CORPORATIONS

FALL 2018
General Agency Principals (*CHECK TYPE OF RELATIONSHIP FOR SPECIFIC RULES)
1. Is there an agency? [RSA § 1.01]
a. Principal manifests assent to agent
b. That the agent shall act on the principal’s behalf
c. And subject to the principal’s control
d. Agent manifests assent or otherwise consents to so act
*IF NO, SKIP TO STEP 3; CAN STILL BE LIABLE UNDER APPARENT AUTHORITY
2. If yes, did the agent violate their fiduciary duties? Did the principal violate his fiduciary duties?
a. Agent’s Duties
i. Duty of Loyalty
1. CCS, Inc. v. Reilly
2. C.f. Hamburger
ii. Duty of Care
1. Act w/ care and w/ skill standard for employment
b. Principal’s Duties
i. Foley v. Interactive Data
3. Is the principal liable to a 3rd party for agent’s actions?
a. Was agent acting with actual authority?
i. Look @ relationship between principal and agent
b. Was agent acting with apparent authority?
i. Look @ relationship between principal and 3rd party; AND
ii. Whether Π’s reliance must be reasonable
c. Blackburn v. Witter; Senott v. Rodman & Renshaw

Partnerships
Issues of Formation
1. Was a partnership formed?
a. Is there a written agreement?
i. Allowed, but not required; creates rebuttable presumption (see b if no
agreement)
ii. 1997 UPA § 103(a)
iii. Hynansky
b. If no, do the facts objectively indicate a partnership was formed?
i. Intent to carry-on as co-owners a business for profit
ii. 1997 UPA § 202(a)
iii. Byker

Management Disputes
2. Is there a management dispute?
a. Did the parties draft an agreement?
b. If no, UPA fills in with default rules.
i. Default
1. 1914 UPA § 18(e); 1997 UPA § 401(e)
2. Equal rights in mgmt.
ii. Ordinary matters
1. 1914 UPA § 18(h); 1997 UPA § 401(j)
2. Decided by majority vote
c. Is the partnership is deadlocked?
i. Cobalt v. High
ii. Without written agreement to the contrary, remedy is dissolution.

Partner Liability
3. Is a partner liable to the partnership?
a. Every partner is an agent [1914 UPA § 9(1)] [see rules about agents above]
 b. Did partner breach duty of loyalty?
i. Think: usurpation of opportunity; self-dealing; stolen profits
ii. Meinhard v. Salmon; Vigneau v. Storch; Starr v. Fordham
c. Did partner breach duty of care?
i. Think: grossly negligent or reckless conduct; intentional misconduct
ii. NOT ordinary negligence [Ferguson v. Williams]
d. Did partner breach duty of good faith and fair dealing?
e. What is the burden of proof?
i. Fiduciary must prove conduct was proper
ii. Standard: clear and convincing evidence

Partnership Liability to 3rd Parties

4. Did the partner bind the partnership?
a. 1997 UPA § 301(1)
b. Did the 3rd party have knowledge or receive notice that the partner does not have the
authority to bind the partnership?
i. If not, then the partnership is generally bound.
ii. Pap v. Moss; Haymond v. Lundy

Dividing Up Partnership Profits and Losses

5. Is the dispute over distribution of profits and losses?
a. 1997 UPA § 401(a)
i. Equally in profits and contribute towards losses according to share in profits
b. Did one party contribute only labor and the other only capital?
i. If yes, apply Kovacik v. Reed rule
1. When one partner loses labor, it does not have to compensate the other
for lost capital; assume equal values

Partnership Dissolution
6. Is there a dissolution?
a. Is exit governed by a partnership agreement?
i. If yes, not entitled to judicial review.
1. Bohatch v. Butler & Binion
b. Was it proper?
i. If yes, departing partner can force liquidation.
1. Brewing
2. 1914 UPA §§ 31, 38; 1997 UPA §§ 601-807
3. Dissolution = one of the partners expresses desire to leave
ii. Each partner is entitled to a settlement.
1. 1997 UPA § 801(5)
2. Distribution of net surplus; allows partner who forced dissolution to buy
back property
iii. Did the partner violate a fiduciary duty in departing? If yes, becomes wrongful
exit.
1. Meehan
2. Burden of proof shifts
c. If no, wrongful exit?
i. 1997 UPA § 602(b)
1. Is it in violation of term of partnership agreement?
2. Is in the breach an express provision of the partnership agreement?
a. Sorenson
ii. Is a partner consistently in breach?
1. If yes, court can dissolve the partnership.
a. 1914 UPA § 32(1)(d)
b. Other parties can continue
Corporations
S/H Removal of Directors
Directors are elected by the shareholders at the annual meeting. Directors can be removed by the
shareholders with or without cause under the default rules.

1. Are the S/Hs trying to remove directors at an annual election?

a. If yes, action is always valid.
b. If no, continue to #2.
2. Are the S/Hs trying to remove directors before election?
a. Do the articles provide that Ds can only be removed for cause? [DGCL § 141(k)]
i. If yes, is there cause?
1. Is D a burden on the corp.?
2. Did D grossly abuse the position?
3. Did D intentionally inflict harm on the corp.?
4. Did D commit fraud?
a. Campbell (DE); MBCA § 8.09(a)
5. If yes to any of 1, 2, 3, or 4, cause show; apply same procedures.
6. If no, no cause to remove D.
ii. If no, continue.
b. How can S/H remove D?
i. Special meeting?
ii. Written consent of S/H delivered to corp. w/o notice to directors?
1. DGCL § 228(b)
c. Is there a unanimity requirement in the articles?
i. If yes, D’s removal must be unanimous.
ii. If no, default allows for non-unanimous removal.

S/H Proposed Bylaw [DGCL § 109(a)]

1. Have the S/Hs adopted the proposed bylaw?
a. If yes, continue to #2
b. If no, are there extraordinary circumstances?
i. Kistefos v. Trico Marine: absent extraordinary circumstances, no judicial review of
proposed bylaw amendment prior to adoption by s/h
2. Is bylaw regulating process or substance?
a. If regulating substance, proposed bylaw is inappropriate for S/H action.
i. DGCL § 141(a)
b. If regulating process, proposed bylaw is appropriate for S/H action.
i. Continue to #3
3. Will the bylaw violate state law?
a. If yes, then inappropriate for S/H action.
i. Will the proposal force the BOD to violate a fiduciary duty?
1. CA v. AFSCME Pension Plan
2. If yes, then inappropriate for S/H action.

Shareholder Proposals in Proxy Materials

***Burden on Corp***
1. Is the S/H proposal proper? [SEC § 240.14(a)-8]
a. Is there more than one per S/H?
b. Is the proposal more than 500 words?
c. If no to both, continue.
2. Does the BOD want to keep the proposal out and is the exclusion proper?
a. Is it improper under state law?
i. CA v. AFSCME Pension Plan
b. Is it a personal grievance or related to special interests?
 c. Is it relevant?
i. Does it meet the 5% economic significance threshold?
1. If no, continue to ii.
ii. Is it related to significant social and ethical issues?
1. Lovenheim
d. Does it relate to management functions?
3. If yes to one of a, b, c, or d, then exclusion is proper.
4. If no to all of a, b, c, or d, then exclusion is improper and the default is the proposal is allowed.

Shareholder Derivative Suit [Demand Requirement]

A shareholder may bring a derivative suit on behalf of the corporation where (1) the plaintiff was a
shareholder at the time of the conduct giving rise to the suit, (2) the plaintiff can adequately represent the
corporation, and (3) the plaintiff first made a written demand that the corporation bring suit on its own –
unless a demand would be futile.

The board of directors may bring a motion to dismiss the suit where a committee of disinterested directors
determines that the suit would not be in the best interest of the corporation.

***Must always consider whether demand was met for loyalty claims***
1. Is the S/H trying to enforce a corp. right?
a. Did the plaintiff make a demand? [Del Chancery Court Rule 23.1]
i. If yes, did the corp. refuse?
1. If yes, continue to b.
ii. If no, continue STRAIGHT to c.
b. Did the plaintiff plead facts showing that demand was improperly refused? [In re GM]
i. If yes, what is the proper standard of review?
1. Were the directors interested?
a. If yes, continue.
b. If no, reviewed under BJR.
2. Did the corp. form an independent special litigation committee?
a. If yes, reviewed under BJR.
b. If no, reviewed under EFR and burden on corp. to show decision not
to bring suit was entirely fair.
ii. If no, suit dismissed.
c. Did the plaintiff plead facts showing that demand was futile?
i. If yes, continue to d.
ii. If no, suit dismissed.
d. Is this an MBCA or DE jurisdiction?
i. If MBCA, demand must be made.
1. MBCA § 7.42
ii. If in DE, was demand excused?
1. Aronson Test
a. Was there reason to doubt director disinterest or independence?
i. In re The Limited, Inc.
b. Was there reason to doubt exercise of sound business judgment?
2. If yes to either, demand is likely excused.
3. If no to both, demand is likely not excused.

Requests for Books/Records

1. Is the request for a list of S/H?
a. If yes, request is presumptively valid. [DGCL § 220]. Did the BOD refuse?
i. If yes, burden on corp. to show no proper purpose for request.
b. If proper purpose, request for S/H list allowed over BOD objections.
i. CC v. Chevron [only one proper purpose needed; other purposes are irrelevant]
2. Is the request for other books and records?
 a. If yes, has the S/H alleged a proper purpose for the request?
i.AB v. Yahoo
ii.Is there a nexus with the request and purpose?
iii.Are the materials necessary and essential?
1. Westland v. Axcelis
iv. Is the information available elsewhere?
b. If S/H established a proper purpose by satisfying ii, iii, and iv, request is allowed under
DGCL § 220.
c. If S/H failed to establish a proper purpose, request is denied under DGCL § 220.

Is a promoter liable for pre-incorporation contracts?

A promoter may enter into contracts on behalf of a corporation not yet formed. However, the corporation
will not be liable on those contracts unless and until the corporation expressly or impliedly adopts the
contracts. Furthermore, the promoter will remain liable on those contracts unless and until there is a
novation whereby the corporation is substituted for the promoter under the terms of the contract and
agrees to indemnify the promoter.

*IF SUING BEFORE THE CORPORATION EXISTS.

1. Does the corporation exist?
a. Have the articles been filed?
i. If yes, continue to b.
ii. If no, the corporation does not exist. Continue to #2.
b. Is an effective date specified in the articles?
i. If yes, look @ effective date.
ii. If no, corporation exists in both MBCA and DE upon filing the articles with the
secretary of state.
1. MBCA § 2.03(a); DGCL § 106
2. Was a contract entered into by an individual pre-incorporation? [MBCA § 2.04; DE C/L]
a. If yes, look at the nature of the individual’s role.
i. Was it a day-to-day manager?
ii. Was it an investor who participated actively in operational decisions?
b. If yes to either liability for the individual. [Timberline]

Post-Incorporation Contracts
3. Did the individual have actual or apparent authority to bind the corporation?
a. If actual authority, promoter is likely liable.
i. Was there a clear intention to the contrary?
b. If apparent authority?
i. Did the creditor unreasonably rely?
ii. Should the creditor have engaged in self-help?
1. General Oversees Film
iii. If yes to both, no liability for promotor.
c. If yes to either a or b, promoter is likely liable.

*IF SUING AFTER THE CORPORATION EXISTS SAME ANALYSIS, BUT ASK ADD’L QUESTIONS.
1. Did the corporation adopt the contract?
a. If yes, the corporation is liable on the contract & and the promoter is not released from
liability.
2. Did the corporation execute a novation whereby the parties agree to release the promoter and
substitute the corporation?
a. If yes, no personal liability for the promoter.
b. If no, the promoter is still jointly and severally liable.
c. RKO-Stanley
BOD Violations of Fiduciary Duties

1. Did the BOD violate the duty of loyalty?

A director owes a duty of loyalty to the corporation.

a. Did a director deprive the corporation of an opportunity?

A director must not usurp corporate opportunities. A corporate opportunity is anything the corporation
could reasonably be expected to be interested in. The director must (1) inform the board of directors of
any corporate opportunity and (2) give the board sufficient time to determine whether it wishes to pursue
the opportunity before taking advantage of the opportunity himself.
i. Is this a corporate opportunity?
1. If yes, continue to ii.
2. If no, director free to pursue.
ii. Did the director inform the BOD about the corporate opportunity?
1. If yes, continue to iii.
2. If no, continue to iv.
iii. Did the corporation reject the opportunity after disclosure of all facts?
1. If yes, advance disclosure provides safe harbor; director can pursue if no
waste.
a. Broz
b. Northeast Harbor Golf Club v. Harris
2. Was the rejection of the corporate opportunity waste?
iv. Did the director purse the opportunity?
1. If yes, what avoids a finding of breach?
a. Del.
i. Broz and Guth Test
ii. Was the corp. able to exploit the opportunity?
iii. Is the opportunity reasonably related to the corp.’s line of
business?
iv. Did the corp. have an actual or expectant interest?
1. CC v. Chevron; Meinhardt
v. If yes to any of these, director violated duty of loyalty.
vi. If no to all, director may avoid a finding of breach.
b. ALI [§ 5.05(e)]
i. Good faith believe that not a corp. activity?
ii. Offered to the corp. w/n a reasonable time after suit filed?
iii. If yes to all, director may avoid a finding of breach.
2. If no, shouldn’t be here.

b. Is there a self-interested transaction?

Deals with interested directors will be void unless (1) the terms are faire to the corporation, or (2) the
interest and all material facts are disclosed to the corporation and the deal is approved by a committee of
disinterested directors or shareholders.

i. Did the transaction concern D compensation?

1. If yes, did an informed majority of disinterested S/H approve?
a. In re Bancorp Stockholders
b. Calma v. Templeton
c. Requires specific info. about narrowly tailored comp.
d. If no, burden on BOD to demonstrate fair price.
2. If either ratified by S/H or fair price, transaction stands.
3. If no, continue to ii.
ii. Are one or more of the D/Os a D/Os of the other organization or have financial
interests in the other organization?
1. If yes, continue to iii.
 2. If no, not a self-interested transaction.
iii. Did the interested D/Os fully inform the BOD or S/H?
1. Did a majority of disinterested Ds or S/ approve?
a. If yes, transaction is not voidable.
i. DGCL § 144(a)
2. If no, burden on Ds to show EFR.
a. Globe Woolen v. Utica G&E
iv. Was the transaction fair?
1. Procedurally?
2. Substantively?
a. If yes to both, transaction is not voidable.
3. In the parent-sub context, was the transaction at the detriment of min. S/H
or did the transaction exclude min. S/H?
a. Sinclair Oil v. Levien
b. If yes, burden on Ds to show EFR.
c. If no, standard of review is BJR.

c. Did the BOD and corp. officers fail to maintain oversight?

i. Did BOD (a) utterly fail to set-up reporting system OR (b) consciously fail to monitor
operations?
1. If yes to either, did the BOD know they were not discharging their fiduciary
duties?
a. If yes, likely liable for breach.
i. Stone v. Ritter
b. If no, likely not liable.

2. Did the BOD violate the duty of care?

A director owes a duty of care to the corporation to act in good faith. Under the business judgment rule, a
court will not second guess the decisions of the board of directors if it was made in good faith, on an
informed and rational basis.
a. Is there a DGCL § 102(b)(7) or MBCA § 2.02(b)(4) shield?
i. If yes:
1. Did the D misappropriate a benefit?
2. Did the D intentionally inflict harm on the corp. or its S/H?
3. Was there a conflict of interest?
4. Did the D intentionally violate criminal law?
5. If yes to any, § 102(b)7 and § 2.02(b)(4) do not shield D.
6. If no to all of the above, no personal liability for D’s violation; suit dismissed.
7. Malpiede v. Townson
ii. If no, continue.
b. Was BOD decision-making grossly negligent?
i. If yes:
1. Was the process rushed without asking critical questions?
2. Did the BOD fail to make an informed decision?
a. Van Gorkum
3. If yes to either, likely liable.
4. If no to both, likely not liable.
ii. If no, likely no liability.
1. In re Citigroup: not liable for regular negligence.

Piercing the Corporate Veil

Generally, a director is not personally liable for the acts or debts of the corporation, but the court will
pierce the corporate veil and hold the director personally liable to avoid fraud or injustice. Courts are
inclined to pierce the veil where the director is acting as the alter ego of the corporation, that is there is a
serious identity of interests. Also, courts are more inclined to pierce when the corporation was
undercapitalized at formation. Also, where a parent corporation forms a subsidiary for the purpose of
avoiding the parent’s debts, the court will pierce the corporate veil and hold the parent liable for the debts
of the subsidiary.

1. What is the object?

a. An individual owner
i. Inadequate capitalization?
1. If yes, must continue; not sufficient alone.
2. Western Rock Co. v. Davis
3. Consumers Co-op v. Olsen
ii. Alter ego?
1. If yes, did the owner use the control to violate the plaintiff’s legal rights?
a. KC Roofing v. On Top Roofing
b. If yes, likely proper for court to pierce the veil.
iii. Would failing to pierce the veil produce injustice and inequitable consequences?
1. If yes, likely proper for court to pierce the veil.
a. Baatz v. Arrow Bar
iv. If the individual owner or owners maintained complete control to render to corp.
functionless and used that control to violate the plaintiff’s legal rights, proper for
court to pierce the veil.
b. Parent Company
i. Does the subsidiary have a separate existence?
1. Are there overlapping directors?
a. If yes, must continue; not sufficient alone.
i. Craig v. Lake Asbestos
2. Did the parent exercise significant control?
a. If yes, indicates lack of separateness.
i. US v. Bestfoods
ii. Look for EEEs of Parent, who are not affiliated w/ subsidiary,
directing subsidiary action
ii. If yes, did the parent use the corporate form to perpetuate fraud or injustice?
1. If yes, proper for court to pierce the veil.
iii. If just overlapping directors, not proper for court to pierce the veil.

Takeover Defenses
1. Is there a hostile takeover?
a. If yes, continue.
b. If no, move to #4.
2. Refusal to disarm the poison pill?
Under Unocal, such actions are subject to enhanced scrutiny, rather than to the highly deferential
business judgment rule. The directors will bear the burden of proof in justifying that their defensive
measures are a proportionate response to a genuine threat to existing company policy. More specifically,
the board has the initial burden to prove both reasonable grounds for believing that a danger existed and
whether the response was proportional.

The basic Unocal framework has two parts. First, the board of directors will bear the burden of proof in
justifying that there’s a danger to corporate policy or effectiveness. Second, the board must show that the
response to that danger was proportional.
a. Reasonable belief that there’s a danger corp.?
i. Process?
1. Good faith?
2. Reasonable Investigation?
3. If yes, continue.
ii. Substance?
1. Price too low?
a. Delaware courts have held that an unsolicited tender offer for a per-
share price that is too low is a cognizable threat. Although not
 structurally coercive, courts are willing to treat it as substantively
coercive under Airgas.
2. Other legitimate threat?
3. Paramount; Unitrin
b. Proportional response?
i. Analyze the board’s actions in conjunction (if there is more than one defensive
action) as they are all in effect together, and they work in tandem to multiply their
total strength. If one defensive measure deals with impeding or interfering with
shareholder right to vote, do a Liquid Audio analysis for part 2.
ii. BOD’s defensive action proportional to the danger identified in a?
iii. Is it coercive or preclusive?
1. If yes to either, BOD action inappropriate.
iv. If not coercive or preclusive, is it within the range of reasonable responses?
1. Moran
2. Versata
c. If yes to a and b, refusal to disarm pill is appropriate.
3. Altering BOD election mechanics?
a. Is the action preclusive or coercive in how it affects S/H ability to vote?
i. Does it impede the S/H vote?
1. If yes, inappropriate BOD action.
2. If no, continue.
b. Does the BOD have a compelling justification?
i. What is BOD’s primary purpose?
ii. Pell v. Kill
1. Can’t be that shareholders will vote erroneously or out of a mistaken belief
iii. If yes, action is likely appropriate.
4. Has the BOD decided to sell?
a. Does the buyer have a controlling party?
i. If yes, Revlon duties apply; continue to b.
ii. If no, Revlon doesn’t apply.
b. Did the BOD exercise their duties under Revlon?
i. Did the BOD get the best value reasonably attainable?
ii. Did the BOD exercise fiduciary duties in doing so?
iii. Did the BOD learn vigorously, analyze rigorously, and negotiate actively?
c. What standard of review?
i. Enhanced scrutiny?
1. D’s burden to show process, reasonable action
ii. Duty of care claim?
1. P must show an utter failure and total disregard in an effort to get the best
price for s/h