Corporations
Prof. Michael Abramowicz
Fiduciary duties
Kamin v. AmEx Co.
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Facts
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What else could AmEx have done?
Holding
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What loss does AmEx suffer?
What does AmEx decide to do about it?
How does this affect AmEx’s profit and loss statements? Is the loss
reflected on financial statements?
Duty of loyalty
Duty of care
Questions
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How deferential is the court?
What might have been enough to change the decision?
(c) 2004
7
Smith v. Van Gorkom
Timeline Overview
1980
l August-September: Internal Management Discussions
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TU Stock priced around $38.
What does CFO (Romans) suggest?
How does Van Gorkom respond?
Sept. 13-19: Van Gorkom negotiates with Pritzker
Sept. 20: Senior management meeting; TU BoD approval
Oct. 8: TU BoD approves revised deal
Oct. 10: TU’s ability to shop limited; VG signs
Oct. 21-Jan. 21: Salomon Bros. seeks alternative suitor
(c) 2004
13
Smith v. Van Gorkom
Legal Structure of the Deal
After
Before
SH
Pritzker
Trans
Union
Marmon
Group, Inc.
SH
Pritzker
Marmon
Group, Inc.
$55/share
Legal effect of merger: see DGCL
§259(a): Ends the separate
existence of all entities except one
surviving entity. All property and
liabilities of merging parties vest
in/attach to surviving entity.
Trans Union
(c) 2004
Merger
NewCo., Inc.
(Surviving Entity)
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Smith v. Van Gorkom
Issues
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The board knew Pritzker was willing to pay a $17 premium
over the prevailing market price. Was that enough? Why
or why not?
Duty of loyalty: Are there conflicts of interest?
Duty of care
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What looks bad here?
What should Trans Union have made a greater effort to
determine?
How might we defend this degree of deliberation?
Why couldn’t directors rely on report from officer?
Why wasn’t the “market test” adequate?
Dissent (Justice McNeilly)
(c) 2004
27
Cinerama v. Technicolor
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Facts
Questions
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How was Technicolor Board’s case stronger than Trans
Union’s?
Why isn’t that enough?
Holding (in final Delaware Supreme Court case)?
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How did the court distinguish Van Gorkom?
What factors must be considered in an “entire fairness”
analysis?
(c) 2004
65
The BJR and the Duty of Care
BJR Applies: Court abstains
No
Fraud?
No
Yes
BJR rebutted
Federal or state
Fraud claims
Conflict of
Interest?
No
Yes
Illegality
No decision
Egregious decision
Uninformed decision
Waste
Yes
BJR rebutted
Duty of Loyalty
(c) 2004
70
The Business Judgment Rule and
the Duty of Care
Calculate
damages
see Van
Gorkom
BJR
Rebutted:
Did
defendant
violate
DoC?
Illegality
Egregious decision
Yes
Uninformed decision
Waste
No Decision
Yes
No
(c) 2004
Defendants
Win
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Brehm v. Eisner
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Facts
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Disney BoD, urged by Eisner (left, with Mickey), hires Ovitz
(right) as President. What were the terms of the deal?
What came of this marriage?
Questions
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What does Brehm allege the Old BoD and New BoD did wrong?
What is “corporate waste”?
Does the court consider the substance of the BoD’s decision?
What did plaintiff need to prove to show process due care
violation?
To what extent can the BoD rely on experts?
(c) 2004
72
Francis v. United Jersey Bank
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Facts
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Who are the directors of Pritchard & Baird’s and how involved were
they?
Who sues Mrs. Pritchard’s estate?
Holding?
Questions
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What business decision of Mrs. Pritchard, if any, is challenged?
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Does business judgment rule apply?
Is duty of care breached?
Why does duty of care apply to creditors here?
What should someone in Mrs. Pritchard’s situation do? And would it
matter?
(c) 2004
85
In re Caremark Int’l Inc.
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Facts
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What is Caremark, and what is ARPL?
What did Caremark do to ensure compliance?
Questions
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What leads to this derivative suit, and what does it claim?
What is the result of the suit?
Did Caremark BoD make decision to allow or require ARPL
violations?
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If it did, would this decision be protected by BJR?
If it didn’t, does BJR apply?
Did BoD violate its duty of care?
(c) 2004
96
The Judge
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Delaware Chancellor William
Allen
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Now professor at NYU law
school
Forbes magazine says:
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“Allen is one of the most
respected jurists on corporate
governance. When he writes,
lawyers listen.”
(c) 2004
100
Sarbanes-Oxley
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Post-Enron scandal, Congress passed Sarbanes-Oxley act,
which:
l Makes it easier to prosecute securities fraud, particularly
financial fraud.
l Imposes greater responsibility on senior management and
directors, particularly independent directors and audit committee
members, by requiring them to take a substantially more
proactive role in overseeing and monitoring the financial
reporting process, including disclosure and reporting systems
and internal controls
l Does not purport to change the common law duty of care, but
increases civil and criminal enforcement authority over the
conduct of corporate officers and directors,
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No question that potential civil liability for directors will be greater
after Sarbanes-Oxley
(c) 2004
111
Sarbanes-Oxley Audit Committee
Requirements
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Section 301 of Sarbanes-Oxley orders SEC to adopt rules
mandating that:
l The audit committee shall receive reports from the independent
auditors regarding critical accounting polices and practices,
discussions that have taken place with management regarding
alternative treatments of financial information under GAAP, and
any accounting disagreements and other material written
communications between the auditors and management
l The audit committee must establish procedures to receive and
address complaints regarding accounting, internal control and
audit issues, and to provide company employees an opportunity
to make confidential, anonymous submissions regarding
accounting and auditing matters
(c) 2004
112
Duty of Loyalty
Overview of Issues
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Interested Director/Officer Transactions
Corporate Opportunities Doctrine
Fiduciary Duties of Shareholders
Ratification
(c) 2004
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Types of Interested Director
Transactions
Direct
Indirect
Officer of
XYZ
Director
of ABC
Contract
ABC
Corp.
ABC
Corp.
Contract
XYZ
Corp.
Director
(c) 2004
116
Types of Interested Director
Transactions
Indirect (alternative)
Bayer v. Beran
Celanese
Corp. of
America
ABC
Corp.
Director
of ABC
Contract
w/ ABC
CEO &
Director
of C
Relatives
Radio
Contract
w/ C
Spouses
Dr. Dreyfus
(c) 2004
Jean Tennyson
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Bayer v. Beran
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Facts
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Radio contract between Celanese and Jean Tennyson
What is the purpose of the advertising campaign?
How did the company proceed in settling on a campaign?
Issues
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Does BJR apply to the decision?
Duty of care
Duty of loyalty
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Reasoning?
Is it plausible that Tennyson would have been hired if not for the
relationship?
(c) 2004
119
Lewis v. S. L. & E., Inc.
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Facts
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Who are the directors and shareholders of LGT?
Who are the directors and shareholders of SLE?
What are Donald, Margaret & Carol required to do?
Why does Donald sue?
Analysis
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Does BJR apply?
Was there a breach of the duty of loyalty?
Who bears the burden of proof?
What could Richard and Leon have done?
(c) 2004
127
Duty of Loyalty
Overview of Issues
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Interested Director/Officer Transactions
Corporate Opportunities Doctrine
Fiduciary Duties of Shareholders
Ratification
(c) 2004
142
DoL & Corporate Opportunities
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The corporate opportunity doctrine is a subset of the
Duty of Loyalty. Courts could have followed the regular
DoL analysis, but instead formed a special rule.
The Delaware test (Guth v. Loft, cited in Broz v. CIS, Inc.)
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An officer/director violates DoL by embracing a business opportunity if:
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The corporation is financially able to take the opportunity;
The opportunity is in the corporation’s line of business;
The corporation has an interest or expectancy in the opportunity; and
By embracing the opportunity the officer/director would create a conflict
between his/her self-interest and that of the corporation.
(c) 2004
143
Corporate Opportunities: The ALI Rule
The American Law Institute’s Principles of Corporate
Governance uses a two-part rule for Corp. Opportunities [see
casebook for exact text]
Definition of a corporate opportunity
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For all insiders (directors & senior executives), opportunities that are
either:
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In connection with the performance of functions as a director/senior
executive; or
Under circumstances that should lead to believe that person offering
opportunity expects it to be offered to the corporation; or
Acquired through the use of corporation information or property, if
reasonably expected that this opportunity would be of interest to the
corporation.
For senior executives only, any opportunity that is closely related to a
business in which the corporation is engaged or expects to engage.
(c) 2004
145
Corporate Opportunities: The ALI Rule
1.
An insider may take advantage of a corp. opportunity
if:
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The insider first offered the opportunity to the corporation,
and disclosed the conflict of interest;
The corporation rejected the opportunity; and either
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The rejection of the opportunity is fair to the corporation; or
The opportunity is rejected in advance, by disinterested directors
or [in case of a senior executive] by a disinterested superior, in a
manner satisfying the BJR; or
The rejection is authorized or ratified by disinterested SH, and the
rejection is not a waste of corporate resources.
(c) 2004
146
Broz v. CIS, Inc.
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Facts
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What is Broz’s connection to CIS and RFBC?
What dilemma does Broz have?
How does Broz respond?
What deal ends up being made?
Who sues whom?
Analysis
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How is each factor resolved here?
Would Broz have had a corporate opportunity under the ALI
rules?
(c) 2004
147
In re eBay, Inc.
Shareholders Litigation
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Facts
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Issues:
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What constitutes a “line of business”?
Is there a conflict of interest between corporate agents and
the principal?
Questions
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How did Goldman Sachs “spin” IPO offerings and why?
What was the alleged corporate opportunity?
Should Goldman Sachs be liable here?
Could the court have just relied on agency law?
Notes case: Beam
(c) 2004
163
Sinclair Oil Corp. v. Levien
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Facts
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What did Sinclair Oil own?
What did minority shareholders in Sinven allege?
What test does SinVen want applied, and Sinclair
wants to avoid?
How does the court analyze each of the three issues?
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Excessive dividends
Preventing expansion of operations
Breach of contract
(c) 2004
183
Pepper v. Litton
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Most cited case on duty of loyalty, so it’s quoted
briefly in the casebook.
308 U.S. 295, 306 (1939):
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A director is a fiduciary ….so is a dominant or controlling
stockholder or group of stockholders…Their powers are in
trust…Their dealings with the corporation are subjected to
rigorous scrutiny and where any of their contracts or
engagements with the corporation is challenged the burden
is on the director or shareholder not only to prove the good
faith of the transaction but also to show its inherent
fairness from the viewpoint of the corporation and those
interested therein.
(c) 2004
189
Zahn v. Transamerica
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Facts
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Three types of Axton-Fisher stock
l Preferred stock;
l Class A stock [2/3 owned by Transamerica];
l Class B stock [almost all owned by Transamerica].
Why have this complex capital structure?
Why did the board redeem the Class A shares and liquidate the firm?
What would Class A shareholders have done if they had received full disclosure?
Issues
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Is Transamerica a controlling shareholder? (Why does that matter?)
Does business judgment rule apply?
Was duty of loyalty breached?
What are the damages that Class A shareholders receive?
(c) 2004
190
Duty of Loyalty
Overview of Issues
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Interested Director/Officer Transactions
Corporate Opportunities Doctrine
Fiduciary Duties of Shareholders
Ratification
(c) 2004
204
Effect of Ratification per §
144(a)(1) or § 144(a)(2)
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§ 144(a): “No contract or transaction between a corporation and 1 or
more of its directors or officers ... shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee which
authorizes the contract or transaction, or solely because any such
director’s or officer’s votes are counted for such purpose, if:
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(a)(1): with disclosure of material facts, it is approved by a
majority of the disinterested directors
(a)(2): with disclosure of material facts, it is approved by a
majority of the shareholders
(a)(3): contract is fair to corporation at time it is authorized,
approved or ratified
Does the plain text of § 144(a) preclude judicial review if properly
approved?
(c) 2004
214
Fliegler v. Lawrence
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Facts:
l What offer did Lawrence make?
l What did Lawrence do?
l What option did Agau retain?
l What is arguably wrong with this?
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Issues
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Are the requirements of § 144(a)(2) literally met?
How does the court read the statute?
(c) 2004
216
Wheelabrator
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Facts
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Why did dissident shareholders sue?
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Transaction
What hoops did WTI jump through?
Disclosure
Duty of care
Duty of loyalty
What is the effect of shareholder approval on
these claims?
(c) 2004
220