1) What is a firm a) A series of relationships

nexus of K’s b) 3 main types

sole proprietorships, partnerships, and corporations (public and private)
2) Fiduciary Duty – duty to promote the interests of the principal over your own a) RULE  until the K is terminated, the agent owes a fiduciary to the principal b) Reasons for duty i)
Lowers transaction costs, you don’t have to K for every term with employee – they just owe you a general duty ii) As an employee you cant actively start a new business on company time, but you can take logical steps (lining up funding, renting office, etc)
3) Agency Relationships a) Types of Authority i) Actual Authority – occurs where the principal manifests his consent directly to agent ii) Apparent/ Ostensible Authority – occurs where the agent is without actual authority, but the principal manifests his consent directly to the 3rd party who is dealing with the agent
(1) Did the principal manifest to the 3rd party, authority in the agent
(2) Was is reasonable for the 3rd party to think that the authority existed iii) Inherent Authority – gap filling device

these are things that you inherently have the authority to do to get a job done b) Rules i) A principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit fraud, is subject to liability for that fraud – Blackburn v. Witter ii) If the fraudulent person is not actually an agent of the principal, then there will be no actual or apparent authority. Also, a firm is not liable for the actions of a partner, if the partner did not knowingly assist in the efforts to defrauds
(1) If the partner had assisted

liable – he had actual authority
(2) If the partnership had manifested

still loses

fraudulent individual is not an agent
1) Determining the legal nature of the relationship a) Partnership is an association of 2 or more persons to carry on as co-owners of a business for profit.
Existence ultimately turns on intent to carry on as a partnership – Byker v. Mannes i) Look for sharing of P&L; Contributing capital; Joint control ii) GP can be imposed by a court; all other entities are formed by filing with Sec of State b)
GP’s look past labels. If you don’t act like a GP, then it doesn’t matter that you have a p’ship agreement. i) Evidence your not a partnership
(1) Treat profits or particularly losses as your own for tax purposes
2) Sharing Profits and Losses – UPA 401 a) UPA Default Rules i) Profits - § 401(b ) – each partner is entitled to an equal share ii) Losses - § 401(b ) – share losses in proportion to profits iii) Compensation - § 401(h ) – no compensation except for services in performed during winding up b) Capital Distribution at Dissolution i) 1) Combine assets, 2) pay off creditors, 3) split up profits or divide losses ii)
§ 807 – each partner has a capital account that tracks his investment + % of P&L
(1) If you have a negative capital account at the end – you have to true up this amount c) Sweat Equity

i) Where one partner contributes money capital and the other contributes labor, neither party is liable for the other’s contribution in the even of a loss because the value of the money and labor are treated as equal – Kovacik v. Reed
(1)
§ 401(a)(1) – capital account is equal to money plus value of any other property (can include labor) ii) When dealing with profits, unless partners agreed to treat sweat equity as a capital contribution, a partner will not be compensated for services rendered at dissolution of a partnership
3) The Partner as a Fiduciary a) Common Duty of Loyalty i) Common Law
(1) Joint adventurers owe to each other the duty of finest loyalty – not honesty alone, but the punctilio of an honor the most sensitive – Meinhard v. Salmon ii) UPA
(1)
§ 103(b
) – partnership agreement may not eliminate 404(b) or 603(b)(3), but it may identify specific duties that do not violate the duty of loyalty as long as they are not manifestly unreasonable
(2)
§ 404(b
) – duty of loyalty to the partnership and other partners is limited to
(a)
1) account to p’ship and hold as trustee any partnership property, profit or benefit derived during the partnership nor can you appropriate a partnership opportunity
(b) 2) refrain from dealing in an interest adverse to the partnership
(c) 3) refrain from competing directly with the partnership
(3)
§ 403
– requires full disclosure among the partners
(4) § 404(e ) – a partner can further his own interest and this does not violate fiduciary duty
(5) Even under the UPA, you have a CL duty to disclose all material information – Apple Square b) Self-Dealing i) Defined – when someone is on both sides of a transaction ii) IF you engage in self-dealing, you do not forfeit your capital contribution

other remedies are available such as disgorgement of profits b/c of breach c) Fiduciary Duty and Management of the Partnership i) § 401(f ) – partners have equal rights in management and conduct of business ii)
§ 401(j
) – a decision in the ordinary course of business is decided by a MAJORITY. An extraordinary decision is decided by UNANIMITY.
(1) If there is a tie, then you maintain the status quo OR if there is a true impasse, then you dissolve
– Covalt v. High d) Contracting Out of Fiduciary Duty i)
UPA § 103(a)(3) and 404
– partnership fiduciary duty is partly mutable but with an irreducible core ii) Even when there is absolute discretion, there is still a duty of good faith and fair dealing – Starr v.
Fordham
(1) UPA 103(b)(3)(i) – UPA specifically allows partners to K around conflicts of interest, but it requires any exception not to be manifestly unreasonable
(a) Burden of proof is on complaining party to prove unreasonable
(2)
UPA § 404(b
) – you can K for the ability to split up profits
(a) BUT you still owe people a minimum duty of good faith and fair dealing because this is a K e) Duty of Care i)
UPA § 404(c
) – a partners duty of care to the partnership and the other partners in the conduct and winding up is limited to refraining from engaging in grossly negligent, reckless conduct, intentional misconduct or a knowing violation of the law
(1)
§ 103(b)(4
) – contemplates K’ing out of duty of care but you cant unreasonably reduce the
404(c) duty of care ii) Negligence in the management of the affairs of the partnership or JV does not create a right of action against that partners by the other partners – Ferguson v. Williams
(1) Makes partners police themselves

4) Dissociation and Dissolution a) CL View i) Dissociation for any reason meant the winding up of the partnership b) General Framework i) First question
(1) Is this a partnership for at will or for term? ii) How does he do it?
(1)
UPA § 601
– Instances of Partnership Dissociation
(a) 601(1)-(10) can be divided into 4 categories
(i) By the partners express will
1.
601(1) – Partners express will to dissociate
(ii) By an event specified in the partnership agreement
1.
601(2) – triggering event specified in the partnership agreement
(iii)By expulsion
1.
601(3) – partners expulsion pursuant to the partnership agreement
2.
601(4) – expulsion pursuant to a unanimous vote conditioned on:
3.
601(5) – expulsion by judicial determination
(iv) Partner is unable to participate
1.
601(6) - partner becomes a bankrupt, assigns interest to creditors, a trustee is appointed to take his property or the failure to appoint a trustee w/in 90 days
2.
601(7) – with an individual – death, appointment of a guardian, or incapacity
3.
601(8) – with a trust – the distribution of the entire trust interest
4.
601(9) – with an estate – distribution of estates entire interest
5.
601(10) – termination of a partner who is not an individual, partnership, corporation, trust or estate iii) Was it wrongful
(1) 602 – Partners Power to Dissociate; Wrongful Dissociation
(a) A partner has the power to dissociate at any time – rightfully or wrongfully, by express will
(b) Dissociation is wrongful only if:
(i) (1)Breach of partnership agreement
(ii) (2) partnership for a specific term or activity
1.
(i) partnership withdraws by express will, unless its within 90 days of another partners death or dissociation through 601(6-10) (partner cant continue)
2.
(ii) judicial expulsion
3.
(iii) partner becomes a bankrupt
4.
(iiii) partner is expelled because it willfully dissolved or terminated
(2) Damages
(a) 602(c) – partner who is wrongful is liable for any damages caused by the dissociation
(b) 701(c) – damages from wrongfully dissociating are offset against the buyout price
(3) Payment if wrongful – 701(h)
(a) For a term

do not have to be paid their share until the term expires UNLESS they can show this will cause no hardship to pay them early iv) Will the partnership continue?
(1) Wound up – you have to dissolve if 801 issues occur
(a)
§ 801
– Events Causing Dissolution and Winding Up
(i) At will

the partner gives express notice of desire to dissociate – NOT under 601(2-10)
(ii) For a Term

within 90 days of a partner dissociating by death or incapacity under
601(6-10) or wrongful dissociation under 602(b), if at least half of the remaining partners choose to wind up the partnership
(iii)Happening of a specified event in p’ship agreement
(iv) Event that makes it unlawful to continue
(v) By judicial determination

(b) McCormick Rule – if a partnership is dissolved by judicial decree, the partnership must be liquidated which means reduced to cash
(i) Exceptions
1.
auction may not be the best way to liquidate- Disotel
2.
if a partnership is short lived, the Court may not order liquidation in fairness to the original capital partner
(2) Buyout
(a)
§
701 – if a partner is dissociated and it does not result in a winding up under 801, then you have a buyout c) Upon Dissociation i)
UPA § 603
– partners right to participate in the management and conduct of the business terminates; partners duty of loyalty under 404(b)(3) terminates; duty of loyalty under 404(b)(1) and 404(c) d)
Fiduciary Limits on Dissolution “At Will” i) CL – power to dissolve must be exercised in good faith e) Fiduciary Limits on Expulsion of Unwanted Partners i) 601(3) – partners can expel a partner if they do not meet their shared values under the p’ship agreement ii) For term

if the majority ousts the deficient partner this can be deemed wrongful iii) Fiduciary duty owed to partners, does not include a duty to remain partners – Bohatch v. Binion f) Fiduciary Duty Owed by Withdrawing Partner i) Partners who leave – courts allow for ex-ante K’s to establish their rights ii) Dissociating partner still owe partnership a fiduciary duty of good faith and loyalty
5) Partners as Agents a) Partners Apparent and Inherent Authority i) Generally, you are on the hook for your partners actions ii) UPA
(1)
§ 301(1)
– each partner is an agent of the partnership. An act binds the partnership UNLESS partner had no authority to act in the manner AND 3rd party knew he had no authority
(a) (2) Act not in ordinary course of business – binds partnership only if authorized by other ptrs
(2) § 303(d) – a filed statement of partnership authority supplements the authority of the partner to enter into transactions
(a) (d)(1) – if a 3d party rules on a grant of authority from the partnership which provides no limitations, then they can rely on it
(b) (f) – 3d party is not deemed to know limits on authority merely because it is in a filed statement
(i) Except for in cases of real property iii) 3 general types of authority – actual, apparent and inherent
(1) Under inherent authority, you can bind the partnership or JV
(2) Actual Authority- in a 50/50 partnership, each partner has the authority to bind the partnership for ordinary course of business. So, one person in a 2 person partnership cannot decide on their own that something is not in the ord course of business, even if they notify a 3rd party. iv) A limitation in the partnership agreement dose not limit the partnership unless it is known to a 3rd party
(1) Partners can still be limited by it because it is known to them b) Partnership Authority and the LLP i)
LLP’s protect partners from other partners bad acts. It does not protect the partnership, but the 3rd party cant go after the individual partners personal assets.
(1) Acts that occur during winding up can still bind the partnership
1) The Corporate Form a) Overview

i) Bylaws – tell a corporation how it is supposed to operate – like statutes
(1) MBCA 10.20 – SH’s may amend the bylaws; Board may amend the bylaws unless AI takes away this power
(2)
DE § 109 – once stock is sold, SH’s can amend the bylaws ii) Articles of Incorporation/Charter
(1) Purpose – required in DE (§ 202(3)) and optional in MBCA (§ 2.02(b)(2)(i))
(2) Amending – DE § 242(b) and MBCA § 10.03
(a)
Amendment must first be adopted by the board and then approved by the SH’s iii) Directors
(1)
MBCA § 8.01 and DE § 141(a) – directors is in charge of management
(2)
SH’s can manage the company directly if its put in the articles iv) Officers – power of day to day management
(1) DE § 142(a) and MBCA § 8.40 – bylaws contain the officers and they can be amended by SH’s v) Shareholders
(1) Elect directors and provide initial capital – 3 basic powers – 1) sell, 2) vote, and 3) sue
(2) SH’s can amend bylaws on their own initiative – MBCA § 10.20 and DE § 109
2) Formation of the Corporation and Corporate Governance a) Where to incorporate i) A corporation can choose which laws to apply to it by choosing the state of incorporation – Internal
Affairs Doctrine ii) GA uses the MBCA iii) DE dominates because of sophisticated code, sophisticated judiciary b) Articles of Incorporation i) Differences between MBCA and DE
(1) Name of company
(a) DE 102(a)(1) – name must contain certain buzzwords
(b) MBCA 4.01(a)(1) – name must contain corp, inc, co, limited or other abbreviation
(2) Registered Agent
(a)
DE § 102(a)(2) – requires full address and name of agent
(b) MBCA § 2.02(a)(3) – requires address and name of agent
(3) Purpose
(a)
DE § 102(a)(3) – purpose is required; can be general (any lawful purpose)
(b) MBCA § 2.02(b)(2)(i) – purpose is optional; default is any lawful purpose(3.01)
(4) Specification of Par Value
(a) DE 102(a)(4) – if you issue 1 class, par must be designated
(b) MBCA 2.02(b)(2)(iv) – specifying par value is optional
(5) Exculpation
(a)
DE § 102(b)(7) – may be contained in articles
(b)
MBCA § 2.02(b)(4) – may be contained in articles
(6) Issuance of Stock
(a)
DE § 151(a) – articles must set forth classes of shares and the numbers within classes that the corp can issue
(b) MBCA § 6.01(a) – basically the same c) Determining Shares to Issue i) Overview
(1) Incorporators authorize a certain of amount of shares, which are sold to investors
(a) To sell more than authorized must amend articles
(2) Classes
(a) Can issue more than 1 class to provide control and liquidity
(3) Preferred Stock
(a) Often this is paid before common stock in liquidation – tends to have better voting or better dividend policy

(4)
See MBCA § 6.01 and DE § 151 d) Voting Rights i) Straight and Cumulative Voting
(1) Straight voting – 1 share = 1 vote – default under MBCA 7.28(a) and DE 212(a)
(2) Cumulative – SH’s vote number of shares * # of positions to be filled
(a) Designed to protect minority but rarely seen ii) Class voting – a corporation may divided shares into classes in the AI, and allow a class to elect a certain number of directors iii) Staggered Board
(1) Dual purpose – allows continuity and takeover protection
(2) MBCA 8.06 – staggered board is ONLY found in AI
(3)
DE § 141(b) – staggered board can be in AI or bylaws (better to put in AI because harder to change) e) SH Action After Electing the Directors i) Meetings
(1) Annual Meeting
(a) MBCA 7.01 – corporation shall hold an annual meeting as proscribed in the bylaws
(b) DE 211(b) – unless directors are elected by written consent, then you hold an annual meeting
(2) Special Meeting
(a) MBCA 7.02 – corp shall hold a special meeting based on BOB or as specified in AI. 10% SH may call a special meeting.
(b)
DE § 211(d) – special meeting may be called by BOD or person specified in AI
(3) Shareholder Action by Written Consent
(a) MBCA 7.04 – action may be written consent in lieu of meeting BUT it must be
UNANIMOUS
(b) DE § 228 – action may be by written consent in lieu of meeting BUT it is by MAJORITY
(4) Record Date – determines whose votes count
(a) MBCA 7.07 – bylaws say what is the record date which should be no more than 70 days before the meeting.
(b) DE § 213 – record date is adopted by board and cant be more than 60 days but less than 10 days before a meeting ii) Removal of Directors
(1) CL – directors had a right to serve out their terms
(2) MBCA 8.08 – SH’s may remove a director with or without cause unless AI says otherwise
(a) If elected by a voting group, then only removed by that group
(b) If cumulative voting, then cant remove unless votes cast for removal are more than votes cast to elect
(3)
DE § 141(k) – members of staggered boards may only be removed for cause
(a) Cumulative board – if less than entire board is to be removed, can remove for cause
(4) DE does not normally require notice before removal unless no NOTICE would be unfair to majority holder – Alderstein v. Werthiemer
(5) A charter or bylaw that alters the principle that a majority of the votes cast at a meeting is sufficient to elect must be positive and clearly understandable.
(a) DE 216 - permits a supermajority
(b) DE 109(b) – AI trumps the bylaws – so go with what is in AI iii) Issuance of Securities
(1) What is a security?
(a) Any note, stock, security bond, debenture or investment K
(i) Investment K is broad – SEC v. Howell
(2) Securities Act of 1933 – covers IPO’s
(3) Securities Act of 1934 – covers disclosure after the sale
(4) How to get out of the acts?

(a) Say something is not a security
(i) A promise of a fixed return does not mean its not a security – SEC v. Edwards
(ii) If in doubt – it’s a security
(b) Claim an exemption to SEC Act
(i) Intrastate transaction
(ii) Private offering –
(iii)Sale to accredited investor
1) Business Judgment Rule a) Def – a rebuttable presumption that the directors have acted in accordance with their fiduciary duties of care, loyalty and good faith i) To rebut
(1) P must prove self-dealing(interested) or conflicting interest (independent)
(2) OR prove fraud, illegality, bad faith, inadequate process
(3) This puts a pleading and evidentiary burden on P ii) If rebutted – then D must prove the entire fairness of the transaction iii) Waste – where no reasonable business person would conclude that this represents a fair exchange
(1) Defines outer boundary of BJR b) Case Law i) Not declaring a dividend out of will to be a charity to the people is bad faith – Not protected by BJR
– Ford v. Dodge
2) Fiduciary Duty of Loyalty a) Introduction i) Duty of Loyalty – requires that director favor the corporation’s interest over their own
(1) Duty of Candor – when faced with a conflict between a directors own interest and that of a corporation, court looks to see whether he has unfairly favored himself AND whether they were candid with the corporation and its SH ii) Arises in 2 classic settings

conflicting interest and corporate opportunity b) Corporate Opportunity Doctrine i) In cases where a director is accused of taking a corporate opportunity, BJR does not apply – this applies to board, not an individual director ii) 2 approaches
(1) ALI Approach
(a) Directors may not take a corporate opportunity unless:
(i) First offer it to corporation and disclose conflicts
(ii) Corporate opportunity is rejected by the corporation, AND
(iii)1) rejection is fair to corp, 2) opp is rejected in advance by disinterested BOD using BJR,
OR 3) ratified in advance by informed SH’s and rejection is not waste
1.
if answer to any of the above is yes then executive is OK
(b) Corporate Opportunity is
(i) An opportunity to engage in a business activity which a director/executive becomes aware
1.
in connection with performance of their functions
2.
through the use of corporate information or property
(ii) any opportunity that a senior executive finds to engage in a business opportunity that is closely related to a business that the corporation engages or expects to engage
1.
ONLY FOR SENIOR EXECUTIVE
(2) DE Approach (Guth v. Loft Balancing test)
(a) Factors that say you may not take the opportunity
(i) Corporation is financially able to exploit this opportunity
(ii) Opportunity is within the corporations line of business

(iii)The corporation has an interest expectancy in the opportunity
(iv) By taking the opportunity for her own, the corporate fiduciary will be placed in a position that conflicts with her duties towards the corporation
(b) Factors suggesting that the director/ officer MAY take the opportunity
(i) The opportunity is presented to an officer/ director in his individual rather than the corporate capacity
(ii) The opportunity is not essential to the corporation
(iii)The corporation has no “interest expectancy” in the opportunity
(iv) The director/ officer has not wrongfully employed the resources of the corporation in pursuing or exploiting this opportunity
(c) Disclosure of opportunity creates a SAFE HARBOR
(d)
DE § 122(17) – corp can renounce any interest or expectancy is certain opportunities iii) Remedy – director holds in trust for the corporation who can buy it from director for what he paid for it c) Conflicting Interest Transaction i) Def – transaction where one or more directors are on both sides of the transaction or deal ii) CL
(1) Transactions between corporation and one or more directors were void or voidable simply because a conflict existed
(2) Transaction between corporation and a controlling SH
(a) At CL, these transactions were subject to hightened scrutiny to protect corporation and noncontrolling SH
(b) If self-dealing is found – apply intrinsic fairness test

must prove deal is entirely fair
(c) If no self-dealing, then apply the BJR iii) Statutory Treatment of Conflicting Interest Transaction
(1) MBCA
(a)
§ 8.60 – conflicting interest transaction is one:
(i) To which the director is a party (just because you’re a director does not make you a party)
(ii) Director had knowledge and a material financial interest, OR
(iii)Director knew that a related person had a material financial interest
(b)
§ 8.61(a) – if its not a conflicting interest transaction, then director cant be sanctioned
(i) (b) – no damages if ratified by qualified directors under 8.62 of ratified by qualified shareholders under 8.63 OR transaction is fair to the corporation
(2) DE view
(a)
§ 144 – no transaction between a corporation and 1 or more of its officers or directors or between corp and entity that officer or director has a financial interest shall be voidable solely by the reason of a conflict if:
(i) Its authorized by a majority of disinterested directors
(ii) Approved in good faith by SH’s OR
(iii)Its fair to the corporation
(b)
Have to disclose material facts to board or SH’s
(c) DE does not pull in related persons but does pull in OFFICERS
3) Fiduciary Duty of Care and Good Faith a) Overview i) Tension between holding managers liable and letting them take risks ii) Applies in 1) making decisions, and 2) duty of oversight iii) Burden of Proof – have to show that directors acted without care and then burden shifts to D to show transaction was intrinsically fair (entirely fair) to the corporation iv) Managers should take risks, but will not be liable unless not in good faith, breach of duty of loyalty, not for a business purpose or gross negligence b) Decisional Setting

i) MBCA View
(1)
§ 8.30 – each member when discharging their duties shall act 1) in good faith, and 2) in a manner that the director reasonably believes to be in the best interest of a corporation
(a) (b) – discharge your duties with care that a person in a like position would reasonably believe appropriate under similar circumstances
(b) Directors must inform themselves of all material information reasonably available in order to get BJR protection
(2) Reliance of Experts – OK – 8.30(d) and (f) ii) DE View
(1) Smith v. Van Gorkom and the Duty of Care
(a) Test – a process based inquiry used to answer whether the board adequately informed themselves regarding a decision that they made
(i) Can use gross negligence (this can be exculpated under 102(b)(7) – under 102(b)(7) you need to allege bad faith)
(b) Board will claim protection of BJR
(i) P can rebut with pleading facts with particularity
(c) If court finds failure to inform, then the BJR
(d) Burden shifts to board to prove that the transaction was entirely fair
(i) Entire Fairness Test – show 1) fair price and 2) fair dealing (facts surrounding decision)
(2) Fallout from Van Gorkom – court has created an emphasis on process and board now create paper trails. DE 141(e) was amended to allow directors to rely on experts iii) Protection for Directors
(1) D&O Insurance
(2) Indemnification Provisions
(3) Exculpation provisions in the company charter
(a) MCBCA
(i)
§ 2.02(b)(4) – can limit or eliminate liability to corporation or SH’s except for 1) receipt of financial benefit to which you are not entitled, 2) intentional infliction of harm, 3) unlawful distributions, OR intentional violation of criminal law
(ii) § 2.02(b)(5) – can limit liability to any person except for situations above
(b) DE
(i)
§ 102(b)(7) – you can limit or eliminate a directors personal liability to the corporation or its SH’s EXCEPT as to 1) breach of duty of loyalty, 2) acts or conduct not in good faith or that involve intentional misconduct, 3) self-dealing, or 4) deriving an improper personal benefit c) Directors Oversight Responsibilities i) Generally – business and affairs of the corporation shall be managed by or under the direction of, and subject to the oversight of its board of directors ii) What is the duty of oversight?
(1) Graham Standard – absent grounds to suspect wrong doing, board can not be liable.
(a) Essentially you need red flags – if there are red flags then you have a duty to investigate
(2) Caremark Standard - Board of directors has an affirmative duty in good faith to assure that a corporation information and reporting system exists and is adequate
(a) TEST

only a sustained or systemic failure of the board to exercise oversight demonstrates the lack of good faith necessary to establish liability
(i) Aspirational Safe Harbor – need to attempt in good faith to be informed
(ii) With Graham – you have to have a system in place, but once that system kicks up red flags, then you have a duty to investigate iii) SOX – executives now have to certify that they have internal controls d) Good faith as Part of Duty of Care i) Currently there are 2 fiduciary duties – care AND loyalty
(1) Good faith is a subsidiary of the duty of loyalty – Stone v. Ritter

ii) Disney Cases
(1) Develop duty of loyalty as a separate entity apart from loyalty and care. 102(b)(7) does not exculpate actions not taken in good faith
(2) Rule – Presumption of BJR creates a presumption that the director acted in good faith. In order to overcome this presumption, a P must prove an act of bad faith by a preponderance of the evidence. Failure to act in good faith is 3 things
(a) Fiduciary intentionally acted with a purpose other than advancing the best interests of the corporation
(b) Intent to violate applicable law
(c) Intentionally failing to act in the face of a known duty iii) Stone v. Ritter
(1) RULE

Good faith is part of the duty of loyalty
(a) It is not a separate duty e) Officer’s Duty of Oversight i) MBCA
(1) § 8.42(a) – Officer has a duty to act: 1) in good faith, 2) with care that a person in a like position would reasonably exercise under similar circumstances and 3) in the manner in which the officer reasonably believes to be in the best interest of the corporation ii) DE
(1) BJR doesn’t apply to Officers under Miller v. US Foodservice
(a) 102(b)(7) does not apply to officers
(b) Standard of care applied to officers is gross negligence
(2) Officers can be liable as agents
4) Derivative Litigation a) Demand Requirement i) DE
(1) General rule – Before you can sue in a derivative suit, you must make a demand on the board
(a) Exception – don’t have to make a demand if the demand would be futile
(2) Demand – decision whether or not to proceed with suit is protected by the BJR
(3) Demand Futility – Aronson Test
(a) Is the board disinterested AND independent?
(i) Interested = financial benefit to the director
(ii) Independence = decision in based on merits rather than director’s own interest
1.
beholdeness, domination and control
(iii)Must show that over half are not disinterested or independent
(b) Must allege definite facts which raise a reasonable doubt that the transaction is covered by the business judgment rule
(i) Demonstrate waste or failed to inform itself of reasonably available information
(c) When Futility is shown – Board must prove entire fairness of transaction ii) Model Act view
(1) Under the MBCA and ALI there is a universal demand requirement
(2)
§ 7.42 – Board has 90 days to meet to say whether or not to reject the suit
(a) After 90 days and no word P can sue or if demand is rejected or harm if you waited 90 days
(3)
§7.44 – Corporation can move to dismiss. Court will dismiss if it determines that qualified directors or a special committee has determined in good faith after conducting a reasonable inquiry that suit should be dismissed
(a) P will challenge the reasonable inquiry and that it was done in good faith.
(b) Dismissal not protected by BJR under MBCA b) Special Committee to Dismiss Derivative Suits i) 3 CL views
(1) Board can delegate special committee whose decisions are protected by the BJR. Court will evaluate committee to see if disinterested, reasonable procedure and good faith

(2) Can appoint a board, but board has no power to control the lawsuit
(3) DE view – 2 step inquiry
(a) 1) Look to see whether the committee was disinterested, independent and acted in good faith.
(b) 2) Court may then in its own discretion decide whether special committee properly dismissed the action ii) MBCA § 7.44(b) – special committee of 2 or more qualified directors can dismiss litigation
5) Indemnification and Insurance a) A principal indemnifies an agent either: 1) due to terms of agreement or 2) loss should fairly be born by principal b) Statutory Indemnification i)
MBCA § 8.51 – 8.57 ii)
DE § 145 c) D&O Insurance i) Part 1 – reimburse corporation who had to indemnify directors ii) Part 2 – reimburse directors who were not indemnified
6) Executive Comp – are we paying people too much
1) Introduction a) Corporate form protects majority from minority i) Majority rule, directors and officers can be dismissed at will, permanence of corporation, BJR b) Protection for the minority i) Sell your shares – harder if closely held c) Closely held corporations protect minority i) Can K, fiduciary duties are in place
2) Shareholder Agreements that Limit Boards Discretion a) Common law – cant sterilize the board through shareholder agreement i) McQuade – SH agreement can not abrogate director level decisions (hiring officers) ii) Clark – where directors are the sole shareholders, a shareholder agreement among all of them is valid because no SH is harmed b) Statutory View i) DE
(1)
§ 141(a) – business and affairs are managed by the board of directors OR as provided in the articles

need a majority to amend the articles – can provide minority protection through the articles but this is not a shareholder agreement
(2)
§ 344 – corporation by 2/3rd votes can be a statutory close corporation
(a)
§ 342 – no more than 30 SH’s
(b) § 351 – AI of close corporation may provide that business will be managed by the SH’s or may be inserted by amendment if all the holders agree.
(c)
§ 350 – SH agreements by a majority are NOT invalid if they interfere with discretion of the board. Must be in writing.
(3) Kurtz rule – court will sometimes enforce agreement even if not done correctly if all agree and party seeking to get out does not take final steps under the agreement. ii) MBCA
(1) § 7.32 – SH’s can vary norms not only in the articles but also by SH agreement if it is in writing and is UNANIMOUS c) Watch out where you put agreement and how it can be amended – Blount
3) Voting Agreements that Limit Shareholder decisions a) Norm – voting agreements are valid i) Do not sterilize the board with these agreements just do shareholder level things b) Corporate SH voting agreement may be valid even if your not a close corporation.
4) Fiduciary Duty and Threat of Dissolution

a) Problem – in a close corporation its hard to K for every right – what to do if problems arise? b) Traditional Rule – deference to the majority – the Majority is protected by the BJR c) Partnership Analogy as a Basis for Enhancing Minority Rights i) Donahue Theory – in a closely held corporation this is similar to a partnership so you owe your other
SH’s the duty of utmost good faith and loyalty
(1) Very protective of minority SH’s from majority opportunism ii) Wilkes Exception – Court requires good faith and loyalty but there is a legitimate business purpose exception. 2 part test
(1) Can the controlling SH demonstrate a legitimate business purpose for its actions
(2) Can the minority SH demonstrate that the same legitimate business purpose could have been achieved through an alternative course of action that was less harmful to the minorities interest? iii) Hetherington and Dooley
(1) Close corporation is like a partnership so we should have a dissolution provision iv) Easterbrook and Fischel
(1) People choose corporations for a reason
(2) The correct inquiry is what would the parties have K’d for originally v) Closely Held but Not statutory Close Corp in DE
(1) Fairness doctrine requires that you treat minority SH’s fairly but not necessarily equally
(2) If you want the protections of a statutory close corporation, you must elect this status d) MCBA Approach i)
§ 14.30 – Court may dissolve the corporation – (2) in a proceeding by the SH if (i) directors are deadlocked, (ii) directors act illegal, oppressive or fraudulent, (iii) SH’s are deadlocked, OR (iv) corporate assets are being wasted.
(1) Also lists other ways that a creditor, AG or corporation could dissolve ii)
§ 14.34 – (a) one or more SH’s may elect to purchase the petitioning SH’s share at FMV. This is an irrevocable election
(1) (b) can elect to purchase within 90 days
(2) (d) if they cant agree to FMV, court can determine this on its own iii) Under Model Act, the only remedy is a buyout so the Court cannot fashion another remedy. iv) Oppressive conduct means the reasonable expectations of the minority has not been met. e) NY Business Law i) Kemp – actions by a majority SH of a close corporation to restrict distributions to the prejudice of the minority SH may constitution oppression and justify dissolution ii) Gimpel – corporation may be subject to dissolution if the majority’s conduct begins to amount to oppression f) Share Repurchase Agreements i) Generally – resolution specifying in advance the conditions on how to re-purchase non-continuing
SH’s ii) Where a clear agreement is reached, ex-ante, and it applies equally, the Court will apply it iii) Where there is a bargain, even if its an inequitable result, the court will usually stick to the bargain
(1) If you can show they behaved opportunistically, then you may get some relief iv) If the agreement violates the reasonable expectations of the parties, the court can offer some relief so majority can not act opportunistically
1) Overview – this is partnership/corporation hybrid a) 3 main issues – Regulatory( follow p’ship or corp), Securities (protected by SEC rule? – no), Liability
(generally limited)
2) Statutory Governance Rules and Importance of K a)
LLC’s are all about the freedom of K – will use some statute as gap fillers b) Members with material conflicts of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its members

3) Role of the Fiduciary Duty a) Can you K out of fiduciary Duty i) LLC can restrict fiduciary duty but it can not eliminate the duty of loyalty and cannot unreasonably reduce the duty of care ii) If a K is ambiguous, we look to statute. However there may be none. Cannot act in secret way that would be inequitable.
(1) Must use duty of candor
4) Exit and Liquidity a) Usually Contractual exit strategies Control b) If you are contracting terms in your exit agreement, be specific and define them.
1) Introduction a) Normally – shareholders aren’t personally liable for actions of the corporation i) Can be held liable if the veil is pierced ii) This typically only happens in small corporations because it would be inequitable in big corporation
2) Test for Piercing a) Complete domination and control of the corporation with respect to finances, policy and the transactions of the corporation b) Used control to do something unfair – fraud/illegal c) The control and breach of duty MUST proximately cause the injury
3) Contract Cases a) Control – looking for complete domination, look at corporate formalities and whether or not followed
(not as necessary with a small corp) b) Wrong the P – look to see if commingling funds or thin capitalization or taking money out instead of contributing c) Proximate cause – was taking $$ out causing them not to be able to pay P? i) Estoppel argument – if you give me more credit and you know I can pay, cant use this against me later
4) Tort – SH, Officers, and Directors not shielded by corporate form for acts they personally commit
1) 10b-5 a) It shall be unlawful i) To make an untrue statement of material fact or to omit a statement of material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ii) In connection with the sale of securities
2) Cases a) Bankers life i) 10b-5 has a private cause of action ii) Even though a security is not publicly traded 10b-5 applies iii) Corporate mis-management is a state issue, becomes federal with a sale of securities b) Blue Chip Stamps i) 10b-5 must involve the purchase or sale of securities – not the attempt to purchase
3) Elements of 10b-5 a) Generally i) Misrepresentation or omission of material fact, 2) scienter, 3) reliance, and 4) causation b) Misrepresentation of material fact i) Material fact influences the decision to buy or sell

(1) Must be a substantial likelihood that ommited information would have been viewed by reasonable investor as significantly altering total mix of info available ii) Lying about a merger is a material misstatement
(1) Silence about a merger is not misleading – best thing to do is say no comment
(2) BIG POINT – DON’T LIE c) Scienter – knowing or intentional mental state i) Negligence is not enough for 10b-5 – Ernst and Ernst ii) Injunctive relief – need scienter iii) Recklessness enough – lower courts say yes iv) PLRSA – must plead facts with particularity d) Reliance i) Fraud on the market theory – you don’t rely on misleading statements, market does and you rely on market
(1) All you have to prove is that you bought stock ii) Rebuttable e) Causation i) Must show both economic loss and loss causation ii) Buying at inflated price is not enough to show causation – need to show economic loss