Corporate Law

Fall 2013 Outline

Professor Fishman

Contents
I. a. Agency Sole Proprietorship .............................................................................................................. 11 Introduction .................................................................................................................................... 11 i. Firm that is Owned by a single individual and is not cast in a legal form that can be utilized only by filing an organic document with the state under an authorizing statute ...................................... 11 b. i. ii. iii. c. i. ii. iii. iv. II. a. i. III. a. i. ii. iii. iv. v. vi. vii. b. c. i. ii. iii. Agency and Authority ..................................................................................................................... 11 Prcpl/Agnt Relationship .............................................................................................................. 11 Prcpl Agency Problems ............................................................................................................... 11 Morris Oil Co. v. Rainbow Oilfield Trucking Inc. (1987) pg. 2 .................................................. 13 Agents Duty of Loyalty ................................................................................................................... 13 Agency Costs ............................................................................................................................... 13 Tarnowski v. Resop (1952) pg. 18 ............................................................................................ 13 Statutes, Rules, and Regulations................................................................................................. 13 Reading v. Attorney General (1951) pg. 21 .............................................................................. 14

A Primer on Accounting and Finance .................................................................................................. 14 Introduction to Accounting and Financial Statements ................................................................... 14 Fundamental Equations .............................................................................................................. 14 Partnerships .................................................................................................................................... 14 What Constitutes a General Partnership ........................................................................................ 14 Definition .................................................................................................................................... 14 Uniform Partnership Act (1914) pg. 30-31 of Statutory Supplement .................................... 14 HILCO Property Services v. US (1996) ph. 49 ........................................................................... 14 Martin v. Peyton (1927) pg. 49 ................................................................................................ 14 Lupien v. Malsbenden (1984) pg. 53 ........................................................................................ 15 Formation of Partnerships .......................................................................................................... 15 Joint Ventures ......................................................................................................................... 15

Legal Nature of a Partnership [Pg. 58-60 of Textbook] .................................................................. 15 The Ongoing Operation of Partnerships ......................................................................................... 15 Uniform Partnership Act pg. 34-35 of Statutory Supplement ............................................... 15 Summers v. Dooley (1971) pg. 60 of Textbook ......................................................................... 15 Sanchez v. Saylor (2000) pg. 62 of Textbook ........................................................................... 15 1

iv. v. d. i. ii. iii. e. i. ii. f. i. g. i. ii. iii. iv. v. vi. h. i. ii. i. i. ii. iii. j. i. ii. IV. a. i. ii. 2

Management of Partnerships ..................................................................................................... 15 Indemnification and Contribution .............................................................................................. 15 The Authority of a Partner .............................................................................................................. 16 Uniform Partnership Act pg. 31-33 of Statutory Supplement ............................................... 16 North Investment Company v. Milford Plaza Association (2001) pg. 66 ................................. 16 Actual vs. Apparent Authority..................................................................................................... 16 Liability for Partnership Obligations (to Third Parties) ................................................................... 16 Uniform Partnership Act pg. 31-34, 40 in statutory supplement ............................................ 16 Partnership Liability Agency principles applies ........................................................................ 16 Partnerships Interest and Partnership Property ............................................................................. 16 Partnership Property partners right........................................................................................ 16 The Partners Duty of Loyalty........................................................................................................... 17 Meinhard v. Salmon (1928) pg. 74 of textbook ....................................................................... 17 Fiduciary Duties partners are fiduciaries of each other & the partnership: ............................ 17 General Partners are personally liable for debts of partnership ................................................ 17 Nature of Liability........................................................................................................................ 17 Extent of Liability ........................................................................................................................ 17 Partnership Liability by Estoppel................................................................................................. 17 Side Notes on partnerships ............................................................................................................. 17 Salary ........................................................................................................................................... 17 Partners share of profits and Losses .......................................................................................... 18 Dissolution ...................................................................................................................................... 18 Dissolution (in general) ............................................................................................................... 18 By Rightful Election ..................................................................................................................... 19 By Judicial Decree and Wrongful Dissolution ............................................................................. 20 Limited Partnerships and Limited Liability Partnerships ................................................................ 20 Limited Partnerships ................................................................................................................... 20 Limited Liability Partnerships ...................................................................................................... 20 The Foundations of a Corporation .................................................................................................. 21 The Characteristics of the Corporation ........................................................................................... 21 Limited Liability ........................................................................................................................... 21 Free Transferability of Ownership Interests ............................................................................... 21

Corporate Law iii. iv. v. b. i. ii. iii. iv. c.

Fall 2013 Outline

Professor Fishman

Continuity of Existence ............................................................................................................... 21 Centralized Management ........................................................................................................... 21 Entity Status ................................................................................................................................ 21 Architecture of Corporate Law ....................................................................................................... 21 Traditional Conflicts .................................................................................................................... 21 Positional Conflicts ...................................................................................................................... 21 Four Major Modules ................................................................................................................... 21 Which States Law Governs a Corporations Internal Affairs ...................................................... 22 Selecting State of Incorporation [textbook pages 122-128] ........................................................... 22

i. A corporation that will have only a few owners will usually be incorporated locally (i.e. in the state that the corporation will have its principal place of business) .................................................. 22 ii. States may impose a franchise tax on the corporation for the privilege of incorporation, even if the corporation does little or no business in the states ..................................................................... 22 iii. d. i. e. i. ii. f. i. ii. iii. iv. g. i. ii. iii. V. Publicly held corporations different things are considered,....................................................... 22 Organizing the Corporation ............................................................................................................ 22 WHITEBOOK Business Corporate Law Statutes [BSC] .............................................................. 22 The Basic Types of Financial Securities [textbook pages 131-135]................................................. 22 Brief Explanation [pg. 131-133.................................................................................................... 22 Introduction to Types of Debt and Debt Covenants ................................................................... 22 The Classical Ultra Vires Doctrine [Textbook page 151-154] .......................................................... 23 Classical Ultra Vires Doctrine ...................................................................................................... 23 Powers and Purposes .................................................................................................................. 23 Recurring Problems ..................................................................................................................... 23 Limitations on the Ultra Vires Doctrine ...................................................................................... 23 The Objective and Conduct of the Corporation .............................................................................. 23 WHITEBOOK Business Corp. Law [BSC] ....................................................................................... 23 ALI Principles of Corporate Governance SEE HANDOUT #2 ..................................................... 24 Interests Other than Maximzation of Shareholders Wealth ..................................................... 24

The Legal Structure of the Publicly Held Corporation ........................................................................ 24 i. The power and the roles of the Board, the Shareholders, and the Executives in the governance of publicly held corporations .............................................................................................................. 24 b. Legal Distribution of Power Between the Board and the Shareholders, and Equitable Limits on the Boards Legal Power ......................................................................................................................... 24 3

i. ii. c. i. ii.

WHITEBOOK Business Corp. Law [BSC] .................................................................................... 24 The Legal Distribution of Power Between the Board and the Shareholders .............................. 24 Requisites for Valid Action by the Board ........................................................................................ 24 WHITEBOOK Business Corp. Law [BSC] .................................................................................... 24 Fogel v. U.S. Energy Systems (2007) SEE HANDOUT # 3 .......................................................... 25

iii. Rules are set at 2 levels. first to set out formalities for board action and second are concerning the consequences for noncompliance with the first level rules ...................................... 25 d. i. ii. iii. iv. e. i. ii. f. i. ii. iii. iv. v. g. i. ii. iii. h. i. i. i. ii. iii. iv. 4 Normal Requisites for Valid Shareholder Action ............................................................................ 25 WHITEBOOK Business Corp. Law [BSC] .................................................................................... 25 Notice of Meeting: ...................................................................................................................... 25 Quorum ....................................................................................................................................... 25 Voting .......................................................................................................................................... 25 Corporate Governance and the Rise of Institutional Shareholders ................................................ 26 Shareholder Voting ..................................................................................................................... 26 Financial Institutions and Their Advisors .................................................................................... 26 Election of Directors........................................................................................................................ 26 WHITEBOOK Business Corp. Law [BSC] .................................................................................... 26 Staggered (or classified) Boards .............................................................................................. 26 Straight and Cumulative Voting .................................................................................................. 26 Plurality Voting............................................................................................................................ 26 Short Slates ................................................................................................................................. 27 Removal of Directors BCL 705-706............................................................................................ 27 Removal by the Shareholders ..................................................................................................... 27 Removal by the Board ................................................................................................................. 27 Removal by a Court ..................................................................................................................... 27 Requisites for Valid Action by Corporate Officers BCL 715 & 716 ......................................... 27 Corporate Officers....................................................................................................................... 27 Equitable Limits on the Boards Legal Powers ................................................................................ 28 WHITE BOOK BCL 707-708 .................................................................................................... 28 Condec Corp. v. Lunkenheimer Co. (1967) pg. 170................................................................... 28 Schnell v. Chris-Craft Industries, Inc. (1971) pg. 171 ............................................................... 28 Blasius Industries, Inc. v. Atlas Corp. (1988) pg. 173 ............................................................... 28

Corporate Law v. j. i. ii. k. i. ii. iii. VI. a. i. b. i. ii. iii. c. i. d. i. e. i. ii. f.

Fall 2013 Outline

Professor Fishman

Business Judgment Rule.............................................................................................................. 28 The Role of the Bylaws in the Allocation of Power between the Board and the Shareholders ..... 28 WHITEBOOK BCL 601 ............................................................................................................... 28 CA, Inc. v. AFSCME Employees Pension Plan (2008) pg. 184 ................................................... 28 Allocation of Power between the Board and the CEO .................................................................... 28 WHITEBOOK BCL 715-716 ........................................................................................................ 28 Managing Model of the Board .................................................................................................... 28 Monitoring Model of the Board .................................................................................................. 28 Shareholder Informational Rights and Proxy Voting ...................................................................... 28 Shareholder Information Rights Under State Law .......................................................................... 28 SEE HANDOUT # 4 ....................................................................................................................... 28 Inspection of Books and Records .................................................................................................... 28 WHITEBOOK BCL 624 and 1315 ............................................................................................ 28 Saito v. McKesson HBCO, Inc. (2002) pg. 224 .......................................................................... 28 Shareholders Inspection Rights.................................................................................................. 28 Stockholder List in a Dematerialized World (textbook page 232-239) ........................................... 29 Concept Release on the US Proxy System .................................................................................. 29 Reporting under State Law ............................................................................................................. 29 WHITEBOOK BCL 624(e) ......................................................................................................... 29 Overview of the SEC and the Securities Exchange Act ................................................................... 29 Textbook pages 240-242 ............................................................................................................. 29 Statutory Supplement pg. 274-274 ............................................................................................. 29 Periodic Disclosure under the Securities Exchange Act (textbook page 243) ................................ 30

i. Addresses the information deficiencies in state law by imposing periodic reporting requirements on corporations with a security registered under 12. .............................................. 30 VII. a. i. ii. iii. b. i. The Proxy Rules ............................................................................................................................... 30 Securities Exchange Act .................................................................................................................. 30 14(a) pg. 279 of Statutory Supplement.................................................................................. 30 14(c) .......................................................................................................................................... 30 14(a)-1, 14(a)-2, 14(a)-6 --- pg. 293-300 & 303-308 of Statutory Supplement..................... 30 Introduction .................................................................................................................................... 30 Definitions ................................................................................................................................... 30 5

ii. c. i. ii. iii. iv. v. d. i. ii. iii. iv. v. VIII. i. b.

Overview of Proxy Rules ............................................................................................................. 30 Shareholders Access ....................................................................................................................... 32 Securities Exchange Act .............................................................................................................. 32 Dissidents Access Provisions *Rule 14a-7] ................................................................................. 32 Shareholder Proposals Under Rule 14a-8 ................................................................................... 32 Lovenheim v. Iroquois Brands, Ltd., () TWEN Case .................................................................. 33 Rule 14a-11 ................................................................................................................................. 33 Material Misleading Proxies and Rule 14a-9 .................................................................................. 33 Securities Exchange Act Rule 14a-9 pg. 316-317 of Statutory Supplement ............................ 33 J.J. Case Co. v. Borak (1964) pg. 256 ........................................................................................ 33 Cort v. Ash (1975) pg. 256 ......................................................................................................... 33 Mills v. Electric Auto-Lite Co. (1970) pg. 257 ........................................................................... 33 Note on Materiality ..................................................................................................................... 33 Personal Liability in a Corporate Context ....................................................................................... 33 Restatement 3rd of Agency 6.04 [Statutory Supplement pg. 23] ............................................. 33 Pre-incorporation Transactions by Promoters ............................................................................... 33

i. A promoter is a person who transforms an idea into an enterprise by bringing together persons and assets, and overseeing the steps required to bring the enterprise into existence ........ 33 ii. iii. c. i. ii. iii. iv. v. vi. d. i. ii. iii. iv. 6 Liability of the promoter ............................................................................................................. 33 Liability of the Corporation ......................................................................................................... 33 Consequences of Defective Incorporation...................................................................................... 33 Note ............................................................................................................................................ 33 De Jure Corporation .................................................................................................................... 34 De Facto Corporation .................................................................................................................. 34 Estoppel ...................................................................................................................................... 34 Who May be Held Liable ............................................................................................................. 34 McChesney, Doctrinal analysis and Statistical Modeling in law (1993) pg. 281 ...................... 35 Limited Liability and Its Exceptions ................................................................................................. 35 Introductory Note on Limited Liability ........................................................................................ 35 Fletcher v. Atex, Inc. (1995) pg. 283 ........................................................................................ 35 Walkovszky v. Carlton (1966) pg. 289 ...................................................................................... 35 Minton v. Cavaney (1961) pg. 294 ........................................................................................... 35

Corporate Law v. vi. vii. viii. ix. x. e. i. ii. IX. a. i. ii. b. i. ii. iii. c. i. ii. iii. iv. v. d. i. ii. e. i. ii. iii. iv. v.

Fall 2013 Outline

Professor Fishman

Arnold v. Browne (1972) pg. 296 ............................................................................................. 35 Slottow Fidelity Federal Bank v. American Casualty Co. (1993) pg. 297.................................. 35 Radaszewski v. Telecom Corp. (1992) pg. 297 ..................................................................... 35 Berkey v. Third Ave. Ry. Co. (1926) pg. 298 ......................................................................... 36 Note on Variations among States in applying the Piercing The Veil Doctrine ............................ 36 Note on Direct Liability ............................................................................................................... 36 Equitable Subordination of Shareholder Claims ............................................................................. 36 Equitable Subordination ............................................................................................................. 36 Comparison with Piercing ........................................................................................................... 36 The Special Problems of Shareholders in Close Corporations ........................................................ 36 Introduction .................................................................................................................................... 36 Uniform Limited Liability Company Act ...................................................................................... 36 Corporations are divided into three classes ............................................................................... 36 Voting Arrangements at the Shareholder Level.............................................................................. 37 Shareholder Voting Agreements................................................................................................. 37 Voting Trusts ............................................................................................................................... 37 Classified Stock............................................................................................................................ 38 Agreements Controlling Decisions that are within the Boards Discretion .................................... 38 WHITEBOOK BCL 620, 715(b) .................................................................................................... 38 McQuade v. Stoneham (1934) pg. 320 .................................................................................... 38 Clark v. Dodge (1936) pg. 323 .................................................................................................. 38 Galler v. Galler (1964) pg. 324 ................................................................................................. 38 Adler v. Svingos (1981) pg. 331 ................................................................................................ 38 Supermajority Voting and Quorum Requirements at the Shareholder and Board Levels ............. 38 WHITEBOOK BCL 608, 616-617, 705, 708, 709 ......................................................................... 38 Sutton v. Sutton (1994) pg. 332 ............................................................................................... 38 Fiduciary Obligations and Shareholders in Close Corporations ...................................................... 38 Donahue v. Rodd Electrotype Co. (1975)pg. 336 .................................................................... 38 Rosenthal v. Rosenthal (1988) pg. 343 .................................................................................... 39 Wilkes v. Springside Nursing Home, Inc. (1976) pg. 344.......................................................... 39 Zimmerman v. Bogoff (1988) pg. 350 ...................................................................................... 39 Smith v. Atlantic Properties (1981) pg. 350 ............................................................................. 39 7

vi. f. i. ii. g. i. ii. iii. X. a.

Merola v. Exergen Corp. (1996) pg. 352 .................................................................................. 39 Restrictions on the Transferability of the Shares and Mandatory Sale Provisions ......................... 39 FBI Farms, Inc. v. Moore (2003) pg. 355 .................................................................................. 39 Gallagher v. Lambert ()-- TWEN .................................................................................................. 39 Dissolution for Deadlock or Oppression ......................................................................................... 39 WHITEBOOK BCL 1001-02, 1104,1104-a, 1111, 1118 ............................................................... 39 Deadlock...................................................................................................................................... 39 Oppression and Mandatory Buy Out .......................................................................................... 39

Limited Liability Companies ................................................................................................................ 39 Introduction .................................................................................................................................... 39 i. Uniform Limited Liability Company Act 101, 103, 201-203, 301-303, 404, 405, 408-409 [Statutory Supplements pg. 67, 69, 72, 74-77, 79-81 ......................................................................... 39 ii. LLCs are non-corporate entities that are created under statutes that combine elements of corporation and partnership law ........................................................................................................ 39 iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. b. i. c. i. ii. iii. Formalities; Articles of Organization; Powers............................................................................. 39 Operating Agreements................................................................................................................ 40 Management ............................................................................................................................... 40 Voting by Members..................................................................................................................... 40 Authority ................................................................................................................................. 40 Inspection of Books and Records ............................................................................................ 40 Fiduciary Duties........................................................................................................................... 40 Derivative Actions ....................................................................................................................... 40 Distributions ................................................................................................................................ 40 Members Interests ................................................................................................................. 41 Liability .................................................................................................................................... 41 Dissociation ............................................................................................................................. 41

Piercing the LLC Veil ........................................................................................................................ 41 Kaycee Land and Livestock v. Flahive (2002) pg. 400 .............................................................. 41 Fiduciary Duties............................................................................................................................... 41 Salm v. Feldstein (2005) pg. 405 .............................................................................................. 41 Vgs, Inc. v. Castiel (2000) pg. 406............................................................................................. 41 Gatz Props. LLC v. Auriga Capital Corp. () -- TWEN ..................................................................... 41

Corporate Law d. i. XI. i. b. i. ii. iii. iv. c. i. ii. XII. a. i. ii. b. i. ii. c. i. ii. iii. d. i. ii. e. i. ii. iii. iv. v.

Fall 2013 Outline

Professor Fishman

Dissolution ...................................................................................................................................... 41 In the Matter of 1545 Ocean Avenue LLC () -- TWEN ................................................................. 41 The Duty of Care and Duty to Act in Good Faith............................................................................. 41 WHITEBOOK BCL 402(b), 717, 719, 720 .................................................................................... 41 The Duty of Care ............................................................................................................................. 41 The Basic Standard of Care ......................................................................................................... 41 The Business Judgment Rule ....................................................................................................... 41 The Duty to Monitor, Compliance Programs and Internal Controls ........................................... 42 Liability Shields ............................................................................................................................ 42 Duty to Act in Good Faith................................................................................................................ 43 In re the Walt Disney Company Derivative Litigation (2006) pg. 479 ...................................... 43 Stone v. Ritter (2006) pg. 484 .................................................................................................. 43 The Duty of Loyalty ......................................................................................................................... 43 Self Interest Transactions................................................................................................................ 43 Gantler v. Stephen (2009) pg. 486 ........................................................................................... 43 Lewis v. SL & E, Inc. (1980) pg. 496 .......................................................................................... 43 Statutory Approaches ..................................................................................................................... 43 WHITEBOOK BCL 713, 714 ........................................................................................................ 43 Cookies Food Products v. Lakes Warehouse (1988) pg. 513 ................................................... 43 Compensation and the Doctrine of Waste, and the Effect of Shareholder Ratification ................ 43 WHITEBOOK BCL 202(a)(10),(13), 712(a)(3), 714, 720 ....................................................... 43 Compensation ............................................................................................................................. 43 Ryan v. Gifford (2007) pg. 527 ................................................................................................. 43 Corporate Opportunity Doctrine .................................................................................................... 43 Northeast Harbor Golf Club, Inc. v. Harris (1995) pg. 537 ....................................................... 43 In re Ebay, Inc. Shareholders Litigation (2004) pg. 552 ........................................................... 43 Duties of Controlling Shareholders ................................................................................................. 43 WHITEBOOK BCL 903 ................................................................................................................ 43 Zahn v. Transamerica Corporation (1947) pg. 553 .................................................................. 43 Sinclair Oil Corporation v. Levien (1971) pg. 561 .................................................................... 43 Kahn v. Lynch Communication Systems, Inc. (1994) pg. 567 ................................................... 43 In re Trados Inc. Shareholders Litigation (2009) pg. 579 ......................................................... 43 9

f. i. ii. XIII. a. i. ii. b. i. ii. c.

Sale of Control................................................................................................................................. 43 Zetlin v. Hanson Holdings, Inc. (1979) pg. 587 ......................................................................... 43 Perlman v. Feldman (1955) pg. 591 [Contrast with DeBaun v First Western Bank & Trust Co] 43 The Antifraud Provision: Section 10(b) and Rule 10(b)-5 ............................................................... 44 Introduction to Section 10(b) and Rule 10(b)-5 .............................................................................. 44 Securities Exchange Act Statutory Supplement pg. 273 and 290 ............................................ 44 The Wharf Limited v. United International Holdings, Inc. (2001) pg. 609 ............................... 44 Elements of Standing and Scienter ................................................................................................. 44 The purchaser-seller requirement .............................................................................................. 44 in connection with requirement .............................................................................................. 44 Duty to Speak .................................................................................................................................. 44 i............................................................................................................................................................ 44

d. i. XIV. a. i. ii. iii. b. i. ii. iii. iv. v. vi. c. i.

Junction of Breaches of Fiduciary duty and Rule 10(b)-5 ............................................................... 44 Santa Fe Industries, Inc. v. Green (1977) pg. 653 .................................................................... 44 Insider Trading ................................................................................................................................ 44 Common Law Background .............................................................................................................. 44 Majority Rule............................................................................................................................... 44 Special facts................................................................................................................................. 44 Atrophy ....................................................................................................................................... 44 Federal Disclose or Abstain Requirement....................................................................................... 44 Statutory Supplement ................................................................................................................. 44 In the Matter of Cady, Roberts, & Co. (1961) pg. 657 ............................................................. 44 Securities and Exchange Commission v. Texas Gulf Sulphur Co. (1968) pg. 658 ..................... 44 Chiarelly v. United States (1980) pg. 673 ................................................................................. 44 United States v. OHagan (1997) pg. 680 ................................................................................. 44 Dirks v. Securities and Exchange Commission (1983) pg. 693 ................................................. 44 Liability for Short-Swing Trading Under Section 16(b) of the Securities Exchange Act .................. 44 Statutory Supplement ................................................................................................................. 44

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Corporate Law
I.

Fall 2013 Outline

Professor Fishman

Agency Sole Proprietorship a. Introduction i. Firm that is Owned by a single individual and is not cast in a legal form that can be utilized only by filing an organic document with the state under an authorizing statute b. Agency and Authority i. Prcpl/Agnt Relationship 1. The employment by one Person (P) of another (A) to act on Ps behalf implicates the law of agency ii. Prcpl Agency Problems rd 1. Liability of Prcpl to 3 Party for Torts of an Agnt a. Respondeat Superior or Vicarious Liability i. Prcpl will be vicariously liable for torts committed by Agnt if: 1. Prcpl-Agnt relationship exists (ABCs) a. Assent informal agreement between Prcpl and Agnt b. Benefit Agnts conduct must be for Prcpls benefit c. Control Prcpl must have the right to control the Agnt by having the power to supervise the manner of the Agnts performance 2. The tort was committed by the Agnt within the scope of that relationship a. Conduct of the kind Agnt was hired to perform was the conduct within the job description b. Tort occur on the job i. Frolic a new independent journey ii. Detour a mere departure from an assigned task within the scope of agency c. Agnt intent to benefit the Prcpl partial benefit is enough for scope 3. Intentional Torts a. Rule Intentional torts are outside the scope of agency UNLESS i. Specifically authorized ii. Natural from the nature of employment (e.g. bouncers) iii. Motivated by a desire to serve the Prcpl (e.g. employee apprehends shoplifter) rd 2. Liability of Prcpl to 3 Party for Contracts entered by an Agnt a. Prcpl will be vicariously liable for contracts entered into by Agnt if: i. A Prcpl-Agnt relationship exists 1. Note: Requires ABC (see above) ii. The Prcpl authorized the Agnt to enter the contract (4 types) 1. Actual Express Authority a. Written or Oral (conveyance of land must always be written) b. revocable (unless durable power of attorney i.e. a written expression of authority to enter into a contract)

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b.

Actual Implied Authority a. Necessity authority is necessary to accomplish expressed tasks b. Custom customarily performed tasks associated with the title or position c. Prior Dealings prior authorization to do it 3. Apparent Authority rd a. Prcpl cloak + a 3 party relies i. the Prcpl cloaked the Agnt with the appearance of the authority and rd the 3 party reasonably relied on the appearance of the authority ii. Secret Limiting Instruction Agnt has actual authority but Prcpl has secretly limited that authority and Agnt acts beyond the scope of the limitation iii. Lingering Apparent Authority actual authority has been terminated and the Agnt continues rd to act on Prcpls behalf anyway. 3 party continues to rely on Agnts rd apparent authority until the 3 party is notified of the Agnts termination 4. Ratification (knowledge + acceptance of benefits) a. authority can be granted after the contract has been entered into IF: i. Prcpl has knowledge of all material facts regarding the contract AND ii. Prcpl adopts the contract by expressly or impliedly accepting its benefits iii. BUT (NY rule) ratification cannot alter the contract (Prcpl must ratify the entire contract) iii. Note: Authorized Agnt NOT liable UNLESS undisclosed Prcpl Rules of Liability on the Contrac i. General Rules 1. If Agnt has no authority the Prcpl is not liable the Agnt is held liable 2. If Agnt has authority the Prcpl is liable the Agnt is not liable ii. Undisclosed Exception Rule (NY Rule) 1. Generally: if Prcpl is disclosed (existence and identity rd of the Prcpl is known to the 3 party) the Prcpl is liable Agnt is not liable 2. Exception: if Prcpl is partially disclosed (Prcpls existence is known but identity is withheld) or undisclosed (neither identity nor existence is disclosed) both Prcpl and/or Agnt may be liable rd a. 3 party can elect to sue either or both Prcpl and Agnt

2.

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Corporate Law

Fall 2013 Outline

b.

Professor Fishman
NOTE: The type of Prcpl (disclosed, partially disclosed or undisclosed is relevant ONLY when you are considering whether the Agnt is liable, NOT when discussing the Prcpls liability)

c.

Duties which Agnt owe to Prcpls a. Duties i. Duty to exercise reasonable Care ii. Duty to obey reasonable instructions (i.e. not break the law) iii. Duty of loyalty 1. Self-dealing Agnt cannot receive a benefit to the detriment of the Prcpl 2. Usurping the Prcpls opportunity OR 3. Secret profits b. Remedies i. Prcpl may recover losses caused by breach, and may disgorge profits made by the breaching Agnt iii. Morris Oil Co. v. Rainbow Oilfield Trucking Inc. (1987) pg. 2 1. Undisclosed Prcpl is liable notwithstanding an agreement between Prcpl & Agnt that no Prcpl/Agnt relationship existed. Where P contracts with A, Retains complete control over As actions, cant avoid liability w/regard to a 3rd party by contractual terms between P&A. a. Rule: He who controls another is Prcpl; he who is controlled by another is Agnt of the other. Agents Duty of Loyalty i. Agency Costs 1. The Sum of: a. Monitoring expenditures by the principal b. Bonding expenditures by the agent c. Residual loss 2. An agent of a corporation that takes an opportunity to benefit for himself where the corporation should have benefited instead a. Agent must work for one principal, in the interest in the principal and not the interest of oneself ii. Tarnowski v. Resop (1952) pg. 18 1. The agent has a duty of loyalty to the principal, and the principal can recover any unauthorized profits made by the agent on the transaction. [Restatement of Agency 407(2)] It makes no difference that the principal rescinds the transaction and gets his money back, or even that he makes a profit. a. Where the agent violates the duty of loyalty, the principal is entitled to receive the value of what he put into the transaction plus any damages caused as a result of the transaction. [Restatement of Agency 407(1)] b. (P tells A to investigate business opprty. A gets bought off, doesnt bother researching, and gives P bad advice. P sues a for damages and for the amount a receive from 3rd party i. The agent has a duty of loyalty to the principal, and the principal can recover any unauthorized profits made by the agent on the transaction. [Restatement of Agency 407(2)] iii. Statutes, Rules, and Regulations 1. RS Agency 8.01 8.05 [Statute Book pg. 27] a. 8.01: General Fiduciary Principal

3.

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II.

i. An agent has a fiduciary duty to act loyally for the principals benefit in all matters connected with the agency relationship b. 8.02: Material Benefit arising Out of Position i. An agent has a duty not to acquire a material benefit from a third party in connection with transaction conducted or other actions taken on behalf of the principal or otherwise through the 4 use of the agents position c. 8.03: Acting as or on Behalf of an Adverse Party i. An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship d. 8.04: Competition i. Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the prinipal and from taking action on behalf of or otherwise assisting the principals competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship. e. 8.05: Use of Principals Property; Use of Confidential Information i. An Agent has a duty 1. Not to use property of the principal for the agents own purposes or those of a third party; and 2. Not to use or communicate confidential information of the principal for the agents own purposes or those of a third party. iv. Reading v. Attorney General (1951) pg. 21 1. Agent may not sue his agency position for personal profit a. If a servant takes advantage of his position for his own profit, he must account for that profit w/his principal. ( took advantage of his position in the military and of his uniform for the purpose of making a profit for himself.) b. In Class Discussion: Fiduciary relationship key. Principal (P) is entitled to all proceeds from the actions of his agent (A), proper and improper. i. A cannot use own wrongdoing as defense to Ps claim. A loses all profits from his unauthorized/illegal acts. A Primer on Accounting and Finance a. Introduction to Accounting and Financial Statements i. Fundamental Equations 1. Assets = Liabilities + Owners Equity 2. Partnerships a. What Constitutes a General Partnership i. Definition 1. An association of 2 or more persons who are carrying on as co-owners a business for profit ii. Uniform Partnership Act (1914) pg. 30-31 of Statutory Supplement 1. 6 Partnership Defined 2. 7 Rules for Determining the Existence of a Partnership iii. HILCO Property Services v. US (1996) ph. 49 iv. Martin v. Peyton (1927) pg. 49 1. Sharing of profits is considered as an element of a partnership, but not all profit-sharing arrangements cause those participating to be partners; nor is the

III.

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Corporate Law

Fall 2013 Outline

Professor Fishman

b. c.

language saying that no partnership is intended conclusive. The entire agreement will be looked at in making this determination. Notwithstanding the appearance of control over an organization, where all of the features of the agreement between the parties are consistent with a loan agreement, no partnership has been formed. v. Lupien v. Malsbenden (1984) pg. 53 1. s financial interest in a business, combined with his participation in its day -today business made him a partner even if the partners considered themselves creditor and borrower. ( had invested $85,000 in the kit car segment of Yorks business. characterized this investment as a no-interest loan. Much of the loan took the form of day-to-day payments for kits and other parts, equipment, and the salary of at least one employee. Repayments of principal were due on the sale of kits rather than at fixed times. opened the business daily, order parts, and sold business assets.) vi. Formation of Partnerships 1. No formalities required no filing necessary 2. Sharing of Profits parties continue money or services in return for share of the profits, if any, is a prima facie evidence of a general partnership 3. Four Element test a. Four Part test to determine whether or not there is a partnership when there is no express agreement i. An agreement to share profits, ii. an agreement to share losses, iii. a mutual right of control or management of the business, and iv. Community of interest in the venture b. UPC does not require the loss-sharing or the control elements i. Mutual Right of Control and Loss-Sharing are evidence of a partnership but NOT a requirement of one vii. Joint Ventures 1. Note: Joint ventures and partnerships are very similar a. JVs are sometimes subject to partnership rules in court proceedings b. special rules are also sometimes invoked to enable certain procedures in JVs that are not allowed in partnerships Legal Nature of a Partnership [Pg. 58-60 of Textbook] The Ongoing Operation of Partnerships i. Uniform Partnership Act pg. 34-35 of Statutory Supplement 1. 18 Rules Determining Rights and Duties of Partners 2. 19 Partnership Books 3. 20 Duty of Partners to render Information ii. Summers v. Dooley (1971) pg. 60 of Textbook 1. In a two person partnership, one partner cannot, over objection of the other partner, take action that will bind the partnership. Where equal partners exist (i.e., partners have equal rights in conduct of the affairs of the partnership), then differences on business matters must be decided by a majority of the partners. iii. Sanchez v. Saylor (2000) pg. 62 of Textbook iv. Management of Partnerships 1. absent an agreement, the default rule is that each partner is entitled to EQUAL control (doesnt matter how much money they contributed) v. Indemnification and Contribution 1. Each partner is only liable for his share of partnership obligations. a. I.e. if one partner pays off a whole debt, he can collect the other partners share of the debt directly

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d.

e.

f.

2. Obligation to indemnify a partner is a partnership liability 3. Obligation to make contribution is a liability of a partner The Authority of a Partner i. Uniform Partnership Act pg. 31-33 of Statutory Supplement 1. 9 Partner Agent of Partnership as a Partnership Business 2. 10 Conveyance of Real Property of the Partnership 3. 11 Partnership Bound by admission of Partner 4. 12 Partnership Charged with Knowledge of or Notice to partner 5. 13 Partnership Bound by Partners Wrongful Act 6. 14 Partnership Bound by Partners Breach of Trust ii. North Investment Company v. Milford Plaza Association (2001) pg. 66 iii. Actual vs. Apparent Authority 1. Actual a. Each partner is an agent of the partnership for the purpose of its business 2. Apparent a. Acts for carrying on in the ordinary course business of kind carried on by the partnership Liability for Partnership Obligations (to Third Parties) i. Uniform Partnership Act pg. 31-34, 40 in statutory supplement 1. 9 Partner Agent of Partnership as to Partnership Business 2. 13 Partnership Bound by Partners Wrongful Act 3. 14 Partnership Bound by Partners Breach of Trust 4. 15 Nature of Partners Liability 5. 16 Partner by Estoppel rd a. Partnership liability by estoppel one who represents to a 3 party that a partnership exists will be liable as if a partnership exists (fact pattern: Liability formation issue liability by estoppel) 6. 17 Liability of Incoming Partner 7. 36 Effect of Dissolution on Partners Existing Liability ii. Partnership Liability Agency principles applies 1. General Partners are agents of the partnership for carrying on usual partnership business 2. Partnership is bound by torts committed by partners in scope of partnership business 3. Partnership is bound by contracts entered into by partners with actual or apparent authority Partnerships Interest and Partnership Property i. Partnership Property partners right 1. Specific partnership assets no single partner may transfer those assets to another a. E.g. Land, leases, or equipment owned by the partnership 2. Share of profits & surplus partners share of profits Is personal property owned, as personal property, by each individual partner (can be transferred freely) 3. Share in management (i.e. right to vote) owned only by the partnership; thus no individual partner may transfer his share in the management to another (not liquid) a. Absent an Agreement, the default rule is that each partner is entitled to EQUAL control (doesnt matter how much money each partner contributed)

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g.

h.

Conflict between specific partnership assets & personal property depends on whose money was used to buy the property; if partnership money was used, its partnership property, & vice versa The Partners Duty of Loyalty i. Meinhard v. Salmon (1928) pg. 74 of textbook 1. 's fiduciary obligation to his joint venture partner as a joint venture "opportunity"? Joint venture partners have the highest obligation of loyalty to their partners. This includes an obligation not to usurp opportunities that are incidents of the joint venture. The duty is even higher of a managing coadventurer. There was a close nexus between the joint venture and the opportunity that was brought to the manager of the joint venture, since the opportunity was essentially an extension and enlargement of the subject matter of the existing venture. ii. Fiduciary Duties partners are fiduciaries of each other & the partnership: 1. Duty of loyalty a. Partners may never engage in self-dealing b. No usurping partnership opportunities; and c. No secret profits 2. Action for account (NY RULE) the only form of action that can be filed by the partnership against its own partners and between partners a. Partnership may i. Recover losses caused by a partners breach ii. Disgorge profits made by the breaching partner & put those profits into a constructive trust for the partnerships benefit b. Between partners an equitable proceeding whereby liabilities between each partner & the partnership are converted into liabilities between the partners individuals (an action lies to recover the balance due any partner) iii. General Partners are personally liable for debts of partnership 1. Incoming partners liability generally, an incoming partner is NOT liable for prior, pre-existing debts/obligations; except for any contributions to the partnership may be used for any purpose (including satisfying prior debts/obligations) 2. Outgoing Partners liability retains liability on future debts/obligations UNTIL notice of withdrawal has been given to all known, & potential creditors a. But liability for future debt/obligations are terminated upon death of the outgoing partner iv. Nature of Liability 1. Joint & Several Liability (one or more partners may be sued) for torts and breaches of trust 2. Joint Liability (all partners must be sued) for all other debts and obligations v. Extent of Liability 1. Each partner is personally and individually liable for entire amount of partnership debts & obligations, and for partnership vi. Partnership Liability by Estoppel rd 1. One who represents to a 3 party that a partnership exists will be liable as if a partnership exists a. I.e. Fact Pattern Liability formation issue liability by estoppel Side Notes on partnerships i. Salary 1. Absent an agreement, partners get NO salary (doesnt matter how many hour s they work)

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EXCEPTION: Partners get compensation for helping wind up the partnership Business ii. Partners share of profits and Losses 1. Absent an agreement a. Profits are shared equally b. Losses are shared like profits Dissolution i. Dissolution (in general) 1. Definitions a. Dissolution ANY material change in the partnership, including by i. Withdrawal ii. Death of any single partner b. Winding Up The period between dissolution & termination in which the remaining partners liquidate the partnerships assets to satisfy th e partnerships creditors c. Termination the real end 2. Notice of dissolution a. Proper notice to terminate the apparent authority of partners to bind the partnership after dissolution (personal notice and/or publication notice) rd b. Failure to notice binds partners personally to 3 parties who, while unaware of the dissolution, extended credit to the partnership 3. Compensation and Liability for Winding Up a. Compensation partners who help wind-up receive compensation (exception to compensation rules) b. Partnerships liability for winding up i. Old business partnership/partners retain liability on all transactions entered into wind up partnership ii. New Business partnership/partners retains liability on all transactions UNTIL notice of dissolution is given to all known & potential creditors 4. Priority of distribution a. Each level must be fully satisfied before beginning the next level in this order: i. Outside creditors Any creditors other than a partner (i.e. trade creditors) must be paid first ii. Inside creditors partners who have loaned money to the partnership must be fully repaid iii. Capital contributions by partners partnership owes the full repayment of capital to its partners iv. Profits & Surplus if any, absent an agreement, partners paid equally b. RULE: each partners must be repaid his/her i. Loans AND capital contributions PLUS either that partners share of the profits or MINUS that parters share of the losses 1. Example One (w/ surplus) liquidated assets $1M to distribute; if partnership owes 600k to trade creditors, partnership loaned 100k from A and B made capital contributions of 200k? a. Outside creditors must be paid full 600k b. A is an inside creditor and should be paid 100k

a.

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c.

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2.

B must be repaid the 200k he contributed to capital d. Absent an agreement surplus of 100k is then split between A & B equally Example Two (w/ loss) Liquidated asset of $700k to distribute; if partnership owes 600k, to trade creditors, partnership loaned 100k from A, and B made capital contributions from 200k? a. Outside creditors must be paid full 600k b. A is an inside creditor and should be paid 100k c. Partnership still owes capital contributions of 200k to B d. Each partner owes back 100k (200k/2) so that the partnership can repay B

ii. By Rightful Election 1. Uniform Partnership Act Sections a. 29: Dissolution Defined b. 30: Partnership not Terminated by Dissolution c. 31(a): Causes of Dissolution (w/o violation of an agreement) d. 38(1): Rights of Partners to Application of Partnership Property e. 40: Rules for Distribution 2. Girard Bank v. Haley (1975) - pg. 79 termination of partnerships/at-will Nature of Partnerships a. If a partnership agreement does not specify that the partnership will be for a particular term, an at-will dissolution of the partnership does not violate that agreement. b. Furthermore, a partners expression of her intention to dissolve the partnership effects a dissolution even if it is in contravention of the partnership agreement. If the dissolution does in fact breach the agreement, the aggrieved partners may seek damages and, in some circumstances, may continue the partnerships business for the remainder of the agreed-upon term 3. Disotell v. Stiltner (2004) pg. 79 4. McCormick v. Brevig (2004) pg. 80 5. Page v. Page (1961) pg. 85 Partnership for a term or at will? a. Where there is no agreement to continue a partnership for a specified term, the relationship is at will and can be terminated notwithstanding the fact that the business has only recently become profitable, as long as the termination is in good faith. b. D testified that there were no understandings about continuation for a term, or until money was paid back, and that another partnership that P and D were in expressly provided for a term. Some cases do hold that the partnership shall continue for a term necessary to repay debt, but only where there is evidence showing this intention. If P is acting in bad faith in seeking dissolution, then he may be violating his fiduciary duty as a partner. Dissolution must be in good faith. State law provides for damages in that case. A separate action could determine this issue. But a partner at will is not bound to remain in a partnership just because it is profitable. 6. Partnership Breakup under RUPA (more complex than the UPA) a. Nomenclature to begin with nomenclature, RUPA continues to use the terms Dissolution, winding up, and termination but adds in

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j.

the term of Dissociation to describe the termination of a persons status as a partner b. Events of Dissociation pg. 89 and 90 in text iii. By Judicial Decree and Wrongful Dissolution 1. UPA Sections a. 31(2): Causes of Dissolution (breaking a contract between partners) b. 32: Dissolution by Decree of Court c. 38(2): Rights of Partners to Application of Partnership Property (when an agreement has been broken) 2. Drashner v. Sorenson (1954) pg. 92 a. Where a partner neglects the business and makes it reasonably impracticable to carry on the business as partners [See UPA 38(2)] A court may terminate the partnership. b. State law allows the court, as a penalty for wrongfully causing dissolution of the partnership, to refuse to consider goodwill in valuing the business, although most of the original value of $7,500 paid for the business was for goodwill. 3. Note on Wrongful Dissolution (pg. 96 of Text) a. Drashner v. Sorenson illustrates the consequences of a wrongful dissolution (damages against the partner, valuation of a partner [minus goodwill], and continuation of a partnership w/o a partner) Limited Partnerships and Limited Liability Partnerships i. Limited Partnerships 1. General vs. Limited a. General Partners liable for all debt/obligations i. But, may exercise substantial control b. Limited Partners not liable beyond contribution i. But limited control, must pay full consideration 2. Formation of Limited Partners a. WHITEBOOK pg. 786-787 & 789-790 i. 303 ii. 403 3. Liability of Limited partners a. Gateway Potato Sales v. G.B. Investment Co. (1991) pg. 98 4. Fiduciary Obligations a. Gotham Partners v. Hallwood (2002) pg. 108 ii. Limited Liability Partnerships 1. Defined a. Members of LLC, who are owners, are NOT liable for all debt/obligations 2. 3.02 Limited Tort Liability in LLPs a. Negligence or other misconduct by a co-partner or other agent/employee of the firm not liable under Delaware 3. 3.03 Limited Liability for All Types of Claims a. Liability is limited for all partnership debts and obligation b. A partner is not personally liable, directly or indirectly, for partnership obligations --- eliminate vicarious liability for all types of claims while preserving partners liability for their own misconduct 4. 3.04 Partners Direct Liability a. Does not relieve owners from liability for their own misconduct i. Limited liability only means that owners are not, solely as owners, vicariously liable for the firms debts

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The Foundations of a Corporation a. The Characteristics of the Corporation i. Limited Liability 1. Shareholders are (normally) not personally liable for corporate obligations 2. Managers are also not personally liable AS LONG AS they act on the corporations behalf, within their authority ii. Free Transferability of Ownership Interests 1. Publicly held corporations Shares of stock are usually freely transferrable 2. Partnership interests cannot be transferred without the consent of ALL the partners unless otherwise agreed iii. Continuity of Existence 1. Corporations Usually continuous, unless a shorter term is specified in the certificate of incorporation 2. Partnerships usually limited terms, and are easily dissolved iv. Centralized Management 1. Publicly held corporations power to manage the business is legally vested in the board of directors (in practice, it is normally exercised by the corporations executives [i.e. CEOs, CFO, etc.] 2. Partnerships all partners have a right to participate in the conduct of the business unless its previously agreed otherwise v. Entity Status 1. Corporation it is a legal person or entity can exercise power and have rights in its own name [i.e. it can sue & be sued, can own real & personal property] 2. Partnership a. States that follow the Uniform Partnership Act are NOT deemed to have entity status b. States that follow the Revised UPA ARE deemed to have entity status b. Architecture of Corporate Law i. Traditional Conflicts 1. Typically involve self-interested transactions between managers and their corporations ii. Positional Conflicts 1. Involve actions by managers to maintain and enhance their positions iii. Four Major Modules 1. State Statutory Law a. Allows corporations to be organized b. Provides corporations with various endowments c. Facilitates corporate transactions 2. Judge-Made Law a. Set the level of care required of officers and directors b. Regulates traditional conflicts of interest c. Gives content to remedial structures to protection shareholders rights and resolve shareholder claims 3. Federal Law (i.e. Securities Acts and Sarbanes Oxley) a. Regulations certain traditional conflicts directly through rules on insider trading and regulations positional conflicts of interest indirectly through rules that govern the proxy voting systems and through regulation of the flow of information concerning managements performance 4. Private Ordering *soft law+ stock exchange rules for listed companies

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c.

d.

e.

Regulate positional conflicts directly, by requiring an independent board and committees to monitor the corporations executive iv. Which States Law Governs a Corporations Internal Affairs 1. A corporations internal affairs may be governed by four different legal modules, often state law will be the most important 2. Normal Rule the law of the states incorporation will govern the corporations internal affairs a. HOWEVER some states [i.e. NY and California] have adopted provisions in their corporate statues under which designated sections of the statues are applicable to the internal affairs of certain corporations incorporated in another state Selecting State of Incorporation [textbook pages 122-128] i. A corporation that will have only a few owners will usually be incorporated locally (i.e. in the state that the corporation will have its principal place of business) ii. States may impose a franchise tax on the corporation for the privilege of incorporation, even if the corporation does little or no business in the states 1. Elements of the doing-business tax and franchise tax may overlap iii. Publicly held corporations different things are considered, 1. See handout To Delaware with Love Organizing the Corporation i. WHITEBOOK Business Corporate Law Statutes [BSC] 1. 201: Corporate Purposes and Powers 2. Article 4 Formation of Corporations a. 401: Incorporators b. 402: Certificate of Incorporation; Contents c. 403: Certificate of Incorporation; Effect d. 404: Organization Meeting 3. Article 6 - Shareholders a. 601: By-laws b. 615(c): Written Consent of shareholders, subscribers or incorporators without a meeting [Notice] The Basic Types of Financial Securities [textbook pages 131-135] i. Brief Explanation [pg. 131-133 1. Common Stock a. Shares of common stock are conceived as ownership or equity interests in the corporation i. Has no fixed claim on the corporation 2. Preferred Stock a. A hybrid that combines the ownership element of common stock and the senior nature of debt i. Does not promise a repayment of the original investment 3. Convertibles, Classified Stock, and Derivatives a. Preferred stock and bonds can sometimes be converted into common stock b. Different classes of stock have their own rights and privileges c. New types of securities can be derived from common stock ii. Introduction to Types of Debt and Debt Covenants 1. Defined a. Debt a fixed claim against the corporation for principal and interest 2. Major Types of Corporate Debt a. Trade Debt i. Amount that a corporation owes for purchased goods or services that have not yet been paid for at any point of time.

a.

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f.

g.

1. It appears on the balance sheet as accounts payable Bank Debt i. Any loans that were used for finance the business 1. It appears on the balance sheet under loans payable c. Bonds and Debentures i. Promises, embodied in an instrument, to repay amounts that the firm has borrowed on a long-term basis, typically by selling the bonds on the general market or on some special market d. Notes i. Legally recognized the same as bonds/debentures ii. Typically notes are ten years or less where debentures are ten years or more The Classical Ultra Vires Doctrine [Textbook page 151-154] i. Classical Ultra Vires Doctrine 1. Corporation is regarded as a fictitious person endowed with life and capacity only insofar as provided in its charter. Transactions outside that sphere are characterized by the courts as Ultra Vires (beyond the corporations powers and therefore unenforceable) a. Original purpose is to protect the public or the state from unsanctioned corporate activity ii. Powers and Purposes 1. Questions of Ultra Vires Doctrine merged to create the powers and purposes clause of a corporations certificate a. Whether the corporation acted beyond its purposes (engaged in a type of business activity not permitted under its certificate) b. Whether the corporation had exercised a power not specified in its certificate iii. Recurring Problems 1. The power of a corporation to guarantee a third partys debts a. Used to be an issue but Present Day statutes address this problem by explicitly empowering corporations to make guarantees iv. Limitations on the Ultra Vires Doctrine 1. Implied or incidental powers based on the corporations primary business 2. Cannot be used to reverse completed transactions or as a defense to tort and/or criminal liability 3. If the corporation doesnt carry out its side of the contract after another party has already completed their portion, performing party sues for nonperformance a. Majority rule nonperforming party I estopped from using the Ultra Vires defense b. Minority rule (federal rule) -- performing party can recover in restitution for the value of any benefit conferred 4. Unanimous shareholder approval barred the ultra vires defense unless creditors would be injured 5. Laundry list of power are conferred on every corporation even without enumeration in the certificate by allowing any lawful business 6. Modern statutes adopted provisions that almost abolish the ultra vires doctrine. Similar statutes have been adopted in all but a few states The Objective and Conduct of the Corporation i. WHITEBOOK Business Corp. Law [BSC] 1. 202(a)(12): General Powers b.

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V.

To make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof. 2. 717: Duty of Directors ii. ALI Principles of Corporate Governance SEE HANDOUT #2 1. 2.01: The Objective and Conduct of the Corporation 2. 6.02: Action of Directors that has the Foreseeable effect of Blocking Unsolicited Tender Offers iii. Interests Other than Maximzation of Shareholders Wealth 1. Dodge v. Ford Motor Co. (1919) pg. 156 2. A.P. Smith Mfg. Co. v. Barlow (1953) pg. 158 3. Note on the Conduct of the Corporation a. Almost every state has adopted statutory provisions similar to Delawares corporate contribution statute. A Limit of reasonableness is implied i. Donations should be reasonable in amount in the light of the corporations financial condition *textbook page 163+ b. There is very little direct authority on the permissibility of taking ethical considerations into account in framing corporate action where doing so might not enhance profits. The Legal Structure of the Publicly Held Corporation i. The power and the roles of the Board, the Shareholders, and the Executives in the governance of publicly held corporations b. Legal Distribution of Power Between the Board and the Shareholders, and Equitable Limits on the Boards Legal Power i. WHITEBOOK Business Corp. Law [BSC] 1. 601: The By-Laws 2. 602(b): Meetings of Shareholders a. Held annually for the election of directors 3. 701: Board of Directors 4. 702: Number of Directors 5. 703: Election and Term of the Directors 6. 704: Classification of Directors 7. 705:Newly Created Directorship and Vacancies 8. 706: Removal of Directors 9. 712: Executive Committee and Other Committees 10. 715: Officers 11. 716: Removal of Officers 12. 801: Right to Amend Certificate of Incorporation 13. 803: Authorization of Amendment or change 14. 804: Class Voting on Amendment 15. 903: Authorization by Shareholders 16. 909: Sale, Lease, Exchange or Other Disposition of Assets ii. The Legal Distribution of Power Between the Board and the Shareholders 1. Charlestown Boot & Shoe Co. v. Dunsmore (1880) pg. 168 2. People ex Rel. Manice v. Powell (1911) pg. 169 c. Requisites for Valid Action by the Board i. WHITEBOOK Business Corp. Law [BSC] 1. 707: Quorum of Directors 2. 708: Action by the Board 3. 709: Greater Requirement as to Quorum and Vote of Directors 4. 710: Place and Time of Meetings of the Board

a.

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d.

5. 711: Notice of Meetings of the Board 6. 712: Executive Committee and Other Committees ii. Fogel v. U.S. Energy Systems (2007) SEE HANDOUT # 3 iii. Rules are set at 2 levels. first to set out formalities for board action and second are concerning the consequences for noncompliance with the first level rules 1. Level One -- Governing rules a. Meetings b. Notice c. Quorum d. Voting 2. Level Two Consequences of Noncompliance a. Unanimous Explicit Although Informal Approval b. Explicit Approval by a Majority of the Directors Coupled with Acquiescence by Remaining Directors c. Majority Approval or Acquiescence d. Unanimous Written Consent Normal Requisites for Valid Shareholder Action i. WHITEBOOK Business Corp. Law [BSC] 1. 602: Meetings of Shareholders 2. 603: Special Meeting for Election of Directors 3. 604: Fixing Record Date 4. 605: Notice of Meetings of Shareholders 5. 606: Waivers of Notice 6. 607: List of Shareholders at Meetings 7. 608: Quorum of Shareholders 8. 609: Proxies 9. 612: Qualification Voters 10. 613: Limitations on Right to Vote 11. 614: Vote of Shareholders 12. 615: Written Consent of Shareholders, Subscribers, or Incorporators without a Meeting 13. 616: Greater Requirement as to quorum and Vote of Shareholders 14. 617: Voting by Class or Classes of Shares ii. Notice of Meeting: 1. Normally take action at annual or special meeting, but can also act with written consent (if certain conditions are met) iii. Quorum 1. A majority of the shares entitled to vote is necessary for a quorum unless the certificate of incorporation sets a higher/lower figure. a. Most statutes have a minimum requirement of one-third of shares entitled to vote to set a quorum iv. Voting 1. Ordinary Matters a. Most statutes require that a majority of the shareholders agree for shareholder action on ordinary matters 2. Fundamental Changes a. An amendment of the certificate of incorporation, merger, sale of substantially all assets, and dissolution, often require approval by a rd majority, or sometimes 2/3 s vote 3. Written Consent [textbook page 141] a. Most statutes allow that shareholders can act by written consent, without a meetings, if certain conditions are met i. Conditions vary from state to state

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I.e. --- The model code requires a majority vote as long articles of incorporation may allow it Corporate Governance and the Rise of Institutional Shareholders i. Shareholder Voting 1. WHITEBOOK Business Corp. Law [BSC] a. 618: Cumulative Voting b. 704: Classification of Directors c. 706(c): Removal of Directors with or without cause 2. Empty Voting and Record Date(s) a. Record Date on or around the date that notice of the meeting was given in order to determine which shareholders are entitled to vote at the meetings i. Only record shareholders on the record date are entitled to vote at that particular meeting 1. Used to prevent discrepancies when record holders change after notice has already been given meaning the new holder would not have received proper notice this would prevent them from voting bc they missed the record date and prevent people from giving empty votes (i.e. votes from the old holders that no longer matter) ii. Financial Institutions and Their Advisors 1. Note on the role of shareholders under modern corporate practice a. {self-study section see text pages 194-204} Election of Directors i. WHITEBOOK Business Corp. Law [BSC] 1. 614(a): Vote of Shareholders a. Directors shall be elected by plurality of the votes (unless stated otherwise) 2. 618: Cumulative Voting 3. 703: Election and term of Directors 4. 704: Classifications of Directors ii. Staggered (or classified) Boards 1. A board that is divided into two or more classes, each of which is elected separately for staggered terms a. I.e. staggered board has 3 classes, with 3 directors in each class, and all nine board members would serve 3 year terms. Each year only 3 of the 9 members would be up for election iii. Straight and Cumulative Voting 1. Straight Voting: one vote per number of shares that she holds a. Example: A owned 100 Shares of X. Xs board is made up of 7 directors and all directors are up for election and there are 2 competing slates of seven candidates i. Under straight voting, A can cast a total of 700 votes (7 directors *100 shares) but no more than 100 votes to any given nominee 2. Cumulative Voting: a shareholder can distribute the votes any way she pleases a. Example: A has 700 votes available. A can cast 350 votes each to her two candidates iv. Plurality Voting 1. The most votes

1.

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g.

h.

v. Short Slates 1. A slate of candidates for less than all, and usually less than a majority, of the directors to be elected Removal of Directors BCL 705-706 i. Removal by the Shareholders 1. Shareholders can remove a director for cause even in the absence of a statute that so provides 2. Shareholders CANNOT remove a director without cause in the absence of specific authority to do so under the statute, the certificate of incorporation, or the by-laws ii. Removal by the Board 1. In the absence of a statute, the board cannot remove a direct either with or without cause a. It is unsure whether or not the certificate of incorporation can change this b. Some states allow boards to remove a board member for specific reasons (i.e. convictions of a felony) iii. Removal by a Court 1. Cases are divided on whether courts can remove a director with or without cause a. Some statutes allow courts to remove board members for specific reasons i.e. fraudulent or dishonest acts i. This normally requires a petition requesting the removal by a designated percentage of the shareholders (normally 10%) Requisites for Valid Action by Corporate Officers BCL 715 & 716 i. Corporate Officers 1. President a. Modern rule is that the president has apparent authority to bind the corporation to contracts that are made in the usual and regular course of business, but does not have apparent authority to bind the corporation to contracts of an extraordinary nature 2. Chief Executive Officer a. Top officer, usually also holds the title of chairman of the board, president or both 3. Chief Operating Officer a. Usually second in command of publicly held corporations i. Little to no law on apparent authority of a COO. Question as to whether apparent authority of a president applies to COOs too 4. Chairman of the Board a. Job varies from corporation to corporation b. No case law on apparent authority 5. Chief Financial Officer a. Usually the number 3 executive b. Corporate finance and typically managing risks and expenses 6. Vice-President a. Not much case law on apparent authority of vice presidents b. Normally a fancy title without added specialties 7. Secretary a. Has apparent authority to certify the records of the corporation, including resolutions of the board 8. Treasurer a. Almost no apparent authority

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Closely Held Corporations a. President exercises absolute authority over the corporations affairs and the board has never questioned, altered, or rejected his decisions, the president will have extremely wide actual and apparent authority. 10. Ratification a. If an officer lacks both actual and apparent authority the corporation may be bound by her act of entering into a transaction on the corporations behalf if the board later ratifies the officers act. 11. Schoonejongen v. Curtiss Wright Corp. (1998) pg. 151 i. Equitable Limits on the Boards Legal Powers i. WHITE BOOK BCL 707-708 ii. Condec Corp. v. Lunkenheimer Co. (1967) pg. 170 iii. Schnell v. Chris-Craft Industries, Inc. (1971) pg. 171 iv. Blasius Industries, Inc. v. Atlas Corp. (1988) pg. 173 v. Business Judgment Rule 1. Officers, directors, managers, and other agents of a corporation are immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in Good Faith. j. The Role of the Bylaws in the Allocation of Power between the Board and the Shareholders i. WHITEBOOK BCL 601 ii. CA, Inc. v. AFSCME Employees Pension Plan (2008) pg. 184 k. Allocation of Power between the Board and the CEO i. WHITEBOOK BCL 715-716 ii. Managing Model of the Board 1. Traditional model a. The board manages the business of the corporation 2. Modern Model a. The executives manage the business b. Central figure is NOT the board but the CEO iii. Monitoring Model of the Board 1. The function of the board in publicly held corporations are to a. select, regularly evaluate, fix the compensation of, and where appropriate, replace the senior executives; b. to monitor the conduct of the corporations business to evaluate whether the business is being properly managed; and c. approve major corporate plans and policies formulated by the corporations executives 2. This model is widely accepted in publicly held corporations and is being used in most corporations Shareholder Informational Rights and Proxy Voting a. Shareholder Information Rights Under State Law i. SEE HANDOUT # 4 b. Inspection of Books and Records i. WHITEBOOK BCL 624 and 1315 ii. Saito v. McKesson HBCO, Inc. (2002) pg. 224 iii. Shareholders Inspection Rights 1. No fishing The credible Basis Requirement a. Credible basis can be shown through documents, logic, testimony or otherwise that there is a legitimate wrongdoing 2. Common Law Interpretation of the Statutes a. A shareholder acting in good faith for the purpose of advancing the interests of the corporation and protecting his own interest as a

9.

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c.

d.

e.

stockholder has a right to examine the corporate books and records at reasonable times i. Shareholder has the burden of alleging and proving good faith and proper purpose 3. Proper Purpose a. Courts have deemed the following proper i. To determine the financial condition of the corporation ii. To ascertain the value of the petitioners shares iii. To obtain a mailing list for the solicitation of proxies from shareholders b. A purpose is proper even though it yields no benefit to the corporation c. Deemed improper i. To seek access to gain information that will be used in a competing enterprise 4. Mixed Purposes a. Multiple purposes that are either proper or not proper i. Once it is determined that a shareholder has a proper primary purpose, any secondary purpose or ulterior motive that the stockholder might have is irrelevant 5. Pillsbury v. Honeywell (1971) pg. 231 6. Stockholder Lists a. As a practical matter, the courts are more willing to grant access to stockholder lists and the like than to grant access to otherwise confidential financial and business information (i.e. internal data and contracts) Stockholder List in a Dematerialized World (textbook page 232-239) i. Concept Release on the US Proxy System 1. The current Proxy Distribution and Voting Process a. Types of Share Ownership and Voting Rights i. Registered Owners ii. Beneficial Owners b. The Process of Soliciting Proxies i. Distributing Proxy Materials to registered Owners ii. Distributing Proxy Materials to Beneficial Owners 1. The Depository Trust Company 2. Securities Intermediaries: Broker-Dealers and Banks c. Proxy Voting Process d. The Roles of Third Parties in the Proxy Process i. Transfer agents ii. Proxy Service Providers iii. Proxy Solicitors iv. Vote Tabulators v. Proxy Advisory Firms Reporting under State Law i. WHITEBOOK BCL 624(e) 1. Books and Records; right of inspection, prima facie evidence a. Upon written request by the shareholder, the corporation will send the records within reasonable time Overview of the SEC and the Securities Exchange Act i. Textbook pages 240-242 ii. Statutory Supplement pg. 274-274 1. Securities Exchange Act a. Section 12: Registration Requirement for Securities

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VII.

i. 12(a), (b), and (g) Periodic Disclosure under the Securities Exchange Act (textbook page 243) i. Addresses the information deficiencies in state law by imposing periodic reporting requirements on corporations with a security registered under 12. 1. 10-K Annually 2. 10-Q Quarterly The Proxy Rules a. Securities Exchange Act i. 14(a) pg. 279 of Statutory Supplement ii. 14(c) 1. Governs disclosure during proxy contests, when various parties might solicit an investor's vote on a corporate action or to vote for certain board members. The Exchange Act requires that disclosure materials be filed with the SEC. iii. 14(a)-1, 14(a)-2, 14(a)-6 --- pg. 293-300 & 303-308 of Statutory Supplement b. Introduction i. Definitions 1. Proxy Bolder: A person authorized to vote shares on a shareholders behalf 2. Proxy/Form of Proxy/Proxy Form: the written instrument in which such a authorization is embodied 3. Proxy Solicitation: the process by which shareholders are asked to give their proxies 4. Proxy Statement: a written statement sent to shareholders as a means of proxy solicitation 5. Proxy Materials: the proxy statement and form of proxy ii. Overview of Proxy Rules 1. Background: a. Proxy voting is the dominant mode of shareholder decision making in publicly held corporations. i. Shareholders are often geographically dispersed making it difficult for them to all meet up at one central location. ii. Shareholders typically only have a few shares in comparison to the total number availablephysical attendance of every shareholder would be a waste of their time, money , and energy b. Proxy Solicitation is The process of systematically contacting shareholders and urging them to execute and return proxy forms that authorize named proxy holders to cast the shareholders vote, either in a manner designated in the proxy form or according to the proxy holders discretion c. After fraudulent solicitations became notorious and widespread, Congress enacted 14(a) of the Securities and Exchange Act i. 14 has no effect on private conduct its only effect was to authorize the SEC to promulgate rules that will govern private conduct that are now referred to as Proxy Rules. 2. Format Requirements a. One of the purposes of Proxy Rules is to regulate the form or presentation the ballot (proxy) itself. i. The proxys format is addressed in Rules 14a -4 and 14a-5 which require that the proxy 1. be in bold face type, 2. identified as a proxy, f.

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Corporate Law

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3.

Professor Fishman

3.

4.

5.

6.

that there be a box for the proxy giver t express approval, disapproval, or abstention with respect to EACH matter to be voted upon 4. that the proxy giver to withhold approval for voting for a nominee 5. that any request for discretionary authority to vote may be sought only with respect to matters the solicitor did not have notice of at least 45 days before the date the proxy materials were sent in the prior years annual meeting 6. all written materials be at least 10-point roman type b. Rule 14-4(d) short slate provision [pg. 245 of text] i. Facilitates efforts to oppose managements dominance of the election of directors Anti-bullying a. Requires separate voting on matters that are not related in order to prevent shareholders from being bullied into a vote i. Prior to anti-bullying clause, in order to obtain approval of an unpopular matter it would be included within a more popular proposal can NO longer do this ii. Note: Management can continue to condition separately voted on proposals so that neither becomes effective without the approval of the other Mandated Disclosure a. Another purpose of the proxy rules is to require full disclosure in connection with transactions that shareholders are being asked to approve (such as mergers, certificate amendments, or election of directors) i. Rule 14(a)-3 provides that no solicitation of proxies that is subject to the proxy rules shall be made unless the person being solicited is concurrently furnished or has previously been furnished with a written proxy statement containing the information specified in Schedule 14A 1. Schedule 14A details the information that must be furnished when specified types of transactions are to be acted upon by the shareholder b. When proxies for the election of directors are solicited on behalf of a corporation that is subject to the Proxy Rules, the corporation must send an Annual Report to its shareholders (in advance or concurrently with the proxy statement) c. If a corporations stock is registered under section 12, and the corporation proposes to take an action that requires shareholder approval, or to hold an annual meeting at which directors are to be elected, then even if the corporation is not soliciting proxies it must distribute essentially the same information that would be required if it was soliciting proxies Filing with SEC a. Rule 14a-6 governs that filing of proxy materials with the SEC. In broad overview, the preliminary proxy statement and the ballot (form of proxy) must be filed with the EC 10 days before the definitive copies of these materials are expected to be sent or given to shareholders Coverage

31

c.

Rule 14a-2 provides that the proxy rules apply to every solicitation of a proxy with respect to securities registered pursuant to section 12 of the act subject to certain exceptions i. Exceptions 1. Rule 14a-1(l)(2) lists several acts that are excluded a. I.e. authorizes instances in which it does not constitute a solicitation for the security holder to announce his intent to vote in a certain manner 2. Rule 14a-2(b)(2) excludes from most proxy requirements a security holders communication directed to ten or fewer persons a. Doesnt apply to the anti-misrepresentation rule of 14a-9 3. Rule 14a-2(b)(1) excludes from most of the proxy rules communications by a person who is not seeking a proxy authority a. Doesnt apply to anti-fraud rule 7. Access to the Body of Shareholders a. Rule 14a-7 and Rule 14a-8 provide mechanisms through which shareholders can communicate with each other Shareholders Access i. Securities Exchange Act 1. Rules 14a-8 pg. 311-316 of Statutory Supplement ii. Dissidents Access Provisions *Rule 14a-7] 1. Provides a means for a shareholder who wishes to solicit proxies to gain access to her fellow stockholders. a. This provision requires that the company shall in response to a request by a record or beneficial holder either provide a list of stockholder or circulate the requesting holders materials i. This rule ONLY applies if the company has or intents itself to engage in a proxy solicitation and the company has the option of either providing the list or mailing the requesting security holders materials iii. Shareholder Proposals Under Rule 14a-8 1. The rule permits a shareholder initiated proposal to be included on managements proxy statement, provided the proposing shareholder has been a beneficial owner of one percent or $2000 of the companys voting shares for at least one year 2. Rule also sets grounds to exclude the proposal a. The proposal is not a proper subject for shareholder action under law b. The proposal relates to operations which account for less than 5% of the firms total assets, net earnings and sales c. The proposal deals with a matter relating to the companys ordinary business 3. In order for the company to exclude the proposal, it must submit a statement of the reasons why to the SEC staff. a. If the SEC agrees, they send a no action letter a letter stating that if the shareholder proposal is omitted, no action will be taken by the SEC b. If the SEC disagrees, the letter briefly states its disagreement with the issuers opinion that the proposal can be omitted i. It is still called a no action letter when the SEC disagrees even though the SEC is likely to lead to an SEC enforcement action

a.

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VIII.

iv. Lovenheim v. Iroquois Brands, Ltd., () TWEN Case v. Rule 14a-11 1. Provides shareholders and shareholder groups who collectively have held investment and voting power of at least 3% of the voting power of a companys securities continuously for 3 years the right to have nominees on the companys ballot. The right extends to a maximum of 25% of the entire board (or a minimum of one director) d. Material Misleading Proxies and Rule 14a-9 i. Securities Exchange Act Rule 14a-9 pg. 316-317 of Statutory Supplement ii. J.J. Case Co. v. Borak (1964) pg. 256 iii. Cort v. Ash (1975) pg. 256 iv. Mills v. Electric Auto-Lite Co. (1970) pg. 257 1. Note on Further Proceedings in Mills v. Electric Auto a. v. Note on Materiality 1. TSC Industries Inc. v. Northway, Inc. (1976) pg. 262 Personal Liability in a Corporate Context rd i. Restatement 3 of Agency 6.04 [Statutory Supplement pg. 23] b. Pre-incorporation Transactions by Promoters i. A promoter is a person who transforms an idea into an enterprise by bringing together persons and assets, and overseeing the steps required to bring the enterprise into existence 1. Normally enters into pre-incorporation contracts for the benefit of a corporation that has not yet been formed. ii. Liability of the promoter 1. The general rule is that when a promoter makes a contract for the benefit of a proposed corporation, the promoter is personally liable on the contract, and remains liable even after the corporation is formed. a. Exception if the party who contracted with the promoter knew that the corporation was not in existence at the time o the contract and nevertheless agreed to look solely to the corporation for performance i. In such cases, the promoter is NOT a party to the contract 2. Goodman v. Darden, Doman & Stafford Assocs. (1983) pg. 275 iii. Liability of the Corporation 1. A corporation that is formed after a promoter has been entered into a contract on its behalf is not bound by the contract, without more a. The corporation was not in existence when the contract was made and therefore did not authorize the promoter to enter into the contract on its behalf b. HOWEVER after the corporation has been formed it may become bound in one of several ways i. Ratification ii. Adoption iii. Novation iv. Proposition made t the promoters is a continuing offer to be accepted or rejected by the corporation when it comes into being and upon acceptance becomes an original contract c. Consequences of Defective Incorporation i. Note 1. Sometimes there is a defect in the process of forming a corporation a. Example: the certificate of incorporation may fail to include a required provision in proper form or may be improperly filed 2. Issue is what is the effect on the defect on the corporations status

33

ii.

iii.

iv.

v.

Usually means the corporation is put in terms of De Jure, De Facto, Estoppel, or not at all. b. This becomes an issue when a third party seeks to hold the would-be shareholders personally liable on the ground that corporate status was not attained and therefore neither was limited liability De Jure Corporation 1. A corporation that is organized in compliance with the requirements of the relevant statute (substantial compliance is normally enough too) a. Status cannot be attacked either by private parties or by the state in a quo warranto proceeding De Facto Corporation 1. Is said to exist when the steps taken to incorporate the enterprise were insufficient to result in a de jure corporation with respect to a challenge by the state in a quo warranto proceeding, but were sufficient to treat the enterprise as a corporation with respect to third parties Estoppel 1. Overview a. In many cases where courts have found that the corporation does not fall under de jure or de facto, the courts have held that a third party who has dealt with an enterprise on the basis that it is a corporation is estopped from denying the enterprises corporate status, as are the corporation and its shareholders b. Estoppel theory is made up of several sets of rules as listed below 2. Denial of Corporation Status by the Would-be Shareholders a. An enterprise engages in a transaction with a third party. At the time of the transaction, the owners claim that the enterprise is a corporation. Later, the third party brings suit against the purported corporation and the enterprise and its owners deny that the enterprise is a corporation [this is a true estoppel case if the third party relied on the owners statements+ 3. Technical Contexts a. Occurs when the question of a corporate status is raised in a technical, procedural context i. Example: In a suit brought by a would-be corporation, the defendant may seek to raise the defense that the plaintiff is not really and corporation and therefore cannot sue in a corporations name. Estoppel is used by the courts to ignore the claims of the defendants 4. Liability of Would-be Shareholders [most important] a. When a third party who has dealt with an enterprise on the basis that it is a corporation seeks to impose personal liability on the would-be shareholders, who in turn defend on the ground that the third person, having dealt with the enterprise as a corporation before, is estopped to deny that the enterprise has corporate status i. Different from the de facto theory 1. Third party has dealt with the enterprise as a corporation before 2. Would be shareholders would not need to resort to the estoppel theory if they could establish that their business had de facto corporate status Who May be Held Liable 1. If a would-be corporation is neither a de jure corporation, a de facto corporation, or a corporation by estoppel, the courts have divided on which

a.

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d.

would-be shareholders may be held personally liable for debts incurred in the corporations name a. Older decisions imposed personal liability on all of the would-be shareholders i. On the theory that if the enterprise is not a corporation it must be a partnership making all shareholders general partners ii. Modern theory imposes personal liability only against those owners who actively participated in the management of the business 1. The owners that actively participated are held personally reliable as if they were partners where the others were passive investors which are not liable vi. McChesney, Doctrinal analysis and Statistical Modeling in law (1993) pg. 281 1. Three requirements for application of the de facto corporation doctrine a. A statute in existence by which incorporation was legally possible; b. A colorable attempt to comply with the statute; i. Note: an attempt to file the articles of incorporation has frequently been sufficient as the necessary attempt as statutory compliance even if it was not successful c. [and] Some actual use or exercise of corporate privileges Limited Liability and Its Exceptions i. Introductory Note on Limited Liability ii. Fletcher v. Atex, Inc. (1995) pg. 283 1. Note: Courts have generally declined to find alter ego liability based on a parent corporations use of a cash management system -- This case illustrates the high burden a plaintiff must overcome to pierce the corporate veil. iii. Walkovszky v. Carlton (1966) pg. 289 1. Note on further proceedings in Walkovszky v. Carlton iv. Minton v. Cavaney (1961) pg. 294 v. Arnold v. Browne (1972) pg. 296 vi. Slottow Fidelity Federal Bank v. American Casualty Co. (1993) pg. 297 vii. Radaszewski v. Telecom Corp. (1992) pg. 297 1. The fact that a corp. does not have sufficient $ to pay claim doesnt mean that its undercapitalized. O/w, the only thing needed to pierce would be to make claim in excess of corps capital. Also, where co purchases insurance to cover liabilities, cannot pierce the veil on the ground that insurer later became insolvent. (PIERCING THE VEIL FOR JURISDICTION PURPOSES.) a. Generally, a person injured by the conduct of a corporation or one of its employees can only look to the assets of the employee or of the employer corporation for recovery. The shareholders of the corporation (including a parent corporation) are not liable. b. There is an exception where the law allows a plaintiff to pierce the veil of the subsidiary to make a parent-shareholder liable. Under Missouri law, in a tort case, you must show three things: i. Control beyond stock control; i.e., complete domination of finances, policy, and business practice, w/ regard to transaction under attack so that the subsidiary had no mind of its own; ii. Control must be used by the to commit a fraud or wrong of some kind (i.e., there is a breach of a duty to plaintiff); and

35

IX.

iii. The control and breach of duty must proximately cause the injury to the plaintiff viii. Berkey v. Third Ave. Ry. Co. (1926) pg. 298 ix. Note on Variations among States in applying the Piercing The Veil Doctrine 1. Although the tests announced by the courts for piercing the corporation veil are often similar from state to state, the manner in which those tests are applied may vary considerably across jurisdictions x. Note on Direct Liability 1. Closely related to piecing-the-veil is parent-subsidiary context are cases in which a parent is sought to be held directly liable as a primary wrongdoer, on the ground that the parent directed the subsidiarys operations, or some relevant portion of those operations and wrongs were committed in the course of those directed operations e. Equitable Subordination of Shareholder Claims i. Equitable Subordination 1. Under the doctrine of equitable subordination, when a corporation is in bankruptcy, debt claims that a controlling shareholder has against the corporation may be subordinated to the claims of other persons, including the claims of preferred shareholders, on various equitable grounds a. Doctrine of equitable subordination is often called deep rock doctrine ii. Comparison with Piercing 1. It simply takes an investment already made, and denies it the status of a creditors claim on a parity with outside creditors, whereas imposing liability for corporate debts undermines the essential premise of limited liability that a shareholders risk is limited to the amount of his investment a. Courts find it fair to subordinate a controlling persons claim based on lesser evidence of misuse of the corporate form than what is required to impose affirmative personal liability for all corporate obligations The Special Problems of Shareholders in Close Corporations a. Introduction i. Uniform Limited Liability Company Act 1. 101, 103, 201-203, 301-303, 404, 405, 408-409 a. Statutory Supplement pg. 67,69, 72, 74-77, & 79-81 ii. Corporations are divided into three classes 1. Publicly Held Corporations [typically have a large number of shareholders] 2. Private Corporations [shares are not publicly traded, although they may have more than a small number of shareholders] 3. Close Corporations [a subset of private corporations a. Have a small number of shareholders b. Typically characterized by owner-management c. Resemble partnerships and sometimes referred to as incorporated partnerships d. Legally viewed and treated a publicly held corporations rather than partnerships 4. Note on legislative strategies toward the Close Corporation i. Note: derived from Delaware, NY, and the Model Act b. Unified Strategies i. To make no special provisions for close corporations but to modify traditional statutory norms so that they will meet the needs of close corporations although applicable to publicly held corporations as well. c. The New York and the Model Act Strategies

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b.

i. To follow the unified approach up to a point but to add one or two important provisions that are applicable only to those corporations that satisfy certain criteria 1. I.e. allowing certain kinds of shareholder agreements for close corporations that are not allowed in publicly held corporations d. Statutory Close Corporations i. Follows the unified approach up to a point but adds an integrated set of provisions that are explicitly made applicable only to corporations that both satisfy certain criteria and formally elect statutory close corporation status ii. Significance of statutory close corporations 1. The data shows that only a tiny fraction of newly formed corporations elect to become statutory close corporations e. Note on non-electing corporations i. When a close corporation dont opt in to be a statutory close corporation does not prevent the courts from applying the laws Voting Arrangements at the Shareholder Level i. Shareholder Voting Agreements 1. WHITEBOOK BCL 609 and 620 2. Ringling Bros-Barnum & Bailey Combined Shows v. Ringling (1947) pg. 308 a. Where one party refuses to vote in accordance with an enforceable agreement these votes should not be counted 3. Note on Shareholder Voting Agreements and Irrevocable Proxies a. Contracts among shareholders concerning the manner in which their shares will be voted (usually known as voting or pooling agreements) are classified as one of two types i. Type 1 the parties agree in advance on the exact way in which they will vote their share during the term of the contract ii. Type 2 the parties do not agree in advance on the exact way in which they will vote their shares but instead agree that during the term of the contract they will vote their shares as a unit, in a way to be decided by agreement, ballot, or other means. ii. Voting Trusts 1. WHITE BOOK BCL 617 2. In General a. A voting trust is a device by which shareholders separate the voting rights in, and the legal title to, their shares from the beneficial ownership of the shares. 3. Validity a. Majority of courts have declared voting trusts to be valid or held that the plaintiff was not in a position to attack them b. Statutes both explicitly validate voting trusts and regulate their creation and their content i. For example 1. Maximum time period (10 years) 2. Agreement must be filed with the corporation 4. Overlap of Voting Trusts and Shareholders Voting Agreements

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a.

Voting trusts may sometimes be used to allocate voting control in other than a pro rata manner or to preserve the solidarity of a faction consisting of less than all the shareholders.

c.

d.

e.

iii. Classified Stock 1. WHITEBOOK BCL 617 2. Note a. One of the most simplest and most effective ways of assuring that all the participants or that particular minority shareholders will have representation on the board of directors is to set up two or more classes of stock, provide that each class is to vote for and elect a specified number or a stated percentage of the directors and then issue each class or a majority of shares in each class to a different shareholder or faction of shareholders Agreements Controlling Decisions that are within the Boards Di scretion i. WHITEBOOK BCL 620, 715(b) ii. McQuade v. Stoneham (1934) pg. 320 1. Shareholders may not agree among themselves how they will act as directors in managing the affairs of the corporation. Shareholders may not agree to control the directors in the exercise of their independent judgment. Such agreements violate public policy. S/Hs may combine to elect directors, but they must let the directors manage the business, which includes election of officers. a. Commentary. Its OK to ally as S/Hs; but corp dirs. must oversee corp. for benefit of S/Hs iii. Clark v. Dodge (1936) pg. 323 iv. Galler v. Galler (1964) pg. 324 1. Where substantially all of the shareholders of a close corporation enter a shareholders agreement that provides for actions to be taken by the corporation, the court will sustain such an agreement although it deviates from state corporation law practice. a. Courts have allowed close corporations to deviate from corp. norms to give bus. Effect to intentions of the parties. Here substantially all of the shareholders of the corporation entered the agreement. The agreement did not injure creditors, other shareholders, or the public. The duration of the agreement is until the death of . This period is not too long. The purpose of the agreement (maintenance of the widow) is proper. The provision for a dividend is valid since a base surplus is required to be maintained. v. Adler v. Svingos (1981) pg. 331 Supermajority Voting and Quorum Requirements at the Shareholder and Board Levels i. WHITEBOOK BCL 608, 616-617, 705, 708, 709 ii. Sutton v. Sutton (1994) pg. 332 Fiduciary Obligations and Shareholders in Close Corporations i. Donahue v. Rodd Electrotype Co. (1975)pg. 336 1. When the controlling majority of a close corporation causes the corporation to purchase some of its shares from the controlling majority, it must offer this same opportunity to the minority to sell a pro rata portion of its shares at an identical price. a. Freeze-outs by majority shareholders controlling close corporations (majority withholds dividends or other corporate benefits from minority shareholder, forcing her to sell at an inadequate price) are illegal. In a close corporation, shareholders owe each other the same strict fiduciary duty that partners do. This is a higher standard than

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X.

shareholders and directors in regular corporations owe to the corporation in discharge of their duties. ii. Rosenthal v. Rosenthal (1988) pg. 343 iii. Wilkes v. Springside Nursing Home, Inc. (1976) pg. 344 iv. Zimmerman v. Bogoff (1988) pg. 350 v. Smith v. Atlantic Properties (1981) pg. 350 vi. Merola v. Exergen Corp. (1996) pg. 352 f. Restrictions on the Transferability of the Shares and Mandatory Sale Provisions i. FBI Farms, Inc. v. Moore (2003) pg. 355 ii. Gallagher v. Lambert ()-- TWEN g. Dissolution for Deadlock or Oppression i. WHITEBOOK BCL 1001-02, 1104,1104-a, 1111, 1118 ii. Deadlock 1. Wollman v. Littman (1970) pg. 371 2. Note on Dissolution for Deadlock a. A number of statutes provide for involuntary dissolution on a showing of deadlock. A few of the statutes define deadlock in terms of an equally divided board or body of shareholders, but most are phrased broadly enough to include deadlock brought about by super-majority or veto arrangements b. The deadlock statutes are generally interpreted to make dissolution discretionary even when deadlock is shown to exist and the courts have been reluctant to order dissolution of a profitable corporation on the ground of deadlock i. Profitability is not a bar to dissolution for deadlock iii. Oppression and Mandatory Buy Out 1. Matter of Kemp & Beatley, Inc. (1984) pg. 374 2. Meiselman v. Meiselman (1983) pg. 380 3. Note on Evolving Expectations a. In Meiselman, the court stated that what constitutes a shareholders reasonable expectations can change over time 4. Note on Duties of Care and Loyalty in Close Corporations a. Two legal safeguards for minority shareholders in publicly held corporations are the duties of care and loyalty imposed by law on corporate directors and officers i. Normally provide insufficient protection in close corporations 5. McCallum v. Rosens Diversified, Inc. (1998) pg. 384 6. Muellenberg v. Bikon Corp. (1996) pg. 387 7. Kelley v. Axelsson (1997) pg. 388 Limited Liability Companies a. Introduction i. Uniform Limited Liability Company Act 101, 103, 201-203, 301-303, 404, 405, 408-409 [Statutory Supplements pg. 67, 69, 72, 74-77, 79-81 ii. LLCs are non-corporate entities that are created under statutes that combine elements of corporation and partnership law 1. Under corporate law, the owners members of LLCs have limited liability. Under partnership law, an LLC has great freedom to structure its internal governance by agreement iii. Formalities; Articles of Organization; Powers 1. An LLC is formed by filing articles of organization in a designated state office (usually the office of the secretary of state). The statutes all allow LLCs to be formed by a single person

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iv.

v.

vi.

vii.

viii.

ix.

x.

xi.

Articles include: Name of the business, the address of its prinicpal place of business, name and address of its agent for service of process i. Some require: the purpose of the LLC, if its going to be manager-managed and if so the managers name, if its going to be member-managed the name of the members, and the duration of the LLC or the latest date on which it is to dissolve, Operating Agreements 1. An LLC articles of organization are usually very sketchy. The operating agreement is an agreement among the LLCs members concerning the conduct of its affairs Management 1. Most statutes provide that the LLC is to be managed by its members. A few statutes provide that unless otherwise agreed an LLC is to be managed by managers who may need to be members Voting by Members 1. Just over half of the statutes provide that unless otherwise agreed, members vote per capital (one vote per member) 2. The remaining statutes provide that unless otherwise agreed, members vote pro rata (by financial interest) 3. Some statutes require a unanimous vote for certain actions a. Such as an amendment of the articles or the operating agreement Authority 1. Member-Managed a. Each member has power to bind the LLC for any act that is for apparently carrying on the business in the usual way or ordinary course 2. Manager-Managed a. Only the managers have apparent authority to bind the firm 3. Delaware Statute a. Unless otherwise provided each member and manager has the authority to bind the LLC i. Must be provided in the company agreement otherwise Inspection of Books and Records 1. Statutes generally provide that members are entitled to access the books and record a. Many require a proper purpose Fiduciary Duties 1. Duties of managers and member is not specified in statutes a. Some specify the duty of care elements , b. Some provide that a manager will be liable for gross negligence, bad faith, recklessness, or equivalent conduct Derivative Actions 1. Most of the statutes explicitly permit members of LLCs to bring derivative actions on the LLCs behalf 2. Courts are likely to permit them even if a statute does not explicitly permit such actions Distributions 1. Most LLC statutes that address the issue of distributions provide that unless otherwise agreed, distributions to members are to be made pro rata according to the members contributions a. Absent an agreement distributions are to be made on a per capita basis

a.

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XI.

xii. Members Interests 1. A member has financial rights and may also have governance rights a. Financial rights include a right to receive distributions b. Governance rights to participate in management, to vote on certain issues, and to be supplied with information xiii. Liability 1. Provide that members and managers are not liable for LLC debts, obligations, and other liabilities a. Members may become liable if the conditions for piercing the veil of an LLC are satisfied xiv. Dissociation 1. Statutes vary considerably in their treatment of dissociation (the termination of a members interest in an LLC other than my the members voluntary transfer of her interest) b. Piercing the LLC Veil i. Kaycee Land and Livestock v. Flahive (2002) pg. 400 c. Fiduciary Duties i. Salm v. Feldstein (2005) pg. 405 ii. Vgs, Inc. v. Castiel (2000) pg. 406 iii. Gatz Props. LLC v. Auriga Capital Corp. () -- TWEN d. Dissolution i. In the Matter of 1545 Ocean Avenue LLC () -- TWEN The Duty of Care and Duty to Act in Good Faith i. WHITEBOOK BCL 402(b), 717, 719, 720 b. The Duty of Care i. The Basic Standard of Care 1. Francis v. United Jersey Bank (1981) pg. 420 2. Aronson v. Lewis (1984) pg. 432 a. Where state law requires that demand on the directors be made prior to bringing a shareholders derivative suit such a demand be excused where it is futile: i.e., i. all directors were named as defendants and they participated in the wrongs; ii. Fink picked and controlled all directors; and iii. to bring this action, the defendant directors would have to have the corporation sue themselves. b. The test is: Based on the particularized facts alleged, is there a reasonable doubt that (i) the directors were disinterested and independent, and (ii) the challenged transaction was the product of a valid exercise of business judgment. c. A general claim that Fink controls the board and owns 47% of the stock does not support a claim that the directors lack independence. P must allege particularized facts showing the control and showing that entering the contract was a breach of good faith or shows control. d. A bare claim that defendants would have to sue themselves is also not enough. Particular facts again must be alleged showing lack of director independence or failure to adhere to standards of the business judgment rule. ii. The Business Judgment Rule 1. Kamin v. American Express Co. (1976) pg. 433 2. Smith v. Van Gorkom (1985) pg. 439 a. The business judgment rule presumes that directors act on an informed basis, in good faith, and in an honest belief that their actions

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are for the good of the company. Plaintiffs must rebut this presumption. There is no fraud here, or bad faith. The issue is whether the directors informed themselves properly. All reasonably material information available must be looked at prior to a decision. This is a duty of care. And the directors are liable if they were grossly negligent in failing to inform themselves. b. The directors were grossly negligent in the way they acted in the first board meeting that approved the merger: They did not know about Van Gorkoms role, and they did not gather information on the intrinsic value of the company. Receiving a premium price over market is not enough evidence of intrinsic value. c. An outside opinion is not always necessary, but here there was not even an opinion given by inside management. The Van Gorkom opinion of value could be relied on had it been based on sound factors; it was not and the board members did not check it. The postSeptember market test of value was insufficient to confirm the reasonableness of the boards decision. d. Although the 10 board members knew the company well and had outstanding business experience, this was not enough to base a finding that they reached an informed decision. e. There is no real evidence of what the outside lawyer said, and as he refused to testify, Ds cannot rely on the fact that they based their acts on his opinion. f. The actions taken by the board to review the proposal on October 9, 1980, and on January 26, 1981, did not cure the defects in the September 20 meeting. g. All directors take a unified position, so all are being treated the same way. h. The shareholder vote accepting the offer does not clear Ds because it was not based on full information. iii. The Duty to Monitor, Compliance Programs and Internal Controls 1. In re Caremark International Inc. Derivative Litigation (1996) pg. 457 a. Outcome: Settlement agreement approved on the ground that, despite the weakness of plaintiffs claims against the defendants, individual members of the corporations board of directors, the settlement was an adequate, reasonable, and beneficial outcome for all parties. iv. Liability Shields 1. WHITEBOOK BCL 726 Statutory Supplement 2. Emerald Partners v. Berlin (1999) pg. 470 3. Malpiede v. Townson (2001) pg. 471

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Corporate Law
c.

Fall 2013 Outline

Professor Fishman

XII.

Duty to Act in Good Faith i. In re the Walt Disney Company Derivative Litigation (2006) pg. 479 ii. Stone v. Ritter (2006) pg. 484 The Duty of Loyalty a. Self Interest Transactions i. Gantler v. Stephen (2009) pg. 486 ii. Lewis v. SL & E, Inc. (1980) pg. 496 b. Statutory Approaches i. WHITEBOOK BCL 713, 714 ii. Cookies Food Products v. Lakes Warehouse (1988) pg. 513 c. Compensation and the Doctrine of Waste, and the Effect of Shareholder Ratification i. WHITEBOOK BCL 202(a)(10),(13), 712(a)(3), 714, 720 ii. Compensation 1. Structure of executive compensation 2. Short term components of compensation 3. Long term components of compensation 4. Restricted stock 5. Stock options 6. Long term incentive plans iii. Ryan v. Gifford (2007) pg. 527 d. Corporate Opportunity Doctrine i. Northeast Harbor Golf Club, Inc. v. Harris (1995) pg. 537 ii. In re Ebay, Inc. Shareholders Litigation (2004) pg. 552 e. Duties of Controlling Shareholders i. WHITEBOOK BCL 903 ii. Zahn v. Transamerica Corporation (1947) pg. 553 iii. Sinclair Oil Corporation v. Levien (1971) pg. 561 1. Where there is self-dealing, the intrinsic fairness test must be applied, which puts the burden on the majority shareholder to show that the transaction with the subsidiary was objectively fair. 2. On the dividend issue there was no self-dealing (since the parent did not receive something from the subsidiary to the exclusion or detriment of the minority shareholders; they shared pro rata in the dividend distributions). On the expansion issue, D did not usurp any opportunities that would normally have gone to the subsidiary. Thus, the business judgment rule applies; the court will not disturb a transaction under this rule unless there is a showing of gross overreaching, which there was not. 3. Note. This case is confused. The court should have decided on one standard to apply in situations of transactions where the majority controls the corporation. If the standard is the intrinsic unfairness test, then one element is self-dealing. Where it is absent, there is no violation. iv. Kahn v. Lynch Communication Systems, Inc. (1994) pg. 567 v. In re Trados Inc. Shareholders Litigation (2009) pg. 579 f. Sale of Control i. Zetlin v. Hanson Holdings, Inc. (1979) pg. 587 ii. Perlman v. Feldman (1955) pg. 591 [Contrast with DeBaun v First Western Bank & Trust Co] 1. A majority shareholder owes a duty to the minority shareholders to investigate an individual and not to sell to him if they reasonably should know he will loot the corporation. a. knew of Mattisons numerous financial failures and that Mattison could not meet his obligations to pay for the corporation without using its assets.

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XIII.

XIV.

The Antifraud Provision: Section 10(b) and Rule 10(b)-5 a. Introduction to Section 10(b) and Rule 10(b)-5 i. Securities Exchange Act Statutory Supplement pg. 273 and 290 ii. The Wharf Limited v. United International Holdings, Inc. (2001) pg. 609 b. Elements of Standing and Scienter i. The purchaser-seller requirement ii. in connection with requirement c. Duty to Speak i. d. Junction of Breaches of Fiduciary duty and Rule 10(b)-5 i. Santa Fe Industries, Inc. v. Green (1977) pg. 653 Insider Trading a. Common Law Background i. Majority Rule ii. Special facts iii. Atrophy b. Federal Disclose or Abstain Requirement i. Statutory Supplement 1. Securities Exchange Act 14(e) Statutory Supplement pg. 281 2. SEA Rule 14(e)(3) Statutory Supplement pg. 350-352 3. SEA Rule 10(b)(5) Statutory Supplement pg. 292 ii. In the Matter of Cady, Roberts, & Co. (1961) pg. 657 iii. Securities and Exchange Commission v. Texas Gulf Sulphur Co. (1968) pg. 658 iv. Chiarelly v. United States (1980) pg. 673 v. United States v. OHagan (1997) pg. 680 vi. Dirks v. Securities and Exchange Commission (1983) pg. 693 c. Liability for Short-Swing Trading Under Section 16(b) of the Securities Exchange Act i. Statutory Supplement 1. 16(b) pg. 283-285 of statutory supplement

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