ENTERPRISE ORGANIZATIONS
Prof. Loewenstein—Fall 1999
I.
INTRODUCTION
What is a blue sky law?
Business judgment rule—a presumption that the directors acted in good faith, in the company’s
best interest, and with due care (pg20, notes)
Options, Puts, and Calls—See BOF, 282. What is a warrant? BOF284
Preferred Stock—BOF 288
Could use some help on BOF 381-397, what is a specialist?
Concerns of investors
1) liability
2) exit strategy or transferability
3) tax
4) continuity
5) fiduciary duty
rd BOF, 98-103, then see notes pg 3-5 to do this section
General Partnership—If not an entity, then
II.
THE CORPORATE ENTITY
Shareholders like to invest in corps b/c:
1) Limited liability
2) Shares have a market—they are freely transferable.
3) There is an established structure, predicticable law governs them—lessens transaction
costs at the outset.
4) Directors make the decisions, so SH don’t have to.
De facto partnership—failure to follow the rules for making a corp. could mean you forfeit your
limited liability and end up in a de facto partnership.
What is the difference between de facto and de jure corporations? See notes, pg6 and BOF, 142.
State of incorporation governs “internal affairs”, such as takeover defensive tactics, events that
trigger appraisal, and the ability of the board to terminate derivative actions. Principal place of
business usually governs other matters.
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Southern Gulf Marine Co. v. Camcraft (pg191)— entered into a K on behalf of a corp. yet to
be formed. Then  breached the K to furnish a ship. The  says that since  was not a
corporation at the time of contract, K is invalid.  wins on estoppel theory;  knew that  was
not a corporation and  relied on the K.
A. PIERCING THE CORPORATE VEIL
Walkovszky v. Carlton (pg196)—Taxi cab tort case. A bunch of separate corporations owned
about 2 cars each (’s had only the minimum insurance for each cab.  claimed all the separate
companies were actually one entity. The court said if the stockholder conducts business in his
individual capacity, he can be held liable—they have to “honor the corporate form” (e.g.hold
meetings, have directors, maintain separate bank accounts). Ct. said since  did not act in his
individual capacity, so they are not going to pierce the corporate veil.
Test—Whether  and his associates are actually doing business in their individual capacities,
shuttling their personal funds in and out of the corporations “without regard to formality and to
suit their immediate convenience”.
Dissent—strongly disagreed with the public policy implications of the decision because ’s were
just trying to get around the statute about minimum insurance. He said the corps were all
deliberately undercapitalized to avoid responsibility.
What is the difference between enterprise liability, respondeat superior, and disregarding the
corporate form?—pg201
Sea-Land Services v. Pepper Source (pg202)— owed  money and couldn’t pay.  seeking
to hold Marchese personally liable.  wins because  did not respect the corporate form (just
his “playthings”.  could and should have gotten a personal guarantee and failed to. So  just
got lucky that Marchese was not following corporate formalities.
Test in Van Dorn—The corporate veil will be pierced when: 1) such unity of interest and
ownership that the separate personalities of the corporation and the individual no longer exist,
and 2) adherence to the fiction of separate corporate existence would sanction a fraud or promote
injustice.
Court said that part I was definitely satisfied but need more facts to find part II about promoting
injustice.
Four factors to demonstrate lack of unity:
1) failure to maintain adequate corporate records or to comply with corporate formalities
2) commingling of funds or assets
3) undercapitalization
4) one corporation treating the assets of another corporation as its own.
Kinney Shoe Corporation v. Polan (pg208)—No capital was put into the sub at all, so  want to
pierce the corporate veil to get paid. Ct. uses the 2 part test to say that 1) the undercapitalization
means that Polan did not honor the separate corporate, and 2) it would be unjust to not pierce.
Court considers a 3rd test—Did Kinney assume the risk of undercapitalization? But court says
they don’t have to ask that, so they don’t here.
Very few piercing cases succeed if they follow the corporate formalities.
2
Perpetual Real Estate Services v. Michaelson Properties (pg211)—Joint venture to sell condos.
AAA pays both partners, MPI distributes to Michaelson. PRES keeps some assets. Condo
owners sued asserting breach of warranty. PRES settles and goes after Michaelson because MPI
has no assets. PRES passed the first test because the corp. was an instrument of Michaelson (no
corporate formalities, undercapitalization), but they lose on whether he used the corporation to
conceal fraud, commit a crime or disguise a wrong. L: tight test. PRES had full knowledge of
the structure of MPI and Michaelson’s role. Therefore, the veil will not be pierced, and
Michaelson is not personally liable for MPI’s debts.
In re Silicone Gel Breast Implants Products Liability Litigation (pg215)—Bristol is the parent
corp. Ct. asks whether the sub is the “alter ego or mere instrumentality of the parent”. Ct. says
corp formalities were not observed, and that it doesn’t matter that there was no fraud or
misconduct. Why should corp. SH be treated differently than ind. SH? It is really difficult for
the parent to keep the sub separate.
Tort creditors should have an easier time piercing than contract creditors. L: Michaelson is a
better way, Kinney is just outrageous.
Frigidaire Sales Corporation v. Union Properties (pg223)—Limited partners do not incur
general liability for the limited partnership’s obligations simply because they are officers,
directors, or SH of the corporate general partner. I don’t understand this case. Ct. says that UP
was a separate entity and Frigidaire knew it was dealing with a corporation. Also, the partners
observed the corp. formalities.
B. SHAREHOLDER DERIVATIVE ACTIONS—BOF 195-201
See notes generally, pg14-16, for a discussion of derivative actions and the incentives they
create. ’s lawyers benefit, directors come out even because of indemnification, and corporation
loses. Not very popular. No derivative actions make a company more attractive to investors.
Cohen v. Beneficial Industrial Loan Co. (pg226)—Recognizes the legitimacy of SH derivative
actions and explicitly recognizes the state’s ability to regulate it
Eisenberg v. Flying Tiger Line (pg230, 17)—I don’t understand the reorganization stuff—If the
injury is to the corporation, then it is derivative; however, if the injury is to the individual ,
then it can be a representative class action. The  is not challenging acts of the management on
behalf of the board; he claims the ’s are interfering with his rights as a SH. A security is not
needed if the claim is by an individual. The court concluded that no security is needed.
Congressional Reforms to Securities Fraud Class Actions:
1) Lead  rule—the lead  is chosen by the court. Takes into account the size of their
claim.
2) Atty’s fees—have to be a reasonable % of the damages actually paid
3) If the  moves to dismiss, no discovery during the pendency of that motion.
4) If  loses, pay attorney’s fees of  (in derivative actions, only applies to small SH)
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5)  must act knowingly
Lately, there is a new player, the intervenor. Other attorneys come in after a settlement, and say
attorneys’ fees or the settlement was too high and sue derivatively. To get rid of the intervenor,
they pay him off too.
Hypo about the lawyer and malpractice, pg14, 18-20
Demand—Statutes often require a SH must make a demand on the board before suing
derivatively, unless they can show demand would be futile. Courts can decide if demand is futile
in the first place, or if there was demand, whether the suit was wrongfully refused.
1) futility—look at director’s relationship and their ties to the underlying transaction.
Very difficult to overcome the demand requirement.
2) wrongful refusal—courts review using the business judgment rule.  has to allege
facts creating reasonable doubt. Then the burden shifts to directors to show the
judgment made was fair to the company.
What about board inaction? Pg20, split of authority on whether they get the normal protections
or if there has to be a business judgment first.
Grimes v. Donald (pg29supp)—Board delegated its authority to one person, and  brought suit
to stop it. Is this direct or derivative? Ct. says it is direct because he is not seeking money.
Why? Also court says that  did not rebut the business judgment rule and show demand was
wrongfully refused. After the  seeks demand from the board, they cannot assert that demand is
excused due to the lack of independence of the board. Factors court offers to demonstrate when
demand is futile:
1) a majority of the board has a material financial or familial interest
2) a majority of the board is incapable of acting independently for some other reason
such as dominion or control
3) the underlying transaction is not the product of a valid exercise of business judgment.
Marx v. Akers (pg39supp)-- alleges self-dealing due to excessive compensation to the outside
directors and executive officers.  did not demand, and demand is excused here, but case is
dismissed for failure to state a claim. Ct. applied the business judgment rule to the salaries.
Compensation is hard to review because it would subject every public corp to justification of
their salaries.
What is the standard of review when the special litigation committee has moved to dismiss the
action? pg23notes
NY—(Auerbach) is a process based review only
DE—chancellor can look at the merits and exercise some judgment
Discussion on whether states trying to attract corp. will be protective of directors or SH, pg23n
Auerbach v. Bennett (pg245)—Corp used a special litigation committee made up of outside
directors who concluded corp would not be served by allowing the suit to proceed. Ct. applied
the business judgment rule and said committee’s conclusion was outside review. Court can only
review the process—committee selection, good faith, and the sufficiency of the investigation.
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Zapata Co. v. Maldonado (pg250)-- alleges demand is futile, so did not demand. Corp used a
special committee anyway and decided the suit should not proceed. Not a wrongful refusal
case—demand is properly excused. Ct. said the business judgment rule is not enough protection,
despite being outsiders, since they are sitting in judgment of other directors who designated
them. Corps need to be able to get rid of meritless suits, but shouldn’t be able to do so just by
making a committee. Need to balance these competing interests. 2 part test: 1) inquiry into the
independence and good faith of the committee, and 2) court should apply its own business
judgment on the merits
Alford v. Shaw (pg259)—Another special committee. L: goes further than Zapata. Says that to
make the committee’s determination binding on the courts is abdicating judicial duty.
C.
ROLE AND PURPOSES OF THE CORPORATION
§3.01
Used to have to state the corporate purpose in the charter and if you went outside it, the action
was invalid or ultra vires
Ultra vires—means beyond the scope
Intra vires—means
A.P Smith Mfg. v. Barlow (pg264)-Dodge v. Ford Motor Co. (pg270)—business judgment rule
Shlensky v. Wrigley (pg275)
III. DUTIES OF OFFICERS, DIRECTORS AND OTHER
INSIDERS
A. THE OBILIGATIONS OF CONTROL: DUTY OF CARE
Kamin v. American Express Co. (pg281)—Derivative suit alleging that the dividend in kind is a
waste of corporate assets. ’s argue they should have sold the company instead for tax
advantage. Demand was rejected by the board. Ct. said that the question of whether to make a
dividend is a business judgment, not enough for it to be imprudent. Ct. says there was a hint that
the directors did it to keep their compensation packages higher, but only 4 of the 20, so not
sufficient enough.
Didn’t the price of Amex stock already reflect the devaluing of the DLJ stock? yes
Joy v. North (pg284)— contend that the s violated their duty of care by allowing Cititrust to
make a series of loans to a real estate developing company. Ct. says SH assume the risk of a bad
business judgment, ad hoc decisions are bad, SH don’t want laws that make directors overly
cautious. Ct has to overcome:
1) must pierce through the special litigation committee decision—entitled to
deference
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2) underlying business judgment
3) trial court’s dismissal of the outside directors.
But court overturns summary judgment. Said lack of knowledge is not a defense; the outside
directors abdicated their directorial responsibility.
Court adopts a substantive review of a special litigation committee. Auerbach might make this
case be decided differently
What is a reinsurer and what is all this standing stuff? N27
Francis v. United Jersey Bank (pg290)—Widow completely abdicated responsibility as a
director, and her sons stole from the company. Key case because it defines the affirmative duties
of a director. Lack of knowledge is not a defense. A director has affirmative duties to stay
informed, general monitoring, read financial statements (if on their face they disclose
wrongdoing then you have to do something—and apparently here “a cursory reading would have
disclosed the pillage”).
Graham v. Allis-Chalmers Manufacturing (pg296)—Case about oversight—see diagram on
n29. What level of review will courts use in determining whether or not directors appropriately
exercised oversight? Low level review—if no notice then you can’t be charged with failing to
exercise oversight.
In re Carmark International Derivative Litigation (pg49supp)—Chancellor disagrees with
Graham, and says there should be oversight. Director has a good faith duty to ensure that he is
getting accurate information.
Need a sustained or systematic failure to exercise oversight—low bar.
Can make a merger:
1) sale of assets
2) statutory merger (appraisal remedy)
3) straight to the shareholders—tender offer
statutory merger consequence is that the board is involved (what does that mean?), but in a
tender offer, not everyone will sell.
Smith v. Van Gorkom (pg301)—talk with eric about the facts of this one—Proposed merger, 
challenge the merger agreement as unfair. Ct finds for the s because the directors failed to
inform themselves so they lost the protection of the business judgment rule. The burden is on 
to show what they did was in the company’s best interest.
§8.30(b)—Directors are okay if you rely on any of these people.
Lock-ups on pg48supp
More here, n32-33
B. DUTY OF LOYALTY
When a court invokes the business judgment rule, the s almost always win. Invoked only 1) if
the directors have been conscientious enough to have exercised real “judgment” (duty of care),
and 2) if they have not had conflicting personal interests at stake (the duty of loyalty)—pg323.
See BOF here:148-153 & 162-170
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Bayer v. Beran (pg323)—Hired the president’s wife to sing on the radio show. Court said the
show is protected by the business judgment rule. Test is “whether the action of the directors was
intended or calculated to subserve some outside purpose, regardless of the consequences to the
company, and in a manner inconsistent with its interests”. Court seems concerned because
president has a conflict of interest, so the rest of the board couldn’t be independent either. But
the court concludes there was a valid business reason for the radio show, so s lose.
L: very strong view of conflict. What does that mean?
Lewis v. S.L. & E (pg328)—The real property is in one company, and lease it to another
company. Some of the directors are on both boards. s claim that since they were acting as
landlord and tenant, couldn’t act objectively. Ct. says that’s right. The burden is on those with
the conflict to justify what they did. (Business judgment rule places the burden on the , but it
presupposes not conflict, which shifts the burden to the s).
Energy Resources Co. v. Porter (pg333)—Dispute over a grant.  claimed that since Jackson
wouldn’t work for ERCO, he was free to pursue the opportunity. Rule is that when a corporation
is unable to avail itself of an opportunity, its employee, officer or director is free to exploit it.
But  kept his involvement a secret from ERCO, so they were not given an opportunity to
change Jackson’s mind. Therefore the court found for ERCO. “A fiduciary’s silence is
equivalent to a stranger’s lie”.
Broz v. Cellular Information Systems (pg63supp)—Rule is: ‘a corporate officer or director
cannot undertake an opportunity that his corp would have the money for, be interested in, and be
in the corp’s line of business. Broz found out about the opportunity in his individual capacity,
but that does not end the inquiry. Ct. also found that 1) CIS could not afford the opportunity, 2)
it was questionable that they had a reasonable expectation to it, or that they would have wanted
it, and 3) Broz only competed with an outside entity, PriCellular, not CIS, for the opportunity.
Ct. said he doesn’t have to formally ask CIS’s board about the opportunity, either. Broz won.
In DE, you look and see if this is in the line of work the corp does (nature, not capacity)
§5.05? nature and capacity.
*Look at questions 5 and 6 and take a close look at §5.05
Sinclair Oil Co. v. Levien (pg338)—Stands for the fact that a majority SH can owe a duty to a
minority SH. Sinclair (parent) owned about 97% of Sinven’s (sub) stock. Test: “Intrinsic
fairness standard”—the burden is on Sinclair to prove that its transactions with Sinven were
objectively fair. Standard will be invoked when there is 1) a fiduciary duty between the parent
and the subsidiary, and 2) self-dealing. Case is that the parent caused Sinven to pay dividends it
did not have because they needed the cash, to the detriment of the minority SH. Court says that
since minority SH received the dividends too, it was not exclusively for the benefit of Sinclair,
and so the business judgment rule applies instead of the intrinsic fairness standard. Also,  did
not show any opportunities that came to Sinven that Sinclair took itself or denied to Sinven.
So, when we have a dominant SH, we can just about ignore the board of directors.
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Zahn v. Transamerica Co. (pg343)—Three classes of stock: Class A, B, and preferred.
Redeeming stock is in B’s interest, but not in A’s. See chart, n37. I don’t understand the classes
of stock, their purpose, and why B is the riskiest. It is okay for the company to prefer Class B
stock. However, they should have disclosed what was going to happen so the Class A people
could convert to B. Case turns on disclosure, not fiduciary duty.
In re Wheelabrator Technologies Shareholders Litigation (pg349)—WTI is a subsidiary of
Wheelabrator. The 7 non-Waste directors of WTI unanimously approved the merger agreement.
What is important about this case? Ct. says that SH approval can cure defect in the board’s
decision. Look at page 352 about burden of proof. If SH are fully informed that is (compare to
Van Gorkom where the SH were not fully informed).
Rule 10b-5
Santa Fe Industries v. Green (pg354)—Short form merger because they owned 90% of the
stock.  did not seek appraisal.  made a Sinclair argument—majority is getting something the
minority is not (self-dealing) AND motivations of the directors are pretty clear. Court said that
no indication that Congress intended to protect anything under 10b-5 except manipulation or
deception, so no breach of fiduciary duty here. Since there was full and fair disclosure, terms
don’t matter.
C. INSIDE INFORMATION
Goodwin v. Agassiz (pg361)-- says he would not have sold his stock if he had known of the
geologist’s theory.  says they had a duty to disclose that they believed the theory.  says I
can’t deceive someone I have never met. If you can see them, duty to disclose; if you can’t see
them, no duty (Strong v. Repide). Mere silence is not usually a breach of duty. Onerous to be a
director if you have to seek out every SH to tell him everything that might possibly be relevant to
him. So there wasn’t much to disclose here, so no breach of duty.
Securities and Exchange Commission v. Texas Gulf Sulphur (pg364, BOF 155)—Upon
learning of a valuable ore strike, corporate officials purchased substantial amounts of company
stock. The SEC successfully sued for disgorgement of profits. 10b-5 was violated when: 1)
insiders traded on material non-public information, and 2) the inaccurate press release caused
some SH to sell their shares at an undervalued price.
An insider must either: 1) disclose material information, or 2) abstain from trading. Materiality
test: would a reasonable person think this important?
Dirks v. Securities & Exchange Commission (pg378, BOF 157)
United States v. O’Hagan (pg73)
Basic Inc. v. Levinson (pg405, BOF 156)—Company denied it was in merger negotiations. s
sold their stock after the release of the press release. “Fraud on the market theory” means that
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stock market needs all the relevant information to have an accurate price. Created a rebuttable
presumption that the s relied on misrepresented or omitted information if it was material.
Expanded Texas Gulf Sulphur.  have a good defense in that keeping negotiations secret was in
SH’s best interests. SC said it was material in order to resolve a circuit split.
Rule 10-b5 was for securities, but now it is used for everything.
Pommer v. Medtest Co. (pg419)--s bought stock in Medtest which was only valuable if the
company went public, paid dividends, or was acquired. None of those things happened, and the
s allege fraud.  told  they had the patent, which they didn’t, and it doesn’t matter that they
got the patent eventually. Case survives because the ct. thinks s could have relied.
Note: s didn’t sue the seller, so how can these s be liable?, see n42.
D. PROTECTION OF OPTION HOLDERS
Deutschman v. Beneficial Co. (pg424)-- alleges losses when, upon disclosure of the facts, call
options on Beneficial’s stock that he had purchased in reliance on the market price created by s
misstatements, became worthless. Options are hurt by: 1) insider trading, and 2) affirmative
misrepresentations.  alleges #2. Ct. says that option traders should not be treated any
differently than stock traders, just because they are “gambling”.
E. SHORT SWING PROFITS
Rule 16b—Have to file an insiders report 1x/month. Officers, directors, and 10% SH must pay
to the corp. any profits they make, within a 6 month period, from buying and selling the co’s
stock.
Reliance Electric Co. v. Emerson Electric Co. (pg429)—Does the bifurcated sale need to be
considered one sale, and all the profit recovered? Ct says no. Literal reading of the statute.
Kern County Land Co. v. Occidental Petroleum Co. (pg432)—not a literal reading of the
statute. Occidental didn’t transfer their Old Kern stock to Tenneco preferred stock to avoid 16b
liability. Instead they made: 1) a tender offer and 2) an option agreement. Ct. doesn’t want to
make a large exception to 16b, so says no liability for this transaction because couldn’t have had
inside info (but not no liability because there’s no sale). Creates the possibility of litigating
around what Congress set up as an irrebuttable presumption. I am not sure I get this case.
Problems, n45
F. DISCLOSURE AND FAIRNESS
1933 and 1934 Acts
1) Made corps. disclose all relevant info
2) Defined security broadly
3) Made fraud a federal violation
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Whenever a security is sold, it has to be registered with the SEC unless exemption:
1) §4(1)—transaction by a person rather than issuer, dealer, or underwriter (our
exemption)
2) §4(2)—transactions not involving an public offering. Ex) Doran
BOF says that sometimes people say that the 33 Act registers securities, while the 34 act
registers companies, BOF201, also see bof202. The SEC protects investors, not shareholders.
Reves v. Ernst & Young (pg443)—Broad definition: “The term security means any not, stock,
treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing
agreement...but shall not include...”. Adopts the 2nd cir. family resemblance test. Every note is a
security, but it is rebuttable. Factors:
1) motivations
2) plan of distribution
3) reasonable expectations of the trading public
4) another regulatory scheme
More here n47-48
SEC v. Howey (pg445, n47)—selling tourists orange trees, profits go to the buyer of the
tree. SEC claimed they should have to register with the SEC. Called it an investment K,
not a purchase with a service K. But that describes almost every AND it involves a lot of
investment schemes. Reeves court rejects this.
United Housing Foundation v. Forman (pg445, note1, n47)—why is this footnote
important?
Doran v. Petroleum Management Co. (pg449)—Was this sale a private offering and therefore
exempt from registration of the 1933 Act? Purpose of the act is to protect investors and make
sure they have the information.
Holding: No, in the absence of findings of fact about whether the investors had all the
information from a prospectus (which is necessary to gain the exception), the court remanded.
Four factors to determine if it is a private offering:
1) number of offerees and their relationship to each other and the issuer
2) the number of units offered,
3) the size of the offering
4) the manner of the offering
 showed the latter 3 factors (small # of units offered, relatively modest financial stakes, and
personal contact. But the most important factor is the first one.
a) Since only 8 investors were offered, that is consistent with private = number is fine
b) But for the relationship part, sophistication is not enough. Test is whether all
offerees had all the information a prospectus would have contained. Availability
means that they had it or had access to it.
Regulation D, pg456—is this important?
State laws about securities are called blue sky laws.
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Escott v. Barchris Construction Co. (pg457)—Bowling alley builder went bankrupt.
33 ACT §11--A false or misleading statement must be material under Section 11. “Matters
which the average prudent investor out to reasonably be informed” about.
The errors on the balance sheet are an example of material false statements.
Pg463—“Due Diligence Defense”—
Then court goes on to examine each of the s in detail as to whether they have successfully
asserted the due diligence affirmative defense pg465-472.
G. INDEMNIFICATION AND INSURANCE
NOTE ON INDEMNIFICATION—pg475
Delaware General Corporation Law §145
a) third party suits
b) derivative suits
c) if the  wins
d) only if proper
e) advancement of expenses
f) private agreements
g) a corporation can have insurance
Citadel Holding Co. v. Roven (pg478)—Does the company has to pay the director because of an
indemnification agreement? This case is extremely confusing and boring...come back to it
Holding: They have to pay the director.
Waltuch v. Conticommodity Services (pg83supp)—Director seeks indemnification. 1) Does the
company have to indemnify Waltuch even if he did not act in good faith? 2) Is the dismissal of
the claims against Waltuch (due to Conti’s settlement) mean he was “successful on the merits”
and therefore entitled to indemnification?
Holding: 1) even though Waltuch is arguing under Article Ninth where there is no good faith
requirement, the court says he still has to act in good faith under §145(a). Under §145(f), a
company can go beyond §145, but it still must be consistent with the “scope” of the
corporation’s power to indemnify, which is already contained in §145. So they don’t have to
indemnify him here. 2) But the company has to indemnify him because the claim settled without
payment by him, and was therefore “successful on the merits or otherwise”. The court refuses to
look into the reason for the success.
See the questions, supp92, and find out the answers.
IV. PROBLEMS OF CONTROL
Managers are accountable to SH because: BOF176
1) proxy fights
2) takeover bid
3) derivative action
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4) public monitoring by the SEC
5) appraisal remedy
Majority elects the entire board v. cumulative voting.
BOF118—a SH is entitled to all earnings and appreciation in the value of the corp’s assets after
the fixed claims of the senior security holders is met (creditors and preferred stockholders).
SH are entitled to vote for the election of directors and other fundamental matters [1)
mergers involving the corporation, 2) any amendment to the certificate of incorporation,
3) sale of substantially all of the corp’s assets, and 4) liquidation.
A.
PROXY FIGHTS (see Jasmine’s outline)
Covered by both federal and state law, but federal law only covers publicly held corp. (prohibits
misleading statements as it relates to soliciting proxies.
Can SH call a special meeting? States differ on this. Intuitively, it seems they should be able to
BUT if there has been a significant amount of change, they may manipulate the ability just to get
a new board.
BOF177—Incumbents rarely lose the contest despite owning less than 10% because:
1) expensive for the dissident to wage
2) most SH don’t have time to pay attention, or are risk adverse or suspicious of the
insurgents; fear of the unknown
Can solicit proxies, they are revocable usually right up until the vote. 2 kinds:
1) blank authorization to the holder (L: a true proxy)
2) authorizes a vote with your stock in a certain way. Not self-executing like a ballot
because proxy actually has to show up for it to work.
Board of directors always has to solicit proxies to get a quorum.
Levin v. MGM (pg485, n50)—s want an injunction to keep the board from spending company
money soliciting proxies in a proxy fight.
Holding: Court denies the injunction. They say that it is essential that the SH be informed, and
there are definite differences between these 2 groups. If there was just a difference in
personalities, then using corp $ is not allowed. The court also said the expenses aren’t
outrageous, and they aren’t doing anything illegal. Also the proxy statement disclosed that
MGM would be paying for it.
Rosenfeld v. Fairchild Engine & Airplane (pg488, n51)—Derivative action to get the return of
money paid out to both sides in a proxy fight. New winners reimbursed themselves and the
departing group. Since the differences in the 2 groups were about policies of the company, the
money is fine.
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Holding: case dismissed. Getting a quorum is fine. Also, the new board having its own
expenses reimbursed is fine, if approved by SH. So, if the contest is one about policy and
conducted in good faith, then reasonable expenses may be reimbursed.
Dissent: this was an expensive, persuasive campaign complete with parties and corporate jets.
Informing is one thing, but the rest is needless expenditure.
L: what if incumbents reimburse insurgent losers? Not a conflict, Rosenfeld might say it
is okay.
Regulation of proxy fights—pg492 SEE the rules §14, etc.
SEC Rule 14a-9—Private cause of action for breach of §14(a), soliciting proxies by means of
materially false or misleading statements.
Virginia Bankshares v. Sandberg (pg495, n52)—Merger freezing out minority SH. The
majority did not need to let the minority vote, but they did anyway, and in the proxy statement
they said they thought the price was a high value and a fair price at $42. There was some
evidence that the value was probably $60. Two questions: 1) can the directors’ statements and
beliefs be materially misleading and 2) is a SH whose vote is not necessary for a merger can
show causation in a damages suit?
Holding: s win, didn’t need the minority, so it didn’t harm them even if it was material and
misleading.
L: the court rejects the s theory: the directors said they would not have gone forward on
the merger without the minority SH approval, and the misstatement was crucial to that
approval. But the court responds that we don’t know that they wouldn’t have gone
forward anyway.
Mills, pg498—Discussed whether the s should have the burden of reliance. There has to be a
causal link between the misstatement and the action, which is hard to prove. So 1) if a
misrepresentation in the proxy, and 2) it is material, then assume reliance.
L: If the board thought it wasn’t a high value, but it actually is, would that be
actionable? I think he said that it is material when the board is lying because SH
will care about the board’s opinion, even if it turns out later to be true. See n53,
though.
Stahl v. Gibraltar Financial Co. (pg502, n53)—Does the  have to actually cast his vote in
reliance on the statement to have it be actionable?
Holding: s have standing even if not personally mislead by the proxy statement. So limits the
reliance requirement. He can bring suit before or after the vote. It would be a catch-22 if those
that ferret out the misstatements cannot sue but those that are beguiled can.
What the heck is this analysis? Pg105, n53
Borak, pg506—In the absence of a private remedy under 14a-9, no meaningful review of proxy
statements because SEC can’t see them all.
Rule 14-8, pg208
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Lovenheim v. Iroquois Brands (pg93, n)—SH wants to his proposal added to the proxy
statement (wants a committee to study cruelty to animals). Exception--Co has to include the
proposal unless the proposal relates to operations that account for less than 5 percent of the
issuer’s business. It is less than 5%, but the rest of the test says “not otherwise significantly
related”, and  relies on that part.
Holding: Have to include it. After the reversal of Cracker Barrel, if a significant social policy,
even if not quantitatively important, still includable. (is this a correct statement? I am confused,
see the supp99-101) Also see n54-55, because there is a lot of stuff that doesn’t make sense
Shareholder Inspection Rights
Federal rules don’t say they have to give you the SH list, but often state rules do.
§16.01(e)—SH has pretty free access to lots of info, just need 5 days notice.
Articles—on file with the Sec of State
Bylaws and articles are also in the registration with the SEC
Minutes are on file in a public co.
Crane Co. v. Anaconda Co. (pg527)—Question of what is a proper purpose for wanting the SH
list. Here, the court asks whether a tender offeror can get the list to tell the SH about the offer.
Holding: Yes, they can get the list. It is not improper to want to solicit directly.
L: Is the court right? Is this a proper business purpose? They don’t want it as a SH; they
want it as a purchaser.
State Ex Rel. Pillsbury v. Honeywell (pg529)-- purchased the stock for the sole purpose of
trying to convince the co to stop producing munitions. He wants the list to communicate with his
fellow SH about bombs. Test: is whether the  has a purpose germane to his interest as a SH.
Holding: His is not a proper purpose. Have to have a bona fide business interest because the
power to inspect may be the power to destroy.
L: the cases are the opposite. Crane had nothing to do with the co., Pillsbury had a
proper purpose.
Question 2, pg532—should inspection rights be up to the co?
Question 4-- should have said he was concerned about bad publicity or something
Sadler v. NCR Co. (pg533)—Does a co have a right to a NOBO list? AT&T is using the
Sadlers.
Holding: Yes.
L: Broad reading—in line with Crane
I have no idea what a NOBO list is or what is going on in this case do I need to?
B.
SHAREHOLDER VOTING CONTROL
Stroh v. Blackhawk Holding Co. (pg541)—There are 2 classes of stock, each had one vote, but
class B had no other economic interest in the stock.
Why is the  upset? He doesn’t own class B stock. Because Class B may have nonfinancial interests and won’t vote for the financial gains of A. The more the Class B
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holders harm the company, the more they benefit economically because it encourages
someone to take them over.
Holding: The class B stock is fine
Analysis#2, pg544—Answer this!, lots of stuff here, n58
C.
CONTROL IN CLOSELY HELD CORPORATIONS
Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling (pg547, n59)—Falling out
between Edith Ringling and son v. Haley and son. Cumulative voting. Ringling and Haley need
to work together to elect a majority of the board, so they had an agreement. Goes to an arbitrator
who tries to enforce the agreement. However, Haley ignores him and elects himself and his
wife. Issues: 1) Is the agreement enforceable? 2) construction of the agreement.
Holding: Agreement is enforceable, but what is the result of the rest? Answer the questions on
pg554 and n61.
McQuade v. Stoneham (pg554, n62)—Agreement to keep everyone in their positions at certain
salaries. McQuade sued when he was not reelected like the agreement specified.
Holding: You can have agreements about who to vote for as a director, but can’t put limitations
on the power of the directors to manage the business. Can’t have an agreement that prohibits
changing officers, salaries, or policies—it is illegal.
L: How they vote may not be in the best interests of the company, so the agreement
should be non-enforceable.
Clark v. Dodge (pg559, n62)—Same court as McQuade. There was an agreement between the 2
sole shareholders to keep Clark as a manager.
Holding: Valid, distinguishable because there is no minority SH. No damages, no problem, K is
valid.
What is a voting trust? pg563
Galler v. Galler (pg566)—2 brothers made an agreement to make sure the family kept control in
the event of one of the brother’s deaths. After the death, one side failed to honor the agreement.
Holding: SH in a closely held corp are free to contract regarding management of the corp absent
the presence of an objecting minority. Ct. ordered specific performance.
More on this case; I might be missing something...n63
D.
ABUSE OF CONTROL
Wilkes v. Springside Nursing Home (pg580)—At the time of incorporation, 4 partners
understood that each would participate actively in the management of the company. Falling out
and Wilkes was not reelected as an officer or a director. His claim is breach of fiduciary duty.
Holding: They did breach their fiduciary duty to him.
L: SH do not usually owe each other a fiduciary duty. Court recharacterizes it as a
partnership, but they expressly agreed to incorporate. They based it on sympathy for
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Wilkes, but maybe they should have narrowed it on wrongful discharge or breach of K.
Causes a groundswell of litigation.
Ingle v. Glamore Motor Sales (pg587)-- claims that because he owns stock, he can’t be fired.
He says that the ownership of stock transforms it from employment at will to a minority SH (as a
co-owner in a closely held corp).
Holding: They don’t owe him a fiduciary duty.
Dissent: strong argument that this is a majority squeezing out a minority SH.
L: Can you reconcile Wilkes and Ingle?
Wilkes chose the corporate form, but a strong K case that they all agreed to be
employed until they all decided otherwise.
Pg602, DE seems to be disavowing the MA approach—They say that a minority SH can properly
make SH agreements to protect themselves, but in the absence of one, the court is not going to
make one up. Do you prefer DE’s “you made your bed now lie in it” or MA’s golden rule?
Jordan v. Duff and Phelps (pg603)— was an at will employee who owned stock. He was
fired and had to sell back his stock due to a repurchase agreement. Later, he found out about a
sale of the co that would have made his stock worth a lot more, and he sued for breach of
fiduciary duty for failure to disclose.
Holding: Close corporations buying their own stock have a fiduciary duty to disclose material
information. Majority is assuming he would have stayed if the info had been disclosed (but his
wife was the one who wanted to move). He has to prove a) he would have stayed, b) they would
have let him stay c) that he would have stuck it out for 2 years after the first deal fell through
Dissent: no duty
L: Why sell Jordan any stock anyway?
No dividends, but possibility of long-term bonanza. Aligns his interests with the
company, loyalty
Why have a repurchase agreement?
If he no longer works there, then no need to ensure loyalty
Less likely to have derivative actions
Not bad for the employee because there is no market for their stock anyway
What is book value, and what are the alternatives to it?
E.
CONTROL, DURATION, AND STATUTORY DISSOLUTION
Alaska Plastics v. Coppock (pg617)—She acquired shares from her ex-husband, but since she is
not one of the boys, they are not paying her anything. Company was paying for events that
included wives, so she has an argument that these are constructive dividends. No derivative
claim here because the corp was not harmed, just direct claim.
4 ways to force a fair value purchase of a minority SH’s stock:
1) provision in the articles
2) petition the court for involuntary dissolution What is that? N69
3) appraisal (available when selling all substantially all the assets or merger)
4) purchase upon a breach of fiduciary duty
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Court can’t order specific performance of an offer to purchase, but at a higher price—goes too
far. Court remands for a more appropriate remedy.
L: she could have a claim against her husband for her share of the director’s fee since he
is getting 3,000 like everyone else, but has half as much stock as everyone else.
See questions and notes after the case, pg624
Pedro v. Pedro (pg631)—Brother gets frozen out after he discovers some missing $.  wants
dissolution of the company. Dissolution is available if those in control have acted fraudulently,
illegally, or in a manner unfairly prejudicial toward one another.
Holding: the brothers have a fiduciary duty to him and they breached it. He had a reasonable
expectation of lifetime employment, so the remedy was correct.
F.
TRANSFER OF CONTROL (all of these cases are kind of shaky for me...I need help
on the facts in this section)
Frandsen v. Jensen-Sundquist Agency (pg644)—Minority SH Frandsen sues to enforce his
right of first refusal.
Holding: Court says there was never an offer that triggered the rights under the agreement.
They interpret the agreement very narrowly. What is the business stuff going on in this case, and
what is the doctrine of independent significance?
Zetlin v. Hanson Holdings (pg649, n72)—
Holding: Majority can sell their stock at a premium and not have to account to the minority SH.
See note after case, pg649
Perlman v. Feldmann (pg652, n72)—The normal rule is ignored—majority has to account to the
minority. So what did he do wrong, what are s upset about, maybe this won’t be on the test
(hopefully) --I am getting a little punchy at this point
L: says this is an important case, shucks, it will probably be on the test. Find out more
about why it is important.
Jones v. H.F. Ahmanson & Company (pg657, n73)—Majority SH tried to create a new
corporation which would make it more marketable to investors, but exclude the minority SH.
The minority claimed they were not being treated fairly or in good faith. I don’t understand the
facts again.
Holding: Absent a compelling business purpose, majority cannot obtain advantage without
regard to the detriment to minority SH
See questions afterwards, pg661
L: this is a highly criticized case. The minority had nothing before and after the
transaction, so they didn’t lose anything. Plus, the majority could have done this anyway,
just selling their stock, not acting in a corp. capacity.
Essex Universal Co. v. Yates (pg662, n74)—A sale of a controlling interest may include
immediate transfer of control. More in the notes n74, more after the case pg665. I am sure there
is something missing here too...
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Why is 23% a control block?
See pg667 for §602-§706 and the problems
IV. MERGERS, ACQUISTIONS, AND TAKEOVERS
3 basic ways to acquire a corp: statutory merger, purchase of assets, or purchase of stock.
Differences:
1) whether the acquiring firm has assume the liabilities of the acquired firm
2) whether the SH of either or both corps has to vote
3) whether the SH of the acquired firm have an appraisal remedy
4) tax treatment of the transaction
In a statutory merger, form can triumph over substance, so a subsidiary is often used to insulate
from liabilities, avoid a vote, and avoid appraisal rights. BOF208
Merger or sale of all the assets requires at least a majority vote, and may require a supermajority
vote, and usually triggers an appraisal remedy. BOF207
A.
MERGERS AND ACQUISTIONS
SEE the discussion of mergers on pg670
Statutory Merger (pg670)—approval by the board and by SH would be required. Also would
trigger an appraisal right.
i.
De Facto Merger Doctrine—
In Glen Alden, the smaller company acquired the larger one. So under DE law, a vote was
required, but no appraisal rights. However, under PA law which would have governed if Glen
Alden had sold its assets to List, then there would have been a vote and appraisal rights.
So much here in my notes that makes no sense...see n75-78. See chart, n78 PA v. DE
Farris v. Glen Alden (pg673, n75)—Looks like a merger, acts like a merger, has all the evils of a
merger, so it is. What in the world? Minnow is swallowing the whale. BOF209
Holding: a transaction that is in the form of a sale of assets, but is actually a de facto merger
must meet the statutory merger requirements to protect minority SH.
Hariton v. Arco Electronics (pg679)—This one is not a de facto merger, it is a sale of assets.
DE court rejected the PA court’s application of the de facto merger doctrine. Why?
ii.
Freeze-Out Mergers—Many companies went public and then went back to private, so
minority SH got frozen out. Court put their foot down in Singer and said you have to have a
good business reason. Then every singer merger was challenged, so abandons Singer and the
business purpose test.
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Weinberger v. UOP (pg681, n79)—Now you have to allege fraud, misrepresentation and other
items of misconduct to demonstrate the unfairness of the merger. Remedy is appraisal
Holding: A freeze out merger approved without full disclosure of share value to minority is
invalid. Have to act in good faith. Report would have been helpful to minority SH.
L: But wouldn’t they have been subject to liability from SH of the other co for sharing
the report? Yes.
Would it have helped to have outside directors look at this? Yes, fn7, pg687
Possible standards for review?
a) business judgment rule
b) entire fairness test and burden with 
c) entire fairness test and burden with 
d) none of the above
e) a & b
a, but maybe c (Sinclair v. Levin)—Okay, what is the entire fairness test, and
what does Sinclair have to do with it?
KK’s outline, pg70: Entire fairness test is fair price and fair dealing.
Coggins v. New England Patriots Football Club (pg692)—He sold non-voting stock to the
public, but then the owner of all the voting stock wants to go private. Arranges a cash-out
merger. A majority of the SHs approved it.  has the burden of showing that the merger does
not violate his fiduciary duty to the minority. Also, MA retains the business purpose test. Can a
cash-out merger go on for the sole purpose of getting rid of the minority SH?
Holding: No. This was only for the personal benefit of Sullivan, so there was no legitimate
business purpose. Don’t even need to consider fairness since this did not have a business
purpose. They give recissory damages because it has been to long to rescind the merger, so just
give him present value.
L: They cited Wilkes, but Wilkes was with people who knew each other.
Rabkin v. Philip A. Hunt Chemical Co. (pg699)—Deal to pay the minority the same if they try
to buy 100% within a year. They waited until the year was up to buy the rest. Does the
company have a fiduciary duty? No question they timed the merger to avoid the extra price, but
does that trigger a duty to pay the minority what they paid the majority? Just a premium for
control.
Holding: This may be enough to trigger a duty here, so case remanded. Inequitable conduct will
not be protected merely because it is legal.
Rauch v. RCA Co. (pg705)-- says this is just like redemption—a “de facto redemption”. Court
rejects this on the same theory as a de facto merger. See analysis afterwards, pg708.
L: Court refuses to judicially create a new protection for preferred SH
Could you give the entire premium to the common SH? To the preferred? Split it? Yes,
probably to all of them. No definitive answer here.
BOF, pg206 that Weinburger forecloses an injunction in cases where full disclosure is made and
the board has satisfied its duties of good faith, loyalty, and due care, or the board has been able to
19
prove the entire fairness of the transaction. Appraisal remains the only remedy (but BOF points
out that each individual SH must perfect its appraisal remedy, but under a class action, they just
have to not opt-out to get protection. Difficult to prefect, and expensive to get your own lawyer,
etc.)
B.
TAKEOVERS
Cheff v. Mathes (pg710)—To get rid of a pesky SH, the company offered him a buyout price at
a premium—green mail. A minority SH said that the buyout was merely to save the directors’
jobs, not for the protection of the company.
Holding: True motives cannot be for perpetuation of control. Only proper if they honestly
thought it was necessary to maintain proper business practices. Since they thought Maremont
would breakup the company, that is a proper worry, and the case is remanded.
L: Cheff signals that these decisions have to be made by the outside directors. If the
board lets the SHs vote, then has to fully disclose, but then “sanitizes the transaction” and
courts will apply the business judgment rule.
Green mail—the purchase by a corporation of a potential acquirer’s stock at a premium over the
market price.
Williams Act—see KK’s outline, pg71 and my notes, n85. GO OVER THIS!!
Target Responses, n86
 White Knight defense (leg-up, lock-up, cancellation fee)
 Litigation
 Defensive Merger
 Shark Repellant
 Scorched Earth
 Pac-Man
 Poison Pill
Two-tier front loaded tender offer, pg720
Unocal Co. v. Mesa Petroleum Co. (pg722, n87)—To ward off a hostile takeover by Mesa,
Unocal made a selective exchange offer.
Holding: Unocal had the power and duty to ward off a bid it thought was harmful to the
company, and they can exclude Mesa from the offer. Directors face a problem because there’s a
conflict between what they thought would harm the company and self-interested motives to keep
their jobs. So not quite the business judgment rule—the action they take must be reasonable in
relation to the threat.
L: this is the scorched earth defense. This case says that even an action that kills an offer
can be proportional.
Duties:
1) Have to prove that the takeover is inimical to the company’s interests
2) Then show the action taken to defend is reasonable
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SEC rules amended to prohibit issuer tender offers, unless made to all shareholders (Rule 13(e)4(f)(8).
Dead-hand provision, n88
Revlon v. MacAndrews & Forbes Holdings (pg733, n89)—Court says to get to the business
judgment rule, directors have burden to show good faith and reasonable investigation. Does the
board have an affirmative duty to resist a takeover?
Holding: yes. Duty to be an auctioneer is when the break up of the company is inevitable, so
you don’t need to protect it anymore because it is not going to be the same company. Lockups
and other things are fine, but not when they stop the bidding during an auction. Revlon was
considering their duty to the bond holders when they should have been concerned with their duty
to the SH, since the SH should be their main concern
L: Unocal says can be defensive, Revlon says may have to be an auctioneer. More in
notes, n90
Court says they have a due care and a duty of loyalty problem.
What is their loyalty problem?
Acting on the noteholders behalf, not SH
Trying to avoid personal liability
What is their due care problem?
Favoring noteholders
So:
1) board had a proactive duty—auctioneer
2) clear that duty is to the SH, not other constituents
3) bring in a 3rd party with an inducement without blocking the other bidding
4 main points:
1) Revlon is the key case showing fiduciary duties of directors to maximize value for SH
at point where co is certain to be broken up. Reason for this is because directors can
longer take the position that they are protecting the corporate entity
2) Discusses the issue of to what extent the directors can give inducements to the white
knight or otherwise lock up the deal. The inducements are judged at different times:
a) when it is provided, b) what effect it has on the transaction
3) Court in Revlon relies on duty of care and duty of loyalty analyses, and is very loose
in the use of the 2. In terms of loyalty, court seems to be saying that to the extent that
Revlon were favoring the noteholders, they were being disloyal. The directors
themselves, however, had not interest which makes it classic business judgment.
They might have been concerned that the co would be sued otherwise. If that’s the
case, then the court second-guessing the directors is disturbing. Other alternative is
breach of duty of loyalty because of personal liability, but as long as they were acting
in good faith, then no worry. Court also talks about duty of care, which is also
troublesome because in care what we are looking at (Van Gorkum) is the process by
which the directors made their decision (process based analysis). It seems they were
meeting with high powered advisors. Other possibility is courts will set aside
business judgment if there is no rational basis for it. By failing to give analysis as to
21
why court concludes there is a breach of the duty of care, it invites this sort of
inquiry.
4) Court resolves in Revlon an ambiguity from Unocal. In Revlon, the court says
directors should consider SH over any potential claims from 3rd parties.
Paramount v. Time (pg744)--, Paramount, asserts Revlon duties—that the Time-Warner
agreement in effect put Time up for sale, and required Time’s board to enhance short-term SH
value and treat all other interested parties on an equal basis. Company responded to the threat
(asserted to be that Paramount was not as good for Time as Warner was) by making a cash tender
offer for Warner, which caused the assumption of a lot of debt.
Holding: The Time-Warner announcement did not make the sale of Time inevitable, so Revlon
duties don’t attach. However, Unocal duties do. 2 part Unocal test: 1) The decision that
Paramount did not serve Time’s needs was not wrong or self-interested; 2) the defensive actions
were reasonable.
2 important points to the case:
1) Court revisits Revlon: What will trigger a board’s obligation to max value for
SHs? DE says Revlon doesn’t apply because no breakup of the co. DE later
changes this in QVC
2) Also, court clarifies Unocal as well. Court says if the directors are
independent and undertake an independent investigation. Question becomes
what is the threat. There it was a coercive 2-tiered tender offer. Here, the
threat is that Paramount would not be as good for them.
Case has been criticized on these grounds—it is just the sort of thing
that SH should be able to vote on. Some think this case is no longer good
law. L: thinks it is good law, but unique because:
1) merger was in progress.
2) Time did its homework to say why Warner was good and
Paramount wasn’t
3) Threat is relatively mild. Was it appropriate to derail
paramount for that threat. Stock has never recovered.
No-shop and no-talk provisions—see Malin’s notes11/29
Paramount v. QVC (pg753)—Paramount and Viacom are doing a merger. They have 3
defensive mechanisms: stock option agreement, no-shop agreement, and a termination fee. QVC
wants Paramount too.
Holding: Paramount erred because these provisions cut off the bidding when Viacom would
have gone higher. Instead, should have used the leverage to get a better deal. Breakup does not
have to be inevitable, and Time was different because the SH would have the same thing they
had before. But here, the SHs interests would be very different [how]. So the test is not whether
there is a breakup, but whether there is a breakup OR change in corporate control. Court says the
board has 4 duties:
1) examine critically the offers
2) act in good faith
3) obtain and act with due care
4) negotiate actively and in good faith with both Viacom and QVC.
22
The court said, “such provisions, whether or not they are presumptively valid in the abstract, may
not validly define or limit the directors’ fiduciary duties under DE law or prevent the Paramount
directors from carrying out their fiduciary duties”.
LOOK at this case more, there is a lot more here...
See Malin’s notes, 11/30 because I don’t understand what Lowenstein is talking about.
Size of termination fee v. size of the deal.
Hilton Hotels Co. v. ITT Co. (supp107)—As a defensive mechanism, ITT created 3 subsidiaries
w/o SH approval. Hilton challenges the action, and that implicates Unocal (because it was action
taken in response to a takeover bid). Was there a threat here? Directors said the price was
inadequate. Ct took a substantive view and analyzed the price (DE wouldn’t have done that).
Assumes the threat and goes to part 2, reasonableness of the action. Is the response excessive?
Holding: yes. Blasius is about increasing the board size—court thinks this is Blasius, is it? s
have to show a compelling justification, which is a difficult hurdle, so they lose.
L: Is the sale to 3 different co. all of your assets? Court didn’t reach it, assumes ITT can
do it.
What is Blasius? Go over this entire case again.
Analysis, pg118
CTS v. Dynamics (pg767, n93, SC)—IN enacted a statutory scheme requiring SH approval prior
to significant shifts in corporate control. The practical effect of this requirement is to condition
acquisition of control of a corporation on approval of a majority of disinterested SH (what
exactly is a disinterested SH?)
Holding: This statute is constitutional. Entities can comply with both the Williams Act and the
Indiana Act, and the purpose of the Williams Act is not frustrated by it. The IL statute that was
struck down in MITE was different because it gave the company an advantage in communicating
with SH, while the IN statute just protects SH against both sides in a takeover. The additional
delay in the IN act is not fatal unless it is unreasonable. And the IN statute doesn’t go against the
commerce clause. Hindering tender offers is not enough reason to invalidate the statute
Concurrence: Statute may not be wise, but as long as it doesn’t discriminate against out of state
interests, then it is fine.
Dissent: It undermines the Williams Act.
See analysis, pg777, Should DE be dictating the law for half of the US corporations?
DE’s anti-takeover legislation, pg778
Amanda Acquistion Co. v. Universal Foods (pg779)—WI statute that prevented a corporation
that was taking over another without the target’s approval from merging or combining the target
into its operations for three years.
Holding: This statute is not a wise idea, but neither the Williams Act nor the Commerce Clause
preempt it, so it is constitutional. The Williams Act is about the process of tender offers: timing,
disclosure, proration, best price rules, etc. It does not regulate the merits. The WI statute can
function at the same time as the Williams Act. In MITE, the IL law was trying to regulate
conduct elsewhere. Here, only the internal affairs of WI companies. Court says that take-over
23
proof companies are worth less and SH are at the whim of incumbent managers, but take-over
resistant companies may help spark an auction or gain benefits for the SH.
PA’s Anti-takeover statutes, pg787 Are any parts preempted by the Williams Act or the
Commerce Clause?
V.
CORPORATE DEBT
Debentures—long-term unsecured debt obligations
Bonds—long-term debt obligations secured by property of the debtor
A.
DEBTOR’S SALE OF SUBSTANTIALLY ALL ITS ASSETS
Sharon Steel Co. v., Chase Manhattan Bank (pg792, n95)—Is a clause in a debt instrument
preventing accelerated maturity in the event of a sale of all or substantially all the debtor’s assets
applicable if the assets are sold piecemeal? [I don’t understand the ultimate reason the interest
rates matter here, see pg793].  argued that it bought everything that UV owned, so it was “all”
the assets.
Holding: No.
Successor Obligor Clauses—purposes, n96
1) protection for the creditors
2) to allow the company to be sold
3) to permit this sort of transaction
L: good argument debt ought to be assumable. What the parties assumed or
expected is irrelevant.
Questions, pg797—HELP!
B.
INCURRENCE OF ADDITIONAL DEBT
Metropolitan Life Ins. v. RJR Nabisco (pg798)—Johnson, the CEO, tried to steal the corp on
the cheap, board stood up to him and got a lot more for the SH. Debt holders took it on the chin,
though. A much bigger risk with no increase in interest rates.
Holding: The assumption of additional debt by a bond issuer in an LBO which results in a
downgrading of the bonds does not constitute a breach of the covenant of good faith and fair
dealing. There was an express provision that allowed mergers and the assumption of debt, but
s want to assert an implied provision prohibiting assumption of more debt that they did not put
in the K, although they could have but decided not to.
L: Have to prove this is the outcome the parties would have contemplated, or if the
parties would have done if they’d thought about it.
Ct. says that there is nothing debt holders can do to protect themselves unless they get it in the
indenture.
What is an Leveraged buyout?
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C.
EXCHANGE OFFERS
Katz v. Oak Industries (pg813)—Prisoner’s dilemma. Each acting on their own is not as good as
they could have come up with together, but isolated from each other.  said the offer was
coercive.
Holding: An exchange offer and consent solicitation made by a corporation seeking to maximize
the benefit to its SH, at the potential expense of it debt holders, does not constitute a breach of
the directors’ duty of loyalty to the corporation. Court said it did not violate the implied
covenant of good faith and fair dealing. Court says it is not the functional equivalent of a
redemption.
Questions, especially #6, pg820, n97
D.
REDEMPTION AND CALL PROTECTION
Morgan Stanley & Co. v. Archer Daniels Midland (pg821)—How can you tell where the money
came from if $ is fungible? Provision said they couldn’t borrow money at a lower interest rate to
pay of these debentures early. However, the s claim the money came from a common stock
sale.
Holding: An early redemption of debentures is lawful where the source of funds originates
directly from the proceeds of a common stock offering. Court says they are going to look at the
true source.
The value of a debenture can rise because 1) the market rate of interest has fallen, or 2) the
issuer’s creditworthiness has improved.
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