AGENCYѦgent?1.[1] manifestation of consent P‐>Ѧ, Gorton•[2] act on behalf of P, Gorton•[3] subject to P's control, Cargill•[4] Ѧ consents to so act•P Liable on K Due to Ѧ's Actions?2.

Express Implied, Mill Street Church (hire 2nd person)

Actual Authority (P‐>Ѧ)•

Express, Dweck v. Nasser (lawyers)Implied, 370 Leasing (salesman inherently)

Apparent Authority (P‐>3rd)•

Undisclosed principles, Watteau v. Fenwick (no manifestations from P)Inherent Authority: solely agency [1] position/industry custom [2] on behalf of P•

Botticello (accepting $ = implied ratification)Ratification: [1] P affirming with intent + P's full knowledge [2] legal effect necessary•

Hoddeson (imposter salesman)Estoppel: appearance [1] 3rd party changed [2] detriment [3] reliance •

Ѧ Liable on K?3.Disclosed P = no liability•

Intent to bindNo authority to KNon/partially disclosed P, Atlantic Salmon (disclose + ID; actual knowledge)

Ѧ can be liable:•

P Vicariously Liable for Ѧ's Tort?4.

Master‐servant = control, Gas Station Cases, Murphy v. Holiday Inn (instrumentality)Indep. contractor = risk, Gas Station Cases

[A] type of work, Clover v. Snowbird Ski Resort (frolic/detour); Bushey (foreseeability)[B] time space, Manning (baseball game)[C] purpose serve P, Manning (intentional torts)[D] exceptions outside scope: P intended/reckless/non‐delegable/reliance on apparent authority

Servant – [3] liable if scope of Ѧ's employ

[A] P retains control[B] employs incompetent, Majestic Realty (bad @$ =/= incompetent)[C] inherent danger/non‐delegable, Majestic Realty

Indep. Contractor – [4] not liable unless

[2] Servant or indep. contractor?[1] Only if P's Ѧ, and:•

Ѧ Violated Fiduciary Duties?5.Duty of Care: paid = ind. stds.•

Conflicts of Interest (bribes)Secret Profits, Reading (profits using army) Business Opps., Singer (referral fee w/o disclosing)Grabbing & Leaving, Town & Country

Duty of Loyalty •

Issue Checklist

PARTNERSHIPPartnership?1.Shared control + shared profits, Fenwick•Partnership by Estoppel = [1] representation + [2] reliance, Young•Partnership Rights + Liabilities?2.Interests (profits + surplus), Putnam (only assign all or none)•Specific property•Management•Liability (rank = non‐partner creditors > partner creditors > capital > profits)•Partner Violated Fiduciary Duties?3.Duty of Care: grossly negligent/intentional•

Conflicts of interestAccount partnership opp., Meinhard (min. duty disclose )Grabbing & leaving, Meehan (firm partners lying)

Duty of Loyalty•

Partner Has Right to Manage/Authority to Bind?4.

Deadlock = no change, National BiscuitOrdinary business decision: majority

Extraordinary: unanimous

Management: equal•

Authority to Bind: [1] by all agents + [2] apparent business usual way, unless [3] no authority + 3rd knows this, compare National Biscuit Co. v. Stroud (P had actual authority b/c deadlock on ordinary business), with Summers v. Dooley (opposite)

•

Tort Liability: partnership liable ordinary business, seeMoren•Partnership Ending?5.

Buy‐sell agreement: "I split, you choose" bag of weedDissolution: by [A] act / [B] operation of law / [C] court order (frustrated/bad conduct/not practicable)•

Wrongful Dissolution: Owen v. Cohen (wrongful b/c not term)•Fiduciary Duties: Page v. Page (dissolve only to profit)•UPA Winding Up = selling assets, paying creditors, dividing, Prentiss (paper dollars OK)•

Kovacik only: [1] 1 service & 1 capital + [2] service no salaryDividing Losses: default share losses proportional to profits, RUPA (rejecting Kovacik) •

Partner Liable in LP, LLP, LLLP?6.

GP personally liableLP's liability::LP's contributions, unless control, Holzman v. De Escamilla (pretending GP liable b/c controlled plants grown/firing/bank $)

LP: >1 GP + >1 LP•

LLP: ~GP, but partners not liable•LLLP: ~LP, but GP liability limited•

CORPORATIONSPre‐Incorporation Liability?1.

Arms length OK, Ѧmust disclose P, Atlantic SalmonPromoter (Ѧ) Fiduciary Duties•

3rd doesn't know = Ѧ bound by K

Corp. bound when adopts KѦ liable unless 3rd intent/releasedѦ liable if never formed

3rd knows yet‐to‐be‐formed corp.

Ѧ's Liability on K•

De Facto Corp.: [1] good faith try + [2] legal right to incorp. + [3] acted ~corp.•Corp. by Estoppel: 3rd [1] thought corp. + [2] deny corp. = windfall to 3rd, Southern‐Gulf Marine Co.•SH Limited Liability?2.SH Limited Liability: unless corp. used only as personalѦ [MBCA]•

[A] corporate formalities [B] commingling $ [C] under‐capitalization [D] shared assets[1] unity interest + ownership

[2] not PCV sanctions fraud/promotes injustice, Sea‐Land Services (must be wrong > not a able to collect debt)

Piercing Corporate Veil:•

Alter Ego Theory: SH liable merged b/c [A] control [B] dummy corp. [C] purely personal goals, Walkovszky (no PVC b/c NYC cab purpose undercapitalized but corps. =/= only SH's personal benefit);Sheffield (alter ego = parent liable for controlled subsidiaries but =/= each subsidiary liable for others)

•

[1] Corp. A<‐‐‐lack horiz. formalities‐‐‐>Corp. B[2] same owner

Enterprise Liability: recover A or B•

[1] Owner<‐‐‐ lack vert. formalities‐‐‐>Corp. A[2] Owner<‐‐‐ lack vert. formalities‐‐‐>Corp. B

Reverse Veil Piercing: A liable for B, Sea‐Land Services (no formalities, all corps. 1 bank, same office)•

Parent‐Subsidiary Liability: if control ~ alter ego, Silicone Gel (fraud/injustice not req. in tort )•LP w/corp. GP: OK if careful, Frigidaire (tax shelter LP's disclosed creditor assumed risk)•SH Derivative Action Allowed?3.Direct: OK, Grimes (who injured + relief)•

Π = SH @ time of wrong + suitBond, Cohen (forum state law)

Unless no good faith/investigation/indep.Dismissed if not corp.'s interest

[a] full ƁΩƉ w/indep. quorum = SH's ßοǷ[b] ind. subset appointed by indep. = corp.'s ßοǷ[c] court‐appointed indep. = SH's ßοǷ

ƁΩƉ review:

[A] Universal Demand = required / 90 days [MBCA]

DE futile [Grimes]: Π's ßοǷ reasonable doubt [a] maj. ƁΩƉ $/family interest [b] maj. ƁΩƉ no indep./controlled [c] underlying transaction no BJR

NY futile [Marx]: Π's ßοǷ allege with particularity [a] maj. ƁΩƉ interested [b] ƁΩƉnot informed [c] underlying transaction no BJR

DE SLC [Zapata]: Δ's ßοǷ [1] independent & good faith + [2] court's BJRNY SLC [Auerbach]: Π's ßοǷ [a] SLC interested [b] not informed

SLC Dismissal = OK after demand excusal if:

[B] DE/NY Demand = required unless futile (excused)

Π's ßοǷ [1] not indep. [2] no due careDemand made & refused = can't argue excused, Grimes

[C]Wrongful Refusal = BJR unless

Derivative:•

FIDUCIARY DUTIESQuestioning Corporate Decision?1.BJR: SH wealth max = deference ƁΩƉ, unless ƁΩƉ breach DoL /DoC, compare Shlensky v. Wrigley(any reason BJR), with Dodge v. Ford (Ford fucked himself)

•

Entire Fairness: breach fiduciary duty, but no liability if entire transaction [procedurally and substantively] fair, compare Cinerama ($, timing, negotiation, structure, disclosure, approval by ƁΩƉ/SHs), with Van Gorkom (double fail =/= entire fairness)

•

Beached Duty of Care?2.

Egregious Decisions: Kamin v. Amex (misjudgment OK, only liable mal/nonfeasance)Insufficient Process: Van Gorkom (grossly negligent not OK b/c talk merger 20 mins w/o inquiry/expert advice)

ƁΩƉ's Obligations: Cinerama (CEO's good job =/= ƁΩƉ relieved duty deliberate + market test) Inattentive Director: Francis v. United Jersey Bank (100% nonfeasance)

Duty of Care: [1] good faith + [2] reasonable belief corp.'s best interests corporation [MBCA]•

[A] utter fail implement control system[B] consciously fail to monitor, compare Caremark (ƁΩƉ conscious decision no compliance prog. = BJR), with Stone v. Ritter (opposite)

Sarbanes‐Oxley: sr. managers + ƁΩƉ proactive oversight

ƁΩƉ Oversight/Compliance w/Law•

Breached Duty of Loyalty? 3.

Bayer (hire wife sing commercial entirely fair) Benihana (director on both sides of table no matter b/c ƁΩƉ actually knew)

Interested Transaction (self‐dealing): conflict of interest = no BJR, but OK if entirely fair•

[1] crop. has $[2] line of business, compareMartha Stewart (sell stock =/= line of business), with eBay(IPO stock line of business ancillary but part of asset strategy)

[3] corp. interest/expects[4] conflict‐of‐interest, Broz (disclosure not needed)

DE Test [Broz]:

[1] corporate opportunity = [A] all insiders, from corp. [B] sr. execs, "closely related"[2] insider take opp. OK if: [A] disclosed [B] corp. rejected

[ALI]:

Usurping Corporate Opportunity =/= normal DoL test•

Controlling SH Actions: BJR unless self‐dealing (detriment minority), then entire fairness, Sinclair Oil Corp. (Π showed self‐dealing in breach of K, Δ's ßοǷ entire fairness); Zahn v. Transamerica(redemption OK, no t disclosing windfall to Class A = usurping opp. to convert)

•

Ratification?4.

Quorum = dis + interestedVotes = only interested

Counting Votes•

[A] maj. disinterested ƁΩƉ

DoC ‐> extinguishedDoL v. ƁΩƉ ‐> shifts ßοǷ to Π show wasteDoL v. controlling SH ‐> shifts ßοǷ to Π not entirely fair

SH ratification effects [Wheelabrator]:[B] maj. interested/dis. SHs

Ratification [Del. 144]: disclosure material facts•

Breached Good Faith?5.Subjective bad faith (::breach DoL) = breach•Intention dereliction duty (::breach DoC) = breach•Gross negligence =/= breach, In re Walt Disney (relying consultant not bad faith)•

SECURITIES REGULATIONSecurity?1.Stock: [1] "stock" + [2] usual characteristics of stock•Investment Contract: [1] invest $ [2] common enterprise [3] profits solely<‐efforts of others, Robinson v. Glenn (control ~partnership, not "solely from others")

•

Liability for Sale/Registration §11 + §12?2.

Public sale [1] register [2] 20 day approval [3] delivery prospectus < sale

<$1M = unlimited< $5M =< 35 offerees> $5M =< 35 sophisticated offerees

Re‐sales No ads File notice

Private exempt [Reg. D]

Registration•

Reliance/causation/scienter ‐> not req.Π cannot have known truthN/A to exempt

Issuer = strict liabilityOther Δs = liable ф of fault + Δs ßοǷ did not cause damages

Possible Δs = signed reg. statement (req. signors)/ director/experts/underwriters

For non‐experts relying on experts: no reason to believeFor others: [1] reasonable investigation [2] reasonable grounds to believe [3] did believestatements true/no omissions material fact, Escott v. BarChris (higher stds. experts )

Due Diligence Defense:

Untrue Statements [Sec. Act §11]: untrue fact/omitted req. material in reg. statement•

Liability + due diligence same as §11Due diligence defense OK

Reg. Process Violation [Sec. Act §12]: strict liability [A] offer/sell unregistered security, unless exempt / [B] misrepresentations in prospectus/oral comm.

•

Accounting Issue?3.

Weak market reflect past pricesSemi‐strong reflect public infoStrong reflects all info

Efficient Capital Markets•

Assets = liabilities + SH's Equity Balance sheet = assets, liabilities SH's equity on specific date

Income statement: profit (revenues, expenses, net‐income [revenue ‐ expenses])/timeΔStatement cash flows: cash received + paid/time ΔStatement SH's equity: Δ in SH's equity

Accounting•

Liability for Misstatements 10b‐5?4.

[1] Jurisdictional nexus [2] Transactional nexus

Sliding scale uncertain events: [A] probability + [B] magnitude, Basic[3] Materiality

Rebut everyone knew/corrected[4] Reliance: fraud on the market

Transaction causation ~ relianceLoss causation: evidence market believed misrepresentation

[5] Causation

[6] Scienter: intent deceive/defraud, some cts. reckless disregard truth

Rule 10b‐5 Untrue Statements of Material Fact:•

Liability for Insider Trading?5.Insider's Duty: only to SHs; sell non‐SHs OK, Goodwin (no duty public exchange)•

Special circumstances rule (only OK in)Minority rule (not OK)Traditional rule (OK)

Common Law: split•

[1] buy/sell security [2] basis material [3] nonpublic info, [Reg. FD] (disclose mat. info to all investors at once)

Statutory insiders= ƁΩƉ, sr. execs, 10% SHsTemp. insiders = [i] given nonpublic material info + [ii] expectation confidence + [iii]relationship implies duty

[4] breach duty [insider], Chiarella (not insider)

Traditional Theory [Rule 10b‐5]:•

Duty Trust/Confidence: [A] agrees [B] history/practice sharing so recipient knows [C]from spouse/parent/child/sibling, unless no expectation, [Rule 10b5‐2]

[1] undisclosed use of [breaching duty confidentiality], US v. O'Hagan (OK if disclosed)

[2] material nonpublic info [3] belonging to principle [4] personal gain

Misappropriation [Rule 10b‐5]: •

[1] tipper breached DoL by tipping for personal benefit, Dirks (Secrist =/= tipper, no breach)[2] tippee should/knows tipper breached, Dirks (Dirks knew Secrist's purpose expose fraud, not personal benefit)

Derivative Liability•

Tender Offers [Rule 14e‐3]: [1] trade on/communicate(if foreseeable) [2] material non‐public info [3] exceptions

•

PROXY SOLICITATIONSoliciting Proxy?1.Proxy Solicitations [Rule 14a]: [1] must be w/statement [2] file w/SEC [3] old ƁΩƉ annual report•

Incumbent OK if [1] expenses reasonable + [2] bona fide contest (policy, NOT personal), Rosenfeld (wining dining)

Insurgents OK if [1] win + [2] SH ratify reimburse

Reimbursing Proxy Fights•

Liability for Misleading Proxy?2.

[1] misleading statement/omission[2] material, Mills v. Electric Auto‐Lite Co. (not disclosing conflict of interest material); Seinfeld(valuations of options not material duh)

[3] causation, Mills v. Electric Auto‐Lite Co. ("proxy statement itself, not [defect] essential link"); but see Virginia Bankshares (material defect =/= causation if maj. SH enough votes)

Merger set aside if equitable$ if can quantify proxy defect

[4] damages = best interest of all SHs

Misleading Proxy Violation [Rule 14a‐9]•

Excluding SH Proposal on Proxy?3.

Personal grievance of SHUnrelated business, Lovenheim (force‐feeding geese %$ not met, but still significant)Elections or procedure forAlready rejected past 5 yearsSpecific dividends

Excluding OK on 13 grounds:SH's Proposal on Corp. Proxy Statement [Rule 14a‐8]: for eligible SH ($2K FMV/1% interest > year)•

SH Inspection Right?4.Right to SH List [Rule 14a‐7]: SH ßοǷ proper [corporate] purpose, compare Crane Co. (inform SHs why his hostile takeover good OK), with Pillsbury v. Honeywell (social/political issues unrelated to economic not OK)

•

CLOSED CORPORATIONSSplit Ownership & Control?1.DE: economic and voting split OK,Providence (28% shares, 3% vote OK)•IL: voting right req., Stroh (loophole b/c no economic OK)•SH Agreements & Voting Trusts?2.SH Agreements: OK but no specific performance, Ringling (remedy ignore inconsistent votes)•

Homemade McQuade (K to prevent)

Director Agreements: void b/c takes away ƁΩƉ's indep. judgment, compareMcQuade (constrain ƁΩƉ = violate fiduciary duty), with Clark (opposite no min. SH, only 2 party K)

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LLC?3.Pass Through Tax•

Managers ‐> fiduciary dutiesManager‐Managed = corp. ƁΩƉ•

All members ‐> fiduciary dutiesMember‐Managed ≈ partnership (1 vote/share, maj. wins) •

Members/managers/SHs not liable PCV OK, but lack formalities not enough, New Horizons (properly formed LLC ‐> no PCV)

Piercing LLC Veil•

End LLC = partnership, New Horizons (Δ liable b/c fucked dissolution $‐>Δ not creditors)•

CORPORATE CONTROLHow to Get Corporate Control?1.Proxy Contest: $$$<benefits•Tender Offer: premium offer, conditional # shares OK, oversubscribed ‐> pro rata, 2‐tier = coercive•Stock Purchase: open market•Sale of Assets: buy Target's assets (effect ≈merger)•

Merger ‐> acquirer lives Consolidation ‐> new corp.

Merger/Consolidation: control + combine•

Merger Sale of Assets (DE)

SH Approval Yes Only if selling "sub. all"

Appraisal Yes (non‐public) No

Liabilities All No unknown

Other Tax

Steps to a Merger (DE)?2.[1] ƁΩƉ approval•[2] maj. SH approval•[3] filing notice•[4] appraisal (n/a public)•De Facto Merger/Non‐Merger?3.PA ‐> legislature abolished de facto mergers post‐Farris•DE ‐> rejects de facto merger, Hariton (follow either indep. statute OK) & de facto non‐merger, Rauch•Acquirer [Maj. SH] Breached Fiduciary Duty w/Freeze Out Merger?4.

Maj. SH Δ's ßοǷ if: [A] no ratification / [B] evidence of fraud/misrepresentation/misconductΠ's ßοǷ show unfairness if: [1] valid ratification (maj. of min.) + [2] no evidence fraud/misrepresentation/misconduct

o

Entire Fairness = test maj. SH breached fiduciary duty in freeze‐out, Weinberger (maj. SH breached by withholding expert report + not disclosing conflicts of interest); Rabkin (maj. SH not violate K per se, but breached by intentionally avoiding commitment to min. SHs)

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DE: not req., WeinbergeroMA: [1] after Πmeets ßοǷ self‐dealing by Δ, [2] controlling SH ßοǷ: legit business purpose + [3]overall fairness, Coggins v. New England Patriots (no legit business purpose to force out minority SHs)

o

Business Purpose•

Value before freeze‐outOpen‐ended valuation (no market, min. discount), Weinberger

[A] Appraisal: if Π only alleged $ too lowo

[B] Equitable Relief [Recession]: if appraisal not adequate + fraud/misrepresentation/self‐dealing/deliberate waste [Weinberger]/simple misconduct [Rabkin]

o

[C] Rescissory Damages: present value if recession not practical, Cogginso

Damages•

Liability in LLC Merger?5.Min. interest ‐‐duty of loyalty [disclosure]‐‐> maj., even if maj. will outvote, VGS, Inc. (LLC merger invalid b/c min. managers secret voted to freeze‐out maj. member)

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Williams Act Tender Offer Violation?6.Acquirer > 5% ‐> disclosure 10 days•Tender open 20 days•Revocable•$ increase ‐> all tenders•

Did ƁΩƉ Breach Fiducary Duty With Takeover Defense?1.

[a]employee unrest, Cheff[b] creditors, customers, employees, Unocal

Revlon auction ‐> only SHs

[c] others OK if ultimate benefit must be for SHs, Revlon, accord ALI

[d] corporate culture, Time

Non‐SH Considerations:

Level of Threat [Unitrin]: [a] opportunity loss [b]structural coercion (SH's decision distorted) [c]substantive coercion (SHs misled on $)

Coercive, Toll Brothers (forced SHs to reelect incumbent ƁΩƉ or not have functioning ƁΩƉ)

Preclusive, Toll Brothers (made any takeover impossible)

Proportionate Action [Unitrin]: no court interference if [1] indep. ƁΩƉ + [2] defense not "draconian" (coercive + preclusive) + [3] range of reasonableness

Revlon Auction: if corp. in sales mode, ƁΩƉ's fiduciary duty = highest auction $, Revlon (lock‐up not OK b/c discourage bidding)

Longstanding Plan Exception [Time]: Revlon does not apply to long‐term sale plan (only active bidding), Time (Time not in Revlon mode b/c deal was long‐standing plan, not abandoning control/strategy)

Unless Longstanding Plan is Change to Private Control [QVC]: Revlon also applies when corp. control shifts public SHs ‐> private, QVC (breakup not req. going private)

Modified Duty of Care Test for Takeover Defenses [Unocal]: ƁΩƉ's ßοǷ: [1] reasonable belief danger to corp. policy/effectiveness ([A] good faith [B] reasonable investigation) + [2] proportionate responses to threat, Unocal (legit threat = $54 offer inadequate, junk bonds, well‐known corp. raider)

•What Type of Takeover Defense?8.Golden Parachute•

Part [1] Unocal DoC test + business purposeNo deterrenceIRS tax

Greenmail [Cheff]•

Reverse‐coerciveNow counteroffers to all SHs [SEC]

Counter‐Tender Offer [Unocal, Time]:$$$ if 1st tier tenders (but not Acquirer)

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Triggering eventƁΩƉ can redeem + "disarm" (forcing negotiation)

Flip‐In Plan: right to buy another share, diluting Target's stock so maj. control difficult/expensive

Flip‐Over Plan: dividend stock w/right to convert 1 Target stock ‐> 2 Acquirer stock, diluting Acquirer stock $, maybe control

Back‐End Plan: ≈ Unocal, offer $$$ debt securities if 1st tier tenders, forcing offer above back‐end price

Voting Plan: dilute voting rights (50% stock = only 5% votes)

Poison Debt: debt issued with K preventing corp. issuing more debt, defeating LBOs

Poison Pills [Revlon]: "SH Rights Plan" via vehicle ‐> takeover less profitable

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Dead Hand Pills: new ƁΩƉ cannot redeem, Toll Brothers (not OK can't restrict ƁΩƉ's power)

No Hand Pills: no one can redeem for X time, Quickturn Design Systems (disproportionate defense can't prevent ƁΩƉ exercising legal duties)

Dead Hand/No Hand Pills: for stopping a new ƁΩƉ from redeeming poison pills

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Incentivizes biddingProblem w/high fees: lowers overall selling price + Target's value

No‐Shop + Lock‐Ups [Van Gorkom, Revlon, QVC]: lock‐up"/termination fees for Acquirer's cost of bidding

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State Regulating Takeovers?7.States can give SHs more protection b/c they created corps., as long as can comply w/state + fed. law, CTS(Indiana Act not preempted by Williams Act/ violate CC)

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Corp. Debt?10.Successor Obligor Clause: boilerplate clause = uniform interpretation + literal, Sharon Steel ("all assets" @ time plan to liquidate created)

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Indenture Agreements: no extra benefits not bargained for in indenture K, MetLife v. RJR (adding more debt =/= breach implied duty good faith + fair dealing b/c risk of existing debt losing value considered + assumed)

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AGENCY

IS THERE AN AGENT?1.Rest. § 1(1): "Agency" is the relationship which results from the [1] manifestation of consent by one person (the principle) to another (the agent) that the other shall act [2] on behalf of the principle and[3] subject to principle's control, and [4] the agent consents to so act.

•

[1] handing over keys = manifestation of consent to drive kids[2] coach drove kids to football game on teacher's behalf (teacher wants football team to win thusSOME SHARED INTEREST, even if more for the benefit of the coach)

A says: even minimal backseat driver limitations signal control[3] telling coach only he could drive indicates a CONDITION, thus under teacher's control

[4] coach implicitly consented to act as A b/c he agreed by taking keys after CONDITIONAL OFFER

See Gorton v. Doty ‐ coach was agent of teacher so teacher liable for kids injured while coach driving•

[1] Cargill directedWarren to enter into grain purchasing contracts with farmers and [4] Warren consented [many times]

[2] Warren putt Cargill's name on contracts and used Cargill bags for the grain[3] in addition to financing, Cargill had control ("strong paternal guidance") in almost every aspect of Warren's day‐to‐day business operations, inspect records, and even enter Warren's premises

See Jenson Farms v. Cargill ‐Warren was Cargill's agent so Cargill as P was liable on all contracts made by an A on the P's behalf (unlike vicarious liability turning on scope of employment)

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PRINCIPLE LIABLE FOR AGENT'S ACTIONS ON CONTRACTS?2.Rest. § 144: a principal "is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party"

•

Express statement that there is or is not authority see Dweck v. Nasser ‐ client told lawyer "you can talk in my name"

Look at reasonable belief of the A for "manifestation of consent" from P to AImplied authority is highly contextual, often depending on prior practices or industry customs (e.g., "incidental authority" to do things that are usually necessary to do the actions expressly authorized)

See Dweck v. Nasser ‐ client had been allowing lawyer to settle suits for 20 years

Implied actual authority which the principal actually intended the agent to possess, typically such powers as are practically necessary to carry out the duties actually delegated

Actual Authority (P ‐> A):•

SeeMill Street Church ‐ everyone knew this was a 2 person job so there was apparent authority to hire another worker

Not all courts hold salesman title auto grants authority, but this 3rd party believed it

See 370 Leasing Corp. v. Ampex Corp. ‐ salesman had apparent authority to sign contract b/c that's what salesmen do ‐ sell shit and inherent part of selling is signing sales contracts

See Hoddeson v. Koos Bros. ‐ some imposter salesman sold lady furniture ‐ silence can be manifestation of authority, but it has to be observed by 3rd party

Apparent Authority (P ‐> 3rd Party): arising from the manifestation of authority from P to 3rd party•

Comes up a lot with undisclosed principles b/c there can be NO MANIFESTATION, seeWatteau v. Fenwick ‐ A held himself to be owner of bar and buyer didn't know actual owner of bar so no apparent authority (no manifestations possible), but inherent authority b/c P allowed A to make so many manifestations that he was actual owner (title, custom, etc)

A says: reasonable belief of 3rd party is NOT required ‐ i.e., the agent has a position/title that indicates certain authority in the industry ‐ irrelevant that 3rd party doesn't know the industry or

Inherent Authority: derived solely from the agency relations, found if [1] transaction is usual in the business (custom in the industry); and [2] done on behalf of P

•

CORPORATIONS OUTLINE

importance of title in industry

Affirmation can be express or impliedP must know or have reason to know all material facts

[1] valid affirmation by P (intent to ratify and with full knowledge of all the material circumstances)

Denied legal effect when necessary to protect the rights of innocent 3rd partyI.e., principle can't ratify a contract just to help himself, must be NECESSARY to protect innocent 3rd party

AND [2] to which the law will give effect

See Botticello v. Stefanovicz ‐ Botticello bought property not realizing that Mary and Walter were both part owners; but Mary ratified contract by accepting payments

Ratification: if A acts without authority (of any kind) and there is no grounds for estoppel, P will only be bound if P ratifies the contract, which requires:

•

Acts or omissions relevant but only if the party is presentP's intentional or negligent actsEstoppel only binds the principal, not the 3rd party

Estoppel: P cannot deny granting authority to A if [1] a 3rd party changed his position [2] to their detriment [3] in reliance on the representations made, see Hoddeson v. Koos Bros. ‐ [1] lady reasonably and in good faith changed position (handing over $) [3] in reliance (an imposter salesman in a gray suit seemed pretty legit in a furniture store), [2] to lady's detriment (lady never got her furniture)

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IS AGENT LIABLE ON A CONTRACT?3.

Disclosed principal but clear intent of all parties to bind ADisclosed principal but agent made the contract without authorityA non‐disclosed or partially disclosed P

RULE: Disclosed principal = no liability, but A can be liable in 3 situations:•

Actual knowledge is the test . . . "The duty rests upon the agent, if he would avoid personal liability, to disclose his agency, and not upon others to discover it."

See Atlantic Salmon v. Curran ‐ an A must disclose not only that he is representing a P, but also the identify of the P to avoid personal liability on a contract

•

PRINCIPLE VICARIOUSLY LIABLE FOR AGENT ON TORT?4.

Yes – P is liable for A's tort

Yes ‐ P is liable for A's tort◊No ‐ P is not liable in agency law for A's tort◊

No – Does situation fall into an exception?

Servant – [2]Was the tort committed within the scope of A's employment?

Yes ‐ P is liable for A's tort.No ‐ P is not liable in agency law for A's tort.

Independent Contractor – [3] Does situation fall into an exception?

Yes – [1] Is A a servant of P, or an independent contractor?

No ‐ P is not liable in agency law for A's tort

Is A an agent of P?ANALYSIS:•

Principals direct results or ultimate objectives of A ("make this happen, but I don't care HOW it happens")

Masters direct or has the right to control every aspect ("this is HOW you [the employee] physically has to get shit done")

More control than agency, this is control or right to control PHYSICAL CONDUCT of servant

See Humble Oil v. Martin / Hoover v. Sun Oil ‐ indicators of control evaluated generally (looked at who set hours of operation, who hired staff, who bought shit)

More control = master‐servant [1] Master‐Servant (Employer‐Employee) OR Independent Contractor?•

But seeMurphy v. Holiday Inns, Inc. ‐ control evaluated narrowly; court holds NO master‐servant relationship b/c the P did not control the "instrumentality" that caused the injury

See Humble Oil v. Martin / Hoover v. Sun Oil ‐ independent contractor b/c gas station had the overall risk of profit or loss

More business risk = Independent Contractor

See Clover v. Snowbird Ski Resort ‐ normally driving to work is not in scope of work, but ski bum skiing to work was "foreseeable" so in the scope of employment

A says: not that great of test b/c if work is in the middle of no where, does that mean people driving 100 miles is a foreseeable harm?

Accord Bushey v. U.S. ‐ adopts Foreseeability Test: who is cheapest cost avoider (sailor shooting dude is not foreseeable, but dock could foresee somebody accidently turning valves & but there were no safety precautions)

[A] kind of work A is employed to perform and conduct in same general nature or incident to the conduct the servant was employed to perform

SeeManning v. Grimsley ‐ Orioles pitcher was warming up in time/space of work[B] substantially within the authorized time and space limits

See Ira S. Bushey v. U.S. ‐ sailor had no purpose to serve P by turning valves at 2AM

A says: not correct b/c the proper Q is if A thinks he is helping to serve P and pitcher must know throwing ball at heckler is not going to help; maybe court arrives at decision by construing it as a subconscious purpose

But seeManning v. Grimsley ‐ court held pitcher could have been serving Orioles by getting rid of the heckler who was interfering with his job

[C] It is actuated, at least in part, by a purpose to serve P

Rest. § 228(1): A's conduct is within the scope of employment if:[2] Tort Within the Scope of Servant's Employment?•

[A] P retains control over action leading to tort (P is a master);[B] P employs incompetent independent contractor;[C] contractor's task is inherently dangerous;[D] duty is non‐delegable

RULE: P not liable for torts of independent contractor, except:

SeeMajestic Realty v. Toti ‐ argue [B] city was negligent for hiring an incompetent contractor and [C] [D] demolishing buildings is inherently dangerous principle's duty non‐delegable

[3] P Liable for Independent Contractor?•

AGENT VIOLATING FIDUCIARY DUTIES?5.Rest. § 13: "An agent is a fiduciary with respect to matters within the scope of his agency." •

Paid to do job, then do it to normal standards in industryDuty of Care

Inherent Conflicts of Interest (kickbacks, bribes, tips from 3rd parties)

From use of position, involving 3rd party, Reading (profits from using army uniform to benefit himself)

From dealing with P without P's knowledge (real estate agent secretly buying house without informing seller)

Secret Profits

Usurping Business Opportunities from principal, Singer (sent away business to another shop for a referral fee without disclosing, key is lack of disclosure to P)

Grabbing & Leaving, Town & Country (OK if you just remembered stuff but cannot jack the entire customer list or other secret/confidential info & duty applies even AFTER you leave)

Duty of Loyalty is violated in following situations:

Fiduciary Duties:•

PARTNERSHIPS

IS THERE A PARTNERSHIP?1.

Co‐owners = shared control + shared profitsNo formal requirements

Definition : "an association of two or more persons to carry on as co‐owners a business for profit."•

UPA § 7(1): Persons who are not partners to each other are not partners as to third parties, except for partnership by estoppel

•

[1] sharing of profits is prima facie evidence of partnership unless profits were paid as wages ‐chick's partnership agreement clearly said this

[2] intention of parties in conducting business ‐ chick's position in the company didn't change[3] obligation to share losses ‐ none, Fenwick still taking all risk[4] property ownership ‐ still owned wholly by Fenwick[5] running the business and control ‐ agreement excludes chick from any control[6] did others see the business as a partnership ‐ how they acted in public is more relevant than the terms the written agreement

[7] assets after dissolution ‐ none, the chick would just end like quitting a normal job

See Fenwick v. Unemployment Compensation Commission ‐ was receptionist a partner in hair salon, when there was a "partnership agreement" but it looked like receptionist was just an employee

•

A says: courts often look at the norms in the community (everyone knows the caddy is not a partner in the sense he has power to control part of Tiger's shot)

HYPO: Tiger Woods's caddy, Steve Williams claims he can't be fired b/c he is Tiger's partner who [1]shared profits and does [5] a little joint decision making

•

PARTNERSHIP BY ESTOPPEL?2.

[1] need representation as partnership AND[2] some sort of reliance on the representation

UPA § 16(1): "A person who represents himself, or permits another to represent him , to anyone as a partner in an existing partnership or with others no actual partners, is liable to any such person whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership."

•

See Young v. Jones ‐ [2] NO partnership by estoppel b/c Π didn't give credit to (rely on) the assertions

•

WHO IS LIABLE IN A GENERAL PARTNERSHIP?3.

(a) Jointly and severally for everything chargeable to the partnership (e.g., torts and breaches of fiduciary duties)

(b) Jointly for all other debts and obligations of the partnership . . . [e.g., contracts]

UPA § 15: All partners are liable•

Debts owed to creditors other than partners;1.Debts owed to partners other than for capital and profits . . .2.

UPA § 40(b): liabilities of the partnership rank in order for payment:•

PARTNER VIOLATING FIDUCIARY OBLIGATIONS?4.GENERAL RULE: "Partners owe each other a fiduciary duty of the utmost good faith and loyalty . . . As a fiduciary, a partner must consider his or her partners' welfare, and refrain from acting for purely private gain . . .", Meehan v. Shaughnessy

•

(a) ONLY fiduciary duties a partner owes to partnership and other partners = the duty of loyalty and the duty of care set forth in subsections (b) and (c).

(1) To account to the partnership and hold as trustee for it any property, profit or (b) Duty of loyalty is limited to:

RUPA § 404:•

Partners must do stuff for the partnership as a whole, including new partnership opportunities, seeMeinhard v. Salmon (minimum duty was to disclose new opportunity to partner)

benefit derived [from partnership] including the appropriation of a partnership opportunity.

No deals where there are conflicts of interest(2) To refrain from dealing with . . . a party having an interest adverse to the partnership

"Grabbing & leaving" law firm partners cannot steal clients, seeMeehan v. Shaughnessy (leaving wasn't the issue, LYING = breach of duty)

(3) To refrain from competing . . .

High standard; accidents are excusable

(c) Duty of care . . . is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

(d) A partner shall discharge the duties to the partnership and the other partners . . . consistently with the obligation of good faith and fair dealing.

Perfectly acceptable to look out for #1 (but just disclose and don't violate duties)

(e) A partner DOES NOT violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.

(f) A partner may lend money to and transact other business with the partnership . . .

See Perretta v. Prometheus Development Co. ‐ could not opt out b/c manifestly unreasonableA's Key Point: look at the agreement as a whole to decide if it is "manifestly unreasonable" ‐and NOT "manifestly unreasonable" when there are good reasons for the agreement

Opting Out: Partners can structure agreements to opt out or differ from general rules of partnership, but there are limits on even what partners can opt out of / contract away

•

PARTNERSHIP PROPERTY RIGHTS5.

his rights in specific partnership property,1.his interest in the partnership (share of profits + surplus), and2.his right to participate in the management.3.

UPA § 24: The property rights of a partner are•

Equal right to possess partnership property for partnership purposesRights in specific partnership property are not assignable except in connection with the assignment of rights of all the partners in the same property

UPA §§ 25(1), (2): "A partner is a co‐owner with his partners of specific partnership property holding as a tenant in partnership."

•

DOES PARTNER HAVE A RIGHT TO MANAGE AND/OR AUTHORITY TO BIND PARTNERSHIP?6.

Each partner has equal rights in management and conduct of the partnership businessBecome a partner only with the consent of all of the partners

If deadlocked (i.e., only 2 partners in National Biscuit), nothing changes

A difference arising in the ordinary course of businessmay be decided by a majority of the partners

An act outside the ordinary course of business or an amendment to the partnership agreement undertaken only with consent of ALL partners (unanimous)

Management ‐ RUPA § 401:•

[1] Every partner is an agent of the partnership for the purpose of its business, AND

[A] the partner has in fact no authority to act for the partnership in the particular matter, AND

[B] the person with whom he is dealing has knowledge that the partner has no such authority

[2] the act of every partner for apparently carrying on partnership business IN THE USUAL WAY binds the partnership, UNLESS:

[3] An act of a partner which is NOT apparently for the carrying on of partnership business in

Authority to Bind ‐ UPA (1914) §§ 9(1),(2):•

the usual way does not bind the partnership, unless authorized by the other partners."

Notice to National Biscuit of no more bread orders didn't matter b/c [2] Freeman still had actual authority to order bread per RUPA § 401 (equal management unless majority decides otherwise)

Compare National Biscuit Co. v. Stroud ‐ Stroud‐Freeman partnership, Stroud says he is not paying National Biscuit for a bread order only Freeman agreed to b/c Stroud told National Biscuit he wasn't ordering anymore

Unlike National Biscuit, Summers hiring another person was NOT in the ordinary course of business and required consent of ALL partners per RUPA § 401

With Summers v. Dooley ‐ Summers‐Dooley partnership for trash collection, Summers hired another employee over Dooley's objections, sued to get paid for this expense

But seeMoren ‐ partner brought her kid to work and partnership liable for kid's injuries ‐ordinarily you don't bring kids to work but court says doing your job at work is "ordinary course," even when your kid is there

TORT LIABILITY: partnership is liable for torts committed by one partner in the ordinary course of partnership business

•

ENDING THE PARTNERSHIP?7.

[1] by act of one or more partners[2] by operation of law (death, bankruptcy, etc.)

(i) the economic purpose of the partnership is likely to be frustrated(ii) another partner has engaged in conduct that makes it not reasonably practicable to carry on the partnership

(iii) not reasonably practicable to carry on the partnership in conformity with the partnership agreement

[3] by court order that:

3 Types of Dissolution:•

After court ordered dissolution, either sell the business and divide the proceeds or have an auction where one partner can buy out the other

See Owen v. Cohen ‐ good partner worried he could lose investment of $7K if he terminates by himself, so he gets court to say [3iii]that there was no way the partners could keep on working together b/c other partner real big asshole

•

Court holds no implied term but warns partner it would be breach of fiduciary duty to dissolve the partnership solely to profit himself

See Page v. Page ‐ partner wants a court declaration that it was a [1] partnership at will (not term "until profits are made") so he can end that shit and PROFIT

•

WHAT ARE CONSEQUENCES OF DISSOLUTION?8.

"Winding up" = selling partnership's assets/business, paying creditors, and dividing remaining assets or liability for remaining losses

Dissolution does not terminate the partnership but limits partners' authority to act for partnership, and starts "winding up" of the partnership

Dissolution and Winding Up Under UPA:•

Court says 2 partners bidding with "paper dollars" is OK b/c the removed partner gets more value for his 15% (not unfair)

CASE: Prentiss v. Sheffel ‐ 2 out of 3 partners, who owned 85% combined interest decide to dissolve partnership then buy business back at auction using their interest in the dissolved partnership, effectively just kicking out the last partner

[1] Acquire business from other partners and continue the partnership

Creates a new partnershipDebts carry over

Remains liable on all firm obligations unless released by creditors Departing partner entitled to an accounting and fair value of the partnership

New partner liable for old firm debts, but debts only can be satisfied out of the partnership assets (i.e., he has no personal liability)

[2] Continuation per agreement

Wrongful dissolver subject to damages for breach of the partnership agreementRemaining partners have right to continue business even absent an agreement to do soWrongful dissolver entitled to the fair value of his interest (NOT including the value of the partnership's goodwill), minus any damages he caused

[3] Continuation after wrongful dissolution (e.g., early termination of a term partnership)

Triggering event = "disassociation", then 2 options:Disassociation and Dissolution Under RUPA:•

HOW ARE REMAINING PROFITS / LOSSES DIVIDED?9.

(1) owed to creditors other than partners(2) owed to partners other than for capital and profits(3) owed to partners in respect of capital(4) owed to partners in respect of profits

UPA (1917) § 40(b): order of distributing assets:•

Explicitly rejects Kovacik

RUPA § 401(b): "each partner is entitled to an equal share of the partnership profits and is chargeable with a share of losses in proportion to the partners' share of the profits."

Dividing Losses, General RULE: if agreement is silent, default is partners intended to share profits and losses equally, regardless of how much capital each contributed

•

Court tailors partnership law to a hypothetic contract negotiation ‐ if the parties had thought about the issue of losses, what would they have agreed to?

This court says Reed is NOT liable for losses b/c he put in labor equal in value to $10K and lost all of that already ‐ holding NOT consistent with general rule

Kovacik limited ONLY to cases where there is 1 service partner and 1 capital partner AND the service partner has [1] NO SALARY, and [2] NO CAPITAL CONTRIBUTION

But see Kovacik v. Reed ‐ Reed provides all labor and Kovacik provides all capital ($10K); they agree to share profit 50‐50 but didn't talk about losses; Kovacik says Reed must pay 1/2 the losses when business fails

•

10. BUYOUT (BUY‐SELL) AGREEMENT?• Trigger events = death, disability, voluntary opt out?•

Have periodic agreements

Hire an appraiser

Use a formula

Most common approach is "I split, you choose" like splitting a bag of weed

Determining price is biggest issue:

11. LIMITED PARTNERSHIP?•

Death of a limited partner does NOT cause dissolution

Limited partnership shares are often transferable

Limited partners may have restricted voting rights.

The general partner is personally liable to creditors

Definition of LP: A limited partnership is composed of at least one general partner, and at least one limited partner

• They are also general partners

But then they are ONLY liable to persons who reasonably believed, based on the limited

partner's conduct, that the limited partner is a general partner

They exercised control (pretending to be a general partner) or had a right to exercise control

See Holzman v. De Escamilla ‐ cannot get out liability by claiming that they only limited partners when they controlled the business by: (1) making big decisions such as what crops are grown; (2) changing management; (3) had absolute control of the business bank account

RUPA § 303(a): limited partners are liable only to the extent of their contributions, UNLESS:

• Similar to a limited partnership, but also grants general partner limited liability (somewhat

similar to making a corporation the general partner).

Limited Liability Limited Partnership (LLLP):

• Acts like a general partnership, but with limited liability.

Liability of LLP – RUPA §306(c): "An obligation of [a limited liability partnership] . . . is solely an obligation of the partnership . . . A partner is NOT personally liable . . . solely by reason of being . . . a partner."

Limited Liability Partnership (LLP):

CORPORATIONSCORPORATE ENTITY?1.

General Partnership Corporation

Limited Liability

No, but partners can bargain it from 3rd party, buy insurance

Yes, but creditors may seek personal guarantees

Free Transferability

Default: No, but may be allowed Default: Yes, but may be restricted

Longevity Dissolution at will, unless agreed upon otherwise

Default: Indefinite, but can be limited

Centralized Management

No; each partner an agent. But can use committee & limit authority by agreement/notice.

Yes, but may want to modify to prevent freeze‐out.

Formation/Formalities

Informal (no filing) Formalities required, including: Articles of Incorporation, Bylaws, Board of Directors, Officers, Minutes, Elections, Filings; more costs

Tax Single taxation – Partnership is not taxed; partners are.

Double on distributed earnings: Corporation taxed, and so are dividends

PROMOTER LIABLE FOR PRE‐INCORPORATION ACTIVITY?2."Promoters" purports to act as an agent of the business prior to its incorporation•

Generally OK to enter into arms length transactions, but if A has a P, A must disclose P's identity

Fiduciary Duties Pre‐Incorporation: promoter is an agent of the corporation so has fiduciary duties, see Atlantic Salmon

•

Promoter not liable ONLY if released by other partyOnce the articles are filed, implicitly or explicitly, corporation adopts the contract

If the articles are NOT filed, promoter liable on the contract (like the undisclosed principal situation)

If 3rd party knows the corp. is yet‐to‐be‐formed:

Liability of Promoter: if 3rd party doesn't know corp. is yet‐to‐be‐formed, an purported A acting for the nonexistent P becomes party to the contract unless agreed otherwise

•

DEFECTIVE CORPORATION?3.

[1] acted in good faith to incorporate;[2] had the legal right to incorporate; and[3] acted as if they were incorporated.

De facto Corporation: a court may treat an improperly incorporated firm as a corporation if organizers:

[1] thought business was a corporation; and[2] would earn a windfall if allowed to deny that the business was a corporation

Corporation by Estoppel: a court may treat an improperly incorporated firm as a corporation if third parties:

RULE: If the articles are NOT filed or are defectively filed, the defectively formed entity (or individuals) can enforce the contract or avoid personal liability only if there is a de facto or corporation by estoppel

•

Court finds SGM was a "corporation by estoppel" b/c [1] both parties treated the SGM as a corporation; and [2] Camcraft would earn a windfall if they were allowed to deny the existence of SGM corporation

See Southern‐Gulf Marine Co. No. 9 v. Camcraft, Inc. ‐ Camcraft claimed contract was void b/c SGM did not exist as a corporation when they entered into the contract

•

IS PERSONAL LIABILITY LIMITED DUE TO CORPORATE ENTITY? 4.

Agency rules hold if a P uses corp. as his agent (furthering only his personal goals), the P is held liable for corp.'s acts as an A of P

Limited Liability ‐MBCA § 6.22(b): "Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is NOT personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct"

•

[A] the lack of corporate formalities (between owner and corporation), [B] the commingling of funds and assets, [C] under‐capitalization, and[D] the use by one corporation of assets of another.

[1] a unity of interest and ownership, determined by looking at four factors:

[A] sanction fraud OR[B] promote injustice.

AND [2] a situation where failing to PCV would either

Piercing the Corporate Veil Requires:•

[1C] Π asked court to PCV b/c the stockowners purposefully left no money

SeeWalkovszky v. Carlton ‐ NYC cab case is not about escaping liability b/c that is the exact purpose of a corporation, but about when PCV is needed to prevent fraud/injustice

The "Alter Ego" Theory: is when a "dummy" corp. is controlled and used by an individual stockholder for purely personal rather than corporate ends, merging the person and corp. so that it would sanction fraud or injustice to not hold the stockholder liable for actions of dummy corps. it controls

•

(undercapitalized) to avoid personal liabilityNo PCV with alter ego theory b/c Π didn't allege taxi corp. owner was using all the corps.for his personal benefit rather than corp.

[2B] mere fact Sheffield will have difficulty collecting from church in Switzerland is not enough of an injustice

See also Roman Catholic Archbishop of SF v. Sheffield ‐ alter ego means a "parent" is liable for the actions of "subsidiaries" it controls, but each "subsidiary" is NOT liable for actions of theother subsidiaries.

Big PRO of reverse veil piercing is judgment creditor > levy owner of equity shares

[1] court found unity of interest and ownership b/c no corporate formalities, only one bank account all businesses, and Marchese moved $ freely from one corp. to another

Had to be a "wrong" BEYOND a creditor's inability to collect a debtOn remand Π won after providing evidence Marchese committed blatant tax fraud

[2] problem was Π didn't allege outright fraud and not enough evidence PCV was necessary as to avoid promoting injustice

See Sea‐Land Services ‐ Π sued owner of PS, Marchese, and 5 of his other companies ‐ claiming that all of Marchese's corps. were alter egos of each other that Marchese used for his own personal benefit

"Reverse Veil Piercing": due to lack of vertical formalities [between the Corp. A and Common Owner,AND Corp. B and Common Owner], a Π can hold Corp. B liable for actions of Corp. A

•

Enterprise Liability: is when there is a lack of formalities horizontally (between two Corps. A and B), both with a common owner, a Π can recover from A or B

•

Evidence of fraud, inequity, or injustice NOT required in this tort liability caseBristol also directly liable b/c it put its name on breast implant packages, endorsing the product negligently without researching it

See In re Silicone Gel Breast Implants Product Liability Litigation ‐ Bristol liable for subsidiary MEC's fucked up boobs b/c they had corporate control of MEC

Parent‐Subsidiary Liability: "Parent corp. is expected to exert some control over its subsidiary . . .however, when a corp. is so controlled as to the alter ego or mere instrumentality of its stockholder, the corporate form my be disregarded in the interests of justice."

•

A says: only b/c Mannon and Baxter were very clear when doing business, i.e., stating when they were acting as limited partners or acting as officers in Union Corp. ‐ so Frigidaire knew and assumed the full risks

See Frigidaire ‐ no personal liability for Mannon and Baxter as limited partners

Tax Shelters: A limited partnership with a corporation as general partner so that the limited partners can claim partnership losses on their taxes, while corp. GP incurs all the liability for the debts

•

PROPER SHAREHOLDER DERIVATIVE ACTION?5.

Direct Action – SH suit allowed.

Full Board (quorum = independent): SH bears burden of proofSubset of Board: Corp. bears burden of proofCourt‐appointed: SH bears burden of proof

Types of review of demand refusal◊

Yes – Dismiss unless institution's decision not in good faith or not based on reasonable investigation.

No – SH suit allowed.

Did appropriate demand review institution find suit not in corp's interest?Yes ‐ Universal Demand Rule (MBCA)

Demand excused – SH suit allowed; Corp. may use SLCs to get court to dismiss.

Is demand futile and thus excused?

No ‐ Non‐universal demand rule (Del./NY)

Derivative – Is demand universal?

Derivative Action Flowchart:•

No – Suit dismissed/stayed until demand made.◊

No – Board of Directors takes control of suit

Yes – Shareholder suit allowedNo – Suit dismissed.

Yes – Refusal wrongful? (decision to refuse demand [not the underlying conduct] reviewed under business judgment rule)

Yes – Demand refused?◊

Demand not excused – was demand made?

Grimes focuses on WHO was injured and thus receive the reliefDirect suit damages are paid directly to SHs

Direct Actions: vindicate individual SHs' structural, financial, liquidity, and voting rights•

I.e., enforce fiduciary duties of directors, officers, or controlling SHs ‐ all duties owed to the corporation, see Cohen v. Beneficial Industrial Loan Corp.

All recovery goes to corporation, but attorney's fees are reimbursed by corp.Πmust be a SH at the time of the alleged wrongdoing and when suit commences

Derivative Suit: suing in equity to enforce the corporation's rights•

And cannot start until "90 days have expired from the date the demand was made . . . unless irreparable injury to the corporation would result by waiting for the expiration of the 90‐day period"

Material interest in transactionDominated or controlled by interested party (i.e., VP is not independent if the President is interested party)

Not independent if:Board, if independent directors = quorum (majority)

Committee of two or more independent directors appointed by independentsCourt‐appointed independent panel

Demand May Be Reviewed By:

Universal Demand ‐MBCA § 7.42: SHs must make "demand" before filing derivative suit•

[1]majority of BoD has a material financial or familial interest; OR[2] majority of BoD is incapable of acting independently for some other reason such as domination or control; OR

[3] the underlying transaction does not pass BJR

DELAWARE Demand Futility Standard (Aronson; Grimes): To excuse the demand requirement, a Πmust show reasonable doubt (easier std. than NY) that EITHER:

[1]majority of BoD interested; OR[2] directors failed to inform themselves; OR[3] challenged transaction could not have passed BJR

NEW YORK Demand Futility Standard (Marx): To show that demand would be futile (thus excused), the Π's complaint must allege with particularity (tougher std.) that EITHER:

Demand Futility ‐ Del/NY: if the directors cannot be expected to make a fair decision, demand would be futile and is excused

•

BJR allows SLC to dismiss suit for variety of reasons (i.e., undermine employee morale, underlying claim lacks merit, recovery not worth cost of litigation, bad publicity, etc)

NEW YORK SLC Test: Unless the Π can show that [1] the SLC's members were themselvesinterested OR [2] did not act on an informed basis, the SLC's recommendations are entitled to judicial deference under the BJR

[1] Independence and good faith of SLC and the bases supporting recommendations (Δhas burden)

[2] Court may apply its own business judgment (less deference to SLC, friendlier to SH Πs) as to whether the case is to be dismissed

DELAWARE Two‐Step SLC Test (Zapata):

Demand Excused ‐ Special Litigation Committees (SLCs) RULES: if demand is excused, suit is allowed unless corp. uses independent SLC to get dismissal

•

If SH makes demand, can't go back and argue it should have been excused ‐ only claim left is wrongful refusal

In DE never make demand b/c demand excusal doctrine (Aronson rule) is much easier for Π than demand refusal doctrine (BJR)

Wrongful Refusal: if a demand is refused, BoD is entitled to presumption of BJR unless the SH can allege facts that gives reason to doubt: [1] the board acted independently OR [2] with due care in rejecting the demand

Demand Refused RULE: BoD takes control of suit unless the refusal is wrongful•

FIDUCIARY DUTIESQUESTIONING CORPORATIONS' MANAGEMENT/DECISIONS? 1.

[1] If NO red flags BJR applies; defer to the business decision of the board

[A] If entirely fair (procedure and substantively) no violation of the relevant duty[B] If NOT entirely fair violation of duty of loyalty OR duty of care

[2] If there ARE red flags Entire Fairness Test applies

ANALYSIS: We are looking for red flags •

[1] Directors breach their duty of loyalty by tainting their decision with fraud, illegality, or a conflict of interest

[2] Directors breach their duty of care by not conducting sufficient investigation OR insufficiently deliberating before making a business judgment

See Shlensky v. Wrigley ‐ derivative action trying to get Δ Chicago Cubs director to install lights for night baseball (to earn more $) was not successful b/c director said lights would fuck up ambiance of neighborhood ‐ court gives ANY reason BJR deference

But see Dodge v. Ford Motor Co. ‐ court would not interfere with Δ Ford's business judgments(i.e. price of products, decision to expand the business, etc.) except Ford's decision not to pay dividend only b/c Henry Ford said he didn't care about making $ ‐ directly against the corporate charter

Business Judgment RULE (BJR): Absent fraud, illegality or conflict of interest, the board's business judgment is not second guessed by the court; the court defers to the BoD's decisions, unless:

•

Argue BoD didn't breach, but even if they did, the transaction is entirely fair so BoD is not liable

"Entire Fairness" Considerations: timing, negotiation, and structure of the transaction, the disclosure to and approval by directors, and the disclosure to and approval by SHs

Different from Van Gorkom b/c Van Gorkom BoD violated duty of care (by failing to adequately inform themselves) AND violated duty of disclosure to SHs ‐ the double failcouldn't pass "entire fairness" test

See Cinerama v. Technicolor ‐ Technicolor BoD (Δ) breached its duty of care (even though CEO did thorough research and hard bargaining, that didn't relieve BoD of their duty deliberate and conduct a market check) ‐ BUT the BoD met its burden of proving the "entire fairness" of the deal so BoD NOT liable

"Entire Fairness" Test: Even when there is a breach of fiduciary duty, if the entire transaction was entirely fair under a balancing test (procedurally and substantively fair), the BoD is relieved of liability

•

BREACH OF THE DUTY OF CARE?2.

Not a breach of duty of care b/c AmEx. BoD addressed the issue, disagreed with it, and had reasonable justification based on the financial statements

Maybe breach if BoD didn't look at the financial statements, just made decision on a whim "oh b/c we feel like it"

See Kamin v. AmEx. ‐ Directors can breach duty of care if they neglect to, or fail to perform, or violate duties of management but can't be ordinary negligence, must be "neglect of duties (i.e., malfeasance or nonfeasance), not misjudgment"

Party attacking a BoD's decision can rebut the presumption of BJR by showing duty of care breached by not making informed decision

BoD should have gotten expert opinions, market tests, more documentation

See Smith v. Van Gorkom ‐ BoD breach duty of care owed to SHs b/c they were grossly negligent in approving the merger in 20 mins without substantial inquiry or expert advice

No BJR protection b/c minimum a director needs to look at basic info that is reasonably available

See Francis v. United Jersey Bank ‐ director turned blind eye to her sons robbing the company blind so she breached her duty of care by nonfeasance (didn't do ANYTHING towards discharging her job duties)

The Duty of Care ‐MBCA § 8.30(a): "Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the director reasonably believesto be in the best interests of the corporation"

•

Requires senior management and directors to take proactive role in overseeing and monitoring the financial reporting process, including disclosure, reporting systems and internal controls

Sarbanes‐Oxley Federal Duty of Care:•

See Caremark ‐ BoD making a conscious decision not to do the compliance program is OK under the BJR ("we thought about it and its too expensive for our small little company") but if you set it up, you have to follow through

But see Stone v. Ritter ‐ change from Caremark, BoD doesn't get BJR if they make an affirmative decision not to do a compliance program

BoD Oversight / Compliance with Law: BJR presumption rebutted and breach of the duty of care if a BoD: [1] utter fails to implement a control system; or [2] consciously fails to monitor the system

•

BREACH OF DUTY OF LOYALTY IN AN INTERESTED DIRECTOR/OFFICER TRANSACTION?3.

BJR does not apply when there is conflict of interest

See Bayer v. Beran ‐ BoD did not breach duty of loyalty by hiring a director's wife to sing in their commercials b/c though there was a conflict of interest (self‐dealing transaction), the transaction was entirely fair (served legitimate corporate purpose and the wife only got normal compensation)

•

Didn't matter BoD weren't expressly told Abdo was BFC's rep. b/c they actually knew he was

But see Benihana of Toyko v. Benihana, Inc. ‐ Benihana BoD did not violate duty of loyalty by allowing self‐dealing (director Abdo on both sides of negotiation) b/c BoD knew Abdo was BFC's representative, thus were informed when making decision that was entirely fair (negotiations fair, final price fair)

•

BREACH OF DUTY OF LOYALTY BY USURPING CORPORATE OPPORTUNITIES?4.Corporate opportunity doctrine is a subset of the Duty of Loyalty with special rule different from regular DoL analysis

•

[1] The corporation is financially able to take the opportunity;[2] The opportunity is in the corporation's line of business;[3] The corporation has an interest or expectancy in the opportunity; and[4] By embracing the opportunity the officer/director creates a conflict‐of‐interest with the corp.

Delaware Test (Guth v. Loft, Broz v. CIS, Inc.): An officer/director violates Duty of Loyalty by embracing a business opportunity if (A says: look at these as factors instead of elements):

•

[1] CIS not financially capable of exploiting the opportunity[2] opportunity may have been in the line of business [3] but CIS had no interest or expectancy b/c the BoD decided to get out the market[4] Broz's interest in opportunity created no conflicts with his obligations to CIS Broz didn't need to disclose to CIS (but disclosure would have provided a "safe harbor") ‐opposite to ALI Rule [2], where the fiduciary MUST disclose and wait for corporation to reject the opportunity

See Broz v. CIS, Inc. ‐ Broz did NOT breach of duty of loyalty under DE Test b/c:

Compare Beam ex rel. Martha Stewart Living v. Stewart ‐ [2] BoD Martha not usurping business opportunity by selling stock b/c selling stock was ancillary and NOT in corp.'s line of business

A says: sometimes even ancillary activitiesmay be considered in the corporation's line of business (but eBay does A LOT of investments)

With In re eBay, Inc. Shareholders Litigation ‐ [2] BoDs usurping opportunities to buy IPOs was in eBay's line of business b/c eBay does a lot of investing in securities b/c they have a lot of cash and it is part of their asset management strategy

in connection with the performance of functions as a director/sr. executive; orunder circumstances where the person offering opportunity expects it to be offered to the corporation; or

acquired through the use of corporation information or property, if reasonably expected that this opportunity would be of interest to the corporation.

[A] For all insiders (directors & senior executives), opportunities:

[B] For senior executives only, any opportunity that is closely related to a business in which the corporation is engaged or expects to engage

[1] a "corporate opportunity" is defined:

[A] The insider first offered the opportunity to the corporation, and disclosed the conflict of interest;

The rejection of the opportunity is fair to the corporation; orThe opportunity is rejected in advance, by disinterested directors in a manner satisfying the BJR; or

The rejection is authorized or ratified by disinterested SHs and rejection is not a waste of corporate resources

[B] The corporation rejected the opportunity; and either

[2] An insidermay take advantage of a corp. opportunity if:

not connected to a position at PriCelluar (entity claiming breach of duty)person offering the opportunity did not expect it to be offered to the corporation ‐ seller didn't want to sell to PriCelluar b/c their financials were too poor

Opportunity not acquired through use of the company info/property

See Broz v. CIS, Inc. ‐ not in definition of "corporation opportunity" under ALI Rule [1A]

American Law Institute (ALI) Rule:•

BREACH OF DUTY OF LOYALTY BY A CONTROLLING SHAREHOLDER?5.Simple majority SH is controlling (but not as obvious as 97% SH in Sinclair), UNLESS voting requires a supermajority

•

The burden is on the director or dominant SH not only to prove the good faith of the transaction but also to show its inherent fairness, Pepper v. Litton

Fiduciary Duty of Dominant SHs: "Entire fairness" is applied in transactions by a dominant SH who has a fiduciary duty ‐ BUT ONLY WHEN the transaction is self‐dealing (transaction is to detriment of minority SHs), otherwise the BJR is applied

•

Excessive dividends ‐ NOT self‐dealing b/c paying dividends benefited all SHs Preventing expansion of operations ‐ NOT self‐dealing b/c Π didn't show any opportunities were actually available

See Sinclair Oil Corp. v. Levien ‐ Δ wants court to apply the BJR (Π has burden of showing the controlling SH was guilty of gross overreaching); Π wanted the "entire fairness" test to apply (once Πshows Δ self‐dealing, burden is on Δ to show the entire fairness of deal)

•

Breach of contract ‐ self‐dealing b/c benefited only Δ while being detrimental to minority SHsSee Zahn v. Transamerica ‐ duty of loyalty breached by controlling SH b/c they should have disclosedthe possible windfall profits (giving Class A SHs opportunity to convert to Class B)

•

NO BREACH OF DUTY OF LOYALTY DUE TO RATIFICATION?6.

Interested directors count toward the quorum attendance, but their votes do not countDisinterested directors can pass a vote even without quorum, as long as other interested directors are there to make it a quorum

Voting Statutes:•

(a)(1): with disclosure of material facts, it is approved by a majority of [all] the disinterested directors [not just ones present at quorum]

(a)(2): with disclosure of material facts, it is approved by a majority of the shareholders[interested or disinterested]

Ratification § 144(a): Ratification OK if:•

Duty of care claims are extinguished by fully‐informed shareholder ratificationDuty of loyalty claims against BoD: ratification shifts burden to Π to show waste (very difficult)Duty of loyalty claims against controlling SH: SH ratification only shifts burden to Π to show lack of entire fairness (that the deal was somewhat unfair)

See In re Wheelabrator Tech. Shareholders Litigation•

BREACH OF DUTY OF GOOD FAITH?7.

1st type of bad faith = subjective bad faith ("I hate Disney, I hate Mickey Mouse, I'm going to ruin this company") for sure breach of duty of loyalty, but very hard to show

2nd type of bad faith = intention dereliction of duty ("Oh I just really don't feel like coming to work this year") is breach of duty of care, but also very difficult to prove

3rd type of bad faith = gross negligence creating a breach of the duty of good faith, but ultimately just reaffirmation of the BJR

See In re Walt Disney Co. Derivative Litigation ‐ not many cases deal with "good faith" separately from duty of care and duty of loyalty, this court says the BoD hired and relied on a compensation consultant so it seems to pass BJR as not in bad faith

•

PUBLIC CORPORATIONS & SECURITIES REGULATION

IS IT A "SECURITY"?1.Securities Act, §2(a)(1): "The term 'security' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit‐sharing agreement, . . . investment contract . . . or, in general, any interest or instrument commonly known as a 'security' . . ."

•

Definition of "Stock": called stock and has usual characteristics of stock•

CASE: Robinson v. Glenn ‐ profits did not come "solely from the efforts of other" so not an "investment contract" dude could sue on

Definition of "Investment Contract": an investment of money (anything of value, i.e., gold) in a common enterprise (money pool to do something) with profits to come solely to come from the efforts of others (Robinson v. Glenn)

•

LIABLE FOR FUCKING UP SECURITIES SALE & REGISTRATION UNDER §11 OR §12?2.

Not allowed to sell securities until you registerOffers permitted and price is usually named at end of the 20 daysThen 20 days for the SEC to say no or do nothing (then you're allowed to sell your securities)Must delivery the prospectus before the sale

Registration:•

Exemptions from Registration:•

Transactions by an issuer not involving any public offering

Under $1M, unlimited number of people Under $5M, up to 35 offereesAbove $5M, up to 35 offerees of financial sophistication

Re‐sales count against the sales need to put restrictions on the stock to prevent resaleIssuer can't advertise publiclyIssuer still must file a notice of the sale with the SEC (but don't have to register security)

Reg. D provides a safe harbor for private offerings:

Do not need to show reliance, causation or scienterNo cause of action if Π knew of untruth or omission;Does not apply to exempted registrations

Issuer is strictly liable

Anyone who signed the registration statement (issuer, executive officers, directors MUST sign)

Every person named as director in reg. statement + directors at time statement becomes effective

Every expert named as having prepared or certified any part of the statement, or as having prepared any report or valuation used

Every underwriter of the security

Possible Δs:

Other Δs liable for degree of fault and Δs have burden of showing the degree their conduct did not cause plaintiff's damages

Issuer (BarChris) is strictly liable but all other Δs raise due diligence defense (none succeed)

See Escott v. BarChris ‐ SHs sues the BarChris corporation and everyone who signs the registration statement under Securities Act §11, claiming false statements on the registration made them buy stock and lose money

Due Diligence Defense: [1] after reasonable investigation, [2] Δ had reasonable grounds to believe and [3] did believe that the statements were true and no omissions of material fact

RULES for Due Diligence Defense:

Liability of Non‐Experts Liability of Experts

Prepared by Non‐Experts

Not liable if reasonable investigation + affirmative belief the statements are true (have show you went out and did actual due diligence so you really had reason to believe misstatement was true)

No liability for the shit that the expert had nothing to do with / materials they didn't prepared / materials the company didn't use / altered materials

Prepared byExperts

Not liable if you had no reason to believe and did not believe statements were misleading (all you have to show is that there were no red flags)

Same as top left box

Securities Act §11: liable for a registration statement that contains an untrue statement of a material fact OR omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . "

•

[1] offering or selling a security in violation of the registration process mandated by the Securities Act (should have been registered but wasn't), unless security is exempt from registration

No need to prove relianceApplies only to public offerings

[2] misrepresentations in the prospectus/oral communications (not just registration)

Strict liability for:Securities Act §12:•

Due diligence defense also availableLiability of Δs same as §11Main remedy is rescission (or comparable remedies if Π no longer owns securities)

ACCOUNTING ISSUE?3.

Weak market reflect past prices1.Semi‐strong reflect public information2.Strong reflects all information including private information3.

Efficient Capital Markets Hypothesis:•

Assets = Liabilities + Shareholder's Equity Shareholder's Equity = Assets ‐ Liabilities

Balance Sheet: company assets (what company owns), liabilities (what company owes), and shareholder's equity on a specific date

Income Statement: profit over a period of time, includes revenues, expenses, and net‐income (revenue ‐ expenses)

Statement of Cash Flows: cash received (i.e., income, proceeds, etc) and paid (i.e., payments to suppliers, income tax, capital expenditures, etc) by business during a period of time

Common stock: class of stock that pays a dividendPreferred stock: class of stock that pays fixed and regular interest incomeRetained earnings: profit that is not distributed to SHs but reinvested into the company (counts as part of SH's statement of equity)

Statement of SH's Equity: how much SH's equity account has changed in a period of time (i.e., change in stock price/share)

Basic Elements of Financial Position•

LIABLE FOR SECURITIES FRAUD UNDER RULE 10B‐5?4.Rule 10b‐5: "it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of amaterial fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

•

[1] Jurisdictional Nexus:must involve interstate commerce

I.e., GE issues a misstatement, you can't sue GE for deciding NOT to buy or sell based on the misstatement

[2] Transactional Nexus: P must have actually bought or sold securities

Sliding Scale Test for uncertain events: (1) probability that the event will occur (i.e., the merger would happen); and (2) the magnitude of the possible event, see Basic, Inc. v. Levinson

[3] Materiality: "fact is material if there is a substantial likelihood that a reasonable SH would consider it important in deciding how to vote"

Rebut with: no reliance b/c everyone knew CEO was lying, P would have sold regardless due to him being broke, misstatement was corrected

[4] Reliance: fraud on the market theory essentially eliminates the reliance requirement

Transaction causation: basically the same thing as reliance (presumed by courts)Loss causation: how much did you lose due to your reliance (provide evidence market believed misrepresentation)

[5] Causation:

Intent to deceive / defraud is enoughSome courts also accept reckless disregard for the truth of a statement

[6] Scienter: state of mind of the person making material misrepresentation

Elements of Rule 10b‐5 Violation:•

LIABLE FOR INSIDER TRADING?5.

Traditional or "Majority" Rule: officers & directors may trade with SHs without disclosing material info

"Special Circumstances" Rule: duty to disclose to SHs might be imposed when there are special circumstances

Minority Rule: insiders have a duty to fully disclose material information whenever they purchase shares from SHs

See also Goodwin v. Agassiz ‐ insiders do not have a duty to disclose when trading on public exchange

Common Law: Split ‐more states follow the special circumstances rule OR minority rule, NOT the majority rule; insider ONLY owes duty to SHs (no duty when selling to non‐SHs at time of transaction)

•

Statutory Insiders: directors, officers, 10% SHsTemporary Insiders: for fiduciary duty to be imposed, outsider must [1] be given nonpublic material info from issuer; [2] with expectation of confidentiality; and [3] relationship implies duty of confidentiality

[1] Secrist was not a tipper b/c he didn't breach his duty for his personal benefit, and no tipper = no tippee

[2] Dirks knew Secrist's motivation was to expose fraud, not personal benefit

Tippee cannot inherit derivative liability UNLESS the tipper breached his duty, see Dirks v. SEC (SEC comes after Dirks but Dirks is NOT an insider so no derivative liability)

Derivative Liability of Tippee: tippee is liable for trading or passing on a tip [1] if the tipper breached his duty of loyalty by disclosing the tip [for a personal benefit]; and [2] the tippeeknows or has reason to know of the breach of fiduciary duty

Rule 10b‐5 Traditional Theory: Rule 10b‐5 is violated when there is a purchase or sale of a security . . . on the basis of material nonpublic information about that security, in breach of a duty to disclose [or to abstain from trading] because of the necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed . . . stockholders

•

No – No liability.

Yes – Subject liable for personal trades under 10b‐5.

No – No liability under "traditional" theory (but check other theories).◊Yes – See "tippee" section below.◊

No – Did D tip others?

Yes – Did D trade (recklessly or intentionally) without disclosing to the trading partner or the market generally [TGS]?

No – No liability under "traditional theory" (but check other theories).

No – No liability for either tipper or tippee (but check other theories).◊

No – Tipper liable under 10b‐5, tippee is not (but check other theories).

Yes – Both tipper & tippee are liable under 10b‐5.

Yes – Did Tippee know or should reasonably know of tipper’s breach?◊

Yes – Did insider tip others recklessly, for personal benefit?

No – Is D a tippee (derivative liability)?

Yes – Is D a statutory insider or a temporary insider?

Is Defendant in possession of material non‐public information?Insider Trading "Traditional" Theory Flowchart: •

•

[1] Material nonpublic information [2] Undisclosed use of information [3] Belonging to principle [4] For personal gain

Requirements:

But A says: NO liability if [2] O'Hagan just disclosed that his planned trades to his law firm and firm's client before trading b/c then no "deceptive device" under 10b‐5

See US v. O'Hagan ‐ O'Hagan defrauded his law firm and firm's client by using material nonpublic info about the tender offer to personally profit

[1] when a person agrees to maintain info in confidence; or [2] when the two people have a history or practice of sharing confidences, such that the

recipient of the info knows or reasonably should know the communicator expects the recipient to maintain confidentiality; or

[3] info obtained from a spouse, parent, child or sibling, UNLESS recipient shows that history or practice indicates no expectation of confidentiality

Rule 10b5‐2: non‐exclusive list of 3 situations where a person has a duty of trust or confidence for the purpose of the misappropriation theory:

Rule 10b‐5 Misappropriation Theory: Rule 10b‐5 is violated when a person misappropriatesconfidential info for securities trading purposes, in breach of a duty of confidentiality owed to thesource of the info

•

No – No liability.

No – No liability under the "misappropriation" theory, unless D received tip from someone who had such a fiduciary duty (in which case, see below).

Yes – Subject liable for personal trades under 10b‐5.

◊ No – No liability under "misappropriation" theory (check other theories).

◊

No – No liability for either tipper or tippee (check other theories).

No – Tipper liable under 10b‐5, tippee is not (check other theories).

Yes – Both tipper & tippee are liable under 10b‐5.

Yes – Did Tippee know or should reasonably know of tipper's breach?

Yes – Did insider tip others recklessly, for personal benefit, without disclosing?

No – Did D tip others?

Yes – Did D trade (recklessly) without disclosing to the source of the information?

Yes – Does D owe a fiduciary duty of confidentiality to possessor of information, and is the information within the scope of this fiduciary duty?

Is Defendant in possession of material non‐public information?Insider Trading "Misappropriation" Theory Flowchart:

•

Rule 14e‐3(d): It is a violation of §14(e) for the following persons to communicatematerial private information to others if it is reasonably foreseeable that this communication will result in a violation of §14(e) . . .

Exceptions for communicating to the target and necessary people within the offering organization

Rule 14e‐3 Tender Offers: when a tender offer has commenced or is about to be commenced, it is aviolation of §14(e) for a person other than the offering person to trade in the relevant securities, if that person hasmaterial non‐public information relating to the tender offer, which the person knows or has reason to know was acquired (directly or indirectly) from: the offeror, target company, or any officer, director, employee of offeror or target company

• HYPO: Insider Trading Liability

Who Traditional Misappropriation 14e‐3

B, CEO of Buyer Co. (discloses) info to T, the CEO of Target Co.

No ‐ B is not an insider of Target Co.

No ‐ B owes the duty of confidentiality to her [Buyer] company, but no liability b/c not for personal benefit (discussing deal)

No ‐ This is tender offer, but the exception allows disclosure to Target Co. b/c it's necessary to the deal

B (trades) on info using her personal account

No ‐ B is not an insider of Target Co.

Yes ‐ now for personal gain, unless she makes disclosure to Buyer Co. before doing so [US v. O'Hagan]

Yes ‐ tender offer and she is trading for her personal gain

T, CEO of target company (trades) on info using her personal account

Yes ‐ T is an insider so liable for trading

No ‐ Target Co. was arguably not source of information, and didn't owe duty of confidentiality to source (B)

Yes ‐ tender offer and she is trading for her personal gain

T (discloses) info to L, her personal lawyer, asking for advice; J, her husband, and inadvertently son S overhears

No ‐ Have to show it was for personal benefit; unless she's hoping someone she disclosed to will trade on this info

No ‐ Target Co. was arguably not source of info, and didn't owe duty of confidentiality to source (B)

No ‐ unless she anticipates trading on this information

L, T's personal lawyer (trades) on info

No ‐ (1) L is not a temp insider b/c he is personal lawyer of T, not corporate lawyer of Target Co.; (2) T was not tipping L for personal benefit, only seeking advice; (3) even if it was for personal benefit, still have to prove L knew it was for personal benefit [Dirks]

Yes ‐ L breached duty of confidentiality to client T by using info to trade

Yes ‐ tender offer and he is trading for personal gain

John, T's husband (trades) on info

No ‐ T did not disclose for personal benefit, so John cannot inherit liability [Dirks]

Yes ‐ there is a presumption of duty with a spouse per Rule 10b‐5; unless John can show there was no pattern of keeping confidences

Yes ‐ tender offer and he is trading for personal gain

John, T's husband (discloses) info

No ‐ disclosure from T to John was not for personal benefit, and the disclosure

No ‐ though John might be breaching his duty to his wife by trading, no liability for disclosing to

No ‐ unless he anticipates trading on this

to golf buddy H from John to H also not for personal benefit

H b/c not for his personal benefit information

S (trades) on info

No ‐ T did not disclose for personal benefit

No ‐ though not perfectly clear this info was in the scope of the duty of confidentiality to T, normal duty of confidentiality between mom and son per 10b‐5 does not apply b/c it was an incidental overhearing

Yes ‐ tender offer and he is trading for personal gain

H, John's golf buddy (trades) on info

No ‐ disclosure from T to John was not for personal benefit, and the disclosure from John to H also not for personal benefit

No ‐ unless (1) H liable as a tippee if he knew John was disclosing for personal benefit OR (2) if there was a duty of confidentiality to John

Yes ‐ tender offer and he is trading for personal gain

• Key to traditional liability = every link must be breached AND initial violation must be from insider• Misappropriation is same as traditional in that every link must be breached, but initial violation

does NOT have to be insider

1. PROXY SOLICITATION / CONTEST?• Rule 14a‐3(a): Anyone soliciting a proxy must first provide a written proxy statement• Rule 14a‐6: Proxy statement must be filed with SEC• Rule 14a‐3(b): Incumbent directors must provide an annual report before soliciting proxies for the

annual meeting•

Reimbursing Incumbent: OK to reimburse even for wining and dining b/c [1] expenses were reasonable and [2] a bona fide proxy contest based on policy, NOT personal reasons

Reimbursing Insurgents: can get reimbursed if they [1] win and [2] shareholders ratify reimbursement

Proxy Fights:

2. LIABLE FOR PROXY VIOLATION?•

[1] misleading statement or omission

SeeMills v. Electric Auto‐Lite Co. ‐ not disclosing conflict of interest in proxy statement was very material

But see Virginia Bankshares (when majority SH has enough votes to pass, even material defect =/= casual necessity)

See also Seinfeld v. Bartz ‐ omission of Black‐Scholes valuations of option grants on the proxy statement is not material as a matter of law b/c not required by SEC regulations

[2] info is material if there is a substantial likelihood that a reasonable shareholder would consider the info important when voting or giving proxy votes

[3] burden of causation met if can show defect was material and the "proxy statement itself, rather than the particular [defect], was an essential link in the accomplishment of the transaction"

Merger set aside only if equitable Monetary relief if possible to quantify of proxy defect

[4] damages is determined by best interests of SH as a whole

Rule 14a‐9 Proxy Violation:

3. CAN BOARD EXCLUDE A SHAREHOLDER PROPOSAL?•

SH eligible only if holds at least $2,000 in market value or 1% interest for over year

Personal grievance of SH Something not significantly related to corporate business

Company can exclude the proposal on 13 grounds, for example:

Rule 14a‐8: allows eligible SH to put a proposal before their other SHs, and have proxies solicited on the company's proxy statement

Related to specific dividends Related to substantially same proposal that had been rejected in past 5 years Related to elections or procedure for elections

• CASE: Lovenheim v. Iroquois Brands ‐ corp. cannot exclude the SH's proposal as "not related to corporate business" b/c this was a really important ethical issue that could have impacts on corp.

4. SHAREHOLDER SUING FOR INSPECTION RIGHTS?•

Default: SH list accessible if there is a proper [corporate] purpose

NOBO list (non‐objecting beneficial owners): longer list that contains the actual names of the beneficial owners, unless they objected to being listed

CEDE list: shorter list with only the street names of the owners

Rule 14a‐7 gives Π SHs the right to either get the SH list or to make the corp. mail out proxy statements to SHs without turning over the SH list of SH

• Compare Crane Co. v. Anaconda Co. ‐ was a proper purpose to get SH list when Π needed to inform the SHs why his hostile takeover offer was actually good for SHs ‐ even when a hostile takeover opposed by BoD

• With Pillsbury v. Honeywell, Inc. ‐ ethical concerns [about producing weapons for Vietnam War] are NOT a "proper purpose" for inspection b/c must be related to an economic purpose / investment return and not purely to persuade adoption of social or political concerns

CLOSED CORPORATIONSDefining characteristic: no secondary market•

DE: OK to have different economic and voting rights, see Providence v. W (OK for SH to own 28% of the shares but only 3% votes due to bylaw limiting number of votes as # of shares increases)

IL:must have voting rights but economic not necessary, see Stroh v. Blackhawk Holding

Splitting Bundle of Rights: important rights related to economic (i.e., the right to dividends, voting, etc)•

Shareholder agreements and trusts (to vote shares per a 3rd party if disagreement) are OK, but no specific performance, see Ringling (remedy is to just ignore the votes of breaching party)

But see Clark v. Dodge (agreement between SHs is valid EVEN WHEN the agreement is about controllingmanagement decisions b/c only 2 SHs affected, unlike McQuade where there were other SHs)

Prevent by making any purchaser of stock consent to the SH agreement

"Homemade McQuade" = sell stock to create another SH so a SH agreement cannot be enforced per Clark

Director agreements are void b/c it takes away independent judgment of directors, seeMcQuade v. Stoneham (directors violate fiduciary duties by constraining themselves b/c they can't consider other options)

Voting Trusts & Agreements:•

IS THIS A LIMITED LIABILITY COMPANY (LLC)?

Main benefit = "pass through taxation" avoid the double tax in corps.

Managers owe fiduciary dutiesManager‐managed is like corporations: exactly same as BoD

All members owe fiduciary dutiesMember‐managed is like partnership: one vote per membership share, simple majority wins

End of LLC: same as partnership (disassociation or dissolution)

Characteristics:•

Members, managers and SHs normally not liable and nothing explicit applying PCV to LLCsA says: can PCV, but more difficult b/c LLC lacks formalities in the first place, so only showing lack of formalities is NOT enough, cf. ULLCA §303(b): "The failure of a [LLC] to observe the usual company formalities . . . is not a ground for imposing personal liability on the members or managers for liabilities of the company."

Piercing Corporate Veil for LLC:•

See also New Horizons Supply Coop. v. Haack ‐ Δs properly formed a LLC so not subject to PCV, but LLC not properly dissolved b/c Δ took the assets of the dissolving LLC instead of turning over to creditors first, thus Δ personally liable for the debts

CORPORATE CONTROL

Proxy contest: expensive and not as large of profits (only the % you own)Tender offer: acquiring company offers premium to target SHs for stocks, can be conditional on # shares, if oversubscribed, tenders accepted pro rata

Stock purchases: buying stock on open market (tough to get more than 10% this way)

Does not come with unknown liabilities Sale of assets: don't buy target corp., instead all of target's assets ‐ but same effect as a merger

More appealing than sale of assets b/c of tax reasonsAssets and liabilities are transferred in a merger

Merger = only the acquirer survives

Consolidation = new company is formed from acquirer and target

Merger/consolidation: only way to gain control AND truly combine the 2 companies

Many ways to get corporate control:•

Usually also change the articles of incorporation[1] Board approval from each company (bound by its own law)o

[2] Majority SH approvalo[3] Filing notice with stateo

NOT available for public corps. (just sell on open market)[4] Appraisal rights (right to get paid cash for fair value of shares)o

Steps to a merger in DE:•

IS THE TRANSACTION A DE FACTO MERGER OR DE FACTO NON‐MERGER?1.

Aftermath: PA legislature abolished the doctrine of de facto mergers

See Farris v. Glen Alden Corp. ‐ court concluded sale of assets was really a merger after looking at: (1) all provisions of agreement, (2) overall consequences of transaction, and (3) purpose of applicable corporate law

o

See also Hariton v. Arco Electronics ‐ DE Court says the DE sales‐of‐assets statute and merger statute are independent so following either is OK and de facto merger does NOT apply

o

De Facto Merger Doctrine: a court will hold a transaction as a merger even if called a "sale of assets"in order to prevent circumvention of SH protection (cannot allow people to take away appraisal rights just by calling it a "sale of assets")

•

See Rauch v. RCA Corp. rejecting de facto non‐merger doctrine b/c merger complied with DE's merger statute, and Δs had the right to choose merger or redemption

o

De Facto Non‐Merger Doctrine: to find that something called a "merger" is really substantively something else (i.e., sale of assets followed by redemption in Rauch v. RCA Corp)

•

DID MAJORITY SHAREHOLDER BREACH FIDUCIARY DUTY IN FREEZE‐OUT (CASH‐OUT) MERGER? 2.

Acquirer (often a majority SH) forms wholly‐owned Subsidiary 1.Subsidiary is capitalized with $ or stock to be paid to Target's SHs2.Subsidiary merges with Target3.Once in control of Target, force the remaining minority SHs of Target to take cash payment, freezing them out

4.

Parties: Acquirer, Subsidiary, Targeto

2 advantages: Acquirer gets total control of Target and without assuming Target's liabilitiesoForward triangular merger: Subsidiary survivesoReverse triangular merger: Target surviveso

Triangular Mergers:•

RULE: whether a majority SH breached his fiduciary duty in a freeze‐out merger is judged by theEntire Fairness Test (remember the primary test for interested transactions), and:

•

AND[A] Valid ratification (majority of the minority);

[B] NO evidence of fraud, misrepresentation, or misconduct

[1] Burden to show unfairness is on the Π, if:o

OR[A] if a Π can show ratification was invalid b/c Δ's failure to meet a disclosure obligation;

[B] if a Π shows SOME evidence of fraud, misrepresentation, or misconduct

[2] Burden to show fairness is on the majority SH Δ if either one of two things is true:o

Entire Fairness Test: evidence pointed to a lack of fair dealing (withholding 1st expert report, not revealing 2nd report was prepared by an interested party); no finding on fair price b/c the lower court didn't consider all relevant factors

o

SeeWeinberger v. UOP, Inc. ‐majority SH for breached his fiduciary duty to minority SHs by withholding relevant info and not disclosing conflicts of interest

o

A says:majority SHs behavior not so bad ‐ contract was a year, and they waited after a year to do the other freeze out merger

o

See Rabkin v. Philip Hunt Chem. Corp. ‐majority SH did not violate merger agreement per se, but court doesn't like bad behavior and finds Δ breached fiduciary duty by intentionally avoiding a commitment made to minority SHs

o

DE: NOT required to show a business purpose, Weinbergero

See Coggins v. New England Patriots ‐majority SH breached fiduciary duty to minority SHs b/c NO legit business purpose (Sullivan only wanted to force out minority SHs so he could pay back his loans)

o

A says: now there is a standard set of business purposes (decrease transaction costs, minimize disclosure obligations, etc)

o

MA: Coggins requires controlling SH Δ to prove (after Πmet his burden of showing self‐dealingby Δ): [1] the transaction served a legitimate business purpose for the corporation; and [2]overall fairness to the minority shareholders

o

Business Purpose of Merger:•

Look at stock value right before freeze out merger, even if price increased solely due to majority SHs merger attempts

Open‐ended valuation to account for other factors (i.e., lack of market, "minority discount"), Weinberger

Appraisal only remedy if the Π only alleges cash‐out merger didn't pay enough $o

Monetary or Equitable Relief (i.e. Recession): OK if appraisal not adequate, "particularly in cases of fraud, misrepresentation, self‐dealing, deliberate waste," Weinberger; maybe simple misconduct per Rabkin

o

Normally recession of the merger, but if practical anymore, minority SHs can recover "rescissory damages" (present value of minority SHs stock)

Recession of Merger or "Rescissory Damages": OK if majority SH breach fiduciary duty, Cogginso

Damages:•

LIABLE FOR LLC MERGER? 3.

Minority interest has a duty of loyalty to themajority interest, even if it means that the majority will outvote the minority

o

No disclosure of vote = breach of fiduciary dutyo

See VGS, Inc. v. Castiel ‐ LLC merger was invalid b/c the two minority managers violated their fiduciary duty to 3rd majority manager by voting in secret to merge (and oust 3rd majority) b/c:

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4. DID BOARD OF DIRECTORS BREACH FIDUCIARY DUTY WITH A TAKEOVER DEFENSE?•

Anyone acquiring, including coordinated buys) more than 5% of shares must file a disclosure within 10 days of purchase

Target company has to file a response on tender offer

Williams Act (1968) Federal Regulation of Tender Offers & Stock Purchases:

• The Front‐Loaded Tender Offer: 2‐tiered tender offer where front‐end offer is really good but back‐end offer is junk , having a "coercive effect" on SHs to tender

• Golden Parachute

Though IRS has big tax on greenmail to discourage this

Greenmail, [Cheff]: OK for BoD of Target Co. to pay off corporate raider but a horrible defense b/c it doesn't deter, but encourages more raids

But not very effective now b/c SEC Rule 13e‐4(f)(8) prohibits an issuer from making counter‐tender offers that are not made to ALL SHs

Counter‐Tender Offers [Unocal, Time]: Target co. offers to buy back shares for high $$ IF the first tier tenders, but excludes Acquirer from offer, thus incentivizing SHs to hold out and NOT sell until second‐tier (which will never happen)

Rights cannot be exercised until a triggering event (i.e. announcement of a hostile tender offer, acquisition of more than 20% of target's stock, etc)

BoD can redeem and "disarm" poison pills, forcing acquirer negotiate with the BoD Flip‐In Plan: SH's granted the right to buy another share of target at 1/2 price after

triggering event, diluting the target's stock pool and making it very expensive for acquirer to get majority control

Flip‐Over Plan: special dividend stock issued to SHs that provides the right to convert existing stock to double the stock in the acquirer ‐ so if acquirer succeeds, the SHs of the target get tons of shares in the acquirer, diluting the stock value of acquirer, possibly even getting control

Back‐End Plan: same idea as Unocal, if first tier goes through, remaining SHs get a right to convert share into debt securities at higher price ‐ forces acquirer to offer above the set back‐end price

Voting Plan: if event triggers, those that acquire stock in target have their voting rights diluted ‐ i.e. acquiring 50% of the target corporation only gives the acquirer maybe 5% of the votes

Poison Debt: target corp. issues debt to SHs, and debtor's rights contains provision preventing the corp. from issuing more debt ‐ defeating LBOs that require using the target corp. as a security for it's loans

Poison Pills [Revlon]:modern defensive tactic which are SH‐exercisable rights ("SH Rights Plan") that make the takeover less profitable to the acquirer, typically by lowering the value of the target's or the acquirer's shares

Dead Hand Pills: provision in pill that says newly‐elected directors cannot redeem poison pill; reserves redemption right only to approved successors, see Toll Brothers (dead hand pill NOT OK b/c: can't create unequal directors and restrict BoD power)

No Hand Pills: creates a time period where no one can redeem pill, see Quickturn Design Systems (no hand pill used was disproportionate b/c it prevented the new BoDs from exercising one of their fundamental duties to the corp. ‐ negotiating possible sale of corp.)

Dead Hand and No Hand Pills: prevents the redemption loophole in poison pills (where acquirer installs a new BoD to redeem poison pills)

Problem is really high termination fees: (1)might get more people to participate butlowers overall selling price AND (2) lowers the total value of Target by the amount it has to pay in termination fees

No‐shop obligation: prevents target from dealing with alternative buyers to bid up the price if one buyer is already putting in the $ and work

Lock‐Ups [Van Gorkom, Revlon, QVC]: to incentivize bids, Target might give "lock‐up" or termination fees to cover an acquirer's cost of bidding

Defenses Against Hostile Takeovers:

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Opportunity loss (offer deprives SHs opportunity to choose a better offer) Structural coercion (coercive offer distorting SHs' decisions to tender) Substantive coercion (SHs led to believe an underpriced offer is fair despite

intrinsic value)

3 common categories of threats to corp. policy [Unitrin]:

Cheff ‐ listed "employee unrest" as valid consideration for BoD Unocal ‐ OK'd considering others such as "creditors, customers, employees,

and perhaps even the general community" Revlon ‐ can consider others besides SHs as long as had some ultimate benefit

for SHs ‐ never in a Revlon auction Time ‐maintaining "corporate culture" was relevant but did not explain how it

would benefit SHs

Consideration of others other than SHs:

Level of Threat: determined by price, offer, risk of non‐consummation, timing of offer, quality of securities

"Coercive" = a bad incentive that forces SHs to do something "Preclusive" = a deterrent that makes tender effectively impossible See Toll Brothers (dead hand pill NOT OK b/c coercive forced SHs to reelect the

incumbent directors if they wanted a functioning BoD and preclusive b/c made any takeover impossible)

Proportionate Action [Unitrin]: a court will not interfere with defensive measures byindependent BoD if: [1] the action is NOT "draconian" (coercive or preclusive), AND [2] as long as action taken is in the range of reasonableness

Revlon – If the company is for sale – must have an auction Time – but not if the sale is part of a longstanding plan QVC – unless the long standing plan represents a change to private control

Relationship between Revlon, Time, and QVC:

Revlon Auction: but once company in sales mode, BoD's fiduciary duty changes to auctioning for highest price, see Revlon (lock‐up agreements are not per se illegal in DE but this lock‐up agreement does NOT passmodified Unocal test b/c BoD's duty changed to auctioneer the lock‐up discourages bidding)

Revlon's White Knight was a new strategy; Time just followed their plan from day 1

Longstanding Plan Exception To Revlon Auction [Time]: but Revlon only applies to [1] active bidding and [2] abandoned long‐term strategy, see Time (Time was NOT in "Revlon Sales Mode"b/c the deal they locked‐up had been in place for a long time and was not a deal to abandon control/strategy ‐ thus regular Unocal standards applied)

Change in Control Exception to Longstanding Plan Exception [QVC]: a BoD has an obligation to seek the best value available for SHs when there is a breakup of the corporate entity (Revlon), OR when there is a change in corporate control, see QVC (breakup not necessary when shifting control from public SHs ‐> single private SH)

Modified Duty of Care Test for Takeover Defenses [Unocal]: BJR normally applies to BoD decisions but potential for conflict in takeover defenses places the burden on the BoD to prove that: [1] BoD had reasonable grounds to believe there was a danger to corporate policy and effectiveness, which is demonstrated by showing [A] good faith and [B] reasonable investigation; AND [2] the defense were proportionate responses to the level of threat posed, see Unocal ‐ counter‐tender offer OK b/c BoD were confronted with a legit threat to corp. policy evidenced by: junk bonds in offer, the $54 offer was inadequate, and dude was a well‐known corp. raider

•

Reasonable response considers all factors as to best interests of the corporation and SHs, including if takeover would threaten corp.'s economic interests

Can consider other interests besides SHs as long as not detrimental to SHs' interests

Π has burden to show action was unreasonable

BoD's action can be enjoined or set aside, but no damages

ALI Approach to Unsolicited Tender Offers: BoD can take defensive action against hostile tender offer if the action is a reasonable response

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Indiana Act NOT preempted by the Williams Act b/c purpose of Indiana Act = protect SH, SAME exact purpose as Williams Act

Indiana Act does NOT violate Commerce Clause b/c: (1) a merely burdening SOME interstate companies =/= discrimination against interstate commerce when the law itself doesn't distinguish between in and out of state corps; and (2) states created corporations, so only logical they also have the power to define the rights and characteristics of corporations

State Regulation of Takeovers: States, as the creators of corporate entities, have the ability to define the protections afforded to SHs as long as it 's possible to comply with the state law and federal law, see CTS Corporation v. Dynamics Corporation of America ‐

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Bidder acquires 85%+ of stock

Target BoD approves tender offer before bidder acquires 15%

Target BoD + 2/3 of disinterested SHs approve after bidder acquires 15%

Delaware Antitakeover Law: if buyer acquires 15% of target's stock, no business combination can be made with target for three years (i.e., cannot merge) unless:

• Directors can take account of non‐SH interests

Provisions limiting voting rights in share acquisitions (like Indiana Act in CTS)

Can't make money by greenmail

"Tin parachute"

Pennsylvania Antitakeover Law:

6. GETTING RID OF & INCURRING ADDITIONAL CORPORATE DEBT?• Successor Obligor Clause: Boilerplate successor obligor clauses should be interpreted to balance the

rights of all interested parties, see Sharon Steel Corp. v. Chase Manhattan Bank (successor obligor clause that requires substantially all of the assets of the company to be transferred with the debt obligation means "all assets" at the time the plan to liquidate company was made)

• Indenture Agreements: A court will not add any additional benefits for the parties in an indenture agreement when the benefits were not bargained for, seeMetropolitan Life Insurance v. RJR Nabisco(RJR did NOT breach implied duty of good faith and fair dealing by taking on a lot more debt, thus lowering value of existing debentures b/c they had no duty to give more benefit than what the contract expressly stated and court won't add terms to give a party something they didn't bargain for)