Other Corp Outline

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Corporations Outline

I. Introduction to Corporations- Developed from contract law, property law, wills and trusts and agency law.- There are three forms of business organization: agency, partnership and corporations

- Goal of corporate law: create wealth and facilitate transactions.1. easuring !fficiency"ow do we #now if a transaction is efficient or has created wealth$Pareto efficiency (Pareto-Optimal): system is efficient when resources are distributed in such away %within a given group or territory& that no reallocation of resources can ma#e at least oneperson better off without ma#ing at least one other person worse off.'roblem: there is no way to (udge the effect the transaction has had on the rest of society.Kaldor and Hicks: )s long as there is a way in society to potentially compensate the people whoare worse off, then it is o#, and it is efficient.'roblem: the compensation is hypothetical and doesn*t say that the person needs to be madewhole.

+. oncernse are concerned with #eeping down costs.The most important transaction cost is agency costs %e: !/s and 0/s who have tastes in veryfine wine&. otion is that the agent %actor& will be doing something to benefit himself to thedetriment of the principle.2truggle here: e want the agent to be productive and wor# to ma#e money for the principle,and we therefore want to give them incentives to wor# hard. )t the same time, we don*t wantthem to go crazy with their spending.

3. Debt, !4uity and !conomic 5alue

apital 2tructure: made up of debt and e4uityThere are two ways that a company can raisemoney:1. Debt: have people lend you money: essentially a contract that allocates the relationshipbetween debtors and creditors with the company to get payments over the course of a certainnumber of years, and then get it all bac#, plus interest.6oo# at solvency: is the company going to ma#e it or not$ )ll you need is for the company toma#e bac# their investment, how successful does not matter.

+. !4uity: issue sharesthere is no contractual relationship, since it is buying part of thecompany. /nce the debtors have been paid, shareholders get the rest. 7t is therefore ris#ier thendebt, but the ris# of return can be much better.

how do we value these assets$ Use the Discounted Cash Flowhen you buy the share you are hopefully getting a return in some way: a cash flow. e thenuse a 8discount rate9 to determine the return an investor would epect over time.This is not an accurate reflection, since you are assuming a future cash flow, and choosing anarbitrary discount rate.

is# and eturn: the ris#ier the pro(ect, the greater the return, and therefore the higherdiscount rate. Diversification can eliminate some of the ris#, but some pro(ects are so ris#y thatthey cannot be diversified.

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II. Agency1. 7ntroduction)gency problems have come up before in contracts and tort liability.)gency is the simplest form of business organization: you are hiring someone to represent you.This is not a contract: agency law imposes a fiduciary duty %higher duty& on the agent then that

which is imposed in contract law.Agent, formally in restatement 3rd: 8)gency is a fiduciary relationship that arises when oneperson %a principal& manifests assent to another person %an agent& that the agent shall act on theprincipal*s behalf and sub(ect to the principal*s control and the agent manifests assent orotherwise consents so to act9.

the agent has authority to effect a legal relationship

+. 5ocabularySpecial agent: deals with one transaction %go by this house for me&General agent: multiple transactions %here is someDisclosed Principal: 3rdparty #nows that there is a principal

Undisclosed Principal: don*t #now that there is a principal, thin# that the agent could be theprincipal;might want to do this because #nowing who they are may drive up the price %eg: a


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the relationship between theprincipal and the agent. ould the reasonable person standing inthe agent*s shoes assume from the principal*s action that they had authority.There can be epress or implied authority.Apparent authority: the relationship between the principal and the third party. hat a reasonablethird party would infer from the behavior of the principal. Designed to protect the third party;

loo# to the manifestations of the principal.Inherent authority: relationship between the agent and the third party; loo#ing for any actionfrom the agent to the third party to signal authority.hite v. Thomas: hite hires 2impson to go and bid on a certain amount of land for him. 2heover spends and then tries to sell part of it to the Thomas*. ourt said that there was no reasonfor Thomas* to believe from her actions that she had authority to ma#e a side deal.Gallant 7nsurance o. v. 7saac: ar insurance case. )n agent had inherent authority because thethird party reasonably believed that it had authority to orally bind coverage, and the past dealingswent through and agent, and the agent filled out the paperwor#.

b. Liability in Tort7f there is a master@servant relationship, then the master is liable for the tort of the servant.

6oo# at how much control the principal has control over the agent: the more control the principalhas over the agent, the more li#ely we are to find the principal liable for the actions of the agent."umble /il and efining o. v. artin: an who ran the gas station for a large company was anagent because the company had financial control, agent had so discretion. 'rincipal was foundliable."oover v. 2un /il o.: Guy who ran a gas station for a large company was not an agent becausehe was under no obligation to follow the principal*s recommendations. 'rincipal was not liablefor in(uries that occurred at the station.

A. )gent*s DutiesThe agent is a fiduciary: they are a category of legal actors upon whom we impose a higher duty.

e are trying to create legal rules that can advance the goals of the relationship: to help theprincipal.Three important duties:1. Duty of are: the agent must behave in the way that a reasonable person would behave underthe circumstances; This is similar to torts, ecept that it is more defendant friendly.+. Duty of 6oyalty: agent must advance the purposes of the principal*s and can*t 8line theirpoc#ets at the epense of the principal9.Tarnows#i v. esop: )gent made a secret commission while selling (u#e boes on behalf of theprincipalB the court said he had to return those profits because he had a duty to advance theinterest of the principal over his own.

7ne Gleeson: agent running trust for the principal leased the principal*s land to himselfB courtsaud he could not deal with himself even though he was trying to #eep the land in good shape.3. Duty of /bedience: not as important.



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III. Partnership1. Introduction- 'artnerships are a way to pool capital.- There are two ma(or problems with partnerships:

1. 6iability: partners are personally liable, if you go into a general partnership, then

creditors can go after your personal assets.+. 7nadvertently get into a partnership, and if no control is specified both partners have

e4ual control, and it only ta#es one person to spoil the partnership.

2. Duty owed among partners

'artners owe to one another a duty of loyalty, and are held to a higher standard than one whomerely contracts.einhard v. 2almon: Third party as#ed 2almon alone to re-lease a building. 2almon did notmention this to his partner einhard. ourt said that 2almon breached his duty of loyalty toeinhard by ecluding him from the opportunity he had as a partner.

3. Problem of Joint wnership

'artners are (ointly and severally liable for the debts of the business this is why people shouldnot go into partnerships.

!. "ormation of Partnerships

) partnership can be formed epressly, or impliedly.1. ) partnership can be implied:

1. ) voluntary contract of association for the purpose of sharing profits and losses.+. 7ntent on the part of the individuals to share profits and losses

0actors to establish intent:

a. receipts showing share of profits and losses

b. furnishing s#ill instead of money: relevant

c. lac# of involvement is not necessarily relevant.

7f you are share of the sales, the argument is that you are an employee but if you are getting ashare of the profits, then you are most li#ely a partner and have some control over the business.

5ohland v. 2weet: 2weet wor#ed at 5ohland*s nursery. "e was paid a +C commission thatcame out of the profits, not the sales. The court found that had partnership could be implied.

#. $hird Party Claims

a. laims against departing partnersPolicy concern: should we release departing partners from debt$ 7f you release them from debt,then they can bail when things get bad. 7f you hold them accountable, then creditors can go afterthen years later for faults of their partners.ule comes from !PA "ection 3#

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%+& releases the departing partner of partnership debts if the courts can infer an agreementbetween the continuing partner and the creditor to release the withdrawing partner.%3& releases the departing partner from personal liability when a creditor renegotiates his debtwith the continuing partners after receiving notice of the departing partner*s eit.

b. laims against partnership property

The partnership has a segregated pool of assets available for creditors.

c. laims against partner*s individual propertyhen a creditor*s claim is not fully satisfied by the partnership property, the creditor can ma#e aclaim to the assets of the individual partner*s assets as well.

$hen the !PA is state la%, and it is not a &'3 ankruptcy case* +ingle ule applies : reditorsof the partnership get assets of the partnership first, creditors of the individual get assets of theindividual first$hen !PA is state la% or it is a &'3 ankruptcy case* Parity ule applies* creditors of thepartnership get first claim on both the assets of the partnership and the assets of the individual.reditors of the individual get first claim on the assets of the individual, and then second claimon the assets of the partnership.

%7f you are giving benefits to the creditors then you are encouraging the formation ofpartnerships.

&. Partnership 'o(ernance

One partners action %ithin the scope of ordinary partnership usiness is inding on

the other partner

.he ma/ority of the partnership has the aility to make the usiness decision, ut 012

is not the ma/ority

when choosing between these rules, chose the rule that will encourage business:policy.

ational Eiscuit o. v. 2troud: Two partners in a ba#er business. /ne partner tells abisco thatthey will not accept anymore bread, the other partner tells them to send it. ourt ruled that theacceptance was binding on the partnership, even though it was ?C, since it was in the ordinarycourse of business.

). $ermination

a. 'artnership at will: a partnership with no time limit %at will&, can be dissolved by either partner

as long as it is in good faith.

b. 'artnership at term: a partnership at term cannot be dissolved until the term is up

1. !plicit: the term of the partnership is eplicit in the contract.f there is a contract in place regarding the terms of dissolution, the terms in the contract

trumps any state la% to the contrary

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policy: we want parties to be able to negotiate, and we want to encourage the formation ofcontracts.

)dams v. =arvis: one partner withdrew from the partnership, under


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b. 6imited 6iability 'artnership

- intended to protect professionals

- same as a normal partnership, ecept partners have limited liability for tort ofcolleagues

c. 6imited 6iability ompany

- )ll members have liability limited to their contributions even when they eercisecontrol as a general partner would

- an choose to be taed as a partnership or corporation.

I,. $he Corporation

A. $he Corporate "orm

The most common form is the publically traded corporation.

1. $erminology

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losely held corporations: usually a small corporation where the shareholders and the board arethe same %usually family businesses& that incorporate for ta purposes rather than capital.'ublic orporation: corporations that traded publicly on stoc# echanges for the purpose ofaccumulating more capital.

!ither of the above can have a controlling shareholder or no controlling shareholder.

'roblem: minority shareholders lac# power, and are liable for the controlling shareholder*saction and decisions.'ublic 'olicy: there is a tension between giving officers fleibility and power to ma#e decisionsto ma#e us money, and holding them accountable for their self-interested actions.

2. Creation of a "ictional -egal ntity

orporations are legally treated as a person.

a. /istory of Corporate "ormation

7n past corporations were non-profits for the public good, their charters were from the state. To

ma#e a corporation for profit, you had to get a special act from the legislature. This meant thatonly the well connected were able to have corporations.

b. Process of Incorporating $oday

- 7ndividual called an 8incorporator9 drafts and signed the articles of incorporation@certificate ofincorporation %corporations 8charter9&. This includes the name of the company, the board ofdirectors, the number of shares, and value %usually one cent&

- The charter is filed with a designated public official, usually the secretary of the state %inDelaware the corporations life begins then&.- 0ee is due: calculated in part as a function of how many shares the new corporation is

authorized to issue %price discrimination&.- 2ecretary of state issues the corporation*s charter: copy of the articles and a certificate ofgood standing %in other (d the corporations life begins then&.- orporation elects directors, adopts bylaws, and appoints officers.

c. Articles of Incorporation or Charter

The articles can contain any provision that is not contrary to law.overriding concept:contractual freedom.The corporate charter will contain the most important customized feature of the corporation,should there be any. %Governance oddities will be covered in this&.harter must name: the original incorporators, state the corporation*s name and %broadly& it*s

business, and fi its original capital structure.harter can establish the size of the board or include other governance terms.

d. Corporate 0ylaws

ust conform to both the corporation statute and the corporation*s charter.

%Eylaws fi the operating rules for the governance of the corporation.

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. 6imited liability ma#es it possible for mar#et prices to impound additional information aboutthe value of firms.

?. limited liability allows more efficient diversification.

A. 6imited liability facilitates optimal investment decisions

!. $ransferable shares

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2hareholders own a share interest, and their share may be transferred together with all rights that

it confers.tied to limited liability: if shareholders were liable, then the creditability of thecompany could change every time.

The ability of investors to freely trade stoc# encourages the development of an active stoc#mar#et.0ree transferability is a default provision: all (urisdictions can limit these agreements.

0ree transferability compliments centralized management in the corporate form by serving as apotential constraint on the self-serving behavior of the managers of widely help companies.

#. Centralied +anagement

The shareholders elect the board, and the board appoints officers and managers.

- orporate 2truggle: we want to give the board leeway so that they will go out and ma#e moneyfor us, but at the same time we don*t want to give them so much room that act againstshareholder interests.

- The structure we have come up with to empower shareholders is that they can sell, sue andelect the board.

a. 0oard of Directors

4 e give immense amounts of power to the board.

- Directors have a fiduciary duty

ule*the board is not re4uired by duty to follow this wishes of a ma(ority shareholder. This is

because the board must represent the interests of the ma(ority and minority shareholders. 7f anindividual does not li#e it, then can sell their shares %all 2treet ule&.

)utomatic 2elf-leansing 0ilter 2yndicate v. unninghame: ontrolling shareholder %??&wanted to sell the company*s assets. The directors refused to sell. The court said the board hasabsolute power because the minority has to be ta#en into account.

Pulic Policy*there is a tension between protecting minority shareholders and letting thecontrolling shareholder have control because he has the most invested. 7f the board does goagainst the ma(ority shareholders, then they can vote out the board.

"taggered 5oards: ) third of the board gets elected each year. 7f you are a ma(ority shareholder,

it could ta#e a while to get the whole board replaced. This prevents the board from turning overevery year. They are therefore good for stability.

6ormality of 5oard Operations*orporate directors are not legal agents of the corporation anddirectors act as a board only at board meetings. ) certain number of directors must attend themeeting for it to be valid %a 4uorum&. inutes must be recorded at the meeting.

.he formality of oard meetings must e follo%ed

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0ogel v. directors. Three meet before the meeting andinformally decide to fire the !/. ourt held that it was not valid since they did not follow themeeting formalities.

b. Corporate fficers5+anagers

The manager and the officers are the agents of the corporation.

ule*/fficers, unli#e directors, are agents of the corporation and therefore a sub(ect to thefiduciary duties of agents.

=ennings vv. 'ittsburg ercantile o.: ercantile*s 5' %officer& made a representation to a realestate bro#er that if the bro#er made any offers, the board would accept them. The court ignoredinherent authority and said that the 5' did not have apparent authority %3rdparty would believebased on dealing with the principal that the agent had authority& because the prior dealings withthe board were not the same and the fact that the company had an office for !gmore wasinsufficient.

Grimes v. )ltheon 7nc.: !/ of a company enters into a verbal contract to sell 1C of thecompany. ourt says that he did not have the authority to do this.

0. $he Protection of Creditors

reditors get some protection: we do not want the corporation to falsify accounting, income orassets for a loan, continue to operate while ban#rupt, etc;

e are worried that companies are going to falsify their documents, and that ultimately creditors

are not going to want to lend anymorepolicy-wise we are pro-business.

1. +andatory Disclosure


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a. Director -iability

Director liability is to the shareholders, and in the unusual case when a corporation is insolvent,they may have a duty to the creditors. orporate law does not tell the directors where the firstduty is owed.

b. "raudulent $ransfers

Generally: 7f you are moving money around to avoid paying creditors, then those transfers arevoid.


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There is two part test to determine when the creditor can hold shareholders liable for acorporation*s debts

1. There is such unity of interest and ownership that the separate personalities of the corporationand the individual no longer eist. onsider the following factors:

- failure to comply with corporate formalities

- comingling of funds

- undercapitalization

+. 2ome #ind of in(ustice or ine4uity: this in(ustice must go beyond not getting paid as a creditor.

7ote*normally you must show both elements, but in some cases you only need to show one %eg:cases where the corporation is obeying formalities, but you can still pierce the veil.&

2ea-6and 2ervices v. The 'epper 2ource: 2ea 6and shipped peppers for 'epper 2ource, refusedto pay, and 'epper 2ource filed for ban#ruptcy. 2ea 6and attempted to pierce the corporate veil

to get to archese*s assets, the owner of 'epper 2ource. ourt said the first prong was metbecause corporate formalities weren*t followed, funds were commingled, and the company wasundercapitalized. The second prong was not met because there was no evidence that there werewrongs past not getting paid.

Kinney 2hoe orp. v. 'olan: Kinney leased a building to 'olan*s company 'olan 7ndustries,'olan 7ndustries didn*t pay then went into ban#ruptcy. Kinney attempted to pierce the corporateveil to get to 'olan*s assets. ourt said the first prong was met because the company as notade4uately capitalized, did not observe any corporate formalities, and 'olan attempted to protecthis assets by moving them to a different company. The second prong was also met because notpiercing would cause a basic unfairness. ourt ignored evidence that Kinney #new that the

'olan 7ndustries was undercapitalized.!. ,eil Piercing on 0ehalf of In(oluntary Creditors

al#ovs#y v. arlton: al#ovs#y got hit by a cab owned by the 2eon ab orporation, ownedby arlton. arlton also owns I other corporations, each of which has two cabs with minimumauto insurance. al#ovs#y attempted to pierce the corporate veil to get to arlton*s assets.ourt said the first prong was not met because he wasn*t conducting the business in an individualcapacity. )lso is not enough that a plaintiff can*t receive full recovery because of the insurancelimits.

C. :ormal 'o(ernance; $he ,oting ystem

1. $he 6oles and -imits of hareholder ,oting

5oting is the shareholder*s most basic right: however there is still a collective action problem:shareholders don*t vote.

2. lecting and 6emo(ing Directors



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a. lecting Directors

- Easic shareholder voting right: they elect the board of directors.- )nnual election of directors: each year voting stoc#holder elect either the whole board, or somefraction of the board %staggered board&. orporations notice period, 4uorum re4uirement, recorddate are established by the charter and the bylaws.

b. 6emo(ing Directors

- ) director can be removed anytime for good cause %fraud, unfair self-dealing& at common law.6imitations on the common law rule: based on due process that director is entitled to the (ob, badbusiness (udgment is not good cause.

- Directors cannot be removed by other directors without epress shareholder authorization.

- 1>1 %#& confers broad removal power on the shareholders.

- 2taggered board: the idea is that it limits a controlling shareholder*s power to appoint the whole

board.

3. hareholder +eetings and Alternati(es

i Annual 8eetings

7n addition to electing directors, shareholders can vote to adopt, amend and repeal bylaws, toremove directors and to adopt shareholder resolutions.

The meeting is mandatory, if the board fails to convene an annual meeting within 13 months ofprevious meeting, courts will entertain shareholder petition and re4uire that a meeting be held.

ii "pecial 8eetings

-These are meetings other then the annual meeting. They are often to allow shareholders to voteon fundamental transactions.

- This is the only way that a shareholder can intitate action between annual meetings.

- evised odel Eusiness orporate )ct section F.C+ allowed for special meetings when it iscalled by the board of directors, or when the holder of at least 1C of the stoc# demands ameeting in writing.

- Delaware ++1%d&: it can be called by the board, or by people designated in the charter.

Policy"should shareholders be able to call a special meeting over the board*s ob(ection$

- ust balance the need to manage with the costs of calling a special meeting'ro special meetings: monitor corporate management, lower wasteful agency costs.on special meetings: shareholder meetings are costly, both money and time of the senioreecutives.

iii "hareholder Consent "olicitations

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This is an alternative to special meetings: statutory provisions allow them to act in lieu of ameeting by filing written consents.- This is through of as primarily than a cost-reducing measure for small corporations.

- This can also assist in hostile ta#eovers.

Delaware ++H: any action that may be ta#en at a meeting of shareholders may also be ta#en bythe written concurrence of the holders of the number of voting shares re4uired to approve thataction at a meeting attended by all shareholders.E): re4uires unanimous shareholder consent.

!. Pro: a class vote is re4uired only if the transaction alters legal or economicrights. %eample$$$&

- Delaware 2ection +F+%b&%+&: a class vote is needed if a transaction would alter legal rights.

&. hareholder Information 6ights

2hareholders have the right to inspect:

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- The company*s boo#s and records: plaintiff has a high burden to show proper purpose.

- The company*s stoc# list: plaintiff has minimal burden to show proper purpose. Thecorporation has the burden of showing improper purpose.

). $echni9ues for eparating Control "rom Cash "low 6ights

Easeline ule: control and cash flow go hand in hand. hen you buy a share, you get the right tovote. 7n these cases we are tal#ing about situations where people are violating this baseline ruleby trying to get control of the company %ie: the vote& without investing their money fully.

a. Circular Control tructures

7dea is that directors will want to 8vote the company*s shares9 on transactions within thecompany itself without actually paying for them. 2ince they cannot do this directly, it is possiblefor them to set up a second company which then buys stoc# in the original company.

- !ssentially a way the director can control the company.

- Delaware 1AC%c& is meant to enforce this baseline: DG6 M 1AC %c&: 2hares of its own capitalstoc# belonging to the corporation or to another corporation, if a ma(ority of the shares entitled tovote in the election of directors of such other corporation is held, directly or indirectly, by thecorporation, shall neither be entitled to vote nor be counted for 4uorum purposes.

2peiser v. Ea#er: "ealthhem owns 1CC of the shares of edallion. edallion has I votingright in "ealthed, which turns into I? voting right. "ealthed owned >+ of "ealthhem,with 2peiser and Ea#er owning the rest. ourt said that because the stoc# could be converted to ama(ority, "ealthhem could not vote its share in "ealthed.

b. ,ote 0uying

Easeline rule is still that you cannot separate control from cash flow.- Elatant way around this: allow people to sell their shares to unmotivated shareholders.'olicy for why we do not want this: this would allow for people to ta#e very high ris#s since theydo not have a lot invested in the company. This is would be unfair to the other shareholders.

$e do not allo% for latant 4ote uying

9ote uying is not illegal per se, unless the purpose %as to decei4e or disenfranchise the

shareholders :ook at the intrinsic fairness to see if the process %as fair or if there is a reason

to see it as unfair

'olicy: !asterbroo# L 0ischel %e-ead&

%a& 5ote buying is not a good public policy.

%i& 2elling votes will not protect the other shareholder*s e4uity.

%ii& ant individuals to have a sta#e in what voting for.

%b& hy not create a mar#et for votes$

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%i& ill never be able to get bac# what the vote is actually worth.

%ii& 'erson selling the vote attaches almost no value so will not charge what it is actuallyworth. %)nything is better than nothing mentality&.

%c& !fficiency: 5aluing stoc#s not hard science, valuing right to vote even more complicated.

2chreiber v. arney: =et owns 3? of T7). There is a plan for a merger between T7) and Teas)ir, but in order for it to go through T7) needs =ets votes. =ets also owns warrants in T7) thatthey want to eercise since the stoc# price will go up. They need a loan to do so. T7) loans =etthe money so that they will vote for the merger. The court found that this was not illegal per se,unless the purpose was to deceive or disenfranchise the shareholders.

ryo-ell: )ngry shareholder had A sta#e in the company and threatened a proy fight forcontrol. ompany they would add him to the management slate in order for him to bac# down.ourt said this is not traditional vote-buying, but is more subtle, and that intrinsic fairness testshould not be used.

c. Controlling +inority tructures

- ontrolling minority structures are ways to separate control from cash flow.- 2ince this is, in effect, doing away with some of the rights to vote, it places a lot of pressure onthe right to sue and sell.

- 7dea is to allow a shareholder to control a firm while only holding a small part of its stoc#.- Three #inds of structures:i ;ual Class "hares*situations where you have one class of shares that have a disproportionateamount of voting rights %eg: artha 2tuart has 1C votes per share in her company&. This is notcommon outside of the


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M 1>%a&: ).N This is the general rule.

ii :imits and =>emptions

% 7f you don*t want to comply with the general rule %1>%a&%3&&, then loo# for limits andeemptions so that you don*t have to go through the steps.

M1>%a&%1&: definitions of critical terms. These definitions are very broad.'roy: any solicitation or consent whatsoever

2olicitation: )ny re4uest for a proy.

M1>%a&%+&: Two eemptions from the general rule.

1. ewer !emption: solicitations by persons who are ordinary shareholders who wish tocommunicate with other shareholders but do not intend to see# proies.

eception to this eemption: if you want to oppose a merger, then you have to followthe general rule even if you are not soliciting a proy.

+. Traditional eemption: solicitation of 1C shareholders.

iii 8echanics

M1>%a&%>&: regulates the form of the proy.M 1>%a&%?&: regulates the presentation of the proy.

M1>%a&%A&: must file the solicitation with the 2!

M1>%a&%F&:

i4 "pecial ules for =lections

b. hareholder Proposals

M1>%a&%H&: Townhall eeting 'rovision: 2hareholders can include certain proposals in the

company*s proy materials, however they must be ecluded if:

4 approval of the proposal would be improper under state law /

- the proposal is about ordinary business as opposed to social policy

"ewlett 'ac#ard ase 2tudy: arpenter*s pension fund want to include a statement to move theboard to use a plurality vote. 2! denies the re4uest to have it ecluded, and "' places theproposal on the ballot. 2hareholders vote down the proposal.

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1>%a&%11&

) 7nc. v. )02! !mployees 'ension 'lan

c. $he Anti4"raud 6ule; >1!?a@?=@

Definition of 0raud:-8aterial misstatement or omission: easier to get defendant for misstatement then omission.

Test for materiality: would a reasonable shareholder consider it important when decidingwhether or not to vote$

- 8ade %ith the intent to decei4e (scienter)

- !pon %hich there is reliance

-Causing

-n/ury

Jou must meet all of these elements.

5irginia Ean#shares v. 2andberg: 7n a proy solicitation regarding a merger, 5E7 stated that a >+buyout price for the shareholders, who were against the merger, was a high value. ourt said thatthe proy solicitation was fraudulent because: it was material in that the statement made by adirector will be relied upon, however there was no causation because the merger could have goneforward without these minority shareholders.

1. tate Disclosure -aw; "iduciary Duty of Candor

Oligation of corporate insiders to e candid %hen talking %ith their shareholders

use this if you can not bring a 1>%a&%I& anti-fraud case.ule: henever directors communicate publicly with shareholders about shares with or withoutre4uest for shareholder action, directors have a fiduciary duty to eercise care, good faith, andhonesty.

- This seems limited to the facts of alone v. Erincat.

D. :ormal 'o(ernance; $he Duty of Care

1. Duty of Care and the :eed to +itigate Director 6is7 A(ersion

)67*s principle of orporation Governance: Duty of are: a corporate director and officer isre


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- 'olicy behind the rule: we don*t want to discourage directors and officers from ta#ing ris#y

decisions, we want to create a system that will allow for directors and officers to ta#e ris#sthisis why the negligence standard is relaing into being defendant friendly.

- Directors* and /fficers* personal assets are protected through a set of the barriers that aplaintiff would have to overcome: indemnification, director and officer insurance, the business(udgment rule, and 1C+%b&%F&.

Gagliardi c. Tri0oods 7nternational 7nc. 87n absence of motive, D and /s are not legallyresponsible for losses incurred in good faith.9

2. tatutory $echni9ues for -imiting Director and fficer 6is7 ?: %a&Li$its to inde$ni&ication"this has to be in good faith and it cannot involvecriminal activities.

%c&: if the officer has been successful on the merits or otherwise, he can be indemnified.2uccessful on the merits is escape from an adverse (udgment or other detriment.

%f&: allows for other indemnification but doesn*t set aside good faith re4uirement.

altuch v. onticommodity 2ervice 7nc.: altuch was 5' of onticommodity where he traded

silver. The silver mar#et crashed, and speculators sued him. "e had legal epenses from

multiple suits that he settled. ourt said the company had to indemnify him because the

settlement showed that he acted in good faith. 7f he had been found guilty, it would have shown

bad faith and therefore no indemnification.

b. Directors and fficers Insurance

orporations can pay the premiums for D and / liability insurance. The only difference fromindemnification is the pot where the money is coming from %in this case it is coming from theinsurance company rather than the corporation itself&.'olicy: hy do we allow corporations to buy D and / insurance$

- 7f the company is a central purchaser: it is cheaper

- ill provide uniform coverage across the company

- hen the company buys it, it can use it as a deduction.

- ore cynical view: it is a disguised bump in the D and /*s salaries %if the corporation did notbuy it, it would come out of D and /*s pay chec#&.

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!nron and orldom: company was going down, and the indemnification was wobbly. Theetent of the fraud was so great that it eceeded the D and / insurance, individual D and /s

were forced to pay out of their own poc#ets.this is the eception.

3. Judicial Protection; $he 0usiness Judgment 6ule

a. $he 0usiness Judgment 6ule

ourts should not second guess good faith decisions made by independent and disinterested %noloyalty claim& directors.

The boardroom not the court room is the place to resolve purely business 4uestions.

;irectors are entitled to e>ercise honest usiness /udgment ased on information efore them

as long as they act in good faith

Courts %ill not interfere unless there is fraud, oppression, aritrary action, or reach of trust

'olicy reasons why the E= is good: encourages ris# ta#ing, avoid (udicial meddling, encourages

smart directors to serve, and ma#es director conduct a matter of law so it can be dealt with4uic#ly in court.

Kamin v. )merican !press: )m ! bought out of E6= for a loss. The )m ! shareholderswanted )m ! to ta#e the loss and deduct from their taes. )m ! instead passed out the sharesto the shareholders. ourt said that this decision fell under )m !*s business (udgment andshould be decided in the board room.

b. Duty of Care in $a7eo(er Cases

@ou can defeat the 5+ if one can sho% that the ; and Os %ere grossly negligent* estalish

that the directors didnt take proper process to ecome duly informed

7f the plaintiffs can show duty of care and breach of the that duty of care, the burden shifts to thedefendants to show that the transaction was entirely fair.

2mith v. 5an Gor#om: erger between two companies. 2hareholder sued, alleging that thedirectors breached their duty of care in approving the deal without being informed about it. Theboard essentially rubber stamped a personally negotiated deal between the two !/s. ourt saidthe directors were grossly negligent because they didn*t follow proper process to ma#e sure theywere informed, so there was a breach of the duty of care.

c. Charter Pro(isions Bai(ing -iability for Due Care ,iolations

M1C+%b&%F&: a waiver in the charter for monetary damages that says a director has no liability for

losses cause by transactions in which the director had no conflicting financial interest orotherwise didn*t violate the duty of loyalty. This essentially eliminates the possibility of a duty ofcare claim.

if you want monetary damages and there is a 1C+%b&%F&, you have to try a duty of loyaltyclaim.7f there is a 1C+%b&%F& provision and there is a claim for money, it will not be actionable, unlessthere is an e4uitable remedy, li#e an in(unction.

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!. Delawares ni9ue Approach

Technicolor:

!merald 'artner :

#. $he 0oards Duty to +onitor; -osses causedE by 0oard Passi(ity

) duty to monitor is a subset of a duty of care.-A oard may ha4e reached its duty to monitor %hen there is a failure to act ;irectors mustac


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. Conflict $ransactions; $he Duty of -oyalty

orporate directors and officers* have to place the corporation*s interests above their own.

1. Duty to Bhom

"hareholder Primacy 7orm* The duty is primarily owed to shareholders, the court found thatyou can be liable for failure to monitor under federal securities law.

"owever, if the corporation is insolvent then the duty can also be owed to creditors.

onstituency statutes.

Dodge v. 0ord: Dodge wants a special dividend paid out the shareholders. 0ord says that insteadthey are going to use the money to cut their costs of production for consumers. ourt said that0ord cannot do this, they must put the needs of the shareholders before the needs of the public.

Corporations can make donations y applying the shareholder profit ma>imiation roadly* if

the directors decide that a donation can ma>imie the corporations profits, then its ok

).'. 2mith anufacturing v. Earlow: ).'. 2mith made a donation to 'rinceton. 2hareholdersued, claiming that the company*s donation did not advance the interests of the company andtherefore breached the duty of loyalty. ourt said the donation did benefit the corporationbecause corporations need learning institutions to have educated people as employees, aid publicwelfare, respect.

2. elf4Dealing $ransactions

This is a transaction where the director and officer is on both sides of the deal.

7f you engaged in a self-dealing transaction, and you owe a fiduciary duty, you must:

1. disclose all information

+. get approval by a disinterested board or shareholders

7f you do not do this, then the transaction is reviewed for fairness.

a. arly 6egulation of elf4Dealing

4 "istorically a bright line prohibition of self-dealing transactions developed from trust law.

- ow corporate law has softened the bright-line rule where the transaction is:

1. Disclosed for approval by disinterested directors or shareholders )D

+. 7ntrinsically fair.

'olicy: 2elf-dealing transactions can be beneficial to a corporation %eg: a corporation gives atalented !/ a loan to ma#e sure that they stay with the company&.

b. $he Disclosure 6e9uirement

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An interest director must make full disclosure of all material facts of %hich she is a%are at the

time of authoriation of the conflicted transaction

Disclosure is only a pre-re4uisite to trying to get disinterested director or shareholder approval. 7fthey have not disclosed, then the approval is not meaningful.

"ayes /yster o. v. Keypoint: 5erne "ayes was a director of oast as well as a director of"ayes /yster. oast needed cash, so they sold some beds to Keypoint, which was partiallyowned by oast. Therefore 5erne was on both sides of the dealing. "e did not tell anyoneabout "ayes /yster*s interest in Keypoint. The court held that 5erne breached the duty ofloyalty by not disclosing his interest in Keypoint.

c. Controlling hareholders and the "airness tandard

i Controlling shareholders

) shareholder has control if they essentially control corporate machinery: this is someone whohas enough stoc# to be able to control the board.

General problem: some controlling shareholders engage in self-dealing transactionsthat hurtminority shareholders.

'olicy: controlling shareholders will argue that they should be able to do what they want, sincethey are in control. inority shareholders say that control does not mean you can disregard allother shareholders.

Controlling shareholders still o%e a fiduciary duty %hen engaged in self-dealing transactions

I& you are a controlling shareholder and you pro'e that you ha'e gone through the necessary

procedures( then the burden shi&ts bac# to the plainti&& to show that the transaction was un&air.

2inclair /il v. 6evien: 2inclair owned 2inven and 2inven was paying out dividends while thecompany needed cash. ourt said there was no self dealing at all because minority shareholderswere also receiving a benefit from the dividends being paid, so 2inclair did not meet thethreshold for a duty of loyalty violation. ourt then applied business (udgment rule, which2inclair passed because no gross negligence or waste.

ii 6airness "tandard

f you are an entity %ith a fiduciary duty, and you are engaged in self-dealing transaction,

then the aseline standard to e4aluate is fairness

0airness O fair price and fair process.

2inclair /il v. 6evien

3. $he ffect of Appro(al by a Disinterested Party

a. afe /arbor tatutes

DG6 1>> %a&: these statutes ma#e self-dealing transaction /K if:

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1. Jou get disinterested board approval or

+.


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7n e heelabrator Technologies 7nc.B eview: if you have a self-dealing transaction between acorporate officer or director: then the E= applies. 7f it is a controlling shareholder, then youhave the fairness standard with a burden shift.

!. Director and +anagement Compensation

Percei'ed !cess Co$pensation- !/*s now ma#e ?CC the average wor#er, E


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- orporation does not have the financial resources to ta#e the opportunity %hard to argue unlessthe corporation is insolvent&.

- orporation did not want to ta#e the opportunity. if this is the case then you want todisclose, but it is not re4uired Eroz v. ellular 7nformation 2ystems.

iii $ai4er of Corporate Opportunity


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0letcher v. ).=. 7ndustries, 7nc.: derivative suit, and they get a settlement. 2ettlement doesn*tinvolve monetary damages, it is mostly around e4uitable relief. !ven though there is nomonetary damages, the lawyers sue and the court awards them their attorney*s fees. Dissent saidthat the trouble the corporation would have to go through the pay these fees will outdo thesubstantial benefit.

3. tanding 6e9uirements

. Demand e4uirement: the complaint must specify the action the plaintiff has ta#en to obtainsatisfaction from the company*s board, or state with particularity the plaintiff*s reason for notdoing so.

i .he ;emand e


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ales v. Elasband: )dds timing aspects to demand futility re4uirements

ii Pre-"uit ;emand

hiited ood 6aith

- orporation has the burden of showing this

Court should use its usiness /udgment to decide of it is fair

ourts tend to avoid using this test by saying

1. Their business (udgment lets them decide the first prong without analysis.

+. They only have to use their business (udgment at their own discretion, and therefore chose notto.

Papata orp. v. aldonado: aldonado brought suit and satisfied all standing re4uirements.

Papata appointed four new directors as a special litigation committee, which found that the

action should be dismissed. ourt set forward the test above and remanded the case to see if the

committee was sufficient.

7n e /racle orp. Derivative 6itigation: /racle*s directors were sued for insider trading. )fter

the plaintiffs filed suit successfully, /racle formed a special litigation committee made of

2tanford professors. The court found that the first prong of the test was failed because the newcommittee was not independent. !ven though they had tenure and therefore had freedom to

ma#e decisions adverse to 2tanford, /racle made a lot of contributions to the school. This is

eceedingly rare, and is the eception.

Courts sometimes use a alancing test to determine %hat usiness /udgment looks like

("econd Prong of Gapata)* loo# at the relative cost benefit of allowing the litigation to goforward, and based on that to decide whether or not to dismiss. =oy v. orth.

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)n alternative to Papata might be a more rigorous effort to ensure the independence of thedirectors who sit on the 26: ichigan has tried this.

i4 "ettlement and ndemnification

Directors and /fficers have great incentives to settle. 2ince they have indemnification and

insurance, their personal assets aren*t really at issues: it is more a concern of bad publicity.

N 7t is a nuisance to be involved in litigation.Courts usually apply the Gapata test to decide if the settlement should proceed

'olicy: should courts be policing settlements$To what etent do wants suits to proceed$'ro: these allow individuals to police the corporationon: saying that these are rich plaintiff lawyer driven suits at the epense of the shareholders.arlton 7nvestment v. T6 Eeatrice: 2hareholder sued the directors based on a payout pac#agethey approved. The corporation put together a committee to decide what to do, and they decidedto settle. ourt applied the Papata test and found that both prongs were met, and the settlement

could be approved.

--

A. $ransactions in Control

i ntro

Generally we do not care about when shareholder*s sell, but there are some situations where theselling of shares involves some #ind of transactions that corporate law is concerned about.

/ne of these areas is when the selling shares changes the control of the corporation: thesecalled transactions in control. They are typically sold as a premium.There are two ways that you can get controlling stoc#:1. Euy someone*s bloc# of controlling stoc#+. )mass a large amount of smaller shares from lots of minority shareholders

ii "ellers ;utiesa Control Premium

8arket ule* 8)bsent looting of corporate assets, conversion of a corporate opportunity, fraud,or other acts of bad faith, a controlling stoc#holder is free to sell, and a purchaser is free to buy,

that controlling interest at a premium price.9defendant friendly.I7n the


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premium price of Q1? per shareB the shares were trading at about QF per share. ourt said thatthe premium was valid because the mar#et offered it and there was no evidence of looting, etc.6eldman =>ception to the 8arket ule*7n a time of mar#et shortage, where a corporation*sproduct commands unusually large premium, a fiduciary may not appropriate to himself thevalue of the premium, it must be spread to the shareholders.

this is very much an eception.. plaintiffs will want to use this.'erlman v. 0eldman: ewport was in the steel business. ilport wanted to get a source of steelin a tight mar#et. ewport was controlled by 0eldman, who sold his shares to ilport for Q+Cper share, when the mar#et price was at Q1+. )long with the sale went ewport*s uni4uebusiness plan. ourt said the premium must be spread around because 0eldman sold a valuablebusiness plan %corporate machinery& along with control of the corporation.=+H: management who sells about 1C of their stoc#. The premium wasslightly above mar#etErecher v. Gregg p. >+I: sale was for > of the shares, and the premium was over 3?The greater the percentage of shares and the lower the premium, the more li#ely to court is goingto say that it is o#.

c :ooting

f a reasonaly prudent person %ould think that they %ere selling to looters, then they ha4e a

duty to in4estigate the uyers acts



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"arris v. arter: arter controlled )tlas with ?+ of its stoc#. arter sold this bloc# of stoc# to

ascola, who diverted much of the value from )tlas to ascola and his friends. ourt said that

the baseline argument that arter could sell his stoc# as he wished was no good because he had a

duty to investigate the buyer. ase was remanded to see if he met that duty.

ii 5uyers ;uties

a $illiams Act

0ederal 2tatute passed: this was designed to slow down the process, and ma#e it so thatshareholders were able to loo# at the offer before they accepted.

Ihas had the unintended effect of reducing transfers in control.

=lements of .ender Offers

1. !arly arning 2ystem 13%d&: if you cross the ? ownership status, you have to file a form

with the 2!. !ssentially declaring to the world that you are crossing a certain threshold.+. Disclosure 1>%d&: if you are going to actually ma#e an offer you must disclose identity, futureplans, financing, etc;3. )nti-0raud 1>%e&: 2pecific anti-fraud statute: prohibits misrepresentations, nondisclosures, and8any fraudulent, deceptive or misrepresentative practice9. This also prohibits insider trading.>. 2ubstantive terms: how long must the offer e held open: at least +C business days 1>e1, andunder 1>e1C, you must offer the same price to all shareholders%you can put conditions on it,li#e 7 will only buy +C,CCC shares&.N )lthough the illiams )ct was intended to govern Tender /ffers, it does not define what atender offer is.

There are two different tests to determine what a tender offer is:

1. 2outhern District Test: loo# at whether there was solicitation, whether it was contingent on acertain numer of shares, and whether there was an offer at a fi>ed price.

+. !ight 0actor 2! Test:

1.)ctive and idespread solicitation of public shareholders

2.The solicitation is made for a substantial percentage of the issuer*s stoc#

3.) premium over the prevailing mar#et price

!.The terms of the offer are firm rather than negotiable

#.hether the offer is contingent is contingent on the tender of a fied minimum numberof shares

&.hether the offer is open only for a limited period of time

).hether the offerees are sub(ected to pressure to sell their stoc#

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*.hether public announcement of a purchasing program . . . precede or accompany arapid accumulation.

Erascan 6td. v. !dper !4uities 6td.: !dper had a > sta#e in Erascan and wanted to increase hisinfluence. !dper had its investor contact potential offerees, informing them that !dper wouldpurchase 3 or > million shares at several dollars above the mar#et price. Ey the end of the day,!dper had purchased A.3 million shares at the price mentioned by the investor. ourt said therewas no tender offer because only ?C of ??,CCC shareholders were contactedB only slightly abovemar#et priceB terms were negotiable %(ust trying to 8find the right level9&B number of sharesdesired was not fiedB offer was openB no pressure because of time constraintsB and only a fewscattered announcements.

Hart-"cott-odino (H;) Act

7mposes a waiting period before a bidder can commence to offer. "2 filings must be disclosedimmediately to target companies and bidders may not close a deal until the relevant warningperiod has elapsed.

ash offer: 1? days

2toc# /ffer: 3C days

0. +ergers and Ac9uisitions ?+ and A@

E ntro

and ) is a particular subculture of corporate law that has etreme intensity.

Three ways to do this:

1. erger: unites two eisting corporations in to

+. )sset )c4uisition: you are essentially going and buying the assets of the corporation.

3. 2hare )c4uisitions: you go out and buy all the stoc# of the company.

8oti4es

hy do people do and )$

POs:

economy of scope: you can spread you costs across a variety of areas, by not increasing the scaleof production but instead by spreading costs across a broader range or related business activities.economy of scale: when a fied cost of production is spread over a larger output , therebyreducing the average fied cost per unit of output.

Diversification: allows the companies to be more competitive and manufacture a variety ofproducts.



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2ynergy: you can do a lot more if you are wor#ing together2uperior ompetition, Ta easons, )gency osts are lowered

N it is much easier to build up through and ) rather than organically.

CO7: ris# of monopoly, lash of cultures, /ver-paying for the company, !go@!mpire-Euilding

824ueeze out9: controlling shareholder ac4uires all of the company*s assets at a low price, at theepense of its minority shareholders.

3 History

5oting: there has been a decrease in regulation. 7t has gone from re4uiring a unanimous vote by

shareholders, to a super ma(ority, to a ma(ority.this is very pro and ).

)ppraisal ight: additional right to voting. Jou can say 87 didn*t vote for the merger9, and go toa (udge and have him appraise how much your shares are worth.

J Allocation of Po%er

To whom do we want to allocate the power to decide mergers and ac4uisitions$

Do we want shareholders to vote, or do we want the board to decide.

There is a continuum of importance of shareholder vote: we do not need shareholders to vote onthe placement of the flowers in the lobby, but we do want them to decide if the corporation isgoing to be dissolved.

ule of Thumb: loo# after the transaction and if the shareholders %ill still ha4e po%er, or a sayin running the company, then %e tend not to gi4e them a 4oteon the transaction.

7f you loo# after the transaction, and the shareholder %ill not longer ha4e po%er: they willprobably ha4e a 4ote.

ergers re4uire a shareholder vote on the part of both the target and the ac4uiring company,epect the ac4uiring company*s shareholders do not vote when the ac4uiring company is muchlarger than the target.

2ale of assets: need a shareholder vote if you are going to be selling all, or substantially all oftheir assets. 'urchases of assets do not re4uire a vote.

7f you are issuing additional shares: under state corporate law does not get the right to vote.

0 .ransactional 6orms

i Asset Ac


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Delaware +>H governs asset ac4uisition: if you are selling 8all or substantial all9 of your assets.

'roblemhat does sustantial allDmean$

Two ways to loo# at this:

a ualitati4e approach: Jou loo# at whether the transaction is out of the ordinary

course and substantially effects the eistence and purpose of the corporation.

Katz v. Eregman: 'lant sold several subsidiaries including one which was their only incomeproducing facility to raise cash. ourt said that ?1 of assets was substantially all, so the salere4uired shareholder approval.

Thorpe: ontrolling shareholders were also the directors and !/s. 7f you put it to shareholdervote, then the controlling shareholder is the insider who can veto the deal.

)lso loo#ing at the 4ualitative effect on the corporationthey still put it to shareholder vote:whether a transaction is out of the ordinary course and substantially affects the eistence andpurpose of the corporation.

:iteral approach* substantially all would therefore be essentially everything

"ollinger, 7nc. v. "ollinger 7ntl.: "ollinger 7ntl. sold the Telegraph Group of its newspapers,which constituted ?A of the company. ourt said this was not substantially all of its assets, sono shareholder vote was needed.

% no% there is a mo4ement a%ay from


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-ergers legally collapses one corporation into another.

- The corporation that survives is the surviving corporation %still maintains its legal identity&.This surviving corporation generally assumes the liabilities of both corporations.

9oting for mergers*

'referred 2toc#:

- 7n Delaware:;C: & 0Generally preferred stoc# holders to not have the legal right to vote.

-;C: &J(5)()*They do however, have the right to vote if their legal rights would beformally altered.

ommon 2toc#:

- Target ompany: always have voting rights

- 2urviving ompany: Generally get a vote unless 3 things are met:

1. 2urviving corporations charter is not modified

+. The security held by the surviving corporation*s shareholders will not be echanged ormodified and

3. The surviving corporation*s outstanding common stoc# will not be increased by morethan +C percent.

N these are actually proies for determining how much power the shareholder is going to haveafter the transactions, and whether it is a 8whale-minnow9 situation.

.riangular 8ergers

- Triangular mergers are a way around liability: surviving corporations create a subsidiary withlittle money or assets that then ac4uires the target: only the assets of the subsidiary are eposed.

&. tructuring the +ergers and Ac9uisitions $ransactions

and ) are actually commercial contracts, and the parties are trying to protect themselvesthrough contracts.

a .iming

7t will always be desirable to close a deal as 4uic#ly as possible.

N the 4uic#est way to ma#e sure that a sale is complete: all cash tender offer to the shareholders%under the illiams )ct, the deal can be closed in +C days&.

2toc# ac4uisitions are slower since you should put it to a shareholder vote %since this willdramatically reduce your chances of getting sued.&

;ue ;iligence

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Jou want to investigate the potential merger to ma#e sure that you are not being defrauded: loo#to ac4uire reliable information about the target company.

N this is made easier by representations and warranties: the companies represent their assets andliabilities, and warrant that they are legitimate, and that you own them.

). $a-6ree Corporate eorganiations

) +o ta!able gain recogni,ed &or reorgani,ation o& ownership interests w-o changingidentity o& owners.

c nternal e4enue Code & 3#L* "a4e Haror for .a>-6ree eorganiations ) !empts 2toc#-for-2toc# ergers in which consideration is voting stoc#. - !empts transactions in which at least HC of all shares of voting stoc# %and HC ofeach class of nonvoting stoc#& ac4uired in echange only for voting stoc# of ac4uirer. - !empts reorganizations in which ac4uirer gets assets only in echange for voting stoc#of the ac4uirer.f emption, no recognition of gain y sellers for ta> purposes.'olicy: Ta law shouldn*t interfere w@ capital in the mar#et any more than necessary.

*. Appraisal 6emedy

)n appraisal remedy is given a 4ualifying merger: a minority shareholder can go to a (udge, and

say that since they did not vote for the merger, they would li#e the fair going concern value fortheir shares.

DG6 +A+: governs appraisal rightsar#et /ut ule

1. 7f you are a shareholder in a private firm with fewer then +,CCC shareholders, you always get

an appraisal rightproy for li4uidity

+. 7f you are a shareholder in a public firm or with more than +,CCC shareholders, you do not getan appraisal right if you are getting stoc#.

you do get an appraisal right if you are getting cash, unless you are getting cash for a fraction

of your shares, in which case you do not get an appraisal right.

6air 9alue*what you can get is your pro rata rate for the fair value of your shares.

1. Jou do not get the value of the merger.

+. Techni4ue used is the discount cash flow model.

with no appraisal rights there is more freedom for business arrangements.

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"ariton v. )rco !lectronics, 7nc.: 6oral purchased all the assets of )rco. Dissentingshareholders in )rco wanted a (udicial appraisal. ourt said no because even though thepurchase of assets had a similar effect to the merger, the D! statute says appraisal is onlyavailable for mergers specifically.

=. De "acto +erger

6unctionalist*if it loo#s li#e a merger, and it feels li#e a merger, then we are going to treat itli#e a merger.

6ormalist: even if it loo#s li#e a merger, it is not one unless it is a merger in formmost (dsfollow this, including Delware.

corporate law is already very formal."ariton v. )rco: the ourt ultimately said that the shareholders should have #nown that section+F1 does not give you appraisal rights, therefore there was no de facto merger, so no appraisalrights.

1. Duty of -oyalty in Controlled +ergers

There is a tension with the controlling shareholder: they can vote their shares for their benefit,but they still owe a fiduciary duty.

aseline rule: a controlling shareholder on both sides of a transaction has the burden of provingentire fairness.

a 6reee Outs

Easic steps for a freeze-out: ma(ority shareholder has control over board, they have the board ora committee come up with a price, they may as# the shareholders to vote on it %it would be thema(ority of the unaffiliated shareholders&, they then give them the money for their shares.Generally, once the board and the ma(ority of the shareholders have voted on it, it becomesmandatory for all shareholders.

2tandard: !ntire 0airness %0air 'rice and 0air Dealing& when directors of a D! corporation areon both sides of the transaction.

6air ;ealing: /bvious Duty of andor %Kahn v. 6ynch& and may not mislead 2"*s.7nitial Eo' on R to prove entire fairness. 7f valid independent committee approvestransaction, Eo' shifts to S to show it was not fair.

hat emedies are )vailable for Ereach of Duty of 6oyalty in controlled merger$%i& /einberger: )ppears to say appraisal remedyis the only available

remedy b@c transaction cannot be undone.

1. 7f there is no evidence of fraud, etc. onetary damages limited toappraisal.

+. 7f there is fraud etc. ourt can award other remedies.%ii&%ab#in: Court found 6iduciary ;uty emedy a4ailale as %ell as

appraisal remedy.


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+. 7f see# an appraisal remedy, have to permanently opt out of merger.3. =ntire fairness actions (not appraisals) are the principal means used

today for "Hs attacking the fairness of price in a self-dealing

merger.%vi& einberger was the first case that said that when determining the fair

price of the shares, you look to the discounted cash flo%einberger v. . 2ignal settled on

Q+1 per share. )ction brought for a duty of loyalty claim. o safe harbor statutes met, so

sub(ect to fairness. Disclosure of the report was flawed, so still stuc# in fairness. ourt said no

fair dealing because no negotiation, poor disclosureB also said price may or may not be fair

depending on (udicial appraisal on remand.

Control

Easeline rule is still: a controlling shareholder on both sides of a transaction has the burden ofproving entire fairness.

E3.3 of 6ynch. 6ynch wanted to merge with elwave, which )lcatel opposed. 6ynchestablished an independent committee to negotiate with elwave, who declined. )lcatel then

offered to buy up the rest of 6ynch at Q1?.?C per share. ourt said this was a conflicted merger,so entire fairness is the standard when a controlling shareholder is involved. Alcatel waseffecti(ely a controlling shareholder e(en though it had only !3F of the shares because ithad authority. !ven though there was a disinterested committee, the burden did not shiftbecause the ma(ority shareholder, )lcatel, dictated the terms of the merger by threatening toproceed with a hostile offer if the original offer was re(ected. ourt says they did not meet theirburden of showing fairness.estern ational: 7n another merger setting, court said estern was not a controllingshareholder because they were only allowed to have + of H directors, therefore they had business(udgment standard which they met.

c "pecial Committees of ndependent ;irectors in Controlled 8ergers

ourt*s 'ossible )pproaches if 7ndependent ommittee )pproves Transaction:- Treat 2pecial ommittee*s decision as disinterested and independent Eoard %0J6&- ontinue to )pply ntire "airness $estb@c court can*t evaluate whether subtle pressure

unduly affect outcome of committee*s decision.)pproaches in Delaware:

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- 0ahn '. Lynch: !ntire 0airness should always be the standard but shifts burden ofshowing fairness N S if independent committee approves.

dea that committee of independent directors deser4es some /udicial recognition stillseems to ha4e some %eight in ;ela%are Apply 5+ if looks like it appro>imates an

arms-length transaction%"orm o(er "unction&.

Again w5 the accordion analogy. Geep it broad so that it can open5close w5 facts.)nother function: )ccordion allows D! courts to avoid overruling each other.

d Controlling "hareholder 6iduciary ;uty on the 6irst "tep of a t%o step tender offer

$he Duty; Controlling "hareholder %ho sets the terms of a transaction and effectuates it

through his control of the oard has aD$H""AI6:to pay a fair price.

?a@ $wo Possible Approaches ; Gahn and olomon

%i& 0ahn: !ntire 0airness should always be the standard %w@ possible shifting&.1. ecognizes an 8inherent coercion in controlling 2" status.+. !ven ma(ority of minority 2" approval will not shift review all the

way to E=.%ii& Solo$on: ontrolling shareholder owes no duty to pay a fair price. /nly

use (udicial review to ensure disclosure and prevent coercion.1. oercion is defined as a 8wrongful threat,9 no inherent coercion.+. Earring coercion N E=.

?b@ 6ule ; :o fiduciary duty applies to non4coerci(e controlling stoc7holder

tender offers.

?i@ Can a(oid theKahnline of cases by going to the /s directly.

%ii& Controlling "tockholder .ender Offer non-coerci4e only if %2olomon2tandard&1. Sub2ect to a non)wai'able $a2ority o& the $inority condition

3. Controlling stoc#holder pro$ises to consu$$ate 4356 $erger at

sa$e price i& obtains $ore than 789 o& the shares

6. Controlling stoc#holder $a#es no retributi'e threatsii& 'olicy-ish: econciling Kahn and 2olomon 6ine of ases

%1&


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C. Public Contest for Corporate Control

E ntro

The issue is who do we want to favor: the insurgents or the managers$ orporate law is torn.

'olitical way to try and get control: mount a proy contest.

!conomic way to try and get control: ma#e a tender offer.

ain issue: these cases are really about the standard of review to apply: should there be anintermediate standard in between fairness and business (udgment.

=>amples*

heff v. athes: as long as the board*s primary motive was to advance the interests of the

shareholders and the company, then its defenses are fine.favoring the managers

2chnell v. hris-raft: found a breach of fiduciary duty when a disinterested board advanced thedate of the company*s annual meeting solely in order to ma#e a hostile proy solicitation

impossible to mount.favoring the interests of the shareholders.

ini )ttac# 'lan:

1. o threat, preventative: Eusiness =udgment ule %oran&+. Threat, defensive measure: proportional, then draconian %


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deal, and vote against the )mGen deal. ourt says that this was not draconian and wasreasonable.

either case has been overrules: general standard to go by is still draconian: loo# to see if it iscoercive or preclusive, then see if it is within the range of reasonableness.

i Poison Pill* "hareholders ights Plan

- apital instruments including the right to buy a capital asset at a discounted price.- 'urpose: Defense mechanism against hostile ta#eovers. Dilutes the stoc# mar#et by triggeringrights in shareholders that will be financially devastating to ac4uiring company.

i& "ow 7t or#s :%1& ights to buy company*s stoc# at a discounted price are 8distributed to all

shareholders.%+& ights are only triggered if someone ac4uires more than a certain percentage of

company*s outstanding stoc# w@o Eoard*s blessing.%3& 'erson whose ac4uisition is the triggering event is ecluded from buying

discounted stoc#.%>& esult: 'erson whose ac4uisition triggered the event*s stoc# is severely diluted

when a lot of cheap stoc# floods the mar#et %/ther shareholders not adverselyaffected b@c have a lot more stoc# even though each individual stoc# is worthless&.

0lip-7n 'lans: when triggered the poison pill creates a right to buy some number of shares of thestoc# in the corporation being ac4uired %the target&.0lip-/ver 'lans: when triggered the poison pill creates a right to buy some number of shares inthe corporate ac4uireror.Policy 6or "hareholders:'/: protects shareholder from hostile ta#eovers and corporate raiders; long term best interest

of the company since managers can focus primarily on the corporation./2: it is sometimes misused to protect the status 4uo, it insulates management, can be thesource of scandals.Poison Pill is a proper defense, and if you adopt a poison pill efore there is any kind of threat

then you get usiness /udgment rule deference

oran v. "ousehold 7nternational 7nc.: "ousehold adopted a poison pill before there was anactual threat because they were concerned about even the possibility of a ta#eover. ourt saidthe poison pill plan was legal and because it was before the threat, the defense was accordedbusiness (udgment treatment which was passed.

ummary;

7f you adopt a poison pill with no threat: E=

7f you adopt a poison pill as a defense:


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2mith v. 5an Gor#om: 5an Gor#om, !/ of Trans


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6yondell hemical o. v. yan: 2ale of 6yondell shares %owned by 2mith& to a company called

Easel, which was owned by Elavatni#. Elavatni# sends an initial letter to the board, saying that

he is interested in the company, and would be willing to buy it for +A.?C-+H.?C. Eoard says that

they are not interested. 7n ay +CCF, Elavatni# files at 1>d saying that they have the right to

ac4uire a large portion of the shares. Ey filing this, the company is supposedly up for sale.

6yondell decides to wait and see; Elavatni# then starts raising the bid: goes up to Q>H@share.

Eoard finally agrees to go with the Elavatni# price, and put it to shareholder vote. II of the

shareholders approve the deal. The ourt found that evlon did not create new fiduciary duties,

and that all that was left was to prove that they did not get the best price and there was a

violation of the duty of loyalty. either claim was present in this case.

Policy* ontrol is #ey in determining the level of protection.

N if shareholders are losing significant control, greater fiduciary duties imposed

N if shareholders continue to have control, lesser protection.

hy have evlon Duties$ 7n most circumstances board are better able to able to value

companies than shareholders are but then shareholder are or might be cashed out of post-merger

enterprise, the board must maimize the short-term value because it is all shareholders are li#ely

to receive.

#. Pro


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'olicy: Cannot use the corporate $achinery to perpetuate yoursel& in o&&ice.

2chnell v. hris-raft 7ndustries, 7nc.: 'laintiffs launched a proy contest to remove incumbent

directors. The board moved the annual stoc#holders meeting to defend against it. ourt said the

change in the meeting date was illegal because it was a blatant attempt to #eep themselves in

office.

!nocal standard does not apply to the shareholder franchise* instead the oard ears the

hea4y urden of demonstrating a compelling /ustification after the plaintiff has estalished

that the oard has acted for the primary purpose of th%arting the e>ercise of a shareholder

4ote

I f the defense is primary purpose is to interfere %ith the shareholder franchise, the oard

needs to ha4e a compelling /ustification

ompelling =ustification: there must be a good reason for the maneuver as opposed to merely

showing that what you did was not draconian. This is a higher level than


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>. F


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E#(a)* re4uires 8designated persons9 to file petitions public reports of any transactions in thecorporation*s securities.

1. Designated 'ersons: directors, officers, 1C shareholders

+. Timing of eports: you must report that you are doing the trade.

E#()*strict liaility rule designated to deter statutory insiders from profiting on insideinformation

N re4uires statutory insiders to disgorge profits made on short-term turnovers to corporations.

8ergers are not a purchase or a sale

Kern ounty 6and o. v. /ccidental 'etroleum

1. /ccidental purchases +C of Kern shares

+. Kern merges with Tenneco

3. Kern shares convert to Tenneco shares

>. /ccident sells a repurchase option to Tenneco

?. Tenneco eercises the plan.

Kern is saying that either Z3 or Z> was a sale. ourt said that selling an option is not actually asale, it is instead the option of having a sale. ourt said you need to loo# at it in terms of thestatutory provisions, have to loo# at it in the contet: with that in mind, it was not a sale.

ii ule E#

!. H


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Three theories for omission: e4ual access, fiduciary, misappropriation

+. in connection with the purchase or sale of securities

+. with intention to deceive

3. upon which there is reliance

>. causation

?. in(ury

ourts have effectively read the elements of reliance and causation to be a fraud on the mar#ettheory. The 2upreme ourt has recently gone bac# to a stricter standard of reliance andcausation.

i. "alse or +isleading statement or omission

There are three theories for false or misleading statement or omission: e4ual access, fiduciaryduty theory and misappropriation.

4 9ual Access

f you ha4e material non-pulic information, you %ither ha4e to disclose it, or you ha4e to

astain from trading ;isclose or Astain

8ateriality* if a reasonale in4estor %ould find the information to e important, then it is

material 8ore te>ture* proaility and magnitude I 4ery fact specific

2! v. Teas Gulf 2ulphur o.: ompany was doing mineral eploration. They were #eeping it4uiet while they were buying stoc#, and then would presumably sell it when the deposits are

revealed. They instead issue a press release saying that the rumors are not true, etc;

2hareholders sue, saying that the insiders #new that there was this big mineral deposit, and thatthey were trading on this information. ourt said that there was a violation.

6ederalism* Plaintiffs cannot ring suits for corporate mismanagement under E10 if the

causes of action are traditionally rought under state la%

= the Supre$e Court is trying to li$it the nu$ber o& corporate plainti&&s that are trying to get

into &ederal court.

2anta 0e 7ndustries 7nc. v. Green: Dissident shareholders who were cashed out in a short formmerger brought a 1Cb-? claim because they thought the shares were worth more. ourt threw

them out because the claim had nothing to do with manipulation or deceptionB case sent to state

court.

4 "iduciary Duty $heory

The 2upreme ourt has actively re(ected the !4ual )ccess theory.

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7O ;uty to ;isclose %hen person trading on info %as not corporations agent, fiduciary, or a

person in %hom sellers of securities placed trustFconfidence.

N7o affirmati4e duty to disclose unless you ha4e a special responsiility

hiarella v. tend to a person %ho learns of the information (.ippee) if*

1. ust have #nown or should have #nown about the breachB )D

+. Traded upon it

Policy; Good b@c doesn*t swing all the way to the TG2@!4ual )ccess 2tandard %which the2upreme ourt re(ected as over-inclusive& but still allows you to get at people who are nottechnically ]insiders* %which is not possible under the fiduciary duty standard that the 2upremeourt found to be under-inclusive&.N eaches all forms of insider trading even if doesn*t involve ]insiders.*%Eetter than 0iduciary Duty Theory&

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ircuits are split as to whether this is a re4uirement for in(unctive relief.

(. 6eliance

0raud on the ar#et Theory: reliance is presumed even though the parties do not interact faceand face.

N This presumption is rebuttable: can argue that the person #now about the fraud, and thereforecould have relied.

Easic 7nc. v. 6evinson

(i. Causation

8ust sho% that you loss %as caused y the fraud, and not y another element

Two #inds o& Causation"

) Transactional Causation" a misstatement or omission must cause the plaintiff to enter into thetransaction.-Loss Causation: a misstatement or omission must cause the plaintiff*s loss.8ust sho% oth of these

Dura 'harmaceuticals: Dura announces that the profits will be lower than anticipated, stoc#prices go down. Then the 0D) does not approve their drug. 'laintiffs are individuals whopurchased shares before the announcement that profits will be down.


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ote: preferred by plaintiffs, and used most regularly.

!l#ind v. 6iggett and eyers: shareholders initiated a class action against 6iggett for insider

trading 'laintiffs made their case, and the sole issue was how to calculate damages. 2econd

circuit decides the disgorgement method is appropriate.

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