Corporations Outline - Fanto Fall 2006

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I. AGENCY.................................................................................................................................................- 3 -

A. INTRODUCTION...............................................................................................................................- 3 -B. AUTHORITY....................................................................................................................................- 3 -C. AGENT’S DUTY OF LOYALTY........................................................................................................- 3 -D. AN INTRODUCTION TO FINANCIAL STATEMENTS..........................................................................- 4 -

II. PARTNERSHIP....................................................................................................................................- 4 -

A. PARTNERSHIP FORMATION UPA §6, §7.........................................................................................- 5 -B. NATURE OF A PARTNERSHIP..........................................................................................................- 6 -C. MANAGEMENT UPA §18, §19, §20...............................................................................................- 6 -D. DISTRIBUTIONS..............................................................................................................................- 7 -E. AUTHORITY UPA §9......................................................................................................................- 7 -F. LIABILITY UPA §13, §14, §15.......................................................................................................- 7 -G. PARTNERSHIP PROPERTY AND INTERESTS UPA §§24-30..............................................................- 7 -H. PARTNER’S DUTY OF LOYALTY UPA §20, §21.............................................................................- 7 -I. PSHIP DISSOLUTION UPA §29.......................................................................................................- 8 -

III. THE CORPORATE FORM...............................................................................................................- 8 -

A. INCORPORATION.............................................................................................................................- 8 -B. ORGANIZATION NYBCL § 201, 401-403, 601..............................................................................- 8 -C. PREINCORPORATION TRANSACTIONS.............................................................................................- 9 -D. DEFETIVE INCORPORATION NYBCL § 403.................................................................................- 10 -E. ULTRA VIRES NYBCL §202, §203...............................................................................................- 10 -F. OBJECTIVE OF THE CORPORATIONIV. CORPORATE STRUCTUTE.........................................- 10 -A. LIMITED LIABILITY......................................................................................................................- 11 -B. EQUITABLE SUBORDINATION.......................................................................................................- 12 -C. CORPORATE ENTITY AND CONTRACT INTERPRETATION.............................................................- 13 -

V. DISTRIBUTION TO SHAREHOLDERS........................................................................................- 13 -

A. INTRO TO FINANCIAL STATEMENTS.............................................................................................- 13 -B. LEGAL CAPITAL NYBCL §503, §504, §506...............................................................................- 13 -C. AUTHORIZED AND ISSUED NYBCL §501, §622..........................................................................- 14 -D. CORPORATE FINANCE NYBCL §502, §518.................................................................................- 14 -E. WATERED STOCK.........................................................................................................................- 14 -F. DIVIDENDS NYBCL §102(A)(2), §102(A)(8), §102(A)(13), §501, §717, §801(B)(10), §801(B)(11), §804 - 14 -G. DIRECTOR & SHAREHOLDER LIABILITY, NYBCL §719, §720,...................................................- 15 -H. REPURCHASE BY A CORPORATION OF ITS OWN STOCK NYBCL §513, §515..............................- 15 -

VI. CORPORATE STRUCTURE..........................................................................................................- 15 -

A. PUBLICLY-HELD CORPORATIONS.................................................................................................- 15 -B. ALLOCATION OF POWER NYBCL §706.......................................................................................- 16 -C. LEGAL STRUCTURE OF MANAGEMENT NYBCL §701, 712.........................................................- 16 -D. BOARD FORMALITIES NYBCL §707, 708, 709, 710, 711...........................................................- 16 -E. OFFICER AUTHORITY NYBCL §715............................................................................................- 16 -F. SHAREHOLDER FORMALITIES NYBCL 602, 604, 605, 606, 607, 608, 614, 615, 616................- 16 -

VII. SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING.............................- 16 -

A. INFORMATION RIGHTS NYBCL §624.........................................................................................- 16 -B. REPORTING REQUIREMENTS........................................................................................................- 16 -C. PROXY RULES ’34 ACT §14(A) 14(B) 14(C) RULES 14A-1, 14A-2, 14A-3, 14A-6, 14A-9, (SKIM 14A-4 AND 14A-5) AND SCHEDULE 14A.......................................................................................................- 16 -D. PRIVATE ACTIONS UNDER THE PROXY RULES............................................................................- 16 -E. SHAREHOLDER PROPOSALS ’34 ACT RULE 14A-8.......................................................................- 16 -

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F. PROXY CONTESTS NYBCL §609.................................................................................................- 17 -

VIII. CLOSE CORPORATIONS...........................................................................................................- 17 -

A. INTRODUCTION TO CLOSE CORPORATIONS..................................................................................- 17 -B. VOTING AGREEMENTS NYBCL §609, §620...............................................................................- 17 -C. VOTING TRUSTS NYBCL §621...................................................................................................- 17 -D. CLASSIFIED STOCK NYBCL §402, §703.....................................................................................- 17 -E. AGREEMENTS DEALING WITH BOARD DISCRETION NYBCL §620.............................................- 17 -F. SUPERMAJORITY VOTING/QUORUM NYBCL §616, §709............................................................- 17 -G. SHAREHOLDERS FIDUCIARY OBLIGATIONS TO CLOSE CORPORATIONS......................................- 17 -H. RESTRICTIONS ON SHARE TRANSFER...........................................................................................- 17 -I. DISSOLUTION NYBCL §1002, §1104, §1111..............................................................................- 17 -J. DISSOLUTION FOR OPPRESSION NYBCL §1140-A, §1118..........................................................- 17 -K. ARBITRATION NYBCL §620(B).................................................................................................- 18 -

IX. DUTY OF CARE AND DUTY TO ACT IN GOOD FAITH........................................................- 18 -

A. BASIC STANDARD OF CARE NYBCL §717(A), §720...................................................................- 18 -B. BUSINESS JUDGMENT RULE.........................................................................................................- 18 -C. DUTY TO ENSURE THAT CORP HAS EFFECTIVE INTERNAL CONTROLS........................................- 18 -D. LIABILITY SHIELD NYBCL §402(B)............................................................................................- 18 -E. GOOD FAITH; DUTY TO ACT LAWFULLY....................................................................................- 18 -F. DIRECTORS AND OFFICERS LIABILITY INSURANCE (SKIM NYBCL §721-726)...........................- 19 -

X. DUTY OF LOYALTY........................................................................................................................- 19 -

A. SELF-INTERESTED TRANSACTIONS NYBCL §713.......................................................................- 19 -B. STATUTORY APPROACHES...........................................................................................................- 20 -C. COMPENSATION, WASTE AND SHAREHOLDER RATIFICATION NYBCL §515(D), §713(E)..........- 20 -D. USE OF CORPORATE ASSETS, COMPETITION WITH THE CORPORATION, THE CORPORATE OPPORTUNITY DOCTRINE......................................................................................................................- 20 -E. DUTIES OF CONTROLLING SHAREHOLDERS.................................................................................- 20 -F. SALE OF CONTROL.......................................................................................................................- 20 -

XI. SHAREHOLDER SUITS.................................................................................................................- 20 -

A. INTRODUCTION NYBCL §626(B)................................................................................................- 20 -B. NATURE OF DERIVATIVE SUIT.....................................................................................................- 20 -C. INDIVIDUAL (PRO RATA) RECOVERY...........................................................................................- 21 -D. CONTEMPORANEOUS OWNERSHIP NYBCL §626(B)...................................................................- 21 -E. DEMAND ON THE BOARD AND TERMINATION OF DERIVATIVE ACTIONS ON THE RECOMMENDATION OF THE BOARD OR COMMITTEE NYBCL §626©..................................................- 21 -F. INDEMNIFICATION........................................................................................................................- 21 -

XII. INSIDER TRADING.......................................................................................................................- 21 -

A. COMMON LAW BACKGROUND.....................................................................................................- 21 -B. RULE 10B-5..................................................................................................................................- 21 -C. ELEMENTS OF 10B-5....................................................................................................................- 22 -D. LIABILITY FOR SHORT-SWING TRADING.......................................................................................- 22 -E. COMMON LAW REVISITED...........................................................................................................- 22 -

XIII. CORPORATE COMBINATIONS...............................................................................................- 22 -

A. SALE OF SUBSTANTIALLY ALL THE ASSETS NYBCL §909.......................................................- 22 -B. APPRAISAL REMEDY NYBCL §623............................................................................................- 22 -C. STATUTORY MERGERS.................................................................................................................- 22 -

a. Classical Mergers NYBCL §§901-906, 910...........................................................................- 22 -b. Small Scale Mergers...............................................................................................................- 22 -c. Short Form Mergers...............................................................................................................- 22 -

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D. DEFACTO MERGER NYBCL §913...............................................................................................- 22 -E. TRIANGULAR MERGERS AND SHARE EXCHANGES NYBCL 913.................................................- 22 -F. FREEZEOUTS.................................................................................................................................- 22 -G. GOING PRIVATE...........................................................................................................................- 22 -

XIV. TENDER OFFERS.........................................................................................................................- 22 -

I. AGENCY

A. Introduction 1. Governs relations between the Principal and the Agent. A Sole

Proprietorship : a business org. owned by a single individual, no special legal form. Owner has unlimited personal liability.

2. Problems: i. between agent and principal /

ii. between third party and principal based on agent’s conduct iii. between third party and principal over liability for agent’s tort.

3. CREATING & PROVING IT:i. Person asserting that there is a agency relationship has to prove it

ii. Can exist w/o intent. Must have1. Agreement between parties that the agent will undertake

some act on behalf of the principal2. Understanding that the principal is in control.

iii. Creation by Agreementiv. BY Ratification: when the principal accepts the benefits of the

agent’s actv. Agency by estoppel: when a 3rd party believes that there is a

relationship because of the principal’s actions.

B. Authority

1. Actual Authorityexpressly conferred by principal or implied by acts2. Apparent Authority: manifested from principal to 3rd party. Or if an agent

does what agents customarily do, even if the agent wasn’t expressly authorized, the principal is bound.

3. Authority by Estoppel: when 3rd party detrimentally relies on authority that principal made him believe, principal is estopped from denying agents authority

4. Scopr: agents acts must be w/in agents auth. 5. principal may ratify after the act.

Cant contract OUT of being an agent/principal if the acts say you are. Morris Oil v. Rainbow Trucking: Principal is liable to 3rd P for agent’s debts incurred in the normal course of business. (Even if the K between principal and agent tries to deny the relationship.)

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C. Agent’s Duty of Loyalty

1. Agent = incurs debts for principal in course of business. i. is a FIDUCIARY, must avoid conflicts, etc.

ii. DUTY OF LOYALTY –anything Agent receives in the course of Agency belongs to the Principal – doesn’t matter is principal suffered no damage— also liable for any reasonably foreseeable injury from his act.

2. Principal = liable for agent’s debts incurred in course of business3. POLICY: agent loyalty lowest cost of monitoring and still gets the most

out of Agents… sort of gives leeway but enforces when agents do something bad, not constant monitoring. Overall social solution that lowers cost: Principal Taking responsibility for actions is costly – lowest cost solution is to make you responsible for liabilities for agents that work for you. Why throw uncertainty into the equation by saying that the third party might have a cost imposed on them?

4. Principal can recover if Agent violates DOL:i. Any anauthorized profit that the agent gets (Rest. §407(2))

ii. Value of what he put in plus damages (Rest. §407(1))

5. Tarnowski v. Resop: Hires guy to investigate value of jukebox business, guy reported false data. Buyer recovered all but $3,000 of his downpayment from seller. P Goes after the “finder” for the rest. Also, wants to recover “secret payment” that seller gave finder - sort of he bribe for the false data. That’s OK.

D. An Introduction to Financial Statements

1. Accounting is the presentation of finances2. Assets = Liabilities + Owner’s Equity3. Balance Sheet:

i. List Assets on left in ascending order of liquidity (cash first, real property later)

ii. Liabilities on right separated by creditors and equity owners, then, by length of term.

iii. Right + left always add up + match. 4. Income Statement

i. Marks income for the period between Balance Sheets. If there is income, it becomes part of the proprietorship’s contribution to the next balance sheet

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II. PARTNERSHIP If the contract contemplates an association of 2 or more persons to carry on as

CO-OWNERS a business for profit, a partnership there is (-yoda) More complex than a sole proprietorship, uses principles of agency law UPA usually applies to joint ventures, but they are usually formed just for 1

transaction.

FormationBy K or not

ManagementEvery partner manages – receives information, has a vote (default, can change by agreement)

Profit DistributionPro Rata by membership – and equal sharing in the losses

TransferRight to profit and right to manage… can only be done with consent of all partners

LiabilityJoint & several. Each partner is liable for all debts of the partnership

DutiesFacts must trigger the duty (cardozo in Meinhard) If you’re involved in numerous ventures, you have to disclose and be sure not to compete…

A. Partnership Formation UPA §6, §7 a. an association of 2 or more persons to carry on a business as co owners for

profit (UPA §6)b. UPA §9: Each partner is an agent of the partnership for the purpose of the

business and the act of every partner.. for apparently carrying on the usual way the business of the partnership binds the whole partnership (unless he has no auth and the 3rd party doesn’t think he had auth)

1 Can bind partnership2 Can incur liabilities3 Duties of loyalty

C. FORMATION BY CONTRACT

D. FORMATION BY ESTOPPEL

One who holds herself out to b a partner, or who expressly or impliedly consents to representations that she is such a partner, is liable to any 3rd P who extends credit ot the pship in good faith reliance on the representation

Ex) I tell George Soros that Warren Buffet is my partner. Warren isn’t, but he knows that im dropping his name, he

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doesn’t warn George. So now Warren is liable for George’s loan, but can’t have any other rights in my business.If I was in a pship with Lindsay lohan and I was doing this, Warren would become an agent of our pship and go out and bind me to his deal with Rupert Murdoch. But if LL didn’t know, and didn’t consent to me using Warren’s name in the first place, shes not liable to Rupert for Warren’s deal.

E. IMPLIED PSHIPS

A loan, not a pship agreement:Martin v. Peyton (NY 1927)Peyton and other Ds had loaned to KNK, a securities firm. They said they were not partners but had lots of profit sharing rights for their loan. KNK’s creditors came after Ds saying they were liable as partners in KNK. Court said it was a loan, not a pship.

Owner v. Lendor:A lendor might have a guanrnteed return, but less controlOwner has huge upside potential + control, but no guarantee.The key is CONTROL. If a player has control, it looks more like equity.

B. Nature of a Partnership

Its both an entity and an aggregate of the partner’s interests. Ex of how its an aggregate: J+S liability, pship itself isn’t taxed.Ex of how its an entity: capacity to be sued. pship can own property.

RUPA states that its an entity, UPA doesn’t. UPA § 24 - you have 3 things as a partner: rights in the

partnership property, interest in the partnership, right to participate in management. These are bundled, cant transfer the management rights separately.

C. Management UPA §18, §19, §20

a. ALL Partners have EQUAL RIGHTS in management (UPA §18e)

i. Subject to agreement. Can pick 1 managing partner.ii. Though you can make a decision with just a maj, everyone

has the right to vote, so they have to be consulted.

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b. All decisions in ORDINARY MATTER CONNECTED TO PSHIP must be decided by majority UPA§18

i. Ex) Hiring an employee Summers v. Dooley (Idaho 1971)

c. anything controverting an existing agreement needs consent of all partners. UPA §18h

d. liability between partners, each parter is liable only to the extent of his involvement in the pship.

D. Distributions a. Distribution is equal, subject to any agreement (UPA §18a)

E. Authority UPA §9 a. Partnership may be liable if third parties think you’re acting for the

partnership… might not be in your agreement, but if people think they’re dealing with the partnership and you act like you are. ( can be just acting like other normal businesses do, not necessarily how your firm acts.)

F. Liability UPA §13, §14, §15 a. Pship Debts and Ks:

1 partners are Jointly liable for the pship debts and Ks (UPA §15b)i. cant sue just 1 partner for a K, other Ps are necessary parties

ii. can sue entity2 remedies:

i. pship assets cant be attached unless it’s a pship debtii. Ps right in a pship peoperty cant be attached (UPA §25(2))

a. You get a “charging order” against the Ps interest.b. Torts

1 Partners are JOINTLY AND SEVERALLY liable for torts + breaches of trust to 3rd parties (UPA §15(a))

G. Partnership Property and Interests UPA §§24-30 a. Partner’s interest is share of profits and is personal property (UPA§26)b. Can assign it, doesn’t dissolve the pship.c. can transfer it, but not w/o consent of every partner (subject to agreement)

Rapoport v. 55 Perry Co. (NY A.D.2d 1975) Each family owned 50% of a company. 1 family wanted to transfer some to their kids, so now the kids are partners.

H. Partner’s Duty of Loyalty UPA §20, §21 a. Duty of Loyalty, Duty to Avoid Conflicts, Duty not to be self-interested to

the exclusion of business interest. - TRIGGERED BY FACTSb. Must disclose related business opportunity

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c. Meinhard v. Salmon NY 1928) Cardozo on duty of loyalty: it was triggered because the D had an existing lease as part of a joint venture with the P, when he took a new lease for himself separate from the JV, it was related to the old deal and should have been disclosed

I. PShip Dissolution UPA §29 a. at death or withdrawl of a partner (subject to agreement)b. expiration of fixed term – ( but it can still be terminated at will)c. at will. It’s a choice.d. Under the UPA a partnership ends when 1 partner leaves. (follows the

concept of pship as aggregate of interestes instead of entity) So there are continuation agreements to keep the business nad the other partners going.

e. Effect on 3rd parties:1 Dissolution and continuation means new business, new 3rd aprty

Ks. f. wrongful acts causing dissolution:

1 Drashner v. Sorenson (S.D. 1954) P had made it impossible to carry on the business. (gots drunk, made crazy demands, ignored work) SO, it can be dissolved, and P gets a third…. But oh ! pship hasn’t repaid the initial capital yet, so P only gets a 3rd after that. Uh oh, co.is valued at less than what they owe to the investors, so P gets nothing (when the co was valued so low, its because they left out goodwill + intangibles.

2 Punishment for the wrongful dissolver:i. damages

ii. court is allowed to ignore goodwill when valuing the co as a punishment for wrongful dissolution)

iii. the rest of the business can go on w.o the dissolving partner.g. wrongful expulsion

1 when other Ps deny someones rights as a P 2 crutcher v. smith (pa 1997) partners excluded P from

management decisions, told bank not to let him withdraw, opened an account excluding him, did not notice or get his consent for purchase w. pship funds.

III. THE CORPORATE FORMBasics: 1. Limited Liability of shareholders and managers. 2. Free Transferrability of Ownership Interests. 3. Continuity of Existence. 4. Centralized Management by a board. 5. Legal Person / Entity Status.

A. Incorporation State law governs corp law.

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B. Organization NYBCL § 201, 401-403, 601 a. You must elect to become a corp.: 1) File a charter (Certificate of

Incorporation or Articles of Incorporation) w/ the state (usually Secretary of State). 2) State approves the charter. 3) The corp. is a legal person created by the state.

b. With:1. name2. purpose (any purpose OK- NYBCL §201)3. specific business (for ultra vires)4. location + service of process agent5. # of directors, original names6. capital structure, # of shares, classes of shares, par values

of shares, or power to issue stock

Three major modes of corporate finance: a) Common stock: (ownership/equity interests). Carries right to vote in election of directors, major corporate events (merger, dissolution, etc.). Dividends are often paid. No fixed claim on the corp. The equity interest, or residual interest - have the claim to what is left after all senior claimants have been satisfied.b) Debt: A fixed claim against the corp. for principal and interest. (Major types of corporate debt are trade debt, bank debt, bonds, debentures, and notes).c) Preferred stock: A hybrid that combines the ownership element of common stock and the senior nature of debt. The special character of preferred stock is its relation to common stock - the preferred SH shall have “first claim” in the event that directors are able and willing to pay a dividend

7. original directors must execute it and certificate must be filed

c. First incorporation meeting:1. adopt bylaws2. Subscription agreement: people agree to invest, maybe put

$ down, then the corporation is created and issue shares in exchange for $.

3. Board is elected by SH, but a corp. has no SH until stock is issued and issuing stock is vested in the Board. 2 methods for solving this problem: 1) Incorporators have the power of SH until stock is issued and power of directors until directors are elected (NY); or 2) Initial directors can be named in the corporation’s certificate (DEL).

C. Preincorporation Transactions a. A promoter brings and idea to a business by getting everyone

together. Promoter’s liability: promoter is personally liable on

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a K he makes on a corps behalf before incorporation. He is still liable for that K after formation.

1. EXCEPTION: Person K-ing w/ the promoter knew that the corp. was not in existence and still agreed to enter into the K and looked solely to the corp. for performance of the K. (express or implied agreement) Courts vary on whether an implied K will be found and whether the corp. may be held liable (after its formation) along w/ the promoter (joint and several liability).

b. Substribers are solicited, nad pre-incorporation subsctiption agreements are irrevocable unless all subscribers agree to a revocation.

c. Debt holder has a fixed claim on the corpd. An owner has no fixed claim

D. Defective incorporation NYBCL § 403 a. Generally incorporation is automatic. b. This comes up when a creditor wants to hold a individual

personally liable y saying that the corp wasn’t formed properly.c. De Facto Corporation:

1. need a colorable, godd faith attempt to organize the corporation (ex, articles get mailed to secretary of state, but get lost)

2. actually use of the corporate form, carryong int as a corp. 3. only the state can challenge the existence of a de facto corp.

E. Ultra Vires NYBCL §202, §203 a. Corporation must act only within their charter (charter usually

says “conduct all lawful business”)b. As a defense: estopped from using it as a defense for non-

performancec. It was made obsolete by NYBCL 203

1. No act of a corp. or transfer of property shall be invalid by reason of the fact that the corp. was w/o capacity or power to do such act, but such lack of capacity or power may be asserted:

a. in an action by SH against corp. to enjoin the doing of any act or the transfer of any property by or to the corp.;

b. by or in the right of the corp. to procure a judgment in its favor against an incumbent or former officer or director for loss or damage due to his unauthorized act;

c. by AG in an action to dissolve or annul the corp. or enjoin it from doing unauthorized business.

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F. Objective of the Corporation a. Shareholders rights are the focus. Maximize shareholder wealthb. What other motivation can a firm have?

1. For-profit is the equity that shareholders have after assets – liabilities. There may be times when assets are declining or disappearing

c. ECONOMICALLY IRRATIONAL 1. Dodge v. Ford Motor Co. Ford wanted to reinvest profits,

not pay out dividends. Ford wanted to reduce the price of cars, which didn’t make sense economically, but Courts are reluctant to second-guess business decisions. Unless its economically irrational and doesn’t make sense with for-profit purpose of the firm.

d. The corporate person is primarily for profit. So, can the firm do non-economic things?

e. Incidental Charity Giving1. Smith v. Barlow Smith donated $ to Princeton and the

shareholders sued, saying it was Ultra Vires. RULE: given that firms have for-profit purpose, they also have power to make charitable contributions that are incidental to business and somehow help the business. Cannot be for personal reasons, but the public benefit has some connection to the market.

IV. CORPORATE STRUCTURE

B. Limited Liability a. shareholders don’t have liability. Separate from the corporate

person1. exception: NYBCL §630 10 largest shareholders liable for

unpaid wages.

PIERCING THE CORPORATE VEIL: b. fraud or injusticec. Alter ego theory – where the corp is the alter ego of individual

shareholders. disregard of corporate requirements (money commingled with individuals and the corp, required meetings not held, rcords not maintined.

1. when a parent and a subsidiary operate as a single economic entity they are not separate corporate persons. Kodak Case: Fletcher v. Atex. 2nd cir. 1995.

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2. NOT alter ego: Using the same cash management system, seeking approval from the parent, having overlapping Board members, calling itself “a Kodak company” is just NOT enough.

d. Undercapitalization: piercing can happen where the Co. has too little capital for its liabilities, debts + risk

1. Liability Insurance as evidence of undercapitalization:a. Can’t sue shareholders unless you allege that the

co. is operated for PERSONAL rather then corporate purposes. Being part of a larger corporate enterprise is OK

b. Walkovsky v. Carlton (NY 1966): taxi hit plaintiff, taxi industry split ownership of the cars into several corporations. P sued 10 corporations that Carlton was a shareholder of. Fanto: the Legal persons don’t really reflect the business. In reality, there were 10 or 20 cabs in a business, conducted together, but they were divided into 10 different businesses.

Theory 1: Sue the firm because of actions of agent of the firmTheory 2: Sue the shareholders - when something indicates that they are the same as the firm (personhood is not respected)Theory 3: Sue the other firms because they were artificially separated to avoid liability.

The individual mini-corporations had barely enough capital + insurance to cover.

e. Contract liability for piercing the veil: 1. Two-Prong Test to pierce the veil: (sealand v. pepper

source 7th Cir. 1991)a. Must be unity of interest and ownership that the

separate personalities of the corporation and the individual no longer exist.

i. Must articulate 4 factors in a complaint:1. Failure to maintain corporate records2. Finances co-mingles3. Individual firm is undercapitalized. 4. 1 corp treating the assets of the other

as their own.

b. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

i. Must plead that someone would be unjustly enriched NOT enough to say that a creditor will go unpaid.

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C. Equitable Subordination: a. a. when a loan is deemed equity and moved down the

distribution chain (becoming LESS senior – just recharacterizes how money is put in the firm.)

b. An equitable alternative to piercing the veil.c. Awarded when there has been bad faith by the SH/creditor

toward other corporate creditors or mismanagement. Or undercapitalization.

d. When the corporations SHs are also lenders (and the corp is insolvent) the SHs loans are pushed to the bottom, its not really ordering the SHs to pay the debts back, its just allowing the non-SH creditors to be paid first

e. when a loan is deemed equity and moved down the distribution chain (becoming LESS senior – just recharacterizes how money is put in the firm.)

D. Corporate Entity and Contract Interpretation a. when the corporate definition is used to contradict pubic policy or legislation,

the courts will hold the parent liable

V. DISTRIBUTION TO SHAREHOLDERS

A. Intro to Financial Statements a. Don’t include non-tangible assets (human capital, reputation, etc) Net Income

= Revenue – Expenses

B. Legal Capital NYBCL §503, §504, §506 a. §501(a)- corporation has power to create + issue shares.b. §504 - consideration for shares can be money, property, labor, future labor

or services. Contribution doesn’t have to be $. Board can determine how much the services are worth + how many shares that translates to.

c. Par Value = what price you sold the shares for. d. §506 - initial capitalization

ex) goal is the capitalize with $100,000 so you offer 1000 common shares at 100$ per share. If the par value is also 100$. The expended $100,000 is stated capital, under Liabilities, and you cant touch it.

If the par value is $10 and the share price is still $100, then only 10,000$ is called stated capital (or legal capital) then, the other 90,000$ is surplus. Surplus is equity and you can touch it. So, Stated Capital (or legal capital) can’t be touched. If it starts to be infringed, the firm is in trouble.

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Stated capital is under Liabilities on a balance sheet, they also have the assets from the cash they gained by selling shares, but they also are liable for it.

e. Legal Capital – how to capitalize the firm: issue shares, get $ in return, shareholders have a claim to it. Equity claim is part legal and part surplus. A share is designated with a par value, then par value x # of shares is the legal capital, the rest is surplous. If you hve no par stock the board can move everything to surplus. Legal capital, once defined, cant be touched. If its touched, it means the firm is in trouble, its assets are shrinking so that the claims (the value) shrink as well. Often, what happens is : the capital is affected, you cant infringe on it, youre in bankruptcy.

C. Authorized and Issued NYBCL §501, §622 a. §622 – Preemptive right- current shareholders have the first right to buy

more shares when more are issued.

D. Corporate Finance NYBCL §502, §518 a. Firm issues shares, takes in money (or property, or services, or

commitment of future services)b. Division of equity into legal capital and surplus: sort of false because you

can choose any par value. i. If you issue 1000 shares at $100 issue price, you have $100,000

cash in assets, and also 100,000 in liabilities, because someone has a claim on it. How do you state that? If the par value of a share is $10, then the equity claim is for just $10,000 (called legal capital) and the other $90,000 is surplus that can be used. The Par value can be anything, or even no par. Then, all the $ is legal capital but the firm can decide to use it.

ii. As the firm makes $, the surplus grows. iii. Lenders want to see that owners are invested in corp.

Creditor protection: can restrict what $ is taken out of the firm –

E. Watered Stock a. stock in exchange for overvalued property (like, watering your cattle

before going to the weigh-in at the auction)b. holder of the stock paid less than par, so they are liable to the company or

the creditors --- p1261

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F. Dividends NYBCL §102(a)(2), §102(a)(8), §102(a)(13), §501, §717, §801(b)(10), §801(b)(11), §804

a. Dividend- Payment of the dividend comes from surplus- the equity account gets bigger. Can buy back shares only out of surplus as well.

G. Director & Shareholder Liability, NYBCL §719, §720,

H. Repurchase by a Corporation of its own stock NYBCL §513, §515

a. Its mechanical, how you capitalize and how you take $ out. Dividends have to be across the board, repurchase can be selective (unless it’s a tender offer) they both have to come out of surplius (we had a case where a Co. reevaluated its assets and said – we have these assets which are worth more than the book says now (book was using original $$ cost.)

VI. CORPORATE STRUCTURE

A. Publicly-held Corporations a. Governance- Shareholders (elected@ meeting) Board

(appointed @ meeting) Officers Shareholder votes on board by plurality (not maj.) typically management puts up a slate of directors. Proxy process allows other names to come forward. Bylaws may allow nominations in another way, but a proxy fight is the way to take control of a board. Put up your own slate and try to get the most votes.

b. Variations – the structure of power runs the other way in reality, the officers have more power and the directors are really just there once a month. SH power is their vote. Blesias cases – a board cant interfere with a shareholder’s rights (these are more often involved in a takeoerattempt where the management tries to play around with election rules to avoid takeover--- adding board seats, delaying election, -- BUT FOR a compelling justification, you cant infringe on shareholders voting right. Its their only real power. Court scrutinized that area for actions that are infringement).

15


B. Allocation of Power NYBCL §706

C. Legal Structure of Management NYBCL §701, 712

D. Board Formalities NYBCL §707, 708, 709, 710, 711

E. Officer Authority NYBCL §715

F. Shareholder Formalities NYBCL 602, 604, 605, 606, 607, 608, 614, 615, 616

VII. SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING

A. Information Rights NYBCL §624 a. Inspection right – demand to see balance sheet, can get

access to contest management maybe a shareholder list, but the main access for a public firm is the federal regulators.

B. Reporting Requirements

C. Proxy Rules ’34 Act §14(a) 14(b) 14(c) Rules 14a-1, 14a- 2, 14a-3, 14a-6, 14a-9, (skim 14a-4 and 14a-5) and Schedule 14A a. Proxy statement – the information given to public

shareholders when a vote is required fo them When they ask for your vote, they have to give you a proxy statement… company says give me your vote, and ill cast it for you. In a contest, youll get 2 proxy statements.

D. Private Actions Under the Proxy Rules a. Private Suit- if you get a materially misleading proxy

statement , you can sue Mills case _ VA bank case define materiality and also when you can or cant sue. Proxy was an essential link in the transaction. Proxy contests are very expensive, but its within the directors discretion to spend the money to defend themselves. The money isn’t just sending out the statement but planning and persuading shareholders.

E. Shareholder Proposals ’34 act Rule 14a-8 a. Shareholder proposals - look at what he highlighted (14a8)

those are the grounds to exclude proposals. The current issue is – can shareholders put names of people on the proxy statement – the proposals are mostly used to push companies

16


around on policy, etc. or maybe its institutional shareholders that recommend that they get rid of the poison pill. Whatever it is, its pressure on the board.

F. Proxy Contests NYBCL §609

VIII. CLOSE CORPORATIONS

A. Introduction to Close Corporations a. privately held. Look at accommodations of small firm

setting and some of the basics of the corporate form

B. Voting Agreements NYBCL §609, §620

C. Voting Trusts NYBCL §621

D. Classified Stock NYBCL §402, §703

E. Agreements Dealing with Board Discretion NYBCL §620

F. Supermajority Voting/quorum NYBCL §616, §709

G. Shareholders Fiduciary Obligations to Close Corporations

a. Managers are shareholders- in that way, theyre like partnerships. What happens when the sameperson is a SH, Officer, Director. ? problems occur when there is a falling out with one party who is no longer a manager, is only a shareholder. $ doesn’t come from dividends, comes from salary. How does law accommodate this setting? Shareholders have duty to aone another in this setting, naj. Shareholders have parternship like dutues toward the minority shareholder §620 of NYBCL says board doesn’t dominate, SH can be in control. Proxy by contract can be irrevocable

H. Restrictions on Share Transfer a. Transfer Restrictions – might want to restrict it, keep it

in the family, etc. law allows restrictions on transfers

I. Dissolution NYBCL §1002, §1104, §1111 a. Dissolution – corporate form is a creation of the state, so

state wont let it die, but a close corp or partnership it’s a

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choice, so you can have afalling out and dissolve. NYBCL 1104 allows for dissolution in the case of deadlock. One alternative is to petition for dissolution because of oppression, nad the controlling shareholder can say, don’t dissolve, ill buy all their shares.

J. Dissolution for Oppression NYBCL §1140-a, §1118

K. Arbitration NYBCL §620(b)

FIDUCIARY DUTIES OF BOARD MEMBERS – these are in the law, but fanto says theyre primarily creatures of equity, where the duties developed from decisions by equitable courts.

IX. DUTY OF CARE AND DUTY TO ACT IN GOOD FAITH

A. Basic Standard of Care NYBCL §717(a), §720 a. Duty of Care- Do whats necessary to make a proper decision –

gather information, monitor, deliberate, ask for information from experts, then make a business decision… THEN if those are met,the court wont scrutinize your decision. seems to be procedural also, (2 part) duty to set up monitoring systems know that supervisory system is in place caremart case.

B. Business Judgment Rule

C. Duty to Ensure that Corp has Effective Internal Controls

D. Liability Shield NYBCL §402(b) a. DE102b7 after smith v. van gorken, states also

relieved directors from liability. Even if they violate the duty of caer, they act not with negligence but gross negligence often you cant recover damages from that breach.

b. Absolved from Liabiltiy- when can directors invoke the proivision in the certificate that relieves them from liaibltiy? Want to make sure that complaint is fully explored ,

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a court wont just dismiss because relief cant be granted. This is a little abstract, but it basically says that the suit will go forward and part of the litigation will consider the effect of the provision. It will only be dismissed if its specifically just a duty of care violation. So everyone knows that and will allege all sorts of things.

c.

E. Good Faith; Duty to Act Lawfully a.Duty to act in good faith- statutes that absolve you from

liability fron duty of case oblications did not absolve you from duty of good faith. Courts have a hard time defining it. Disney case (supplement) – bad faith means youre not paying attention to your job, willfully not doing it or being spiteful, making a decision just to thwart people. If you see director action that not self-interested but just nasty, willful neglect of duty,

b. Duty to act lawfully – also a case on that, no court will absolve them from liability or §402b says NOT absolved from violatiosn of the law.

F. Directors and Officers Liability Insurance (skim NYBCL §721-726)a. they have insurance.

X. DUTY OF LOYALTY

A. Self-interested Transactions NYBCL §713 a. Duty of Loyalty – §717 talks about it it, but the development is

really from CL.

b. dorector or officer engages in a transactrion with the firm self interested transaction.

c. When director is on one side of transaction conflict duty to avoid conflicts.

d. Courts do nto defer to decisions.

a. Fairness analysis – more instrusive examination of transaction,

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i. who has the burden?

1. If plaintiffs make the pleading burden defendants have burden to show the transactions was fair toe the firm.

ii. NY 713- transaction is not void or voidable simply because its self- onterested, but you have to show fairness.

b. Then the issue is is there any way for the interested party to shift the burden off of itself?

i. Disinterested directors did it or disinterested shareholder approved it full disclosure of conflict and all relevant information.

ii. DE takes different position but were not being tested on DE.

1. In DE: if disintereeested directors did it business judgment rule.

2. if disinterested SHs approved it must show waste. – in executive compensation Delaware is special – fanto wants us to know just that part of deleware law.

B. Statutory Approaches

C. Compensation, Waste and Shareholder Ratification NYBCL §515(d), §713(e)

D. Use of Corporate Assets, Competition with the Corporation, The Corporate Opportunity Doctrinea. Corporate opportunity - NE harbor case. If its an

opportunity, you have to disclose and give it to the firm.

E. Duties of Controlling Shareholders a. Controlling shareholders are fiduciaries.

b. Controlling Shareholders – DE is just like NY: anytime oyu have a controlling SH doing a transaction with the firm he controls, the analysis is fairness.

a. DE wont lower the standard for controlling SHs even if disinterested directors approved it, that just shifts the burden, but its still a fairness analysis.

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b. When is the controlling shareholder involved? When he wants to purchase some remaining interest in the firm. Then it’s a fairness analysis.

i. The law says that you can set up an independent negotiation

ii. Han case- was the committee independent in substance and in how it acted? If so, the burden shifts – they are hard on those committees .rare that they are independat enough to shift the burden.

F. Sale of Control a. Sale of Control – deals with CS selling a controlling share to

someone else and getting a premium for it. Cant sell it and take advantage of an unusual opportunity of the firm or sell it to someone else who will loot the firm.

XI. SHAREHOLDER SUITS

A. Introduction NYBCL §626(b)

B. Nature of Derivative Suit a. Derivative suit: Have to go to the board to make demands.

But its futile ! theyre al linteresetd . NY- be particular in the complaint and establish a reasonable doubt. Delaware you need enhanced pleading. Often, directors, if they are all involved, concede the futility but appoint an independent litigation ncommittee that recommends the suit be dismissed. What deference does the at committee get? NY is fairly deferential if the committee made a good business judgment. DE courts are not as deferential, we may do that, but we may just use our own judgment to decide if dismissal is appropriate.

21


C. Individual (pro rata) Recovery

D. Contemporaneous Ownership NYBCL §626(b)

E. Demand on the Board and Termination of Derivative Actions on the Recommendation of the Board or Committee NYBCL §626©

F. Indemnification

XII. INSIDER TRADING

A. Common Law Background a. 3 general things: federal cause of action aimed at

officeres, Ds, controlling SHs - duty not to trade, nad if you do trade, disclose. SHs has to show materiality and reliance. Plead the loss, that lack of material information shared the loss. Companies are also liable for lying to the public. SH suits are sometime saimed at the Co, not the insiders. The SEC generally beings suits on the insiders. Against insiders, its insider trading, against a CO, its accurate speaking… their misrepresentation had to cause your loss.

B. Rule 10b-5 a. Classic insider situation – cant trade unless you

disclose, and cant trade after you disclose until the information has been dispersed (texas case) ousiter theory – not only to insiders hve the duty, outsiders have the dduty under the misappropriations theory not to trade on information that they take improperly from someone withom they have a confidential relationship. O- Hagan case- info about a tender offer was only material because somoen was abou to do a tender offer. Having other s do the trading: Dirks, Chiarella. Tipper – tippee : is it material information? If so, is it misappropriation or the classical insider theory?

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C. Elements of 10b-5

D. Liability for short-swing trading

E. Common Law Revisited

XIII. CORPORATE COMBINATIONS1) what are technicalities associated with it?

2) Who has votes?

3) Who has appraisal rights?

Fiduciary development – if it’s a controlling SH in a merger fairness inquiry. There are ways aroundit, maybe a tender offer followd by a short form merger, there is no fairness inquiry. Solomon case , Alaska.

A. Sale of Substantially All the Assets NYBCL §909 a. Jurusprudence on Asset Sale- whats sale of all or

substantially all the assets ? its quantitiative / qualitative.

B. Appraisal Remedy NYBCL §623

C. Statutory Mergers

A. CLASSICAL MERGERS NYBCL §§901-906, 910

B. SMALL SCALE MERGERS

C. SHORT FORM MERGERS

D. DeFacto Merger NYBCL §913 a. De Facto Merger is just PA saying “the law says x but well

call it something else. DE says that if you structure it one way, the voting and appraisal IS as you structured it. Wont reshuffle nad apply the law like PA.

E. Triangular Mergers and Share Exchanges NYBCL 913

F. Freezeouts

G. Going Private

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XIV. TENDER OFFERS NYBCL §912a. Tender Offers – development of the fiduciary duty. (wont ask

any detail about the Williams act ) our focus on tender offer is all about how does the board behave. Generally what to boards to? Defend themselves. Court says : You can put up defenses, but we wont defer to you. Ask: did you see a threat? Did you respond to threat? Courts allow pretty significant responses if a Co. doesn’t want to be sold. When you decide to sell, you have to focus on the shareholder value. Nothing else.

Is this fairness? If you see a takeover ask if there was coercion . intermediate unocal standard .

NOTES FROM LAST CLASS>>>>>

Agency and Partnership

How do each legal form deal with liability, management, transferring interest, authority to act for firm, distribution, (and other major issues) that’s probably all you need to know. And that its s default form, loyalty and liability cant be contracted around, but mostly pships are heavily contracted.

NO RUPA on exam

Agency:

Sole proprietor hires employees, same big issues, formation can be done thru circumstances or agreement where corp form is more formal, loyalty, authority of agent.

No LLCs no LPs no tax no pship accounts.

CORPORATE FORM

Creature of the state for defined purposes, with limited powers. But now its evolved to something with broad purposes and unlimited powers. Still need certificate and acknowledgement by the state.

Ultra vires doctrine isn’t that significant anymore, given how broad corporate powers may be.

Corporate purpose: dodge motors case, the for profit purpose, a focus on profit for shareholders (which we came back to in Revlon and paramount cases--) this becomes the norm of corporate law. Charitable contributions have to be reigned in so that its focus remains shareholder profit.

Limited Liability. Contrasted this with a partnership because LL is one of the beauties of the corporate form. Invest $ in firm, capitalize

24


it, and that’s the extent of your risk. Investors who are distant from management don’t have to worry that theyre responsible for more.

Piercing the Corporate Veil. – rarely used. When might you look to the shareholder and disregard the corporate form? If corp is a legal person, if it doesn’t function as a person,( lack of capital, funds go in & out w/o record) you might pierce it. Also, equitable reasons to pierce? A creditor might be allowed to look to the shareholder only when the firm doesn have enough $$ (taxicab case--)

Legal Capital – how to capitalize the firm: issue shares, get $ in return, shareholders have a claim to it. Equity claim is part legal and part surplus. A share is designated with a par value, then par value x # of shares is the legal capital, the rest is surplous. If you hve no par stock the board can move everything to surplus. Legal capital, once defined, cant be touched. If its touched, it means the firm is in trouble, its assets are shrinking so that the claims (the value) shrink as well. Often, what happens is : the capital is affected, you cant infringe on it, youre in bankruptcy.

Dividend- Payment of the dividend comes from surplus- the equity account gets bigger. Can buy back shares only out of surplus as well.

Its mechanical, how you capitalize and how you take $ out. Dividends have to be across the board, repurchase can be selective (unless it’s a tender offer) they both have to come out of surplius (we had a case where a Co. reevaluated its assets and said – we have these assets which are worth more than the book says now (book was using original $$ cost.)

Governance- Shareholders (elected@ meeting) Board (appointed @ meeting) Officers Shareholder votes on board by plurality (not maj.) typically management puts up a slate of directors. Proxy process allows other names to come forward. Bylaws may allow nominations in another way, but a proxy fight is the way to take control of a board. Put up your own slate and try to get the most votes.

Variations – the structure of power runs the other way in reality, the officers have more power and the directors are really just there once a month. SH power is their vote. Blesias cases – a board cant interfere with a shareholder’s rights (these are more often involved in a takeoerattempt where the management tries to play around with election rules to avoid takeover--- adding board seats, delaying election, -- BUT FOR a compelling justification, you cant infringe on shareholders voting right. Its their only real power. Court scrutinized that area for actions that are infringement).

Inspection right – demand to see balance sheet, can get access to contest management maybe a shareholder list, but the main access for a public firm is the federal regulators.

25


Proxy statement – the information given to public shareholders when a vote is required fo them When they ask for your vote, they have to give you a proxy statement… company says give me your vote, and ill cast it for you. In a contest, youll get 2 proxy statements.

Shareholder proposals - look at what he highlighted (14a8) those are the grounds to exclude proposals. The current issue is – can shareholders put names of people on the proxy statement – the proposals are mostly used to push companies around on policy, etc. or maybe its institutional shareholders that recommend that they get rid of the poison pill. Whatever it is, its pressure on the board.

Private Suit- if you get a materially misleading proxy statement , you can sue Mills case _ VA bank case define materiality and also when you can or cant sue. Proxy was an essential link in the transaction. Proxy contests are very expensive, but its within the directors discretion to spend the money to defend themselves. The money isn’t just sending out the statement but planning and persuading shareholders.

CLOSE CORPORATIONS – privately held. Look at accommodations of small firm setting and some of the basics of the corporate form

Managers are shareholders- in that way, theyre like partnerships. What happens when the sameperson is a SH, Officer, Director. ? problems occur when there is a falling out with one party who is no longer a manager, is only a shareholder. $ doesn’t come from dividends, comes from salary. How does law accommodate this setting? Shareholders have duty to aone another in this setting, naj. Shareholders have parternship like dutues toward the minority shareholder §620 of NYBCL says board doesn’t dominate, SH can be in control. Proxy by contract can be irrevocable

Transfer Restrictions – might want to restrict it, keep it in the family, etc. law allows restrictions on transfers

Dissolution – corporate form is a creation of the state, so state wont let it die, but a close corp or partnership it’s a choice, so you can have afalling out and dissolve. NYBCL 1104 allows for dissolution in the case of deadlock. One alternative is to petition for dissolution because of oppression, nad the controlling shareholder can say, don’t dissolve, ill buy all their shares.

FIDUCIARY DUTIES OF BOARD MEMBERS – these are in the law, but fanto says theyre primarily creatures of equity, where the duties developed from decisions by equitable courts.

26


Duty of Care- Do whats necessary to make a proper decision – gather information, monitor, deliberate, ask for information from experts, then make a business decision… THEN if those are met,the court wont scrutinize your decision. seems to be procedural also, (2 part) duty to set up monitoring systems know that supervisory system is in place caremart case.

DE102b7 after smith v. van gorken, states also relieved directors from liability. Even if they violate the duty of caer, they act not with negligence but gross negligence often you cant recover damages from that breach.

Duty to act in good faith- statutes that absolve you from liability fron duty of case oblications did not absolve you from duty of good faith. Courts have a hard time defining it. Disney case (supplement) – bad faith means youre not paying attention to your job, willfully not doing it or being spiteful, making a decision just to thwart people. If you see director action that not self-interested but just nasty, willful neglect of duty,

Duty to act lawfully – also a case on that, no court will absolve them from liability or §402b says NOT absolved from violatiosn of the law.

Insurance- Directors have it.

Absolved from Liabiltiy- when can directors invoke the proivision in the certificate that relieves them from liaibltiy? Want to make sure that complaint is fully explored , a court wont just dismiss because relief cant be granted. This is a little abstract, but it basically says that the suit will go forward and part of the litigation will consider the effect of the provision. It will only be dismissed if its specifically just a duty of care violation. So everyone knows that and will allege all sorts of things.

Duty of Loyalty – §717 talks about it it, but the development is really from CL.

dorector or officer engages in a transactrion with the firm self interested transaction. When director is on one side of transaction conflict duty to avoid conflicts. Courts do nto defer to decisions. Fairness analysis – more instrusive examination of transaction, who has the burden? If plaintiffs make the pleading burden defendants have burden to show the transactions was fair toe the firm. NY 713- transaction is not void or voidable simply because its self- onterested, but you have to show fairness. Then the issue is is there any way for the interested party to shift the burden off of itself? Disinterested directors did it or disinterested shareholder approved it full disclosure of conflict and all relevant information. DE takes different position but were not being tested on DE. In DE: if disintereeested directors did it business judgment rule. if disinterested SHs approved it

27


must show waste. – in executive compensation Delaware is special – fanto wants us to know just that part of deleware law.

Corporate opportunity - NE harbor case. If its an opportunity, you have to disclose and give it to the firm.

Controlling Shareholders – DE is just like NY: anytime oyu have a controlling SH doing a transaction with the firm he controls, the analysis is fairness. DE wont lower the standard for controlling SHs even if disinterested directors approved it, that just shifts the burden, but its still a fairness analysis. When is the controlling shareholder involved? When he wants to purchase some remaining interest in the firm. Then it’s a fairness analysis. The law says that you can set up an independent negotiation – Han case- was the committee independent in substance and in how it acted? If so, the burden shifts – they are hard on those committees .rare that they are independat enough to shift the burden. Controlling shareholders are fiduciaries.

Sale of Control – deals with CS selling a controlling share to someone else and getting a premium for it. Cant sell it and take advantage of an unusual opportunity of the firm or sell it to someone else who will loot the firm.

Derivative suit: Have to go to the board to make demands. But its futile ! theyre al linteresetd . NY- be particular in the complaint and establish a reasonable doubt. Delaware you need enhanced pleading. Often, directors, if they are all involved, concede the futility but appoint an independent litigation ncommittee that recommends the suit be dismissed. What deference does the at committee get? NY is fairly deferential if the committee made a good business judgment. DE courts are not as deferential, we may do that, but we may just use our own judgment to decide if dismissal is appropriate.

Insider Trading- 3 general things: federal cause of action aimed at officeres, Ds, controlling SHs - duty not to trade, nad if you do trade, disclose. SHs has to show materiality and reliance. Plead the loss, that lack of material information shared the loss. Companies are also liable for lying to the public. SH suits are sometime saimed at the Co, not the insiders. The SEC generally beings suits on the insiders. Against insiders, its insider trading, against a CO, its accurate speaking… their misrepresentation had to cause your loss.

Classic insider situation – cant trade unless you disclose, and cant trade after you disclose until the information has been dispersed (texas case) ousiter theory – not only to insiders hve the duty, outsiders have the dduty under the misappropriations theory not to trade on information that they take improperly from someone withom they have a confidential relationship. O- Hagan case- info about a tender offer was only material because somoen was abou to do a tender offer. Having other s do the trading: Dirks, Chiarella. Tipper –

28


tippee : is it material information? If so, is it misappropriation or the classical insider theory?

MERGERS – know mechanics

Asset Sale –

Triangular Mergers

Short form mergers

900s and 910

Always ask:

1) what are technicalities associated with it?

2) Who has votes?

3) Who has appraisal rights?

Jurusprudence on Asset Sale- whats sale of all or substantially all the assets ? its wuantitiative / qualitative. De Facto Merger is just PA saying “the law says x but well call it something else. DE says that if you structure it one way, the voting and appraisal IS as you structured it. Wont reshuffle nad apply the law like PA.

Fiduciary development – if it’s a controlling SH in a merger fairness inquiry. There are ways aroundit, maybe a tender offer followd by a short form merger, there is no fairness inquiry. Solomon case , Alaska.

Tender Offers – development of the fiduciary duty. (wont ask any detail about the Williams act ) our focus on tender offer is all about how does the board behave. Generally what to boards to? Defend themselves. Court says : You can put up defenses, but we wont defer to you. Ask: did you see a threat? Did you respond to threat? Courts allow pretty significant responses if a Co. doesn’t want to be sold. When you decide to sell, you have to focus on the shareholder value. Nothing else.

Is this fairness? If you see a takeover ask if there was coercion . intermediate unocal standard .

29

Documents

Corporations Outline - Fanto Fall 2006