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I intro to Law of Enterprise Organization

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I Intro to Law of Enterprise Organization
A. Efficiencies

1. Pareto Efficiency- No change can be made making at least one person better off without making at least one person worse off

Doesn’t go to net value

Doesn’t address externalities

2. Kaldor-Hicks Efficiency – If at least one person would gain, after all losers are compensated

Doesn’t involve actual compensation

3. Both Ignore distributive effects and legitimacy of original asset distribution
B. Developing the firm

1. Adam Smith believed agency costs of monitoring managers and assuring incentive alignment would be to high

2. Coase theorized extra-organizational transaction costs would be higher than inter-organizational agency costs.
C. Agency costs


Bonding- trust creation costs

Residual – Incentive Alignment costs

II Agency

Restatement 2nd of Agency (RSA)

1. Fiduciary relation resulting from:

a. Manifestation of consent by principal that agent shall act on his behalf and subject to his control

b. Consent by Agent

2.Termination by either party

Master/Servant vs. IC

1. extent of control over details

a. work hours

2. is agent involved in a distinct occupation

3. IS the work typically done by an employee or an IC

4. skill required

5. who provides tools and workplace

6. length of time of employment

7. payment by time or by job

8. is the work part of the employer’s regular business

9. what do the parties believe

10. is the employer in business

Actual Authority

Apparent authority – reasonable 3d party may infer authority from acts or statements of P

Inherent Authority A would ordinarily have such authority and T doesn’t know otherwise §161

A. Liability in Tort – Respondeat Superior

1. Generally liable if and only if there is a Master/Servant relationship and agent is acting within the scope of his employment.

2. RS2 §228 Within scope of employment if:

a. type of work employed to perform

b. occurs within time/space parameters of employment

c. intent at least in part to serve employer, AND

d. in case of use of force, force not unexpectable by master

3. §230 forbidden act may be w/in scope of employment

4. §231 criminal or tortious acts may be w/in scope

5. §232 failure to act may be w/in scope
Humble v. Martin

  • Woman leaves car at station, car rolls away and injures π

  • Humble owns station and Schneider, IC runs it

  • Agreement with Schneider found to create agency relationship

    • perform other duties as required by company

    • Humble pays majority of utility expenses

    • Humble set hours of operation

    • Terminable at will of Humble

Hoover v. Sun Oil

  • Sun owns all equipment and station and leases to Barone

  • No Agency relationship found

    • Barone independently determined hours of operation and hiring conditions

    • Barone had risk of profitability

    • No control over day to day operations

B. Liability in Contract

Nogales Service Center Ariz. 1980 p. 20

  • ARCO’s rep promises a fuel discount if certain conditions, ARCO reneges

  • Trial court refused to give instruction on inherent authority

  • Appeals upheld for procedural reasons, but inherent seems to have been present

Jenson v. Cargill Minn. 1981 p. 16

  • Cargill financed Warren grain mill

  • Agency found due to extent of Cargill’s control over operations

  • Cargill an active participant in managing the business, and made the key economic decisions

  • Illustrates risk of overly active creditors becoming Ps under law

C. Nature of Fiduciary Relationship

Duty of Obedience

Duty of Care

  • Good faith

  • Manner to best advance Ps interests

  • Not to work for self benefit

Duty of Loyalty

  • Good Faith As a reasonable person would

  • Become informed in

  • Exercising agency

  1. Duty of Loyalty

    1. RS2 §387 duty to act solely for Ps benefit in all matters connected w/ agency

    2. §338 Duty to give P any Profit made in connections with transactions conducted on behalf of P

    3. §389 Duty not to deal as adverse party without P’s knowledge - voidable

    4. §390 When acting as adverse party w/ principals consent, duty to deal fairly and disclose all facts which A knows or should know would reasonably affect P’s judgment

Tarnowski v. Resop Minn. 1952 p. 34

      • A takes secret commission on coin op franchise purchase by P

      • Deal found to not actually contain what it was purported to contain

      • P remedy from agent includes

        1. secret commission

        2. costs of recovery from seller

        3. Recovers MORE than he lost

Restatement 2 of Trusts

§203 – trustee accountable for any profit arising from administration of trust even if it doesn’t arise from breach of trust

§205 – liability in case of Breach – liable for

  • Any depreciation of estate

  • Any profits made by Trustee

  • Any profits which might otherwise have been made by Trust

§206 liability for Breach of loyalty - §205 applicable when trustee sells property to himself
In Re Gleeson Ill. 1954 p. 36

  • Tenant becomes trustee when landowner dies

  • Increases rent and extends lease for next season

  • Claims too difficult to secure a new tenant

  • Trustee was honest with beneficiaries

  • Court holds he was barred from dealing with himself as trustee and must return all profits

    • Regardless of good faith or disclosure

III. Joint Ownership: Partnership
Partnership property: tenancy in partnership
Meinhard v. Salmon NY 1928 p. 43

  • Duty of Loyalty

  • JV covering lease of building in NY

  • One partner approached re: leasing a larger piece of land and does deal

  • Other partner feels left out

  • Punctilio of on honor the most sensitive

  • Salmon should have shared at least notice of the opportunity w/ his partner

  • Meinhard gets 49% of the new venture

Vohland v. Sweet Ind. 1982 p. 47

  • Sweet employed in exchange for 20% of profits

  • Doesn’t participate in mgt or financing, or file as a partner

  • §7(4) UPA receipt of share of profits is PF evidence of partnership

  • Throughout course inventory increases through investment of earnings, which otherwise would have belonged by 20% to Sweet.

  • Sweet found to be a partner entitled to “wind up”

  • NB: If Vohland had reinvested solely out of his 80% he probably could have avoided this

Munn v. Scelera Conn. 1980 p. 51

  • Brothers agree to build house, go bankrupt

  • Before going kaput, π’s agree to have house finished by brother A

  • Brother A defaults and π’s seek recovery against brother B

  • UPA § 34-39 dissolution does not discharge one partner from responsibilities, but when a party assumes partnership obligation, departing party absolved w.r.t T if T, knowing of the agreement, consents to a material change in nature or time of payment obligations.

  • Court finds brother B non-liable b/e π’s materially altered the contract w.r.t. payment terms.

In Re Comark Cal. 1985 p. 55

  • Partnership goes bankrupt, but individual partners do not

  • Partnership creditor wins judgment against on partner’s property

  • Court hold creditor cannot enforce because such property must be accessible to partnership creditors as a whole, to be distributed by the bankruptcy trustee.

Jingle Rule (p. 57 and slides)

Parity Rule

UPA § 40

78 Bankruptcy (Ch 7) RUPA §807

Partnership Creditors always have first claim on Partnership Assets

Personal Creditors have first claim on Personal Assets

Partnership (only as a whole Comark) and Personal creditors on parity

Applies only if Partnership is not in Ch7 bankruptcy, and UPA is in force

National Biscuit v. Stroud N.C. 1959 p. 58

  • Stroud and Freeman partners in a grocery

  • Stroud tells Nabisco he won’t be responsible for any more orders

  • Freeman places orders

  • General partners under UPA §18 have equal rights in mgt and conduct of partnership business.

  • Stroud held liable b/e he couldn’t restrict power and authority of his general partner to conduct “ordinary matters connected with partnership business”

Dissolution and Disassociation



§29 Dissolution upon any change of partnership relations i.e. exit of a P, Dissolution forces Winding up

§601 Disassociation, pursuant to agreement Pship can continue if a P departs

§37 Winding up, orderly liquidation and settlement of Pship affairs

§801 Dissolution onset of liquidation and winding up

§30 Termination, follows winding up

§38 dissolution caused in any way, except in violation of Pship Agreement, unless otherwise agreed, each P may call for P property to be used to pay off liabilities, and remainder to be distributed in cash (sale of assets)


Ability of Ps to opt out of statutory wind-up when a partner leaves (Adams v. Jarvis)

Mode of liquidation in statutory wind-up (Dreifurst v. Dreifurst)

Limitations on power to force statutory dissolution and wind up (Page v. Page)
Adams v. Jarvis Wis. 1964 p. 63

  • Dr. Adams withdraws from 3 doc partnership

  • Pshp agreement holds withdrawal does not result in termination

  • Trial court finds withdrawal works as dissolution

  • Appeal finds parties are free to structure a Pship such that withdrawal does not force such a dissolution which would force winding up

Dreifurst v. Dreifurst Wis. 1979 p. 66

  • 3 brothers own 3 mills in partnership, one wants dissolution and wind up and sale of assets

  • Trial court just splits the mills

  • UPA §38 allows payment in cash ergo sale of assets

  • In Kind Distribution only if agreed to by partnership or in Mich.

    • No creditors

    • Sale sense less b/e nobody else interested in assets

    • In Kind is fair

  • NB If In kind is really more economically suitable, remaining P’s can buy withdrawing P’s rights to a liquidation, and they’re probably free to bid on assets.

Page v. Page Cal. 1961 p. 70

  • Partnership agreement to run laundry

  • When partnership appears to be about to make good money, big P calls for dissolution

  • Little P argues big P wants opportunity for himself

  • Restrictions on dissolution only through a term of partnership

  • Term can be implied only when supported by evidence

    • i.e. to make a certain amount of money or

    • Recoup investment

  • If π had proven bad faith (fiduciary breach), dissolution would be wrongful and could sue for damages

Limited Partnership

  • Limited liability for limited partners who don’t manage the business

  • Must always be one general partner

  • If ltd partners exercise mgt powers they may lose their ltd liability

Originally liked b/e you can get partnership (1 tier) taxation with corp. ltd liability

Now mostly LLCs

Delaney v. Fidelity Lease Ltd Tex. 1975 p. 74

  • 3 ltd partners formed a corp. to act as general partner

  • Corp only function was to operate the partnership

  • No requirement that creditor show reliance on partnership

  • If they controlled partnership through the corporation than they are liable as general partners

LLC – can have partnership taxation unless publicly traded equity

Actual Authority

Apparent authority – reasonable 3d party may infer authority from acts or statements of P

Inherent Authority A would ordinarily have such authority and T doesn’t know otherwise §161
IV. Introduction to the Corporate Form
5 Basic Characteristics of a Corporation

  • Legal Personality with indefinite life

  • Ltd liability for investors

  • Free transferability of share interests

  • Centralized management appointed by equity investors

  • Ownership and Profit sharing by capital investment (only sort of, only by IPO price)

Why Does Delaware Dominate?

Race to the bottom/race to the top?

Management paradise or most efficient body of law and best procedure?

Corporation statutes are primarily enabling

Can’t always contract around them

Judicially created fiduciary duties

Federal securities Law

Mandated terms:

  • Voting stock

  • Board of Directors

  • Shareholder voting for certain transactions

Charter also defines:

  • Corporations name, original capital structure

  • Different voting shares/rights

  • Can Board issue blank check preferred?

  • May establish size of board and other governance terms

  • Annual elections or classified


  • Must conform to incorporation statute and charter

  • Operating rules

  • Responsibilities of executives and directors

Sometimes SH have inalienable right to alter bylaws, sometimes Directors only

Shareholder Agreements

Agreements between SH

Case for limited Liability Easterbrook and Fischel p. 93

  • Decreases need for monitoring corporation

  • Less need to monitor other SH (in case of joint and several liability)

  • Makes diversification and passivity a more rational strategy

  • The above promote free transfer, which incentives mgt to act efficiently

  • Makes creditors real monitors of mgt tort exposure (HH notes 38)

Centralized management

Board can act contrary to SH Majority

BOD has primary management power
Automatic Self Cleansing v. Cunningham Eng. 1906 p.98 HH p. 42

  • Articles provide ¾ majority required for special resolution compelling board

  • Π wanted Board to sell some assets at specific terms but only has 55% majority

  • Judge doesn’t force sale

  • Protects Board’s responsibility to the minority

Del § 271 requires Board motion and SH vote on sale of assets, Board can still decide against sale even if SH are pro, why?

Board still has duty of care and loyalty to the minority (liability)

Del §141 Certificate of incorporation may modify Board power

RBCA §8.01 permits modification of Board powers by SH agreement (which must also be in articles) under §7.32 but only if the corp. isn’t exchange traded
Jennings v. Pittsburgh Mercantile Pa. 1964 p. 103 HH 46

  • Executive solicits RE agent to explore a sale and leaseback deal of all Co. owned land

  • Assures board approval and offers commission

  • Board does not approve and doesn’t pay commission

  • Court held no authority for this transaction

    • Agent can’t unilaterally create apparent authority

    • Transaction at issue was so drastic that

    • Jennings was on constructive notice to verify authority

Menard v. Dage MTI Ind. 2000 p. 106 HH 46

  • President operated Co. For years w/o board input

  • President signs and sale is held valid

  • Ruled to have inherent authority

  • Pres even told Menard he had to go back and get approval

  • Puzzling

V. Debt, Equity, and Economic Value

Basic Concepts of valuation HH 47

Economic risk calculi HH50

Efficient Capital Market Hypothesis- stock prices reflect all public info. Bearing on value of stock p. 123 HH 58

Debt v. Equity

Interest is pretax, dividends are not

VI. Protection of Creditors
Ltd liability means creditors can only recover from corp. ergo greater risk.

Protection Strategies

  • Mandatory Disclosure – Financial statements

  • Rules regulating corporate capital

  • Safeguard duties imposed on directors, creditors, or SH

  1. Regulating Corporate Capital

    1. Requiring equity contributions

    2. Restricting Distributions

      1. Dividend tests

      2. Fraudulent Conveyance Doctrine

      3. Fiduciary duties to creditors

      4. Equitable subordination

      5. Piercing the corporate veil

  2. Dividend Tests

    1. Minimum level of capital (abandoned in US)

    2. Prohibitions on Issuing dividends when net assets fall below a certain stated amount

      1. Stated amount chosen by company

      2. Can’t pay dividends when value falls below

    3. Capital surplus test

      1. Can only pay dividends out of surplus

      2. Some RE only, some also Paid in surplus

    4. Del §170a nimble dividend test

      1. Capital surplus or if no surplus can pay out of

      2. Current or preceding year net profits

    5. Equity insolvency test

      1. Can’t pay dividends if inability to meet debt obligations would result

    6. Tests can be avoided

      1. SH can reduce stated capital

      2. Can revalue assets upward

  3. Distribution Constraints

    1. NY Bus Corp Law §510 may only pay out of surplus and cannot render company insolvent

      1. §516a4 can only reduce stated capital w/ SH approval

    2. DGCL §170 nimble test

      1. Capital surplus or if no surplus can pay out of

      2. Current or preceding year net profits

    3. Cal §500 Modified Retained Earnings

      1. RE or

      2. Assets, as long as assets remain 1.25x liabilities and CA>CL

    4. RMBCA §6.4

      1. Can’t pay dividends if it would make you unable to pay debts as they come due or

      2. If liabilities plus preferential SH claims exceed assets

      3. But can use a fair value asset test (not bound to Balance sheet value)

  4. Standards Based Duties

    1. Director Liability

    2. Credit Lyonnaise Del.1991 HH72

      1. Del: when a firm is insolvent or “in the vicinity of insolvency” duty to consider not only SH, but creditors as well

      2. Firms must maximize value of a firm as a whole

      3. Why didn’t the Bond Holders have to covenant for this?

  5. Creditor Liability: Fraudulent Transfers

    1. Fraudulent conveyance Doctrine-effective obligation to T parties dealing with an insolvent or near insolvent debtor must give fair value in any transaction or can be targeted by debtor’s creditors.

    2. UFTA §4a1 & UFCA §7 p. 140

      1. Present or future Creditors may void transactions with intent to hinder, delay or defraud any creditor of a debtor

      2. Void transfers made w/o reasonably equivalent value if debtor left w/ unreasonably little assets in relation to its business or debtor intended, or reasonably should have known that he was incurring debts beyond his ability to pay when due, or if the debtor becomes insolvent

      3. Kupetz v. Wolf future creditors who knew or could easily have found out about transfers cannot attack them

      1. Capital surplus or if no surplus can pay out of

      2. Current or preceding year net profits

  6. Leveraged Buyouts crease senior preferred debt, displacing equity and old debt

  7. Equitable subordination applies where controlling party is also a creditor

    1. Costello v. Fazio 9th cir. 1958 p. 142 HH 78

      1. Partnership with Fazio as principal contributor

      2. Partners withdraw most of their investments and incorporate

      3. Corporation goes bankrupt 2 years later, complete turnover of creditors

      4. New capital found to be inadequate

      5. When a partnership is incorporated and the partners become officers directors and shareholders, and they convert the bulk of their capital contributions into loans leaving the corporation undercapitalized their claims as creditors will be subordinated to general creditors

      6. No mismanagement, fraud or deception

        1. Transaction must be justifiable “within the bounds of reason and fairness”

    2. Costello Issues

      1. Can they escape liability to continuous creditors? Only if creditors agree – Munn v. Scelera TR 4

      2. What if its a new corporation with no predecessor? No problem as long as no one is misled no law against undercapitalization

      3. What about creditor turnover as in Fazio?

      4. Perhaps they were relying on Pships established Rep.

      5. See UFTA §4

  8. Piercing the Corporate Veil

    1. Lowendahl test

      1. SH who completely dominates corporate policy

        1. Usually failing to treat corporation formality seriously

      2. uses control to commit a wrong which causes injury

    2. Krivo Industrial Test

      1. Pierce the veil whenever its recognition would extend the principle of incorporation beyond its legitimate purposes and would produce an iniquity

    3. Generally

      1. Disregard of corporate formalities

      2. Thin capitalization

      3. Few SH

      4. Active SH involvement in mgt

    4. Sealand v. Pepper Source 7th Cir. 1991 p. 148 HH83

      1. Marchese owns Pepper Source and several other Co.s

      2. Ignores almost all corporate formalities

      3. Mixes their finances with each other and his own

      4. 2 part test

        1. Unity of Interest and ownership focus on 4 factors

          1. Ignoring formalities

          2. Commingling funds and assets

          3. Undercapitalization

          4. One corp. treating another’s assets as its own

        2. Not piercing would sanction fraud or promote injustice

          1. Must be a wrong beyond a creditors inability to collect

            1. Intent to avoid responsibility

            2. Unjust enrichment

            3. In this case tax fraud, and intent to manipulate assets to avoid repayment

    5. Sealand notes

      1. Are funds pushed around to mislead creditors as to what’s available to pay debts?

    6. Kinney v. Polan 4th cir. 1991 p. 152 HH 86

      1. Industrial (shell owned by Polan) leases from Kinney

      2. Polan leases from Industrial

      3. Industrial defaults

      4. Industrial veil pierced

        1. no formalities

        2. zero capitalization

        3. clear intent to use Industrial purely as a shield

      5. but see Laya when creditors can be expected to check up (i.e. banks) maybe they can’t pierce

    7. Courts won’t pierce vis-à-vis

      1. Public Corporations

      2. Passive SH

      3. Unlikely against minority SH

      4. Almost never if all formalities are respected and nothing funny about its accounts

    8. Walkovsy v. Carlton NY 1966 p. 157 HH 90

      1. Cab company tort case

      2. Carlton owns 10 Cos. 2 cabs each

      3. Funds regularly drained (dividended out)

      4. Π wants more than the 10K liability insurance min. but Co. that hit him had no real assets

      5. Free to pierce horizontally, as all companies were owned and operated as one

        1. run as a single enterprise with common financing, support, and intermingling

      6. Can’t pierce v-a-v Carlton b/e there’s no allegation that he was operating the business in his individual capacity

        1. low capitalization never enough

        2. legislature set the 10K minimum why F with it

        3. must allege intermingling of assets or lack of formal barrier between Carlton and corp.

      7. might be able to recover from Carlton with

        1. NY §510 dividend test

        2. fraudulent conveyance of some monies

      8. Dissent Keating wants reasonable capitalization test

        1. are torts so expectable that money should be set aside for them

        2. what about the statutory minimum

      9. Clark’s idea tort victims should get primacy over creditors (but they don’t)

    9. Liability after dissolution p. 162 HH97

      1. Del §278, 282 SH liable for pro rate share of distributed assets for claims arising w/in 3 yrs of dissolution

      2. RMBCA §14.07(c)(3)-doesn’t state 3 year limit

    10. Successor Corporation liability p. 162

      1. Liability follows the product line

    11. Hannsman and Kraakman Pro unlimited SH liability in torts p. 162 HH 98

VII. Normal Governance: The Voting System

  1. Role and Limits of SH voting p. 171 HH 101

    1. Right to elect Board

      1. Collective action problems ergo SEC 1934 proxy rules

        1. Mandated Disclosure

        2. 1992 made institutional block voting easier

      2. Primary Right

        1. Every Corp must have voting stock

        2. Annual elections (can be classified Max of 3 in Del)

        3. Law dictates minimum circumstances

          1. Notice dates and requirements as well as quorum

      3. Board Removal

        1. At common law by SH for cause

        2. D’s cannot remove colleagues but can petition a court to do so

        3. DGCL §141k makes it harder to get rid of a classified board p. 175

    2. Cumulative voting HH 102

    3. ????????????? HH103????????????????????????????????????????????????????

  2. Hilton v. ITT Nev. 1997 p. 177

    1. Hilton wants to take over ITT

    2. Board delays SH meeting and enacts comprehensive plan creating 3 spin-offs

    3. Major spin-off now has classified board w/ 80% vote required to declassify or remove D’s w/o cause

    4. Board cannot take an action otherwise permissible w/ purpose of disenfranchising SH

    5. Circumstantial evidence which goes to purpose

      1. Timing

      2. Entrenchment

      3. Stated Purpose

      4. Benefits

      5. Effects

    6. “Interference w/ the SH franchise is especially serious”

      1. b/e sale and voting are SH only protections

  3. SH Meetings and Alternatives

    1. SH may vote to ammend and repeal bylaws

    2. Remove Ds

    3. Adopt SH resolutions to ratify Board actions or request actions

    4. If no meeting held w/in 13 mos. Of last meeting, Del §211 courts will entertain a SH petition and require a prompt meeting

    5. Special Meetings

      1. RMBCA §7.02 Corp. must hold a special meeting if called for by Board or aperson authorized in charter, or 10% SH demand it in writing

      2. Del doesn’t have 10% provision

    6. SH Consent Solicitations – Paper meetings

      1. Del §228 if they could do it at a real meeting w/ 100& attendance, they can do it by paper

      2. RMBCA requires unanimous SH consent

  4. Rosenfeld v. Fairchild NY 1955 p. 183 HH 104

    1. Who pays for the proxy war?

    2. Incumbents spent 106K corp money and 28K personal

    3. Insurgents won and spent 127K which they reimbursed after winning w/ SH approval

    4. Also reimbursed losers for 28K

    5. Dissenting SH wants money returned

    6. Incumbents reimbursed win/lose if acting in good faith in a contest over policy

    7. SH ratified insurgent reimbursement is upheld

    8. Generally insurgents must win to get reimbursed

    9. HH 105 explores financial incentives involved

  5. Class Voting

    1. Typical class voting requires a majority in every class of voting stock entitled to such a class vote

    2. DGCL §242(b)(2) holders of a class of stock entitled to vote upon any ammendment which would

      1. increase or decrese the aggregate shares of of the class

      2. increase or decrease par value of the shares

      3. alter or change the powers, preferences, or special rights of the shares so as to affect them adversely

    3. RMBCA if a proposed charter ammendment would have an adverse affect (doesn’t require it to be an ammendment to their class)

    4. Del could still insert a senior class

  6. SH Information Rights p. 187

    1. DGCL §220 any stockholder on written demand and sworn oath of legitimate purpose can inspect stock ledger, list of SH and other

      1. Legitimate purpose – reasonably related to SH interests as a SH

  7. General Time Corp v. Talley Del. 1968 p. 189

    1. Desire to solicit proxies is a legitimate purpose

    2. Entitled to a SH list to make a proxy

    3. Thiele denied when he wanted to sell it as a mailing list.

  8. Separating Control from Cash Flow Rights

    1. A Corp can’t vote shares in itself which it owns directly or indirectly p. 190

    2. DGCL §160(c) cannot vote or count for quorum shares of a corp

      1. Belonging to it

      2. Belonging to another corp if majority of shares entitled to vote in the election of directors is held directly or indirectly by the corporation

  9. Speiser v. Baker Del 1987 p. 191 HH 110

    1. See HH110 for picture of ownership

    2. Baker and Speiser own a piece of Chem, but control it through Med.

    3. Med is owned by Chem, but owns a big piece of Chem.

    4. Speiser (bad) wants to force a Med SH meeting, and can under Del §211

    5. Stock held by a corporate subsidiary can in some circumstances belong to the parent and be prohibited from voting even if the Parent doesn’t hold a majority of shares entitled to elect directors.

    6. Reasoning, §160 says you cant vote them if you control the elections, doesn’t say you always CAN vote them if you don’t control the elections.

  10. Easterbrook and Fischel Voting in Corporate law p. 197 cant separate vote from own

  11. Schreiber v. Carney Del 1982 p. 199 HH 111

    1. TI wants to merge with TA

    2. JCC owns 35% of TI, and threatens to veto merger because it has warrants which would expire in case of merger, and doesn’t have enough cash to exercise them

    3. IC of TI, negotiating at arms length decides to lend JCC the money

    4. Loan had no cash effect on TI because it was immediately paid back to exercise the warrants

    5. Loan approved by Board and Majority of uninvolved SH

    6. Vote buying illegal per se if its purpose is to defraud or disenfranchise other SH

    7. Not void per se b/e object not to defraud, and it was in other SH best interest

    8. Voidable, but ratified by the independent SH vote

  12. Controlling Minority Structures p. 203 HH 112

    1. Dual Class equity structures – most popular

      1. High vote and low vote stock

    2. Pyramiding controller owns 51% of A which owns 51% of B ….

      1. US and UK tax at each transfer, so this is pricey

    3. Cross Ownership

    4. Investment Co. act of 1940 requires disclosure of B and C

  13. Easterbrook and Fischel voting and collective action p. 207

  14. Proxy Rules basic framework

    1. Securities Act of 1933 – Disclosure procedures when selling securities on public markets

    2. SA 1934 – establishes disclosure reqmnts for corps when they go public

    3. Reg 14A (14A1-12) – regulate proxy solicitation process and interSH communication

    4. Schedule 14A – disclosure reqmnts in “full dress” registration statement


      Old p. 211

      New (post 1992)


      Almost anything held to be a proxy solicitation

      Expensive and difficult


      Solicitations not actually seeking proxy authority

      People owning < $5million

      Self funded solicitations by mgt. or Board

      Simple announcements and explanations, even if in advertisement form


      Exempts Solicitations to fewer than 10 SH

      Exempts solicitations by individuals who don’t actually solicit proxies

      Unless you own >$5million, but then you can still advertise freely


      Disclosure requirements

      Doesn’t apply to speeches or advertisements provided no proxy form is attatched, and data has been filed w/ SEC

      14a 4,5

      SH can choose or cross out nominees

      Mgt can bundle Directors and initiatives

      Must unbundled

      Short Slate rule (ie if I propose only a portion of the Board I can indicate which of mgts I like)


      Requires advanced deposit of proxy solicitations w/ SEC

      Proxy statements must be prefiled

      Other Comm. Can be filed at time of issue


      Must provide SH list, or mail the proxy

      Unclear p. 216

  15. Tapers Hypothetical p. 216 HH114???????????????????????????????????????????????

  16. 14a8 Shareholder proposals to be included w/ proxy materials p. 218 HH 115

    1. Must hold $2K or 1% of stock for a year

    2. Must File w/ Mgt 120 dys prior to release

    3. May not be > 500 wds

    4. May not violate subject matter restrictions

      1. Cannot relate to ordinary business

      2. Cannot relate to <5% of business

      3. Cannot relate to election of Directors

      4. Cannot conflict with Co. proposal

      5. Cannot be illegal

      6. Co. has burden to justify exclusion

    5. CASE STUDY p. 220 HH 116

    6. CASE STUDY: Binding Pill Redemption p. 224 HH 116

      1. SH vote to force Board to redeem pill and not adopt new one

      2. Board ignores it

      3. Oklahoma court overturns

      4. Oklahoma Legislature subsequently reserved power to amend bylaws to Ds

      5. Delawazre probably would not allow such a motion

    7. Corporate Social Responsibility Proposals p. 225

      1. Social policy issues cant be tossed out as ordinary business p. 226

    8. 14a9 Antifraud p. 227 roughly same ot prove as fraud

      1. materiality

      2. culpability

      3. reliance and causation

      4. remedies

    9. Virginia Bankshares US 1990 p. 229 HH 118

      1. Whether a statement couched in conclusory or qualitative concerns purporting to explain Ds reasons for recommending corporate action can be misleading under 14a (YES)

        1. when knowingly false

      2. Whether damages can be shown by a group of voters too small to be required for the action(NO)

        1. material if a reasonable SH would consider it important

      3. Still have a fiduciary Claim

      4. Dissent: 15% could have tried to convince others

    10. Fiduciary duty of Candor

      1. State law fraud remedy

        1. knowingly false

        2. material

        3. relied on

        4. causing injury

      2. Del Majority SH and D’s have duties to include all germane facts

        1. proxies or tender offers

        2. when asking SH to take action

      3. Whenever Ds communicate publicy or directly with SH about corp affairs, fiduciary duty

VIII. Normal Governance: Duty of Care
Fiduciary Duties are:

  • Obedience

  • Loyalty (self dealing)

  • Care

  1. Duty of Care ALI §4.01(a) p. 240 HH 119

    1. Ds and Os have duty to perform functions

      1. In good faith

      2. In a manner he/she reasonably believes to be in co.s best interests

      3. With care that an ordinarily prudent person would reasonably be expected to exercise in a like position & similar circumstances

  2. Business Judgment Rule ALI §4.01(c)

    1. D or O who makes a BJ in good faith fulfills duty if

      1. Non interested party

      2. Is informed to the extent he believes appropriate under circumstances

      3. Rationally believes it to be in Corp’s best interests

  3. Gagliardi v. Trifoods Intl Del 1996 p. 241 HH 120

    1. When a Director is independent and disinterested there can be no liability for Corp loss unless facts are such that no person could possibly authorize such a transaction if they were trying to exercise their duty in good faith

  4. Del §145 Indemnification

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