merger, or the authorized unissued shares or the treasury shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other shares, securities or obligations to be
issued or delivered under such plan do not exceed 20% of the shares of common stock of
such constituent corporation outstanding immediately prior to the effective date of the
merger. No vote of stockholders of a constituent corporation shall be necessary to
authorize a merger or consolidation if no shares of the stock of such corporation shall
have been issued prior to the adoption by the board of directors of the resolution
approving the agreement of merger or consolidation. If an agreement of merger is
adopted by the constituent corporation surviving the merger, by action of its board of
directors and without any vote of its stockholders pursuant to this subsection, the
secretary or assistant secretary of that corporation shall certify on the agreement that the
agreement has been adopted pursuant to this subsection and, (1) if it has been adopted
pursuant to the first sentence of this subsection, that the conditions specified in that
sentence have been satisfied, or (2) if it has been adopted pursuant to the second sentence
of this subsection, that no shares of stock of such corporation were issued prior to the
adoption by the board of directors of the resolution approving the agreement of merger or
consolidation. The agreement so adopted and certified shall then be filed and shall
become effective, in accordance with § 103 of this title. Such filing shall constitute a
representation by the person who executes the agreement that the facts stated in the
certificate remain true immediately prior to such filing.
§ 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this section with respect to such
shares, who continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to § 228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word "stockholder"
means a holder of record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more shares, or
fractions thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation to be effected pursuant to § 251
(other than a merger effected pursuant to § 251(g) of this title), § 252, § 254, § 257, §
258, § 263 or § 264 of this title
Background: 262(d)(1), 262(e)-(k)
THE FIDUCIARY DUTY OF CARE
1) Overview
a) Everyone agrees that a well-functioning, competent board of directors is essential
to a corp’s long term success, but there is substantial disagreement as to the
contours of the duty of care, and even further disagreement as to when, if ever, the
threat of fiduciary litigation is the best mechanism for enforcing BOD duties.
b) In DE, the fiduciary duty of care is defined solely by judicial doctrine.
i) There are statutory alterations, though; in DE, most significantly: the statutory
exculpatory provision, which authorizes a corporation to adopt charter
provisions that limit or eliminate directors’ liability for money damages for
breach of the fiduciary duty of care. DGCL § 102(b)(7).
DGCL §102: Exculpation Provision
(b) In addition to the matters required to be set forth in the certificate of incorporation by
subsection (a) of this section, the certificate of incorporation may also contain any or all
of the following matters:
(7) A provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the liability of a
director: (i) For any breach of the director's duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any
transaction from which the director derived an improper personal benefit. No such
provision shall eliminate or limit the liability of a director for any act or omission
occurring prior to the date when such provision becomes effective. All references in this
paragraph to a director shall also be deemed to refer (x) to a member of the governing
body of a corporation which is not authorized to issue capital stock, and (y) to such other
person or persons, if any, who, pursuant to a provision of the certificate of incorporation
in accordance with § 141(a) of this title, exercise or perform any of the powers or duties
otherwise conferred or imposed upon the board of directors by this title.
FIDUCIARY DUTY AND THE BUSINESS JUDGMENT RULE
1) Overview
a) Under the general agency law principles, officers and other corporate agents are
subject to fiduciary duties.
b) IN the corporate setting, fiduciary duty has two different functions:
i) First, it instructs directors to be absolutely fair and candid in pursuing
personal interests. Thus, the duty of loyalty makes it wrongful for a director
unfairly to compete with her corporation or unfairly to divert corporate
resources or opportunities to her personal use.
ii) Second, fiduciary duty describes the bounds of acceptable conduct for
directors in carrying out their individual and collective duty to manage the
corporation.
iii) Both functions raise a core issue: how to reduce the possibility that directors
will favor personal interests over the corporation’s interests.
c) As a constraint on directors’ personal interests, fiduciary duty primarily involves
the duty of loyalty. However, in its application, fiduciary duty not only covers
selfish actions but also the possibility of excessively negligent behavior—in other
words, fiduciary duty has both a loyalty component and a care component.
d) In Delaware, judicial rules developed under the rubric of fiduciary duty also
define the bounds of directors’ potential liability for misconduct in carrying out
official duties.
e) Normally, directors owe fiduciary duties to the corporation, not to individual
shareholders. Thus, the corporation has primary responsibility for instituting and
controlling fiduciary litigation.
i) Still, there are circumstances in which courts allow shareholders to initiate and
control fiduciary litigation on the corporation’s behalf. (‘derivative’ action)
ii) Additionally, there are important circumstances in which managers and the
corp. owe fiduciary duties directly to the corporation’s shareholders. (‘direct’
action.)
f) While the apparent purpose of fiduciary duty is regulation of directors’ conduct to
protect shareholders, it is helpful to think of fiduciary duty and derivative
litigation as state-provided governance structures designed to protect the
investment expectations of shareholders and directors.
2) The Business Judgment Rule
a) Def: A judge-made doctrine that provides that backdrop for other judicial and
legislative rules defining or affecting the scope of fiduciary duty.
b) Great Ohio definition on p. 261: “The rule is a rebuttable presumption that
directors are better equipped that the courts to make business judgments and that
the directors acted without self-dealing or personal interest and exercised
reasonable diligence and acted with good faith.’ (OHIO—don’t use it)
c) An obvious purpose of the BJR is to protect directors from liability unless they
have failed to act with requisite care or loyalty….however, it also determines the
extent to which directors have discretion to take a long view of corporate well
being, to take into account the interests of other constituencies/larger community,
or to chart a course that other similar corps have eschewed…
DGCL : Proper and Improper Use of Majority Power
§ 271. Sale, lease or exchange of assets; consideration; procedure.
(a) Every corporation may at any meeting of its board of directors or governing body
sell, lease or exchange all or substantially all of its property and assets, including its
goodwill and its corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or other property,
including shares of stock in, and/or other securities of, any other corporation or
corporations, as its board of directors or governing body deems expedient and for the
best interests of the corporation, when and as authorized by a resolution adopted by the
holders of a majority of the outstanding stock of the corporation entitled to vote thereon
or, if the corporation is a nonstock corporation, by a majority of the members having the
right to vote for the election of the members of the governing body, at a meeting duly
called upon at least 20 days' notice. The notice of the meeting shall state that such a
resolution will be considered.
(b) Notwithstanding authorization or consent to a proposed sale, lease or exchange of a
corporation's property and assets by the stockholders or members, the board of directors
or governing body may abandon such proposed sale, lease or exchange without further
action by the stockholders or members, subject to the rights, if any, of third parties under
any contract relating thereto.
DGCL: Introduction to Conflicting Interest Transactions
1) Introduction
a) IN the nineteeth century, CL courts were in substantial agreement that
transactions between a corporation and one or more of its directors were void or
voidable simply because a conflict of interest existed.
b) Quotes from Justice Field:
i) “Thus a person cannot be a purchaser of property and at the same time the
agent of the vendor. The two positions impose different obligations, and their
union would at once raise a conflict between interest and duty; and,
“constituted as humanity is, in the majority of cases duty would be overborne
in the struggle”…
ii) Directors of corporations, and all persons who stand in a fiduciary relation to
other parties, and are clothed with power to act for them, are subject to this
rule; they are not permitted to occupy a position which will conflict with the
interest of parties they represent and are bound to protect. They cannot, as
agents or trustees, enter into contracts on behalf of those they are appointed to
act, and then personally participate in the benefits.
2) As the complexity and interconnection of US business increased, conflicting interest
transactions became an accepted business reality. Judicial view evolved accordingly.
a) Courts no longer viewed conflict of interest transactions as automatically void or
voidable.
b) Instead, conflicting interest transactions were voidable only if the transaction or
the conduct of conflicted directors was unfair to the corporation.
c) Thus, a conflicting interest transaction would be voided if the substantive terms of
the transaction were found unfair, or, even if such terms were found fair, if the
benefiting directors had in any way breached their obligation to disclose fully all
relevant facts to the corporation, including, of course, the fact of their interest in
the subject matter.
3) DGCL § 144
a) In essence, it provides that no conflicting interest transaction shall be void or
voidable solely by reason of conflict if the transaction
i) Is authorized by a majority of the disinterested directors, or
ii) Is approved in good faith by the shareholders, or
iii) Is fair to the corporation at the time authorized.
b) In addition, §144 codifies the CL requirement of complete candor and fair dealing
by making director/SH approval effective only if the interested director has
disclosed all material facts.
The Effect of Disinterested Approval: If the conflicting interest taint is removed from a
transaction by disinterested shareholder or director approval, does this reinstate the
business judgment rule and its presumptions, and, if so, what must a dissatisfied
shareholder establish to prove that the transaction is unfair? Two ‘normal’ rules:
1. Disinterested approval DOES reinstate the business judgment rule;
2. Even with BJR defenses in place, a conflicting interest transaction may be challenged
as a gift or waste of corporate assets.
§ 144. Interested directors; quorum.
(a) No contract or transaction between a corporation and 1 or more of its directors or
officers, or between a corporation and any other corporation, partnership, association, or
other organization in which 1 or more of its directors or officers, are directors or officers,
or have a financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of the board or
committee which authorizes the contract or transaction, or solely because any such
director's or officer's votes are counted for such purpose, if:
(1) The material facts as to the director's or officer's relationship or interest and as to the
contract or transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(2) The material facts as to the director's or officer's relationship or interest and as to the
contract or transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith by vote of
the shareholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors, a committee or the shareholders.
(b) Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the board of directors or of a committee which authorizes the
contract or transaction.
DGCL: Stock Options
§ 157. Rights and options respecting stock.
(a) Subject to any provisions in the certificate of incorporation, every corporation may
create and issue, whether or not in connection with the issue and sale of any shares of
stock or other securities of the corporation, rights or options entitling the holders thereof
to purchase from the corporation any shares of its capital stock of any class or classes,
such rights or options to be evidenced by or in such instrument or instruments as shall be
approved by the board of directors.
(b) The terms upon which, including the time or times which may be limited or
unlimited in duration, at or within which, and the price or prices (including a formula by
which such price or prices may be determined) at which any such shares may be
purchased from the corporation upon the exercise of any such right or option, shall be
such as shall be stated in the certificate of incorporation, or in a resolution adopted by the
board of directors providing for the creation and issue of such rights or options, and, in
every case, shall be set forth or incorporated by reference in the instrument or
instruments evidencing such rights or options. In the absence of actual fraud in the
transaction, the judgment of the directors as to the consideration for the issuance of
such rights or options and the sufficiency thereof shall be conclusive.
(c) The board of directors may, by a resolution adopted by the board, authorize 1 or
more officers of the corporation to do 1 or both of the following: (i) designate officers
and employees of the corporation or of any of its subsidiaries to be recipients of such
rights or options created by the corporation, and (ii) determine the number of such rights
or options to be received by such officers and employees; provided, however, that the
resolution so authorizing such officer or officers shall specify the total number of rights
or options such officer or officers may so award. The board of directors may not
authorize an officer to designate himself or herself as a recipient of any such rights or
options.
(d) In case the shares of stock of the corporation to be issued upon the exercise of such
rights or options shall be shares having a par value, the price or prices so to be received
therefor shall not be less than the par value thereof. In case the shares of stock so to be
issued shall be shares of stock without par value, the consideration therefor shall be
determined in the manner provided in § 153 of this title.
THE DEMAND REQUIREMENT
1) Introduction
a) A shareholder-controlled derivative suit is a usurpation of the directors’ normal
power to manage the business and affairs of a corporation justifiable only in
circumstances where the directors are unwilling or unable to handle the litigation
in the best interests of the corporation.
b) To accommodate the circumstance of simple unwillingness, DE and most other
jurisdictions require a shareholder to make pre-suit demand on the board,
explaining the claims which he wishes investigated and remedied. It is then up to
the board to consider how to deal with the matters brought to their attention in the
demand letter.
i) If the board reaches a decision not to pursue the claim via litigation, the
shareholder may challenge the directors’ decision as a breach of fiduciary
duty, but has no right to directly pursue the original claim that was the subject
of his demand, unless the directors’ action in refusing to institute litigation is
found not to be protected by the business judgement rule.
c) DE, and some other jurisdictions, excuse shareholders from making pre-suit
deamdn in circumstances where demand would be futile, for example, when the
directors lack the independence to impartially consider a demand. In these
jurisdictions, the demand futility exception becomes the initial battleground in
derivative litigation. Defendants quickly move for dismissal on the grounds that
the shareholder-plaintiff wrongfully failed to make demand.
2) Aronson v. Lewis established the core principle of DE’s demand futility doctrine.
THE INTERSECTION B ETWEEN THE APPRAISAL REMEDY AND FIDUCIARYDUTY BASED JUDICIAL REVIEW: Cash-out Mergers and the Business Purpose Test
1) Introduction
a) Traditionally, corporate law has imposed heightened ‘fairness’ obligations on
fiduciaries involved in self-dealing transactions. This concern is especially acute
in connection with a relatively recent phenomenon, ‘cash-out’ mergers.
b) Specific statutory authorization for the use of cash as consideration in a merger
because the norm in very few states prior to 1970. Not until 1967 in Delaware was
cash not authorized as consideration in a merger.
c) When these ‘cash’ statutes were interpreted by courts as not requiring the same
consideration for all shareholders, the way was open for controlling shareholders
directly to force minorities out of the enterprise via a merger or other fundamental
change by specifying that the controlling shareholder would get equity in the
merged enterprise and the minority shareholder would get cash.
d) Minority SH’s challenged cash-outs via class-actions; defendants asserted such
complaints were barred by general rule that appraisal is a dissenting SH’s
exclusive remedy, unless the underlying transaction is fraudulent…
i) IN response to this litigation, several jurisdictions adopted ‘business purpose’
tests as a means of giving closer scrutiny to cash-out mergers, and,
correspondingly, creating larger exceptions to the appraisal exclusivity rule.
e) DE joined the business purpose club with Singer v. Magnavox—case required
controlling shareholders to prove a valid business purpose for a cash-out merger.
Left unclear was the extent to which the controlling shareholder must consider the
business needs of the controlled corporation or its other shareholders.
f) IN parent-subsidiary actions, not only will defendants have to prove business
purpose, but also entire fairness of the decision (interested transaction,
remember?)
2) The Weinberger Approach
a) From 1977-1983, DE courts encouraged challenging cash-out mergers via a class
action suit rather than to pursue an individual appraisal action.
i) The Singer case and its progeny made it relatively easy for shareholders to
obtain an entire fairness review.
ii) During this same period, the Lynch v. Vickers cases increased plaintiff’s
preferences for class actions…thus plaintiffs syaed clear of appraisal actions.
(1) Trial court, on remand, created appraisal-like result based on ‘DE block
method’; seeing it to be less than merger offer; no problem, right?
(2) DE S. Court says you need to award damages for the breach of fiduciary
duty, not just for the difference in share value…a fair result could be
achieved “by ordering damages which are the monetary equivalent of
rescission and which will, in effect, ewual the increment in value that
Vickers enjoyed as a result of acquiring and holding the Transocean stock
in issue.
iii) Seeing as how trial courts were still oblivious to Singer/Lynch, and plaintiffs
kept avoiding appraisal, DE crafted a new appraisal remedy, reshape the rules
governing fiduciary duty-based review of cash-out mergers…
REGULATING THE SHAREHOLDER COMMUNICATION PROCESS:
OVERVIEW OF FEDERAL REGULATION
1) Introduction
a) While states determine the substantive law governing relations between a
corporation and its shareholders, federal law plays the dominant role in regulating
vote-related communication between and among shareholders and the
corporation.
b) Federal regulation began with the enactment of the 1935 Securities Exchange Act.
i) §14(a) of that act gave the SEC authority to regulate the proxy or consent
solicitation process of a corporation required to register stock with the SEC.
c) The legislative history suggests that Congress was primarily concerned with
preventing corporations from soliciting proxies by means of materials that did not
reveal the true nature of the matter being acted upon. However, the SEC has
interpreted its §14(a) mandate broadly.
d) The rules promulgated from 14(a) seem designed to ensure that the proxy process
allows shareholders to communicate with each other and the corporation
smoothly…
i) Consistent with this broader mission, the SEC has promulgated extensive
rules to address the content and timing of proxy solicitation.
2) Rules Primarily Affecting Solicitation of Proxies, Whether by Management or
Shareholders
a) Rule 14a-3:
i) Prohibits any proxy solicitation unless the person solicited is first furnished a
publicly filed preliminary or final proxy statement containing the information
specified in Schedule 14A of the Exchange Act Rules.
(1) Disclosure includes basic facts that voters would possess: time, date, plae
of meeting to which the solicitation relates, revocability of proxy,
soliticitor’s identity, source of funds, and, if concerning directors, the
identity/basic info about candidates for directors…
ii) Rule 14a-5:
(1) Regulates the form of the proxy statement: principle requirements relate to
readability—type style, size, manner material is presented in, etc.
iii) Rule 14a-4:
(1) Regulates the form of the proxy that solicitors ask shareholders to
execute…concerned with readability, however the overriding concern of
this Rule is to ensure that shareholders be given an opportunity to do more
than grant the authority requested by the solicitor. Thus, the proxy card
must provide boxes for a shareholder to approve, disapprove, or abstain
with respect to each matter covered by the proxy…
iv) Rule 14a-9:
(1) Rule 14a-9 is a catch-all provision designed to supplement and reinforce
the specific disclosure mandates. Rule 14a-9 prohibits the making of false
or misleading statements as to any material fact, or the misleading
omission of a material fact, in connection with a proxy solicitation.
SEC ‘34
§14(a): Solicitation of proxies in violation of rules and regulations
It shall be unlawful for any person, by the use of the mails or by any means or
instrumentality of interstate commerce or of any facility of a national securities exchange
or otherwise, in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the protection of
investors, to solicit or to permit the use of his name to solicit any proxy or consent or
authorization in respect of any security (other than an exempted security) registered
pursuant to section 12.
Rule 14a-3 -- Information to be Furnished to Security Holders
a. No solicitation subject to this regulation shall be made unless each person
solicited is concurrently furnished or has previously been furnished with a
publicly-filed preliminary or definitive written proxy statement containing the
information specified in Schedule 14A or with a preliminary or definitive written
proxy statement included in a registration statement filed under the Securities Act
of 1933 on Form S-4 or F-4 or Form N-14 and containing the information
specified in such Form.
b. If the solicitation is made on behalf of the registrant, other than an investment
company registered under the Investment Company Act of 1940, and relates to an
annual (or special meeting in lieu of the annual) meeting of security holders, or
written consent in lieu of such meeting, at which directors are to be elected, each
proxy statement furnished pursuant to paragraph (a) of this section shall be
accompanied or preceded by an annual report to security holders as follows:
Rule 14a-9 – False or Misleading Statements
a. No solicitation subject to this regulation shall be made by means of any proxy
statement, form of proxy, notice of meeting or other communication, written or oral,
containing any statement which, at the time and in the light of the circumstances
under which it is made, is false or misleading with respect to any material fact, or
which omits to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same meeting or
subject matter which has become false or misleading.
b. The fact that a proxy statement, form of proxy or other soliciting material has been
filed with or examined by the Commission shall not be deemed a finding by the
Commission that such material is accurate or complete or not false or misleading, or
that the Commission has passed upon the merits of or approved any statement
contained therein or any matter to be acted upon by security holders. No
representation contrary to the foregoing shall be made. (look for examples)
RULE 14a-9
1) Introduction
a) Section 14(a) of SEC ’34 authorizes the SEC to regulate proxy solicitations “as
necessary or appropriate in the public interest or for the protection of investors.”
b) Pursuant to this authority, the SEC has supplemented the express disclosure
obligations in 14a-3 with a broad prohibition in Rule 14a-9 against any false or
misleading statement of a material fact or any omission necessary to make an
included statement not misleading or to correct a statement that has become
misleading.
2) Implied Private Cause of Action
a) Rule 14a-9 does not expressly provide for a private cause of action by
shareholders who believe they were misled by a proxy statement. The USSC’s
holding that an implied private right of action exists for 14a-9 dramatically
affected the use of the rule.
b) Since the c/o/a is not expressly set out in a statute/rule, determining the elements
of a private action has required judges to look beyond the statute and the rule.
c) Courts have essentially viewed 14a-9 as an antifraud provision and turned to the
familiar law of common law fraud or the tort of deceit (similar to what’s been
done with 10b-5.)
d) The black letter elements of common law fraud or decient require a plaintiff to
show misrepresentation or omission of a material fact made with scienter on
which plaintiff relies, suffering damages as a consequence.
3) Express Federal Cause of Action
a) §21 of SEC ’34 permits the SEC to bring civil actions for violation of the act and
§32 provides for criminal penalties. The 1934 Act provides express causes of
action to private parties in §§ 9, 16, and 18.
i) § 18 covers false and misleading statements in any ‘application, report or
document filed pursuant to this title or any rule/reg thereunder.’
ii) This c/o/a has been lmited by courts requiring ‘eyeball reliance’ on the
misleading statement and some other procedural restrictions.
4) State Causes of Action
a) Many states have their own antifraud provisions; how do fed/state spheres coexist
here?
REGULATION OF INSIDER TRADING UNDER §16 OF THE SECURITIES
EXCHANGE ACT OF 1934
1) Introduction
a) The increased attention paid to 10b-5/§10b of SEC ’34 has obscured §16, tha part
of the 1934 Act that was originally intended to deal with insider trading.
2) Enforcement
a) Section 16(b) violations are easier to discover than most law violations because of
the public reporting of trading required by §16(a).
i) Of course, this easy discovery system is only as good as the compliance rate,
and the SEC has expressed concern about the widespread LACK of
compliance under §16(a)…
ii) Under 1991 rules, the SEC now requires corporations to state in their annual
report any insiders who are not current with their §16(a) reporting.
3) Computation of Recovery
a) The severity of 16b is heightened by the method commonly used to calculate
damage, not ‘first in, first out’, but rather ‘lowest price in, highest price out’
within six months. (see problem, p. 1199)
4) Who Is An Insider?
a) As part of a review of §16(b) in 1991, the SEC defined ‘officer’ similarly to how
that term is used elsewhere in the securities laws. (Broadly—see Rule 16a-1(f).)
Usually an ‘officer’ has some kind of policy-making power.
b) The statute specifies three groups of potential defendants: officers, directors, and
beneficial owners of more than 10 percent of a class of equity security of a
corporation.
c) SEC broadens liability
i) Those who own more than 10% of a class of the issuer’s equity securities are
‘beneficial owners’; §13(d) standards determine if/how a group of investors
might count as a beneficial owner.
ii) An officer of directors is said to be the beneficial owner of the shares of
members of her family living in the same house, but the SEC describes this
rule as a rebuttable presumption..see Rule 16a-1(a)(4)
iii) SEC rulemaking does not speak to the concept of ‘deputization’, explicitly
leaving it to the development of case law. §
Section 16 -- Directors, Officers, and Principal Stockholders
a. Filing of statement of all ownership of securities of issuer by owner of more than
ten per centum of any class of security
Every person who is directly or indirectly the beneficial owner of more than 10
per centum of any class of any equity security (other than an exempted security)
which is registered pursuant to section 12, or who is a director or an officer of the
issuer of such security, shall file, at the time of the registration of such security on
a national securities exchange or by the effective date of a registration statement
filed pursuant to section 12(g), or within ten days after he becomes such
beneficial owner, director, or officer, a statement with the Commission (and, if
such security is registered on a national securities exchange, also with the
exchange) of the amount of all equity securities of such issuer of which he is the
beneficial owner, and within ten days after the close of each calendar month
thereafter, if there has been a change in such ownership or if such person shall
have purchased or sold a security- based swap agreement (as defined in section
206B of the Gramm-Leach Bliley Act) involving such equity security during such
month, shall file with the Commission (and if such security is registered on a
national securities exchange, shall also file with the exchange), a statement
indicating his ownership at the close of the calendar month and such changes in
his ownership and such purchases and sales of such security based swap
agreements as have occurred during such calendar month.
b. Profits from purchase and sale of security within six months
For the purpose of preventing the unfair use of information which may have been
obtained by such beneficial owner, director, or officer by reason of his relationship to
the issuer, any profit realized by him from any purchase and sale, or any sale and
purchase, of any equity security of such issuer (other than an exempted security) or a
security-based swap agreement (as defined in section 206B of the Gramm-LeachBliley Act) involving any such equity security within any period of less than six
months, unless such security or security- based swap agreement was acquired in good
faith in connection with a debt previously contracted, shall inure to and be
recoverable by the issuer, irrespective of any intention on the part of such beneficial
owner, director, or officer in entering into such transaction of holding the security or
security-based swap agreement purchased or of not repurchasing the security or
security-based swap agreement sold for a period exceeding six months. Suit to
recover such profit may be instituted at law or in equity in any court of competent
jurisdiction by the issuer, or by the owner of any security of the issuer in the name
and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within
sixty days after request or shall fail diligently to prosecute the same thereafter; but no
such suit shall be brought more than two years after the date such profit was realized.
This subsection shall not be construed to cover any transaction where such beneficial
owner was not such both at the time of the purchase and sale, or the sale and
purchase, of the security or security based swap agreement (as defined in section
206B of the Gramm-Leach Bliley Act) involved, or any transaction or transactions
which the Commission by rules and regulations may exempt as not comprehended
within the purpose of this subsection.
RULE 10b-5 AS APPLIED TO CORPORATE TRANSACTIONS
1) Introduction
a) Rule 10b-5 is a broad catch-all that has become a key element in the federal
regulation of corporations. Here it is:
Rule 10b-5 -- Employment of Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
2) What Rule 10b-5 catches must be fraud. But fraud emcompasses a wide variety of
acts and Rule 10b-5 does not remedy all fraud, only that in connection with the
purchase or sale of securities.
3) 10b-5 began as a tool for the government. Nongovernment lawyers, however, sought
to make use of it in private suits. IN 1946, federal courts implied a private cause of
action. After being broadened in scope through the 60’s and early 70’s, by the mid
70’s the USSC began to sharply limit the reach of the rule.
a) Congress stayed out of most of this debate, but in 1995 passed legislation that
codified the more restrictive interpretation.
THE COMMON LAW FOUNDATION FOR RULE 10b-5
1) Rule 10b-5 is the primary regulator of insider trading today, but is not the only legal
source on this topic. Note that no specific reference to insider trading appears in the
statute or the rule. Courts have construed a ‘deceptive device’ and ‘fraud’ as
proscribed by the statute and rule to include insider trading in some circumstances.
2) Prior to Rule 10b-5 being adapted to the purpose of regulating insider trading, both
federal statutes and the common law addressed the issue.
a) SEC ’34 §16(b)—federal statute, w/accompanying regs
b) Common law
i) Majority rule: directors purchasing stock from shareholders had no fiduciary
duty to the shareholdes
ii) Minority rule: a director negotiating with a shareholder for purchase of shares
acts in a relation of…trust and confidence…such transactions must be
subjected to the closest scrutiny, and unless conducted with utmost fairness,
the wronged shareholders may invoke proper remedy.
iii) Other decisions rested on a ‘special facts’ doctrine: the ordinary relationship
between a director and shareholder does not require disclosure of knowledge a
director may possess, but, by reason of special facts, such duty exists.
iv) An alternative common law approach has focused on fiduciary duty of
trustees and agents owed to the corporation and the unjust enrichment of the
insider.
3) Rule 10b-5 as a Regulator of Insider Trading
a) First important step in the use of 10b-5 to regulate insider trading was In re Cady,
Roberts & Co. (1961). That case announced the principal that a corporate insider
who has material non-public information about the enterprise is under a duty
either to abstain from trading or to disclose the non-public information.
THE DELAWARE SHORT-FORM MERGER taken from Green v. Santa Fe
The laws of Delaware permit a majority of 90% or more of the shareholders of a
Delaware corporation to squeeze out the minority without giving prior notice of the
intention to do so, without any statement of a justifiable corporate reason for the merger
and upon payment to the minority shareholders of an amount of dollars per share
specified in the terms of the merger. The sole remedy of an objecting minority
shareholder under these Delaware laws is to demand an appraisal of the value of his stock
in a proceeding in the Delaware Court of Chancery.
Many years ago Delaware though its legislature established a series of corporation laws
thought to be favorable to corporate management and designed to attract corporations to
the state for the purpose, among others, of raising revenue for the state and furnishing
business for the legal profession in Delaware…some of these laws were intended to
facilitate the squeexing out of minority shareholders. Of these laws, the one we are
concerned about here is the short form merger, provided for in DGCL §253.
The salient feature of this short-form merger was that a majority of 90% of the
shareholders could eliminate the 10% minority without any vote of the shareholders,
without prior notice to the minority shareholders, without any statement of corporate
purpose and by fixing an amount to be paid per share to the minority shareholders, who
were given the option of selling their shares at the stipulated price or demanding an
appraisal under the auspices of the DE court of chancery, pursuant to DGCL §262. We
are told that the avowed purpose of these laws was to wipe out the minority. The DE
courts have held that the sole remedy of the minority shareholders is to demand the
appraisal and be paid the fixed amount per share. No opportunity is afforded the minority
shareholder in advance of the date when the merger becomes effective to apply to any
court for injunctive relief to stop the merger, nor is there any provision for rescission or
other relief.
The DE laws also permit a longform merger in cases where the majority have control, but
not 90% of the stock. IN such cases prior notice is required and an opportunity is
afforded to apply to a court for injunctive relief. In this class of mergers a vote of the
shareholders is necessary.
In the case of a shortform merger, if the majority decides to fix the price to be paid to the
minority SH’s at a figure substantially less than the shares are worth and the merger
becomes effective and the minority SH’s trun in their stock and receive the amount
stipulated, all in the absence of any stated corporate purpose, the corporation pays for the
stock bought from the minority SH’s, the minority is squeezed out and the entire benefit
of the transaction inures to the majority shareholders. The corporation receives no
advantage, and may in fact suffer detriment, and by the elimination of the shares of stock
of the minority the majority’s shares become more valuable…
Securities Exchange Act of 1934
Section 13 -- Periodical and Other Reports
a. Reports by issuer of security; contents
Every issuer of a security registered pursuant to section 78l of this title shall file
with the Commission, in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate for the proper protection
of investors and to insure fair dealing in the security-1. such information and documents (and such copies thereof) as the
Commission shall require to keep reasonably current the information and
documents required to be included in or filed with an application or
registration statement filed pursuant to section 12, except that the
Commission may not require the filing of any material contract wholly
executed before July 1, 1962.
*****See Regulation FD, Form 8-K. *****
SAFE HARBOR FOR PROJECTIONS p. 1048
1) Introduction
a) Fear of litigation can make corporations and their executives unwilling to discuss
the company’s plans and expectations with analysts or the public, silence that can
frustrate the disclosure aims of the securities laws.
b) Legislation passed by Congress in 1995 was, in part, spurred by concerns that an
unexpected change in a company’s earnings triggered an instant lawsuit alleging
fraud in prior statements. (ex: silicon valley)
c) The 1995 legislation added a safe harbor that went beyond the language provided
in prior SEC rules. The safe harbor seeks to protect projections of revenues,
earnings, dividends, or similar items as well as statements of the plans and
objectives of management for future operations, products, and services IF the
forward looking statements are accompanied by “meaningful cautionary
statements identifying important factors that could cause actual results to differ
materially.”
d) The safe harbor does not protect statements made in an initial public offering,
tender offers, going private transactions, and others….
e) Statements made with ‘actual knowledge’ that the statement was false or
misleading (or in the case of a business entity, made or approved by an executive
officer with actual knowledge of falsity) are excluded
f) Prior to the legislative measure, several appellate courts developed the ‘bespeaks
caution’ doctrine. That doctrine was frequently used in litigation arising out of
new issuances of securities. (see case chart for wording.)
2) The 1995 reform litigation added a statutory requirement for loss causation for private
10b-5 actions…requires a plaintiff to prove that defendant’s wrongful action ‘caused
the loss for which the plaintiff seeks to recover.’ The relationship of this loss
causation requirement to reliance or other ‘connection’ requirements is not
specified…
a) Courts considering fraud cases also require that there be loss causation,
sometimes discussed as legal causation or proximate causation. Judicial
discussion of these concepts is fluid. Sometimes it occurs in connection with
discussion of damages. Other courts introduce these causation discussions as a
function of the Rule 10b-5 requirement that fraud be ‘in connection with’ a
purchase and sale of a security.