Corporations
Corporations ........................................................................................................................ 1
Agency ................................................................................................................................ 3
Authority (Libability in contract) .................................................................................... 3
Actual authority ............................................................................................................ 3
Apparent Authority ...................................................................................................... 3
Other liability theories ..................................................................................................... 4
Ratification ................................................................................................................... 4
Estoppel ........................................................................................................................ 4
Agent’s liability on a contract ...................................................................................... 4
Principal’s liability in tort ................................................................................................ 5
A. Subsidiaries / Franchises ......................................................................................... 5
B. Scope of Employment ............................................................................................. 5
C. Independent Contractors .......................................................................................... 6
Fiduciary Duties of Agents .............................................................................................. 6
Duties during agency.................................................................................................... 6
Duties after agency (Grabbing & Leaving) .................................................................. 7
Partnerships ......................................................................................................................... 7
1. What is a Partnership & who is a partner? .................................................................. 7
Partnership by Estoppel ................................................................................................ 8
2. Fiduciary obligations of partners ................................................................................. 8
After Dissolution .......................................................................................................... 9
Expulsion...................................................................................................................... 9
3 Partnership Property ..................................................................................................... 9
5 Rights of partners in management .............................................................................. 10
4: Raising Additional Capital ........................................................................................ 10
6 Partnership Dissolution............................................................................................... 10
The Right to Dissolve ................................................................................................. 11
Consequences of Dissolution ..................................................................................... 11
Sharing of Losses ....................................................................................................... 12
Buyout Agreements .................................................................................................... 12
Law Partnership Dissolutions .................................................................................... 13
7 Limited partnerships ................................................................................................... 13
Exercising Control...................................................................................................... 13
Safe-harbors ............................................................................................................. 14
Voting Rights ............................................................................................................. 14
Corporations ...................................................................................................................... 14
Promoters ....................................................................................................................... 15
Piercing the Corporate Veil ........................................................................................... 15
Horizontal Liability (Enterprise Liability) ................................................................. 16
Undercapitalization .................................................................................................... 16
Failure to follow corporate formalities....................................................................... 16
Parent-subsidiary ........................................................................................................ 17
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Limited Liability Company............................................................................................... 17
Formation....................................................................................................................... 17
Operating Agreement ................................................................................................. 18
Piercing LLC Veil ......................................................................................................... 18
Fiduciary Obligation ...................................................................................................... 18
Dissolution ..................................................................................................................... 18
Derivative Litigation ......................................................................................................... 19
Independent Litigation Committees ........................................................................... 19
Duties of Directors ............................................................................................................ 20
Duty of Care .................................................................................................................. 20
Duty of Loyalty ............................................................................................................. 21
Corporate Opportunities ............................................................................................. 22
Dominant Shareholders .............................................................................................. 23
Ratification ................................................................................................................. 23
Disclosure ...................................................................................................................... 23
Rule 10b-5 .................................................................................................................. 23
Insider Information ........................................................................................................ 24
Disclose or abstain ..................................................................................................... 24
Misappropriation Theory............................................................................................ 25
Short swing trading ........................................................................................................ 25
Problems of Control .......................................................................................................... 26
Close corporation ........................................................................................................... 26
Pooling agreements (shareholder voting) ...................................................................... 26
Restrictions on Directors ............................................................................................... 27
Abuse of Control / transfer restrictions ......................................................................... 28
Freeze-out/Oppression ............................................................................................... 28
Statutory Dissolution ..................................................................................................... 29
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Agency
Agency: (1) mutual consent (2) subject to principal's control.
Gorton v. Doty (Id. 1937)--Driver is agent of car owner. Owner lends car to football team
on condition that coach will drive.
AUTHORITY (LIBABILITY IN CONTRACT)
Cargill--Cargill was liable for Warren Seed's debts because of agency. Cargill was more
than a lender and buyer--they intervened in debtor's business. Third party didn't know-undisclosed principle.
ACTUAL AUTHORITY
Actual authority: arises from consent that the other person be an agent (no K necessary).
TEST: Agent's reasonable belief that the principal wishes the agent to act. (R3d § 2.01)
Scope of actual authority (R3d § 2.02): agent has actual authority with acts that principal
intended as well as the acts necessary to carry out
Implied authority: actual authority that the principal intended the agent to possess (but
didn’t specify) and includes powers necessary to carry out duties.
TEST: Necessity or custom-- Did the agent act reasonably?
Mill Street Church: Sam Hogan (hurt while painting) was employee of church b/c his
brother hired him acting as an agent for the church. Couldn’t have painted it alone and
relied on prior similar practices to prove agency.
APPARENT AUTHORITY
Apparent authority: Principal acts in a way that gives the appearance of authority to
third party. (R3d § 2.03: condenses apparent authority and inherent authority—
reasonably believes that acts are consistent with the agent’s job.)
TEST: Reasonable belief of third party.
Schenley Industries: Superior had inherent and apparent authority to be considered an
agent of company to offer big salary increase to Lind.
370 Leasing Corporation: Action of company that all dealings should go through
salesman (even though contract actually required principal’s approval) to 370 suggested
that salesman could create a contract to sell computer cores. 370 reasonably believed
salesman had authority.
Inherent authority: Agent’s position in an organization would usually allow such
authority.
TEST: Custom--Third party reasonably believes that agent’s position grants him or her
authority.
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Watteau v. Fenwick: Pub owner held liable as principal of shopkeeper who bought cigars
on credit—although owner explicitly limited shopkeeper to buy beer only. Undisclosed
principal: third parties didn’t know about principal.
Undisclosed principal (R2d § 194): undisclosed principal liable for acts of agent--even if
forbidden.
Both the agent and principal are held liable in undisclosed principal.
Kidd v. Thomas Edison: Principal bound to agent's contract (custom indicated that agent
would contract) b/c undisclosed that principal had to make final contract for tone recitals.
Nogales v. ARCO: Truckstop deals with ARCO’s marketing manager who agrees to loan
money for restaurant and motel and to give 1% discount on diesel (w/o discount
authority). Inherent authority does not rely on manifestations of principal, but just the
general duties of the agent.
OTHER LIABILITY THEORIES
RATIFICATION
Ratification: Affirmance of principal of a prior act done on his or her account (R2d §
82).
TEST: (1) Intent to ratify act (2) done for principal (3) with full knowledge of the
material circumstances.
Botticello & Stefanovics: Walter sets sale of co-owned farm w/o wife. Never purported
agency and no ratification because no 1) act done on principals behalf 2) intent to ratify
3) full knowledge of circumstances. (Marriage does not imply agency.)
ESTOPPEL
Estoppel: Agency by estoppel is created when there is a dereliction of a duty owed to a
third party.
TEST: Reliance on agency that principal had a duty to prevent the appearance of agency.
Hoddeson: Imposter salesman sells furniture. There's no apparent authority because no
manifestation of principal. But perhaps agency by estoppel because the store should take
reasonable care to prevent impostors.
AGENT’S LIABILITY ON A CONTRACT
Agent is jointly liable for a contract if principal is only partially disclosed.
Atlantic Salmon: Man buys and sells salmon under fictitious business. He is held
personally liable for contract because it is agent's duty to disclose "partially disclosed"
principal.
Warranty of authority: Can go after agent if s/he warranted his or her own authority.
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PRINCIPAL’S LIABILITY IN TORT
Respondeat Superior: employer liable for torts of employee within the scope of
employment
Master-servant: (1) work on behalf of master (2) subject to control or right to control
manner of how job is done.
Independent Contractor: Agent if principal controls day-to-day operations. Non-agent
if independent.
TEST: Does the principal control the day-to-day operations?
A. SUBSIDIARIES / FRANCHISES
Gas Stations: Depends on the amount of control, lease, indemnity.
Humble Oil: Oil company held liable for station operation when car rolled into family
(parked by customer) because contract stipulates financial control.
Sun Oil: Oil company could not be held liable for station operator for fire because the
company did not control day-to-day operations.
POLICY: Shouldn’t oil company require franchises to get insurance?
Hotels: Depends on amount of control, but usually guests are on-notice thru contract. But
company may be liable for passer-by.
Murphy v. Holiday Inns: Holiday Inn not held liable for slip and fall at franchise owned
by Betsy-Len because no control over day-to-day operations. Relevant that plaintiff is a
guest--she's on notice of the franchise relationship (preexisting contractual situation).
Billops v. Magness: Event at Hilton ruined by employees demanding more money. The
Hilton hotel may have actual or apparent authority over franchisee who ruined event.
"Sufficient facts of record...show day-to-day control." Standardization is not enough to
show control.
B. SCOPE OF EMPLOYMENT
Employer responsible for torts within scope of employment.
Foreseeability
Bushey: Drunk sailor turned valves that sunk the drydock and the boat. Usually, liability
must be within the scope of employment. Drunk sailor was not working, but the conduct
was not "unforeseeable." (The actual conduct doesn't have to be foreseeable, but it was
foreseeable that crew might do damage. See Palsgraf dissent.)
Snowbird employee injures other skier and court held liable because foreseeable despite
not serving employer’s interest.
Willful Torts: Liability for willful torts of employees can apply even for circumstances
at distance from scope of employment.
Manning v. Grimsley: Pitcher's employer could be held liable for pitcher hitting heckler
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with a baseball because P's conduct was interfering with employee's duties.
Statutory violations
Conoco: Racial discrimination by gas station employees (§1981). Oil company denied
agency relationship of franchisee and not liable. Station operator could be liable for
action of employee.
Scope of employment factors:
1. time, place, purpose of act
2. similarity to acts servant authorized to perform
3. act commonly performed
4. extent of departure from normal methods
5. employer reasonably expect conduct
POLICY: Should state common law definitions extend to federal statutes? Oil company
relieved from liability under 1981 because common law rule is no liability. CERCLA
uses concept that owner may be liable for facility--do you use corps law to define if the
franchisor is liable or not?
C. INDEPENDENT CONTRACTORS
Person engaging a contractor does not assume liability for the negligent acts of the
contractor.
Except:
1. landowner controls the work
2. landowner engages incompetent contractor
 Statutory competence = insured and bonded
 how is this measured, could it exclude poor/minority contractors?
3. activity constitutes a nuisance per se.
 inherently dangerous: Owner can only escape liability if the contractor is
not negligent in taking special precautions.
 ultrahazardous: Joint liability for owner in any ultrahazardous activity.
Majestic Realty v. Toti: Contractor wrecks buildings next door when demolishing a
building. Liability is imposed on the landowner because the activity is a nuisance per se
(i.e. it is "inherently dangerous").
Statutory violation is prima facie case of negligence so long as the statute sought to
protect against the tort.
FIDUCIARY DUTIES OF AGENTS
DUTIES DURING AGENCY
1. Must be some detriment to the principal (Reading didn't require this.)
2. Critical issue: duty to disclose. General Automotive
3. After disclosure, need to look at the implied or express contract of employment (e.g.
require full-time, no-compete clause, reasonable belief that he could engate in sideline,
etc.)
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Reading v. Regem: Solder made money escorting lorries was forced to give it to the
Crown (his employer) because he was unjustly enriched because of his uniform and
employment.
Engaging in trade because of location overseas is distinguished.
Use of the tools of the trade may be sufficient (e.g. Reading), however an implied
contract can trump the concept (e.g. professors earning money from case books).
General Automotive Manufacturing v. Singer: Machinist ordered to give employer
proceeds from sideline business because he didn't disclose. He filtered work toward
GAM unless they couldn't do it then he brokered it out.
DUTIES AFTER AGENCY (GRABBING & LEAVING)
There’s a duty not to abuse the relationship of the former employer.
Town & Country v. Newbery: Employees of mass production house cleaning business
enjoined from soliciting customers from past employer for new business. Took
advantage of good will of former employer.
Partnerships
Partnership: an (1) association of two or more persons (2) to carry on as coowners a (3)
business for profit. But non-profit associations can also have a similar liability.
Coowners: (1)equal rights in management and conduct (2) own assets of business only
for the purposes of partnership (3) share the profits and losses.
Attributes of a partnership:
1. Mutual agency power: each partner is a general agent for the partnership
(automatic dissolution of partnership if change of partners)
2. Unlimited Liability: Partners are personally liable (cf. shareholders only have their
investment capital at stake)
3. Limited duration: by natural lives and fates of the partners (if any change, you
have a right to dissolve partnership; i.e. bankruptcy, retirement, relocation,
expulsion).
1. WHAT IS A PARTNERSHIP & WHO IS A PARTNER?
Unlike employees, partners have intent, share in management, losses, profits, control of
property.
Fenwick v. Unemployment Compensation: Beauty salon receptionist now partner despite
contract b/c no usual rights of partners (e.g. management, liability). If she's an employee
then he needs to pay unemployment insurance.
EEOC v. Sidley Austin, 315 F.3d 696: law firm demoted partners to senior attorneys, age
discrimination issue? The status as partners under state law is different from federal law.
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Employers are not protected from anti-discrimination law--are partners employers to one
another?
Classic case of public law definition of partnership perhaps should be drawn differently
than in private law.
Lenders are not necessarily partners.
Uniform Partnership Act sec. 16202(c) defines what rules apply to determining whether a
partnership has formed:
1. joint tenancy, property
2. sharing of gross profits (not alone)
3. person sharing profits is presumed to be a partner unless: in payment of debt,
compensation of employee, rent, retirement benefit, interest on loan, sale of goodwill.
Martin v. Peyton: firm 1 in financial difficulties and firm 2 loaned them money in
exchange for (1) share of net profits and (2)right to expel partner and (3) veto risky
business decisions. Firm 1 went under and creditors want to know if the two firms are in
a partnership. Although lender granted lots of control, presumption of partnership
destroyed because profit sharing in payment of a debt.
Partnership is determined by a totality of the circumstances.
Southex Exhibitions v. RI Builders: Agreement to produce an share profits of home show
not enough for partnership because indemnified against risks, no partnership name, no
partnership taxes. 1) didn’t share losses; 2) didn’t share management; 3) shares profits
PARTNERSHIP BY ESTOPPEL
A person who represents himself or permits another to represent him to anyone as a
partner in an existing partnership or with others not actual partners, is liable to any such
person to whom such a representation is made.
Young v. Jones: Plaintiff invested in false fund endorsed by Price Waterhouse-Bahamas.
PW-US was not liable by partnership estoppel because no representation of partnership in
endorsement.
2. FIDUCIARY OBLIGATIONS OF PARTNERS
High duty of loyalty to partner:
 Loyalty in property
 refrain from adverse dealings
 refrain from competition.
 Duty of care: to refrain from negligence.
Meinhard v. Salmon: Partners went in on a building as a joint venture with an expiration
at the end of the lease. Later one partner made a new lease in secrecy--he had a duty to
disclose or he was liable for part of the profits to the old partner.
DISSENT: The partnership should be limited to the scope of the joint venture, it by its
express terms ended on a specific date.
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AFTER DISSOLUTION
Bane v. Ferguson: Plaintiff is a former partner, retirement plan lasted as long as law firm
in business. Firm tried to merge and law firm dissolved. Plaintiff's theory is that
dissolution was act of negligence and that as a former partner they had a fiduciary duty to
him. Duty of care (refrain from negligence)does not extend to the retired partner.
One nasty problem...suppose Bane leaves partnership and retired after signing a 10 year
lease. Bane is still responsible for paying the remainder of the lease
EXPULSION
Default rule is partnership at-will, but certainly no right of a majority of partners to expel
someone else (perhaps unanimity or behavioral problems are required). Contracts often
try to deal with these problems of expulsion.
Lawlis v. Kightlinger & Gray: Agreement explicitly provides a majority may expel and
no for-cause requirement. Previously the rules were bent in favor of employee and the
employee tried to use that exception to say the terms of the contract had changed. Can’t
push it.
Holman v. Coie, 522 P.2d 515: is a good case for this issue. Partners have a 7-hour
caucus to discuss expulsion of partner who criticized main client and at the real meeting
Holman is expelled within a minute.
Some courts struggle to interpret without-cause to mean without reasonable cause.
California says a common law right of fair process--even with at-will.
3 PARTNERSHIP PROPERTY
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

Partners are coowners of a business for profit.
Management rights
Interest in property rights (inside shell of partnership--not accessible unless part
of partnership).
 property right to profits (distributions)
 remaining assets of liquidated firm upon dissolution (capital and retained
profits).
Putnam v. Shoaf: Frog Jump Gin Putnam sells her interest in partnership to Shoaf
because it was losing money. Found out that old bookkeeper was embezzling money and
they won money in a judgment. Putnam lost her rights to that property (even though it
was taken while under her control) because she transferred her property interest.
Rule:
• The incoming partner is responsible for pre-arrival partnership debts limited by
amount invested in partnership--limited liability.
• The departing partner is responsible for liabilities prior to departure--unlimited
liability. (Can ask creditors for release.)
But you can contract otherwise. Nothing will bar a third party from suing (contract could
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give you a right to recover from contracting party).
5 RIGHTS OF PARTNERS IN MANAGEMENT
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


Partners are agents of the partnership and are liable for all acts in the ordinary
course of business.
Equal division of partnership binds both partners and third party gets benefit.
o National Biscuit v. Stroud: Stroud doesn't want to pay biscuit for final
bread deliveries even though he gave notice that he wanted it to stop, but
other partner said to keep delivering.
Unequal division and majority rules.
A notice to third party that majority decided something is binding.
o Section 16303 file statement of partnership authority with the State
Secretary. If filed a statement of limitation of authority then the third
party is on notice.
Unless agree otherwise:
Summers v. Dooley: Trash collection partnership where they agree to provide
replacement at own expense. Summers hired an employee without Dooley's permission.
Summers liable to pay for employee.
4: RAISING ADDITIONAL CAPITAL
Going through a rough period, you may need additional capital to get over the hump.
Investors are hesitant to invest more--all lose.
RULE: Majority usually required to make ordinary decisions (is voting per person or per
share). But is raising additional capital ordinary or does it require unanimity? Many
courts will require unanimity.
Contract in advance: Is there a contractual obligation to force the free-rider to
participate?
Borrow money from bank (will still need notes from partners).
Partnerships are different from corporations because of the personal liability you can
invest anything (cash or whistling).
6 PARTNERSHIP DISSOLUTION
If there is any change in the personal composition of the partnership (entry or exit) then
the partnership is dissolved. Each partner has the right to decide if they like the new
composition.
Sec. 16103 (a) relations among partners are governed by partnership agreement. The rest
of the code provides the default rules in absence of a contract.
Except, there are mandatory provisions § 16103(b) agreement may not do any of the
following:
• vary the power to dissociate as a partner under sec. 16602 (power to dissociate at any
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time rightfully or wrongfully, by express will.
THE RIGHT TO DISSOLVE
There’s always the power to dissolve, but not always a right to dissolve. At-will you
have the right, at term you still have power but it will be wrongful unless there’s grounds
for dissolution.
Grounds used to be conduct, now more focused on economics--more difficult test.
Court may dissolve (UPA s 801(5))
1. frustrate economic purpose
2. conduct makes partnership impracticable
3. otherwise impracticable
What are dissociating acts?
Sec. 16601
• event agreed in contract
• expulsion under contract
• expulsion by unanimous vote
• expulsion by judicial determination
• conduct (bankruptcy)
•
death, incompetence
Must go to court to get right of dissolution. If you self-help it can be used against you for
a breach of the partnership.
Owen v. Cohen: Judicial dissolution where one bowling alley partner deprecates the other
partner. Certain level of behavior justifies application for dissolution. Loan trumped bad
behavior. The court ordered the loan be repaid from proceeds from sale of assets (not just
from profits).
CONSEQUENCES OF DISSOLUTION
Partner's dissociation does not discharge liability (16703) for pre dissociation
obligations. And sometimes for post-dissociation up to two-years unless you give proper
notice to third parties.
You can dissolve the partnership at-will (if no term specified), but if you are trying to
seize the benefits in bad faith then you must adequately compensate the other partner for
lost opportunity costs.
Page v. Page: If no term specified then at-will, but other partner must be fully
compensated for lost opportunity costs. Brothers partners in linen supply at first the
business lost money then it started to make money.
Former partners are not barred from sale of partnership assets.
Prentiss v. Sheffel: Partnership for shopping center. Two partners who have the most
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interest in the partnership want to oust third who is not keeping up his end. The court
allows a dissolution and the two partners buy the center at auction.
Duty not to sabotage the sale of the partnership's assets to the other partner.
Monin v. Monin: One brother bought out the other in milk hauling business, but the
contract for milk hauling went to the other. (He had contacted the client before
dissolution.) Because the primary asset of the business was the contract there was a
violation of a fiduciary duty.
Collins v. Lewis: One partner finances it and another manages the cafeteria. The court
refuses to dissolve because the contract did not permit funder to stop contributing despite
underestimate at outset. He can wrongfully dissolve, but his recovery is different.
Non-wrongful partners have right to the business and damages. Wrongful partner will be
paid for his share of interest minus damages. (Default rule)
Pav-Saver Co. v. Vasso: PSC wrongfully terminates partnership but wants patents on
paving machine...UPAA says non-wrongful partner has the right to continue and patents
are necessary for continuation (despite contract that gave patents back).
600s discuss & define dissociation
700s consequences of dissociation
16800 sections of cal. corp. code discusses winding up or continuation of remaining
partners.
SHARING OF LOSSES
RULE:
UPA 401(b): "Each partner is entitled to an equal share of the partnership profits and is
chargeable with a share of partnership losses in proportion to the partner's share of the
profits." (Unless contract otherwise.)
Kovacik v. Reed: When one party contributes money and the other contributes labor.
laborer not liable for lost money because loses labor. (Rejected by UPA)
BUYOUT AGREEMENTS
Buy-out formula depends on (1) triggering event; (2) obligation or option; (3) other
investors available. Default price of buyout described in 16701(a) if dissociated. Can
contract around this.
G&S Investments v. Belman: Filing of complaint does not dissolve, but apartment
manager's had conduct gave court the power to dissolve. Upon death may continue
partnership but must buy-out.
Trigger events:
1. Willfully departing partner = less generous payout than if expelled or death.
2. Wrongful departure, brings penalties and default rule (get money back but no goodwill,
offset damages)
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Obligation v. option:
Call or put, required to buy or right to buy.
Estate has a right to get something out. (Investment can't remain hostage.)
If some other investor available, what obligation is there to allow him/her to join to
pay estate?
Nothing in partnership act sets bottom limits to buy-outs. Common-sense suggests that
someone not be totally ripped off.
LAW PARTNERSHIP DISSOLUTIONS
RULE: No matter how it takes you to actually take a case to the fee level, that fee
belongs to the no-longer existing old partnership and is split in accordance with the
partnership interests. Jewel v. Boxer
In other words, partnership continues until wound-up, new statute allows reasonable
compensation for services of winding-up.
Howard v. Babcock (2003) 6 Cal.4th 409. A reasonable toll on departing partners who
compete with the firm is enforceable. They have to pay share of profits partner would
have received for a year.
POLICY: reinforce loyalty to law partnerships because expensive to withdraw.
Bus. Prof. 16602 can make covenants not to compete. But another rule is that one cannot
restrict the right of a member to practice law.
7 LIMITED PARTNERSHIPS
Characteristics:
 Partnership taxation
 Limited liability
 Continuity of enterprise (harder to dissolve than partnership)
 Centralization of management (not equal right to management)
 Transferability of shares
 No agency powers of partners
Allows an investor to participate in profits as an owner without liability for the business.
Often IRS tried to recharacterize them as corporations.
General partners have the same rights, powers, restrictions and liabilities as in a regular
partnership (e.g. fiduciary duties, personal liability, agency powers, managerial rights).
EXERCISING CONTROL
A limited partner shall not be liable as a general partner unless they overstep limited
partnership and start to control. Then only liability to third parties who (1) rely and (2)
believe it was a general partner). Cal Corps. 15632 (a).
Holzman v. DeEscamilla: Some partners dictated certain crops on a farm and made other
financial decisions so they are liable because they overstepped into controlling.
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SAFE-HARBORS (acts declared not to be exercising control)
Cal. Corps Code 15632
(b): exceptions to liability if the control conduct is
occasional (e.g. advising & consulting)
Limited partners acting as directors are not liable as general partners.
Frigidaire General partners were a corporation and limited partners were directors in a
breach of contract suit. But they were not liable even though they controlled because the
third party knew they were dealing with a corporation.
VOTING RIGHTS
Cal. Corps Code 15636 (f): Voting rights of limited partners similar to shareholders (e.g.
dissolution, merger, change in business, new or remove general partner).
Corporations
Corporations governed by the laws of the state of incorporation. Sometimes, law of the
“seat” of the corporation or the largest facility.
Cal. protects against pseudo-foreign corps with Cal Corps 2115 that uses three factors to
determine if the corporation should be governed by Cal. law (rather than Delaware, etc.).
Look narrowly at corporation law governing internal affairs, and relations between
shareholders and management.
Tension about intervening change of corp law (conflicting with right to contract).
To sum up:
1) Internal affairs - narrowly defined
2) State of incorporation applies the law
3) The state can change the law midstream
Generally, corporate objective must be profit, but decisions motivated by ethical or
public interest may be permissible.
 Smith v. Barlow: A corporation has the power to make charitable contributions
despite shareholders concerns because the corporation has a social, community
responsibility.
 Dodge v. Ford Motor: Ford announces no more special dividends, going to
reinvest in company (cap price of car and raise wages). Court allowed retaining
money for expansion, but ordered the remainder paid out as dividends (wage
increase not for profit maximization).
 Shlensky v. Wrigley: Minority shareholder wanted night games to maximize
profits, but since the motive for not installing lights was that it would be bad for
the neighborhood it did not rise to a problem.
Easy to form a corporation (charter/ articles of inforporation):
•
name
•
purpose
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•
•
name & address for service of process
total number of shares
Main problems:
1. Capitalization (even minimum requirement is meaningless because money is not
liquid)
2. Law of promoters: contracting party knows you are not yet formed
3. Defective incorporation: contracting party reasonably believes that the
corporation has been formed yet it has not.
PROMOTERS
A promoter sets up the corporation.
Promoters Contracts:
1. Contracts in name of promoter  personal liability, unless creditor agrees to
release (i.e. novation)
2. Contracts in name of corporation  personal liability because agent
misrepresents a nonexistent principal, unless subsequent formation can be
interpreted as a novation.
3. Contracts referring to the fact the corporation is not yet formed  intention of the
parties determines liability (usually intention to hold promoter personally liable
inferred, until the corporation is formed).
If promoters are liable, they are considered to be partners.
Corporations by Estoppel
Southern Gulf Marine: Contract for a boat with not yet formed corporation who never
delivered. Seller tried to escape liability because corporation inexistent. Defendant
estopped from denying corporate existence.
Defacto corporation if incorporation was defective.
Corporation’s liability on promoter’s contract
Corporation not automatically liable for promoter’s contract, only if it assents (which can
be express or implied).
If contract formed with understanding that corporation will be formed, the corporation
adopts the contract.
Ask if promoter had authority as an agent.
PIERCING THE CORPORATE VEIL
Was the corporation merely an agent for a principle?
Piercing the corporate veil is usually invoked to prevent fraud or to achieve equity.
Who should pay the creditor or the shareholders?
All piercing cases must show separate corporate existence will lead to injustice or unfair
or inequitable result.
Factors considered:
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Fraud, misrepresentation
Harm to third party
Excessive control over corporation
Unity of ownership and interest
In contract: assume that the creditor should have investigated and gotten a personal
guarantee.
In tort: assume that the company should have liability insurance (depends on if corp
financed against reasonably foreseeable risks)
Conduct (e.g. misconduct by shareholders: assume unjust enrichment and corp. liable.
HORIZONTAL LIABILITY (ENTERPRISE LIABILITY)
Courts haven’t done this yet.
Walkovsky: Taxi companies that are all owned by one entity and each undercapitalized
shield mega-entity. Problem was that he plead horizontal (enterprise) liability rather than
vertical (shareholder). On remand won because owner commingled his personal assets.
Archbishop: Boalt student ordered a dog from Swiss monastery, they kept money as
donation. Court said pope might be liable, but that SF branch of the Roman Catholic
church is not.
UNDERCAPITALIZATION
TEST Sealand breached contract to ship peppers (remanded to see if promotes injustice).
1. Unity of interest
 Commingling of funds
 Inadequate records
 Undercapitalization
 Using assets as own
2. Fraud or promote injustice
 Fraud
 Injustice must be beyond inability to collect
Minton v. Cavaney: A corporation need not be capitalized to ensure against all liabilities,
but it should be reasonably capitalized in light of the risks of the business. Another test:
grossly inadequate capitalization.
FAILURE TO FOLLOW CORPORATE FORMALITIES
There is a substantial risk that the separate existence of a corp will be ignored if:
 Business commenced w/o completing organization of corporation
 No shareholders or directors meetings
 Decisions made by shareholders informally (as if partners)
 No distinction between corporate and personal property
 Commingling of funds
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
No financial records
Kinney Shoe: No corporate formalities and gross under capitalization could be enough to
pierce veil. (Capitalized company shielded by other company.)
PARENT-SUBSIDIARY
General rule is that parent corporations are not liable for debts of subsidiaries.
Corporate shareholders have been held liable for subsidiary obligations:
 Subsidiary operated in unfair manner
 Subsidiary represented as part of parent (division, office0
 No separate corporate formalities
 Integrated business & subsidiary undercapitalized
 No delineation between parent and subsidiary transactions.
In tort:
In re Silicone Gel Breast Implants: Can parent company, Bristol Meyers, held liable for
subsidiary's faulty breast implants.
Veil piercing factors:
•
common directors
•
common departments
•
common financial statements
•
parent finances subsidiary
•
parent created subsidary
•
undercapitalization
•
parent pays salaries
•
sub gets only parent's business
•
treats property as own
•
daily operations
•
no corporate formalities
Although fraud or injustice required in contract, it's not required in tort.
*CERCLA not limited to state law concepts of corporate entity.
Choice of Law
Usually law of the state of the subsidiary.
Limited Liability Company
Preferred entity if small (tax treatment similar to partnership).
FORMATION
Filing & operating agreement
1. Limited liability for all members
2. flexibility of management structure
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3. desireable tax treatment
Water Waste & Land: Undisclosed or partially disclosed LLC. The agent is liable under
agency law despite LLC statutory notice rules. This is an agency case, not an LLC case.
If you don't identify who the company is, then the statutory notice doesn't apply.
OPERATING AGREEMENT
Elf v. Jaffari: arbitration agreement binding on all members of LLC. The LLC act
provides only default rule.
Except there may be some mandatory rules but they usually protect third parties not
members of LLC. (e.g. Cal. Corps Code 17100: if a partner leaves there is a "reasonable"
limitation to the compensation of the leaving member, whereas partners could be given
just one dollar.)
PIERCING LLC VEIL
Not liable as member, except common law alter ego liability doctrines apply. Corps code
17101.
Kaycee Land & Livestock Wyoming statute didn't discuss piercing corporate veil, but it
was implied to LLC anyway.
FIDUCIARY OBLIGATION
Lots of contractual freedom, yet a fiduciary duty like a partnership rather than a
corporation.
17103: if no agreement then voting is in proportion to member's shares.
Duty of loyalty and care are mandatory.
McConnell v. Hunt Sports: Hunt took it upon himself (w/o authorization) to get an arena
for the hockey team and he rejected various leases. McConnell accepts a lease but on
behalf of another LLC. Operating agreement states that members may compete. The
court holds for McConnell and agrees that the operating agreement can limit the
obligation of fiduciary duties. This case is a little too weird to tell the lesson. Hunt's
overstepping made the case come out this way. But really if someone in bad faith
grabbed and left it might be more of a problem.
DISSOLUTION
Dissolution borrowed from partnership law: withdrawal, bankruptcy, or death of member.
Also for (1) specified in operating agreement (2) consent of members (3) event that
makes business unlawful (4) judicial decree based on misconduct or frustration of
business purpose.
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Must follow procedure.
New Horizons Supply Coop: provides fuel to Kickapoo Freight. Agreement to pay for
fuel. Allison Haack signs but no indication if on behalf of Kickapoo. She didn’t follow
proper dissolution procedure so she was personally liable. (If proper dissolution
procedure, creditors can recover.)
Liberman v. Wyoming.com: Member withdrawal from LLC and he wanted capital and
accrued profits, LLC only wanted to give him his capital contribution. Continuity clause
in agreement (so his withdrawal could not be considered a dissolution)--absent the clause
withdrawal might normally function as dissolution. The court holds that no dissolution so
it doesn't force buy-out, so there is a gap as to what leaving member will get. It leaves
Liberman's investment hostage.
Derivative Litigation
Minority shareholders bring a suit on behalf of the corporation (rather than the directors
bringing suit because they are implicated by breach of duty of care or loyalty).
If not all directors implicated (e.g. suit against officers), then shareholders must make a
demand on the board (litigation committee) and if they decline to bring suit then the case
is over.
Litigation committee decisions are protected by the business judgment rule. But in
California the decision must also be just and reasonable.
Rule: Unless you can separately allege with specificity that the non-implicated directors
are in the pockets of the implicated directors, then you must make a demand on the board.
Really difficult if all family on the board. Only clean case is if entire board is implicated
or serious breach of duty of care.
INDEPENDENT LITIGATION COMMITTEES
Demand-on-directors: not only do you need approval by a sufficient number of
disinterested directors, but also need just and reasonable. Cal. Code 800
Quorum: as specified by articles or majority (but not less than 1/3 or 2 people unless
only one director authorized). Interested directors could count.
Demand-futile: corporation may still impanel a litigation committee. If they recommend
litigation not be continued then test: (1) truly independent? (2) meet requirements of
business judgment rule (3) court’s own judgment that the dismissal recommendation
should be accepted.
Demand-required:
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1. if demand, then plaintiff’s admission that demand required
2. if demand rejected, only judicial review if particularized facts indicate that
decision was not proper (ie not protected by business judgment rule)
3. in determining whether to make a demand, no discovery allowed
Duties of Directors
Duty of care relates to the quality of decision-making .
Duty of loyalty involves and assessment of the propriety of specific transactions.
Generally, directors have a duty to the whole corporation rather than individual
shareholders unless they have directly injured a specific shareholder.
Role of the directors:
1. Monitor the performance of the corporation as presented by the CEO
2. Statutory functions: declare dividends, amend articles of incorporation, plan.
3. Crisis management: if problems (i.e. share prices dropping) perhaps step-in.
Sarbanes-Oxley Act: imports federal standards for directors into large corporations.
DUTY OF CARE
Duty of care (1) in good faith; (2) in a manner you believe (subjectively) to be in the best
interests of the corporation and its shareholders (3) and with care (including reasonable
inquiry) as an ordinarily prudent person in a like position would use under similar
circumstances.
Prudence allows for risk-taking.
The “mere fact” that the director is an expert shall not impose a higher standard.
Reasonable inquiry heightens the standards for California (an experts reasonable inquiry
may be more searching).
Safe Harbor Rule: You can rely on reports, information, opinions from: CEO staff,
experts (lawyers, accountants), specialized committees (i.e. audit committee).
One Free Bite Rule: everyone except the audit committee board members.
Business Judgment Rule: Lots of judicial deference to the business judgment (because of
respect for risk taking).
Courts will not interfere with judgments unless fraudulent, collusive, or destructive of
shareholder rights. (Must provide some rationale, but a very lenient standard.)
Kramin: Derivative suit to stop dividend because other action would have been
financially sound. Failed to state a claim because no bad faith or fraud.
Directors must make a good faith effort to establish procedures to protect the corporation
from malfeasance by employees.
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Caremark : health care kickbacks, directors not personally liable because they didn’t
know, but they had adequate reporting mechanism.
Overrules Graham that excused put no duty on directors to look for problems.


Self-dealing or misconduct: Generally, personal liability of directors only if
elements of self-dealing or misconduct (e.g. improper use of funds, false use of
credit statement).
Omission: Sometimes, personal liability when directors fail to do anything at all
even in the face of evidence of wrong doing. (e.g. Failure to direct at all.)
o Francis v. United Jersey Bank: Inactive director personally liable to
creditors because her sons siphoned money from the corporation. She was
a factor in loss because failed to respond to obvious problemproximate
causation.
o Not allowed to “bury his head in the sand”
o Van Gorkom: director said he’d sell a lot of shares at $55 (another
company wanted it), but it was never appraised and rushed through the
process. Directors were held liable because they didn’t investigate
adequately. But this was an important decision to sell the business so
higher standard than business judgment rule. (Outer limit of liability)
Disney Board hired guy with a too-good-to-believe severance package. The court relied
on an expert and so they were not held liable. They got off pretty easily on a safe-harbor.
Mandatory areas where liability cannot be limited by articles of incorporation:
(1) duty of loyalty
(2) acts or omissions “not in good faith or involve intentional misconduct or knowing
violation of law”
(3) transaction from which director derived an improper benefit.
DUTY OF LOYALTY
Deals with conflict of interest.
Types:
(1) transactions between director & corp (self-dealing)
(2) transactions between corps with common directors
(3) director taking opportunity belonging to corp
(4) director competes against corp
(5) director distribute false/misleading info to shareholders
Business judgment rule gives way if looks like conflict of interest, then director must
prove decision was legitimate, fair and reasonable.
Bayer v. Beran: President hires wife for radio advertisements. No breach of loyalty
because legitimate purpose. Disclosure was important.
Transactions approved by disinterested directors are OK, if director establishes that they
are fair.
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Ratification as “safe-harbor”
Some statutes self-dealing transaction can be sanitized if (1) disclosed & approved by
disinterested board or (2) disclosed & approved by disinterested shareholders. If not
“sanitized” then still OK if fair.
Lewis: family owns related companies and gives below-market rental rate that was not
proven fair and reasonable. If the price fell within a fair spectrum it could have been OK,
but it was far below.
Parent-subsidiary
Parent and subsidiary file consolidated tax statements and shareholders are mad because
they could have benefited from the subsidary’s loss if it hadn’t been consolidated. These
cases have inconsistent outcomes.
Absent self-dealing (parent receives benefit to detriment of subsidary’s minority
shareholders) often will be subject only to business judgment rule. Sinclair Oil (liable
because subsidiary didn’t enforce parent’s breach of contract).
If self-dealing then “intrinsic fairness” test.
CORPORATE OPPORTUNITIES
(1) Does the corporation have a legitimate interest in the opportunity (“line of business”
test) and (2) if so, under what circumstances may the director take advantage of it (the “ ”
test).
Factors:
 Prior negotiations
 Did director learn of opportunity through corp
 Importance to corporation
 Ability of corporation to take advantage of opportunity
Broz: cell phone company allowed to purchase license even if on another cell phone
company’s board because didn’t satisfy corporate opportunity factors:
 Financially able to undertake (but shouldn’t director try to get $ for it?)
 In line of business
 Reasonable expectancy or corporation’s interest
 Director placed in position inimical to their duties
Safe-harbor: full disclosure & offer the opportunity to the corporation.
Guth v. Loft: guy develops formula for pepsi while at work at candy store. He sells the
formula in secret, corp opportunity breach, and Loft got Pepsi.
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Martha Stewart: When she sold stock to other company, no breach of corporate
opportunity because on balance the factors didn’t show that stock sales was in line of
business nor expected interest.
ALI: you have to offer it to the corporation if you came aware of it through the company.
*Likely exam problem on corporate opportunity. Look at problems on page 384 (1&2)
DOMINANT SHAREHOLDERS
Fairness test
May come up if dominant shareholder sells stock at a premium or if s/he gets stock issued
to self to gain more voting control.
Martha Stewart: they found that the plaintiffs didn’t plead sufficient facts to show that the
disinterested directors were under her control.
Directors are required to treat fairly each class of stock and provide accurate information.
Zahn Tobacco company knew that the value of inventory had skyrocketed. Treated the
senior (minority) stock classes differently by calling them at a low price.
RATIFICATION
Shareholders can ratify a transaction making valid.
Wheelabrator:
Duty of care cases: shareholders can validate actions by approval.
Duty of loyalty cases (parent subsidiary mergers, interested transactions): shareholders
approval can shift burden of proof of fairness to the corporation.
DISCLOSURE
Knowing dissemination of false information to shareholders is a breach of fiduciary
duty.
Three situations of providing info to the shareholders
1. seeking shareholder action: disclose all material information
2. speak to securities markets about corp: federal securities law regulates
3. general info about corporate affairs: duty of loyalty and good faith
If injury to corporation then derivative action. If injury to shareholders, then damages.
RULE 10B-5
Unlawful (to use interstate commerce):
1. to employ any device, scheme, or artifice to defraud;
2. to make any untrue statement of material fact or omit material fact (in light of
circumstances)
3. to engage in any act that operates as fraud or deceit.
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




There’s a private cause of action for buyers and sellers of securities (options also).
Defendants may be liable even if they didn’t buy or sell.
Scienter: must prove “intentional wrongdoing,” sometimes recklessness may satisfy.
10b-5 prohibits deception (not unfairness).
Material: if reasonable person would attach importance to the information in
determining his or her course of action (affects value of securities).
 Magnitude / probability
In California the buy-sell requirement is relaxed a bit…shareholders that continue to hold
securities based on false statements have been able to bring suits.
(1) misstatement or omission (2) that is material in that a reasonable person would attach
significance to it in deciding whether to buy or sell an investment (3) made with scienter,
and (4) causes injury to a plaintiff who relied upon the misstatement or omission.
Fraud on the market: If price influenced by false statements, the investor relied on
those statements and was injured by them. Unnecessary to establish that each plaintiff
individually relied on a misrepresentation.
Investor’s reliance on information (on market price) may be presumed—but rebuttable.
Basic Inc: Corporation made public statement that no merger negotiations going on.
Material if reasonable probability of influencing trading decisions (magnitude discounted
by probability).
If info wouldn’t have caused price change then no fraud-on-the-market. West
Must still have deception with fraud-on-market theory.
Santa Fe: Parent wants to merge with subsidiary, claim that low price was 10b-5
violation. Even though price can indicate fraud-on-the-market, no violation because no
deception.
INSIDER INFORMATION
Rule 10b-5 applied to insider trading. Persons with non-public information trade before
public.
Goodwin: no duty to disclose uncertain plans. Mining company directors buy shares
based on geologists theory that land might have copper. Information not material.
DISCLOSE OR ABSTAIN
Persons with information may not trade until public has had time to digest information.
SEC v. Texas Gulf Sulphur: Violated 10b-5 to fail to disclose mining strike. Mining
success was material (probability that the event will occur and the anticipated magnitude
of the event). Not only insiders, but tippees were also in violation.
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SEC recommends that insiders make periodic investments or only after info goes public.
No disclosure duty from non-insider (nor tippee).
Chiarella: Worked for printer and figured out an acquisition so he profited. He had no
duty to general public to disclose because he was not an insider and received no
information from the target corporation.
 Dissent raised idea of misappropriation theory (but not discussed)
 Rule 14e-3 specifically prohibited anyone from trading on basis of undisclosed
information about pending tender offers.
Tippee subject to 10b-5 only if tipper breached fiduciary duty by giving info to tippee.
Dirks: broker advises clients to sell after getting undisclosed information from insider and
then he blows the whistle.
 Tippee liable only if tipper obtains an improper benefit (financial, reputational)
from disclosure.
 Consultants, attorneys, accountants, etc. are considered temporary insiders.
MISAPPROPRIATION THEORY
Fraud under 10b-5 if misappropriates confidential information for securities trading
purposes, in breach of duty owed to the source of information.
New rule 10b5-2: three situations where duty under misappropriation theory:
1. agrees to confidentiality
2. pattern of sharing confidences and reasonably expects confidentiality
3. nonpublic information received from spouse, parent, child, or sibling.
Carpenter: WSJ writer gave info about column to friends who purchased stock. Info he
used belonged to WSJ. (Court split on misappropriation theory.)
O’Hagan: Tender offer to buy Pillsbury and attorney working at law firm of buyer
invested. (No info from Pillsbury—insider.) He misused information that belonged to law
firm and their client. But violation of 10b-5 because he owed duty to firm and client.
Chestman: complicated chain of transfer of information to a broker who ends up using
the information. Too far from source for liability until 10b5-2 where family
automatically has duty.
* Exam question: outsider gets information legitimately (and agrees not to trade) but they
tell their friends who trade. Tipper/tippee, misappropriation
SHORT SWING TRADING
Short swing trading frequently based on misuse of information so there are statutory
reporting and corporation recoups the profits made on short-swing profits.
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Problems of Control
CLOSE CORPORATION
A close corporation is one with few shareholders—no active market for shares.
Usually majority and minority shareholders. Disagreements arise about: planning for
death, divorce, quarrels.
In absence of agreement default rules turn management over to majority shareholders
who can vote for the board (which has total power). The majority may:
1. exclude minority from having voice in management by not choosing them as
directors
2. decide not to pay dividends
3. provide controlling shareholders with jobs and salaries while refusing to employ
minority shareholders
4. arrange for the corporation to give percs to controlling shareholders.
Minority shareholders may be locked-in: they cannot compel dissolution (unless certain
circumstances); they cannot compel a buy-out of their shares.
Contracts (e.g. employment contracts, shareholder contracts, etc.) may be important.
Problems include:
Oppression & Freeze-out
Change in circumstances (differing interests as passed down family)
Solutions: pooling agreements, irrevocable proxies, classes of shares.
POOLING AGREEMENTS (SHAREHOLDER VOTING)
Pooling agreement is a contract to vote in a specified manner on certain matters.
Sometimes the agreement specifies the way the shares are to be voted, usually they
provide for subsequent negotiation by shareholders with a mechanism for voting shares if
no agreement.
Important distinctions:
 Voluntary constraints on shareholder voting is treated more favorably than
constraints on directors. (Shareholder or director)
 Resolution of disagreements may be made by arbitration or by a decision of some
person mutually trusted by all the participants. (Self-help or external).
 Pooling agreement usually common law contract but some states have statues
limiting time period, requiring depository, or conflict resolution—irrevocable
proxy. (Common law v. statutory)
Must build in some type of enforcement.
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Ringling Bros: The agreement didn’t appoint anyone to vote the shares of an objecting
shareholder who refused to follow the arbiter’s instructions. The court held that the
proper remedy was to not count the dissenting votes (so the effect of the pooling
agreement was lost and the minority won).
Cumulative Voting: differs from straight voting (where someone votes y shares for each
director position) because they get y shares multiplied by the number of director positions
and they can vote the shares in any fashion (e.g. all shares for themselves). This way a
minority has a possibility of getting at least one director on the board.
Enforcement mechanisms:
 Proxies are permitted, and can be irrevocable if designated by agreement (705)
 Arbitrator’s decision can be judicially enforced by specific performance (706)
 Up to a 10-year (renewable) trustee who can vote the shares. (706)
 (If arbitrator or trustee in collusion, courts can break trust.)
Ramos v. Estrada: Two groups merge and one group had a pooling agreement. One
woman defects and votes with other group. Agreement had SELF HELP:
 Automatic Call--Self-enforceable pooling agreement because they can then call
her shares. (He thinks this is dubious.)
 Virtual Proxy--They also change her vote to the majority vote (when you don't
agree you indirectly give them your proxy).
Court upholds agreement and forces her to sell her shares and kicks her out.
RESTRICTIONS ON DIRECTORS
Directors may not agree to eliminate their discretion (unless unanimity).
McQuade Agreement to keep certain people as directors and officers at certain salaries.
(It is OK to make an agreement to keep people as directors.) Cannot make an agreement
that precludes directors from changing officers, salaries, or policies.
Unanimity may make an agreement on directors’ decisions enforceable.
Clark v. Dodge Clark brings intellectual property and Dodge brings money. Agree that
Clark stay on as director and general manager and receive 25% of income but Clark shut
out. Even though directors decide salary, contract is valid because:
1. No third party affected (e.g. creditors)
2. Clark & Dodge are sole stockholders (unanimously agreed to the contract)
Zion Minority shareholder (creditor) got a commitment of corporation getting consent
from creditor before new transactions. Agreement OK if statutory close corporation, but
enforced even though corporation had not elected the close form.
Can restrict directors if appears in articles of incorporation and approved by all
shareholders.
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Galler v. Galler: agreement with numerous impingements on directors discretion was
upheld. Agreements that are agreeable to all (unanimous) and:
(1) no complaining minority interest appears
(2) no fraud or apparent injury to the public or creditors
(3) no clearly prohibitory statutory language is violated
Cal Close Corp Code:
158 (a) less than 35 and articles say "close corp"
300: no agreement about management etc that interferes with discretion of directors.
158(c) amendments to provisions require 2/3 vote.
(Could allow abandonment of agreement by 2/3 and is less protective than the common
law which would require unanimity. You could write into contract that it couldn't be
abandoned by 2/3.)
No one really uses the statutory form of a close corporation they all assume that
California is comfortable with common law structure and just use that.
ABUSE OF CONTROL / TRANSFER RESTRICTIONS
Abuse abusive transactions are possible in close corps because difficult to exit.
Shareholders have a fiduciary duty of good faith and loyalty to one another. Donahue
These sometimes come up because shares are transferred unequally through family.
FREEZE-OUT/OPPRESSION
Improper to remove a director without legitimate business interest.
Wilkes v. Springside Nursing Home: Bad blood between directors/shareholders.
Shareholders remove Wilkes as director and stop paying him against agreement. Court
held this was a freeze-out and breach of duty.
Employee who gets shares cannot use duty of loyalty to extend employment agreement.
Ingle: Agreement allowed for repurchase-upon-termination-of-employment for any
reason.
Sugarman: Majority shareholder had duty of loyalty and good faith in close corporation,
must have various elements to establish freeze-out.
Claims are that Leonard breached fiduciary duty through freeze-out: (1) didn't employ;
(2) didn't pay dividends; (3) improper payments to self; (4) didn't offer fair price for buyout. (He shouldn’t have ever offered to buy-out.)
Jordan v. Duff: Employee who sued under 10b-5 for the failure to disclose merger before
he quit and sold shares back to corp--could have case if can prove intent to mislead and
that info was material--he would have stayed. (Don’t make exceptions, offers.)
If you offer to buy stock you must offer a fair price.
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Must treat all shareholders equally or breach, if all equally but hurts some more than
others that’s OK.
STATUTORY DISSOLUTION
Liquidation available when reasonably necessary for rights and interests of shareholders.
Statutes often allow judicial discretion to dissolve if:
1. directors deadlocked in management and irreparable injury to corporation is
threatening
2. directors acting illegal, oppressive, or fraudulent
3. shareholders deadlocked in voting power
4. corporate assets being misapplied or wasted.
Common law: Duty of loyalty and good faith like partners (no right of involuntary
dissolution).
Most cases hinge on freeze-out.
Four ways a dissatisfied shareholder can get fair value of shares:
1. buy-back provision
2. involuntary dissolution
3. at change in structure (e.g. merger or sale of nearly all assets = right of appraisal)
4. breach of fiduciary duty
Cal has a statutory remedy less than dissolution for deadlock—an arbitrator.
Courts hesitate to dissolve, so despite statutory remedy they may order buy-back (but
may not if the harm doesn’t rise to level of causing dissolution.
If oppressive or fraudulent conduct by majority then involuntary dissolution (liquidation)
is possible.
Alaska Plastics: ex-wife wanted more fair offering for her shares. She complained that
she didn't get to participate enough (e.g. never consulted about purchase of another
company). But they didn’t need to consult a shareholder about that decision so she’s
stuck.
If shareholders breach duty, the non-breacher can get fair value of shares even if agreed
on lesser amount.
Pedro v. Pedro : Brothers agreement of equal benefit from corporation. Second
agreement that reduces the stock price (on death or leaving). Family fight re: financial
discrepancy and brothers fire him despite contract of lifetime employment. He gets value
agreed-upon plus fair value (they breached so he can get more) plus lost wages.
Stuparich: One part of company operates at loss and minority shareholders want
reorganization. Brother refuses to buy-out. Sisters receive dividends. Court will not
dissolve without extreme hostility—they removed themselves from frustration.
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