AGENCY

An agent has ... if a reasonable ... would so infer from the

person in the position of Manifestations of

Actual authority Agent Principal

(Intended)
Apparent authority Third party Principal
(unintended)
Inherent authority (derived from Third party Agent
agency relations) (protect third party’s reasonable
inference; ordinarily or in
connection with)

R3d Agency. 1.01- act on behalf of another, mutual manifestation, fiduciary

R3d § 2.03-Apparent authority, manifestation of Principal

R2d § 8A – inherent authority

R3d § 2.06 – inherent authority
R3d § 2.05 -estoppel
R3d § 2.06 Undisclosed principal
R3d § 2.07 - restitution

R3d § 2.04- liability for torts of employees

R3d § 7.07-definition of employee

Cases
Jenson Farms Co. v. Cargill, Inc. – micro-managing bank; apparent authority, control, agent ex post.
Gallant Insurance Co. v. Isaac – authorized insurance sale; inherent authority; from agency relationship
itself, incidental
White v. Thomas – unauthorized farm sale; acts are not reasonably necessary to implement authority

Agency Cost Theory. Definition (“agency costs”). The catch-all for costs associated with delegating tasks
and authority.

Monitoring costs. Principals spend money making sure their agents are loyal. E.g., Shareholders monitor
corporate mangers

Bonding costs. Agents spending money to signal to their principals that they are indeed loyal.

Residual costs. Everything else.

Agency cost theory of organizational law

Problem. The “separation of ownership from control” yields agency costs
(Legal) solution. Impose duties on agents to mitigate these costs
 PARTNERSHIP

DEFINITION
RUPA § 202(a) -association of two or more persons; to do things that constitute a partnership, “intent to
associate”
RUPA 202 (3) – profit sharing and joint-ownership indicative

CORE FEATURES
1. Association
2. Mutual Agency
3. Limited Liability
4. Control

DEFAULT RULES
RUPA 401(j) Default. Nearly all of partnership law
1. Voting
RUPA § 401; UPA § 18 – voting shares; each partners one share, matters in ordinary course, majority;
admission of new partner, unanimous
2. Termination at will
3. Liability – jointly and severally; exhaustion of property
4. sharing of profits and losses

Mandatory Rules (duty of care, duty of loyalty and obligation of good faith)

RUPA § 404(b) – duty of loyalty consists of (1) account partnership benefit; (2)refrain from taking adverse
position; and refrain from competing
RUPA § 404(c) – duty of care; gross negligence
RUPA § 404(c)- good faith and act with fairness
RUPA 103(b)(5) Mandatory. Obligation of good faith.

Altering

RUPA 103(b)(3)(i) Altering. Changing the duty of loyalty. Identify activities which do not breach.

RUPA §§ 501-503 – partnership is a separate entity from partners, transferor entitled to participate in
management of partnership; remains personally liable for partnership oblgations until he withdraws.
RUPA §§ 502- partner’s transferable interest -share of profits and loss of profits; right to receive
distributions.
RUPA § 1002 requiring an LLP’s name to end with “LLP”

RUPA § 404(b) – duty of loyalty consists of (1) account partnership benefit; (2)refrain from taking adverse
position; and refrain from competing
RUPA § 404(c) – duty of care; gross negligence
RUPA § 404(c)- good faith and act with fairness
RUPA 103(b)(5) Mandatory. Obligation of good faith.
RUPA 103(b)(3)(i) Altering. Changing the duty of loyalty. Identify activities which do not breach.

Vohland v. Sweet – flower partner; on implied formation of a partnership

Meinhard v. S

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almon – duty of loyalty; “a punctilio of honor” on fiduciary duties that partners owe to the partnership
Benjamin Cardozo's 1928 opinion in Meinhard v. Salmon that co-venturers owe each other "the
punctilio of an honor the most sensitive" remains, 80 years later, a defining point for framing the
discussion of fiduciary duty, still the most important issue in the law of business association

Partnership – no limited liability

LP- general partner no limited liability; all the rest with limited liability
LLP- all enjoy limited liability
LLC-operating agreement
Tax “Pass through” Partnership income “passes through” to the partners; it is subject only to partner’s
personal income tax. This includes, LP, LLP, LLCs

CORPORATIONS

Corporate law as 3 solutions to the agency problem

Fiduciary duties, shareholder voting, and control contests

Key features
Legal personality, indefinite life (robust to entry and exit of owners)
Limited liability
Choice of law (and the resulting inter-jurisdictional competition)
Transferable ownership – plus limited liability owner identity does not matter, liquid
Centralized Management

Board structure and governance

Default- one year: DGCL- 3 years staggered
Rqmt. of independent director NYSE
Formality in calling and conduct of board meetings

Take -over defense

Dual Class
Staggered board

Format
BL – can be amended by Board
Form 8-K disclosure

Delaware General Corporate Law (DGCL), Model Business Corporation Act (MBCA)
Sarbanes-Oxley (2002), Dodd-Frank (2010)
DGCL § 141(a) Authority is in the board, not individual directors
§ 141(b) Decisions require a quorum; DGCL default is 1/3rd
NYSE listing rules (303A) Definition (independent directors).
NYSE Listed Company Manual § 303A.01 NYSE listing rules require, inter alia, all listed companies to
maintain majority-independent boards.
DGCL 109The bylaws can be amended by shareholder vote or board resolution.
Form 8-K? An “unscheduled” disclosure to the SEC. Securities law requires public companies to make
“annual and quarterly reports” to the Securities and Exchange
Commission

Cases:

3
Automatic Self-Cleansing Filter v. C. – board says no deal
Jennings v Pittsburgh Mercantile Co. – officer’s authority

Part II
RUNNING THE CORPORATION

Unit 4
SHAREHOLDER VOTING

(annual meeting· rational apathy· proxy fights· proxy access· shareholders proposals)

Rational apathy-collective action problem

Meetings
DGCL § 211(b) an annual meeting for election of board is mandatory.
DGCL § 211(d)At a special meeting, which by default only the board can call.
DGCL § 228.By written consent (in lieu of a meeting).

Voting in Person or Proxy

DGCL § 213 Shareholders that hold stock on the record date (10-60 days before the vote) are allowed to
vote, even if they’ve since sold their shares.
DGCL § 212(b) few shareholders actually attend the meeting to vote in person
Instead, they authorize another person to vote on their behalf by proxy.

Election of directors: Default rule Plurality

DGCL § 216(3) Default rule. plurality
DGCL § 214Cumulative voting (permitted, but rare).
DGCL§ 216 By default, most other matters upon which shareholders vote require a “majority of the
majority”
DGCL § 212(a)Default rules. One-share one-vote.

Anti-fraud provision
Rule 14a-9 (anti-fraud). Private shareholders or SEC can take action against a fraudulent proxy

Failed Proxy Access Rule

Rule 14a 11. Failed proxy access rule. attempt to mandate shareholder ability to nominate directors on
company proxy

Required Disclosures
Sarbanes-Oxley Act of 2002 (SOX) - required auditors of public companies be subject to external and
independent oversight for the first time in history
Securities Exchange Act of 1934 Enabling statute. covers trading in secondary market (financial markets
generally) and continuing disclosures by the issuer (the one whose stock, or more generally whose
securities, are publicly traded)
Securities Act of 1933” - issuer’s first offering
Schedule 14A ("proxy statement"). Required form for soliciting proxies

Delaware authorizes Proxy Access

DGCL §112 explicit statutory authority for a bylaw requiring a Delaware corporation to include
stockholder proposed nominees for director in the corporation’s proxy materials.

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DGCL §§ 113 explicit statutory authority for a bylaw requiring a Delaware corporation to reimburse proxy
solicitation expenses incurred by a stockholder nominating his own directors.
If it’s efficient for a company, won’t the company do it itself? How?
How? E.g., via bylaw amendments;

Shareholders Proposals
Section 14 of this Act enables SEC to issue rules on proxy solicitation
Rule 14a-8 (shareholder proposals). Enables precatory (non-binding) shareholder proposals; cannot
nominate directors. Federal rules for ”getting on the ballot”. The board has discretion over the contents of
the corporation’s proxy card. The sole exception is provided in this Rule.
Rule 14 a-8
- Section address when a company must include a shareholder’s proposal in its proxy statement
and identify the proposal in its form of proxy when the company holders an annual or special meeting.
Exception to the rule that directors decide what is to be included in proxy.
Rule 14a-8 – a company must include a shareholder proposal in its proxy materials unless proponent fails
to company with the rules eligibility ($2,000 or 1% of securities), or the proposal meets one of the 13 bases
for exclusion. when a company must include a shareholder’s proposal in its proxy statement and identify
the proposal in its form of proxy when the company holders an annual or special meeting. Exception to the
rule that directors decide what is to be included in proxy.
Rule 14 a-1 – a company may exclude a shareholder proposal from its proxy materials if the proposal falls
into one of the 13 substantive bases for exclusion.
- Personal agenda
- 5% of assets, 5% of net profits
- Relevance rule
- Proposals that would lead to breach of contract.
No action letter
Rule 14a-8(i)(8) To be excluded: It seeks to effect the outcome of the current election.

“Director elections. If the proposal:

(1)Would disqualify a nominee who is standing for election;
(2)Would remove a director from office before his or her term;
(3)Question the competence, business judgment, or character of one or more of the nominees;
(4)Seeks to include in the company’s proxy materials for election board of directors;
(5) Otherwise affect the outcome of election.
- Prevents a shareholders’ proposal changing voting rules for current election but allowable if
applicable next election.
-
14a-8(i). Board omission. In addition to procedural requirements, the Board can omit the proposal under
certain conditions.
Rule 14a-8 (No Action Letter)
Rule 14a-9Proxy fraud. is an anti-fraud provision for proxy solicitation. It prohibits proxy statements that
include statements that are “false or misleading with respect to any material fact.”

Schnell v. Chris-Craft Industries, Inc. – hurry-up meeting date- duties to act in shareholders’ interest reach
a zenith in an election setting.
Blasius Industries Inc. v. Atlas Corp. – presumptive board expansion; even if in good faith because it
involved meddling with elections

5
 FIDUCIARY DUTIES: THE DUTY OF CARE

Protection of Directors

Business judgment rule

Section 102 (b) (7) for grossly negligent acts of directors

Indemnification of Directors/Officers

Mandatory indemnification for reasonable expense incurred in wholly successful proceeding against
director or officer.

Section 145 (a) allows a corporation to indemnify a director, officer or employee or agent for amounts
paid in settlement “if he is reasonably believed to be acting in good faith in or not opposed to the best
interest of the corporation”. Does not protect gross negligence. Section 102 (b) (7) shield directors even for
grossly negligent acts.

Section 145 (f) disallows the amendment of a by law provision granting indemnification after the
occurrence of act or omission of director or officer

Insurance for those not covered by indemnification

§ 145(g) provides gives the corporation “power to purchase insurance on behalf of any agent of the
corporation . . . whether or not the corporation would have the power to indemnify such person against
such liability under this section”

Duty of Care

Directorial Decisions. Decisions that leads to a corporate loss. Example. Van Gorken, price of the shares
sold for merger; Disney- loss to corporation due to high severance pay of Ovitz.

Failure to monitor. Oversight. Loss resulting from “unconsidered inaction”. Caremark-failure to monitor
system leading to fees imposed for failure to monitor employees practice of allowing doctors to get
commissions. Stone v. Ritter, 50M fine to the company from the employees illegal act of allowing a Ponzi
scheme. Goes beyond Grahan-Allis-Chalmers “red flag”.

Rulings:

Van Gorken – duty of care, informed, rational

Disney- definition of good faith

Caremark- oversight doctrine- a sustained or systemic failure of the board to exercise oversight loss

Stone – 2 standards (a) the directors utterly failed to implement any reporting or information system or
controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its
operations thus disabling themselves from being informed of risks or problems requiring their attention

6
Citgroup- on whether losses suffered by Citibank during the real estate bubble violated the duty of care-
not a duty of care because duty of care only covers failure to monitor systems that lead to employee
misconduct not monitor business risk.

FIDUCIARY DUTY: DUTY OF LOYALTY

DGCL Safe Harbor

In Case of Minority Shareholder is Interest and Majority of Board not Conflicted

If no disclosure + standard is entire fairness Plaintiff first has burden

approval/ratification; basis for fairness
then burden on
Or if majority shareholder/ conflicted defendant entire
directors. fairness
and if burden
overcome, defendant
entitled to BJR
Disclosure + approval/ratification Standard is business judgment Burden on Plaintiff
(Cooke v. Oolie) Rule

Cooke v. Oolie – board approval, not majority shareholder, not conflicted board. not squarely 144 (a) (1)
if there is disclosure plus approval of stockholders – (BJR provided that it is not involving a controlling
stockholder or conflicted board-entire fairness)

Lewis v. Vogelstein- Conflicted board. shareholder ratification of conflicted board. Entire fairness. In all
events, informed, uncoerced, disinterested shareholder ratification of a transaction in which the corporate
directors have a material conflict of interest has the effect of protecting the transaction from review except
on the basis of waste. Mattel, stock option to outside directors.

Parent-Sub
Sinclair – Parent-Sub. Not automatically subject to entire fairness review. Does not entire fairness only
if self-dealing. Benefit to the exclusion of.
Weinburger- Arledge and Chitea. Parent-sub. Burden shifting. Plaintiff to show basis of review.
Plaintiff can show basis of entire fairness review by showing majority of minority not informed.
If there is basis, then defendant shows entire fairness. Entire fairness- fair dealing plus fair price.

7
Fleigler v. Lawrence. Corporate Opportunity case. Metallurgical option case. Majority of Shs who
approved were interested. A director who is part of a conflicting interest transaction but fails to gain the
protection of one of the safe harbors in (1) and (2) noted above may avoid liability if she can establish that
the transaction was objectively fair to the corporation at the time it was consummated.

Technique: approval of committee minority independent directors.

Guft v. Loft- line of business test.

122 (17) -Waiver of conflict of interest, corporate opportunities. By charter or board action

Principles of Corporate Governance §5.02 (a)(2)(D) law limit the power of an interest majority of
shareholders to bind a minority that is disinclined to ratify a submitted transaction.

Principles of Corporate Governance §5.02 (a)(2)(D) Powers of shareholders to affirm self-dealing

transactions is limited by corporate “waste” doctrine, which holds that even a majority vote cannot protect
wildly unbalanced transactions that, on their face, irrationally dissipate corporate assets.

Zapata – Test for demand-excused. To survive dismissal, the shareholder-plaintiff in a derivative suit
must plead particularized facts that show (1) A majority of directors are interested or lacked independence
(i.e., dominated); thus, incapable of exercising judgment over whether to bring the suit, or (2) There is a
reasonable doubt that the transaction was not the product of reasoned business judgment.

Oracle- not independent because of many connections

Chancery granted limited discovery to do what? And why?

To investigate three things:

(1) “the independence of the SLC”
(2) “the good faith of its investigative efforts”
(3) “the reasonableness of the bases for its conclusion that the lawsuit should be terminated”

DGCL § 141(c)(2) In practice, corporations create “Special Litigation Committees” (SLCs) to intervene when
the shareholder skips demand in a derivative suit

Common fund doctrine-litigant who creates a fund to which others have a claim is entitled to recover
litigation costs and attorney’s fees from the fund.

DGCL § 102(f)No fee-shifting to shareholders. The charter or bylaws may not hold a shareholder liable for
the corporation’s attorney’s fees ¤ E.g., even if shareholder loses on all claims.
Section 115 Forum selection provision.
Policy Reasons for the Business Judgment Rule:

Courts are not well-positioned to make routine business decisions. Courts will not indulge in
Substantive second-guessing of the merits of the business decision.
Stockholders have selected the board to run the company
Encourages beneficial risk-taking
Attracts qualified individuals to serve as directors by minimizing their financial risk

Ordinary care vs. Business judgment rule

.To begin with, the application of an ordinary standard of care to the quality of decisions by directors and
officers might too often result in the unfair imposition of liability. It has already been shown that where a

8
range of decisions is reasonable, it is often difficult to sort out decisions that turn out badly from bad
decisions.

Moreover, the shareholders' own best interests may be best served by a very limited review of the quality
of directors' and officers' decisions. It is often in the interests of shareholders that directors or officers make
a more risky rather than a less risky decision, because the expected value of the more risky decision may
be greater than the expected value of the less.

Business judgment rationality standard versus good faith

Unlike a pure good-faith standard, a rationality standard represents an appropriate balance of the relevant
considerations of fairness and policy. A rationality standard gives enormous scope to the decisions of
directors and officers, so as not to discourage them from making bold decisions and not to subject them to
an undue likelihood that they will unfairly be held liable simply because their decisions turn out badly. At
the same time, however, a rationality standard preserves a minimum and necessary degree of
accountability on the part of directors and officers, and allows the courts to enjoin actions of fiduciaries
that threaten to waste the assets of their beneficiaries by dealing with those assets in a manner that lacks a
rational basis.

Duty of Care

Directors and officers should have all appropriate protection against the imposition of liability for bold
decisions that happen to turn out badly, and against the imposition of liability that is disproportionate to
fault. However, they also must be subject to the general rule that if a private individual assumes a role
whose performance involves a risk of injury to others, he is under a moral and legal obligation to perform
the role with due care.

102 (b) (7)

Accordingly, it would be appropriate to reasonably limit the liability of outside directors for simple
violations of the duty of care-for example, to an amount related to the director's compensation.
Unfortunately, lesser accountability

Safe harbor provisions policy increase shareholder value

We argue that there are, in fact, several plausible economic rationales for a corporation to embrace a COW
for the sake of shareholder value. The exacting requirements of the duty of loyalty had begun to impede
corporations’ ability to raise capital. sources of capital may be subject to to fiduciary duties in profound
conflict with either their larger business plans or with fiduciary obligations they owe to other business
entities.

Although the duty of loyalty requires the “punctilio of an honor the most sensitive,” conflicts of interest do
not automatically give rise to breach.