Fall 2008
I.
II.
III.
IV.
BUSINESS ASSOCIATIONS
Purposes of Business Organization
A.
Primary purpose is to make money for shareholders
B.
Milton Freidman and agency theory
i.
Corporate executives are employees of the shareholders so cannot give away
corporate money
ii.
Can only give away own money
C.
A.P. Smith Mfg. Co. v. Barlow
i.
Was the donation intra vires (within the right of the board) or ultra vires
(outside of the role of the board)
ii.
Court holds that the donation was intra vires and that the corporation had the
right to make the donation
iii.
Factors for determining whether something is ultra vires
1.
Public or secret
2.
Reasonable amount given away
3.
Favorite charity of the director
4.
Does director receive seat on board as a result of the donation
Accounting and Financial Statement
A.
Basic equation: assets = liabilities + owner’s equity
B.
Balance Sheet
i.
Snapshot in time
ii.
Use historical costs
C.
Income Statement
i.
Revenue – Expense = Net Income
ii.
Tries to fill in the gap between balance sheets
iii.
Revenues and expenses must be matched
D.
Cash Flow Statement
i.
When a business is bought at a rate higher than what it is worth it has to be
carried as an asset as goodwill on the balance sheet
ii.
Accounts receivables affect your cash in-flow because it represents what you
have sold but you failed to receive cash because when people owe you money
but have not yet paid your cash flow is decreased or increased if pre-pay
E.
Sarbanes-Oxley Act (public companies)
i.
Effort to make relationships between accounting and company
performance stronger
ii.
Increased vouching for financial statements and made proper reporting more
intertwined with compensation and performance
Sole Proprietorship
A.
The owner is the business and the two entities are legally one
B.
Regardless of number of employees if there is one owner it is sole proprietorship
C.
This is the default
Agency Law
A.
Restatement of Agency § 1
i.
Fiduciary duties flow from agent to principal
ii.
Principal has to be aware of the agent and consent to agency
iii.
Agent must have the authority to work on behalf of the principal
iv.
Principal must have control of the agent
B.
Botticello v. Stefanovicz
i.
Default is that there is no agency so Tony bears the burden of
proving that Walter acted as an agent of Mary
ii.
Marriage does not create agency relationship
C.
Actual Authority
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i.
D.
E.
F.
G.
Restatement of Agency § 7
1.
Expressed – principal told the agent he had the authority
2.
Implied – look to past transactions, title principal gave agent, etc.
ii.
Restatement of Agency § 26
1.
Authority can be created by written or spoken words or other action
2.
Must cause agent to reasonable believe principal has given such authority
Apparent Authority
i.
Restatement of Agency § 8
1.
An act or statement by the principal that would lead a third party to
believe that the agent is in fact acting with the principle’s permission
2.
Relevant communication is between principal and third
party
ii.
Restatement of Agency § 27- apparent authority is created when an act of the
principal reasonably creates a third party to believe that the principal consents to
have the act done on his behalf
Apparent agency different than apparent authority because apparent agency can come
when there is no agency relationship at all
Stergo v. Lagerquist
i.
Relevant time is when the contract was made not coming later and calling agency
into question (no apparent authority at the time of the contract)
ii.
Do not get to the question of apparent authority if actual authority exists
Liability of Principal to Third Person
i.
Contract Liability
1.
Restatement of Agency § 140 – The liability of a principal to a third
party based upon a transaction by an agent flows from: Actual authority,
Apparent authority, Some other power to act on behalf of agent
2.
Restatement of Agency § 4 – differentiates between a disclosed (named),
partially disclosed (said I’m working for someone but not named, and
undisclosed (no information) principal
3.
Restatement of Agency § 320 says if disclosed principal is liable on
contract and agent not party to contract
4.
Restatement of Agency § 321 – agent becomes party to the contract if
does not name the principal unless third party and agent agree to not
make the agent liable
5.
Restatement of Agency § 322 – an agent becomes a party to the
transaction and personally liable if he fails to disclose the existence of a
principal
ii.
Fiduciary Duties
1.
Restatement of Agency § 383 – agent has a fiduciary duty to principal to
act only within his consent
2.
Restatement of Agency § 385 – an agent has a fiduciary duty to obey the
direction of the principal even if employment contract says principal will
not give such instruction
iii.
Ratification
1.
If principal gives consent to transaction after entered into consent
retroactively applies to the time contract was made
2.
Only kicks in if principal gave consent with all material and relevant
facts
3.
Makes agent free from liability for violation of fiduciary duty
iv.
Principal’s Liability for an Agent’s Tort
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Restatement of Agency § 343 – just because an agent committed a tort
under authority of the principal he is not relieved of personal liability
2.
Principal liable if agent is
a.
Restatement of Agency §220 Servant – subject to control of
principal and is not an independent contractor
b.
Within the scope of employment
3.
Hayes v. National Service Industry – attorney has actual authority over
matters of settlement and even if doesn’t likely has apparent authority
Rationales
1.
Making principal liable in contract for the actions of an agent is good
because there was actual authority for the agent to act OR the principal in
some way suggested that the agent had the authority so it’s fair
2.
Making a principal liable for the torts of an agent/servant good because
principal has deeper pockets, prevents accidents by encouraging the
principal to be careful in training and hiring, principal gets benefits if
employee does good so should suffer if bad
1.
v.
V.
Partnership
A.
Creation
i.
Lerner v. Holmes
1.
Partnership is the default when two or more involved even if there is no
writing
2.
RUPA § 202(a) – association of two or more persons that carry on as coowners a business for profit forms a partnership whether or not the intent
was to form partnership
3.
RUPA § 401 says partners share profits and losses equally unless agree
different
4.
Presumption that sharing profits is a partnership unless negated by §
202(c)(3) factors for profit sharing not equating to partnership then
person arguing partnership has to prove otherwise
ii.
Beckman v. Farmer
1.
Farmer is guaranteed a salary
2.
Argument is that when you are guaranteed a salary moving outside the
realm of RUPA § 402 profit sharing and likely not partners
B.
Partnership by Estoppel
i.
Cheesecake Factory v. Baines
1.
RUPA § 308(a) – a person who holds themselves out as a partner, either
by publically or privately representing themselves as such, is liable to
any third party that relies but if done so in a public manner, the purported
partner must consent to the representation
2.
Similar to apparent authority in protecting reliance
C.
Theories of Partnerships and Property
i.
RUPA § 201 – partnership is an entity distinct from its partners (entity
theory) as opposed to the old aggregate theory that a partnership is simply
made up of the aggregate of people that make it up (old theory)
ii.
RUPA § 203 – property acquired by a partnership is property of the partnership
and not of the partners individually
iii.
RUPA § 204 – property is partnership property if acquired in the name of the
partnership (either paid with partnership assets or acquired by partners as
partners) or transferred to partners in role as partners
C.
Partnership Decision Making
i.
RUPA § 401(f) – each partner has equal rights in management
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RUPA § 401(j) – disagreement within ordinary course of business decided by
majority of partners but disagreement outside ordinary course of business or to
amend partnership agreement must have unanimity
iii.
To determine ordinary course of business look to purpose clause but if there isn’t
one try and figure out what the partners agreed to do
Fiduciary Duties
i.
Meinhard v. Salmon
1.
Intent rationale – look to what the parties intended to do in this situation
(intended to do side deals together, disclose deals deals, do no side deals)
2.
Control rationale – when one party has entrusted his welfare to the
control of another the controller has a duty to at least disclose all side
deals
3.
Court adopted control rationale and said Meinhard had control so at least
had to disclose to Salmon since land so close together
ii.
RUPA § 404
1.
(a) says following are only fiduciary duties
a.
Duty of loyalty
b.
Duty of care
2.
Some states adopt RUPA but do not find it exclusive
iii.
RUPA § 103 says you can limit fiduciary duties but only with all relevant
material facts and consent of all partners but you cannot under (b)(3) eliminate
the duty of loyalty but you can limit specifics
Partner Liability to Third Parties
i.
RUPA § 305(a) if a partner acts within ordinary course of business partnership is
liable and § 305(b) says that if a partner misappropriates money the partnership is
still liable for the loss
ii.
RUPA § 306 says partners are jointly and severally liable for partnership
obligations unless otherwise agreed
iii.
RUPA § 307 says a partnership may sue and be sued and these are separate so
partner cannot be forced to satisfy judgment against partnership unless meets (d)
exceptions
1.
Partnership has insufficient assets
2.
Partnership is in bankruptcy
3.
Agrees to be liable
4.
Court grants permission to get to partner
5.
Liability imposed independent of partnership
Partnership Finance
i.
Original – partners or lenders
ii.
Later – earnings or contributed capital
iii.
RUPA § 401(h) – a partner cannot take a salary from the partnership unless the
business is winding up, partnership agreement says you can, consent of all
partners to trade service for salary
iv.
Capital Accounts
1.
RUPA § 401(a) has an accounted credited with value of service or
money and charged with distributions made to the partner
2.
Things that can affect capital gains
a.
Contributions (+)
b.
Gains (+)
c.
Losses (-)
d.
Distributions (-)
v.
By/Sell Agreements
ii.
D.
E.
F.
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1.
G.
RUPA § 502 can sell a right to profits and right to distributions but
cannot sell right as a decision making partner
2.
RUPA § 503(d) says the effect of selling a partnership interest is that
transferor keeps interest as partner other than financial rights
3.
RUPA § 504 says a judgment creditor can get a charging order (which is
in essence a lien) that takes the judgment debtor’s share of proceeds and
gives it to the judgment creditor until the judgment is fully satisfied
Dissociation and Dissolution
i.
RUPA § 601 generally deals with events that trigger dissociation
of a partner
ii.
RUPA § 602 says a partner can dissociate at any time but does so wrongfully if
breaches express provision or if leaves before term of undertaking and § 602(c)
provides for payment of damages
iii.
RUPA § 603 (SWITCHING PROVISION) says if dissociation results in
dissolution go to Article 8 otherwise go to Article 7 to keep operating
iv.
RUPA § 701(a) says if a partner dissociates and it is not wrongful then the
partner has a right to be bought out unless the partnership has been dissolved and
(b) provides a default formula for buyout price
v.
RUPA § 801 outline events that trigger automatic dissolution (partnership is at
will need all partners consent to keep operating)
vi.
RUPA § 802 tells us partnership does not automatically end upon dissolution and
changes the purpose of the partnership because the new purpose is winding up
1.
Cannot make new contracts relating to the old service
2.
Can only carry on business for the purpose of closing the doors
vii.
RUPA § 803 deals with who has the power to wind up
1.
Anyone that did not wrongfully dissociate has a right to participate in
wind up
2.
If they cannot come to an agreement they can go to the court for
supervision
vii.
RUPA § 804(1) says all partners have power to do things for wind up and (2)
says they have the powers they had before the dissolution UNLESS the third
party has notice they are in dissolution
ix.
RUPA § 805 requires a statement of dissolution in order to tell third parties you
are ending
x.
RUPA § 807 (a) says assets of partnership include contributions of partners (b)
deals with settling partner accounts and bringing them all to 0 when winding up
is over (d) says each partner will have to contribute in the proportion that they
share losses in the event that there are any creditors that come forward AFTER
dissolution
xi.
Kovacik v. Reed
1.
Most cases that apply the 50/50 rule deal with partners that are both
contributing capital
2.
Court holds that original agreement was 50/50 so the partners must have
agreed that the Reed’s services and Kovacik’s money were equal in
value so partner contributing services does not have to pay for the loss
3.
RUPA has not adopted this holding
xii.
Bohatch v. Butler & Binion
1.
Under RUPA § 404 the content of the duty of loyalty is limited to
account for property and its uses, refrain from dealings which are adverse
to the partnership, refrain from competition with the partnership, but not
to remain partners
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2.
VI.
VI.
Under § 601 we can expel a partner when:
a.
It is in accord with the partnership agreement
b.
Unanimous vote by the other partners if
 Unlawful to do business with that partner
 Transfer of all their financial rights
 If the partner is a business entity that dissolves then you can
seek to expel the entity as a partner
c.
Get a court order to kick out a partner
xiii.
Court says that the location near an air force base is not an asset on the balance
sheet but it is something that a buyer would pay for
1.
If the broke brother can show that the rich brother is artificially low
balling the bid then he will have a cause
2.
The rich brother though had an affirmative duty to show (after the
allegation) that he has offered a fair price
Limited Partnership
A.
Formation of Limited Partnership
i.
ULPA § 201 - publically file a certificate of limited partnership with Secretary of
State, must have at least one general partner, must have at least one limited
partner that cannot exert control if he wants to be able to avoid liability but can
be more than one of each type of partner, name must contain the words limited
partnership (RUPA § 108)
ii.
RULPA § 303 says cannot use the names of limited partners in the name of the
partnership because we are trying to alter the public’s attention to the general
partners
iii.
§ 403(a) gives the general partner the powers and restrictions that a partner not in
a limited partnership has and nothing to prevent limited partners from controlling
but do say if you participate in control you might be on the hook for liabilities
iv.
Zieger v. Wilf
1.
RULPA § 303(a) – a limited partner substitutes as a general partner if
exerts control and a third party could reasonably believe he is a general
partner
2.
RULPA § 303(b) – safe harbor provisions as to what is not control
B.
Taxes
i.
Corporate double tax of dividends
ii.
Partnership gets tax breaks but comes with increased liability
iii.
Happy medium is limited partnership but lose control
iv.
So form corporation as general partner and act as officer of
corporation to get control (like in Kitner) but the IRS caught on
and outlined Kitner factors and 3 yeses determines how you will be taxed
1.
Does the entity provide limited liability? (yes for corp. no for p/s and yes
for lp/s)
2.
Is there centralized management (yes for corp. no for p/s and yes for lp/s)
3.
Is there free transferability of interest (yes for corp. no for p/s and ? lp/s)
4.
Is there continuity of life (yes for corp. no for p/s and ? for lp/s)
v.
Now IRS follows the “Check the Box Test” that requires owner to check what
type of entity they are
C.
Not liable as a limited partner for torts committed within the scope of the partnership
unless you were the tortfeasor and are liable individually
Limited Liability Company
A.
Drafted to be a hybrid between partnership and corporation
i.
Manager managed (limited partnership where only general partners manage)
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ii.
Member managed (general partnership where everyone has equal rights)
ULLCA § 201 says an LLC is an entity distinct from its members
ULLCA § 202 one or more persons can organize an LLC and file articles of
organization
D.
ULLCA § 203 requires the following in the articles
i.
Name of company
ii.
Address of officer
iii.
Name and address of agent for service or process
iv.
Name and address of each organizer
v.
Term company
vi.
Manager managed (name and address of manager)
vii.
Whether any or all members will be liable for debts incurred
E.
ULLCA § 401 contribution of a member can consist of tangible or intangible property
F.
ULLCA § 103 implies that there does not need to be any operating agreement
G.
ULLCA § 404(a) says if it is member managed each member has equal rights and if there
is a difference of opinion majority if members prevails
H.
Under ULLCA § 404(b) says if it is manager managed each manager has equal rights and
if there is a difference of opinion majority if managers prevails
I.
ULLCA § 404(c) lists all the things that require uniformity
J.
§ 301 adds to this dichotomy (a) is the actual and apparent authority clause of LLCs (b-c)
say if it is manager managed then the member has no actual authority
K.
Default rule member managed § 404(b)(3) and requires a majority of members to name
manager
M.
Members and managers can be personally liable through:
i.
Agency law (disclosure of principal)
ii.
Tort feasors
iii.
Piercing the entity veil (starting to apply to LLC as is applied to corporations)
N.
How can a member get money out of the LLC?
i.
Work for a salary
ii.
Through distributions to owners
iii.
Sell to a third party
iv.
Selling your interest back to the company via dissociation/dissolution
O.
Fiduciary Duties
i.
ULLCA § 409 says if member managed all members have a fiduciary duty
ii.
ULLCA § 409 if manager managed only the managers have a fiduciary duty
P.
Lieberman v. Wyoming.Com L.L.C
i.
Lieberman drafted a notice to withdraw and a demand for the fair market value of
his shares and court first decides he is entitled to the initial contribution for the
value of $20,000
ii.
Court then determines there was no dissolution because the other members
wanted to continue to operate the business
iii.
Distinguish the original contribution from whatever transpires after so
contribution only refers to capital account initially and not as it changes over
time ruling out market value
iv.
Point is the statutes here are not clear so be careful to plan for how you are going
to get your money out before you put it in
Limited Liability Partnerships
A.
Partial shield law – liability from tort but not contract
B.
Full shield laws – liability from tort and contract
C.
RUPA Article 10 gives requirements for converting a partnership into an LLP
B.
C.
VII.
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D.
VIII.
IX.
X.
In an LLP the partners capital contribution is not protected from creditors just the partner
and his personal assets are protected
E.
In an LLP each partner will have apparent authority to transact business on behalf of the
partnership in the ordinary course of business so limited partners can control where
general partners are limitedly liable
F.
Down side is that each partner is liable for their own malpractice
Limited Liability Limited Partnership – ULPA includes a question that requires a limited
partnership to decide if they are going to be an LLLP or not (because they want people to think
about giving everyone, including general partners, limited liability) and most states allow this
Contracting Before Incorporation
A.
Cantor v. Sunshine Greenery, Inc.
i.
Corporation was sued for lease that was entered into before articles filed
ii.
Brunetti’s defense is that there was a de facto corporation so he cannot be held
liable
1.
Law under which you can incorporate
2.
Make a bona fide attempt to follow that law
3.
Use of corporate power that you think you have
iii.
Distinguished from a de jure corporation which is a legally recognized
corporation
iv.
There is an argument that this is fair because Cantor knew he was making a
contract with the corporation and not with Brunetti personally
B.
Robertson v. Levy
i.
Person to whom the representation was made should be estopped from claiming
there was no corporation since he dealt with the corporation in the first place
ii.
The doctrine corporation by estoppel is weird here because the person estopped
is not the person who made the representation (Levy) but rather the person to
whom the representation was made (Robertson)
iii.
More modern version of corporate codes seem to preempt applications of the
above named doctrines
C.
MBCA § 2.03 says that a corporation is not formed until the articles are filed and
accepted and § 2.04 says anyone acting under the “authority” of a corporation that does
not exist is jointly and severally liable and this prevents application of either doctrine
D.
Stone v. Jetmar
i.
Court determines we should apply an equitable remedy since Stone was
defrauded out of the land in the first place
ii.
Purpose of the doctrine of estoppel is to validate a transaction to which the LLC
was a party rather than to preclude someone from liability (which is its usual
sense)
iii.
Unless the corporation releases the original signer from liability, formation of the
corporation alone does not relieve the original of liability (but can seek
indemnification from the corporation that apparently did not pay)
E.
Secret Profit Rule
i.
In a business context a promoter is someone that has the idea and goes out there
and tries to get the company deal sealed so if they sell to the corporation they
have to disclose any profit they are making from the sale
ii.
Generally speaking there is considered to be a fiduciary duty between a promoter
and the corporation even though it is not yet formed
Corporations
A.
After Articles Filed MBCA § 205 governs
i.
Named directors can take on business
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ii.
B.
C.
D.
If no directors then the incorporators can appoint directors to hold a
meeting and complete the organization of the corporation by adopting
bylaws
iii.
Bylaws are governance procedure that generally deal with internal
matters like where meetings will be held, number of board seats, notice
requirements, how many and what officers whereas articles are external
iv.
MBCA § 2.06 says if there is a conflict between articles and bylaws the
articles govern
Issuance of Stock
i.
MBCA § 6.01 says articles have to authorization of one or more classes of shares
with unlimited voting rights and entitled to receive the net assets of the
corporation upon dissolution
ii.
MBCA § 6.02 allows the board to classify within shares but this is unusual and
the articles have to expressly authorize the board to do that because you don’t
know what will be attractive to investors in the future so you need authority to
add terms into articles once they are reached
iii.
MBCA § 6.03 defines issued and outstanding share
iv.
MBCA § 6.21 says you can reserve for the shareholders the right to approve
issuance of stock but in general the business management decisions are reserved
for the directors of the corporation under MBCA § 8.01
v.
Can authorize either mandatory or permissive redemption of shares by the
corporation and deem it a call right
vi.
Cumulative means that if you went a year and did not pay a dividend then in a
later year if you declare a dividend then you owe the preferred stock holders for
all the years that you did not pay
vii.
If a stock is cumulative and participating that means the stock holders are entitled
to their cumulative dividends then those stock holders are thrown back in the
pool to share pro rata in the remaining dividends
Par Value
i.
MBCA says you do not have to state a par value
ii.
Delaware requires par value in § 153 and DL § 152 says what you can issue
shares for and § 162 says if you paid less than par value you are liable to the
company for the difference
iii.
In Delaware the balance sheet’s equity must say how much stated capital has
been issued as well as the par value
iv.
If it is under you have to create a fictitious asset for the difference
v.
If paid over par value have to create an equity entry called capital surplus
vi.
DL § 170 says can pay dividends out of surplus but not out of capital
vii.
Under DL law § 154 says if there are shares issued at no par value the board
still has to allocate some to capital and some to surplus
Choice of Law
i.
Internal Affairs Rule – the laws of the state in which a business is incorporated in
is the law that governs the internal affairs of a company
ii.
MBCA § 15.01 says a business not incorporated in a state must qualify as a
foreign corporation in order to be qualified to do business there
iii.
Chose Delaware rather than home state because
a.
Lawyers more familiar with that law because that seems to be what is
taught in law schools
b.
Statutory corporate law is more favorable to business
c.
Delaware common law on corporate law (director fiduciary duties) has
become incredibly developed
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d.
E.
F.
Chancery Courts used to be the courts of equity and in Delaware the
Chancery Courts have all jurisdiction over corporate matters and the
judge is the fact finder and law decider
Piercing the Corporate Veil
i.
MBCA § 6.22 says shareholder is never liable for corporate action
ii.
No rule for piercing the corporate veil in the MBCA because it is a court made
doctrine
iii.
Dewitt Truck Brokers, Inc. v. W. Ray Fleming Fruit Co. piercing factors
1.
Undercapitalization
2.
Corporate formalities disregarded
3.
Non-payment of dividend
4.
Insolvency at time
5.
Siphoning of funds
6.
Non-Functioning Directors and Officers
7.
Absence of Corporate Records
8.
Element of unfairness
iv.
In re Silicone Gel Breast Implants Liability Litigation
1.
The plaintiffs sued MEC and asked the court to pierce the corporate veil
and hold Bristol personally liable
2.
The law that applies in the piercing cases is unclear because law of state
of incorporation only governs internal affairs
3.
The Court questions whether there needs to be a Dewitt unfairness factor
when the victim is a tort victim
4.
There may be an element of unfairness in that Bristol’s name appeared
on all of MEC’s implant advertising and may be unfair for Bristol to now
say that was not us
v.
Enterprise Theory as an Alternative to Piercing
1.
If the real business is all the subsidiaries operating together symbiotically
(like a taxi cab company) then the corporate lines are artificial
demarcations that should be ignored
2.
We should get at what the real “business” is and hold that business liable
regardless of the lines they have drawn
Decision Making for the Corporation
i.
Shareholders and Board are not agents but all others are
ii.
Board Creation
1.
MBCA § 8.01(a) says we have to have a board (b) outlines what the
board has to do and says cannot undertake fundamental changes without
shareholder approval and (c) is only applicable to publicly held corps
2.
An inside director is one who is also an employee of the corporation
3.
An outside director is one that is just a director and has no other link to
the company
4.
MBCA § 8.02 says prescribes qualifications for board
5.
MBCA § 8.03 says articles or bylaws set number on board
6.
MBCA §§ 8.20-25 deals with meeting and action of the board
a.
Meet once a year
b.
Notice required unless shareholders waive notice
c.
Held at principal place of business
iii.
Shareholders
1.
MBCA § 701 gives shareholders an annual meeting
2.
MBCA § 702 says 10% of votes entitled to be cast request can have a
shareholder special meeting
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3.
iv.
v.
vi.
MBCA §7.03(a)(1) shareholders can get court order to compel annual
meeting
4.
MBCA § 7.05(a) entitles shareholders to notice of the date, time, and
place of each annual and special meeting no fewer than 10 no more than
60 days before the meeting date but need not include a description of the
purpose(s) for which the meeting is called if annual but needs description
of purpose(s) if special meeting
5.
MBCA §7.06 says a shareholder can waive notice if in writing and
delivered to corporation then added into minutes
6.
MBCA § 7.07 allows the corporation to set a record date as of who is
entitled to notice of the meeting
7.
MBCA § 7.25 if you form a voting group need a quorum of the votes to
have a voice at the meeting
8.
Shareholders only have to approve fundamental changes like
a.
Amending the articles
b.
Mergers (article 11)
c.
Sale of all the assets (article 12)
d.
Dissolution (article 14)
Director Voting and Election of Directors
1.
Straight voting – get only to vote your number of shares per open slot
individually
2.
MBCA § 7.28 Cumulative voting – multiply the number of shares you
own by the number of people to be elected to the board and then vote
those once for all open seats
3.
MBCA is opt into cumulative voting but a minority of states have
cumulative voting unless you opt out
4.
Combating cumulative voting
a.
Issue more shares and increase the numerator
b.
Elect fewer directors at a time
c.
Create a staggered board with rotating elections per MBCA §
8.06 but have to opt into this
5.
MBCA § 8.04 says articles can authorize director election by certain
classes of shares or can give certain classes differing votes
Removal of Directors
1.
MBCA § 8.07 governs retiring of directors
2.
MBCA § 8.08 contemplates firing of directors
a.
Unusual because the typical remedy when you are not satisfied
with a director is to not re-elect them
b.
A director can be removed with or without cause and generally
some sort of misconduct needs to be proven
c.
When counting for removal and against removal in cumulative
voting if you get the amount need to elect the director to deny
removal then you cannot remove
Proxy Statements
1.
MBCA § 7.22 says proxy cards are revocable and can be made
irrevocable but have to state that expressly on proxy
2.
The latest dated proxy is the one deemed valid if you have given
more than one
3.
If you show up in person the proxy is void and you can change
your vote
4.
Federal Securities Law
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1933 Securities Act – original issuance of shares and
registration and disclosure in those registration materials
b.
1934 Securities Exchange Act – regulates trading of
securities in ways similar to the 1933 act
 § 12 registration is required in two circumstances (securities
traded on a national securities exchange and any class of
securities having more than 500 record owners issued by a
company with total assets of more than $10 million)
 § 14(a) leaves to the SEC the power to regulate securities but
(b) requires that one continuously own $2000 of market
value or 1% of the company’s securities entitled to vote and
you must continue to hold the shares through the meeting in
order to solicit
 No more than 500 words in the proposal
c.
There are also rules and forms that go with the 1934 act
Federal Proxy Rule 14a
1.
Rule 14a-4 governs the form of the physical proxy cards
2.
14a-7 is relevant to shareholder records and lists of holders
a.
If we want to solicit proxies, the company has a choice
b.
Disclose the list of shareholders to the person that wants to
do the soliciting OR
c.
Have to agree to mail the solicitation along with their own
stuff at the solicitor’s expense
3.
Rule 14a-8 governs shareholder proposals at annual meetings
a.
Requires inclusion of shareholder proxy solicitations with notice
of annual meeting because corporation has to send notice
anyway so it makes sense to force them to include rather than
force shareholder to take on the cost
b.
14a-8(i) says corporation can deny proxy if
 Improper under state law
 Proxy would be a violation of law
 Proposal is contrary to proxy rules
 Advances a personal grievance or special interest
 Account for operations which make up less than 5% of
operations
 Company would lack the power to carry out proposal
 Proposal relates to ordinary management functions
 Relates to election of directors
 Conflicts with a proposal by the company
 Proposal has been substantially implemented
 Duplicates another proposal
 Duplicates a past submission
 Relates to specific amounts of dividends
c.
Lovenheim v. Iroquois Brands, Ltd
 Shareholders seek to include a proposal that would stop the
company from buying any geese for pate that have been
force fed
 Managers challenge on the grounds that it is less than 1/2%
of the total business
a.
vii.
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


viii.
ix.
Rule allowing to keep it out says less than 5% of total assets
and not otherwise significant to the company’s business
Otherwise significant usually deals with social, economic, or
political negatives
Because cannot tell managers what to do usually rely on
statistics to make a recommendation and create hype so
board stops the practice
Inspection Rights
1.
Kortum v. Webasto Sunroofs, Inc
a.
Delaware Corporate law under § 220(b) says that any
shareholder has the right to inspect and make copies of any
records during business hours of the corporation if they
demand under oath and state a proper purpose defined as
anything reasonably related to a person’s interest as a
shareholder
b.
Burden is on corporation if a shareholder list is sought to show
improper purpose but on shareholder to show proper purpose if
anything else
c.
DL § 220(d) governs director’s inspection rights as authority to
demand and inspect records that are reasonably related to their
rights as a director, access to stockholder list, books, and records
(just like shareholder)
d.
Burdens are a bit different because we expect that a director
needs the records to do his job so challenger has to prove
improper purpose
2.
Pillsbury v. Honeywell
a.
Pillsbury was a rich kid who had shares of Honeywell so that he
could contact shareholders to urge them to contact the board and
encouraged to stop making the bombs
b.
When people want shareholder lists they want none objecting
beneficial owners list (NOBO list) of those that do not mind their
identity being revealed
c.
MBCA § 16.01 says can get records of bylaws, resolutions,
articles, and other non-juicy stuff
d.
MBCA § 16.02 gives shareholders access to minutes,
shareholder records, accounting records
e.
All other records would be governed by common law rights
f.
MBCA § 16.02(c) we have to show a proper purpose, what that
purpose is, and how the records requested directly connect to
that purpose
g.
If the corporation denies access to records can file suit under
MBCA § 16.04
Voting Trusts and Agreements
1.
Ringling Bros. Circus v. Ringling
a.
Haley’s refused to go along with a voting agreement to vote in
combination with Edith but Edith wanted a ruling that the
directors were improperly elected so their appointed officers
were not valid either
b.
MBCA § 7.30 governs voting trusts
 Requires a writing
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

x.
And shares transferred to a trustee
Then the trustee would vote the shares in accordance with
the writing
 Limited to 10 years in duration
 Must be disclosed
 The true owners then become beneficial owners still with a
right to dividends and what not
c.
Thought this to be a bad thing because it was a separation
of economic ownership and voting rights so that the trustee
has no incentive to vote the “right way”
d.
MBCA § 7.31 governs voting agreements which are just a
contract to agree to vote in a certain way and does not have to be
disclosed and if the agreement is broken the remedy is specific
performance
e.
Defense then is that this is a voting trust because they have
separated the vote from the stock due to the arbitrator’s role (this
is a weak argument though because they did not comply with the
requirements for a voting trust) so court just invalidates the
improper votes
Board Powers
a.
McQuade v. Stoneham
 Three owners agreed to try their best to elect each other as
directors and then appoint each other as officers
 McQuade argues that the contract was violated after he was
voted out then not appointed as an officer
 Argument is that the contract is void because it infringes
upon the management functions given to directors in MBCA
§ 8.01 and as a policy matter do not want directors driven by
desire to keep bad directors in office as per an agreement
 Court says all agreements that restrict director’s actions are
void and appointment of officers is typical management
function
 The agreement to elect each other as directors is ok but we
cannot separate this into two contracts so whole thing void
 Subsequent case law says might not be quite as upset if it is
just a minor restriction on the board’s power as opposed to
binding their hands altogether
b.
Villar v. Kernan
 Villar (49%) and Kernan (51%) made an oral agreement that
neither one would take a salary from the corporation
 Later consulting agreement entered into that gave Kernan
$2,000 per week
 Villar then sues that this is unenforceable because it’s a
violation of the agreement
 Kernan’s defense raised is that this is a limit on discretion of
the board because it limits employment agreements so it
must be void
 State statute says no written agreement that restrictions
employment will be valid unless it meet certain restrictions
namely that it be in writing
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
G.
It does not meet the statute so the agreement is out (assumes
that the statute preempts common law)
 In some cases though even though you fail the statute you
might still be able to validate the agreement on common law
grounds
 Shareholder Agreements governed by MBCA § 7.32
o (a) shareholders can
 Limit powers of board
 Govern distributions
 Establish/remove officers or directors
 Division of voting power
 Transfer or use of property
 Gives corporate power to shareholders
 Dissolution upon request
 Other things
o (b) requirements for valid agreement
 Authorized by bylaws
 Authorized by articles
 Authorized in written agreement AND
 All shareholders consent
o (c) if you sell your shares the agreement cannot be
enforced against the new owner unless it can be
proven that they knew about the agreement
o (d) if shares traded publically no agreements because
only apply to closely held corporations
o (e) if agreement limits board then those it gives the
power to become liable for the decisions rather than
holding the directors liable
o (f) says this cannot be held against a corporation on
a piercing claim
xi.
Shareholder Power to Control Board Action
a.
MBCA § 10.20
 (a) – shareholders have the power to amend or repeal bylaws
 (b) – board has the power to amend or repeal bylaws unless
o Articles reserve power to shareholders
o In amending shareholders limit boards power to
amend
b.
MBCA § 2.02(b)(2)(3) says the articles can set forth provisions
not inconsistent with law limit the power of the board of
directors
c.
MBCA §10.03 authorizes shareholders alone do not have the
power to amend the articles though they need to have the board’s
approval
Fiduciary Duties
1.
Duty of Care
i.
Shlensky v. Wrigley
a.
Wrigley alleges that the reason for day only games is the
preservation of the neighborhood and keeping people coming to
games but Shlensky alleges that this is the result of personal
decisions of the board
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b.
ii.
iii.
The defense the directors interpose is that there was no pleading
of fraud, illegality, or conflict of interest on the part of the
directors so business judgment rule protects
c.
The business judgment rule is a presumption that decisions were
formed in good faith and was designed to promote the best
interest of the corporation
d.
To show fraud on the part of the directors
 Misrepresentation intended to mislead and defraud
shareholders (affirmative act)
 Maybe element of good faith which would be easier to prove
e.
To show illegal conduct
 Ultra vires which limits director authority in articles and the
directors acted outside
 Not a legal authorization of power within the certain
corporation
 Maybe even uphold conduct that is considered irrational as
evidence of illegality and bad faith
f.
To show conflict of interest
 Usually buying at inflated prices, selling at low prices to
directors (vertical conflict)
 Self dealing
g.
Ultimately in corporate law it is for the best interest of the
shareholders
Dodge v. Ford
a.
Ford’s plan was to reinvest in the company by building a new
plant, buying out all suppliers and make one company that
makes everything we need, and use the money to stop buying
from others and make it by himself, and higher more people and
lower the price of cars
b.
End result was to not pay dividends, lower the price of the cars,
and spend more money
c.
Dodge’s want lower court to enjoin construction of the new
plant, require Ford to pays dividends, and seeking to stop Ford’s
decision to carry out the new plan
d.
Appellate court says enjoinment of construction is within the
business judgment rule and lower court should not have ruled on
that
e.
This case is usually cited for the proposition that you have to
advance shareholders in the short term rather than the Wrigley
holding because anything can be a long term benefit
Macey Article
a.
Describes shareholders as the residual beneficiaries because they
get the benefits if the directors are good and they suffer the
benefits if the corporation’s directors make really bad decisions
b.
If there is no money left the shareholders are the first to not get
paid but if the decisions are good the shareholders get everything
left over
c.
Argument then is shareholders are the proper best interest
because they have the most to gain/lose
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Also argues that other people’s remedies are contractual and they
have specific terms and can choose not to do business
Business Judgment Rule
i.
Joy v. North
a.
Policy arguments in favor of the business judgment rule
 Shareholders assume the risk of loss because they voted the
directors in so trusted their judgment
 After the fact rulings aren’t the same as being in the
director’s shoes at that time and acting quickly
 Biggest profits come from huge risk so to limit risk would
also limit potential profits
b.
Business judgment rules covers everything unless
 No business purpose
 Conflict of interest
 Egregious/no win situation
 No supervision
c.
There were two levels of protection in this case
 Business judgment rule applies to the risky loans
 Special Litigation Committee’s investigation decision
entitled to deference so suit shouldn’t even reach the merits
d.
There is at least an argument that the risky loans are no win
so business judgment should not apply and should be trial
on that issue
v.
Smith v. Van Gorkom
a.
MBCA § 11.04 - mergers require that directors and shareholders
both have to approve of a merger
b.
MBCA § 11.06 – requires that participants files articles of
merger saying merged, naming survivor, approval, and margin
and will be deemed officially merged on the date of filing the
articles of merger
c.
MBCA § 11.07 – effect of merger is that all the attributes are
absorbed by the survivor
d.
CFO said $55 per share was fair for Trans Union stock even
though shares were trading at $30
e.
Van Gorkom immediately offered a cash out merger at $55 per
share and told no one because there was no time but he called a
special meeting and presented it to the others and they approved
it as did shareholders
f.
Directors are in charge of running the corporation under DL law
and court uses this as business judgment rule
 BJR stems from this because this is the legislature saying
directors are in charge
 Also get fiduciary because corporation like a trust where law
implies a duty to carry out functions in the interest of those
whose assets you are managing
g.
Business judgment rule here is a presumption giving rise to
informed, good faith decision, thought to be in best interest of
corporation (must be gross negligence before presumption does
not apply)
d.
2.
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Defense is statute gives director’s permission to rely on reports
from other people (because directors don’t know everything and
they need expert opinions form economists, lawyers, etc.)
i.
Court said the presentation was not informed itself so was not
such a report so no presumption
vi
Barnes v. Andrews
a.
Complaint against defendant is lack of attention to company
matters because he took no steps to be informed on his own and
only accepted periodic reports from the president that things
were going ok
b.
Court says directors do not need to be business experts but they
do need to pay some attention to the affairs of the business
c.
Business judgment rule is not applicable here because the board
has not actually made a decision
d.
Not held liable ultimately because there is no proof that
defendant’s inattention to the business affairs caused the harm
because plaintiffs offered no evidence of what director should
have done
e.
Judge treats this as a tort that need duty, breach, and damages but
there also needs to be causation
vii.
MBCA § 8.30 seems consistent with some sort of fiduciary duty and
creates a standard of acceptable conduct
viii.
MBCA § 8.31 talks about a director not being liable to the corporation
for taking action or failing to take action unless
a.
Not in good faith
b.
Not in best interest of corporation or failure to be informed
c.
Conflict of Interest – indirect
d.
Conflict of Interest – direct
e.
Sustained failure of the director to devote attention to the
ongoing business (puts burden of proof on the plaintiff)
ix.
In re Caremark Int’l, Inc., Derivative Litigation
a.
Caremark is alleged to have undertaken illegal referrals from
doctors to defraud Medicare and Medicaid
b.
Cause of action was for failing to properly supervise and
maintain employees
c.
Defense was that the employee supervision process was
reasonable and undertaken in good faith and they had no reason
to suspect illegal conduct
d.
Business judgment rule not looking at the substance of the
decision but rather good faith and informed process
e.
Here stance is that Graham (no duty to look for violations)
means as long as there is a reasonable employee supervision and
information system in place directors cannot be liable and only
liable for prolonged system of failure to monitor
Exceptions to Business Judgment Rule
i.
McCall v. Scott
a.
Directors should likely have suspected something because some
directors were on the boards of acquired company’s and those
companies are now making triple the revenue
b.
The argument is that this should have been a red flag that there
was smoke and the directors should have gone looking for fire
h.
3.
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c.
4.
Waiver of director liability in articles that limits the monetary
liability of directors for what would otherwise be a breach of
fiduciary duty except for decisions
 Not in good faith
 Breach duty of loyalty
 For which an improper benefit was received
d.
Directors have the burden of proving they are shielded at
common law
ii.
MBCA § 2.02(b)(4) is parallel provision for limiting director liability
with exceptions of
a.
Financial benefit received
b.
Intentional infliction of harm on shareholders
c.
Violation of § 8.33 (liability for unlawful distributions)
d.
Intentional violation of criminal law
iii.
Under MBCA plaintiff has to prove the shield does not apply
iv.
MBCA shield is tighter (no bad faith opening) and the plaintiff has to
prove that shield is not applicable
Duty of Loyalty
i.
Competing with the Corporation (Jones v. Frank Burke)
a.
Plaintiffs work for defendant but thinks he is bad so start to
contact clients and form new business taking the clients along
b.
Plans for this were made while they were still fiduciaries of
defendant because the fiduciary duties stop when you leave the
company unless there is a covenant not to compete
c.
At some level though people need to be able to get together off
hours and talk about leaving and starting a new business
ii.
Corporate Opportunity (Northeast Harbor Golf Club v. Harris)
a.
Directors sue President Harris for a violation of corporate
opportunity when she bought 3 tracts of land around golf
course and began preparation for development
b.
Trial court says she is not liable because use Guth test
 Line of business
 Financially able to undertake on own
 How great will conflict be if we say this is not a corporate
opportunity
 Does corporation have an interest or expectancy
c.
Most courts look at this as a multi factor test and to use all of
them to see if there was a corporate opportunity
d.
ALI Principles of Corporate Governance § 5.05
 (b)(1)(A) any opportunity where director or officer becomes
aware of opportunity because of role
 (b)(1)(B) use of corporate information or property and the
director thinks this would be of interest to the corporation
 (b)(2) says any activity that a senior executive becomes
aware or knows has close relation to a business in which a
corporation is engaged or is expecting to engage
 If one of the two apply she has to disclose the opportunity
and give the corporation first dibs
 If corporation rejects the opportunity then she gets it
iii.
Conflict of Interest
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a.
H.
HMG/Courtland Properties, Inc. v. Gray
 Common Law Conflicts of Interest – transaction
automatically void or voidable at a later date but maybe not
that harsh if person with conflict could show that the
transaction was fair in substance and procedure
 Gray and Fieber were directors of a corporation selling real
estate NAF was buyer and Fieber had an interest which he
disclosed but Gray, the chief negotiator, did not disclosed
and Fieber didn’t tattle
 Business judgment rule does not apply because there is a
direct conflict of interest
 Burden is on Gray and Fieber as defendant’s to prove
fairness because conflict of interest is prime facie case of
unfairness
 Elements of fairness are a continuum of
o Fair dealing – the transaction itself was conducted
fairly (procedural)
o Fair price – the cost of the transaction was fair
(substantive)
 If majority of non-interested approve knowing of the conflict
is the transaction seen as
o A negation of the common law automatically void
but corporation can request void
o Burden of proof changes and now plaintiff has
burden to show it was unfair
o Now the business judgment rule applies and
plaintiffs have to negate that
b.
Cookies v. Lakes Warehouse
 Judge says that the statute merely negates automatically
voidable rule but still have to show fairness
 Defendant has the burden of proving good faith and fair
dealing
 On fairness grounds court finds that disclosure was
recognized because everyone knew of the conflict of interest
but court here gave statute very little weight by just saying
automatic voiding is negated
Shareholder Derivative Suits
1.
Direct v. Derivative
i.
Eisenberg v. Flying Tiger Line
a.
Direct – suit by and on behalf of the shareholder individually
b.
Derivative – assert the corporation’s claim because the
corporation is unwilling to do it on its own
c.
Allegation was that rights as a shareholder have been changed
which is a direct suit
d.
The defense is that the only reason there was an injury at all was
because of an action of the board so your injury flows through
the corporation and affects all shareholders
e.
Court says invokes shareholder voting rights which is direct
2.
Procedures
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i.
I.
J.
Corporation is defendant because asking court to enjoin corporation and
force them to take an action but also gets the benefit if the plaintiff wins
ii.
Corporation cannot get involved in litigating on the merits
3.
Restrictions on Filing
i.
If plaintiff does not have a big enough stake in the company they have to
post a bond for the expenses of the litigation (this is rare)
ii.
MBCA § 7.41 imposes standing requirements
a.
“commence or maintain” interpreted to mean must be a
shareholder throughout the litigation
b.
Shareholder at the time of the injury OR became shareholder by
operation of law from someone that was AND
c.
Fairly and adequately represents the interest of the corporation
4.
Procedural Hurdles
i.
Must satisfy standing requirements
ii.
Post bond in some states
iii.
Make demand that corporation institute suit or show why it was futile
a.
But if you ask and they say no you are admitting their
independence showing this not futile
b.
If you don’t ask have to prove board would have refused
iv.
To get around this demand futility dilemma many have created special
litigation committees of uninterested directors to determine whether to
file (usually say no)
v.
MBCA has gone to a universal demand rule but this does not mean you
are done if they say no just have to allege that directors refusing made a
mistake because
a.
Majority were not qualified (independent) directors OR
b.
That if they were qualified they failed to make an investigation
c.
Relevant time frame is the time that you made the demand
vi.
If there is a special litigation committee it is the plaintiff’s burden to
prove that either the members were not independent or that their
procedures were flawed
vii.
DL law says look to independence and procedure BUT the burden is on
the corporation to prove these and says court can apply business
judgment and could overrule the SLC even if independent and
procedures good
Indemnification for Director Liability
1.
MBCA § 8.52 mandatory indemnification – if the director wins he has to be
indemnified for expenses he incurred during the litigation
2.
MBCA § 8.51 permissive indemnification
i.
(a) says must meet standard of showing director thought he was acting in
good faith
ii.
(d)(1) contractual promise to indemnify a director regardless of whether
he won or lost for reasonable expenses
ii.
(d)(2) says you cannot be indemnified for any judgment amount
for which you were found to be liable (damages)
iii.
Gets complicated when directors ask for indemnity in advanced to pay
the litigation costs while case being litigated
Insurance Against Director Liability
1.
Director and Officer (D&O) insurance can insure directors against risk
2.
Insurance can pay costs of litigation and sometimes even damages
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3.
K.
Premiums for this are high but the corporation is not prohibited from buying such
insurance under the MBCA
4.
Need insurance to pick up rest for directors to cover the stuff not covered under
indemnification
Raising Capital and Corporate Growth
1.
Issuing Authorized but Unissued Shares
i.
Preemptive rights allow a current shareholder to maintain proportion of
current ownership to get “first dibs” on new shares
ii.
MBCA § 6.30 says no preemptive rights unless articles authorize
iii.
If there are preemptive rights a shareholder has the right maintain a
proportional ownership in the corporation but may choose not to exercise
that right
iv.
(6) says cannot lower the price and sell to someone else for at least one
year after offering to old shareholders
v.
(b)(3) gives exceptions to preemptive rights
a.
Issued as compensation to directors
b.
Shared issued to be convertible or option rights for compensation
of directors
c.
Shares issued within 6 months of incorporation
d.
Shares issued for non-monetary consideration
vi.
§ 6.21(f) gives a voice to shareholders on issuance of shares but only if
going to dilute shareholders by more than 20%
vii.
Byelich v. Vivadelli
a.
Vs (90%) removed preemptive rights via bylaw amendment then
issued more stock one increasing stock ratio to 99% to 1%
b.
Under MBCA § 6.30 says preemptive rights in articles to needed
to amend articles to get rid of them (not bylaws)
c.
Vs defenses are that statute allows removal of preemptive and
followed statute and this is not direct but derivative and did not
meet procedural hurdles
d.
In closely held shareholders have a duty of good faith to each
other and act in good faith with each other and this preemptive
removal intended to hurt Bs
e.
Relief was shift burden to corporation to should fairness in
issuing and actual sale
f.
Minority view in Nixon v. Blackman (jungle rule)
 Have to protect yourself from the outset
 Once you’re in you’re stuck in on the terms you agreed to
when you got in
2.
Venture Capitalists
i.
Company needs money but it is a risky investment
ii.
Venture capitalists benefit from initial public offering so ask for
registration rights to make shares public and recoup their investment and
make a little extra
3.
Going Public
i.
Underwriters (securities firms) “agree” to take company public
ii.
File registration statement pursuant to the 1933 Securities Act (and go
back and forth with the SEC until requirements met)
iii.
Solicit offers to buy (but not legal to sell yet)
iv.
Registration accepted by SEC and deemed effective
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v.
vi.
vii.
viii.
L.
Initial public offering at price agreed upon by underwriters and
corporation
Underwriters buy at named price (or often at discount)
Underwriters resell on public trading market
Shares are traded and then triggers ongoing requirements implicated
under the 1934 Securities Act
Oppression
1.
Hollis v. Hill
i.
Hollis (50%) sues Hill (50%) alleging oppression which entitles him
dissolution of the corporation
ii.
The question here is in the TX federal court has to apply the law that TX
state courts would apply and state court would apply NV law but has no
dissolution for oppression provision
a.
Normally dissolution only occurs by board vote and then
shareholder vote
b.
Under MBCA § 14.30 there is shortcut for oppression by
majority shareholder
iii.
Because NV does not have the shortcut, Hollis’s argument is that Hill
violated fiduciary duties that were owed to Hollis individually as a
minority shareholder
iv.
Court agrees and recognizes that in closely held corporation shareholders
have duty of good faith and fair dealing to each other
v.
Wilkes gave two part test in order to fire a minority shareholder
a.
Majority must articulate a legitimate business purpose for the
decision (even if it is at will employment)
b.
Minority needs an opportunity to prove that the end could have
been achieved in a manner less detrimental to the minority
shareholder’s interest
vi.
In Hollis case court looks to factors in applying Wilkes
a.
Did Hollis own significant amount
b.
Usually a distribution or salary
c.
Is Hollis a founder
d.
Were shares in compensation of services
e.
Expects value of shares to increase
f.
Significant contribution
g.
Reasonable expectation that what happened wouldn’t happen
h.
Stock ownership requirement of employment
2.
Exacto Springs v. Commissioner of the Internal Revenue
i.
IRS cares what salary majority corporation’s CEO is getting because IRS
says you can expense reasonable salaries but not dividends
ii.
Test that the tax court applied was a multi-factor test
a.
Type and extent of services
b.
Scarcity of qualified employees
c.
Prior earning capacity
d.
Contributions
e.
Net earnings
f.
Compensation
g.
Peculiar characteristics
iii.
Posner says this is no good because if allows the court to second guess
business decisions and makes arbitrary rules so look at what the expected
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BUSINESS ASSOCIATIONS
return was and if the actual return was bigger it justifies a larger salary
but if it is less than it certainly does not justify huge salary
3.
Gianotti v. Hamway
i.
Issue is directors and majority shareholders giving themselves higher
salaries and misapplying certain other funds
ii.
Here the remedy is that the oppression statute entitles court to order
dissolution of corporation
iii.
MBCA § 14.30(a)(2)(ii) directors have acted in a manner that is
oppressive, illegal, or fraudulent (iv) says assets misapplied or wasted
and then (i) and (iii) are director and shareholder deadlock respectively
and oppression defined as conduct which departs from fair dealing,
unfair conduct by those in control and can be a gun that the minority
owner can hold to majority
iv.
This court puts burden on defendants to show oppression did not occur
but usually it will be up to the plaintiff to prove that oppression occurred
v.
Test that has been most widely accepted is to analyze the conduct that is
being challenged in terms of reasonable expectation of the shareholder
vi.
Question is what power does Court have?
a.
Most courts say if I can dissolve I can require dividend
b.
MBCA § 14.34 authorizes relief of stock buyout and agreed
upon price of the worth of the shares (must be a reasonable price
and the price is what will be litigation rather than on the presence
of oppression)
c.
Not mandatory but can avoid litigation on oppression if agree
d.
Alternative is DL rule that there is no court remedy because
could have protected themselves from the outset so leave them
where they are (minority view)
Dividends
1.
Zidell is an extension of close corporation duties to dividends because Court does
not apply BJR in closely held corporation and require fiduciary duties to each
shareholder so when board did not pay dividends to minority ruled violation of
fiduciary duties
2.
Legality of distribution under MBCA § 6.40
i.
May authorize dividends but cannot authorize if
a.
Would not be able to pay debts as they become due in the normal
course of business OR
b.
Total assets would be less than total liabilities plus the amount
that would be needed if the corporation were to be dissolved at
the time of distribution to satisfy preferential rights
ii.
(e) says look at date issued if going to be paid after 120 days
authorization or look to authorization date if going to be paid within 120
days
iii.
If in a DL legal capital jurisdiction follow same test but with new part
a.
Positive balance sheet
b.
Pay debts as come due BUT NOW ADD
c.
Has to have enough in surplus to pay it out
3.
MBCA § 1.40(6) – definition of distribution does not include issuance of more
shares because there is no economic effect outside of the value of the shares for
the shareholders but redemption of shares is considered a distribution because
taking money out of corporation (so illegal for corporation to buy back shares if
MBCA § 6.40(c) test not met)
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Transferability of Shares
1.
Donahue v. Rodd Electrotype Company
i.
Outlines equal opportunity doctrine that says if you offer something to
one shareholder you have to offer the same thing to all the rest
ii.
Court then says you can either make corporation get money back from
buy back of father’s shares or you can make the same offer to Donahue
iii.
Concurring judge says this is ok now for stock redemption but what
about employment or other such offers to shareholders
2.
MBCA § 6.27
i.
(a) Says what form and where restriction can take place but does not
need to be unanimous (but should be to be useful)
ii.
(b) deals with transferees and says if shares legended as to alter as to
restriction or you knew about the restriction you are bound
iii.
(c) has to do with valid purpose and says allow such contracts to
maintain the corporation’s status when it is dependent on number and
identity of its shares, preserve exemptions under securities laws, other
purpose that is reasonable
iv.
(d) says what kinds of restrictions are valid
a.
Prohibits transfer to certain types of people
b.
Consent approval (permission to transfer)
c.
Obligations and options (corporation’s option to buy is call
option of shareholder to sale is put option or could be
obligations)
3.
What to worry about with buy/sell agreements
i.
At what price the purchase will occur (should be set in the agreement)
a.
Agreed value at every year
b.
Appraisers designated to set a value
c.
Could be other formula
ii.
Ownership proportion changes
iii.
Dispute resolution – a way to get out upon disagreement
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