Business Associations
AGENCY – Chapter 1
§ 1. WHO IS AN AGENT?
Gordon v. Doty, 69 P.2d 136 (Idaho 1937)
F: Sept. 1934 Richard Gorton – junior on the Soda Springs High School football team; scheduled
to play a game against Paris High – had to travel there. Mrs. Doty volunteered her car for the
coach Mr. Garst to drive football players to Paris High for the game. On the way there was an
accident which injured Richard Gorton, his father R.S. Gorton filed an action on behalf of his son.
Q: Was the Coach an agent of Mrs. Doty while driving her car from Soda Springs to Paris High?
A: Mrs. Doty was not promised any compensation – the school district paid for gasoline – Mrs.
Doty had not employed Coach Garst – she volunteered her car based on the number of vehicles
available – Mrs. Doty designated Coach Garst to drive her car - made it a condition precedent –
express condition that Coach Garst should drive it – Coach Garst action of driving the vehicle
showed consent.
-Relationship of Principal and Agent existed between Coach Garst and Mrs. Doty
“Agency” – is the relationship which results from the manifestation of consent by one person to
another that the other shall act on his behalf and subject to his control, and consent by the other so
to act.
3 Principal Forms of Agency
 Relation of principal and agent
 Relation of master and servant
 Relation of employer or proprietor and independent contractor
Principal and Agent
-Principal is responsible for the acts of his or her agent
E: If at the time of the accident based on the evidence the Coach Garst was the agent of Mrs. Doty
then she was chargeable with the acts of the Garst – to the same extent as if she was driving.
-Principal and Agent relationship does not necessarily involve some matter of business
-Not essential for there to be a contract (Restatement Agency § 15, 16)
-Not essential for there to be compensation in place (Restatement Agency §16)
-Ownership alone – regardless of presence of the owner at the time of accident – establishes prima
facie against the owner of the vehicle (Mrs. Doty)
Dissent: Budge, J.
Agency means more than passive permission – an agent undertakes to transact business with
another or manages some affair for another by authority.
-Mrs. Doty offered nothing more than a kind gesture to help out Coach Garst
-she stated Garst should drive the vehicle – to be sure no student would drive it – natural
The rule would seem to be that one who borrows a car for his own use is a gratuitous bailee and not
an agent of the owner
Gay Jenson Farms Co. v. Cargill, Inc. 309 N.W. 285 (Minn. 1981)
F: Warren – local Minnesota firm operated grain elevator entered into security agreements with
Cargill – a worldwide dealer in grain. Under contract Warren would receive funds and pay its
expenses by issuing drafts drawn on Cargill through Minneapolis banks – drafts had both Warren
and Cargill’s names – proceeds from Warren’s sales would be deposited with Cargill and credited
to its account. In return for the financing Warren appointed Cargill as its grain agent with the
Commodity Credit Corporation – Cargill had right of first refusal to purchase market grain sold by
Warren to the terminal market. Cargill continued to extend Warren’s credit line from 175,000 in
1964 all the way to 1,250,000 in 1972. Warren was not to make any capital improvements or
repairs in excess of 5,000 without Cargill’s consent – and Warren was not to divide or sell and
purchase stock without Cargill’s permission. “This organization needs very strong paternal
guidance.” - 1970 Cargill contracted with Warren to act as its agent to seek growers for a new type
of wheat called Bounty 208 – Warren entered into contracts for the growing of the wheat seed –
with Cargill named as contracting party – farmers were paid directly by Cargill – Warren
contracted with other farmers (behalf of Cargill) for the growing of sunflower seeds as well –
Warren cleaned and packaged the seed in Cargill bags. Cargill continued to review Warren’s
expenses and operations – at the time Warren was shipping Cargill 90% of its grain. – Warren
became more in debt – Cargill called everyday regarding financial affairs. 1977 Warren was $3.6
million in debt to Cargill after ceasing all production – and in debt to Gay Jenson Farms for $2
million.
Q: Is Cargill by its course of dealing with Warren liable as a principal on contracts made by
Warren with Gay Jenson Farms?
A: Cargill by its control and influence over Warren became a principal with liability for the
transactions entered into by its agent Warren. Cargill was the principal of Warren.
“Agency” is the fiduciary relationship that results from the manifestation of consent by one person
to another that the other shall act on his behalf and subject to his control, and consent by the other
so to act….
In order to create an agency
-must be an agreement
-does not necessarily have to be a contract between the parties
-agreement may result in agency relationship exist even if parties did not call it an agency
-may be proved by circumstantial evidence – shows dealing between the two parties
-the principal must show to have consented to agency
E: Pre-requisites of an agency relationship
 Consent to agency
o Cargill consented by directing Warren to implement its recommendations
 Agent act on behalf of principal
o Warren acted on behalf of Cargill in procuring grain as part of normal operations
 Principal exercise control over agent
o Cargill’s interference with internal affairs of Warren – de facto control of elevator
Creditor-Debtor
A creditor who assumes control of his debtor’s business may become liable as principal for the acts
of the debtor in connection with the business. (Restatement 2d of Agency §14 O)
- A security holder who vetoes business acts of his debtor by preventing purchases or sales above
specified amounts does not become a principal.
- but if one takes over management of debtor’s business either in person or through an agent – and
directs what contracts may or may not be made then yes becomes principal – and liable.
E: Cargill’s controls over Warren (9)
 Constant recommendations through telephone
 Right of first refusal on grain
 Permission to enter into mortgages; purchase stock or pay dividends without consent
 Right to enter premises and conduct periodic audits
 Correspondence and criticism regarding Warren’s finances officers salaries and inventory
 “Strong paternal guidance”
 Provisions of drafts and forms to Warren upon which Cargill’s name was imprinted
 Financing of all Warren’s grain and operating expenses
 Power to discontinue financing and Warren’s operations
Buyer-Supplier
Factors indicating a supplier – rather than agent
 Receive a fixed price for the property irrespective of price paid by him – IMPORTANT
 He acts in his own name – receives title to the property which is transferred
 Independent business – buying/selling similar property (Restatement 2d Agency 14 K)
E: the record establishes that all portions of Warren’s operations were financed by Cargill – and
that Warren sold almost all of its market grain to Cargill
E: Cargill’s course of dealing with Warren – by its own admission; a paternalistic relationship
where Cargill made key economic decisions; Cargill’s financing of Warren was not to make
money as a lender – to establish a source of market grain for its business – operation was profitable.
§ 2. LIABILITY OF PRINCIPAL TO THIRD PARTIES IN CONTRACT
A. AUTHORITY
Mill Street Church of Christ v. Hogan, 785 S.W.2d 263 (Ky. 1990)
F: The New Workers Compensation Board at Mill Street Church reversed the Old Board’s decision
that Sam Hogan was not an employee of the church. Sam was the brother of Bill Hogan. Bill was
hired by the Church to paint the building – elders decided that Gary Petty would be hired to help
paint. In the past Bill has asked his brother Sam to help paint the church. Dr. Waggoner- elder –
contacted Bill about the job- Bill accepted the job – at that meeting no detailed discussion took
place regarding hiring a helper. (normally Bill painted the church himself – until he got to the high
points – difficult); Waggoner briefly mentioned hiring Gary Petty- but then told Bill that Gary was
hard to reach. Dec. 14, 1986 Bill approached his brother Sam – Sam accepted – Dec. 15 – Sam
climbing a latter – latter breaks and Sam broke his left arm. At this time church elders – had no idea
Bill hired Sam. Bill Hogan reported the accident to Charles Payne – a church elder and treasurer –
Payne said the church had insurance – and issued a check to Bill for the number of hours worked;
including the hours Sam worked. Bill used the church’s tools and materials – had to go to Dunn’s
Hardware – charged to church account. Meanwhile Sam filed a workers compensation claim
against Mill Street Church of Christ.
-Dispute arose as to whether or not Bill Hogan had implied authority or apparent authority to hire
Sam.
“Implied authority” – actual authority circumstantially proven which the principal actually
intended the agent to possess and includes such powers as are practically necessary to carry out the
duties actually delegated.
“Apparent authority” – not actual authority but is the authority the agent is held out by the
principal as possessing – matter of appearances on which third parties come to rely.
Q: Did Bill have any type of authority to hire Sam?
A: it is important when determining implied authority to focus on the agent’s understanding of his
authority.
 Must be determined whether the agent reasonably believes because of present or past
conduct of the principal that the principal wishes him to act in a certain way or to have
certain authority
 Nature of job or task – consider
 Implied authority may be necessary to implement express authority
 Existence of prior similar practices – one of the most important factors
 Specific conduct by the principal in the past permitting the agent to exercise similar powers
is crucial
 Person alleging authority has the burden of proving it exists
HOLDING: Bill had implied authority to hire Sam; In the past the church allowed Bill to hire his
brother – or others; the fact that Dr. Waggoner told Bill that Gary would be hard to reach – gave
him permission to hire whomever he pleased; Maintaining an attractive place of worship – is part
of the church’s function – (painting); Furthermore, Sam relied on Bill Hogan’s representation.
B. APPARENT AUTHORITY
370 Leasing Corporation v. Ampex Corporation, 528 F.2d 993 (5th Cir. 1976)
F: involves a breach of contract between 370 and Ampex for the sale of 6 computer core memory
chips; 370 was formed by Joyce – only active employee. August 1972 Joyce initiated
conversations with her friend Kays who was a salesman of Ampex regarding the sale of computer
equipment- Joyce then had meeting with Kays, and Kays supervisor Mueller and was informed that
she could Ampex could sell to 370 as long as 370 passed the credit requirement. – At the same time
Joyce had been in negotiations with EDS – EDS verbal commitment to lease 6 units of Ampex
computer core from 370. – With Kays Joyce has a written document submitted by Kays at the
direction of Mueller;
 document provided that Joyce purchase 6 units at $100,000/each –
 downpayment $150,000 and the remainder be paid in 5 years –
 delivery to be made to EDS>
Joyce received the document – Nov. 3, 1972; executed Nov. 6, 1972 – document never executed by
rep. of Ampex.
Ampex contends that the document was simply a solicitation for an offer of purchase;
More F: On Nov. 1972 – Mueller issued intra-office memo – stating the Ampex was awarded a
deal with 370 for the purchase of six units to be installed at EDS – Nov. 17, 1972 Kays sent Joyce a
letter confirming the delivery dates
Q: Did Kays have apparent authority to accept Joyce’s offer on behalf of Ampex?
A: For a contract to exist
 has to be a meeting of the minds; communication that each party has consented to the terms
of the agreement
 acceptance
A: except for the contract itself – no evidence showing the Ampex had the requisite intent to form
the contract; document itself does not show intent – the fact that the doc. had a signature block for a
rep. of Ampex to sign which was unsigned – negates any interpretation that Ampex intended this to
be an offer to Joyce. When the document was signed by Joyce – constituted an offer by him to
purchase – nothing else
H: an agent has apparent authority sufficient to bind the principal when
 the principal acts in such a manner as would lead a reasonable prudent person to suppose
that the agent had the authority
 absent knowledge on part of the third party – the agent has the apparent authority to do
those things – usual and proper conduct of the business
HERE: Kays was employed by Ampex; - reasonable for third parties (Joyce) to presume that one
salesman has the authority to bind his employer to sell; Kays at the consent of Mueller submitted
the document/contract to Joyce; nothing suggested that Kays did not have the authority to sign on
behalf of Ampex; Mueller indicated that he wished all communications between Ampex and Joyce
–go through Kays;
Various individuals testified at Ampex – only the contract manager or supervisor can sign
contracts; no evidence that this was ever communicated to Joyce
Rule of Law: Absent knowledge of such a limitation by third parties, that limitation will not bar a
claim of apparent authority.
C. INHERENT AGENCY POWER
Watteau v. Fenwick, (1 Queen’s Bench 346 (1892)
Watteau – supplier; Fenwick – defendant, new owner of Victoria Hotel
F: Humble carried business at a beerhouse (Victoria Hotel) transferred business to Fenwick – a firm
of brewers; Humble remained as Fenwick’s business manager – license was in Humble’s name and
his name was painted over the door – in the agreement between Humble and Fenwick; Humble had
no authority to buy any goods for the business except bottled ales and mineral waters; - everything
else to be purchased by Fenwick; this action was to get damages for the price of goods delivered to
Victoria Hotel – and credit was given only to Humble (cigars, bovril, etc.)
R: where a man carries on business in his own name through a manager – he holds out his own
credit; and would be liable for goods supplied even where the manager exceeded his authority –
A: business is carried out in the agent’s name and the goods are supplied on his credit – a person
wishing to go behind the agent and make the principal liable must show an agency.
A: the Victoria House was kept by Humble not Fenwick; whose name was over the door –
Watteau, the supplier gave credit to Humble; the business was really Fenwick’s though – Fenwick
is liable –
 once it is established that Fenwick was the real principal, the principal agency doctrine
applies
 principal is liable for all the acts of the agent which are within the authority usually
confided to an agent of that character notwithstanding limitations
P: what we don’t want is that everytime there is an undisclosed principal – that secret limitation of
authority to prevail and defeat the action of the person dealing with the agent and then discovering
that he was the agent and had a principal
“law of partnership” – is a branch of principal/agent
H: Watteau knew nothing of Fenwick – Fenwick is liable; for Humble was acting as the agent –
which was represented to Watteau.
D. RATIFICATION
Botticello v. Stefanovicz, 177 Conn. 22, 411 A.2d 16 (1979)
F: Mary and Walter Stefanovicz acquired a farm in 1943 as tenants in common; 1965 Anthony
Botticello wanted to buy the farm; he was advised that the selling price was $100,000 – Botticello
came back a few months later counter offered $75,000 – at this time Mary stated “no way” would
she sell under $85,000 with an option to purchase; the agreement was later drawn up by Walter and
Botticello with their attorneys; - neither Botticello nor Walter’s attorney were aware that Walter did
not own the property by himself – Mary was involved; no title search done – Walter never
represented that he was acting for his wife Mary as her agent; Mary came involved during a 1968
easement settlement – Meanwhile Botticello and Walter conducted the deal – Botticello made
improvements on the property and exercised his option to purchase – Mary and Walter denied the
option. Botticello brought action against Mary and Walter.
“Agency” – the fiduciary relationship which results from manifestation of consent by one person to
another that the other shall act on his behalf and subject to his control, and consent by the other so
to act..
R: existence of an agency relationship – question of fact; the burden of proving agency is on
Botticello; marital status – cannot by itself prove an agency relationship
A: Mary remarked that she would not sell for less than $85,000 – a statement by her to sell for no
less than this = does not equal an agreement to sell; the fact that one spouse handles the business
portion of things – does not constitute delegation of power as to the agent; Walter never signed any
documents as an agent for Mary prior to this deal either.
Q: Did Mary ratify the terms of the contract by her conduct by receiving and accepting payments
from Botticello?
“Ratification” – the affirmance by a person of a prior act which did not bind him but which was
done or professedly done on his account.
Requisites for Ratification:
 if the original transaction was not purported to be done on account of the principal, the fact
that the principal receives its proceeds does not make the principal a party to the deal.
Ratification - is a means by which the principal can say “my agent didn’t have the right to enter
into this contract, but I’m glad she did so.”
H: Walter at no time purported to be acting on behalf of his wife – which is essential to ratification
– Mary is not bound by the terms of the agreement
Walter however may be held liable – since he contracted to convey full title and for breach of that
contract
E. ESTOPPEL
Hoddeson v. Koos Bros., 135 A.2d 702 (App. Div. 1957)
F: In August - Mrs. Hooddeson with her aunt and four children, went to furniture store Koos Bros.
for bedroom furniture – when she arrived she was greeted by a man – who asked if he could be of
any assistance – the man lead her to the area of furniture she was interested in; Mrs. Hoodeson that
day purchased $168.50 worth of furniture, the man informed her that the furniture she choose was
not in stock – and would be delivered to her next month in September. She received a receipt for
her payment – time went by and Mrs. Hoodeson never received her furniture – she called Koos
Bros. which informed her that their records failed to disclose any such sale. When Mrs. Hoodeson
returned to the store with her aunt to identify the salesman they worked with – they recognized one
that they thought resembled the salesman they worked with – when checked into it was found that
the salesman they identified was on vacation during the period in which the purchase took place;
the person that served Mrs. Hoodeson was an impostor impersonating a Koos Bros. salesman.
R: where a party (Mrs. Hoodeson) seeks to impose liability upon an alleged principal (Koos Bros.)
on a contract made by an alleged agent (impostor) the party must assume the obligation of proving
the agency relationship. It is not the burden of the principal to disprove.
Liability to Third Parties for Acts of an Agent may be shown by: (3)
 express or real authority which has been definitely granted
 implied authority – to all that is proper, incidental and reasonably appropriate to the
exercise of the authority granted;
 apparent authority – where the principal by words, conduct, or other indicative
manifestations has “held out” the person to be his agent
Q: whether or not the evidence here shows apparent authority?
Rule: the apparency and appearance of authority must be shown to have been created by the
manifestations of the alleged principal, and not alone and solely by proof of those of the supposed
agent.
H: The tincture of estoppel that gives color to instances of apparent authority might in the law
operate likewise to preclude a defendant’s denial of liability
“Duty of Proprietor” – to exercise reasonable care and vigilance to protect the customer from loss
occasioned by the deceptions of an apparent salesman – it goes beyond simply slippery removing
banana peels from the aisles.
Where a proprietor of a place of business by his dereliction of duty enables one who is not his
agent to conspicuously act as such and transact the proprietor’s business – the appearances being
of such a character as to lead a person of ordinary prudence and circumspection to believe that the
impostor was in truth of proprietor’s agent – the law will not permit the proprietor to defensively
avail himself of the impostor’s lack of authority and thus escape liability for the consequential
loss thereby sustained by the customer.
F. AGENT’S LIABILITY ON THE CONTRACT
Atlantic Salmon A/S v. Curran, 591 N.E. 2d 206 (1992)
F: Curran began doing business with Salmonor A/S and Atlantic Salmon A/S – Norwegian
corporations and exporters of salmon; Curran dealt with Salmonor and Atlantic as a rep. of Boston
International Seafood Exchange, Inc. “BISE”; the salmon purchased by Curran was sold to other
wholesalers; payment checks – from Curran were imprinted with the name BISE – signed by
Curran and conveying that he was the treasurer; wire transfers made – in the name of BISE; Curran
gave the plaintiff’s rep.’s business cards – listed him as “marketing director” of BISE;
F: May 31, 1977 – Mass. Corp. named “Marketing Designs, Inc.” – created for the purpose of
selling motor vehicles; as of 1983 – Curran was a president, treasurer, clerk, a director, and sole
stockholder of the Marketing Designs; Oct. 19, 1983 – Marketing Designs – dissolved; Dec. 4,
1987 – certificate was filed with the city clerk of Boston – declaring that Marketing Designs was
conducting business as BISE;
F: Salmonor is owed $101,759.65 and Atlantic $153,788.50 – for salmon sold to business known
as BISE not Inc. – during 1988; Marketing Designs was dissolved at the time the debt incurred; in a
trade journal that year advertising – Boston Seafood Exchange Inc., listed Atlantic and Salmonor as
suppliers; - Curran delivered rep. of Atlantic and Salmonor a card that stated he was marketing
director of “BISE Inc.” July 8, Aug. 19 and 30, Sept. 9- Curran made checks imprinted with the
name BISE Inc. - Curran never informed Salamor or Atlantic of Marketing Designs
A: defendant argues that he was acting as an agent of Marketing Designs Inc., in 1988 – Curran
contends that because they were “aware” that they were transacting business with a corporate entity
and not with Curran himself.
Rule: if the other party (to a transaction) has notice that the agent is or may be acting for a
principal but has no notice of the principal’s identity, the principal for whom the agent is acting is
a partially disclosed principal Restatement 2d Agency § 4(2)
Unless otherwise agreed, a person purporting to make a contract with another for a partially
disclosed principal is a party to the contract.
HERE: Atlantic and Salmonor had notice that Curran was purporting to act for a corporate
principal – but had no notice of the identity of the principal.
DUTY OF THE AGENT: if the agent would avoid personal liability on a contract entered into by
him on behalf of his principal, to disclose not only that he is acting in a rep. capacity, but also the
identity of his principal
 it is not the duty of the plaintiff (Atlantic or Salmonor) to seek out the identity of the
defendant’s (Curran) principal; it was the defendant’s obligation (Curran’s) to fully disclose
RULE of LAW: determining the identify of the principal – ACTUAL KNOWLEDGE
“Actual Knowledge” – is the test the duty rests upon the agent, if he would avoid personal
liability, to disclose his agency – it is not enough that the other party has the means of ascertaining
the name of the principal; the agent must either bring him actual knowledge or, what is the same
thing, that which to a reasonable man is equivalent to knowledge or the agent will be bound.
**Agent always has the power to relieve himself from personal liability by fully disclosing his
principal – and contracting only in the principal’s name.
H: Curran is liable – the use of trade names or fictitious names by which he called Marketing
Designs Inc., conducted his business, is not a sufficient identification of the alleged principal; even
though Atlantic and Salmonor could have found out who they were dealing with by public records
– it is not there obligation; rather the duty of the agent (Curran) in order to avoid liability, to
disclose his principal.
§ 3. LIABILITY OF PRINCIPAL TO THIRD PARTIES IN TORT
A. SERVANT VERSUS INDEPENDENT CONTRACTOR
-doctrine of respondeat superior – a master (employer) is liable for the torts of its servants
(employees).
-master/servant relationship exist where the servant agreed
 (a) to work on behalf of the master and;
 (b) to be subject to the master’s control or right to control the “physical conduct” of the
servant (the manner in which the job is performed)
Servants are distinguished from independent contractors –
Independent Contractors – 2 types agents and non-agents
 Agent type – has agreed to act on behalf of another (the principal); but not subject to
principal’s control over how the result is accomplished (that is, over the “physical conduct”
of the task)
 Non-agent type – one who operates independently and simply enters into arm’s length
transactions with others.
o E: a carpenter is hired to build a garage for a homeowner; if it is agreed upon and
understood that the carpenter is there to simply get the job done and is not to take
directions from the homeowner; - carpenter is an independent contractor non agent.
Humble Oil & Refining Co. v. Martin, 222 S.W. 2d 995 (1949)
F: Mrs. Love brought her vehicle into Humble Oil – a filling station – for servicing purposes;
before any employee had touched it the car rolled off the premises – went across the street and
struck Mr. Martin and his children who were walking in their yard; the filing station was operated
by W.T. Schneider, an independent contractor; Mr.Martin brought an action against Humble Oil –
and Mrs. Love - Humble asked for summary judgment based on the relationship with W.T.
Schneider.- Humble contended that they are neither liable to the Martins or Mrs. Love – station was
not operated by the company –
The jury however in the Court of Civil Appeals convicted Humble found the company to be
negligent on these accounts
 Failure to inspect the love car to see if the emergency brake was on
 Failure to set the emergency brake on vehicle
 Leaving the Love car unattended
Q: whats the relationship between Humble and Schneider? Is there any evidence indicating a
master-servant relationship?
A: The Appellate Court agreed - Humble is responsible for the operation of the station:
 Principal products sold by Schneider under their agreement were owned by Humble
 Selling products with Humble’s title still remaining – until delivery to customer
o Strict system of financial control and supervision by Humble
 Humble furnished the location and equipment –
 Hours of operation controlled by Humble –
 The contract b/t Humble and Schneider was terminable at any time at the will of Humble
 The instrument – the contract between Humble and Schneider – indicates master/servant
o Schneider is to make reports and perform other duties in connection with the
operation of the station that may be required of him from time to time by Humble
o Schneider is required to pay all operational expenses
A: the business was Humble’s; Schneider was Humble’s servant – and so accordingly were
Schneider’s assistants;
Hoover v. Sun Oil Company, 212 A.2d 214 (1965)
F: James F. Barone – operated a service station; one day as a car was being filled up with gas – due
to negligent behavior on the part of an employee of Barone – was set on fire and injuries resulted;
in the case the plaintiff Hoover went after Sun Oil Company (Sun) the company that owns the
service station; Sun moved for summary judgment – contending that Barone was acting as an
independent contractor – and the alleged negligence of his employee – would not hold Sun liable;
Plaintiff’s believe that Barone was action as an agent of Sun and that Sun is liable for Barone’s
employee’s negligence.
F: Barone and Sun entered into a leasing contract – where everything but certain advertising
displays and tire-stand and rack belonged to Sun; the lease was subject to termination by either
party with proper notice – Barone’s rent was partially decided upon the volume of gasoline
purchased;
F: Barone and Sun also entered into an agreement where Barone was to purchase petroleum
products from Sun and Sun was to loan necessary equipment and advertising materials;
 Barone was required to maintain the equipment;
 Use it solely for Sun products;
 As for Sun products Barone was prohibited from selling them except under the
Sunoco liable and was prohibited from blending them with other supplies not
supplied by Sun
 Barone’s advertisement in the paper – was under the Sunoco heading; employers
wore uniforms – with the Sun emblem;
 Barone was urged to attend a Sun school for service station operators
o Learned bookkeeping, merchandising, and proper maintenance of Sun
stations and the proper uses for Sun Oil products
F: Barone while the contract was kind of intricate; Barone made no written reports to Sun and he
alone assumed the overall risk and loss of the business operation; - Barone independently
determined hours of operation; pay scale and working conditions of the employees
Q: Was this an agency relationship?
A: the undisputed facts make it clear that Barone was an independent contractor;
When looking for agency or the principal has control of agent – the question you ask is whether or
not the company has retained the right to control the details of the day-to-day operation of
whatever….
H: the answer here is no. Sun had no control over the day-to-day operations of Barone’s; therefore
no liability can be placed on Sun from the alleged negligent acts of Barone’s employee; Summary
judgment granted to Sun.
Murphy v. Holiday Inns, Inc. 219 S.E.2d 874 (1975)
F: In 1973 Kyran Murphy was a guest at a motel in Danville; - she slipped and fell on an area of
walk where water had been dripping from an air conditioner; suffered serious and permanent
injuries; Holiday Inns claims summary judgment on the grounds that there is no relationship with
them and the operator of the premises; Betsy-Len Motor (Hotel) Corporation is the operator;
F: the subject matter on the agreement between Betsy and Holiday Inns Corp., allow:
 Providing the public ..an inn service…high quality, distinctive, etc.
 Can use words like “holiday inn” and architectural designs, styles, furnishings etc.
The Plaintiff Murphy feels she’s right:
 Betsy employed the trade name, signs, and other symbols designated by Holiday Inns
 Betsy conducts her business under the “system” – observes the rules of operation; make
quarterly reports to Holiday Inns; and submit periodic inspections of facilities and
procedures conducted by licensor’s representatives
“Franchising” – a system for the selective distribution of goods and/or services under a brand
name through outlets owned by independent businessmen, called “franchises.”
 Franchisee – enjoys the right to profit and runs the risk of loss

Franchisor – controls the distribution of his goods and/or services through a contract which
regulates the activities of the franchisee, in order to achieve standardization
-the fact that an agreement is a franchise contract – does not mean there is an agency relationship
A: Here – the license agreement contains the principal features of the typical franchise contract –
HOLDING: Holiday Inns. gave no control or right to control the methods or details of doing the
work; no master/servant or principal-agent relationship was created; the purpose of the system in
place was to achieve system-wide standardization throughout – The regulatory provisions in the
license agreement between Betsy and Holiday Inns never gave Holiday Inns the control over the
day-to-day operations of Betsy-Len’s motel.
 Holiday Inns had no power – Betsy could hire and fire employees –
 She could determine price wages
 Discipline unproductive employees

RULE: when an agreement, considered as a whole, establishes an agency relationship, the parties
cannot effectively disclaim it by formal “consent.”
**When determining whether a contract establishes an agency relationship, the critical test: the
nature and extent of the control agreed upon
B. TORT LIABILITY AND APPARENT AGENCY
Miller v. McDonald’s Corp., 945 P.2d 1107 (Ore. App. 1997)
F: One day while biting into her Big Mac Sandwich – Mrs. Miller bit into a heart-shaped sapphire
stone – resulting in damages and injuries; 3K Restaurants (3K) entered into a franchise agreement
with McDonald’s Corp. that required 3K to operate in a manner that was consistent with the
“McDonald’s system”; described the way that 3K was to operate the restaurant in considerable
detail;
 Trade names, designs, color schemes, equipment layout, signs
o 3K could not make any changes to building without McDonald’s approval
 Formulas and specifications for food products, methods of inventory
o Ingredients had to meet McDonald’s standards
 Operation control – bookkeeping, accounting, manuals covering business practices
 Had to operate with McDonald’s standards – policies, practices, and procedures
o Serving only food and beverage products that McDonald’s designed
 3K kept the restaurant open – during the hours prescribed by McDonald’s
o Employed personnel – maximum capacity during these hours
 3K employees had to wear McDonald’s uniforms – neat and clean appearance
 McDonald’s periodically – sent field consultants to the restaurant to inspect operations
*failure to comply with these standards = 3K could lose franchise
F: Despite these stipulations – the contract stated that 3K was not an agent of McDonald’s for any
purpose – responsible for all obligations and liabilities – resulting from the operation of the
restaurant
Q: Whether an agency relationship exists between McDonald’s and 3K; whether the putative
principal held the third party out as an agent and whether the plaintiff relied on that holding out?
A: that day Mrs. Miller went to the McDonald’s restaurant (operated by 3K) under the assumption
that McDonald’s owned it, controlled it and managed it – with the expectation that she would
receive the same service she had by other McDonald’s in the past – nothing disclosed her to the
fact that another entity operated the restaurant – employees wore McD’s uniforms; signs of McD’s;
the general appearance – and food sold there was similar to other McD’s restaurants;
A: To hold McDonald’s liable for 3K’s negligence – vicarious liability = required that
McDonald’s had the right to control the method by which 3K performed its obligations under the
License Agreement
Rule of Law: if the franchise agreement goes beyond the stage of setting standards, allocating to
the franchisor the right to exercise control over the daily operations of the franchise – then an
agency relationship exists.
H: based on the evidence presented; a jury could find the McDonald’s retained sufficient control
over 3K’s daily operations – and an agency relatioAnship existed
 There was evidence that McDonald’s had the right to control 3K – in the precise part of its
business which included making the Big Mac – that resulted in Mrs. Miller’s injuries.
Apparent agency – one who represents that another is his servant or other agent and thereby
causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to
liability to the third person for harm caused by the lack of care of skill of the one appearing to be a
servant or other agent as if he were such.
-McDonald’s imposed the regulations – to maintain an image of uniformity of operations and
appearance for the franchisor’s entire system
-even though 3K may have had a sign up – doesn’t necessarily lead us to believe or strong enough
evidence C. SCOPE OF EMPLOYMENT
Manning v. Grimsley, 643 F.2d 20 (1st Cir. 1981)
F: Ross Grimsley, pitcher for the Baltimore Orioles – was warming up in the bullpen; some
spectators at Fenway Park in Boston – seated behind the a wire mesh fence in the bleachers in right
field – were heckling Grimsley – for about 3 innings; on several occasions – Grimsley – looked
directly at the hecklers – at the end of the 3rd inning after his catcher had left – Grimsley faced the
bleachers and threw a ball as if he were pitching at them more than 80 m.p.h. directly towards the
hecklers – ball passed through the wire mesh fence and hit Manning.
A: the evidence would have permitted a jury to conclude that Grimsley intended to throw the ball at
the hecklers, cause imminent apprehension of being hit, and that he responded to conduct presently
affecting his ability to warm up – Grimsley committed a battery against Manning
An actor is subject to liability to another for battery if –
 Intention to cause a third party imminent apprehension of a harmful bodily contact
 Actor causes the other to suffer harmful contact
Rule for Massachusetts: in order to recover damages from an employer for injuries sustained by
an employee’s assault must prove:

That the employee’s assault was in response to the plaintiff’s conduct which was presently
interfering with the employee’s ability to perform his duties successfully
Miller decision – F: a porter worked for Filene’s Basement slapped a customer who had annoyed
and insulted him –
H in Miller: - a critical comment by a customer to an employee did not in the circumstances
constitute conduct interfering with the employees performance of his work.
Here: the jury could reasonably conclude the spectator’s heckling was for the purpose of rattling
the employee (Grimsley) so that he could not perform his duties successfully – the jury could find
that Grimslsey’s assault was not a mere retaliation – but a response to continuing conduct which
was “presently interfering” with his ability to pitch in the game if called upon to play.
D. STATUTORY CLAIMS
Arguello v. Conoco, Inc. 207 F.3d 803 (5th Cir. 2000)
F: A number of incidents took place for the arising of this claim:
1. March 1995 - Denise Arguello and her father Alberto Govea – stopped a Conoco-owned
store in Forth Worth, Texas – went inside to pay for their gas – the cashier Cindy Smith
asked to see Arguello’s id along with credit card; - Smith stated that Arguello’s Oklahoma
drivers license – was not acceptable identification (out-of-state); Arguello disagreed with
Smith – led to profanity and name calling – it continued out the door as Smith used the
intercom outside continuing to call Arguello racial slurs
 Arguello outside used the pay phone to call customer service – at the time Govea
tried to re-enter the store – Smith and another employee locked the doors – a
district manager saw the video tape – reprimanded Smith – but no suspension or
termination
2. September 1995 - Gary Ivory, Anthony Pickett, and Michael Ross – went to Conocobranded store in Fort Worth, Texas
 They were followed by a store employee – told “we don’t have to serve people
like you”
 employee refused to serve them – asked them to leave; police arrived required
employee to serve them
3. Nov. – 1996 – Manuel Escobedo and Martha Escobedo stopped at Conoco-branded store in
San Marcos, Texas –
 the store employee refused to provide toilet paper for the restroom – told them “you
Mexicans need to go back to Mexico”
 Escobedo called Conoco customer service – told them there was nothing we could do
because the station was not owned by Conoco –
A: The Conoco-branded stores involved were independently owned – and entered into Petroleum
Marketing Agreements that allow them to sell and market Conoco brand gasoline and supplies at
their store.
 In order to impose liability upon Conoco for discriminatory remarks made by a third party–
the plaintiff’s must demonstrate that there is an agency relationship
A: The PMA’s language indicates that a Conoco-branded store is an independent business and is
nor, nor are its employees, employees of Conoco – Conoco and branded store are completely
separate entities
H: no agency existed – Conoco as a matter of law – cannot be held liable for the unfortunate
incidents which happened –
Scope of Employment
-a master is subject to liability for the torts of his servants while acting in the scope of their
employment: the factors to consider are:
 time, place, and purpose of the act;
 similarity to acts which the servant is authorized to perform;
 whether the act is commonly performed by servants
 the extent of departure from normal methods;
 whether the master would reasonably expect such an act to be performed
HERE: Smith’s behavior towards Arguello and Govea occurred while she was on duty inside the
Conoco station – where she was employed; the sale of gasoline and other store items – completion
of the purchase by credit card are customary functions of a gasoline store clerk; self-evident that
Smith did not utilize normal methods for conducting the sale;
Remember: The fact that an employee engages in intentional tortuous conduct does not require a
finding that the employee was outside the scope of his employment
Continuation: could Conoco reasonably expected Smith to act in a racially discriminatory matterno law on this – but that a jury even if Smith acted upon expected conduct – the jury would find
other factors in favor of plaintiffs to outweigh this consideration
HOLDING: Smith was acting on personal racial bigotry and animosity that she was employed by
Conoco as a sales clerk with the intention of doing her duties – Smith acted within her scope of
employment
E. LIABILITY FOR TORTS OF INDEPENDENT CONTRACTORS
Majestic Realty Associates, Inc. v. Toti Contracting Co., 153 A.2d 321 (1959)
F: Majestic Realty is the owner of a two-story building at 297 Main Street - Authority of Paterson,
NJ acquired properties along Main Street adjacent to Majestic’s two story building – with hopes of
a public parking area; this required demolition of several buildings on the street – Authority
entered into a contract with Toti to do this work; the project began and eventually got to the
building next to Majestic’s; the building was at least a story (20 feet) higher than Majestic’s roof;
Toti used a large metal ball (weighing 3,500 lbs) in order to demolish the walls of this building –
every time the ball would strike – debris would go flying and the Majestic building “rocked” ;
Bohen operated a dry goods business out of the first story and basement of the Majestic building;
one of the swings of the ball – propelled the uppermost section of the wall back in the direction
from which the blow had come and resulted that a 15 by 40 foot section of the wall – falling on
Majestic’s roof – thereby causing damage
Rules: where a person engages a contractor, who conducts an independent business by means of
his own employees, to do work not in itself a nuisance, he is not liable for the negligent acts of the
contractor in the performance of the contract
Exceptions:
 where the landlord retains control of the manner and means of the doing of the work which
is subject to the contract;
 where he engages an incompetent contractor, or

where the activity contracted for constitutes a nuisance per se..
A: the injured has no control over or relation with the contractor – the contractee has no control
over the doing of the work – and in that sense is also innocent – but he does have the power of
selection – and in the application of concepts of distributive justice – the loss arising out of the
tortuous conduct of a financially irresponsible contractor – should fall on the contractee
A: under the exception for nuisance – liability will be imposed upon the landowner in spite of the
engagement of an independent contractor if the work to be done constitutes a nuisance per se ..
Rules and Laws:
§ 416 Restatement
Liability shall be imposed on the landowner who engages an independent contractor to do work
which he should recognize as necessarily requiring the creation during its progress of a condition
involving a peculiar risk of harm to others unless special precautions are taken – if the contractor
is negligent in failing to take those precautions.
“inherently dangerous” - (a) necessarily involves a serious risk of harm to the person, land or
chattels of others which cannot be eliminated by the exercise of utmost care, and (b) is not a matter
of common usage.
 By its nature the line of work – is high risk of harm to members of the public or adjoining
proprietors
“ultra-hazardous” – liability is absolute where the work is ultra-hazardous
NEW YORK LAW: the razing of buildings in a busy, built up section of the city is inherently
dangerous within the contemplation of § 416 Restatement.
§ 4. FIDUCIARY OBLIGATION OF AGENTS
A. DUTIES DURING AGENCY
Reading v. Regem, 2 All ER 27, (1948) WN 205
F: Reading was a sergeant in the Royal Army Medical Corps – he didn’t make much money –
never had many more opportunities; while stationed in Cairo a man approached him and asked him
to escort money and lorry across the way – pass the civilian police without being inspected; while
under investigation the Crown found several thousand pounds and he had more thousands of
pounds in his notes in his flat – and he acquired a motor car worth 1,500 pounds; the sergeant had
been making money off his services
A: the military authorities took possession of the money – it was because of his uniform the
responsibilities that it brought – was the reason he was able to make the money and aid this
individual in his illegal scheme –
Rule: if a servant takes advantage of his service and violates his duty of honesty and good faith to
make a profit for himself, in the sense that his assets of which he was control, the facilities which
he enjoys, or the position which he occupies, are the real cause of his obtaining the money as
distinct from merely affording the opportunity for getting it, that is to say, if they play the
predominant part in his obtaining the money, then he is accountable for it to his master.
It matters not that that the master has not lost any profit nor suffered any damage, nor does it
matter that the master could not have done the act himself
R: if the servant has unjustly enriched himself by virtue of his service without his master’s
sanction, the law says that he ought not to be allowed to keep the money, but it shall be taken from
him and given to his master, because he got it solely by reason of the position which he occupied as
a servant of his master.
Policy: want to create economic disincentives for breaches of the loyalty – because we all benefit
that can’t be quantified from the appearance for the breach of loyalty
General Automotive Manufacturing Co. v. Singer, 120 N.W.2d 659 (1963)
F: -General Automotive – is a small machine shop; about 5 employees
-Singer – hired by General – machinist consultant – worked in the shop field for 30 years – he was
adept to metal treatments, grinding techniques, and special techniques - Singer brings in clients –
that would not normally be there without his assistance; Singer has a brokerage sideline – he’s
farming out other jobs for other machine shops Husco – he takes a brokerage commission for these
jobs …he does this when Singer feels General cannot handle these jobs – for it’s a small shop
F: 8A of the contract b/t Singer and General – “to devote his entire time, skill, labor and attention
to said employment, during the term of this employment, and not to engage in any other business or
vocation of a permanent nature during the term of this employment, and to observe working hours
for 5 ½ days.”
R: If Singer violated his duty to Automotive by engaging in certain business activities in which he
received a secret profit he must account to Automotive for the amounts he illegally received
A: Singer received orders – Singer had the duty to exercise good faith by disclosing to Automotive
all the facts regarding this matter – by failing to disclose all the facts relating to the orders from
Husco and by receiving secret profits from these orders – Singer violated his fiduciary duty to act
solely for the benefit of Automotive.
H: Singer is liable for the amount of the profits he earned in his side line business.
B. DUTIES DURING AND AFTER TERMINATION OF AGENCY: HEREIN OF “GRABBING AND LEAVING”
Town & Country House & Home Service, Inc. v. Newbery, 147 N.E.2d 724 (1958)
F: Newbery was in the same business as Town & County Home; Newbery worked for Town &
Country for three years – before they severed their ties- the nature of the enterprise was house and
home cleaning by contract with individual households – the dispute was over Town & Country’s
House list of customers – these customers could not be found by just looking them up in telephone
book or city directory – but were screened by other housewives –
I: Was Newbery outside of their duty of loyalty and good faith to Town and Country by soliciting
their customers – are customers a trade secret?
A: Newbery only solicited Town & Country House’s customers – even though they were outside
their employment with Town & Country – it would have been different if these customers had
equally available to Newbery and Town & Country – but these customers had been screened by
Town & Country – at considerable effort and expense –
H: some profits or damages should be paid to Town & Country
PARTNERSHIPS – Chapter 2
§ 1. WHAT IS A PARTNERSHIP? AND WHO ARE THE PARTNERS?
A. PARTNERS COMPARED WITH EMPLOYEES
Fenwick v. Unemployment Compensation Commission, 44 A.2d 172 (1945)
F: Fenwick owned and operated a beauty shop in Newark in November of 1936 – Mrs. Chesire was
employed as a cashier and reception clerk – duties to receive customers, take orders, and collect
charges – Mrs. Chesire earned $15 per week until she requested a raise in December of 1938.
Fenwick and Chesire entered into this agreement – hoping to pay her more in connection with the
income of the shop; the contract stipulated:
 Business shall be the operation of the beauty shop, called United Beauty Shoppe
 No capital investment made by Mrs. Chesire
 Control and management of business – Fenwick
 Mrs. Chesire is to act as cashier – for $15/week and a bonus of 20% of the net profits – if
business can afford it
 Fenwick alone is liable for debts of partnership agreement
 Both parties shall devote all their time to the shop
 Salary of Fenwick is $50/week + 80% of the profits
 Partnership shall continue – until either party terminates it
F: contract was terminated in January of 1942 – wanted to work at home with her child –
Q: was the agreement entered into by Fenwick and Mrs. Chesire more than just an agreement
fixing the compensation of the employee? Or was it a partnership?
A: Several elements to consider in determining the existence or non-existence of the partnership
relation:
 Intention of the parties –
 Right to share in profits – not every agreement that includes the share of profits is a
partnership
 Obligation to share in losses –
 Ownership and control of the partnership property and business
 Community of power in administration
 Language of the agreement – although the parties call themselves “partners” and the
business a “partnership” doesn’t necessarily mean partnership
 Conduct of parties towards third persons –
 Rights of the parties on dissolution – here it was the exactly same as if Mrs. Chesire
would quit her employment
H: we think that the partnership has not been established, and that the agreement between these
parties, in legal effect, was nothing more than one to provide a method of compensating the girl for
the work she had been performing as an employee – she had no control in operating the business –
she was not subject to any losses –
“Partnership” – an association of “two or more persons to carry on as co-owners a business for
profit.” UPA
UPA § 31 –
Dissolution is caused: (1) without violation of the agreement between the partner, … (b) by the
express will of any partner when no definite term or particular undertaking is specified
B. PARTNERS COMPARED WITH LENDERS
“Partnership law” – makes each partner potentially liable for all of the debts of the partnership
Martin v. Peyton, 158 N.E. 77 (1927)
F: Martin was a creditor of the firm Knauth, Nachod & Kuhne – Peyton and others claimed to be
creditors – Spring of 1921 – the firm K.N. & K. was in financial difficulties – John Hall was one of
the partners – he was friends with Mr. Peyton, Mr. Perkins, and Mr. Freeman – they were to loan
$2,500,000 worth of liquid securities – to insure that Peyton, Perkins and Freeman against a loss
K.N. & K were to turn over to them a large number of their own securities – which may have value
– but could not be used for collateral for bank loans based on the speculative nature – in
compensation Peyton and crew were to receive 40% of the profits for the firm – until the return was
made – not exceeding $500,000 but not below $100,000. Peyton, Perkins and Freeman were also
given an option to join the firm - Mr. Peyton and them were called “trustees” as they represented
the firm – at all times they were to be kept informed of all transactions affecting them; with their
consent the firm may sell any of its securities held by Peyton and crew;
F: Until the securities are returned – the directing management of the firm is in the hands of John
Hall – and his life is to be insured for $1,000,000 and the policies are to be assigned as further
collateral security to the trustees
Trustees – to be kept advised as to the conduct of the business and consulted as to the important
matters – may inspect the firm books and are entitled to any information they feel is important; they
may veto any business they think is high speculative or injurious
 Trustee may not initiate any transaction as a partner may do – may not bind the firm by any
action of their own
A: there is no obligation that the firm shall continue the business – may dissolve at any time –
H: we conclude – there is nothing here not properly adapted to secure the interest of the respondent
as lenders
Southex Exhibitions, Inc. v. Rhode Island Builders Assoication, Inc., 279 F.3d 94 (1st Cir. 2002)
F: RIBA with the construction of the Civic Center – and expansion of their home shows – decided
to enter into an agreement with Sherman Exposition Management Inc., (SEM) – Massachusettsbased professional show owner and producer – for future productions of the RIBA home shows
Contract Stipulated:
 RIBA wishes to participate in such shows as sponsors and partners –
 Term was fixed at five years – renewable by mutual agreement
 RIBA agreed to sponsor and endorse only shows produced by SEM








To persuade RIBA members to exhibit at those shows
To permit SEM to use RIBA’s name for promotional purposes
SEM agreed to obtain all necessary leases – licenses – permits and insurance
SEM agreed to indemnify RIBA for show-related losses “of whatever sort”
SEM agreed to accord RIBA the right to accept or reject any exhibitor
Audit show income and advance all the capital required to finance the shows
Net profits were to be shared: 55% to SEM 45% to RIBA
Show dates and admission prices were to be determined mutually by both parties
F: SEM’s president specifically informed RIBA’s executive director that she “wanted no
ownership of the show” - uncertain about financial prospects of the show; After a number of series
and assignments – Southex acquired SEM and SEM’s interest – including the contract with RIBA
that began in 1974 – now it was 1994; Riba expressed dissatisfaction with Southex’s performance
– and entered into another contract with another producer Yoffee Exposition Services, Inc.
Q: Was a partnership formed between SEM and RIBA and then inherited by Southex when they
acquired SEM?
A: the 1974 Agreement was called an “Agreement” – rather than a “Partnership Agreement” –
rather than an indefinite duration – it prescribed a fixed (renewable) term – SEM agreed to advance
all monies required to produce the shows and to indemnify RIBA for all show-related losses – there
was no agreement to share operating costs (state law normally presumes that partners share equally
or at least proportionately in partnership losses)
A: the mutual association was never given a name – and nothing was ever filed – neither a federal
or state partnership tax return; the evidence is speculative as to whether or not SEM or RIBA
contributed any corporate property with the intent of it becoming jointly-owned partnership
property – especially since this involved a periodic event – annual home show;
“Partnership”
-can be created absent any written formalities whatsoever, its existence vel non normally must be
assessed under a “totality of the circumstances” test
-the labels the parties assign to their intended legal relationship – are not necessarily dispositive as
a matter of law, particularly in the presence of countervailing evidence…
H: no partnership existed between Southex and RIBA (Rhode Island Builders Association Inc.)
§ 2. THE FIDUCIARY OBLIGATIONS OF PARTNERS
A. INTRODUCTION
Meinhard v. Salmon, 164 N.E. 545 (1928)
F: April 10, 1902 – Louisa Gerry leased Hotel Bristol to Walter Salmon – for a term of 20 years –
commencing May 1, 1902 ending April 30, 1922 – Meanwhile for the funds Salmon was in a
course of treaty with Meinhard – result was a joint venture;
 Meinhard was to pay half of the moneys requisite to reconstruct – alter and manage the
property –



Salmon was to pay Meinhard 40% of the net profits for the first 5 years of the lease and
50% for the years thereafter
If losses – each party was to bear them equally
Salmon – had to sole power to manage, lease, underlet and operate the building
F: during the early years the building operated at a loss- when the lease was near its end Elbridge
Gerry – the owner in reversion now; had a plan to lease the entire tract for a long term to someone
who would destroy the buildings then existing, and put another in their place – Elbridge ended
entering into a new lease with Midpoint Realty Company – owned and controlled by Salmon –
 20 years – successive covenants allowing for renewal = maximum of 80 years;
 Existing buildings may remain unchanged for 7 years
 Salmon personally guaranteed the performance
 New lease signed and delivered Jan. 25, 1922 –
Salmon did not tell Meinhard anything; did not even know of the new project
Rule of Law: joint adventurers, like co-partners, owe to one another, while the enterprise
continues, the duty of finest loyalty
A: To the eye of the observer – Salmon held the lease as owner in his own right buy himself and
with no one else – Salmon appropriated to himself and in secrecy and silence; the trouble of his
conduct – was that he excluded his co-adventurer from any chance to compete, from any chance to
enjoy the opportunity for benefit that had come to him alone by virtue of his agency.
The very fact that Salmon was in control with exclusive powers of direction charged him with the
duty of disclosure –
H: here the subject matter was a new lease – extension and enlargement of the old lease – a
managing coadventurer appropriating the benefit of such a lease without warning to his
partner might fairly expect to be reproached with conduct that was underhand, or lacking, to
say the least, in reasonable candor, if the partner were to surprise him in the act of signing
the new instrument.
DISSENT:
A: the venture had a limited object – to end at a limited time; no intent to expand it into a far
greater undertaking lasting for many years – Meinhard’s interest terminated when the joint
adventure terminated – no intent that for the benefit of both any advantage should be taken of the
chance of renewal – that the adventure should be continued beyond that date.
Nothing unfair of Mr. Salmon’s conduct.
§404 General Standards of Partners Conduct
B. AFTER DISSOLUTION
Bane v. Ferguson, 890 F.2d 11 (7th Cir. 1989)
F: Bane practiced law as a partner for Chicago law firm – Isham, Lincoln & Beale – in 1985 the
firm adopted a retirement plan – giving every retiring partner a pension –the plan provided that if
the firm were to dissolve without a successor – the pensions would disappear; four months after the
plan was implemented Bane retired at the age of 72
F: Several months later Isham, Lincoln & Beale merged with Reuben & Proctor – merger was a
disaster – merged firm was dissolved in 1988 without a successor – thus the payments from the
pension ceased towards Bane
Q: whether a retired partner (Charles Bane) in a law firm has either a common law or a statutory
claim against the firm’s managing council for acts of negligence that by causing the firm to
dissolve – terminated his retirement benefits?
A: the charge was for negligent mismanagement – not deliberate wrongdoing
UPA 1914 § 9(3)(c) - “unless authorized by the other partners … one or more but less than all the
partners have no authority to do: Do any…act which would make it impossible to carry on the
ordinary business of the partnership”
 The purpose of this is to limit the liability of the other partners for the unauthorized act of
one partner – not to make negligent partners liable to persons with whom the partnership
transacts (such as Bane) its there to protect partners
***A partner is a fiduciary of his partners, but not of his former partners, for the withdrawal of
a partner terminates the partnership as to him
H: even if the defendants were fiduciaries of the plaintiff, moreover, the business judgment rule
would shield liability for mere negligence in the operation of the firm, just as it would shield a
corporations directors and officers, who are fiduciaries of the shareholders
C. GRABBING AND LEAVING
Meehan v. Shaughnessy, 535 N.E.2d 1255 (1989)
F: Leo V. Boyle and James F. Meehan were partners of the law firm, Parker, Coulter, Daley &
White – Meehan joined the firm in 1959 and became partner in 1963; Boyle joined in 1971 and
became partner in 1980; each were active in management in the firm – had a say in policy
recommendations to the general partnership – Meehan’s interest in the firm was 6% and Boyle’s
was 4.8%. Boyle and Meehan became dissatisfied with Parker Coulter in June 1984 – discussed
leaving – July 1 they decided to leave – form their own partnership; they then started focusing on
who to bring with them, they spoke with Cohen – a junior partner at Parker Coulter- they also
intended to offer Schafer, Black, and Fitzgerald all of who were associates at Parker Coulter; they
agreed to keep their plans confidential; Cohen accepted her position first week of August – she
liked working with Boyle and Meehan that’s why
 Boyle stated he hoped the clients he was representing would switch with him
 Although the partnership agreement required a notice period of three months – they decided
to give only 30 days notice
 Boyle told Schafer to keep an eye towards cases to be resolved in 1985 and to handle these
cases for resolution in 1985 rather than 1984 – and to make a list of the cases he could take
with – keep this conversation and information private
 In Oct. 1984 Meehan and Black met with USAU vice president in New York – to discuss
whether USAU would follow them to a small firm like MBC – they received assurance that
USAU would be sending business to MBC.
 During July and the following months – MBC made arrangements for their new practice –
building searching; hiring an architect etc.










Nov. – Boyle prepared form letters to send to clients and referring attorneys as soon as
Parker Coulter found out about the separation;
Drafted letters to clients authorizing them to remove cases and bring them to MBC – to be
returned to Boyle’s home address
Meehan, Boyle, Cohen, Fitzgerald, Black and Schafer – all continued to work full schedules
– while waiting for the separation – settled cases appropriately, made reasonable efforts to
avoid continuances – tried cases – worked on discovery etc.
Rumors starting flying about the move – originally wanted to break the news Dec. 1, 1984
On Nov. 30, 1984 – partner Maurice Shaughnessy approached Boyle and asked him
whether him and Meehan were leaving – Boyle didn’t really respond – tipped off
Shaughnessy as to the move
Dec. 3 - Parker Coulter – appointed a separation committed – gave Boyle a list of cases and
requested that he identify the cases he intended to take with him
Boyle did not present the committee with his list until Dec. 17
Parker Coulter waived the three month notice period provided for by the partnership
agreement
Of the 350 contingent cases at Parker Coulter – MBC removed approx. 142
Approx. 39% of the 142 contingent fee cases removed to MBC came to Parker Coulter –
through personal efforts or connections of Parker Coulter attorneys other than Meehan,
Boyle, Cohen, Black, Fitzgerald and Schafer
Q: Did the attorneys who formed MBC breached the fiduciary duties towards Parker Coulter?
A: Meehan and Boyle owed their co-partners at Parker Coulter a duty of the utmost good, faith and
loyalty – obliged to consider their partners welfare; Meehan and Boyle did not breach their
fiduciary duty to Parker Coulter when they handled cases for their own benefit, or when they
secretly set up a new firm during their tenure.
H: However, the court did find that Meehan and Boyle did breach their fiduciary duty by unfairly
acquiring consent from clients to remove cases from Parker Coulter – their secrecy concerning
which clients they intended to take, and the substance and method of their communications with
clients, obtained an unfair advantage over their former partners in breach of their fiduciary duties.
A partner has an obligation to “render on demand true and full information of all things affecting
the partnership to any partner”
A: on 3 separate occasions – denied to their partners – that they had any plans for leaving; during
the period of secrecy – made preparations for obtaining removal authorizations from clients;
Meehan and Boyle continued to use their position of trust and confidence to the disadvantage of
Parker Coulter -
D. EXPULSION
Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (Ind. App. 1990)
F: partnership Kightlinger & Gray have practiced law in Indianapolis – Gerald Lawlis became an
associate in 1966 – but resigned after three years – joined Eli Lilly as an attorney; in 1971
Kightlinger & Gray offered Lawlis a position as a partner – he accepted; he signed partnership
agreement – remained effective until a new one was executed – agreement provided for partnership
compensation based upon a unit system – partners participated in profits according to the number
of units assigned to them each year by the partnership – Lawlis continued to work fine until 1982 –
became an alcohol abuser – revealed problem to the partnership in 1983 – upon finding out the
partnership met as a group with a physician with expertise in alcoholism – drafted a document
“Program Outline”
 It must clearly understood – no second chances
March 1984 – lawlis was back drinking – the firm gave him another chance – despite the contract
Under the 1984 Agreement, senior partners – were to determine by a majority vote – (a) the units
each partner annually received, (b) the involuntary expulsion of partners (c) the involuntary
retirement of partners
F: As Lawlis battled his problem – his units of participation reduced – he then had a turn-a-round
and was getting better – asked for increase in units for 1987 on Oct. 1, 1986 –
-On Oct. 23, 1986 – Lawlis was told that his senior partnership was going to be severed no later
than June 30, 1987
 Two days later all of Lawlis’ firm files were removed from his office
 Lawlis was assigned by the Finance Committee – one unit of participation for the first six
months in 1987 = max total of $25,000 on a weekly draw
 Lawlis refused to sign the 1987 containing these provisions
A: the removal of the files – is immaterial – Lawlis continued to participate in the partnership’s
profits through a weekly draw even though he evidently had nothing to do; Lawlis’ name did not
get removed from the letter-head;
Expulsion of Partner
A two-thirds majority of the Senior Partners at any time, may expel any partner from the
partnership upon such terms and conditions set by said Senior Partners …
A: Lawlis claims he was expelled for the “predatory purpose” of “increasing the firms lawyer to
partner ratio”
When a partner is involuntarily expelled from a business, his expulsion must have been “bona
fide” or in “good faith” for a dissolution to occur without violation of the partnership agreement.
-if the power to involuntarily expel partners granted by a partnership agreement is exercised
in bad faith or for a “predatory purpose” the partnership agreement is violated –
A: the firm from the time Lawlis’ addiction with alcohol became known – sought to assist and aid
him through his medical crisis – even though he took substantial amounts of time off work- the
firm allowed him to continue drawing on his partnership account – even though he was
unproductive; he received a “second chance”
**The fiduciary relationship between partners to which the terms “bona fide” and “good faith”
relate …
Concern the business aspects or property of the partnership and prohibit a partner, to wit a
fiduciary, from taking any personal advantage touching those subjects.
H: the executive committee had the right to expel plaintiff without stating a reason or cause
pursuant to the Partnership Agreement, there was no breach of any fiduciary duty.
-the use of the “guillotine method” was fine
§ 3. THE PARTNERSHIP PROPERTY
Putnam v. Shoaf, 620 S.W.2d 510 (Tenn., 1981)
F: Originally the Frog Jump Gin company was operated in equal partnership between E.C.
Charlton, Louise Charlton (50%) and Lyle Putnam and Carolyn Putnam (50%); Mr. Putnam died –
Mrs. Putnam received her husband’s interest – Mrs. Putnam wanted to sever the relationship with
the Charltons; - at the time the Gin company was heavily in debt to Bank of Trenton and Trust Co.
The Shoafs agreed to take over Mrs. Putnam’s position even though the debt was roughly 90,000the Shoafs required that Mrs. Putnam and the Chartlon’s each put in 21,000 into the partnership
account; Shoafs agreed and assumed personal liability for all partnership debts; at the time the
assets in the agreement included the gin, equipment, and land located on the premises; - Mrs.
Putnam conveyed her ½ interest to the Shoafs by way of quitclaim deed; Shoafs hired a new
bookkeeper – turns out that the old bookkeeper was part of systematic embezzlement from the
Frog Jump Gin Company – suit against the bookkeeper by the gin company – both the Charltons
and Mrs. Putnam each received half of 68,000.00 from the suit –
The Agreement:
 All of the personal property and machinery, company’s buildings, gin stands,
 Overhead incline cleaner, stick and green leaf machine, lint cleaners etc
 Mrs. Putnam agrees to pay 21,000.00 and sell and convey her interest in the partnership
to the Shoafs
 Mutually agreed that the partnership be and hereby is dissolved – Mrs. Putnam is
completely released and discharged from any and all liability –
Mrs. Putnam obtained a complete release from the Bank of Trenton – from all personal liability
Q: what is the nature of the ownership interest by Mrs. Putnam of what she conveyed?
Q: Did Mrs. Putnam intend to convey her interest in the partnership to the Shoafs?
A: UPA – her partnership rights consisted of her (1) rights in specific partnership property, (2)
interest in the partnership and (3) right to participate in management…
“specific partnership property” – “the partnership tenancy possessory right does not exist absent
the partnership”
 Not the partner’s interest “in the assets of the partnership”
 A co-partner owns no personal specific interest in any specific property or asset of the
partnership – the partnership owns the property or the asset
A: a conveyance of partnership property held in the name of the partnership is made in the name of
the partnership and not as a conveyance of the individual interests of the partners.
H: all Mrs. Putnam had to convey was her interest in the partnership – she had no specific interest
to separately convey or retain – Mrs. Putnam definitely intended to convey her interest to the
Shoaf’s – she wanted out –
She conveyed her interests – therefore she wasn’t entitled to anything.
§ 5. THE RIGHTS OF PARTNERS IN MANAGEMENT
National Biscuit Company v. Stroud, 106 S.E.2d 692 (1959)
F: C.N Stroud and Earl Freeman entered into a general partnership to sell groceries under the name
of Stroud’s Food Center; Stroud advised Freeman that he would not be responsible for any
additional bread sold to Stroud’s Food Center – after the notice to Freeman requested National
Biscuit Co. to deliver bread to Stroud’s in the amount of $171.04.
Rule: if one partner go to a third person to buy an article on time for the partnership, the other
partner cannot prevent it by writing to the third person not to sell to him on time; or, if one party
attempt to buy for cash, the other has no right to require that it shall be on time; what either partner
does with a third person is binding on the partnership
A: UPA – General Assembly of N.C. “every partner is an agent of the partnership for the purpose
of its business, and the act of every partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of the partnership of which he
is a member binds the partnership, unless the partner so acting has in fact no authority to act for the
partnership in the particular manner and the person with whom he is dealing has knowledge of the
fact that he has no such authority.
I am
“all partners are jointly and severally liable for the acts and obligations of the partnership”
Disputes between partners arising may be decided by a majority of the partners
H: Freeman is a general partner – no restrictions are placed on his to act within the scope of the
partnership – purchasing bread is an ordinary matter connected with the partnership business –
Stroud can not restrict his partner from buying bread; Freeman’s purchases bind the partnership
Summers v. Dooley, 481 P.2d 318 (1971)
F: Summers and Dooley have a partnership agreement to operate a trash collection business – when
either of them were unable to work – the non-working partner provided a replacement at his own
expense; Dooley became unable to work and at his own expense hired an employee to take his
place – Summers approached Dooley about hiring an additional employee- Dooley refused;
Summers did anyway – paid the guy out of his own pocket; Dooley upon finding out – refused to
pay the new employee out of the partnership funds; Summers continued to operate the business
using the third man – incurred 11,000 in expenses;
A: Summers continually voiced his objection of hiring a third man H: it is manifestly unjust to permit recovery of an expense which was incurred individually and not
for the benefit of the partnership but rather for the benefit of one partner.
Rule: “any difference arising as to ordinary matters connected with the partnership business may
be decided by a majority of the partners.” – central them of the UPA is the concept of equality
between partners with respect to management of business affairs – so business differences must be
settled by a majority provided that no other agreement between the partners speaks to the issues
§ 6. PARTNERSHIP DISSOLUTION
A. THE RIGHT TO DISSOLVE
Owen v. Cohen, 119 P.2d 713 (1941)
F: Owen and Cohen entered into an agreement to become partners in a bowling alley business – in
CA. Owen advance 6,986.63 to the partnership for purposes of securing necessary equipment; with
the understanding that the money should act as a loan to the partnership - and was to be repaid out
of the profits of the business as soon as it could be reasonably done so; the business was being
operated at a loss; differences began to arise between the partners Q: whether or not the evidence warrants a decree of dissolution of the partnership?
A: the breach between the partners was in due large measure to Cohen’s persistent endeavors to
become the dominating partner of the enterprise – to humiliate plaintiff before the employees and
customers of the bowling alley. Cohen told Owen that he had not worked in 47 years and did not
intend to start now …he also told a mutual acquaintance that Owen would not be here very long.
Another dispute – happened when Cohen wanted to open a gambling room on the second floor –
Owen did not approve. Cohen was also taking money from the partnership funds – without consent
or knowledge of Owen.
Rule: normally trifling and minor differences – that involve no permanent mischief – will not
authorize a court to decree a dissolution of a partnership, however, courts of equity may order the
dissolution where there are quarrels and disagreements of such a nature – to the extent that all
confidence and cooperation between the parties has been destroyed – or where one of the parties by
his misbehavior materially hinders a proper conduct of the partnership business.
H: Cohen’s whose persistence in the commission of acts provocative of dissension and
disagreement between the partners made it impossible for them to carry on their partnership
business, and is no position now to insist on its continued operation.
Collins v. Lewis, 283 S.W.2d 258 (Tex. 1955)
F: Collins and Lewis partnered up to open a cafeteria building – Collins had the cash; Lewis had
the experience, tell the construction guys what to do, what to buy – the food, restaurant equip etc. –
however there were all kinds of massive construction delay 2 ½ years –Collins wanted out – he
wanted the business to sell it and get his money back – Lewis didn’t put in cash – he put in his
experience; if not for the construction delays the cafeteria would have been operating normally and
closer towards turning a profits closer to Collins expectations; the Construction delays were caused
by the building owners and other parties.
Q: Did Collins breach his contractual obligations to Lewis?
Rule: an action for the dissolution of a partnership is an equitable action – the court is convinced
the Collins was at least partially at fault – and a court will not provide equitable relief to a party
who comes to court with unclean hands.
H: The Court suggests that Collins has breached his contractual obligations to Lewis. Collins and
Lewis are stuck with one another for now, but they have the same options open to every
partnership: one party can buy out the other, they can sell to a third party or they can liquidate
Page v. Page, 359 P.2d 41 (1961)
F: Page and Page are partners in a linen supply business – oral partnership agreement in 1949 – the
first two years – each partner contributed $43,000 for the purchase of land, machinery and linent
needed to begin the business – from 1949 to 1957 the business was unprofitable losing it $62,000
in 8 years – the partnership’s major creditor was a corporation owned by the Page (the plaintiff) –
corporation holds $47,000 demand note of the partnership – Partnership began to improve – earned
$3,824.41 in the next year etc. - despite the improvements Page wishes to terminate the partnership
– defendant fears that due to the Vandenberg Air Force Base coming into the vicinity that the
business will go up – and he will lose out on profits.
A: the defendant admitted that the former partnership in which earnings were to be retained until
the obligations were repaid; the previous partnerships they were in – had definite term of 5 years
and a partnership at will after that – the partners never figured out how they would deal with losses
– it proved that the partners expected to meet current expenses from the income they were bringing
in – and recoup their investment;
H: Defendant failed to prove any facts from which an agreement to continue the partnership for a
term may be implied.
-All they had was common hope that a partnership earnings would pay for the necessary expenses.
-Such a hope does not establish even by implication a “definite term or particular undertaking” as
required by section 15031 of the Corporations Code.
-there was no showing of bad faith or that the improved profit situation is more than temporary
Rule: when a partner advances a sum of money to a partnership with the understanding that the
amount contributed was to be a loan to the partnership and was to be repaid as soon as feasible
from the prospective profits of the business, the partnership is for the term reasonably required to
repay the loan. Owen v. Cohen
Rule: a partner at will is not bound to remain in a partnership, regardless of whether the business
is profitable or unprofitable. A partner may not however, by use of adverse pressure “freeze out” a
co-partner and appropriate the business to his own use. A partner may not dissolve a partnership
to gain the benefits of the business for himself, unless he fully compensates his co-partner for his
share of the prospective business opportunity…
Page (plaintiff) has the power to dissolve the partnership by express notice to Page (defendant) – if
plaintiff acts in bad faith and violates fiduciary duties – the dissolution would be wrongful and the
plaintiff would be liable.
B. THE CONSEQUENCES OF DISSOLUTION
Prentiss v. Sheffel, 513 P.2d 949 (1973)
F: A partnership was created for the purpose of acquiring and operating the West Plaza Shopping
Center – between three partners; the two partners wanted the other one out – based on his derelict
of his partnership duties, and failed to contribute to the balance of the operating losses incurred by
the Center.
 Each of the plaintiffs owned 42½% interest in the partnership w/ an aggregate interest of
85%, while the defendant owned 15%.
 No detailed partnership existed – how management decisions were to be made etc.; there
were frequent attempts to make an agreement
 Numerous unresolved disputes between parties occurred – how title to the partnership
property was to be held
 Relationship between plaintiffs and defendant deteriorated
 Defendant (Sheffel) was never denied physical access to the property
 There was a freeze out or exclusion of the defendant from partnership management and
affairs
The trial court appointed a receiver and the trial court proceeded with the liquidation and sale of the
Center. – the plaintiffs were the highest bidders – they were sold the Center.
Q: whether two majority partners in a three-man partnership-at-will, who have excluded the third
partner from partnership management and affairs, should be allowed to purchase the partnership
assets at a judicially supervised dissolution sale?
A: Such a purpose is proper –
 principal contention by defendant is that he was wrongfully excluded from the
management of the partnership - and plaintiffs should not be able to purchase the
partnership assets at a judicial sale.
 There was no evidence of bad faith – by the partners – it was simply for the purpose of the
inability of partners to harmoniously work together in a partnership relationship.
 Defendant failed to show how he was injured as a result of the judicial sale – in fact he was
given more money since the plaintiffs were the highest bidders – drove the price up more –
and therefore defendant since he received 15% of the interest – received more due to the
higher bidding price.
H: plaintiffs had the power and permission to buy the partnership assets at a judicial sale – the
defendant had the same right to purchase the partnership assets as the plaintiffs- if he would have
submitted the highest bid.
Pav-Saver Corporation v. Vasso Corporation, 493 N.E. 2d 423 (1986)
 F: Pav- Saver Co. (PSC) the owner of Pav Saver trademark and certain patents for the designs
and marketing of concrete paving machines – Harry Dale is the inventor of the Pav-Saver –
majority shareholder of PSC; H. Moss Meersman – attorney who is the owner and only
shareholder of Vasso Corp. PSC, Dale, and Meersman all entered into a partnership (Pav-Saver
Manufacturing Company) for the manufacture and sale of Pav-Saver machines –
 Dale = contribute his services
 PSC = contribute patents and trademark necessary to the proposed operation
 Grant to the partnership the exclusive right to use on all machines manufactured and sold –
and the use of trademark during the term of Agreement
 Meersman = contribute financing – whatever financing necessary for the joint venture
 F: Paragraph 11 of the Agreement: it is contemplated that this joint venture partnership shall
be permanent, and same shall not be terminated or dissolved by either party except upon
mutual approval of both parties. If however, either party shall terminate or dissolve said
relationship, the terminating party shall pay to the other party, as liquated damages, a sum
equal to four (4) times the gross royalties received by PAV-SAVER Corporation in the fiscal
year ending July 31, 1973.
 *upon mutual consent the PSC/Dale/Meersman partnership was dissolved and replaced with an
identical one between PSC and Vasso – eliminating individual partners.
 *later – the economy slumped and heavy machines dropped off considerably - PSC terminated
the partnership with Vasso (Meersman).
 A: PSC filed a suit to recover patents and trademarks – Vasso countered – that PSC had
wrongfully terminated the partnership and that Vasso was entitled to continue the partnership
business – with the use of the patents  Rule: when dissolution is caused by contravention of the partnership agreement the rights of
the partners shall be as follows:
 each partner who has not caused dissolution wrongfully shall have
 II. the right, as against each partner who has caused the dissolution wrongfully,
to damage for breach of the agreement
 the partners who have not caused the dissolution wrongfully, if they desire may continue
the business in the same name, either by themselves or jointly with others, may do so,
during the agreed term for the partnership and for that purpose may possess the
partnership property

a partner who has caused the dissolution wrongfully shall have:
 II. the right against his co-partners and all claiming through them in respect of
their interests in the partnership, to have the value of his interest in his
partnership, less any damages caused to his co-partners by dissolution
 H: the partnership agreement on its face – was a “permanent” partnership – terminable only
upon approval of the parties - Pav-Saver machines (business) could not be manufactured
without the use of the patents or trademarks.
 “the value of the good will of the business shall not be considered”
C. THE SHARING OF LOSSES
Kovacik v. Reed, 315 P.2d 314 (Cal. 1957)
 F: Nov. 1952 - Kovacik told Reed he had a chance to remodel some kitchens in San Francisco
– asked Reed to be his job superintendent and estimator – Kovacik was investing $10,000.00 –
Kovacik did not ask Reed to share any losses that might result – Reed did not offer – they did
settle that Kovacik and Reed would split profits 50/50. Reed accepted Kovacik’s proposal –
Reed contributed no funds – Kovacik provided all the financing – In August 1953 – Kovacik
told Reed that the venture had lost money – he demanded that Reed contribute to the amounts
that he had advanced beyond the income he received. Reed refused.
 H: the party who contributed money (Kovacik) upon the loss of money, is not entitled to
recover any part of it from the party who contributed only services (Reed).
 Rationale of the Rule: where only one party contributes money and the other contributes
services, then in the event of a loss each would lose his own capital – the one his money and the
other his labor.
 Rule: in the absence of an agreement the law presumes that partners and joint adventurers
intended to participate equally in the profits and losses of the common enterprise, irrespective
of any inequality in the amounts each contributed to the capital employed in the venture with
the losses being shared by them in the same proportions as they share profits.
 the parties had contributed capital either money or land or services – and each was to
receive compensation for services rendered to the common undertaking which was to be
paid before computation of the profits or losses.
 HOWEVER HERE Where one partner or joint adventurer contributes the money capital as
against the other’s skill and labor, neither party is liable to other for contribution for any loss
sustained.
E. LAW PARTNERSHIP DISSOLUTIONS
Jewel v. Boxer, 156 Cal.App.3d 171 (1984)
 F: Dec. 2, 1977 – law firm Jewel, Boxer, and Elkind was dissolved mutually – the (4) partners
formed two new firms: Jewel and Leary and Boxer and Elkind. Partners in the old firm lacked
an agreed as to how to handle –allocation of fees from active cases upon dissolution of the
partnership. Upon dissolution, each former partner sent a letter to each client who case he
handled for the old firm announcing the dissolution, which included a substitution of attorney
form.
 Q: What is the proper allocation of attorneys’ fees received from active cases in the event that a
partnership undergoes a dissolution?
 H: in the absence of a partnership agreement the UPA requires that attorneys’ fees received on
cases in progress upon dissolution of a law partnership are to be shared by the former partners
according to their right to fees in the former partnership, regardless of which former partner
provides legal services in the case after the dissolution.
 Rule: UPA (Corp. Code § 15001 et. seq.) a dissolved partnership continues until the winding
up of unfinished partnership business. No partner (except a surviving partner) is entitled to
extra compensation for services rendered in completing unfinished business. Thus absent a
contrary agreement, any income generated through the winding up of unfinished business is
allocated to the former partners according to their respective interests in the partnership.
 Rationale: prevents partners from competing for the most wealthiest cases – during the life of
the partnership in anticipation that they might retain the case if the partnership should dissolve
in the middle of the case. Also discourages former partners from scrambling to take physical
possession of files and seeking personal gain by soliciting a firm’s existing clients upon
dissolution.
 Also should eliminate an undue hardship – should be prevented by two basic fiduciary duties
owed between former partners.
 each former partner has a duty to wind up and complete the unfinished business of the
dissolved partnership
 Prevent a partner from refusing to furnish any work and imposing this obligation totally on the
other partners, thus unfairly benefiting from their efforts while putting forth none of his or her
own.
 no former partner may take any action with respect to unfinished business which
leads to purely personal gain
 Former partners are obligated to ensure that a disproportionate burden of completing unfinished
business does not fall on one former partner or one group of former partners, unless the former
partners agree otherwise.
 **partners are free to include in a written partnership agreement provisions for completion of
unfinished business that ensure a degree of exactness and certainty unattainable by rules of
general application.**
 **former partners must bear the consequences of their failure to provide for dissolution in a
partnership agreement**
 Rule: when partners fail to have a partnership agreement which determines how and to what
extent such reimbursement should take place, they have no cause to complain about the law
supplying an equitable resolution of the issue…
§ 7. LIMITED PARTNERSHIPS
Holzman v. De Escamilla, 195 P.2d 833 (1948)
 F: Hacienda Farms, Limited, was organized a limited partnership; Ricardo de Escamilla –
general partner and James Russell and H.W. Andrews – limited partners; partnership went into
bankrupt – Lawrence Holzman was appointed as trustee of the estate regarding the bankruptcy
– it was alleged that Russell and Andrews by taking part in the control of the business – has
become liable as general partners to the creditors of the partnership –
 Escamilla (general) always consulted Andrews and Russell (limited) as to what crops were to
be planted
 Never a crop planted before it was thoroughly discussed between the Escamilla, Andrews, and
Russell
 Russell and Andrews came to the farm about twice a week to consult
 Andrews and Russell requested that Escamilla resign as manager – they appointed a new
manager
 Escamilla had no power to withdraw money w/o the signature of Andrews or Russell
 Twenty checks were used to withdraw money signed by Russell and Andrews
 Q: did Russell and Andrew become liable as general partners through their actions and control
of the business?
 A: without question this clearly shows that Andrews and Russell took part in the control of the
business of the partnership – and are liable as general partners.
 Rule of Law: “A limited partner shall not become liable as a general partner, unless, in
addition to the exercise of his rights and power as a limited partner, he takes part in the control
of the business.”
THE NATURE OF THE CORPORATION – Chapter 3
§ 1. PROMOTERS AND THE CORPORATE ENTITY
“promoter” – term of art referring to a person who identifies a business opportunity and puts
together a deal, forming a corporation as the vehicle for investment by other people.
§338 R. 2d Agency – “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 a profit to the
principal”
Southern-Gulf Marine Co. No. 9, Inc. v. Camcraft, Inc., 410 So.2d 1181 (La. App. 1982)
 F: Southern Gulf – a company yet to be formed – was to purchase 156 foot vessel from
Camcraft Inc. for $1,350,000.00; a letter of agreement - had an anticipated delivery date,
authority for Camcraft to begin purchasing components – and a specific set of specifications
and a Vessel Construction Contract – letter was signed by both President of Camcraft and
President of Southern Gulf; the Contract was later executed – the contract stated that Southern
Gulf was a Texas corp. – among one of the promises in the contract was that of the Shipping
Act of 1916- where the owners warranted they were citizens of the United States – however
President of Southern –Gulf wrote to President of Camcraft informing him that his corp. was
incorporated in the Cayman Islands – this was done to make the vessel’s use in foreign
commerce more economical – this hiccup was understood and agreed upon everyone involved –
signed etc.; Camcraft however defaulted on its obligation – and thus attempted to rid liability
stating that there was no contract because of the legal status regarding Southern-Gulf.
 Q: should Camcraft be estopped from asserting the lack of corporate capacity by SouthernGulf at the time the Vessel Construction Contract was executed – after dealing with SouthernGulf as a corporation?
 A: NO! Camcraft should not be afforded the opportunity to escape performance by raising an
issue as to the character of the organization to which it was obligated; both parties relied upon
this contract –
 Rule: one who contracts with what he acknowledges to be and treats as a corporation,
incurring obligations in its favor, is estopped from denying its corporate existence, particularly
when the obligations are sought to be enforced.
 Rule: where a party has contracted with a corporation, and is sued upon the contract, neither
is permitted to deny the existence, or the legal validity of such corporation.
 Q: Should Camcraft be able to inject into the case the fact that Southern-Gulf subsequently did
incorporate into the Cayman Islands rather than in Texas as originally represented?
 A: the evidence indicates that the plaintiff’s legal status is not germane to any cause for the
contract and as such should not be grounds for avoidance of the contract.
 H: judgment is reversed – in favor of Southern-Gulf – Camcraft is estopped from getting out of
there obligations owed to Southern-Gulf.
§ 2. THE CORPORATE ENTITY AND LIMITED LIABILITY
Walkovszky v. Carlton, 223 N.E.2d 6 (1966)

F: Taxi cab service – Carlton is claimed to be stockholder in 10
corporations including Seon Cab Corporation – Walkovszky alleges to have been severely
injured 4 years ago in New York City when he was rundown by a taxicab owned by Seon;
only the $10,000 minimum automobile liability insurance required by law is covered on any
one cab; the 10 corporations although independent – are alleged to be operated, as a single
entity unit in regards to financing, supplies, repairs, employees and garaging – Walkovszky
claims that he is entitled to hold the stockholders personally liable – for damages because
the multiple corporate structures constitutes an unlawful attempt “to defraud members of
the general public” who might be injured by cabs.
 A: courts will disregard the corporate form and will “pierce the corporate veil” whenever
necessary to “prevent fraud or to achieve equity.”
 “General rules of agency”
 Rule: whenever anyone uses control of the corporation to further his own rather than the
corporation’s business, he will be liable for the corporation’s acts “upon the principle of
respondeat superior applicable even where the agent is a natural person.”
 A: either the stockholder is conducting the business in his individual capacity or he is not.
 If he his – he will be liable; if he is not – then his personal liability does not matter
 HERE: Carlton is charged with having “organized, managed, dominated, and controlled, a
fragmented corporate entity but there are no allegations that he was conducting business in
his individual capacity. – if the $10,000 minimum insurance coverage required by the State
is insufficient – that’s not a problem for the courts but the legislature.
 H: it is not fraudulent for the owner-operator of a single cab corporation to take out only the
minimum required liability insurance, the enterprise does not become either illicit or
fraudulent merely because it consists of many such corporations.
 DISSENT:
 -Carlton was a principal shareholder and organizer of the taxicab corp. Under the
circumstances of this case – shareholders should all be held individually liable to the
plaintiff for the injuries he suffered…
 -Doesn’t agree with the fact that because the minimum amount of insurance required by the
statute was met – the corporate veil cannot be pierced
 Dissent wants to use this case to move the policy –
 The dissent – says you and I need $10,000 minimum for insurance - it wasn’t saying
Carlton go out and purposely undercapitalize your companies so that you liable for the
minimum amount –
 H: a participating shareholder of a corporation vested with a public interest, organized with
capital insufficient to meet liabilities which are certain to arise in the ordinary course of the
corporation’s business, may be held personally responsible for such liabilities.
 Enterprise Liability – “only a larger corporate entity would be held financially
responsible”; treat 10 sister corporations as if they were one corporation on the theory that
Seon might have limited assets – but if you pull all assets from all 10 you might have
enough to pay Walkovsky’s medical expenses
Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir. 1991)
 F: Sea-Land Services, Inc. – an ocean carried shipping peppers on behalf of The Pepper
Source; The Pepper Source stiffed Sea-Land on a freight bill- Sea-Land filed diversity action –
was awarded $86,767.70 – but Pepper Source was nowhere to be found; it had dissolved for
failure to pay annual state franchise tax; even if it didn’t dissolve Pepper Source did not have
any assets; Sea-Land brought this suit against Gerald Marchese and the business entites he
owned: Pepper Source, Caribe Crown, Inc., Jamar Corp., and Salecaster Distributors, Inc. –
Sea Land hoped to pierce Pepper Source’s corporate veil and render Marchese personally liable
for $87,000 and then reverse hook Marchese’s other corporations so that they would be on the
hook for $87,000. Later Tie-Net was added to the lawsuit, Marchese doesn’t solely own TieNet, but owns 50% of the stock and George Andre owns the other;
 Test for Corporate Veil Piercing: Van Dorn Test
 corporate entity will be disregarded and the veil of limited liability pierced when
two requirements are met:
 Control (there must be such unity of interest and ownership that the separate personalities of
the corporation and the individual no longer exist)
 circumstances must be such that adherence to the fiction of separate corporate existence would
sanction a fraud or promote injustice
 Whether a corporation is so controlled by another to justify disregarding separate
identities: 4 factors
 the failure to maintain adequate corporate records or to comply with corporate formalities;
 the commingling of funds or assets;
 undercapitalization; and
 one corporation treating the assets of another corporation as its own
 A: for physical facilities – Marchese runs all of these corporations out of the same single office
with the same phone line – same expense accounts; Marchese borrows money from these
corporations when he feels like it – and corporations borrow money from each other when need
be; Marchese has used these accounts to pay personal things – like child support, education
expenses for his children, maintenance of automobiles, health care of his pet, Marchese did not
even have a personal bank account – he simply used the corporations;
 Here: the “shared control/unity of interest and ownership part of the Van Dorn test was met in
this case – corporate records and formalities have not been maintained – funds and assets have
been commingled;
 A: Second part of Van Dorn – promotion injustice is more problematic! The court in Pederson
– failed to pierce the corporate veil because “nothing in these facts provides evidence of
scheming on the part of defendant to commit a fraud on potential creditors;
 “promoting injustice” – courts that have properly pierced corporate veils have done so in the
event that if they didn’t some “wrong” beyond a creditor’s inability to collect would result
 H: if Sea-Land desires summary judgment – it needs to produce evidence that would establish
that kind of additional “wrong.”
 Sea-Land could for example establish that Marchese used these corporate facades to avoid its
responsibilities to creditors
In Re Silicone Gel Breast Implants Products Liability Litigation, 887 F.Supp.1447 (N.D. Ala. 1995
F: MEC – incorporated in Wisconsni in 1969 – principal place of business Racine; independent
privately owned corporation manufacturing a variety of medical and plastic surgery devices –
including breast implants
Bristol – sole shareholder of Medical Engineering Corp. – major supplied of breast implants –
never itself manufactured or distributed implants;
 Bristol purchased MEC’s stock for $28 million
 1988 Bristol expanded breast implant business – purchasing Natural Y Surgical Specialities
Inc., and Aesthetech Corporation for $8.7 miilion – paid from a Bristol account –
MEC and Bristol jointly conducted a due diligence review regarding possible liability to
polyurethane-coated breast implants;
 MEC had at least a board of three directors – consisting of Bristol VP, Bristol exec., and
MEC’s President
 MEC prepared significant event reports for Bristol’s Corporate Policy Committee
o Reports on information for breast implants regarding testing, publicity, expenses,
lawsuit settlements, and backorders
 Bristol also required MEC to prepare and submit a five-year plan for its review.
 MEC submitted budgets for approval by Bristol’s senior management
 Cash received by MEC was transferred to an account maintained by Bristol
 Bristol was MEC’s banker – providing such loans as it determined
 Bristol set the employment policies and wage scales that applied to MEC’s employees
 MEC needed to seek Bristol’s approval before hiring a top executive or negotiating salary
 ConvaTec – subsidiary of Bristol – assisted MEC in developing a premarket approval
application (PMAA) regarding breast implants for the FDA
 Some of Bristol’s in-house counsel acted as MEC attorneys
 Bristol’s “TESD” formed auditing and review functions for MEC once or twice a year
 TESD also audited MEC’s sterilization and lab companies
Bristol’s public relations dept. issued statements regarding the allegations of TDA production and
cancer in rats implanted with polyurethane implants.
Bristol’s name and logo were contained in the package inserts and promotional products regarding
breast implants –
MEC posted a profit every year between 1983 and 1990 = total sales in 1983 were approx. $14
million and in 1990 they were $65 million.
 Bristol never received dividends from MEC
Bristol executives suspended MEC’s sales of polyurethane coated breast implants – MEC ceased its
breast implant business – and later ceased all operations
A: THEORIES OF RECOVERY: Corporate Control or Direct Liability
++Corporate Control: - deals with piercing the corporate veil to abrogate limited liability and
hold Bristol responsible for actions of MEC.
 Potential for abuse is greatest when the corporation is owned by a single shareholder
 A parent corporation is expected – required to exert some control over its subsidiary
 When a corp. is so controlled as to be the alter ego of its stockholder – the corporate form
may be disregarded in the interests of justice
 Totality of the circumstances must be evaluated when determining whether a subsidiary
may be found to be an alter ego of the parent corporation.
Factors to consider:
 Parent and subsidiary have common directors or officers
 Parent and subsidiary have common business departments
 Parent and subsidiary file consolidated financial statements and tax returns
 Parent finances the subsidiary
 Parent caused the incorporation of the subsidiary
 Subsidiary operates with grossly inadequate capital
 Parent pays the salaries and other expenses of the subsidiary
 The subsidiary receives no business except that given to it by the parent
 The parent uses the subsidiary’s property as its own
 The daily operations of the two corporations are not kept separate
 The subsidiary does not observe the basic corporate formalities, such as keeping separate
books and records and holding shareholder and board meetings
--Many of these factors have been proven-It would be inequitable and unjust to allow Bristol now to avoid liability
++Direct Liability: - strict products liability, negligence, failure to warn, negligence per se for not
complying with FDA regulations, misrepresentation, fraud and participation.
 Theory of negligent undertaking –
o one who undertakes, gratuitously or for consideration, to render services to another
which he should recognize as necessary for the protection of a third person or his
things, is subject to liability to the third person for physical harm resulting from
his failure to exercise reasonable care to [perform] his undertakings, if
 (a) his failure to exercise reasonable care increases the risk of harm or
 (b) he has undertaken to perform a duty owed by the other to the third
person or,
 (c) the harm is suffered because of a reliance of the other or the third person
upon the undertaking

Under this theory a duty that would not otherwise have existed can arise when an individual
or company nevertheless undertakes to perform some action
H: by allowing its name to be placed on breast implant packages and product inserts – Bristol held
itself out as supporting the product, apparently to increase confidence in the product and to increase
sales – now it cannot deny potential responsibility under § 324A.
§ 4. THE ROLE & PURPOSES OF CORPORATIONS
A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 appeal dismissed, 346 U.S. 861 (1953)
 F: A.P. Smith incorporated in 1896 – engaged in manufacture and sale of valves, fire hydrants,
and special equipment – the board of directors in 1951 adopted a resolution that said it was in
the company’s best interest to join with others in the Annual Giving to Princeton University a
sum of $1,500 – this action was questioned by stockholders; the President of the company
Hubert F. O’Brien testified that he felt this was a sound investment for the company – the
public expects corporations to aid philanthropic events, they obtain good will with the
community- charitable donations create favorable environment for business operations –
 Plaintiffs position –
 plaintiff’s certificate of incorporation does not expressly authorize the
contribution and under common-law principles that company does not possess
any implied or incidental power to make it, (2) the NJ statutes which expressly
authorize the contribution may not constitutionally be applied to the plaintiff, a
corporation created long before their enactment
 F: corporate giving has correspondingly increased – estimated over 300 million dollars
corporate contributions – over 60 million going to universities and other educational
institutions;
 1930 NJ Statute: any corporation can cooperate with other corporations in the creation and
maintenance of community funds and charitable – philanthropic events conducive to public
welfare, and could for such purposes expend corporate funds as the directors “deem expedient
and as in their judgment will contribute to the protection of the corporate interests.”
 Public Policy: -although the power is there to act regarding public interest of the contract
between the state and the corporation, it has no effect on the contractual rights between the
corporation and its stockholders; contentions have been sustained by the U.S. Supreme Court
 The public policy supporting this point of view is great
 H: no hesitancy in sustaining the validity of the donation by the plaintiff. – it was made to an
institution of higher learning, in a modest amount and well within the limitations imposed by
statutory requirements, and was voluntarily made in the reasonable belief that it would aid the
public welfare and advance the interests of the plaintiff as a private corporation and as part of
the community in which it operates.
Dodge v. Ford Motor Co., 170 N.W. 668 (1919)
F: Ford Motor Co. incorporated in 1903 –investment of $150,000 – Henry Ford was the majority
shareholder with 58% of the common shares while brothers Horace Dodge and John Dodge held
10% of the common shares; By 1908 the $150,000 grew to $2 million. – The car the company
made sold initially for $900 – but then by 1916 despite improvements the car price dropped to $440
– and then again lowered later that year to $360. Profits soared – for the three fiscal years – total
number of cars sold was 472,350 – and the profit was almost $60 million.
In 1911 – regular dividends were $1.2 million (60% of the amount initially invested) By 1915 the
special dividends paid were $10 million. – The company’s profit by year 1916 was $174 million. –
company had more than $50 million cash on hand. –
F: Henry Ford in 1916 announced a plan that in the future no special dividends would be paid and
that profits would be reinvested in the business – to expand the existing plant – build an iron ore
smelting plant so that the company can make its own metal parts – also the company’s car price
would be reduced –
In 1915 - The Dodge Brothers who owned 10% of the common shares – received a regular
dividend of $120,000 and their share of the special dividend was $1 million. Under Ford’s plan the
Brothers would be expected to receive only $120,000 per year.
In 1913 – they formed a car company of their own – competing with Ford – after hearing of the
plan – in 1916 the Dodge Brothers offered to sell their shares to Ford for $35 million - Ford
expressed no interest –
Rule: directors of a corporation, and they alone, have the power to declare a dividend of the
earnings of the corporation, and to determine its amount. Courts of equity will not interfere in the
management of the directors unless it is clearly made to appear that they are guilty of fraud or
misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has
a surplus of net profits which it can, without detriment to its business, divide among its
stockholders, and when a refusal to do so would amount to such an abuse of discretion as would
constitute fraud, or breach of that good faith which they are bound to exercise towards the
stockholders.
Q: whether it appears that the directors were acting for the best interests of the corporation?
A: it has been the policy of Ford for some time now to annually reduce the selling price of the cars
– while still keeping up quality – a plan for expansion of the plant has been talked and discussed by
the board of directors – the plan does not call and is not intended to immediately produce a
profitable business – Mr. Ford is the dominant force in the business – no plan of operations could
be adopted unless he consented and no board of directors can be elected whom he does not favor;
Mr. Ford said that this company has made too much money – and by reducing prices of the car –
sharing the profits with the public ought to happen – the court agrees that Mr. Fords plan has been
fueled by philanthropic and sentiment – policy based to improve the public welfare –


a business corporation is organized and carried on primarily for the profit of the
stockholders
powers of the directors are to be employed for that reason

discretion of the directors is to be exercised in the choice of means to attain that end.
-it is not within the lawful powers of a board of directors to shape conduct the affairs of a
corporation for the merely incidental benefit of shareholders and for the primary purpose of
benefiting others, and no one will contend that, if the avowed purpose of the defendant directors
was to sacrifice the interests of shareholders – it would not be the duty of the courts to interfere.
H: we are not persuaded that we should interfere with the proposed expansion of the business of
the Ford Motor Company. Judges are not business experts.
Shlensky v. Wrigley, 237 N.E.2d 776 (1968)
F: Shlensky is a minority stockholders of the Chicago Cubs – a Delaware Corp. with principal
place of business in Chicago, Illinois – Philip Wrigley is President of the Corporation – owner of
approx. 80% of the stock – 19 of the 20 major league teams scheduled night games – every other
team except the Cubs back in 1966 - out of the 1620 games in the season 932 were played at night
– From 1961 to 1965 the Cubs sustained operating losses – Shlensky contributes those losses to the
attendance at Cubs’ home games – if the directors continue to refuse to install lights and have night
games – the losses will continue; Compares attendance at the Chicago White Sox games – White
Sox night games drew more than did the Cubs’ weekday games – Shlensky contends that Wrigley
refuses to install lights not because of the interest of the welfare of the corporation – but because of
his public belief “that baseball is a daytime sport” – and that installation of lights will have a
deteriorating effect on the surrounding neighborhood.
Q: whether Shlensky’s amended complaint states a cause of action?
Rules:
 its not courts’ function to resolve corporation questions of policy and business management
- directors are chosen to pass upon such questions and their judgments unless shown to be
tainted with fraud is accepted as final
 given the benefit of the doubt that directors were chosen in good faith and designed to
promote the best interests of the corporation they serve
 in a purely business corporation … the authority of the directors in the conduct of the
business of the corporation must be regarded as absolute when they act within the law, and
the court is without authority to substitute its judgment for that of the directors.
H: Even though Wrigley and directors may be acting fueled by other motives they are not contrary
to the best interests of the corporation and the stockholders –
 Surrounding neighborhood might need to be considered by a director who is considering
putting lights
 Long run interest of the corporation – is beyond our jurisdiction and our ability –
 Decision is one properly before directors – and since the alleged motives showed no fraud,
illegality or conflict of interest in making that decision – its ok
 No evidence was given to show that other teams have substantially (profit wise) benefited
from having night games – opposed to day games
Directors are elected for their business capabilities and judgments and the courts cannot
requires them to forego their judgment because of the decisions of directors of other
companies – we can’t force the Cubs directors to follow the same practice as other major
league baseball directors.
THE DUTIES OF OFFICERS, DIRECTORS, AND OTHER INSIDERS –
Chapter 5
§ 1. THE OBLIGATIONS OF CONTROL: DUTY OF CARE
Kamin v. American Express Company, 387 N.Y.S.2d 993 (1st Dept. 1976)
F: AmEx bought $29.9M shares of Donaldson Lufkin & Jenrette. That investment lost 90% of its
value – took a $26M loss on the investment. AmEx then paid out special dividend to its
shareholders – there is nothing wrong or unusual with this – Kamin wanted AmEx to write off for
tax purposes – which would have benefited an $8M tax benefit – shareholders recognized dividend
income equal to the fair market value ($4 miilion) of the DLJ stock, on which they could be taxed
if they sold it.
A: How do AmEx directors defend their decision?
 Such a reduction of net income would have a serious effect on the market value of the
publicly traded AmEx stock”
 We are announcing to the world we took a bath to the tune of $26 million.

Economists pretty much universally reject this theory, arguing that writing off the DLJ
stock would have had no effect on AmEx’s stock price.

If AmEx declared the loss on their taxes – it would have zero effect on the stock price –
because analysts know that they would have already taken that loss
H: Directors and officers are often compensated for making achievement goals – which is probably
why they didn’t report this – plaintiffs didn’t make this argument – court didn’t acknowledge
We are left with a waste claim – the court doesn’t buy it – AmEx comes up with a justification –
even though its crappy – the court buys it and defers the board to the business judgment
Smith v. Van Gorkom, 488 A.2d 858 (Del. Sup.Ct. 1985)
F: Trans Union – public traded company (railcar leasing business)
 Aug. 27, 1980 – Jerome Van Gorkom (Trans Union CEO) meets with Senior Management
o Possible sale of Trans Union to a company with taxable income
o Brief preliminary work had been done so far
 Sept. 5, 1980
o Donald Romans (CFO) brought up idea of leveraged buyout
o No price for the company – “ran numbers”
o Van Gorkom stated he would be willing to take $55 per share for his own 75,000
shares
o Van Gorkom vetoed the idea of a leveraged buyout – he has been officer with Trans
Union for 24 years, CEO for over 17 and Chairman of the Board for 2 – looking to
retire soon







Sept. 13, 1980 - Van Gorkom meets with Jay Pritzker – corporate takeover specialist
o Van Gorkom assembled a proposal per share price for sale of company – he did this
without consulting either the Board or any members of Senior Management
o Trans Union’s Controller – Carl Peterson – helped Van Gorkom out with this – and
calculated the buy out at $55/share
o Total value of the company with the outstanding shares = $690 million + $200
million equity contribution by the buyer
o Proposal:
 Trans Union was free to accept any better offer than $55/share
 Pritzker mentioned $50/share would be nicer for him – but nothing evolved
Sept. 15, 1980
o Pritzker is interested in the merger proposal at $55/share – wanted more info on
company – doesn’t want to become a “stalking horse” though
Sept. 18, 1980
o Van Gorkom knew that Pritzker intended to make a cash-out merger offer
o Pritzker told her attorney to begin drafting merger documents
o Number of shares to be offered – to Pritzker was negotiated down to 1,000,000
shares
o Pritzker to protect himself gets to buy a 1,000,000 shares at $38/share (mini-lockup)
put one trading partner in a favorable position
o Have to have a decision no later than Sunday (Sept. 21)
Sept. 19
o Van Gorkom called a special meeting – Trans Union Board for noon – to take place
on Sept. 20
o Senior Management’s reaction to Pritzker’s proposal was completely negative
Sept. 20
o Management isn’t very pleased with this meeting – meeting lasted 2 hours
o Very little information is provided – directors end up approving the Proposed
Merger Agreement
 2 attached conditions:
 Ask for a 90 day “market test” period – to accept a better offer than
$55/share
 Trans Union reserved the right to share proprietary information with
any other potential bidders
Sept. 20 – Merger Agreement was executed by Van Gorkom and Pritzker
o 10 days later Senior Management is disgusted with the agreement
o Pritzker agreed to modify the agreement – with conditions attached
Oct. 8 –
o Two other offers
 Salomon Brothers
 KKR
Rule: business judgment rule is a presumption that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith
Rule: no protection for an uninformed decision –
 Under the business judgment rule there is no protection for directors who have made “an
unintelligent or unadvised judgment”
Q: Did the directors reach an informed business judgment on Sept. 20, 1980? And whether the
directors’ actions taken subsequent to September 20 were adequate to cure an infirmity in their
action taken on Sept. 20?
A: The directors failed to inform themselves of all information reasonably available to them and
relevant to their decision to recommend the Pritzker merger; failed to disclose all material
information such as a reasonable stockholder would consider important in deciding whether to
approve the Pritzker offer

The Agreement between Pritzker and Van Gorkom – concedes that the Agreement barred
Trans Union from actively soliciting such offers and from furnishing to interested parties
any information about the Company other than that already in the public domain
H: Board of Directors did not reach an informed business judgment on Sept. 20, 1980 – they
breached their fiduciary duty to their stockholders
Brehm v. Eisner, 746 A.2d 244 (Del. Sup.Ct. 2000)
F: Oct. 1, 1995 – Disney hires Ovitz as President; long time friend of Disney Chairman and CEO
Michael Eisner – Ovitz’ Employment Agreement – initial term of 5 years and required Ovitz to
“devote his full time and best efforts exclusively to the Company,” with exceptions for volunteer
work, service on the board of another company, and managing his passive investments.
 If he stays with the company:
o Base salary of $1 million/year
o Discretionary bonus
o Two sets of stock options (A and B)
o Stock options on 5 million shares of Disney common stock
 If he leaves the company on an non-fault basis:
o Discounted present value of remainder of 5 years salary
o $ 10 million severance payment
o Immediate vesting of options on 3 million shares
o Total value of package = $140 million
Ovitz did not do a really good job – or a really bad job; after 14 months Ovitz was non-fault
terminated (see more in the book Disney Wars)
This is a shareholder derivative action –
Rule: When plaintiff alleges waste and due care violations in connection with executive
compensation, does court review merits of claim?
 No….”process due care” only
 At least absent irrationality, compensation is a matter of business judgment and court will
not review decision
Q: whether there should be personal liability of the directors of a Delaware corporation to the
corporation for lack of due care in the decisionmaking process and for waste of corporate assets?
H: the board was not liable they relied upon an expert in Crystal 141 (e) defense – if you rely on an
expert
Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981)
F: Mrs. Pritchard took over Pritchard & Baird after her husband died – Mrs. Pritchard was the
single largest shareholder and a director – and her two sons were also directors (Charles Jr. and
William) Charles and William were taking “loans” in the amount of $12 million. The loans were
taken from funds that the corporation was supposed to hold in trust for its clients. Plaintiff’s
alleged a breach of duty of care by Lillian Pritchard.
Q: Did Mrs. Pritchard breach her duty of care?
 Yes – she was inattentive- facts that she was old, depressed, drunk and ignorant of the
business were not defense worthy in this case
A: Mrs. Pritchard was not active in the business; - she knew nothing virtually about the corporate
affairs – She was warned by her husband that Charles Jr. would “take the shirt off my back” - Mrs.
Pritchard wasn’t taken any precaution or look over the business – she was too busy getting drunk Rule: Duty to be informed:
 Obligations of basic knowledge and supervision
 Read and understand financial statements
 Object to misconduct and, if necessary, resign
Shareholders have a right to expect that directors will exercise reasonable supervision and control
over the policies and practices of a corporation. The institutional integrity of a corporation depends
upon the proper discharge by directors of those duties.
Rule: directors are under a continuing obligation to keep informed about the activities of the
corporation…
 Directors may not shut their eyes to corporate misconduct and then claim that because they
did not see the misconduct, they did not have a duty to look.
 Directorial management – does not require a day-to-day inspection of activities; rather a
general monitoring of corporate affairs and policies.
H: Mrs. Pritchard’s estate is liable – her neglect of duty contributed to the climate of corruption;
her failure to act contributed to the continuation of that corruption.
In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996)
F: Caremark – Delaware Corporation – headquarters Northbrook, IL – involved in two main
health care business segments (patient care and managed care services); Feds prosecute and civily
sue Caremark – settle for $250 million – shareholder sues Caremark board “derivatively” Caremark denied any wrongdoing relating to the indictment and believed that the OIG investigation
would have a favorable outcome; Caremark settles shareholder suit – agrees to pay plaintiff
attorney fees of $1 million; settlement requires court approval
Q: trying to figure out if the settlement agreement is proper?
A: Graham standard
o [A]bsent cause for suspicion there is no duty upon the directors to install and operate
a corporate system of espionage”
**This court does not follow the Graham standard – but that the board must: “attempt in good faith
to assure…a corporate information and reporting system.”
Allen says the Graham standard is no longer reliable – 3 Reasons
1. things have changed since 1963 – suggests that the S.C. not takes much more seriously the
boards duty to monitor
2. section 141 – the board has a supervisory and monitoring rule
3. revision to the federal sentencing guidelines – imposes new penalties on corporations for
violations and thus imposes new duties on boards – take reasonable and good faith – to see
that your board does not get fined $250 million
H: Chancellor Allen – ruled the settlement fair, the board used due care – the lawyers get fees
Stone v. Ritter, 911 A.2d 362 (Del. Supr. 2006)
F: derivative action – brought on AmSouth’s behalf by William and Sandra Stone – alleged they
owned AmSouth common stock “at all relevant times. Louis Hamric and Victor Nance – contacted
AmSouth Bank in Tennessee to arrange custodial trust account to be created for “investors” and in
a “business venture.” The venture: involved the construction of medical clinics overseas, - Nance
had convinced more than forty of his clients to invest in promissory notes bearing high rates of
return – by misrepresenting the nature and the risk of that investment; - relying on the same
misrepresentations- AmSouth agreed to provide the custodial accounts; - the scheme was
discovered in March 2002 – when investors did not receive their monthly interests payments Hamric and Nance – were indicted on federal money-laundering charges – both pled guilty –
USAO advised AmSouth it was subject to criminal investigation – charging AmSouth failed to file
SAR’s – and pay a $40 million dollar fine
Q: Was there such a failure of oversight here as to constitute a breach of the duty to act in good
faith?
What is the scope of that duty?
 Graham standard: Absent cause for suspicion there is no duty upon the directors to install
and operate a corporate system of espionage.”
 Caremark standard: However, if the claim is based on the board’s ignorance of liabilitycreating activities “only
H: no breach of duty on part of AmSouth – the steps they took were in good faith – there’s nothing
more they could have done.
§ 2. DUTY OF LOYALTY
A. DIRECTORS AND MANAGERS
Bayer v. Beran, 49 N.Y.S.2d 2 (Sup. Ct. 1944)
F: Celanese Corporation of America – radio advertising program in 1942 costing $1,000,000/year.
The complaint consisted of the fact that the directors were negligent in selecting the type of
program and renewing the radio contract for 1943 – Before 1942 the company did not use radio
advertising – the advertising expense through other outlets was $683,000 while net sales were
$62,277,000 for that same year. – the company always labeled their products “Celanese” – and that
they were different and better than rayon products – ten years ago a radio program was considered
– but nothing occurred out of it- 1937 FTC required that all products be labeled rayon and that the
name “Celanese” could no longer be used; - so for advertising purposes the company turned to
radio – they looked at studies reported to them by the advertising department of the company – they
brought in a radio consultant regarding the idea – and ultimately decided they would spend
$1,000,000 /year – subject to cancellation every 13 weeks –
However – Camille Dreyfus president of the company – hired his wife (married 12 years) to be
included on the radio – she was a singer – she suggested other artists as well as herself – she
received $500/evening;
Q: 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”?
A: the expenditure was not reckless – or unconscionable: it is not improper to appoint relatives of
officers or directors to responsible positions in a company but where a close relative of the CEO of
a corporation, and one of its dominant directors, takes a position closely associated with a new and
expensive field of activity – motives of the directors are likely to be questioned – the board would
be placed in a position where selfish, personal interests might be in conflict with the duty it owed to
the corporation – therefore this must be challenged under rigorous scrutiny H: evidence fails to show the program was designed to foster or subsidize “the career of Miss
Tennyson as an artist” or to “furnish a vehicle for her talents.” Her compensation was in
conformity with that paid for comparable work – she received less then the other artists Rule: directors acting separately and not collectively as a board cannot bind the corporation –
1. collective procedure is necessary in order that action may be deliberately taken after an
opportunity for discussion and an interchange of views;
2. directors are the agents of the stockholders and are given by law no power to act except as a
board
-failure to observe the formal requirements is by no means fatal – its members are in daily
association with one another and their full time is devoted to the business of the company with
which they have been connected for many years
B. CORPORATE OPPORTUNITIES
Broz v. Cellular Information Systems, Inc., 673 A.2d 148 (Del. 1996)
F: Robert Broz – (President of RFB Cellular and member of the B.O.D. at CIS) – In April of 1994
Mackinac Cellular Corp. – sought to divest itself of Michigan-2, license area immediately adjacent
to Michigan-4; RFBC owns and operates Michigan-4 (cellular telephone service) – Mackinac
contacted Daniels & Associates – arranged for Daniels to seek buyers for Michigan-2; Daniels
included RFBC as a candidate, and did not include CIS – due to the company’s financial struggles
– June 13, 1994 Broz spoke with CIS CEO concerning his interest in Michigan-2; it was
communicated to Broz that CIS is not interested in Michigan-2 – the company did not have the
wherewithal or the financial power to purchase Michigan-2; Broz continued to speak with directors
of CIS – and all of them gave the same response that they were not interested
June 28, 1994 – six CIS directors entered into an agreement with PriCellular to sell their
shares of CIS at $2.00/share. The date on the closing date kept getting delayed –

August 6, Sept. 6 and Sept. 21, 1994 – Broz submitted written offers to Mackinac for the
purchase of Michigan-2 – during this time PriCellular began negotiations with Mackinac to
arrange an option for the purchase of Michigan-2; PriCellular’s interest in Michigan-2 was
fully disclosed to CIS CEO

Late Sept. – PriCellular reached an agreement with Mackinac on an option to purchase
Michigan-2; the price was set at $6.7 million, - the agreement allowed Mackinac to accept
another offer that was at least $500,000 more. Broz agreed to pay Mackinac $7.2 million
for the Michigan-2 license; deal was done between Mackinac and RFBC –

Nov. 23, 1994 – (nine days later) – PriCellular closed its tender offer with CIS.
DOCTRINE OF CORPORATE OPPORTUNITY –
If there is presented to a corporate officer or director a business opportunity which the corporation
is financially able to undertake, is, from its nature, in the line of the corporation’s business and is
of practical advantage to it, is one in which the corporation has an interest or a reasonable
expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be
brought into conflict with that of the corporation, the law will not permit him to seize the
opportunity for himself.
A: Mackinac did not offer the property to CIS; CIS was not financially capable of exploiting the
Michigan-2 opportunity; it is not clear that CIS has a cognizable interest of expectancy in the
license; CIS articulated a business plan – that did not include or involve any new acquisitions –
The corporate opportunity doctrine – only comes in to play with cases when the fiduciary’s
seizure of an opportunity results in a conflict between the fiduciary’s duties to the
corporation and the self-interest of the director as actualized by the exploitation of the
opportunity.


Broz took care not to usurp any opportunity which CIS was willing and able to pursue.
It is not the law of Delaware – that presentation to the board is necessary prerequisite to a
finding that a corporate opportunity has not been usurped
H: Broz was under no duty to consider….the contingent and uncertain plans of PriCellular in
reaching his determination of how to proceed. Broz did not breach his fiduciary duties In Re eBay, Inc. Shareholders Litigation, 2004 WL 253521 (Del. Ch.)
F: plaintiff’s allege that eBay’s investment banking advisor, Goldman Sachs Group – engaged in
“spinning” (allocating shares of lucrative initial public offerings of stock to favored clients;
Omidyar and Skoll founded eBay – sole proprietorship; 1998 eBay retained Goldman Sachs and
other investment banks to underwrite an IPO of common stock – stock was priced at $18/share.
Goldman purchased 1.2 million shares; stock of eBay rose to $175/share. eBay has paid Goldman
Sachs – over $8 million; Goldman “rewarded” individual defendants by allocating to them
thousands of IPO shares – at initial offering price of $18/share. The defendants resold these
securities on the market for millions of dollars in profit.
A: no one disputes that eBay financially was able to exploit opportunities in question – eBay was in
the business of investing in securities; eBay had more than $550 million invested in equity and debt
securities; eBay invested more than $181 million in “short-term investments” and $373 in “longterm investments” - thirdly – investing was integral to eBay’s cash management strategies and a
significant part of the business - - and it is undisputed that eBay was never given an opportunity to
turn down the IPO allocations as too riskyRULES: an agent is under a duty to account for profits obtained personally in connection with
transactions related to his or her company.
H: eBay has to return the money – illegal
C. DOMINANT SHAREHOLDERS
Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971)
F: Sinclair Oil was a holding company with multiple subsidiaries; each operating subsidiary
functioned in one country. Sinclair is the parent company of Sinven – based on Venezuela (97%
share); minority objected to three aspects of Sinclair-Sinven relationship; Sinven’s large dividends
prevented its expansion – paid out dividends in excess of earnings - $40 million; Sinven was
limited to Venezuelan projects; (weak usurpation claim – which the court rejects); there was also a
contract between Sinven and another Sinclair subsidiary breached.
Q: Sinclair caused Sinven to pay out legal but very large dividends
 Standard of Review? BSJ rule applies
International breached contract and Sinclair wouldn’t let Sinven sue?
 Standard of Review? Intrinsic fairness A: Sinclair benefits from not having a subsidiary H: Business Judgment Rule applies Intrinsic Fairness test: - is only used when the parent has received a benefit to the exclusion of the
minority shareholders of the subsidiary and at the expense of the minority shareholders of the
subsidiary
Zahn v. Transamerica Corporation, 162 F.2d 36 (3d. Cir. 1947)
F: Transamerica was the controlling shareholder of Axton-Fisher. Preferred stock – not relevant –
class A stock: 2/3 owned by Transamerica; class B stock: 80% owned by Transamerica.
Transamerica elects majority of the board.
 CLASS A
o Annual dividend of $3.20
o Entitled to liquidation dividend 2x that of Class B
o Convertible into Class B at option of holder
o Callable by corporation at $60/share plus accrued but unpaid dividends
 CLASS B
o
o
o
o
Annual dividend of $1.60
entitled liquidation ½ of Class A
not convertible
not callable
F: Transamerica caused Axton-Fisher’s board to call the Class A shares for redemption $80; $60
call price plus $20 in unpaid dividends. Firm was then liquidated – allegedly to appropriate for
Transamerica the increased value of tobacco inventory. Plaintiff claims Class A would have
received 240 per share had they not liquidated
3 options:
1. redeem without disclosing intent to liquidate -----what they actually did
2. liquidation without redemption ----- what plaintiff wanted to happen
3. redeem after giving notice of the material facts and their intent to liquidate
A: you have to redeem but after giving notice – you have to give them the opportunity – that all A’s
would make under the circumstances – which is to trade in their B shares for A’s shares and share
in the liquidation.
THE NATURE OF THE CORPORATION CONT’D – Chapter 3
§ 3. SHAREHOLDER DERIVATIVE ACTIONS
A. INTRODUCTION
Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541 (1949)
F: Beneficial Industrial Loan Corporation – Delaware corp. doing business in New Jersey; the
claim was that since 1929 the defendants (managers and directors) have enriched themselves
through a conspiracy at the expense of the corporation – charges of mismanagement and fraud –
over 18 years alleged wasted assets exceed $100 million. The stockholder bringing the claim
owned 100 shares out of the 2 million – approx. he had .0125% of the outstanding stock = worth
about $9,000.
1945 NJ Statute: a plaintiff with such a small interest – is liable for reasonable expenses and
attorney fees – of the defense if he fails to make good his complaint and entitle the corporation to
indemnity before the case can be prosecuted –
Q: Is this statute Constitutional? NO
 Background of stockholder litigation required no more than general notice
 Director was not subject to accountability – created strong incentives for directors to
personally benefit and profit at the expense of the trust
 Business code was tolerant of those practices
 Equity came to the relief of the stockholder – who otherwise had no standing to bring a civil
action against faithless directors and managers
 Equity allowed the stockholder to step into the corporations shoes – seek the right
restitution
 Suits would be bought off by secret settlements – payments that would come from corporate
assets “strike suits”
Indemnity = a duty to make good any loss, damage, or liability incurred by another; or the right of
an injured party to claim reimbursement for its loss, damage, or liability from a person who has
such a duty
Rule: A stockholder who brings suit on a cause of action derived from the corporation assumes a
position, not technically as a trustee, but one of a fiduciary character
 he sues not for himself alone – but as a representative of a class with similar situations
A: the statute imposes liability and requires security for “the reasonable expenses, including
counsel fees, which may be incurred” by the corporation and by other parties defendant. The
amount of security may increase or decrease; no type of litigation is more susceptible of
regulation than that of a fiduciary nature
H: it cannot be said that a state makes unreasonable use of its power as to violate the Constitution
when it provides liability and security for payment of reasonable expenses if a litigation of this
character is adjudged to be unsustainable -this statute creates a new liability where none existed before – it makes a stockholder who
institutes a derivative action liable for the expense to which he puts the corporation and other
defendants, if he does not make good his claims.
Eisenberg v. Flying Tiger Line, Inc.,451 F.2d 267 (2d Cir. 1971)
F: Max Eisenberg – stockholder of Flying Tiger Line, resident of New York – Flying Tiger Delaware corporation with principal place of business – California; Eisenberg is seeking to
overturn a reorganization and merger with Flying Tiger effective in 1969. – this merger diluted
his voting rights; Flying Tiger organized a wholly owned subsidiary “Flying Tiger Corporation”
(FTC) – and FTC in turn organized a wholly subsidiary FTL Air Freight Corporation (FTL); the
three corporations entered into a plan of reorganization – subject to stockholder approval
 Flying Tiger merged into FTL and only FTL survived
 Proxy statement dated August 11 – sent to stockholders – approved the plan
 Necessary 2/3rds voted at stockholders meeting held on Sept. 15
 FTL took over operations and Flying Tiger shares were converted into identical number of
shares of FTC
 FTL changed its name to “Flying Tiger Line, Inc.”
 Business operations are now confined to a wholly owned subsidiary of a holding company
whose stockholders are the former stockholders of Flying Tiger
N.Y. Business Corporation Law: requires a plaintiff suing derivatively on behalf of a corporation
to post security for the corporation’s costs.
Q: Should Eisenberg have been required to post security costs as a condition to prosecuting his
action?
A: Eisenberg claims that the reorganization has deprived him and fellow stockholders of their right
to vote on the operating company affairs and that this right in no sense ever belonged to Flying
Tiger itself. – but the stockholders were only affected secondarily or derivatively – because before
stockholders can be helped – need to breathe life back into the dissolved corporation Cohen – instructs that a federal court with diversity jurisdiction must apply a state statute providing
security for costs if the state court would require the security in similar circumstances
TEST: whether the object of the lawsuit is to recover upon a chose in action belonging
directly to the stockholders, or whether it is to compel the performance of corporate acts
which good faith requires the directors to take in order to perform a duty which they owe to
the corporation, and through it, to its stockholders.
 if Flying Tiger’s directors had a duty not to merge the corporation – the duty was owed to
the corporation and only derivatively to its stockholders
Rule: security for costs could not be required where a plaintiff – “does not challenge acts of the
management on behalf of the corporation. He challenges the right of the present management
to exclude him and other stockholders from proper participation in the affairs of the
corporation. He claims that the defendants are interfering with the plaintiff’s rights and
privileges as stockholders.”
Suits are now derivative only if brought in the right of a corporation to procure a judgment
“in its favor.”
H: the reorganization deprived Eisenberg and other minority stockholders of any voice in the
affairs of their previously existing operating company. Eisenberg’s claims should not have been
dismissed for failure to post security. REVERSED.
B. THE REQUIREMENT OF DEMAND ON THE DIRECTORS
Grimes v. Donald, 673 A.2d 1207 (Del. Sup. Ct. 1996)
F: DSC Communications Company – Delaware corp.; headquartered in Plano, TX – manufacture,
design, market and service telecommunication systems – C.L. Grimes’ complaint revolves around
Employment Agreements for James Donald (CEO and Board of Directors)
Employment Agreement –
 Donald shall be responsible for the general management of the affairs of the company
 Donald shall report to the board
 Runs until Donald’s 75th birthday or termination
o Termination can come by death or disability
o For cause
o Without cause
 Donald can declare a Constructive Termination Without Cause – if that happens then..
o Donald will get continued payment of his “Base Salary” for the remainder of his
term – which is like 6 ½ years or until he turns 75 –
o Base Salary = $650,000
o Annual incentive awards = $300,000
o Medical benefits for his wife for life and children until the age of 23
o Continue participation in employee benefit plans
o Other benefits
Income Continuation Plan
 After Base Salary ceases – under Employment Agreement –
 Donald entitled to receive – for the remainder of his life – annual payments equal to the
average of the sum of his Base Salary plus bonuses in the three highest years multiplied by
3%, multiplied by his years of service
 Awarded 200,000 units –
 Could be totaled at $600,000
F: Grimes wrote the board on Sept. 23, 1993 demanding that these Agreements be abrogated –
board refused the demand in a letter –
A: due care, waste, and excessive compensation claims asserted here are derivative and will be
considered as such.
Distinction between direct and derivative claims depends on “‘the nature of the wrong alleged’
and the relief, if any, which could result if plaintiff were to prevail.”
Rule: a court “cannot give legal sanction to agreements which have the effect of removing from
directors in a very substantial way their duty to use their own best judgment on management
matters.”
A: the Donald Agreements do not formally preclude the DSC board from exercising its statutory
powers and fulfilling its fiduciary duty.
A: if an independent and informed board, acting in good faith, determines that the services of a
particular individual warrant large amounts of money, whether in the form of current salary or
severance provisions, the board has made a business judgment.
 This judgment will receive protection of the business judgment rule unless the facts show
that such amounts compared to the services to be received in exchange, constitute waste or
could not otherwise be the product of a valid exercise of business judgment…
A stockholder filing a derivative suit must allege either that the board rejected his pre-suit
demand that the board assert the corporations claim or allege with particularity why the
stockholder was justified in not having made the effort to obtain board action
 “Reasonable Doubt” that a board is capable of making independent decision to assert
the claim if demand were made.
Demand Requirement 1. requiring intracorporate remedies – invokes a species of alternative dispute
resolution – avoid litigation altogether
2. if litigation is beneficial – corporation can control the proceedings
3. if demand is excused or wrongfully excused the stockholder will normally control
the proceedings


a stockholder who makes a demand is entitled to know promptly what action the
board has taken in response to the demand
a stockholder who makes a serious demand and receives only a peremptory refusal
has the right to use the “tools at hand” to obtain the relevant corporate records, such
as reports or minutes, reflecting the corporate action and related information in order
to determine whether or not there is a basis to assert that demand was wrongfully
refused
The stockholder by making demand, waive the right to claim that demand has been
wrongfully refused.
Rule: if a demand is made and rejected, the board rejecting the demand is entitled to the
presumption of the business judgment rule unless the stockholder can allege facts with particularity
creating a reasonable doubt that the board is entitled to the benefit of the presumption.
 If there is reason to doubt that the board acted independently of with due care = stockholder
may have the basis ex post to claim wrongful refusal
A: Here the Board of DSC considered and rejected the demand – they invested time and resources
to consider and decide whether or not to take action
H: Board is entitled to have its decision analyzed under the business judgment rule unless the
presumption of that rule can be rebutted – Grimes made a pre-suit demand with respect to all
claims arising out of the Agreements, he was required by Chancery Rule 23.1 to plead with
particularity why the Board’s refusal to act on the derivative claims was wrongful
 the complaint fails to include particularized allegations which would raise a
reasonable doubt that the Board’s decision to reject the demand was the product of a
valid business judgment.
Marx v. Akers, 666 N.E.2d 1034 (1996)
F: IBM directors engaged in self-dealing by awarding excessive compensation to 15 outside
directors on the 18-member board. Plaintiff claims a breach of fiduciary duties – voting for
unreasonably high compensation for IBM executives DEMAND REQUIREMENT:
1. relieve courts from deciding matters of internal corporate governance by providing
corporate directors with opportunities to correct anlleged abuses
2. provide corporate boards with reasonable protection from harassment by litigation on
matters clearly within the direction of directors
3. discourage “strike suits” commenced by shareholders for personal gain rather than for the
benefit of the corporation
**need to have a balance between discretion of directors to manage a corporation with undue
interference – and permit shareholders to bring claims on behalf of the corporation when
directors wrongfully refuse to bring the claims
Delaware Approach
 once director interest has been established – BJR becomes inapplicable and the demand
excused without further inquiry
 determining whether a board validly exercised BJ must be evaluated by looking to see
whether the directors exercised procedural (informed decision) and substantive (terms
of the transaction) due care….
Universal Approach
 make case-by-case determinations –
Barr’s Demand/Futility Standard
1. Demand is excused because of futility when a complaint alleges with particularity that a
majority of the board of directors is interested in the challenged transaction
2. Demand is excused because of futility when a complaint alleges with particularity that the
board of directors did not fully inform themselves about the challenged transaction to the
extent reasonably appropriate under the circumstances
3. Demand is excused because of futility when a complaint alleges with particularity that the
challenged transaction was so egregious on its face that it could not have been the product
of sound business judgment of the directors
A: Since only three directors are alleged to have received the benefit of the executive compensation
scheme, plaintiff has failed to allege that a majority of the board was interested in setting executive
compensation….the complaint does not allege particular facts in contending that the board failed to
deliberate or exercise its business judgment in setting those levels
Rule: Directors are self-interested in a challenged transaction when they will receive a direct
financial benefit from the transaction which is different from the benefit to shareholders generally..
 A director who votes for a raise in directors’ compensation is always “interested” because
that person will receive a personal financial benefit from the transaction not shared in by
stockholders
H: plaintiff has not stated a cause of action regarding director compensation – and the complaint it
dismissed entirely –
Rule: a complaint challenging the excessiveness of director compensation must - to survive a
dismissal motion – allege compensation rates excessive on their face or other facts which call into
question whether the compensation was fair to the corporation when approved, the good faith of
the directors setting those rates, or that the decision to set the compensation could not have
been a product of valid business judgment.
C. THE ROLE OF SPECIAL COMMITTEES
Auerbach v. Bennett, 393 N.E.2d 994 (1979)
F: summer of 1975 – General Telephone & Electronics Corporation – suspicion that payments of
the company had been made to public officials and political parties in foreign countries – Nov. 6 –
the board referred to the matter to the board’s audit committee – the audit committee – engaged in
an investigation into the corporation’s world-wide operations;
 Paid directly or indirectly to any political party or person or to any officer, employee,
shareholder, or director of any governmental or private customer
 Used to reimburse any officer of the corporation or other person for such payments

March 4, 1976 – released report – found evidence that payments were made constituting
kickbacks – totaling more than $11 million dollars; and that some individual directors had
been involved;

Auerbach – a shareholder – instituted the present shareholder’s derivative action on behalf
of the corporation – claims were against the corporations directors and Arthur Andersen &
Co. for breach of their duties to the corporation

April 21, 1976 – board adopted a resolution created a “special litigation committee”
SLC –
 Nov. 22, 1976 report – Arthur Andersen conducted examination of the corporation’s affairs
in accordance with generally accepted auditing standards and in good faith and concluded
that no proper interest of the corporation or its shareholders would be served by the
continued assertion of a claim against it
o None of the defendants violated NY statute
o Personally profited or gained in anyway
o Committed determined that it would not be in the best interest of the corporation for
the present derivative action to proceed
Kickbacks and Bribes
“determination of the special litigation committee forecloses further judicial inquiry in this
case”
Rule: the business judgment rule does not foreclose inquiry by the courts into the disinterested
independence of those members of the board chosen by it to make the corporate decision on its
behalf – here the members of the special litigation committee. Indeed the rule shields the
deliberations and conclusions of the chosen representatives of the board only if they possess a
disinterested independence and do not stand in a dual relation which prevents an
unprejudicial exercise of judgment….
HERE: nothing in the record raises a triable issue of fact as to the independence and disinterested
statute of these three directors
Q: action of choosing the SLC itself – 2 components
H: the conclusion reached by the SLC is outside the scope of our review – there is no evidence of
insufficiency or infirmity as to the procedures and methodologies chosen and pursued by the
special litigation committee – individual interviews were conducted with directors – they sought
out legal advice –
Nature and characteristics are crucial to whether or not the investigative methods are
appropriate Rule: the court may properly inquire as to adequacy and appropriateness of the committees
investigative procedures and methodologies, it may not under the guise of consideration of such
factors trespass in the domain of business judgment.
 May have to show that they have pursued their chosen investigative methods in good faith
Zapata Corp. v Maldonado, 430 A.2d 779 (Del. 1981)
F: June 1975 - William Maldonado – stockholder of Zapata – instituted derivative action on behalf
of Zapata against 10 officers/directors – breaches of fiduciary duties; June 1979 – 4 of the
defendant-directors were no longer on the board – hired two new outside directors – board created
“Independent Investigation Committee” – Committee determined that each action should “be
dismissed forthwith as their continued maintenance is inimical to the Company’s best interests..”
Q: whether the Committee has the power to cause the present action to be dismissed?
“business judgment rule is irrelevant to the question of whether the Committee has the
authority to compel the dismissal of this suit.”
McKee Rule: “a stockholder cannot be permitted….to invade the discretionary filed committed to
the judgment of the directors and sue in the corporation’s behalf when the managing body refuses.
This rule is a well settled one.”
Rule: a stockholder may sue in equity in his derivative right to assert a cause of action in behalf of
the corporation, without prior demand upon the directors to sue, when it is apparent that a demand
would be futile, that the officers are under an influence that sterilizes discretion and could not be
proper persons to conduct the litigation.
A demand, when required and refused (if not wrongful), terminates a stockholder’s legal
ability to initiate a derivative action.
A: a board has the power to choose not to pursue litigation when demand is made upon it, so long
as the decision is not wrongful – if a board determines that a suit would be detrimental to the
company, the board’s determination prevails.
The final substantive judgment whether a particular lawsuit should be maintained requires a
balance of many factors – ethical, commercial, promotional, public relations, employee
relations, fiscal as well as legal.”
Two Step Test:
1. inquire into the independence and good faith of the committee and the bases
supporting its conclusion
a. corporation should have the burden of proving independence, good faith, and a
reasonable investigation, rather than presuming independence, good faith and
reasonableness
2. determine, applying its own independent business judgment, whether the motion
should be granted
a. consider and weigh the corporate interest in dismissal is when faced with a nonfrivolous lawsuit
In Re Oracle Corp. Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003)
F: allegations of insider trading – by principles of Oracle, CEO, CFO, 2 directors – 4 major
players; also allegations of Caremark claims – Oracle forms SLC- does its job – gets advisors – top
firms in NY – and submits reports over 1,100 pages – explaining everything that happened –
explained that absolutely nothing wrong was done – this was ordinary trading – didn’t base it on
any significant material
How does the court treat this SLC?
 The committee members had ties with Stanford University – they were professors
 All sorts of ties to Stanford – donations etc.
 convinces the court that this was not really an independent SLC.
Does the Oracle Court Apply the Zapata 2-step correctly?
 Was the SLC independent?
 What about adequacy of the investigation by the SLC?
o Super thorough – 1,100 page document
This court doesn’t even get to the 2nd step of the Zapata 2 step
 left out, because the court applies the structural bias analysis in the first step
 is this right?
H: The independence prong in Delaware – it switched it’s a structural bias instead of being a
personal benefit
THE LIMITED LIABILITY COMPANY – Chapter 4
§ 1. FORMATION
Water, Waste & Land, Inc. D/B/A Westec v. Lanham, 955 P.2d 997 (Colo. 1998)
§ 2. THE OPERATING AGREEMENT
Elf Atoochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. Sup. Ct. 1999)
§ 3. PIERCING THE “LLC” VEIL
Kaycee Land and Livestock v. Flahive, 46 P.3d 323 (2002)
DUTIES OF OFFICERS, DIRECTORS, AND OTHER INSIDERS – Chapter 5
Cont’d
§ 3. DISCLOSURE AND FAIRNESS
Robinson v. Glynn, 349 F.3d 166 (4th Cir. 2003)
Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir. 1977)
F: limited partnership for oil dwelling – offered to 8 different investors except for Doran – a
wealth sophisticated investor- Doran buys into this for $25,000 down and for the equipment they
are using- invests in this petroleum oil corporation – investment takes the form of a loan – they
commit various regulatory violations – get production clamped down on them – fall behind on their
debts – and at that point the creditors come after Doran.
Q: Was this a public or private offering?
TEST: Private Placement Test - Four Factors:
 Number of offerees and relationship to issuer
 Number of units offered
 Size of the offering
 Manner of the offering
o No general advertising or solicitation
 But the first factor is “the touchstone of the inquiry” (Ralston Purina)
Q: Did the offerees know or have a realistic opportunity to learn facts essential to an investment
judgment? - this is the issue for remand
A: the Securities Acts focuses on facts – facts disclosed, facts known, or access to facts; evidence
of a high degree of business or legal sophistication on the part of all offerees does not suffice to
bring the offering within the private placement exemption; the more offerees, the more likelihood
that the offering is public; - a total of 8 investors would be entirely consistent with a finding that the
offering was private.
Basic Inc. v. Levinson, 485 U.S. 224 (1988)
F: Basic Inc. – publicly traded company – engaged in the business of manufacturing chemical
refractories for the steel industry –
-“The Strategic Plan” - for Combustion Industrial Products Group to acquire Basic Inc. for $30
million; Basic Inc. made three public statements – denying that it was engaged in merger
negotiations; On Dec. 19, 1978 – Basic’s board endorsed Combustion’s offer of $46/share for its
common stock; Respondents brought this suit – because they sold their stock after Basic’s first
statement prior to Oct. 21, 1977 and before the suspension of trading in December 1978
Issue:
 Were Basic’s statements materially false?
 Can we have reliance when materiality is the issue?
What is the test for materiality?
 In general, “whether there is substantial likelihood that a reasonable shareholder would
consider the fact important” - TSC Industries v. Northway Inc. (1976)
You have materiality when a reasonable investor would deem it important
**Basic was in position that they were discussing negotiations - were not sure that they were
actually going to merge
What about Reliance?
**in any fraud case you have to show you have been lied to on the fraudulent omission

An element of claim
o Presumed in omission cases – Affiliate Ute Citizens of Utah v. U.S. (1972)
o But Basic is a misrepresentation case

Class certification implications
o Rule 23(a)(2) commonality requirement
o If each class member has to prove reliance, class action is impossible
Fraud-on-the-market theory
 Presumption that investor relied on integrity of market price – investor need not have
seen misrepresentation
H: because most publicly available information is reflected in market price, an investor’s reliance
on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b5 action; public information reaches professional investors, whose evaluations of that information
and trades quickly influence securities price.
DISSENT:
 Question the “integrity” of the market in the context of “fraud-on-the-market”
 This amounts to investor insurance, which is really for the legislature to provide
 Works poorly in this case
o P’s made money, and some bought stock after the merger denials
o D’s did not manipulate the stock, so there is no transactional nexus
West v. Prudential Securities, Inc., 282 F.3d 935 (7th Cir. 2002)
F: Stockbroker James Hofman – works for Prudential Securities – told 11 customers that Jefferson
Savings Bancorp was “certain to be acquired, at a big premium, in the near future.” Hofman
continued this statement for seven months - this was a lie no acquisition was impending.
Q: whether the action may proceed, not on behalf of those who received Hofman’s “news” in
person but on behalf of everyone who bought Jefferson stock during the months when Hofman was
misbehaving
A: First, these were oral statements, which creates a problem for commonality; Second, there is no
support for efficient markets thesis w/ respect to non-public information
o Maybe if the volume of trades was significant it would have had an effect
o Or if insiders were involved, but they weren’t obtained here
A: The record here does not demonstrate that non-public information affected the price of Jefferson
Savings’ stock - Hoffman’s tips raised the demand for Jefferson Savings Stock and curtailed that
supply (for the tippees were less likely to sell their own shares); that combination of effects raised
the stock’s price;
**one fundamental attribute of efficient markets is that information, not demand in the abstract,
determines stock prices ….
**in an efficient market, how could one ignorant outsider’s lie cause a long-term rise in price?
H: Can’t claim fraud on the market with respect to stock price on the market
Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)
F: this is a short form merger. Santa Fe own 90% of Kirby; Santa Fe buys out 5% minority at
$150/share – this is great for Santa Fe they don’t have to deal with a minority shareholder vote;
Minority shareholders – are protected through an appraisal right - they think that appraisal remedy
is insufficient – they believe they won’t get anything like $772 in an appraisal – they claim this
whole merger is a type of securities fraud and that it violated Rule 10b-5 – because the merger is
affected without prior notice to minority shareholders, without any legitimate business purpose –
and because their shares are unfairly undervalued
Trial Court: says this isn’t securities fraud – they didn’t lie no misrepresentation or omission –
2nd Cir. reverses – no we think it’s a sufficient breach of fiduciary duty to qualify for a violation;
H: you can’t have a 10b-5 violation without some sort of manipulation or deception – provides
three categories of justifications:
 Legislative history on 1934 Act
o Purpose of regulations: to prevent fraud by providing disclosures – once disclosures
are made as a matter of federal law the court is not going to look into the fairness of
the transaction
 H: company disclosed as they had to under Delaware law – that we are
merging you are offered this and have a right to appraisal
 Implied right of action rules

o Don’t think there should be rights without remedies – it wouldn’t make any sense if
Congress want tot eh trouble to say this is a violation and have no remedy for it
o If it does have a remedy – courts shouldn’t rush in – when there is an adequate state
remedy – don’t need to get involved
 H: alleging breach of fiduciary duty – which is governed by state law
Principles of Federalism
o State governments experiment – hopefully the best solution wins out
o We defer to state governments when it comes to breaches of fiduciary duty
 We don’t want a federal government to come in and swoop down when all
this creativity is happening in the states
Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir. 1988)
F: this case is about a guy who has an option to buy stock but fails to exercise that option based on
misleading statements issued by the company; this is an issue of standing.
Q: Does an option purchaser have standing under 10B-5?
A: the option purchaser has not bought or sold the stock at issue; and the defendants neither bought
nor sold the option.
2 kinds of options
 Call: contract giving owner right to buy a fixed number of shares at a given price – option
owner profits if increase in share price exceeds premium paid for the option
 Put: contract giving owner right to sell fixed number of shares at a given price – a way for
investors to hedge against losses
H: Option purchasers are susceptible to deceptive practices just like any other instrument; Options
are securities for the purposes of the 1934 Act; doesn’t matter that they didn’t buy and sell the
securities – options themselves are the securities
§ 4. INSIDE INFORMATION
Goodwin v. Agassiz, 186 N.E. 659 (1933)
F: defendants in May 1926 purchased 700 shares of stock of the Cliff Mining Company – which
the plaintiff owned – Defendants was the president and directors of the company – they had
knowledge as to the value of the stock regarding the a theory developed by a geologist which said
that there was a possible existence of copper deposits under conditions prevailing in the region
where the property of the company was located. – that region was known as the mineral belt in
Northern Michigan; Another company – were the defendants were officers, this company made
geological surveys of its land – based on the surveys - they started exploring the property; the
defendants agreed that the geologist’s theory should be tested –
F: Before testing though options should be acquired by another copper company of which they
were officers on land adjacent to or nearby the copper belt – the theory should not be
communicated to any one unless it became absolutely necessary; they secured the options –
F: The defendants bought many shares of stock through agents – for they felt that if the geologists
theory had any merit – the price of the stock on the market would go up; the plaintiff first learned
of the closing of exploratory operations on the property from an article in a paper on May 15, 1926
– immediately he sold his shares of stock through brokers - Defendants were not responsible for
the publication of the article – the plaintiff did not know that the purchase of stock was made for
the defendants –
Rule: the directors of a commercial corporation stand in a relation of trust to the corporation and
are bound to exercise the strictest good faith in respect to its property and business….
 Directors are not supposed to occupy the position of trustee toward individual stockholders
in a corporation
Q: whether on the facts found the defendants as directors had a right to buy stock of the plaintiff, a
stockholder
A: knowledge that naturally comes as a result of the position that a director holds within a
corporation places him in a peculiar obligation to observe every requirement of fair dealing when
directly buying or selling its stock;
 Mere silence is not usually enough to amount to a breach of duty
A: an honest director needs to be able to sell and buy stock within his corporation without first
seeking out the actual ultimate party to the transaction and disclose to him everything which a court
or jury might later find that he then knew affecting the real or speculative value of such shares;
 Fiduciary obligations of directors ought not to be made so onerous that men of experience
and ability will be deterred from accepting such office
Rule: where a director personally seeks a stockholder for the purpose of buying his shares without
making disclosure of material facts within his peculiar knowledge and not within reach of the
stockholder, the transaction will be closely scrutinized and relief may be granted in
appropriate instances…
**fraud cannot be presumed; it must be proved
H: the knowledge possessed by the defendants not open to the plaintiffs was simply an existence of
a theory – the defendants made no representations to anybody about the theory – the Cliff Mining
Company was not harmed by the non-disclosure; there was no duty on the part of the
defendants to set forth to the stockholders at the annual meeting their faith aspirations, and
plans for the future.
 Additionally, the plaintiff was no novice
 He acted upon his own judgment in selling his stock
Plaintiff cannot prevail….
Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1969)
F: late 1950’s – mining firm Texas Gulf Sulphur (TGS) began exploratory drilling in eastern
Canada; Richard D. Mollison (defendant) mining engineer – supervised the project. Richard H.
Clayton (defendant); On October 29, 30 – TGS located a segment of land that looked especially
promising – TGS drilled an exploratory hole in early November – found high mineral content –
Nov. 12, decided to buy the land in the area; TGS President Claude O. Stephens – ordered
employees to keep drilling results secret – to preserve the opportunity for the company to buy the
land without driving up the prices; March 27, 1964 rolled around – and the company had bought
enough of the land that it could safely resume drilling –
From Nov. 12, 1963 – to March 31, 1964 – TGS employees bought TGS stock and calls (options)
on stock. –
 In Nov. the employees owned 1135 shares of TGS and no calls
 End of March they owned 8,235 shares of and 12,300 calls
F: rumors were circulating throughout Canada regarding an ore strike; TGS President on April 11
read in the New York Herald and New York Times unauthorized reports of the TGS drilling which
seemed to infer a rich strike from the fact that the drill cores had been flown to the United States
for chemical assay. – Fogarty drafted a press release designed to quell the rumors – appeared in the
morning newspapers of general circulation on Monday April 13. the press release – attempts to
deny all the allegations of a copper discovery on the property; tells everyone that the drilling done
to date has not been conclusive, but the statements made by many outside quarters are unreliable
and include information and figures that are not available to TGS.
F: Up to April 10 or April 12 – Fogarty was told the developments from Mollison – and that the
discoveries they had made – TGS had already discovered 6.2 to 8.3 million tons of ore having a
value of anywhere between $26 and $29 per ton; TGS denied at the hearing that proven ore was
calculated by April 11 or 12.
April 13 – New York Herald Tribune “Copper Rumor Deflated” there were positive preliminary
results – at least to require a stepup in drilling operations.
Also on April 13 – a Canadian mining industry journal – visited the drill site – interviewed
Mollison, Holyk, and Darke – prepared an article that confirmed a 10 million ton ore strike; - this
report was released on April 16th but was supposed to be released on April 15th – for undisclosed
reasons, ON APRIL 16 – an official detailed statement announced a strike of at least 25
million tons of ore – based on the drilling data set forth – read to the representatives of
American Financial Media form 10:00 AM to 10:10 – appeared on Merrill Lynch’s private
wire on 10:29 AM and over Dow Jones ticker tape at 10:54 AM
F: between the first press release and the TGS official announcement – Clayton, Crawford, and
TGS director Coates – ordered shares of stock (massive amounts, 200, 300, and 2,000); During the
period the market price of TGS stock fluctuated but gained overall –
 Drilling began Friday Nov. 8 – at 17 3/8
 After the drilling – Friday Nov. 15 – closed at 18
 December 13 – the price rose to 20 7/8
 Chemical assays results were received – closed at 24 1/8
 April 10 – closed at 30 1/8
 April 12 – day of release – TGS opened at 30 ½ and rose to 32 and closed at 30 7/8
 April 15 – closed at 29 3/8
 April 16 – official announcement of Timmins discovery – price climbed to 37 and closed at
36 7/8
 May 15 – TGS stock selling at 58 ¼
The essence of the Rule 10b-5: anyone who, trading for his own account in the securities of a
corporation, has “access, directly or indirectly, to information intended to be available only for a
corporate purpose and not for the personal benefit of anyone” may not take “advantage of such
information knowing it is unavailable to those with whom he is dealing.”
Anyone in possession of material inside information must either disclose it to the investing
public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he
chooses not to do so, must abstain from trading in or recommending the securities concerned
while such inside information remains undisclosed.
Rule: an insider’s duty to disclose information or his duty to abstain from dealing in his company’s
securities arises only in “those situations which are essentially extraordinary in nature and which
are reasonably certain to have a substantial effect on the market price of the security if [the
extraordinary situation is] disclosed”
The basic test of materiality…..is whether a reasonable man would attach importance….in
determining his choice of action in the transaction in question.
“material facts” – include not only information disclosing the earnings and distributions of a
company but also those facts which affect the probable future of the company and those which may
affect the desire of investors to buy, sell, or hold the company’s securities.
Whether facts are material when they relate to a particular event and are undisclosed by
persons who have knowledge
 Test: Depend at any given time upon a balancing of both the indicated probability that the
event will occur and the anticipated magnitude of the event in light of the totality of the
company activity.
Q: was the K-55-1 discovery a material fact?
A: knowledge of the results of the discovery hole – would have been important to a reasonable
investor and might have affected the price of the stock; the timing of the drilling for those who
knew of it – greatly influenced the stock purchases and their purchases of short-term calls – core of
Rule 10b-5 is the implementation of Congress to show that all investors should have equal access
to the rewards of participation in securities transactions; here the insiders were not trading on an
equal footing with the outside investors –
H: all transactions in TGS stock or calls by individuals apprised of the drilling results of K-55-1
were made in violation of Rule 10b-5; those advised of the results of the visual evaluation as well
as those informed of the chemical assay traded in violation of law.
**The SEC argued below and maintains on this appeal that this release painted a misleading and
deceptive picture of the drilling progress at the time of its issuance, and hence violated Rule 10b5(2)
**DOMINANT CONGRESSIONAL PURPOSE: to promote free and open public securities
markets and to protect the investing public from suffering inequities in trading, including,
specifically, inequities that follow from trading that has been stimulated by the publication of
false or misleading corporate information releases.
 Protect the investing public and to secure fair dealing in the securities markets
Q: was the release misleading, did it convey to the public a false impression of the drilling situation
at the time of its issuance?
H: from the information provided – based on Congressional intent – we cannot definitely conclude
that it was deceptive or misleading to the reasonable investor, or that he would have been misled by
it.

Remand – determine whether the reasonable investor, in the exercise of due care, would
have been misled by it -
Chiarella v. United States, 445 U.S. 222 (1980)
F: defendant was a “markup man” in the composing room of a financial printing company –
acquiring corporation made every reasonable effort to keep the identity of the tender offer target a
secret, even from the employees of the printer; Chiarella – correctly identified the target and bought
shares of its stock through a broker – when the tender offer was announced – target shares rose in
value and Chiarella sold his shares at a profit;
H: Chiarella’s conduct was not a violation because he was not an “insider” of the corporation
whose shares he had traded (that is, the target corporation).
Rule: a corporate insider must abstain from trading in the shares of his corporation unless he has
disclosed all material inside information known to him”
 the duty to abstain arises from the relationship of trust between a corporation’s
shareholders and its employees
Here: there was no relationship between Chiarella and the shareholders of the corporations whose
shares he trade, he had no duty to “disclose or abstain.”
Dirks v. Securities & Exchange Commission, 463 U.S. 646 (1983)
F: Raymond Dirks – received material nonpublic information from “insiders” of a corporation of
which he had no connection with – he turned around and disclosed this information to investors
who relied on it – trading in the shares of the corporation; Dirks was an officer of a New York
broker-dealer firm – specialized in providing investment analysis of insurance company securities
to institutional investors; Dirks received information from Ronald Secrist, a former officer of
Equity Funding of America – Secrist urged Dirks to verify the fraud and disclose it publicly; Dirks
investigated the allegations – throughout the investigation he openly discussed the information he
had obtained with a number of clients and investors; some of those investors – sold their holdings –
ultimately worth $16 million. While investigated – Dirks was in touch with William Blundell – a
Wall Street Journal bureau chief – Dirks urged Blundell to write a story on the fraud allegations –
Blundell declined;
During the 2 week period where Dirks investigated – and spread word of the charges – price of the
stock fell from $26/share to less than $15/share. The New York Stock Exchange halted trading –
California insurance authorities impounded Equity Funding’s records and uncovered evidence of
the fraud – SEC began to investigate into Dirks’ role in the exposure of the fraud – the SEC found
that Dirks aided and abetted violations of SEC under Rule 10b-5 – by repeating the allegations of
fraud to members of the investment community who later sold their Equity Funding Stock;
Rule: where “tippees” regardless of their motivation or occupation – come into possession of
material corporate information that they know is confidential and know or should know came from
a corporate insider, they must either publicly disclose that information or refrain from trading
Q: whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure?
Back to Chiarella: 2 elements
 the existence of a relationship affording access to inside information intended to be
available only for a corporate purpose

the unfairness of allowing a corporate insider to take advantage of that information by
trading without disclosure.
Rule: there can be no duty to disclose where the person who has traded on inside information “was
not the corporation’s agent, … was not a fiduciary, [or] was not a person in whom the sellers [of
the securities] had placed their trust and confidence.”
A: tipping potential traders – Dirks breached a duty which he had assumed as a result of knowingly
receiving confidential information from [Equity Funding] insiders.
Tippees such as Dirks who receive non-public, material information from insiders become
‘subject to the same duty as [the] insiders.’
 a tippee violates that fiduciary duty when he knowingly transmits the information to
someone who will probably trade on the basis thereof. – Dirks breached this duty
A: anyone who knowingly receives nonpublic material information from an insider has a fiduciary
duty to disclose before trading; the need for a ban on some tippee trading is clear – some tippees
must assume an insider’s duty to the shareholders not because they receive inside information, but
rather because it has been made available to them improperly;
**Whether a tippee is under an obligation to disclose or abstain, it is necessary to determine
whether the insiders “tip” constituted a breach of the insider’s fiduciary duty.
 Whether disclosure is a breach - large part depends on the purpose of the disclosure
TEST: whether the insider personally will benefit, directly, or indirectly, from his disclosure.
H: we find that there was no actionable violation by Dirks; he took no action, directly or indirectly,
that induced the shareholders or officers to repose trust or confidence in him; Dirks did not
misappropriate or illegally obtain the information about Equity Funding; the tippers received no
monetary or personal benefit for revealing the company’s secrets to Dirks – nor was it their purpose
to make a gift of valuable information to Dirks. – The tippers were motivated by a desire to expose
the fraud.
United States v. O’Hagan, 521 U.S. 642 (1997)
F: James O’Hagan – partner in a law firm of Dorsey & Whitney in Minnesota – In July 1988 Grand
Met – company based out of London, England retained Dorsey & Whitney – regarding a potential
tender offer for the common stock of the Pillsbury Company (headquartered in Minnesota) – both
Grand Met and Dorsey & Whitney – took precautions to protect the confidentiality of Grand Met’s
tender offer – Oct. 4, 1988 – Grand Met publicly announced tender offer for Pillsbury stock;
F: August 18, 1988 – Dorsey & Whitney still representing Grand Met – O’Hagan (partner of
Dorsey & Whitney) began purchasing call options for Pillsbury stock; each option gave him
 Right to purchase 100 shares of Pillsbury stock by Sept. 1988
 By the end of Sept. – he owned 2,500 unexpired Pillsbury options – more than any other
investor
 O’Hagan also purchased – Sept. 1988 – 5,000 shares Pillsbury common stock at just under
$39/share
 Grand Met announced its tender offer in October – price of Pillsbury stock rose to
$60/share
 O’Hagan then sold – making a profit of over $4.3 million
O’Hagan is Charged by the SEC – 57 counts







20 counts of mail fraud;
17 counts of securities fraud; violation of § 10(b) of the Securities Exchange Act of 1934
and SEC Rule 10b-5;
17 counts of fraudulent trading in connection with tender offer in violation of § 14(e) of the
Exchange Act and SEC Rule 14e-3(a);
3 counts of violating federal money laundering statutes
Sentenced to 41-months in prison –
Court of Appeals – 8th Circuit reverses all O’Hagan’s convictions
U.S. Supreme Court reverses Court of Appeals
Q: is a person who trades in securities for personal profit, using confidential information
misappropriated in breach of a fiduciary duty to the source of the information, guilty of violating §
10(b) and Rule 10b-5? YES
Q: did the commission exceed its rulemaking authority by adopting Rule 14e-3(a), which
proscribes trading on undisclosed information in the tender offer setting, even in the absence of a
duty to disclose? NO
“TRADITONAL” or “CLASSIC THEORY”
Rule: § 10(b) and Rule 10b-5 – are violated when a corporate insider trades in the securities of his
corporation on the basis of material, nonpublic information.
 “deceptive device”
 a relationship of trust and confidence exists between the shareholders of a corporation and
those insiders who have obtained confidential information by reason of their position with
that corporation”
 that relationship gives rise to a duty to disclose or to abstain from trading because of the
necessity of preventing a corporate insider from …taking unfair advantage of …uninformed
…stockholders”
 applies not only to officers, directors – but to attorneys, accountants, consultants, and others
who temporarily become fiduciaries of a corporation.
“MISAPPROPRIATION THEORY”
-a person commits fraud “in connection with” a securities transaction, and violates § 10 (b) and
Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in
breach of a duty owed to the source of the information.
 A principal’s information to purchase and sell securities – in breach of a duty of loyalty and
confidentiality, defrauds the principal of the exclusive use of that information
**Traditional theory = targets a corporate insider’s breach of duty to shareholders with whom the
insider transacts;
**Misappropriation theory = outlaws trading on the basis of nonpublic information by a
corporate “outsider” in breach of a duty owed not to a trading party, but to the source of the
information
 designed to protect the integrity of the securities markets against abuses by “outsiders” to a
corporation who have access to confidential information that will affect the corporation’s
security price when revealed, but who owe no fiduciary or other duty to that
corporation’s shareholders.
 Full disclosure – forecloses liability under the misappropriation act
o rids of the “deceptive device” then an no § 10(b) violation Rule: a fiduciary who “pretends” loyalty to the principal while secretly converting the principal’s
information for personal gain “dupes” or defrauds the principal.
Remember: § 10(b) is not an all-purpose breach of fiduciary duty ban – rather, it trains on conduct
involving manipulation or deception
***A misappropriator who trades on the basis of material, nonpublic information, in short, gains
his advantageous market position through deception; he deceives the source of the information and
simultaneously harms members of the investing public.***
A: the misappropriation at issue here was properly made the subject of a § 10(b) charge because it
meets the statutory requirement that there be “deceptive” conduct “in connection with” securities
transactions.
§ 14(e) Exchange Act of 1934
“It shall be unlawful for any person…to engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with any tender offer…The [SEC] shall, for the
purposes of this subsection, by rules and regulations define, and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.”
**Congress has authorized the Commission, in § 14(e), to prescribe legislative rules, we owe the
Commission’s judgment “more than mere deference or weight.”
Conclusion: trading on the basis of material, nonpublic information will often involve a breach of
a duty of confidentiality to the bidder or target company or their representatives.
 “disclose or abstain from trading” – does not require specific proof of a breach of a
fiduciary duty
 Rather – a means reasonably designed to prevent fraudulent trading on material,
nonpublic information in the tender offer context.
§ 5. SHORT-SWING PROFITS
 § 16(b) of the 1934 Securities Exchange Act: officers, directors, and 10 percent
shareholders must pay to the corporation any profits they make, within a six-month period,
from buying and selling the firm’s stock.
o Penalizes insiders for trades unrelated to non-public information
o Misses many trades based squarely on this information
o Provided that the owner of the 10% shareholder had more than 10% at the time of
the purchase and sale
Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418 (1972)
F: June 16, 1967 – Emerson Electric Co. acquired 13.2% of Dodge Manufacturing Co. common
stock through a tender offer made in an unsuccessful attempt to take over Dodge – purchase price
was $63/share; shortly after – Dodge approved a merger with Reliance Electric – Emerson decided
to dispose of enough shares to bring its holdings below 10%; August 28 - Emerson sold 37,000
shares of Dodge common stock to a brokerage house at $68/share – reduced Emerson’s holdings in
Dodge to 9.96% - remaining shares sold to Dodge at $69/share; Emerson filed this action seeking
declaratory judgment as to its liability under § 16(b)
Emerson claims: not liable = was not a 10% owner at the time of the purchase of Dodge shares; if
Emerson was a 10% shareholder at time of purchase – it was only liable for the profits on August
28 – for the sale of 37,000 shares – because after that it no longer owned 10% of the shares – in
accordance with § 16(b)
District Court
What about the term “time of…sale” – does it include “the entire period during which a series of
related transactions take place pursuant to a plan by which a 10% beneficial owner disposes of his
stock holdings” ? - the district court said yes
Court of Appeals
Emerson split its sale of Dodge stock – to avoid liability under § 16(b) – but that’s ok if the two
sales are “not legally tied to each other and [are] made at different times to different buyers.”
Q: whether the profits derived from the second sale are recoverable by the Corporation under §
16(b)? NO
A: § 16(b) imposes strict liability upon all transactions occurring within the statutory time period –
regardless of the intent of the insider or the existence of the actual speculation –
Rule: a person avoids liability if he does not meet the statutory definition of an “insider,” or if he
sells more than six months after purchase….
A: read § 16(b) requires that the 10% owner be both at “at the time of the purchase and sale of
the security involved.”
 Contemplates that a statutory insider might sell enough shares to bring his holdings below
10% - but still within six months – sell additional shares free from liability under the statute
H: though the two sales – are independent they are still “interrelated parts of a single plan.”
Rule: a “plan” to sell that is conceived within six months of purchase clearly would not fall within
§ 16(b) if the sale were made after the six months had expired
Foremost-McKesson, Inc. v. Provident Securities Company, 423 U.S. 232 (1976)

§ 16(b) – last sentence = “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 that sale and
purchase, of the security involved…”
F: Provident Securities – personal holding company; in 1968 decided to liquidate, dissolve; hired
an agent to find a purchaser; Foremost-McKesson (potential purchaser) – disagreement though for
Foremost wanted to purchase using securities – while Provident wanted cash; a compromise
reached –
Deal agreed upon on September 25, 1969:
 Foremost – would buy 2/3rds of Providents assets for $4.25 million in cash and $49.75
million in Foremost convertible debentures
 Foremost – would register under Securities Act of 1933 $25 million of the debentures and
would participate – in an underwriting agreement to sell debentures to the public
At closing October 15, 1969:
 Foremost delivered cash and $40 million debenture – which was exchanged for two
debentures in the amounts of $25 million and $15 million
 Foremost delivered $2.5 million debenture to an escrow agent
October 20, 1969:
 Foremost delivered to Provident $7.25 million debenture = balance of the purchase price
 Immediately debenture converted into more than 10% of Foremost’s outstanding common
stock
October 24, 1969:
 Provident distributed $15 million and $7.25 million – debentures to stockholders
 Reduced the amount of common stock to less than 10%
Q: whether a person purchasing securities that put his holding above the 10% level is a beneficial
owner “at the time of the purchase” so that he must account for profits realized on a sale of those
securities within six months? NO
A: as of Oct. 20 – Provident’s holdings in Foremost were large enough to make it a beneficial
owner – within the meaning of § 16(b) Principle disagreement is:
Does the term “at the time of purchase” mean “before the purchase” or “immediately after the
purchase”
 Courts of Appeals are split
 Legislative record suggests that drafters of § 16(b) covered short-term purchase-sale
sequences by a beneficial owner only if his status existed before the purchase, and no
concern was expressed about the wisdom of the requirement
 But this section was omitted during the reconstruction
H: we hold that in a purchase-sale sequence, a beneficial owner must account for profits only if
he was a beneficial owner “before the purchase”
Congress thought all short-swing trading by directors and officers was vulnerable to abuse because
of their intimate involvement in corporate affairs –
§ 16(b)

Issuers – only to companies register stock under 1934 Act;
o Companies with stock traded on national exchange
o Companies with assets at least $10 million
o Companies with 500 or more shareholders

Officers – applies to trades by directors and officers
o If an officer or director trades stock – that trade generally cannot be paired with a
transaction that occurred prior to his or her appointment
o Can be paired to one that occurs after he or she ceases to be an officer or director

Deputization –
o if a firm’s employee serves as a director of another firm § 16(b) may apply to the
first firm’s trades in the stock of the second

Stock classes and convertible debentures –
o Determine stock percentages – consider classes of stock separately
o Shareholders are liable for the short-swing profits on any class of stock
o “equity securities”
 Convertible debt – not other bonds or debentures

Politics of § 16(b)o Although recover under § 16(b) accrues to the corporation, shareholders may
enforce it derivatively

Matching stocko Calculate a company’s recovery under § 16(b) – a court mustmatch a defendant’s
purchases with her or his sales
o Courts match stock sales and purchases in whatever way maximizes the amount the
company can recover
o Do not use any standard accounting tools
o Don’t allow shareholders to identify specific shares of stock
o Match the lowest priced purchases and the highest priced sales

Options
§ 6. INDEMNIFICATION AND INSURANCE
 There are several different situations that might give rise to liability
o Claims by third persons (where an officer or director is driving a company car on
company business and negligently injures someone)
o Where officers or directors are defendants along with the corporation
 Risk of liability may be remote – amount of damages can be large  Corporations may be able to buy insurance to cover damages and expenses of defense
 Officers and directors need to be concerned about the possibility that the corporation will be
taken over by people hostile to them






§ 102(b)(7): corporations may elect to limit personal liability of directors for breach of
fiduciary duty of care
§ 145(a) & (b): corporation may indemnify any person against liability for direct and
derivative actions
o So long as the conduct is in good faith – not criminal – and the corporation has no
reason to believe otherwise § 145(c): corporations must indemnify § 145(a) & (b) defendants if they are “successful on
the merits or otherwise”
§ 145(e): corporation may advance defense costs to officers and directors
§ 145(f): the rights to indemnification provided in this section are not exclusive
§ 145(g): corporations can buy insurance to protect officers and directors from liability
Waltuch v. Conticommodity Services, Inc., 88 F.3d 87 (2d Cir. 1996)
F: Waltuch was a VP and chief metal trader for Conticommodity Services –

Waltuch settled the CFTC litigation by paying a $100,000 fine and agreeing to a six month
ban on trading
 He spent $1 million in legal fees in that proceeding
 Conticommodity paid $35 million to settle the private party litigation
o Waltuch was dismissed from that litigation without having to make a monetary
payment
o He incurrend $1.2 million in legal expenses in connection with the private party
litigation
Waltuch conceded that he did not act in good faith
Q: Does Article 9 of Conticommodity’s articles on incorporation require indemnification in this
case despite Waltuch’s lack of good faith?
 In other words, does § 145(f) permit a corporation to indemnify beyond the scope permitted
under §§ 145(a) and (b)?
 Does § 145(c)’s mandatory indemnification language apply with respect to the private
litigation, even though Conticommodity paid a large settlement?
A: § 145(a) only authorizes indemnification if the director or officer “acted in good faith.”
Article IX: no good faith requirement
 Conticommodity claimed that Art. IX therefore was invalid, because it implicitly mandated
indemnification of bad faith actions.
 Waltuch: indemnification permitted under § 145(f)
H: Waltuch is not entitled to indemnification in connection with the CFTC litigation – lawyers fee;
But what about the private litigation?
§ 145© mandates indemnification where the defendant was “successful on the merits or otherwise”
 Waltuch claimed he was “successful” because he was dismissed from the private party
cases without having to contribute to the settlement




“The only question a court may ask is what the result [of the underlying litigation] was, not
why it was”
Unlike subsections (a) and (b), there is no good faith limitation under § 145(c)
Accordingly, success for purposes of subsection © does not require “moral exoneration”
It only requires escape
PROBLEMS OF CONTROL – Chapter 6
§ 1. PROXY FIGHTS
INTRODUCTION





Corporations hold annual meetings of shareholders for election of directors and where
necessary for voting on other matters
May also call special meetings
Few shareholders of public companies actually attend these meetings – hardly own enough
to make a difference – stake generally too small to effect the outcome
Most annual shareholder meetings are uneventful
Directors often reelected without any opposition





Small firms – shareholders may appear at the meeting to help decide business strategy
Because few shareholders of public corporations attend meetings – the outcome will
generally depend on which group has collected the most “proxies”
Under corporate law – shareholders may appoint an agent to attend the meeting and vote on
their behalf
The agent = shareholders “proxyholder” or “proxy” - proxycards
Managers of large firms – will solicit to shareholders to sign proxy card
“proxy fights” – when an insurgent group tries to oust incumbent managers by soliciting proxy
cards and electing its own representatives to the board.
 Subject to the 1934 Securities Exchange Act – and to state corporate statutes
A. STRATEGIC USE OF PROXIES
Levin v. Metro-Goldwyn-Mayer, Inc., 264 F.Supp. 797 (S.D.N.Y. 1967)
F: Philip Levin – director of MGM – rest of plaintiffs also hold substantial blocks of MGM stock;
MGM is a Delaware corporation – with principal place of business in New York; conflict of control
between “the O’Brien group” and “the Levin group”; each group had been soliciting proxies for
meeting to be held on Feb. 23, 1967 – As of August 31, 1966 –MGM had $251,132,000 in assets
and a gross income of approx. $185 million
Q: whether illegal or unfair means of communication, such as demand judicial intervention, are
being employed by the present management? NO
A: as to the continuance of the present management – the decision entirely rests with the
stockholders – a court may not override or dictate on a matter of this nature to stockholders
Rule: a court should not get in the way of influencing a stockholder’s decision as to which faction
should receive his proxy –
Can management use corporate funds to pay for expenses they incur in conducting their proxy
solicitation?
 Yes, as long as the amounts are “reasonable” and the contest involves “policy” questions
rather than just a “purely personal power struggle”
 Were the expenses reasonable in Levin?
H: the proxy statement filed by MGM on January 6, 1967 – opens with the statement “MGM will
bear all cost in connection with the management solicitation proxies.” ….discloses the employment
of Georgeson & Co. at $15,000 and Kissel-Blake Organization, Inc. at $5,000 for services and
estimated out-of-pocket expenses…
We do not find the method of operation disclosed by MGM management to be unfair or illegal
B. REIMBURSEMENT OF COSTS
Rosenfeld v. Fairchild Engine & Airplane Corp., 128 N.E.2d 291 (1955)
F: brought by an attorney – who owns 25 shares out of the company’s 2,300,000+ seeks to get the
return of $261,522 paid out of the corporation to reimburse both sides in a proxy contest for their
expenses; out of the $261,522 - $106,000 was spent by the old board of directors for the contest –
and $28,000 was paid by the old board by the new board after the change of management occurred
as a result of the proxy contest; also $127,000 was paid to the new board to compensate them;
Rule: in a contest over policy, as compared to purely personal power contest, corporate directors
have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts
when duly challenged, from the corporate treasury for the purpose of persuading the stockholders
of the correctness of their position and soliciting their support for policies which the directors
believe, in all good faith, are in the best interests of the corporation.
TEST: when the directors act in good faith in a contest over policy, they have the right to incur
reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies,
and are not obliged to sit idly by…
Q: Can the insurgent use corporate funds to pay for expenses it incurs in conducting their proxy
solicitation?
A: where it is established that such moneys have been spent on personal power – individual gain or
private advantage – not in the best interest of the stockholders or corporation – or where the
fairness and reasonableness of the amounts allegedly expended are duly and successfully
challenged – the courts will not hesitate to disallow them.
H: plaintiff’s complaint – dismissed – corporate directors have the right
DISSENT:
 No resolution was passed by the stockholders approving the payment
 Not all the $133,966 was spent on providing information to stockholders
 Expenses for entertainment, chartered airplanes, limos, public relations etc.
 Appellate court –this management group obtained a lot of needless expenses
 Directors should have to come forward – and explain the charges
 Appellate court also saw a ratification by the stockholders –
 An act which is ultra vires – cannot be ratified merely by a majority of stockholders of a
corporation
 Very difficult to distinguish “policy” from “personnel” as being the dominant factor for
the expenses
C. PRIVATE ACTIONS FOR PROXY RULE VIOLATIONS
J.I. Case Co. v. Borak, 377 U.S. 426 (1964)
F: action brought by shareholder of J.I. Case – claims that merger between Case and American
Tractor Co. – was effective through a false and misleading proxy statement by those who prepared
the merger; the shareholder owned 2,000 shares of common stock in Case prior to the merger –
claims of a breach of fiduciary duty on part of the Case directors and misrepresentations contained
in the material circulated to obtain proxies – they allege that the merger was approved at the
meeting by a small margin of votes – and had not been for the false and misleading statements in
the proxy solicitation material the merger would have never been approved; the complaint alleges
that the proxy material failed to disclose unlawful market manipulation of the stock of ATC – the
unlawful manipulation would not have been apparent until after the merger
Q: whether § 27 of the Securities Exchange Act of 1934 authorizes a federal cause of action for
rescission or damages to a corporate stockholder with respect to a consummated merger which was
authorized pursuant to the use of a proxy statement alleged to contain false and misleading
statements violative of § 14(a) of the Act?
A: private parties have a right under § 27 to bring suit for violation of § 14(a) of the Act;
§ 14 (a) – purpose: prevent management or others from obtaining authorization for corporate action
by means of deceptive or inadequate disclosure in proxy solicitation.
A: too often proxies are solicited without explanation to the stockholder of the real nature of the
questions for which authority to cast his vote is sought;
Rule: it is unlawful for any person to solicit or to permit the use of his name to solicit any proxy or
consent or authorization in respect of any security registered on any national securities exchange 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.
H: here it is the duty of the courts to provide remedies as are necessary to make effective the
congressional purpose; federal courts have the power to grant all necessary remedial relief
D. SHAREHOLDER PROPOSALS
Lovenheim v. Iroquois Brands, Ltd., 618 F.Supp. 554 (D.D.C. 1985)
F: Peter Lovenheim – owned 200 shares of common stock in Iroquois Brands – wants to bar
Iroquois from excluding the proxy materials being sent to all shareholders in preparation for an
upcoming shareholder meeting information concerning a proposed resolution he intends to offer at
the meeting; the resolution – relates to the procedure used to force-feed geese for production of
pate de foie gras in France – his resolution is to form a committee to study the methods and report
to the shareholders its findings and opinions – based on expert consultation – whether the method
causes pain, distress or suffering to the animal;
Securities Exchange Act of 1934 – 14(a) = shareholder proposal rule
If any security holder of an issuer notifies the issuer of his intention to present a proposal for action
at a forthcoming meeting of the issuer’s security holders, the issuer shall set forth the proposal in its
proxy statement and identify it in its form of proxy and provide means by which security holders
[presenting a proposal may present in the proxy statement a statement of not more than [500] words
in support of the proposal].
General exception of Rule 14a-8(i)(5):
If the proposal relates to operations which account for less than 5 percent of the issuer’s total assets
at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross
sales for its most recent fiscal year, and is not otherwise significantly related to the issuer’s
business…
 an issuer of securities “may omit a proposal and any statement in support thereof” from its
proxy statement and form of proxy
A: based on the following information
 Iroquois has annual revenues of $141 million
 $6 million in annual profits and $78 million in assets
 Pate de foie gras sales were just $79,000 last year
 Representing a net loss on pate sales of $3,121
 Iroquois has only $34,000 in assets related to pate

None of the company’s net earnings and less than .05 percent of its assets are
implicated by plaintiff’s proposal
The 1983 revision adopted the 5% test of economic significance in an effort to create a more
objective standard.
H: the meaning of “significantly related” is not limited to economic significance; the plaintiff here
has shown a likelihood of prevailing on the merits with regards to the issue of whether his
proposal is “otherwise significantly related” to Iroquois’ business.
NYCERS v. Dole Food Company, Inc., 969 F.2d 1430 (2d Cir. 1992)
F: NYCERS – public pension fund – owns approx. 164,841 shares of common stock in Dole Food
Company; Dec. 12, 1991 custodian of NYCERS assets Elizabeth Holtzman asked the executive VP
of Dole to include the NYCERS proposal in its proxy statement: a shareholder resolution on health
care; the proposal was concerning Dole’s increased health care costs – and the financial pressure
employees were put under – shareholders want a committee formed by outside and independent
directors to assess the health care reform and then report its findings – report to be done in a
reasonable time and costs and available to any shareholder upon request –
Jan. 16, 1992 In response Dole – wrote to the SEC stating that they could exclude the NYCERS
proposal from its proxy statement because the proposal concerned employee benefits, an assertedly
“ordinary business operation”….
Feb. 10, 1992 – SEC responds – their view has some merits based on Rule 14a-8(c)(7) – and the
SEC will not enforce action if the proposal is omitted from the Company’s proxy statements
because the proposal is directed at involving the Company in the political and legislative process
relating to an aspect of the Company’s operations
March 19, 1992 – NYCERS finds out SEC denies proposal – and they file this suit submitted with
an affidavit from Theodore R. Marmor – a professor of political science and public policy at Yale
University – stating all these facts and figures regarding the impact of health care in the United
States.
Rule 14a-8: if any security holder of a registrant notifies the registrant of his intention to present a
proposal for action at a forthcoming meeting of the registrant’s security holders, the registrant shall
set forth the proposal in its proxy statement
there are exceptions……..
Rule 14a-8[i]: allows a corporation to omit a shareholder proposal from its proxy statement
because of certain circumstances….”ordinary business operations,” “insignificant relation,” and
“beyond power to effectuate.”
 The Corporation bears the burden of showing that the proposal fits into one of these
exceptions
Rule 14a-8[i](7): Ordinary Business Operations
A corporation may exclude a shareholder proposal from a proxy statement if the proposal deals
with a matter relating to the conduct of the ordinary business operations of the registrant
 Where proposals involve business matters that are mundane in nature and do not involve
any substantial policy or other considerations, the sub-paragraph may be relied upon to omit
them
 Even if it touches on the way daily business matters are conducted – the statement may not
be excluded if it involves a significant strategic decision as to the daily business matters -
A: NYCERS has shown that the proposal does not relate to “ordinary business operations” –
ordinary business operations determinations are fact dependent – here Dole has not provided to the
Court whether Dole has an health care insurance plan, how it operates, or the amount of financial
resources that go into it; instead Dole just argues that it relates to employee relations and health
care benefits – traditionally which is in the category of “ordinary business operations”
H: the NYCERS proposal does not relate to “ordinary business operations” – it simply relates to
Dole’s policy making on an issue of social significance –
Rule 14a-8[i](5): Insignificant Relationship
A corporation may exclude a shareholder proposal from a proxy statement if the proposal relates
to operations which account for less than 5% of the registrant’s total assets at the end of its most
recent fiscal years, and for less than 5% of its net earnings and gross sales for its most recent fiscal
year, and is not otherwise significantly related to the registrant’s business
A: the activity addressed by the NYCERS proposal relates to activities that likely occupy in outlays
more than 5% of Dole’s income – Dole loses again on this point
Rule 14a-8[i](6): Beyond Power to Effectuate
A corporation need not include a shareholder proposal on a proxy statement if the proposal deals
with a matter beyond the registrant’s power to effectuate….
A: while NYCERS proposal does request Dole to influence the national health care reform
proposals – there is nothing about political lobbying – rather the NYCERS policy simply calls for a
commission of a research report on national health insurance proposals and their impact on Dole’s
competitive standing - the court does not see how such a research study would “deal with a matter
beyond the registrant’s power to effectuate.”
H: Dole is directed to include it its proxy statement for the June 4, 1992 annual meeting NYCERS
shareholder proposal
Austin v. Consolidated Edison Company of New York, Inc., 788 F.Supp. 192 (S.D.N.Y. 1992)
F: three plaintiffs – stockholders of Consolidated Edison Company – Edison supplies gas,
electricity and steam to customers in the New York metro area; plaintiffs wanted Edison to include
in its proxy materials for the upcoming annual shareholders meeting – an nonbinding resolution
containing the idea that Edison employees should be able to retire after 30 years of service –
regardless of age
Dec. 30, 1991 – plaintiffs proposed this idea to include in its proxy materials the pension changes –
right now under the current plan the normal retirement age is 65 – but employees may retire at or
after the age of 60 if they meet the requirements of the so-called “Rule of 75”
Jan. 16, 1992 – Edison wrote to SEC – stating that the proposal should not be included in its proxy
materials – because the proposal dealt with the company’s day-to-day operations and it was
designed to give a benefit and further personal interest to the plaintiffs that was not common
to shareholders generally – 2 reasons why ConEd refused plaintiff’s proposal
Feb. 13, 1992 – SEC issues a “no-action letter” – Edison does not need to compel to plaintiff’s
wishes
A: the real issue here is companies that seek to exclude pension proposals from their proxy
materials




50 cases/letter within a 10 year period
Plaintiffs have available to them collective bargaining – but this doesn’t show that the only
forum or that the most effective forum that plaintiffs have available to them is a shareholder
vote
The pension plan proposal relates to the entire workforce – not just senior management or to
any other specific group – thus it is not extraordinary
Here plaintiffs proposal shows us that – even an “audacious” proposal on a mundane topic
is still mundane
Medical Comm. for Human Rights v. SEC, 432 F.2d 659 (D.C. Cir.)
During the Viet Nam war a vote by Dow Chemical Company shareholders was sought to determine
whether the company should continue to manufacture napalm.
 Not quite the same topic or issue here H: Con Edison has show that the resolution proposed comes within the exception of an “ordinary
business operation” – no need to show whether or not it was designed to confer a benefit on and
further interests to the plaintiffsPlaintiff’s complaint – dismissed; Defendant’s motion for summary judgment granted
E. SHAREHOLDER INSPECTION RIGHTS




If you pay the costs you may be able to require the corporation to mail your solicitation
materials – when your trying to include your slate on the solicitation materials
The corporation can choose to mail you the solicitation materials and bill you – or just give
you the names of the shareholders instead - Rule 14a-7
Its better to get the “shareholder list” – most incumbent managements choose to keep the
list confidential
Nothing in the federal proxy rules requiring the corporation to give you the shareholder
list, but the federal rules do not impair any rights you may have under state law
o Fights for shareholder lists – are fought under state law
Crane Co. v. Anaconda Co., 346 N.E.2d 507 (1976)
August 1975 Crane, IL corporation, publicly announced an offer to exchange 100 million dollars in
subordinated debentures for as many as 5 million shares of common stock of Anaconda Co., a
Montana corporation – the exchange was opposed by Anaconda’s management – 4 letters were sent
to shareholders as a result – stating that the exchange was not in the best interest of the company –
Crane filed with the SEC a registration statement detailing the material facts regarding the
exchange;
Nov. 19, 1975 – Crane’s statement became effective; Crane proceeded to distribute this information
to brokers, dealers, commercial banks and trust companies – trying to solicit Anaconda’s
shareholders –
Nov. 20, 1975 - Crane then requested a copy of Anaconda’s shareholders list – claiming that
Anaconda had a fiduciary duty to its shareholders to present them with this information regarding
the exchange – Anaconda refused- Crane owned no stock of Anaconda at this time
Dec. 11, 1975 – approx. 2,350,000 Anaconda shares had been tendered to Crane – Crane was now
Anaconda’s largest stockholder;
Dec. 12, 1975 – Crane demands Anaconda to produce its stock book for inspection – Anaconda
rejected the demand but offered to mail Crane’s prospectus to its shareholders at Crane’s expense,
the demand was accompanied by an affidavit
Crane was not satisfied- for they owned 11% of Anaconda’s common stock – and its request
conformed with the requirements of the Business Corporation Law – in that the inspection was not
required for a purpose other than the business of Anaconda and that Crane had not participate in teh
sale of any stockholder list within the 5 years.
Q: whether a qualified stockholder may inspect the corporation’s stock register to ascertain the
identity of fellow stockholders for the avowed purpose of informing them directly of its exchange
offer and soliciting tenders of stock? YES
A: a shareholder desiring to discuss relevant aspects of a tender offer should be granted access to
the shareholder list unless it is sought for a purpose inimical to the corporation or its stockholders –
and the manner of communication selected should be within the judgment of the shareholder.
 Conceptual basis for this right: derived from the shareholder’s beneficial ownership of
corporate assets and the concomitant right to protect his investment
Rule: Business Corporation Law §§ 1315, 624
Access must be permitted to qualified shareholders on written demand, subject to denial if the
petitioner refused to furnish an affidavit that the “inspection is not desired for a purpose …other
than the business” of the corporation and that the petitioner has not been involved in the sale of
stock lists within the last five years
A: whenever the corporation faces a situation having potential substantial effect on its wellbeing or
value, the shareholders qua shareholders are necessarily affected and the business of the
corporation is involved within the purview of section 1315 of the Business Corporation Law
H: since the pendency of such an exchange offer may well affect not only the future direction of
the corporation but the continued vitality of the shareholders’ investment, inspection of the stock
book should be allowed so that qualified shareholders may have the means to independently
evaluate the situation
 Anaconda failed to sustain its burden of proving an improper purpose and it cannot be said that
the court below abused its discretion – the inspection should be compelled.
State Ex Rel. Pillsbury v. Honeywell, Inc., 191 N.W.2d 406 (1971)
July 3, 1969 – petitioner attended a meeting on the “Honeywell Project” – American involvement
in Viet Nam was wrong – Honeywell should stop production of munitions – Honeywell had a large
government contract to produce anti-personnel fragmentation bombs – this upset petitioner because
he opposed the war – and know a company that he knew and respected was fueling the war;
July 14, 1969 – he purchases 100 shares of Honeywell – which he admits was for the sole purpose
so that he has a voice in Honeywell’s affairs and could persuade Honeywell to stop producing
munitions
F: Additionally- petitioner submitted two formal demands to Honeywell requesting they produce
original shareholder ledger and current shareholder ledger – and all corporate documents dealing
with weapons and munitions manufacturing – Honeywell refused; Honeywell is a Delaware
corporation – doing business in Minnesota
April 8, 1970 – trial court dismissed the petition – holding that the relief requested was for an
improper and indefinite purpose – trial court ruled that petitioner had not demonstrated a proper
purpose germane to his interest as a stockholder
Delaware Statute: the shareholder must prove a proper purpose to inspect corporate records other
than shareholder lists.
Rule: the act of inspecting a corporation’s shareholder ledger and business records must be viewed
in its proper perspective. In terms of the corporate norm, inspection is merely the act of the
concerned owner checking on what is in part his property.
“Considering the huge size of many modern corporations and the necessarily complicated nature of
their bookkeeping, it is plain that to permit their thousands of stockholders to roam at will through
their records would render impossible not only any attempt to keep their records efficiently, but the
proper carrying on of their businesses.”
 Because the power to inspect may be the power to destroy, it is important that only
those with a bona fide interest in the corporation enjoy that power….
A: petitioner had no interest in the affairs of Honeywell before he learned of their involvement in
the Viet Nam war – immediately after obtaining such knowledge – he purchased stock for the sole
purpose of asserting ownership privileges and forcing Honeywell to cease production of munitions;
if it weren’t for his opposition – petitioner probably would not have bought Honeywell stock in the
first place or wanted to communicate with Honeywell’s shareholders; this was a position maneuver
–cannot be deemed a proper purpose germane to his economic interest as a shareholder; this
petitioner wasn’t even remotely interested in the long-term well being of Honeywell or the
enhancement of the value of his shares
H: this purpose on the part of the petitioner – to persuade a company to adopt his social and
political concerns – irrespective of any economic benefit to himself or the company – does not
entitle him to inspect the company’s books and records
§ 2. SHAREHOLDER VOTING CONTROL
Stroh v. Blackhawk Holding Corp., 272 N.E.2d 1 (1971)
F: Blackhawk Holding Corporation was organized under Illinois Business Corporation Act – Nov.
1963; articles of incorporation – authorized the issuance of 3,000,000 shares of Class A stock with
a par value of $1, and 500,000 shares of Class B stock without par value;
21 promoters purchased 87,868 shares of Class A stock at $3.40/share ($298,751.20) and 500,000
shares of Class B at ¼ cent/share ($1,250). – Corporation registered the Class A shares with the
securities division – Sec. of State of IL for the sale of 500,000 shares to the general public at
$4/share. The prospectus explained that every share of each class of stock – would have 1 vote on
all general matters submitted to a vote of the shareholders – also that no class B stock was being
offered. Aug. 1964 – there was a 2 for 1 split of the Class A stock – increasing the outstanding shares from
587,863 to 1,175,736 shares. The corporation sold additional Class A stock to the public in 1965
for $4/share;
June 1968 – there were 1,237,681 Class A shares and 500,000 Class B shares outstanding;
representing 28.78% of the total voting shares of the company
“shares” – “the units into which the proprietary interests in a corporation are divided”
Plaintiffs – feel that shares or “proprietary” means a property right, and shares must then represent
some economic interest, or interest in the property or assets of the corporation.
Q: the issue before the court is the validity of the 500,000 shares of Class B stock – of which the
articles of incorporation said “none of the shares of Class B stock shall be entitled to dividends
either upon voluntary or involuntary liquidation or otherwise.”
A: the court agrees with the defendants – that statutory definition – means that ownership of stock
may consist of one or more of the rights to participate “in the control of the corporation, in its
surplus or profits, or in the distribution of its assets.
Q: to what extent should economic attributes of shares of stock be eliminated?
Section 14 of the Act – expresses the intent of the legislature to be that parties to a corporate
entity may create whatever restrictions and limitations they may want with regard to their
corporate stock by expressing such restrictions and limitations in the articles of incorporation.
 the articles may not limit or deny the voting power of any share
 can prefer a class of shares over another with regard to dividends and assets
 limits the power of a corporation only as to the voting aspect of ownership
Present Constitution
 requires only that a shareholder not be deprived of his voice in management
 does not require that a shareholder – must also have an economic interest
 the right to vote be proportionate to the number of shares owned – not to the investment
made by the corporation
 if fraud or overreaching is established regarding the voting rights of shares – remedies are
available
H: the “economic rights” such as the rights to earnings and assets – may be removed and
eliminated from the other attributes of a share of stock – only the management aspect of ownership
may not be removed. – there is nothing wrong in the scheme that enables one class of shares to
obtain greater voting rights with the same or lesser investment into the corporation State of Wisconsin Investment Board v. Peerless Systems Corp., 2000 WL 1805376 (Del. Ch.)
F: SWIB – agency of State of Wisconsin – invests in Wisconsin Retirement System (State
Investment Fund and several other smaller trust funds in Wisconsin); SWIB was the beneficial
owner of 985,000 share of Peerless common stock (between 7%-9%) of the total outstanding
shares at Peerless; Peerless is a Delaware Corp. with principal place of business in California –
provides software-based imaging systems to manufacturers of printers, copiers, fax machines and
scanners;
1999 – Peerless had four directors – Edward Galvadon, Robert Barrett, Robert North, and Robert
Adams; Barrett, North and Adams were all non-employee outside directors – as a part of their
compensation they received stock options according to a formula; Galvadon was President, CEO,
and Chairman of the Peerless Board – received both salary and stock options
May 20, 1999 – Peerless issues a proxy statement – explaining three proposals – recommending
the each shareholder vote to approve proposals
 Proposal 1 = re-elect each of the four members of the Peerless Board
 Proposal 2 = to increase by 1,000,000 the number of Peerless shares available
 Proposal 3 = ratify the Board’s selection to have PricewatershouseCoopers LLP as the
Company’s auditors
June 1, 1999 – SWIB reacted in opposition to Proposal 2 – SWIB sent a letter to each Peerless
shareholder asking them to vote against Proposal 2
June 10, 1999 – Peerless held a special meeting with its shareholders to discussed a proposed
acquisition of Auco, Inc.
 As of May 11, 1999 – there were 11,286,967 shares of Peerless outstanding
 At special meeting – shareholders approved the merger by a vote of 5,697,037 for and
352,539 against with 9,600 abstentions
 Total number of shares that voted at meeting = 6,059,176 (appx. 54% of outstanding shares)
June 17, 1999 – Annual meeting takes place – Galvadon presided; SWIB was not in attendance;
Proposals 1 and 3 passed easily; the meeting was adjourned for 30 days without closing the pools
on Proposal 2 – the adjournment was made by Galvadon – and no one expressed any concern about
this at the meeting – motion was approved –
 If the polls would have closed on Proposal 2 – it would have been defeated by 684,266
votes
Peerless claims they adjourned the meeting – due to the low voter turnout in comparison to
Proposals 1 & 3.
 Under Rules of New York Stock Exchange (“NYSE”)
o On vote of routine matters – brokers and agents can vote
o On non-routine matters – the vote of the beneficial owners is required
o Proposals 1 & 3 = routine; Proposal 2 = non-routine
Peerless did not provide any information as to why Proposal 2 was adjourned to its shareholders –
and did not tell them that if they would voted and held it would have been defeated; Nevertheless
Peerless continued to solicit votes on Proposal 2, but only from selected shareholders;
 Company’s Claim
 “to get the shareholder’s to vote” in order to increase voter
participation on Proposal 2
June 24, 1999 – Peerless informed SWIB that the Annual Meeting was adjourned – and the polls
were still open on Proposal 2 – SWIB sent another letter on July 1, 1999 – to Peerless shareholders
urging them to vote against Proposal 2
July 16, 1999 – 30 days after adjournment – meeting is reconvened; SWIB did not attend –
Galvadon ordered the polls closed on Proposal 2- passed by a vote of 3,874,380 for and 3,653,310
against – (34.33 % for and 32.37 % of outstanding shares against)
Dec. 7, 1999 - SWIB filed complaint – to cancel the vote – they want injunctive relief
Q: Does SWIB have standing to bring this claim?
A: Peerless asserts SWIB has no standing to bring claim – they did not attend either meeting – did
not object to the adjournment – did not exercise reasonable diligence to preserve its rights to
challenge Galvadon’s ruling as the Chairman of the meeting; the court is aware of no Delaware law
– that requires shareholders must attend a meeting and record an objection or lose its ability to
challenge the propriety of a shareholder vote
Reasons Why? - Policy




Proxy solicitation exists – because shareholders are not required to attend meetings and protect
their rights
Expensive to attend all meetings – so the proxy system helps in that way as well – protects both
the small and large investor ($$)
If fraud or something else is not found out until after meeting – then shareholders would lose
their right to seek redress –
SWIB has standing to challenge the adjournment
Q: Have Peerless and Galvadon breached their Fiduciary Duty of Loyalty by Adjourning the
Annual Meeting without closing the polls on Proposal 2?
Blasius Standard –
 2 part test:
o Plaintiff must establish that the board acted for the primary purpose of thwarting the
exercise of a shareholder vote
o Board has the burden proving compelling justification for its actions
“Compelling justification” – appropriate only where the “primary purpose of the board’s action
[is] to interfere with or impede exercise of the shareholder franchise” and the stockholders are not
given a “full and fair opportunity to vote”
A: no finding that the primary purpose of the board’s action was to interfere with or impede
shareholder – business judgment rule applies then
Q: Did Peerless and Galvadon act with the primary purpose of frustrating the shareholder
franchise?
A: if the purpose of the adjournment was to merely increase shareholder participation – it makes no
sense then why Peerless did not inform all of its shareholders that it had called the adjournment and
that they could continue to vote on Proposal 2 – here the purpose behind the adjournment was
to ensure the passage of Proposal 2 by interfering with the shareholder vote and allowing
Proposal 2 to have more time to gain votes Q: did Peerless demonstrate a compelling justification for interfering with the shareholder vote on
Proposal 2?
A: the facts of Blasis are not the same as in here – and thus its difficult to subject the adjournment
to heightened Blasis scrutiny – SWIB argues that Peerless had personal financial interests to
adjourn the vote on Proposal 2- and violated their fiduciary duties – Defendants argue that
Proposal 2 does not grant any options to any director, officer or employee of Peerless; nor does
Proposal 2 vary the terms on which any options are granted pursuant to Company’s existing option
plan; the court says – the factual record is insufficiently developed to make a decision
A: Peerless contends that directors and officers owe fiduciary duties to the opponents of Proposal 2
– but all Peerless shareholders; because Proposal 2 passed at the Reconvened meeting after
additional shareholders has the opportunity to vote it would have denied shareholders a “full and
fair opportunity to vote” – required by Stroud II –
Delaware Law:
+Void acts – those are ultra vires, fraudulent, gifts or waste, and are legal nullities incapable of
cure
+Voidable acts – performed in the interest of the company, but beyond the authority of
management and are also cause for relief
 If shareholders ratify the voidable act after the fact – as opposed to void – the ratification
cures and relates back to moot all claims provided that the ratification was “fairly
accomplished.”
H: it is far from clear whether the ratification was “fairly effected and intrinsically valid.”
A: a need for a higher vote count justified the adjournment; - no Delaware case or statute supports
this rationale where a quorum is present – one is hard pressed to understand why an adjournment
was needed; this factor is unimportantH: defendants have not provided a compelling justification for their actions; nevertheless – its hard
to decide this at the summary judgment level – and thus both claims for summary judgment are
denied – and the issue requires further argument and factual development
§ 4. ABUSE OF CONTROL
Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657 (1976)
F: Wilkes acquired an option to purchase a building and lot – the building previously was the
Hillcrest Hospital. Riche, an acquaintance of Wilkes – learned of the option, and interested Quinn
and Pipkin – the four men met and decided to participate jointly in the purchase of the building and
lot as a real estate investment; decided that its greatest potential for profit – would be as a nursing
home; if they did go into it as a partnership as a nursing home – they would be partners and liable
for any debts incurred by the partnership – instead they changed the ownership of the property as
Springside Nursing Home – a corporation under Massachusetts law;
Each of the four men invested $1,000 and subscribed to ten shares of $100 par value stock in
Springside; each would be a director – and actively participate in the management and decision
making of the corporation – and that if resources permitting – each would receive $$ from the
corporation in equal amounts as long as each assumed an active an ongoing responsibility for
carrying a portion of the burdens necessary to operate the business
Riche was elected President; Wilkes – treasurer; Quinn – clerk; Each of the four parties initially
received a $35/week from the corporation; - as time went on the weekly return to each was
increased until it totaled at $100/week.
1959 – Pipkin sold his shares to Connor – after a long illness; Connor – was elected a director but
never held any other office; he participated in business decisions and decisions as a director and
served additionally as financial adviser to the corporation;
1965 – stockholders decided to sell a portion of the corporate property to Quinn – Quinn was also a
interested holder in another corporation that desired to operate a rest home on the property; Wilkes
got a higher sales price – then Quinn initiated from the stockholders; after the sale happened
Wilkes and Quinn’s relationship deteriorated; Wilkes gave notice in 1967 – to sell his shares; also a
meeting was held and salaries were established for officers and employees- Quinn was to receive a
substantial weekly increase – Riche and Connor continued receiving $100 a week – Wilkes was left
of the list to whom a salary was to be paid;
Annual meeting in March – Wilkes was not re-elected as a director or an officer – he was not
longer wanted; though the board of directors has the power to dismiss any officer or employee for
misconduct or neglect – no indication that the failure to establish Wilkes salary was based on either
ground – rather from the person desire of Quinn, Riche and Connor to prevent him from continuing
to receive money from the corporation; despite the fallout Wilkes continued to carry out his
responsibilities to the corporation in the same satisfactory manner – same degree of competence
A: Wilkes brings a claim of breach of fiduciary duty owed to him by other participants in this
venture
Rule: “stockholders in the close corporation owe one another substantially the same fiduciary duty
in the operation of the enterprise that partners owe to one another”
 Standard of duty owed by partners to one another is one of the “utmost good faith and
loyalty” - Donahue v. Rodd Electrotype
 Stockholders in close corporations must discharge their management and stockholder
responsibilities in conformity with this strict good faith standard
Application of the strict good faith standard – will result in the imposition of limitations on
legitimate action by the controlling group in a close corporation which will unduly hamper its
effectiveness in managing the corporation in the best interests of all concerned.
Rule: when a minority stockholder in a close corporation brings a suit against the majority alleging
a breach of the strict good faith duty owed to them by the majority, we must carefully analyze the
action taken by the controlling stockholders in the individual case.
 Must ask whether the controlling group can demonstrate a legitimate business purpose
for its action
A close corporation must have some room to maneuver in establishing the business policy of the
corporation; a minority must demonstrate that the same objective that corporation was trying to
achieve could have been reached through an alternative action – one of that was less harmful to the
minority’s interest –
A: the majority stockholders have not shown a legitimate business purpose for severing Wilkes
from the payroll and refusing to re-elect him into a director or officer; no showing of misconduct
on Wilkes part that would lead us to believe the majority acted legitimately; Wilkes always
continued to do his work – and never showed an unwillingness to do so;
H: the action on behalf of the majority was a “freeze out” – for which no legitimate business
purpose was established; forcing Wilkes to sell his shares – probably was at the heart of the
majority’s plan;
Duty of Utmost Good Faith and Loyalty – Punctilio
 Wilkes was one of the four originating of the nursing home ventures
 Wilkes had invested his capital – and time for more than 15 years
 Cutting Wilkes off assured that he would never receive anything else from the corporation
Result: The case was remanded to the Probate Court for further proceedings concerning the issue
of damages; Quinn, Riche, and Connor – breached their fiduciary duties to Wilkes as a minority
stockholder
Smith v. Atlantic Properties, Inc., 422 N.E.2d 798 (1981)
F: Dr. Wolfson agreed to purchase land in Norwood for $350,000 with an initial cash payment of
$50,000 and a mortgage note of $300,000 payable in 33 months. Dr. Wolfson offered a quarter
interest each in the land to Mr. Smith, Mr. Zimble, and William Burke; each paid Dr. Wolfson
$12,500; Mr. Smith – organized the corporation (Atlantic) to operate the real estate; each received
25 shares of stock; as part of the articles of incorporation - no election or resolution by the
stockholders and no election, appointment, resolution, purchase, sale, lease, contract etc. shall be
valid or binding upon the corporation until effected, passed, approved, or ratified by an affirmative
vote of (80%)
Atlantic purchased the Norwood land – Atlantic retained 28 acres; Dr. Wolfson – wanted to
reinvest the money and fix up the facilities – while the three other guys wanted to get their
dividends – also there tax fraud implications with the IRS – due to the excess of cash sitting
around – and not paying out dividends;
Q: was there a breach of fiduciary duty on behalf of Wolfson – and if so was there a breach of
fiduciary duty on the other guys?
A: Wolfson only has 25% interest (1/4) so why does Wolfson have so much power? Its because of
the veto power – veto power renders power to each shareholder
H: A minority shareholder that has a veto power over corporate action – has fiduciary duties owed
to the majority; Wolfson use of his veto power was inconsistent with that duty because it subjected
the corporation to an unnecessary assessment of penalty taxes.
But wait…Wolfson isn’t the only one at fault – Wolfson thinks it better to reinvest the money and
improve the facilities – and the other guys want to get their dividends
Rule: fiduciary duties are now attached to any controlling shareholder including a minority with
veto power.
§ 5. CONTROL, DURATION, AND STATUTORY DISSOLUTION
Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (Alaska 1980)
F: 1961 – Ralph Stefano, C. Harold Gillam, and Robert Crow – formed a corporation known as
Alaska Plastics – began producing foam insulation at a building they bought; each incorporators
held 300 shares of stock; 1970 Crow was divorced and part of the settlement gave Patricia Muir,
his ex-wife, 150 shares or 1/6 interest in the corporation; Muir was failed to be notified by the
corporation of an annual shareholders meeting in 1971 and 1974;
Shareholder meetings were held in Seattle – Crow and Gillam brought their wives at company
expense – no business purpose whatsoever; 1971 – Stefano, Crow, and Gillam voted themselves
each a $3,000 annual director’s fee; the three directors also never authorized Alaska Plastics to pay
dividends; in 1974 – the three board members also authorized an annual salary of $30,000/year for
Gillam – Muir claimed she never received any money from the corporation;
Muir was offered $15,000 for her shares – she felt that was too low – hired an attorney and an
accountant – inspected company’s books – and found that the stock’s true value was somewhere
between $23,000 and $40,000;
Special director’s meeting – Oct. 1974 – 3 board members agreed to make $50,000 offer for
Broadwater Industries; - purchased happened – Muir testified she was never made aware;
Muir offered her stock to the corporation for $40,000 – in June 1975 – the board raised its offer to
$20,000 again Muir rejected; shortly after the building where they were working burned to the
ground –
A: Shareholder Remedies:
 Corporation with publicly traded stock, dissatisfied shareholders can sell their stock on the
market – and recover their assets – invest elsewhere – in a close corporation there is not
likely to be a ready market for the corporation’s shares –
 No provision in the articles of incorporation which would allow Muir to force Alaska
Plastics to purchase her shares
Rule: a shareholder may bring an action to liquidate the assets of a corporation upon a showing that
“the acts of the directors or those in control of the corporation are illegal, oppressive, or
fraudulent…”
 A shareholder may also seek liquidation when “corporate assets are being misapplied or
wasted.”
 Muir has to prove that the acts of Stefano, Gillam and Crow are “illegal, oppressive or
fraudulent”
Absent compelling circumstances, courts are often reluctant to order involuntary dissolution
What Constitutes Oppression?
 Conduct that substantially defeats a minority shareholder’s reasonable expectations
Reasonable Expectations:
 Were reasonable under the circumstances
 Known (or should have been known) to the majority
 Central to the petitioners decision to join the venture
 Has to be something more than mere disappointment
 The very reasons for participating have been defeated
Q: the issue in this case involves the rights of a minority shareholder in a close corporation who
allegedly has been deprived of benefits accorded other shareholders?
Remedy?
 “Equal Treatment” – require that the directors treat Muir equally with the other shareholders
o Muir should get dividends
o But firm not required to buy her stock
Rule: the rule of equal opportunity in stock purchases by close corporations provides equal access
to these benefits for all stockholders.
Muir’s Complaint
 Directors breached their duty of care toward the coporation
o Failed to insure the Fairbanks plant – that burned down
o Kept large reserves of cash in noninterest-bearing checking accounts
o Loan an employee money at a rate below prevailing rates of interest
 But the court says evidence insufficient to establish a breach of duty towards
corporation
Derivative suit – not appropriate form of action in this case – for Muir was harmed individually –
not that the corporation was harmed
H: the remedy is not available on the present record as a matter of law
Stuparich v. Harbor Furniture Mfg., Inc., 83 Cal.App.4th 1268 (2000)
F: Harbor Furniture was founded by sisters Candi and Ann – their grandfather in 1929 – as a
furniture manufacturing business; ownership was divided between their grandfather (and his wife)
– 50% and their son Malcolm and his wife (50%); Harbor Furniture bought land in 1946 which
they developed into a mobile home park – “The Californian” – Harbor Furniture was incorporated
in 1957 – Malcolm is the brother of Candi and Ann;
In 1982 Malcolm was given the business and an annual salary of $153,000 plus bonuses – his wife
is employed by Harbor – and receives an annual salary of $49,000 – she is an office manager;
Malcolm’s son is employed – as a salesman – besides attending board meetings Candi and Ann
have not been involved in the operation of the company; plaintiffs had shares in the company
through gifts and inheritances – Malcol had 51.56% of the voting shares and 33.33% of the nonvoting shares; Candi and Ann became dissatisfied with the failure of the company to observe
various formalities;
In 1990 – on Ann’s command – the corporation began holding annual meetings - she served as
chairman of the board of directors between 1990 and 1996 – both her and Candi were on the board
of directors for that period; the sisters proposed separating the mobile home park operation with the
furniture manufacturing operation – creating separate divisions; the furniture business was
incurring financial losses;
Realizing that their efforts were futile – the sisters stopped attending annual meetings; Malcolm
refused to his sisters request to buy out their shares; since 1984 both sisters have received more
than $800,000 in dividends – the sisters filed this action – after the action was filed there was a
serious argument between Candi and Malcolm – Candi was injured
Q: whether plaintiffs raised a triable issue of material fact as to their right to involuntary
dissolution of the corporation under § 1800(b)(5) which applies where “liquidation is reasonably
necessary for the protection of the rights or interests of the complaining shareholder or
shareholders.”
A:
2 Precedents : addressing the right of minority shareholders to force dissolution of a
corporation because their interests and rights cannot be protected:
 Stumpf: dissolution ordered when required to assure fairness to minority shareholders and at
the same time to lessen the danger of minority abuse

Bauer: no dissolution where minority has unfairly competed and had no reasonable
expectation of dividends
Candi and Ann (sisters) – have 4 Arguments
1. Malcolm has voting control of the corporation
2. sisters (plaintiffs) have no meaningful input/participation in the corporation
3. Malcolm roughed up Candi – violent confrontation
4. Malcolm wants to continue furniture business because it employs his family
Court says….
1. there is no claim that Malcolm acquired control improperly he’s got 51.56% of the voting
shares – he can outvote plaintiffs on any issue
2. they are minority shareholders; if they can’t get along with Malcolm, they should appoint a
representative – an opportunity to participate and speak is all a minority shareholder is
entitled to and may expect
3. ?? – nothing to say – court doesn’t care
4. Malcolm gets the benefit of the Business Judgment Rule here
o No need for a drastic remedy
H: no triable issue of material fact is raised – because it can always be argued that more profits
could be made; courts should not be involved “in the tweaking of corporate performance. Such is
the reason for the ‘business judgment rule.’
§ 6. TRANSFER OF CONTROL
Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941 (7th Cir. 1986)
F: 1975 – Walter Jensen owned all the stock of Jensen-Sundquist(holding company) h then sold
52% of his stock to members of his family; 8% to Dennis Frandsen– gave $97,000 to Jensen, the
rest to other family members in smaller chunks, in an agreement – the “majority bloc” – the family
members agreed that if they decided to sell their stock they will first offer to Frandsen and six other
minority shareholders – they will not sell their stock to any other person, firm, or organization
without first offering said stock to these minority shareholders – so if the majority bloc offered to
sell shares – they had to give Frandsen a right to buy the shares at the offer price;
So in 1984 – President of Jensen-Sundquist began discussions with 1st Wisconsin Corporation –
Wisconsin’s largest bank holding company – for the bank company was looking to acquire
Jensen’s-Sundquist’s principal property – a price of $88/share of stock was agreed upon; each
stockholder of Jensen would receive $62/share which translated into $88/share of the bank; Jensen
asked each minority shareholder to sign a waiver of any rights he “may have” – but advised them
that they had no rights other than to receive $62/share; each of the minority shareholders signed or
agreed to sign by Frandsen
Frandsen not only refused to sign – but he announced he was exercising his right of first refusal –
and buying the majority bloc shares at $62/share- the majority did not want to sell his shares to
him; they restructured the deal – against Frandsen protest – he brought suit
Frandsen’s Claims – brought suit against the majority bloc for breach of stockholder agreement
Q: what are the rights of a minority shareholder in a closely held corporation?
A: the transaction was originally configured as a purchase of the holding company rather than just
of the bank, an asset of the holding company; the part of the agreement that grants a right of first
refusal refers to an offer to sell “their stock,” and to a sale of “their stock” and “their” refers to the
majority shareholders; - they never offered to sell their stock to First Wisconsin – First Wisconsin
just wanted the bank – they were not interested in becoming a majority shareholder in JensenSundquist; - a sale of stock was never completed; it was a merger originally
Merger – the acquired firm disappears as a distinct legal entity; the shareholders of the merged
firm yield up all of the assets of the firm, either receiving cash or securities in exchange – and the
firm dissolves
A: if the majority bloc wanted to sell its stock to someone who wanted a controlling interest in the
company rather than the company itself or an asset of the company such as First Wisconsin – then
it has to offer its shares to Frandsen by a right of first refusal – Frandsen may have just wanted to
protect himself from being at the mercy of a new and perhaps hostile majority bloc; the right of
first refusal – did not give Frandsen protection against a sale of the company itself
warrant – is like quitclaim deed; the signer waives whatever rights he may have, but does not
warrant that he has any rights to waive
Policy: the effect of a right of first refusal is to add a party to a transaction, for the right is
triggered by an offer of sale, and the effect is therefore to inject the holder of the right into the sale
transaction. – the right is enforceable but only if the contract clearly confers it.
H: Frandsen loses – not a sale of stock – but a sale of the company and its assets
Zetlin v. Hanson Holdings, Inc., 397 N.E.2d 387 (1979)
F: Zetlin owned approx. 2% of the outstanding shares of Gable Industries with defendants Hanson
Holdings Inc. and Sylvestri together with members of the Sylvestri family – owning 44% of
Gable’s shares; Hanson Holdings sold their interest to Flintkote Co. for $15/share – when Gable at
the time was selling on the open market for $7.38/share – sold at a premium
“premium” – is the added amount an investor is willing to pay for the privilege of directly
influencing the corporation’s affairs.
Rule: absent looting of corporate assets, conversion of a corporate opportunity, fraud or other acts
of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy, that controlling
interest at a premium price
A: Zetlin contends that minority stockholders are entitled to an opportunity to share equally in any
premium paid for controlling interest in the corporation –
 If this rule were so – it would affect the manner in which controlling stock interests are now
transferred – and would require that a controlling interest be transferred only by means of
an offer to all stockholders – (tender offer)
H: contrary to existing law – too radical a change for the court – has to be done by the leglislature
MERGERS, ACQUISITIONS, AND TAKEOVERS – Chapter 7
§ 1. MERGERS AND ACQUISITIONS
A. THE DE FACTO MERGER DOCTRINE

“statutory merger” – is a combination accomplished by using a procedure prescribed in the
state corporation laws
o Farris v. Glen Alden – contemplated that the shareholders of each corporation would
wind up owning stock in the surviving corporation –


if statutory merger – were used the merger agreement would have
specified how many shares would go to the shareholders of each of the 2
corporations
if merger agreement – with the appropriate state official, Glen Alden would
have disappeared and all the property interests, rights, and obligations of
Glen Alden would have passed by law
Ferris v. Glen Alden Corporation, 143 A.2d 25 (1958)
F: Glen Alden – PA corporation – mining of anthracite coal and manufacture of AC units and firefighting equipment; company’s operating revenue has declined substantially – coal operations = tax
loss of $14,000,000.
Oct. 1957 – List, a DE holding company – into motion pictures, textile companies and real estate,
and to a lesser extent, in oil and gas operations, warehouses and aluminum piston manufacturing –
purchased through a wholly owned subsidiary 38.5% of Glen Alden’s outstanding stock –
March 20, 1958 – 2 corporations entered into a “reorganization agreement” subject to stockholder
approval
 Glen Arden – acquire all assets of List – except a small amount of $$ reserved for the
payment of List’s expenses in connection with the transaction (include over $8,000,000 in
cash held chiefly in the treasuries of List’s wholly owned subsidiaries)
 Glen Arden – to issue 3,621,703 shares of stock to List – List is to distribute stock to
shareholders
 Glen Arden – assume all of List’s liabilities including a $5,000,000 note incurred by List in
order to purchase Glen Arden stock in 1957 – outstanding stock options, incentive stock
options plans, and pension obligations
 Glen Arden change name to List Alden Corp.
 Present directors at both corporations – to become directors at List Alden
 List to be dissolved – List Alden carry on operations of both former corporations
1. List owned 38.5% of Glen Alden
 List wants to merge the two companies
2. List sells its assets to Glen Alden for Glen Alden stock
3. List then liquidates and distributes the Glen Alden stock to its shareholders
 List shareholders wind up owning 76.5% of the Glen Alden shares
 Plaintiff, a Glen Alden shareholder, claims that he was entitled to dissenter’s rights
Glen Alden is the smaller company – basically a mining company
List – is a much more diversified company
Glen Alden is going to acquire all the assets of List – List then liquidates and sells all its shares to
Glen Alden’s shareholders
**You only have a shareholder vote if you are being acquired – the end of corporation is near –
Any of these things happen to Glen Alden?
 List is the company that Glen Alden acquires here – taking away shareholder votes
Is the Court going to permit it? NO
What permits a court to treat a merger that is not really a merger? De Facto Merger Doctrine
Rule: need to determine properly the nature of a corporate transaction, we must refer not only to all
the provisions of the agreement, but also to the consequences of the transaction and to the purposes
of the provisions of the corporation law said to be applicable.
Standard for De Facto Merger:
 When a transaction so fundamentally changes the nature of the business as in effect to
cause the shareholder to give up his shares in one company and against his will accept
shares in a different business.
On these facts, there had been the requisite fundamental change?
 Changes the type of company from mining to a holding company
**If they structure it as an asset purchase – and not a merger – shareholders do not get a say –
**This court is seeking to undue merger that was voted upon a majority of shareholdersUnder these circumstances it may well be said that if the proposed combination is allowed to
take place without right of dissent, plaintiff would have his stock in Glen Alden taken away
from him and the stock of a new company thrust upon him it its place.
H: we hold that the combination contemplated by the reorganization agreement – although
consummated by contract rather than in accordance with the statutory procedure is a merger within
the protective purview – the shareholders of Glen Alden should have been notified accordingly and
advised of their statutory rights and dissent and appraisal.
Hariton v. Arco Electronics, Inc., 188 A.2d 123 (Del. 1963)
F: Laurel and so and so agreed to asset sale – Arco sells assets to Loral in return for shares in Loral
(governed by DE GCL § 271) – Arco then dissolves (governed by DE GCL § 275)– all of these are
done as part of one “Reorganization Agreement and Plan” – this sale was overwhelmingly
approved by Arco shareholders by 80% What is Hariton’s claim?
 This is a de facto merger
 Effect is to deprive Arco shareholders of their appraisal rights – they are focused to accept
shares in Loral
Would de facto merger even be available in this case? Court’s response?
 Plaintiff is right – this is a de facto merger
 But equal dignity doctrine governs – treat each section under the DE code with equal
dignity –
Clearly we are promoting form over substance – court doesn’t dispute this is not a de facto merger
court doesn’t care that they are different substantively – because it promotes business planning and
efficiency – if business people are permitted to do what the statutes permit them to do
Doctrines like de facto – are oriented towards protecting corporation management – then protecting
individual shareholders –
Is this intrinsically fair?
Is this a violation of fiduciary duties?
DE court – says doesn’t matter that shareholders rights are being circumscribed – because the DE
legislature said that we could circumscribe their rights
B. FREEZE-OUT MERGERS
Weinberger v. UOP, Inc., 457 A.2d 701 (Del. Sup. 1983)
F: Signal bought 50.5% of UOP’s stock for $21/share in an oversubscribed tender; Signal later
decided to buy the remaining 49.5% of UOP’s shares at $21/share through a cash-out merger
between Signal and UOP; plaintiff challenged the fairness of the merger on a variety of grounds
Issues:
1. Standard of showing unfairness in a freeze-out merger
2. Burden of proof on plaintiffs to show that a freeze-out is unfair – especially when ratified
3. what is fair dealing in this context?
4. What’s the proper method of appraisal in case of unfair price and what remedies are available?
5. Is Singer still good law?
Answers:
1. Intrinsic fairness standard applies?
 Why? - majority shareholder is benefiting and there is an interested transaction
 What does fair dealing require?
o Complete candor
o Uncompromising duty of loyalty
 Is this deal intrinsically fair?
Effect of ratification?
 Ordinarily would shift burden of proof to plaintiff to show deal was not intrinsically
fair…but here
 Defendant failed to disclose all material facts.
2. What’s the remedy? - Appraisal remedy – usual relief to dissenting shareholders if they don’t
like a merger
 Relief for unfair mergers is usually limited to the appraisal remedy
 In cases of fraud, misrepresentation, self-dealing, deliberate waste of corporate assets or
gross and palpable over-reaching, relief may be available outside appraisal
 Here transaction cannot be undone, so only monetary damages available
Delaware Law Today
 Under Weinberger, what factors does a court consider in setting the appraisal price?
o All relevant factors, other than speculative elements of value that may arise from the
accomplishment of the merger, in determining what constitutes a fair price for the
minority shares.
A: We don’t have fair dealing – didn’t disclose they were willing to pay $24 for the price
And we don’t have a fair price –
Well what do we do now?
-remove yourself from the transaction
-appoint a special committee board – of independent directors?
C. DE FACTO NON-MERGER
Rauch v. RCA Corporation, 861 F.2d 29 (2d Cir. 1988)
F: GE and RCA looking to merge – agreement stated that all common stock and preferred stock
would be sold at a certain price – RCA Corp. is merged into GE in a triangular merger – created
GESub – at that point the common RCA stock is converted at $66.50/share, preferred RCA stock is
converted at $40.00/share – RCA preferred stock can be redeemed at $100 – Rauch is a holder of
the 250 shares of preferred stock; Rauch wants the court to say this really isn’t a merger – just
doing as a merger – to get around their duty to pay me my redemption rights;
H: Redemption is always at the control of the corporation – he doesn’t have a preferred right to
require redemption is at the option of the corporation – even if Rauch were entitled- the equal
dignity rule – DE BCL permits this transaction, and courts must respect that, even if it promotes
form over substance
Policy? Good result?
a. Yes it makes sense to promote form over substance b/c it creates legal clarity and guidance to
business leaders thus reducing transaction costs and promoting planning
b. Yes, b/c preferred shareholders got a fair price
c. Yes, b/c redeeming thee shares at $100 would make the merger too expensive and thus hurt
common shareholders
d. All of the above
B. FREEZE-OUT MERGERS
Coggins v. New England Patriots Football Club, Inc., 492 N.E.2d 1112 (1986)
F: Nov. 18, 1959 – William Sullivan purchased an AFL franchise for a professional football team –
(today this is called the AFC); Sullivan paid $25,000 – four months later Sullivan set up the
corporation – nine other people put in $25,000 – in return each investor received 10,000 shares of
voting common stock; July 1960 – corporation sold 120,000 shares of nonvoting common stock to
the public at $5/share; Sullivan had control of corporation til 1974 – In April 1974 – Sullivan
increased his shares from 10,000 to 23,718 voting common stock and 5,499 shares of nonvoting
stock; but in 1974 he was ousted by the other shareholders –
Nov. 1975 – Sullivan bought 100,000 shares of voting stock at $102/share ($10,200,000)– he used
his power to vote out the hostile directors and elect a friendlier board – Sullivan borrowed approx.
$5,348,000 from the Rhode Island Hospital National Bank and the LaSalle National Bank of
Chicago; Sullivan reorganized the Patriots in a way that income of the corporation went to pay off
personal loans – and the assets of the corporation pledged to secure them – to do this though
Sullivan had to eliminate the interest of nonvoting shares;
Oct. 20, 1976 – Sullivan organized the (New Patriots) – the two boards (Old and New) executed an
agreement for a merger of the two corporations – after the merger the voting stock of the Old
Patriots would be no more – the nonvoting stock would be exchanged for cash at the rate of
$15/share; Sullivan gave up his Old Patriots stock (100,000 shares) for 100% of the New Patriots
stock;
Dec. 8, 1976 – merger was approved by the nonvoting stockholders – Jan. 31, 1977 merger
happened
Meanwhile, David Coggins was the owner of 10 shares of nonvoting stock in Old Patriots – in
1967 Coggins purchased the shares through his brother while he himself was serving in Viet Nam;
Coggins voted against the merger – he was a diehard fan loved being an owner – he commenced
this suit on behalf of other stockholders like himself who believed this transaction to be unfair and
illegal.
Q: What approach will a MA court reviewing a cash freeze-out merger employ?
A: Delaware has come up with some tests 1977 - Singer Test – “business-purpose test” – controlling stockholders violate their fiduciary
duties when they cause a merger to be made for the sole purpose of eliminating a minority on a
cash-out basis.
1983 – Weinberger Test – “fairness test” – expanded appraisal remedy now available to
stockholders – facts of a given case may dictate provided sufficient protection to the frozenout minority.
 Where one stands on both sides of a transaction – he has the burden of establishing its entire
fairness, sufficient to pass the test of careful scrutiny by the courts
 The concept of fairness has two basic aspects: fair dealing and fair price
Rule: in cases where a controlling stockholder and corporate director choose to eliminate public
ownership – easy for dangers of self-dealing and abuse of fiduciary duty – courts need to examine
with the closest scrutiny the motives and behaviors of the controlling stockholder.
Rule: a controlling stockholder who is also a director standing on both sides of the transaction
bears the burden of showing that the transaction does not violate fiduciary obligations
**Furthermore – dissenting stockholders are not limited to the statutory remedy of judicial
appraisal where violations of fiduciary duties are found;
A: considered the totality of the circumstances; result of the freeze-out merger is the elimination of
public ownership in the corporation; the directors who benefit from this transaction must show how
the legitimate goals of the corporation are furthered Rule: the duty of a corporate director must be to further the legitimate goals of the corporation –
Rule: a director of a corporation violates his fiduciary duty when he uses the corporation for his or
her family’s personal benefit in a manner of detrimental to the corporation
If the court finds that the elimination of public ownership was for the business purpose of
furthering the corporation – then the courts must examine whether or not the transaction was fair by
examining the totality of the circumstances.
Here: the sole purpose for this merger was to effectuate a restructuring of the Patriots so that
Sullivan would be able to repay his personal debt; Sullivan with 100% control of voting stock – has
the power to act of behalf of the Patriots at League meetings and foreclose the possible recurrence
of the internal management disputes that had existed in 1974; defendants did not show that the
merger was to further the corporation – no need for fairness test
Hold: the merger was illegal – and the plaintiffs have been wronged; can’t rescind the merger – its
almost 10 years old- and so have to determine monetary damages; and because it happen along
time ago- 3rd parties that relied on the merger would be inappropriately harmed
Note: the trial judge – dismissed claim based on waste - - the Superior Court reversed and
remanded this question as well to the trial court -
Rabkin v. Philip A. Hunt Chemical Corporation, 498 A.2d 1099 (Del. 1985)
F: July 5, 1984 – Hunt Corp. merged into Olin Corp. – merger agreement recommended by Hunt
board of directors; Hunt – DE corp.; Olin – VA corp.; March 1, 1983 – Olin bought 63.4% of the
outstanding shares of Hunt’s common stock from Turner Newall Industries at $25/share – this
agreement also stated that Olin pay $25/share if Olin acquired the remaining Hunt stock within one
year – when Olin acquired the 63.4% it stated in a press conference that they were considering
acquisition of the remaining shares – but no present intention to do so;
March 23, 1984 – senior management at Olin met with investing banking firm to discuss possible
acquisition and valuation of Hunt stock; Olin proposed to the bank that they wanted to pay
$20/share – firm said that was fair to the minority; - the price fairness was based on Hunt’s net
worth, Hunt’s earnings history, Hunt’s current prospects, Hunt’s failure to achieve earnings
projections, and the current historical market value of Hunt stock from 1982 to 1983 Hunt reviews proposal – Merrill Lynch their financial advisor – Merrill Lynch says that $20/share
is fair for the minority but that the stock is probably worth anywhere between $19 and $25/share. –
Hunt required that Olin increase the price above $20/share – Olin declined to raise proposal; special
Hunt board then said ok we agree that $20/share is fair and recommended approval of the merger;
Plaintiff’s challenge: the price offered was grossly inadequate because Olin unfairly manipulated
the timing of the merger to avoid the one year commitment – and that Olin failed to abide to their
fiduciary duties in relation to price commitment – to pay the $25/share in the one year agreement –
now they are paying $20/share - Chancellor court dismissed plaintiffs claim – based on the fact
that there was not deception or fraud in relation to a minority’s shareholder’s rights in a
cash-out merger
Q: did the trial court err in dismissing the claims on the ground that absent deception the plaintiffs’
sole remedy under Weinberger is an appraisal?
A: Weinberger – is not necessarily a stockholder’s sole remedy – in certain cases where fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable
overreaching are involved – other relief should and can be granted;
“Fair dealing” – embracing questions when the transaction was timed, how it was initiated,
structured, negotiated, disclosed to the directors, and how the approvals of the directors and
the stockholders were obtained. – Weinberger
 Doesn’t only rest on fraud – in a non-fraudulent transaction price may be the preponderant
consideration
Here: plaintiff’s seeks to enforce a contractual right to receive $25/share instead of $20- which
they claim was a result of Olin’s manipulation;
Rule: while a plaintiff’s mere allegation of “unfair dealing” without more, cannot survive a motion
to dismiss, averments containing “specific acts of fraud, misrepresentation, or other items of
misconduct” must be carefully examined in accord with our views expressed both here and in
Weinberger.
H: Remanded – Court of Chancery needs to focus on the entire fairness of the transaction based on
careful analysis of fair price and fair dealing with aspects of a transaction – On remand – decision
went in favor for defendants
D. LLC MERGERS









One entity controlled by a single individual forms a one “member” LLC –
Shortly after – two other entities, one controlled by the owner of the original member –
become members of the LLC
LLC Agreement creates a 3 member Board of Managers – sweeping authority to govern the
LLC
Individual owning the original member has the authority to name and remove two of the
three managers
Also individual owning the original members – acts as CEO
The third manager – convinces original member’s owner’s appointed manager to join him
in a merger from an LLC to a Delaware Corporation
The appointed manager and disaffected third member – do not give the original member’s
owner notice of the merger
After merger – original member finds himself relegated to a minority position in the
surviving corporation
The two managers acted without notice to the third manager – breached their duty of loyalty
to the original member and their fellow manager by failing to act in good faith
VGS, Inc. v. Castiel, 2000 WL 1277372 (Del. Ch. – 2001)
F: David Castiel formed Virtual Geosatellite LLC on Jan. 6, 1999 – in order to pursue FCC license
to build and operate a satellite system which its proponents claim could dramatically increase the
“real estate” in outer space capable of transmitting high speed internet traffic and other
communications – it only had one member when originally formed – Virtual Geosatellite Holdings
– Jan. 8, 1999 – Ellipso joined the LLC as a the second member – Jan 29, 1999 – Sahagen
Satellite became third member of LLC; Castiel controlled Holdings and Ellipso – while Peter
Sahagen controlled Sahagen Satellite;
Original LLC Agreement
 Holdings received 660 units (63.46% of the total equity of the LLC)
 Sahagen Satellite received 260 units (25%)
 Ellipso received 120 units (11.54%)
 There was a board of managers
 Castiel had the power to appoint, remove, and replace board members and prevent any
board decision with which he disagreed –
 Board: Castiel, Tom Quinn, and Sahagen
Castiel and Sahagen’s relationship began to deteriorate; Sahagen offered on a number of occasions
to buy control of the LLC; Sahagen contends that Castiel was running the LLC into the ground,
poor management and decisions; Sahagen claims that Castiel directed LLC assets to Ellipso in oder
to prop up a failing, cash-strapped Ellipso –
F: Sahagen convinced Quinn (board member) that Castiel needed to be ousted in order for the LLC
to prosper; together the two tried to wrest control of the LLC from Castiel; many LLC employees
and Castiel’s lieutenants testified that taking control from Castiel was probably best for the LLC;
April 14, 2000 – without consent to Castiel – Quinn and Sahagen acted by written consent to
merge the LLC under Delaware law into VGS Inc. – a DE corp.; the Virtual Geosatellite then
ceased to exist – passed all liabilities to VGS – and VGS became the LLC’s legal successor-ininterest; the new board at VGS consisted of Quinn, Sahagen, and Neel Howard
Sahagen issued promissory note to VGS for $10 million – and he received 2 million shares of VGS
A Preferred Stock; VGS issued 1,269,200 shares of common stock to Holdings; 230,800 shares of
common stock to Ellipso; and 500,000 shares of common stock to Sahagen Satellite; NOW
 Holdings and Ellipso have 37.5% interest in VGS – used to have 75%
 Sahagen has 62.5% interest in VGS – used to have 25%
If Castiel would have been notified – Quinn would have been ousted by Castiel for he had this
power – and a new majority which would not want to strip Castiel from his power would have been
in place – therefore they had to act without Castiel’s knowledge
A: the LLC Agreement states
 The Board of Managers did not have authority to act by majority vote
o that Sahagen has a right to appoint one member to the initial board – and does not
expressly state that Managers of the LLC must act by a unanimous or a majority
vote; - but if unanimity were required the number of managers would be irrelevant –
and Sahagen and his minority interest would have veto power § 8.01(b)(i)
o Also the Agreement states that Sahagen’s approval is needed for a merger,
consolidation, or reorganization of the LLC – if unanimity was required there would
be no need to expressly list Sahagen’s minority interest and veto power; § 8.01(c)
o Also the LLC Agreement provides that the LLC may be dissolved by written
consent by members holding 2/3rds of the Common shares – § 12.01(a)(i)
 By failing to give notice of their proposed action, Sahagen and Quinn failed to
discharge their duty of loyalty to Castiel in good faith
o Sahagen and Quinn knew what would have happened had they notified Castiel of
their intention to act by written consent – Castiel would have attempted to remove
Quinn and block the merger
o Regardless why he wanted to – removal of Quinn would have been within Castiel’s
power under the Agreement §18-404(d)
 I don’t think the intention of the LLC Agreement was to enable two
managers to deprive, clandestinely and surreptitiously, a third manager
representing the majority interest in the LLC of an opportunity to protect that
interest by taking an action that the third manager’s member would surely
have opposed if he had knowledge of it
o Sahagen and Quinn each owed a duty of loyalty to the LLC and to Castiel – when
Sahagen and Quinn – recognized that this was Castiel’s way of protection against
adverse majority interest - and acted in a secret, without notice, they failed to
discharge their duty of loyalty to him in good faith – they owed him at least
prior notice – they didn’t afford Castiel a level playing field on which to defend
his interest
A: the issue of who is best suited to run the LLC should not be decided here in the court – that is
best decided in board meetings where all managers are present and all members appropriately
represented, and/or in future litigation, if it unfortunately becomes necessary
Q: What standard should be applied Business Judgment Rule or Fairness Test?
***It should be clear that the actions of Sahagen and Quinn in their capacity as managers
constituted a breach of their duty of loyalty and that those actions do not, therefore entitle
them to the benefit or protection of the business judgment rule.
 Maybe had notice been given and an attempt then to block Castiel’s anticipated action
to replace Quinn – analysis might be different
H: the majority vote of the LLC’s Board of Managers could properly effect a merger – but Quinn
and Sahagen failed to discharge the duty of loyalty to Castiel – and therefore the acts taken to
merge the LLC into VGS Inc., are invalid and the merger is order to be rescinded.
PUNCTILIO?? – YES, ALL PURPOSE FIDUCIARY DUTY OF LOYALTY – FOR PARTNERS – FOR LLC
MEMBERS – FOR EVERYONE – FOR BOARD MEMBERS – THE PUNCITILIO IS EVERYWHERE – ITS VERY
EASILY CONTRACTED AROUND THOUGH – SO LONG AS THE FIDUCIARY DUTY IS NOT LIMITED ENTIRELY
– FOR THAT WOULD GET IN THE WAY OF POLICY
§ 2. TAKEOVERS
A. INTRODUCTION
Cheff v. Mathes, 199 A.2d 548 (1964)
F: Holland Furnance Co- DE corp. – manufactures warm air furnaces, AC equipment, and other
home heating equipment – at time of transaction – board consisted of 7 individuals:
 Mr. Cheff – CEO (annual salary $77,400 and owned 6,00 shares of company) - director
 Mrs. Cheff – wife of Mr. Cheff – daughter of the founder of Holland served as director
o She owned 5,804 shares – 47.9% of Hazelbank United Interest ($200.00 for each
board meeting whether or not she attended)
 Edgar P. Landwehr – nephew of Mrs. Cheff – he owned 24,010 shares of Holland and 8.6%
of the outstanding shares of Hazelbank – no compensation other than directors fee
 Robert H. Trenkamp – attorney – director of Holland and acted as counsel for the company
o Received no retainer fee, but did receive substantial sums for legal services rendered
to the company; - received no compensation – monthly director’s fees –
o He owned 200 shares of Holland Furnace stock
o Was serving as director and counsel of Hazelbank – but owned no shares
 John D. Ames – partner in Chicago investment firm – joined Holland’s board
o At times he owned anywhere between 0 and 300 shares of Holland stock –
o Considered to be the financial advisor of the board
o No compensation – director’s fees that its
 Boalt – not substantial – not employee, businessman became director for Mr. Cheff
 Spatta – not substantial – not employee, businessman became director for Mr. Cheff
Board of Directors at Hazelbank:
 Mrs. Cheff
 Leona Kolb – Mrs. Cheff’s daughter
 Mr. Landwehr
 Mrs. Bowles – Mr. Landwehr’s sister
 Mrs. Putnam – Mr. Landwehr’s sister


Mr. Trenkamp
Mr. William DeLong – accountant
F: business had started to decline between 1948 through 1956 – by 1957 the company was
reorganized as to get ride of sales departments that weren’t cutting it; during the first 5 months in
1957 – the trading volume of Holland’s stock went from 10,300 shares to 24,200 shares; - last
week of June increased to 37,800 shares;
 Meeting in June of 1957 – between Mr. Cheff and Mr. Maremont – President of Maremont
Automotive Products and Chairman of the boards of Motor Products Corporation and
Allied Paper Corp- merger discussions between Holland and Motor Products – Cheff told
him probably not feasible; - and now Maremont had no other interest and refused to buy
anymore stock in Holland

In July 1957 – Maremont owned 55,000 shares of Holland stock; Maremont did not request
at this time to be made a member of the board at Holland; – Cheff testified that Mr.
Maremont is not well known or highly regarded in the Kalamazoo-Battle Creek Detroit
area;

Aug. 23, 1957 – request of Maremont – a meeting was held between Mr. Cheff and
Maremont – Cheff was informed that Motor Products now owned approx. 100,000 shares of
Holland stock – and Maremont demanded to be named to the board of directors – Cheff
refused – there was evidence that Maremont wanted to change the way Holland did
business
Holland began to start losing workforce – and key men – due to the proposal set by
Maremont; It was also shown the Motor Products was showing a loss of $336,121.000 for
the period of 1957.


Aug. 30, 1957 – board finds out about Maremont’s proposal/plan – so the board authorized
the purchase of company stock on the market with corporate funds, for use in the stock
option plan – as a result of all this purchasing the stock price rose

Sep. 4, 1957 – Maremont proposed to sell his current holdings of Holland to the corporation
for $14.00/share – Maremont withdrew the offer – due to a timely response;

Sep. 30, 1957 – Motor Products sends a letter to Mrs. Bowles with a buy-sell offer to
Hazelbank; Oct. 3 – Bowles presents letter to the board – board took no action – referred
the offer to the Holland Board –

Meeting Oct. 14-15, 1957 – between Trenkamp and Maremont – tentative agreement on
the part of the Motor Products to sell 155,000 shares at $14.40/share – the purchase was
considered by the Holland board.
The book value of the stock at the time was $20/share – the proposal was approved by the board;
1959 Holland stock reached $15.25/share

Feb. 6, 1958 – owners of 60 shares of Holland stock – filed a derivative suit – naming all
individual directors of Holland –
Rule: under provisions 8 Del.C. § 160 – a corporation is granted statutory power to purchase and
sell shares of its own stock.
A: if the actions of the board were motivated by a sincere belief that the buying out of the dissident
stockholder was necessary to maintain what the board believed to be proper business practices, the
board will not be held liable for such decision, even though hindsight indicates the decision was
not the wisest course.
Q: the allocation of the burden of proof to show the presence or lack of good faith on the part of the
board in authorizing the purchase of shares.
A: the decision of the board of directors in authorizing a purchase was presumed to be in good faith
and could be overturned only by a conclusive showing by plaintiffs of fraud or other conduct;
Plaintiff’s claim:
 Sale price was unfair – price was in excess of the open market
 Inappropriate to require the defendant corporation to pay a control premium, since control is
meaningless to an acquisition by a corporation of its own shares
Q: whether or not defendants satisfied the burden of proof of showing reasonable grounds to
believe a danger to corporate policy and effectiveness existed by the presence of the Maremont
stock ownership?
Remember: directors satisfy their burden by showing good faith and reasonable investigation; the
directors will not be penalized for an honest mistake of judgment, if the judgment appeared
reasonable at the time the decision was made….
A: Maremont had deceived Cheff as to his original intentions, Maremont had given Cheff some
reason to believe that he intended to eliminate the retail sales force of Holland, Maremont
demanded a place on the board, Maremont substantially increased his stock purchases after being
refused a spot on the board, directors at Holland had good reason to believe that unrest among key
employees has been engendered by the Maremont threat, the board received advice from Dun and
Bradstreet that Motor Products had a knack for liquidation or quick sale activities, board received
professional advice from Merrill Lynch, etc.
H: evidence clearly leads to the conclusion that the board of directors, based upon direct
investigation, receipt of professional advice, and personal observations of the contradictory action
of Maremont and his explanation of corporate purpose – believed with justification that there was a
reasonable threat to the continued existence of Holland –
If the actions were proper because of a decision by the board made in good faith that the
corporate interest was served thereby, they are not rendered improper by the fact that some
individual directors were willing to advance personal funds if the corporation did not.
This question was a matter of business judgment – furnishes no need for justification for
holding the directors personally responsible – there was no fraud involved.
++Greenmail – in the 1980’s the purchase by a corporation of a potential acquirer’s stock, at
a premium over the market price
B. DEVELOPMENT
E: I own shares in Sloth Co. – they trade shares at $50/share; T. Boone Pickens announces a one
tier tender offer for Sloth Co. at $60/share – no limit on how many shares he wants to take – at least
51% though; now shareholders who think this is the best offer they are going to receive can tender
– those who don’t can refuse
Now suppose – Pickens makes a two-tier tender offer – offer to buy 51% at $65/share and for the
remaining 49% he will merger Sloth into his own firm paying $55/share – suppose also that rivals
will bid the Sloth stock up to $70/share
 If you tender you will receive up to $65/share if Pickens succeeds and $70/share if he fails
 If you do not tender – you will receive $55/share if Pickens succeeds and $70 if he fails
o Most shareholders are likely to tender their shares and not risk getting $55/share


This shows how the two-tiered front-end loaded offer “coerces” each
shareholder into tendering, and forecloses a more advantageous auction
for the stock –
The two-tiered offer is also an ingenious and efficient solution to freeriders
Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985)
F: April 8, 1985 – Mesa (owner of approx. 13% of Unocal’s stock underwent a two tiered cash
tender offer for 64 million shares (approx. 37% of Unocal’s outstanding stock price of $54/share.)
Unocal’s board – 8 independent outside directors – 6 insider directors; meeting to discuss tender
offer lasted 9 ½ hours- board received presentations from Peter Sachs (Goldman Sachs & Co.) and
Dillon Read & Co. – Sachs said Unocal could expect in excess of $60/share – and he presented
them with defensive strategies
 self tender by Unocal for its own stock reasonable price range = $70-$75/share – cost the
company around $6 billion in debt – the company could handle it though – reduce
exploratory drilling
board unanimously agreed to reject Mesa’s tender offer – it was inadequate and should pursue a
self-tender to provide stockholders with a fairly priced alternative
 the directors unanimously agreed upon $72/share – the board’s decision was made upon
reliance of an investment banker
 Unocal was to buy the remaining 49% of the outstanding shares for value of $72/share
Mesa wanted to finance the back end of their tender offer with “junk bonds” – Mesa brought this
suit challenging their exclusion from the deal;
Vice Chancellor – restrained Unocal from proceeding with the exchange offer unless Mesa was
included
Q: did the Unocal board have power and a duty to oppose a takeover threat it reasonably perceived
to be harmful to the corporate enterprise, and if so, is its action here entitled to the protection of the
business judgment rule?
Mesa contends….
 Unocal violated their fiduciary duties owed to Mesa
 The directors by tendering their own shares will derive a financial benefit that is not available
to all Unocal stockholders
Unocal answers…
 Does not owe a duty of “fairness” to Mesa
 Unocal’s board of directors reasonably and in good faith concluded that Mesa’s $54 two-tier
tender offer was coercive and inadequate
 Unocal’s board approval of the exchange offer was made in good faith, on informed basis,
and in the exercise of due care
Q: What is the power of a board of directors of a DE corporation to adopt a defensive measure?
A: the board has a large reservoir of authority upon which to draw – including authority to deal in
its own stock; a Delaware corporation may deal selectively with its stockholders, provided the
directors have not acted out of a sole or primary purpose to entrench themselves in office
 The board’s power to act derives from a fundamental duty and obligation to protect the
corporate enterprise – including stockholders
BJR
 A court will not substitute its judgment for that of the board if the board’s decision can be
attributed to any rational business purpose. – Sinclair
 When a board addresses a pending takeover bid – it has an obligation to determine whether
the offer is in the best interests of the corporation and its shareholders
 There is an enhanced duty which calls for judicial examination – when directors are
confronted with conflict of interest as is the case here
Rule: in the face of inherent conflict directors must show that they had reasonable grounds for
believing that a danger to corporate policy and effectiveness existed because of another person’s
stock ownership
 This burden is satisfied by showing good faith and reasonable investigation
A: Corporate directors have a fiduciary duty to act in the best interests of the corporation’s
stockholders….their duty of care extends to protecting the corporation and its owners from
perceived harm whether a threat originates from third parties or other shareholders
Balancing Test: if a defensive measure is to come within the ambit of the business judgment rule,
it must be reasonable in relation to threat posed; - requires an analysis by the directors of the
nature of the takeover bid and its effect on the corporation;
 Legitimate concerns:
o Inadequacy of price offered - (Unocal’s concern in this case) – they knew their
stock price was worth more than $54/share
o Nature and timing of the offer
o Questions of illegality
o Impact on “constituencies” – other than shareholders (creditors, customers,
employees, community maybe)
o Board may also reasonably consider the basic stockholder interests at stake
Threat of “greenmailer” = pretty significant;
 Refers to the practice of buying out a takeover bidder’s stock at a premium that is not
available to other shareholders in order to prevent the takeover
 Mesa apparently has a history of greenmailing
H: the selective exchange offer is reasonably related to the threats posed;
Rule: if the board of directors is disinterested, and has acted in good faith and with due care, its
decision in the absence of an abuse of discretion will be upheld as a proper exercise of business
judgment.
H: there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock
exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect
the corporate enterprise; under the circumstances the board’s actions are entitled protection
under the standards of the business judgment rule.
Revlon, Inc., v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1985)
F: June 1985, chairman of the board and CEO of Pantry Pride - Ronald Perelman met with CEO
of Revlon - Michel Bergerac; Perelman wanted to purchase Revlon at $40-50/share – Revlon said
no; all Pantry Pride’s offers were rejected – Pantry Pride continued to make offers – and was
approved by their board for a hostile takeover at $45/share;
Revlon met with Lazard Freres – Revlon’s investment banker – advised the directors that $45/share
was a grossly inadequate price for the company and that Pantry’s takeover strategy included
acquiring Revlon through “junk bond” financing – with proper timing Pantry could profit at $6070/share;
counsel for Revlon recommended two defensive measures
 Revlon repurchase up to 5 million of its 30 million outstanding shares –
 Adopt a Note Purchase Rights Plan
o Each Revlon shareholder – receive as a dividend the Rights for each share of
common stock; entitling the holder to exchange one common share for a $65
principal Revlon note at 12% interest with one-year maturity.
August 23 - Pantry Pride makes hostile move with cash tender offer for any and all share of Revlon
at $47.50/common share and $26.67/preferred share
August 26 – Revlon directors met – rejected offer –
August 29 – Revlon commenced its own offer for up to 10 million shares
 Revlon stockholders tendered 87% of the outstanding shares (approx. 33 million) – and the
company accepted the full 10 million shares on a pro rata basis
 The notes contained covenants which limited Revlon’s ability to incur additional debt, sell
assets, or pay dividends unless otherwise approved by the “independent” (non-management)
members of the board
Sept. 16 – Pantry Pride announces a new tender at $42/share – conditioned upon receiving at least
90% of the outstanding stock
Sept. 24 – board rejected offer and authorized management to negotiate with other parties
interested in acquiring Revlon
Sept. 27 – Pantry offers $50/share
Oct. 1 – Pantry offers $53/share
Oct. 7 – Pantry raises offer to $56.25/share
Meantime – Revlon has been negotiating with Forstmann – Revlon directors met on October 3 – to
consider Pantry Pride’s $53 bid and examine possible alternatives to the offer; Forstmann made a
proposal – Revlon directors unanimously agreed to the buyout by Forstmann
 Each stockholder would get $56/share
 Forstmann would assume Revlon’s $475 million debt
 Revlon would redeem the Rights and waive the Notes covenants for Forstmann
 Before the merger Revlon was to sell its cosmetics and fragrance division to Alder &
Shaykin for $905 million
Oct. 7 - Pantry Pride counters with another proposal at $56.25; furthermore Pride announces that
they will top any Forstmann offer to buy by a slightly higher one; however Forstmann and Pantry
Pride were not negotiating on equal terms – Forstmann had more info on Revlon –
Oct. 12 – Forstmann makes a new $57.25/share offer – demanded a lock-up option to purchase –
there would be a $25 million cancellation fee to be placed in escrow – and released to Forstmann if
the new agreement terminated or another acquirer received more than 19.9% of Revlon’s stock –
Forstmann also required immediate acceptance - Revlon board unanimously approved
Oct. 22 – Pantry Pride raised offer to $58/share –
Rule: in the face of inherent conflict directors must show that they had reasonable grounds for
believing that a danger to corporate policy and effectiveness existed because of another person’s
stock ownership
 This burden is satisfied by showing good faith and reasonable investigation
A: First Defensive Measure - The Rights Plan – board approved the Plan in the face of a hostile
takeover by Pride for $45/share – a price that was inadequate; Pantry Pride was a “bust-up”
company – the board protected the shareholders from a hostile takeover at a price below the
company’s intrinsic value
 Board acted in good faith upon reasonable investigation – it was not unreasonable
considering the threat posed
Second Defensive Measure – exchange offer for 10 million of its own shares –; when exercising
power to forestall a hostile takeover – the board’s actions are strictly held to the fiduciary standards
outlined in Unocal; require that directors determine the best interests of the corporation and
its stockholders, and impose an enhanced duty to abjure any action that is motivated by
considerations other than a good faith concern for such interests…
 Board acted in good faith – on an informed basis, with reasonable grounds to believe that
there existed a harmful threat to the corporate enterprise
However – when Pantry increased their offer to $50/share and then $53 – and Revlon’s board’s
decision to find someone else interested in purchasing the company – sent the message that the
company was for sale;
 The duty of the board had thus changed – and now the sole purpose and duty of the board
was to maximize the company’s value at a sale for the stockholder’s benefit
 Get the best price for the stockholders at a sale of the company
A: selective dealing to fend off a hostile but determined bidder was no longer a proper objective. –
instead obtaining the highest price for the benefit of the stockholder should have been the central
theme guiding Revlon directors.
When the Revlon board entered into an auction-ending lockup agreement with Forstmann on
the basis of impermissible considerations at the expense of the shareholders, the directors
breached their primary duty of loyalty.
 Lock-ups are not illegal per se under Delaware law – but the Forstmann option had a
destructive effect on the auction process
Revlon contended…
 That they acted on good faith – but concern non-stockholder interests is inappropriate when
an auction among bidders is in progress – and the object no longer is to protect or maintain
the corporate enterprise but to sell to the highest bidder
No-shop provisions are impermissible under Unocal – when a board’s primary duty becomes that
of an auctioneer responsible to selling to the highest bidder
POLICY:
 When bidders make relatively similar offers – and sale of the company becomes inevitable directors cannot fulfill their enhanced Unocal duties by playing favorites – market forces
must be allowed to operate freely to bring the target’s shareholders the best price
available for their equity
H: the initial defensive tactics by the Revlon board – were done in good faith in response to the
hostile takeover – was in the best interest of Revlon’s shareholders; but the granting of the option
lock-up led to the ultimate detriment of shareholders by not allowing the maximum shareholder
profit and ceasing the auction – No such defensive measure can be sustained when it represents
a breach of the directors’ fundamental duty of care.
Paramount Communications, Inc. v. Time Incorporated, 571 A.2d 1140 (Del.1989)
Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del.1994)