Outline Fall 2007 Corporations Outline Acevedo Fall 2007 I. Corporation A. Broad Overview 1. Formation 2. Operation 3. Termination II.

II. Agency A. Restatement of the Law 2nd (Agency) 1. 1 Agency; Principal; Agent a. (1) Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to act. b. (2) The one for whom action is to be taken is the principal c. (3) The one who is to act is the agent d. Notes i. Looking for a manifestation of consent by both parties to consent ii. An Agency is a fiduciary relationship 2. 2 Master; Servant & Independent Contractor a. (1) A master is a principal who employs an agent to perform services in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service b. (2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master. c. (3) An independent contractor is a person who contracts with another to do something for him but who isnt controlled by the other nor subject to the others right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent. d. Notes i. A master is a principal ii. A servant is an agent iii. An independent contractor may or may not be an agent 1) Have to establish how much control there is by the principal 3. 4 Disclosed Principal, Partially Disclosed Principal; Undisclosed Principal a. (1) If at the time of a transaction conducted by an agent, the other party thereto has notice that the agent is acting for a principal and of the principals identity, the principal is a disclosed principal. b. (2) If the other party has notice that the agent is or may be acting for a principal but has no notice of the principals identity, the principal for whom the agent is acting is a partially disclosed principal. c. (3) If the other party has no notice that the agent is acting for a principal, the one for whom he acts is an undisclosed principal. 4. 6 Power a. A power is an ability on the part of a person to produce a change in a given legal relation by doing or not doing a given act.

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Outline Fall 2007 b. Notes i. Ability on the part of a person to produce a change in a given legal relation by doing or not doing an act ii. Did the agent have the power to do this? 5. 7 Authority a. Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principals manifestations of consent to him. 6. 8 Apparent Authority a. Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the others manifestations to such third persons. 7. 26 Creation of Authority; General Rule a. Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principals account. b. Notes i. Can be created by written or spoken words, or conduct 8. 27 Creation of Apparent Authority a. Except for the execution of instruments under seal or for the conduct of transactions required by statute to be authorized in a particular way, apparent authority to do an act is created as to a 3rd person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him. 9. 82 Ratification a. Ratification is the affirmance by a person of a prior act which didnt bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. b. Notes i. 3 elements 1) Affirmance by a person 2) Of a prior act 3) Done on his account B. Three Levels of Agency Power 1. Actual Authority a. Express grant of authority from the principal to the agent 2. Apparent Authority a. Appearance of authority that a principal creates in an agent that is relied upon by a third party 3. Implied Authority a. Authority that someone has by virtue of their office or position b. Inherent Authority i. Authority given to principal, and the agent doesnt have authority to do something, but by virtue of their office they use it for a transaction

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Outline Fall 2007 C. Respondeat Superior 1. Status inquiry a. Do you have a servant? Or i. W/in the scope of employment 1) Principal is liable ii. Outside the scope of employment 1) P is not liable b. Do you have an independent contractor? i. General Rule No Liability ii. Exception Inherently Dangerous Activities 1) Principal is Liable D. Case Application 1. Three-Seventy Leasing Corporation v. Ampex Corp a. Rule: Absent knowledge on the part of the third party, to the contrary, an agent has apparent authority to do those things that are reasonable and proper to the conduct of the business. 2. Hodeson v. Koos Brothers a. Rule: Where a proprietor of a place of business, by his dereliction of duty, enables one who is not his agent, conspicuously to act as such, and ostensibly to transact the proprietors business w/ a patron in the establishment, the law wont allow the proprietor to escape liability. 3. Atlantic Salmon v. Curran a. Rule: if an agent seeks to avoid personal liability on a contract entered into by him on behalf of his principal, then it is the duty of the agent to disclose,(1) that he is acting in a representative capacity, and (2) the identity of the principal i. Whats the value of an undisclosed principal? 1) You can have an indemnification agreement between the agent and principal, so that if the agent is sued, then the agent can direct the principal to stand in his place 4. Humble Oil, Hoover, Holiday Inn, Miller v. McDonald a. Rule: Lack of control over day to day operations does not amount to control i. Test: Whether the franchisor has retained the right to control the details of the day to day operation? b. Control is the critical factor A fact intensive inquiry 5. Ira Bushey & Sons v. US a. Rule: Where the conduct of an employee is foreseeable, the employer will be held liable. 6. Manning v. Grimsley a. Rule: To recover damages from an employer for injuries resulting from an employees assault, P must demonstrate that the employees assault was in response to the plaintiffs conduct which was presently interfering with the employees duties successfully 7. Majestic Realty Associates v. Toti Contracting Co. a. Rule: Exceptions to independent contractor liability i. Where Principal maintains control of the independent contractor ii. Where principal hires an incompetent contractor

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Outline Fall 2007 8. Reading v. Regem a. Rule: If a servant takes advantage of a service, and violates his duty of honesty and good faith, to make a profit for himself in the sense that the assets of which he has control the facilities he enjoys or the position which he occupies, are the real cause of his obtaining the money, then he is accountable for it to this master. i. Agent is liable to the master for money, if the agent uses the masters property to make money 9. General Automotive Manufacturing Co v. Singer a. Rule: An agents fiduciary duty to his principal imposes on the agent a duty to exercise the utmost good faith and loyalty so that he doesnt act adversely to the principals interest III. Fiduciary Duty A. Meinhard v. Salmon 1. Rule for fiduciary duty among partners a. High standard for duty among partners b. Applies in the partnership, LLC, and corporate context B. 3 Elements 1. Duty of Care 2. Duty of Loyalty 3. Duty of Good Faith IV. LLCs A. Overview 1. LLCs are conceptually similar to how corporations operate B. Summary 1. The LLC is an alternative to the corporate and partnership form 2. Highly flexible organization a. You get the benefits of Limited Liability, and the flexibility of a partnership 3. There are critical formalities that must be followed a. You must make a filing to create an LLC i. If you dont do it, you default to a partnership 4. An operating agreement is highly recommended but not required a. Nothing more than a partnership agreement w/ a different title 5. The standard fiduciary duties apply among the members of an LLC 6. Limited Liability for the members 7. Single Layer of Tax a. As opposed to a corporation that has a double layer of tax 8. There is piercing potential for LLCs V. Corporation A. Model Business Corporation Act 1. Formation a. 2.01 Incorporations i. One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the secretary of state for filing ii. Notes

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Outline Fall 2007 1) 1 or more people may act as the incorporator or incorporatators of a corporation I. Owe the company a fiduciary duty to act in their best interest b. 2.04 Liability for Preincorporation Transactions i. All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. c. 2.02 Articles of Incorporation i. (a) The articles of incorporation set forth: 1) A corporate name for the corporation that satisfied the requirements of 4.01. 2) The number of shares the corporation is authorized to issue; 3) The street address of the corporations initial registered office and name of the initial registered agent at that office; and 4) The name and address of each incorporator ii. (b) The articles of incorporation may set forth; 1) The names and addresses of the individuals who are to serve as the initial directors; 2) Provisions not inconsistent with law regarding; I. (i) the purpose or purposes for which the corporation is organized; II. (ii) managing the business and regulating the affairs of the corporation; III. (iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders; IV. (iv) a par value for authorized shares or classes of shares; V. (v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; 3) Any provision that under this Act is required or permitted to be set forth in the bylaws; 4) A provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm of the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law. 5) A provision permitting or making any obligatory indemnification of a director for liability (as defined in section 8.50(5)) to any person for any action taken, or any failure to take any action, as a director, except liability for; (A) receipt of a financial benefit to which the director is not entitled; (B) an intentional infliction of harm of the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law. iii. (c) The articles of incorporation need not set forth any of the corporate powers enumerated in this Act.

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Outline Fall 2007 iv. (d) Provisions of the articles of incorporation may be made dependent upon facts objectively ascertainable outside the articles of incorporation in accordance with section 1.20(k). v. Notes 1) Anyone who acts knowing that the company is not yet formed, the law will hold the promoter responsible vi. Notes 1) (a) Mandatory 2) (b) Discretionary 2.03 Incorporation i. (a) Unless a delayed effective date is specified, the corporate existence begisn when the articles of incorporation are filed. ii. (b) The secretary of states filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except in a proceeding by the state to cancel or revoke the incorporation or involuntarily dissolve the corporation. iii. Notes: 1) The corporate existence begins when the articles of incorporation are filed I. You need to operationalize the company hold a meeting, adopt a board, A. You have to give the corporation substance 2.05 Organization of Corporation i. Either the incorporators or initial board can operationalize the company 2.06 Bylaws i. Internal regulations of the company 1) Normally set out the authority of the board, and what the corporation can and cant do 3.01 Purposes i. Can engage in any lawful purpose 3.01 General Powers i. Corporation has broad powers to do all things necessary or convenient to carry out its business ii. A corporation has perpetual existence, it can go on forever 4.01 Corporate Name i. Must indicate that the corporation is a corporation ii. Must be distinguished upon the records of the secretary of state 5.01 Registered Office and Registered Agent i. Every corporation must maintain a registered office and agent, to allow for process of service

d.

e. f.

g. h.

i. j.

B. Cases 1. Corporate Formation a. Remember Default position, is that there is no shareholder liability, the corporation absolves all of the liability b. Promoter Liability i. Southern Gulf Marine v. Camcraft

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Outline Fall 2007 1) Rule: Where the party contracts w/ a corporation and incurs liability or obligations in his favor, and the party is sued upon his contract, neither is permitted to deny the existence or legal validity of the corporation c. Walchovski v. Carlton i. Rule: Where a corporation is a dummy for its individual shareholders to carry on personal business, the individual will be liable. However, where a corporation is a corporate combine which actually conducts a business the corporation will be liable. d. Sea Land Service v. Pepper Rules for piercing the corporate veil i. Rule: To pierce the corporate veil you must meet two standards 1) Unity of ownership and interest I. Failure to maintain corporate records or observe corporate formalities II. Find evidence of commingling of funds or assets III. Company itself is under capitalized IV. Treating the assets as your own 2) Observing the corporate existence promotes a fraud or injustice e. In re Silicone Gel Breast Implants Products Liability Litigation i. Rule: Limited liability is the rule and not the exception, however, where a corporation is so controlled as to be the alter ego or mirror instrumentality of its shareholders, the corporate form may be disregarded in the interests of justice 1) Have to apply the totality of the circumstances C. Derivative Suits 1. Direct v. Derivative suit a. Direct: i. Ex: Affecting the shareholders right to vote, compelling the payment of dividends, preserve right to inspect corporate books and records ii. Shareholder owns the right, not the corporation b. Derivative Suit i. When there is some damage to the corporation, and the shareholder is bringing the suit on behalf of the corporation ii. The corporation may be named as a nominal defendant iii. Typically involve a breach of a duty of care or duty of loyalty, corporate opportunity, excessive compensation, self dealing iv. Theres tension over who gets to bring the suit 1) Nobody wants to sue themselves v. Requirements 1) Contemporaneous Ownership I. You must own the stock, and you must continue to own the stock II. Exception: When you buy the stock, and there was a preexisting wrong that was done 2) Continuing Ownership I. You must continue ownership up until the date of settlement of judgment 3) Written Demand on the board I. Exception: When the demand is excused

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Outline Fall 2007 A. When the demand is futile 1. High burden, the corporation has the benefit of the business judgment rule 2. Must prove that there is self interest on behalf of the board in rejecting the claim vi. Corporations create special litigation committees, to decide whether to proceed w/ a lawsuit 1) The SLC will decide whether to proceed 2) Presumption of good faith and deference to the business judgment rule 3) Where the plaintiff proves that the SLC did not exercise good faith, the court may interfere vii. Any settlement that is proposed requires court approval 2. Cases a. Cohen v. Beneficial i. Rule 7.46 Payment of Expenses 1) On termination of the derivative proceeding the court may: I. Order the corporation to pay Ps reasonable expenses incurred in proceeding if it finds the proceeding has resulted in a substantial benefit to the corporation. II. Order P to pay any of Ds reasonable expenses incurred in defending the proceedings if it finds that the proceeding was improper III. Order a party to pay an opposing partys reasonable expenses incurred because of the filing of a pleading, motion or other paper, if it finds that the pleading, motion, or other paper was not well grounded in fact, after reasonable inquiry, or warranted by existing law or good faith argument for the extension, modification or reversal of existing law and was interposed for an improper purpose ii. Illustrates: An unsuccessful plaintiff in a derivative suit may have to reimburse the company for its litigation expenses b. Eisenberg v. Flying Tiger Line, Inc. i. Rule: A cause of action that is personal and not derivative cant be dismissed on the basis of a state statute requiring the posting of a security c. Grimes v. Donald i. Illustrates: the board decision rejecting the demand is entitled to a presumption of good faith ii. Rule: absent evidence to the contrary, a board decision rejecting a demand for a lawsuit is entitled to the presumption that the rejection was made in good faith d. Marx v. Akers i. Illustrates demand requirement and excuse or futility ii. Plaintiff in allege with particularity e. Auerbach v. Bennett i. Introduces us to the concept of Special litigation committees ii. Rule: A substantive decision of the SLC namely whether to pursue litigation or not is subject to the business judgment rule and therefore outside the scope of the courts review

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Outline Fall 2007 iii. Rule: A procedural decision of the SLC, namely the adequacy and appropriateness of the SLCs investigative procedures and methodologies is subject to the review of the courts. f. Zapata Corporation. v. Maldonado i. Illustrates: How to tell when a decision by an SLC to terminate a derivative lawsuit is valid ii. Rule: When invalidating a SLC decision to terminate a derivative action, the court should inquire into the independence and good faith of the committee, and the basis for supporting its conclusions iii. Rule: The court should determine applying its own Business judgment whether the motion to dismiss should be granted g. In re Oracle Corp i. Rule: Question of independence turns on whether a director is for any substantial reason incapable of making a decision with only the best interest of the corporation in mind D. Role and Purposes 1. Cases a. Dodge v. Ford i. Rule 8.01 Requirement For and Functions of Board of Directors 1) (a) Except as provided in 7.32, each corporation must have a board of directors 2) (b) All corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any limitation set forth in the articles of incorporation or in an agreement authorized under 7.32 ii. Rule: Directors of a corporation have the power to declare a dividend, absent a clear showing of fraud or misappropriation the courts wont interfere with the management decisions of the directors b. Shlensky v. Wrigley i. Rule: Business Judgment Rule VI. Duties of Directors, Officers, and Other Insiders A. Duty of Care 1. Three Elements a. Due Diligence i. Rule: When making a corporate decision, the board is under a duty of due diligence that will alert them of all relevant facts?? b. Rational Basis i. Kamen: Rule: Board must have a rational basis for making its decision 1) Doesnt mean the optimal course of action, it means any reasonable alternative under the facts and circumstances c. Attention and Attendance i. Francis: Rule: Directors are under an obligation to be reasonably informed of corporate activities, and under a continuing obligation to keep informed. Directors also have an obligation to monitor the corporate affairs and policies of the company

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Outline Fall 2007 2. Caremark a. Rule: A director has a duty to make a good faith effort to ensure that the corporation has an existing information and reporting system that will bring to its attention in a timely matter matters of importance so that the board can satisfy its obligations. B. Duty of Loyalty 1. Overview a. Self Dealing A situation where you, as a director are dealing w/ the corporation in a transaction i. Ex: Landlord/Tenant, you own some property, and you lease some property to the corporation ii. Can be either direct or indirect (Through A directors other company) b. Competing w/ the corporation i. Direct or Indirect c. Corporate Opportunity Doctrine i. Direct or Indirect ii. When a director seizes an opportunity for himself, that really belongs to the company. iii. Sub-Categories 1) Line of Business Test I. Most common test II. Looks to see if the opportunity is closely related to the existing or prospective activities of the corporation. 2) Interest or Expectancy Test I. Looks to see if the corporation had an interest or expectation in the transaction II. At one time this was the predominant test, became too difficult 3) Fairness Test I. Really ambiguous, hard to apply II. Evaluate the relevant facts to establish the fairness of the particular facts and circumstances. 4) Combination of the line of business test and the fairness test d. Executive Compensation i. Your compensation will always be your base salary, bonus, any equity, and additional perks. ii. Hard to attack if you can establish that the board acted independently and in good faith. 2. Directors & Managers a. Bayer v. Beran i. Illustrates the duty of Loyalty and the board acting as a body ii. Rule 8.20 - Meeting 1) (a) The board of directors may hold regular or special meetings in or out of this state 2) (b) Unless the articles of incorporation or bylaws provide otherwise, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting throught he use of, any

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Outline Fall 2007 means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting iii. Rule 8.21 0 Action without Meeting 1) (a) Except to the extent that the articles of incorporation or bylaws require that action by the board of directors be taken at a meeting, action required or permitted by this Act to be taken by the board of directors may be taken without a meeting if each director signs a consent describing the action to be taken and delivers it to the corporation 2) (b) Consent must be unanimous, otherwise it is invalid. 3) (c) A consent signed under this section has the effect of action taken at a meeting of the board of directors and may be described as such in any document iv. Rule 8.22 Notice of Meeting 1) Unless articles or bylaws provide otherwise, regular meetings may be held without notice of the date, time, place, or purpose of the meeting. v. Rule 8.23 Waiver of Notice 1) Director may waive any notice required by the act, the articles, or bylaws before or after the date and time stated in the notice. 2) A directors attendance or participation at a meeting waives any required notice to him of the meeting. vi. Business Judgment Rule 1) Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interest, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient. vii. Rule In an interested transaction, the board of directors must prove 1) The good faith of the transaction; and 2) The transaction is inherently fair to the corporation b. Lewis v. S.L. & E., Inc. i. Illustrates: In an interested transaction the board of directors has the burden of proof. ii. Rule: In a conflict of interest situation, courts will require that the board establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board. iii. Business Judgment Rule presumes that there is no conflict of interest, when there is a conflict of interest we have to apply the fairness theory 3. Corporate Opportunities a. Broz v. Cellular Information Systems, Inc. i. Illustrates: 1) The difficulty a director has when he serves on the board of more than one company

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Outline Fall 2007 2) The corporate opportunity doctrine is a subset of the duty of loyalty, it isnt a separate document ii. Rule: Corporate Opportunity Doctrine 1) If there is presented to a corporate officer or director a business opportunity: I. Which the corporation is financially able to undertake II. Is in the line of the corporations business III. And is of practical advantage to it 2) The law wont permit him to seize the opportunity for himself. b. In Re eBay, Shareholders litigation i. Demonstrates the duty of loyalty within the IPO context 4. Dominant Shareholders a. Sinclair Oil Corporation v. Levien i. Demonstrates the fiduciary duty by the majority shareholder to the minority shareholder, and again illustrates the application of the intrinsic fairness test. ii. Self Dealing 1) Two Elements, trigger intrinsic relationship test I. Parent-Subsidiary Relationship II. Self Dealing A. Occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of and detriment to, the minority shareholders of the subsidiary iii. Fiduciary Duties 1) A director is a fiduciary... So is a dominant or controlling stockholder or group of stockholders...their powers are in trust...Their dealings w/ the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements w/ the corporation is challenged the burden is on the director or shareholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested theirin I. Look at inherent fairness to the corporation, and by extension to the minority shareholder 5. Simplest Stock Transaction a. Pay money, and take home a stock certificate b. Stock i. Can be denominated as common stock or preferred stock ii. All corporations must have at least one share of common stock 1) Default Position c. Preferred Stock i. How is it different from common stock 1) You get a preference as to dividends, you take yours before the other shareholders 2) You get a preference on liquidation 3) Can be cumulative or non cumulative I. Ex: Lets assume a $100 par value, 6% preferred share

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Outline Fall 2007 A. Cumulative every year, you are entitled to a 6% dividend ($6), and if you dont get paid, it gets tacked onto the next year; The company has to back pay for unpaid dividends B. NonCumulative if you dont get paid in a particular year it is gone 4) Can be participating or non participating I. Participating A. If you are a preferred shareholder you may be able to participate in the dividends over and above the 6% threshold under certain conditions 1. Most common: the dividend exceeds a certain threshold amount 2. There has to be additional money over a certain threshold B. As a preferred shareholder, you get to participate on excess money when a certain threshold has been met. II. Nonparticipating A. You get your 6% and that is all ii. Pecking order, for who takes first, under bankruptcy, or a liquidation sale 1) Creditors I. Secured A. Take first II. Unsecured A. Stand in line 2) Preferred Shareholders 3) Common Shareholders d. Liquidation and Redemption Transactions i. Liquidation Transaction 1) Affects all shareholders 2) All shareholders have to turn in their stock certificates ii. Redemption Transaction 1) The corporation redeems specific transactions 2) Much more limited in scope and only affects a certain number of shareholders 3) Company has to either redeem the entire class, or offer the option of redemption e. Convertible Stock or Security i. You can convert your preferred stock into common stock at a specific ratio ii. You could convert from a creditor status into equity 1) Equity means you own a piece of something 2) Convertibility feature allows the parties to swap one equity instrument for another 3) Allows you to swap a debt instrument for an equity instrument iii. You can swap out your stock certificate for something else f. Zahn v. Transamerica Corporation i. Rule: The majority shareholder has the right to control, but when it does so it occupies a fiduciary relation towards the minority shareholder.

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Outline Fall 2007 ii. Rule: When a majority shareholder votes as a shareholder he may have the legal right to vote w/ a view of his own benefits, and to represent himself only. But when he votes as a director he represents all the stockholders in the capacity of a trustee for them, and cant use his office as a director for his personal benefit at the expense of the stockholders iii. Rule: A director owes a fiduciary duty to all of the shareholders. 6. Ratification a. Fliegler v. Lawrence i. Illustrates the concept that a shareholder ratification can cure a defect in an interested transaction ii. Rule: Shareholder ratification of an interested transaction will remove the taint of conflict of interest and shift the burden of proof from the board to the objecting shareholder. b. Rule 8.60 Subchapter Definitions c. Rule 8.61 d. Rule 8.62 e. Rule 8.63 (a) f. In Re Wheelabrator Tech. Shareholders Litigation i. Rule: A board of directors has a fiduciary duty to disclose fully and fairly all material facts within its control that would have a significant effect upon a shareholder vote ii. Rule: A ratification of interested director transaction 1) An interested transaction wont be voidable if it is approved in good faith by a majority of interested shareholders I. The objecting shareholder has the burden of proof in showing that no person of ordinary sound business judgment would say that the consideration received was a fair exchange. iii. Material Basic Case 1) Gauged by a reasonable persons perspective, and if they would have a total mix of information that they can make a decision 2) Can be financial and non-financial iv. Analysis 1) To cure a defect, we need a vote of disinterested shareholders. 2) If the minority shareholder continues on his claim, the burden of proof will shift to the objective shareholder 3) The objecting shareholder must illustrate that the merger wasnt in the best interest of the company. 7. Securities Rules a. All Securities are subject to registration b. If you are incorporating a company, and you want to sell stock, you have to go through the registration process. c. There are several key exemptions i. Most Common and Most Important: Private Placement 1) Rule 504,505,506 Exemptions 2) Rule 144 Exemption C. Disclosure and Fairness

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Outline Fall 2007 1. Definition of a Security a. Robinson v. Glynn i. Rule: In determining the character of a particular instrument, the economic reality controls, and not the labels attached by the particular instrument. ii. Rule: When looking at the stock, youre supposed to look at: 1) The right to receive dividends contingent upon an apportionment of profits 2) Negotiability of the instrument 3) Ability to be pledged or hypothecated 4) The conferring of voting rights in proportion to the number of shares owned 5) The capacity to appreciate in value 2. The Registration Process a. Concept i. All securities must be registered ii. Exception 1) Private Placements b. Doran v. Petroleum Management Corp. i. Rule: Each offeree of a private placement must have access to or have been furnished with relevant info on an equal basis. ii. Rule: It is a violation of the securities and exchange act for any person to offer to sell a security unless a registration statement has been filed. iii. Rule: Section 4(2) exempts private offerings from the registration requirement. 1) Some courts have held that the applicability of the exemption should turn on whether the persons affected need the protection of the act. 2) An offering to sophisticated investors who are able to fend for themselves is a transaction not involving any public offering. 3) Four factors must be considered I. The number of offerees and their relationship to the issuer II. The number of units offered III. The size of the financial stake; and IV. Whether the offering was characterized by personal contract between the issuer and the offerees free of public advertising or intermediaries such as investment bankers. c. Escott v. BarChris construction Corp. i. Rule: Nonexperts, w/ respect to parts of the registration statement not prepared by experts, must, after a reasonable investigation, have reasonable grounds to believe and actually believe, that the statements made were true, and that there were no omissions of material fact. ii. Rule: W/ respect to statements made by experts, nonexperts must show that they had no reasonable ground to believe, and didnt believe, that the statements made were untrue or that there was a material omission. iii. Rule: A reasonable investigation is one that a prudent person in the management of his own property would conclude. iv. Rule: To access the due diligence defense, a defendant must demonstrate that he had, after reasonable investigation, reasonable grounds to believe, and did believe that the registration statements were true and free from mistakes

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Outline Fall 2007 Rule 10b-5 ONLY BASIC a. Basic Inc. v. Levinson i. Facts: Despite participating in merger discussions and subsequent negotiations with Combustion, Basic 3 times publicly denied that it was engaged in any merger negotiations. After a merger was announce, Levinson and other former shareholders of Basic stock brought a class action asserting that the 3 public statements were materially misleading and therefore actionable under 10(b) of the Securities Exchange Act and Rule 10b 5. ii. Rule of Law: (1) Whether a company statement is material, in the context of merger discussions, requires a case by case analysis of the probability that the transaction will be consummated and the significance of the transaction to the issuer of the securities. 1) merger discussions: analysis of the probability that the transaction will be consummated and the significance of the transaction to the issuer of the securities iii. Rule of Law: (2) An investors reliance on material, public misrepresentations may be presumed under a fraud on the market theory for purposes of a Rule 10b 5 action. 1) common sense and probability support the notion that the market price of a companys stock is a reflection of all information available in the market place I. an investor who buys or sells stock at the price set by the market can be presumed to have relied on any material misrepresentations affecting that price iv. Rule: Gauged by a reasonable persons perspective, and if they would have a total mix of information that they can make a decision 1) Can be financial and non-financial VII. Problems of Control A. Proxy Fights 1. MBCA Chapter 7 Shareholders a. 701 Annual Meeting i. A corporation should have an annual meeting ii. Can be in or out of the state iii. Failure to hold an annual meeting doesnt affect the validity of any corporate action b. 702- Special Meeting i. Should hold a special meeting of shareholders 1) On call of its board members, or the person authorized to do so by the articles of incorporation or bylaws 2) If the holders of at least 10% of all votes entitled to be cast on an issue proposed to be considered at a proposed special meeting ii. NOTE Would have a special meeting, if there is something large that would affect a corporation, merger, big acquisition, not meant to discuss daily activities c. 704 Action W/o Meeting 3.

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Outline Fall 2007 i. Ex: our company is going to merge w/ another company, if you get all shareholders to agree that its a good idea, then there really isnt a need to meet 1) You need all of the shareholders to sign off on it 2) Must be a unanimous vote d. 705 Notice of Meeting i. Notes - General meetings do not require an agenda, Special Meetings require an agenda e. 707 Record Date i. Notes Important for dividend dates ii. Two functions setting the dates for when a person must own a stock, to have a vote, and to be paid a dividend f. 708 Conduct of the Meeting g. 722 Proxies i. A shareholder may vote his shares in person or by proxy ii. Notes In general, proxies are revocable 2. Strategic Use of Proxies a. Levin v. Metro-Goldwyn-Mayer, Inc. i. Financial Statements 1) Balance Sheet I. Picture of the company at one point in time II. Most balance sheets are as of 12/31 the previous year. 2) Income Statement I. Shows you the activity for the company for a 12 month period 3) Cash Flow Statement I. Shows activity of the cash into and out of the corporation 4) Proxy Statement I. Where the shareholder will vote for some type of action 3. Reimbursement of Costs a. Rosenfeld v. Fairchild Engine & Airplane Corporation. i. Rules: 1) A corporation cant reimburse either party, either incumbent or insurgent, unless the dispute concerns questions of corporate policy 2) Only reasonable and proper expenses can be reimbursed 3) Incumbents can be reimbursed whether they win or they lose 4) Insurgents can be reimbursed only if they win, and only if the shareholders ratify the payment 4. Private Actions for Proxy Rule Violations a. JI Case Co v. Borak i. Illustrates: The concept of a private right of action ii. Rule: A private right of action for alleged violations of SEC rules exist both as to derivative and direct claims. b. Mills v. Electric Auto-Lite Co. i. Rule: The plaintiff must prove that the alleged defect has a significant propensity to effect the voting requirement ii. Notes: Need to establish that the fact could have influenced your vote, you dont have to prove that it did influence your vote.

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Outline Fall 2007 1) 7th Circuit see it the other way. c. Seinfeld v. Bartz i. In valuing options, there is a formula thats used called the Black-Scholes formula d. General Rules i. A corporation cant reimburse either party be it the incumbent or the insurgent unless the dispute concerns questions of corporate policy. ii. Only reasonable and proper expenses can be reimbursed iii. Incumbents can be reimbursed whether they win or lose. iv. Insurgents can be reimbursed only if they win, and only if the shareholders ratify the payment. 5. Shareholder Proposals a. Lovenheim v. Iroquois Brands, ltd. i. General Rule In general shareholder proposals need to be included in proxy statements 1) Exception Deals 5% of the companys net earnings I. Or is significantly related to the companys business A. The application of the exception will look at economic and noneconomic factors when examining non-economic factors, courts will examine policy issues to determine whether they are significantly related to the companys business. b. The NYC Employees Retirement System v. Dole Food Company. i. Rule: A corporation may refuse to issue a shareholder proposal if the proposal is directed at ordinary business. 1) Burden of proof is on the company. ii. Rule: Insignificant Relationship 1) If the proposal relates to operate which account for less than 5 % of the registrants total assets as the end of its most recent fiscal year, a corporation may exclude a shareholder proposal from a proxy statement. iii. Rule: Beyond Power to Effectuate 1) A corporation doesnt need to include a shareholder proposal if the proposal deals with a matter beyond the registrants power to effectuate iv. Rule: A corporation must include a shareholder proposal unless one of the exceptions authorizes its exclusion, and a corporation has satisfied the burden of proof. v. Note There is usually a minimum dollar investment and time restriction c. Austin v. Consolidated Edison Company of New York, Inc. i. Illustrates: The need to meet only one exception to obtain relief under the exception rules. ii. Rule: A company need only satisfy one of the exceptions to avail itself of the desired relief from including the shareholder proposal. 6. Shareholder Inspection Rights a. Crane Co. v. Anaconda Co. i. Rule: A shareholder request for a shareholder list must be made pursuant to a proper purpose. b. State Ex Rel. Pillsbury v. Honeywell

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Outline Fall 2007 i. Facts: After learning of Honeywells involvement in the production of munitions for use in the Vietnam war, Pillsbury bought a sufficient number of shares to give him a voice in Honeywells affairs for the purpose of altering its policies. Pillsbury submitted 2 formal requests for the inspection of Honeywells shareholder list and corporate records. Honeywell refused, and Pillsbury initiated suit. ii. Rule of Law: In order for a stockholder to inspect shareholder lists and corporate records, the stockholder must demonstrate a proper purpose relating to an economic interest. Doesnt include any social or political agenda items advanced by the shareholder. 1) Pillsburys sole purpose in obtaining access to Honeywells shareholder list and corporate records was for the furtherance of his political views, regardless of any economic implications 7. Sadler v. NCR Corporation a. Illustrates: Te expansion of corporate records. b. Expansive definition of a shareholder list i. Traditional shareholder book and record ii. NOBO a list of beneficial owners consenting to disclosure of their identity iii. CEDE a list of the street names of the shareholders. c. Two applications for denying/allowing the request i. Delaware Rule 1) A very restricted application and wont permit access to the CEDE and the NOBO lists; Extremely inefficient, and plays no central role in a proxy contest. ii. NY Rule 1) Does permit access to the traditional, but also to the NOBO and the CEDE lists 2) ILL follows the NY B. Shareholder Voting Control 1. Stroh v. Blackhawk Holding Corporation a. Facts: Blackhawks articles of incorporation provided the issuance of $3 million share of Class A stock and 500,000 shares of Class B stock. Each share was entitled to one vote. The articles also provided that in the case of liquidation, shares of Class B stock ere not entitled to dividends. Shareholders sued, claiming this limitation on their economic interest in the shares rendered the shares invalid b. Rule of Law: A corporation may prescribe whatever restrictions or limitations it deems necessary in regard to the issuance of stock, provided that it not limit or negate the voting power of any share. c. 14 Illinois Corporation Act a corporation may proscribe the relative rights of its classes of shares in its article of incorporation, subject to their absolute right to vote d. a shareholders right to vote in guaranteed, and must be in proportion to the number of shares possessed i. stock here was valid possessed equal voting rights, despite the right to dividends e. Rule:

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Outline Fall 2007 i. A corporation has the right to prescribe the rights and preferences among its issued shares provided it doesnt interfere with a shareholders right to vote ii. If the corporation issues non-voting stock, and later decides to recapitalize, they can go ahead and do that, because it isnt affecting the voting rights. iii. All these changes generally require a shareholder vote and approval 2. State of Wisconsin Investment Board v. Peerless Systems Corporation. a. Rule: When evaluating _ board action in a shareholder vote context or controversy, the applicable standard of review is the Blasius Two part test not the business judgment rule i. Test: 1) The plaintiff must establish that the board acted for the primary purpose of thwarting the exercise of a shareholder vote. 2) The board has the burden to demonstrate a compelling justification for its actions. 3) Note: Doesnt apply in all cases where a board of directors has interfered with a shareholder vote. b. Almost everything gets filtered through the Business Judgment Rule, this case takes the standard of review a little higher. C. Control in Closely Held Corporations 1. Ringling Bros. Barnum & Bailey Combined Shows v. Ringling a. Facts: Ringling and Haley entered into a voting trust agreement binding them to act jointly in all matters relating to their stock and ownership interests in Ringling Bros. The contract further provided that in the event that the parties failed to reach a joint conclusion in respect to the exercise of their voting rights, the issue would be submitted to an arbitrator. Ringling and Haley failed to agree on the selection of a 5th director. Haley was absent from the shareholders meeting, and her stock was voted in accordance with the arbitrators direction. Ringling sued to review the election. b. Rule of Law: A group of shareholders may lawfully contract to vote in any manner they determine. c. Agreement between shareholders purporting to bind the exercise of their voting rights have also been upheld as a valid means of obtaining the advantages of concerted actions d. Haleys failure to vote consistent with the arbitrators decision was a breach of this contract e. Illustrates: i. Shareholders can enter into a pooling agreement or shareholder agreement and they are valid as long as they apply among shareholders and regulate at the shareholder level, not the director level 2. McQuade v. Stoneham a. Facts: Stoneham owned a majority of shares in the NY Giants. McQuade and McGraw each purchased 70 shares of Stonehams stock, and entered into a shareholder agreement to preserve themselves as directors and officers of the corporation. The agreement further prohibited the amendment of salaries, shares, or bylaws of the corporation except with unanimous consent of the 3 aforementioned parties. The board of directors consisted on 7 men including

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Outline Fall 2007 Stoneham, McGraw, and McQuade. McQuade was named treasurer, until he was discharged from the corporation in his capacities as both officer and director. In contravention of the agreement with McQuade, Stoneham and McGraw both abstained from voting. b. Rule of Law: A shareholder agreement prohibiting the board of directors from changing officers, salaries, or policies, or retaining individuals in office, is illegal and void absent express contractual consent. c. Shareholders of corporations possess and inalienable tight to elect directors, and may combine to achieve this purpose d. Shareholders may not enter into agreement interfering with the directors powers to exercise their independent judgment in the management of the corporations affairs e. there is no evidence that Stoneham and McGraw didnt act consistent with their business judgment f. Illustrates: Shareholders may not, by agreement among themselves, control the directors in the exercise of the judgment vested in them by virtue of their office g. Rule: Generally shareholders have a right to agree as shareholders how to vote, but the shareholder agreement cant infringe upon the directors duties to act as a director, they must be free to exercise their duty of loyalty and care to all shareholders 3. Clark v. Dodge a. Facts: Clark and Dodge owned 25% and 75% of the stock of 2 pharmaceutical corporations in the business of manufacturing medicinal compounds from secret formulas. Though he was a director, Dodge didnt take an active role in the management of the companies. Clark served as director, treasurer, and manager of Bell and Co and also managed most of the businesses of Hollings Smith Company, Clark possessed sol knowledge of the formulas. Both entered a written contract that Dodge should vote so that Clark would continue as director of Bell, he would receive net income form the corporations. and that no unreasonable salaries would be paid to other officers of the corporations. Clark in turn agreed to disclose the formula to one of Dodges sons, and to bequeath his interest in the companies to Dodges wife and sons should he have no heirs of his own. Clark claimed Dodge breached the contract by failing to continue Clark as a director, preventing Clarks receipt of his income, and paying excessive salaries. Clark sought reinstatement, an accounting, and an injunction against future violations. b. Rule of Law: Where the directors are also the sole stockholders of a corporation, a contract between them to vote for specified person to serve as directors is legal, and not in contravention of public policy. c. General Rule: board of directors have the unfettered responsibility of managing the daily operation of the corporations business i. where the directors are also the sole shareholders of the corporation, policy concerns of shareholder interference with management decisions are no longer applicable d. Rule: Where the directors are the sole shareholders, there seems to be no objection to enforcing an agreement among them to vote for certain people as officers,

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Outline Fall 2007 provided the vote or action receives unanimous director approval, and the agreement includes all of the minority shareholders 4. Galler v. Galler a. Rule: Where no complaining minority interest appears, no fraud or apparent injury to the public or creditors is present, and no clearly prohibitory statutory language is violated, we can see no valid reason for precluding the parties from reaching any arrangements concerning the management of the corporation which are agreeable to all. 5. Ramos v. Estrada a. Approach i. Look at the shareholder level transaction ii. Look at the subject matter of the agreement, what are they agreeing to iii. Does it infringe on the duties of the board b. Illustrates i. Use of shareholder agreement and the resulting consequence of breaching the agreement ii. Where you have a valid agreement you have a valid contract D. Abuse of Control 1. Wilkes v. Springside Nursing Home, Inc. a. Rule: Majority shareholders in a close corporation have a stick obligation to deal with minority shareholders with the utmost good faith and loyalty, the majority shareholder may not act out of averous, expediency, or in derogation of their duty of loyalty to the other shareholders and the corporation. b. Notes: Whats the danger of closely held corporations? i. The majority has all the authority and the influence. ii. If you own more than 50% of a closely held company you control all of the operations 2. Ingle v. Glamore Motor Sales a. Illustrates: Explored the concept of a minority shareholder who owns shares in a company who has an employment contract b. Rule: A minority shareholder in a closed corporation by that status alone, who contractually agrees to repurchase of his shares after termination of employment for any reason, acquires no right from the corporation or the majority of the shareholders against an at will termination 3. Sugarman v. Sugarman a. Illustrates: A minority shareholder has the burden of proof in establishing shareholder oppression 4. Smith v. Atlantic Properties a. Facts: Smith, Wolfson, Zimble, and Burke formed Atlantic Properties for the purpose of acquiring real estate. All 4 held an equal amount of shares. A clause in the articles of incorporation had the effect of giving to any one of the 4 original shareholders a veto in corporate decisions. Wolfson wanted earnings devoted to making building repairs, while the other 3 wanted a declaration of dividends in order to avoid penalty taxes. Wolfson refused to vote for any dividends, leading to an IRS assessment of a penalty tax. Smith and the other filed suit, seeking a court determination of the dividends to be paid, the removal of Wolfson as a director,

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Outline Fall 2007 and an order that Atlantic be reimbursed by Wolfson for the penalty taxes assessed against it and for related expenses. b. Rule of Law: Stockholders in a close corporation owe one another the same fiduciary duty in the operation of the enterprise that partners owe to one another. c. Reasoning i. Here, a clause required an affirmative vote of 80% of the capital stock issued outstanding and entitled to vote in order to effect a change. ii. The minority becomes an ad hoc controlling interest, thus reversing the usual roles of the majority and minority shareholders. iii. Wolfson wanted an 80% provision to protect himself from the other shareholders. 1) his conduct went beyond what was reasonable iv. the court may require information necessary to direct the adoption of a specific dividend and capital improvements policy, and reserve jurisdiction d. Rule: A minority ad hoc controlling shareholder in a closed corporation has a strict obligation to deal with the majority shareholder with the utmost good faith and loyalty. 5. Jordan v. Duff and Phelps a. Acevedo Rule: A close corporation that is buying its own stock has a fiduciary duty to disclose all material facts to the shareholder. b. Book Value Can be assigned at whatever time the company chooses. E. Control, Duration, and Statutory Dissolution 1. Alaska Plastics v. Coppock a. Acevedo Rule: Where a controlling shareholder takes advantage of a special corporate benefit, the fiduciary duty owed to the other shareholders requires that the corporation offer such a benefit equally b. Facts: As part of a property settlement related to her divorce from one of Alaska Plastics directors, Coppock received 1/6 pf the shares issued by Alaska Plastics. Alaska Plastics subsequently failed to notify Coppock of annual shareholder meetings, paid her no dividends, didnt allow her to participate in the business, and later offered to buy her shares for $15,000/ An accountant hired by Coppock appraised the shares as having a value between $23,000 and $40,000. One of the directors later offered Coppock $20,000, but a purchase never took place. Coppock sued after further negotiations failed c. Rule of Law: Majority shareholders in a closely held corporation owe a fiduciary duty of utmost good faith and loyalty to minority shareholders. d. Reasoning: Here, payments were made to the directors and personal expenses paid for their wives, which might be characterized as constructive dividends. i. whether these payments were a distribution of dividends, whether Coppock was deprived of other corporate benefits, or whether the majority shareholders violated Alaska law should be determined by the trial court. ii. Coppock failed to allege that Alaska Plastics itself was harmed e. Rule: Where a controlling shareholder takes advantage of a special corporate benefit, there is a fiduciary duty owed to the other shareholders. f. Rule: 4 ways to require the Corporation to repurchase the shares @ Market Value

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Outline Fall 2007 i. There may be a provision in the articles of incorporation or bylaws that provide for the purchase of shares by the corporation, contingent upon the occurrence of some event, such as the death of a shareholder or transfer of shares. ii. The Shareholder may petition the court for involuntary dissolution of the corporation. iii. Upon some significant change in corporate structure, such as a merger, the shareholder may demand a statutory right of appraisal. iv. In some circumstances, a purchase may be justified as an equitable remedy upon a finding of a breach of a fiduciary duty between directors and shareholders and the corporation or other shareholders. 2. Meiselman v. Meiselman a. Summary: i. Shows us a relaxation of the strict rule of the minority shareholders burden of proof ii. The court looks to the reasonable expectation of the minority shareholder. b. Facts: The corporation owned movie theaters and real estate. The shareholders were Ira and Michael. Ira was the majority shareholder and ran the business. Michael did not have a management position, but was employed by the corporation and was drawing a salary. Michael was later fired and lost his salary and fringe benefits. He did receive dividends. c. Related statute: allows a court to order dissolution where such relief is reasonably necessary for the protection of the rights and interests of the complaining shareholder. d. Rule of Law: In cases involving close corporations, the complaining shareholder need not establish oppressive or fraudulent conduct by the controlling shareholder or shareholders. Rights and interest under the statute include reasonable expectations, which include expectations that the minority shareholder will participate in management of the business or be employed by the company, but limited to expectations embodied in understandings, express or implied, among the participant 3. Pedro v. Pedro a. Illustrates i. Relaxed standard of dissolution ii. Looks at the reasonable expectations of a shareholder. 4. Stuparich v. Harbor Furniture Mfg. a. Recourse of a minority shareholder. i. Only recourse as a minority shareholder is to sell the stock to another buyer, or have the stock redeemed by the corporation, or seek a liquidation of the company. b. Rule: i. Absent proof of fraud, mismanagement, or abuse of authority, a court will not order dissolution if the corporation is economically viable and paying dividends to its shareholders despite the presence of extreme hostility among the shareholders. c. Facts: Plaintiffs are sisters. Harbor Furniture was started by grandfather, and later split up among grandfather and his wife (50%) and Malcolm Sr. and his wife

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Outline Fall 2007 (50%). Malcolm Sr. turned over CEO position to Malcolm Jr. Malcolm Jr.s wife and son work for Harbor. Plaintiffs hold shares in Harbor. Plaintiffs wanted dissolution of the company. d. Issue: Whether plaintiffs raised a triable issue of material fact as to whether dissolution is reasonably necessary to protects their rights and interests e. Rule of Law: Court held that the drastic remedy of liquidation was not reasonably necessary for protection of the plaintiffs rights or interests in the corporation. Plaintiffs chose not to participate in the governance of the corporati F. Transfer of Control 1. Frandsen v. Jensen Sundquist Agency, Inc. a. Terms i. Asset Sale 1) Sale of the companys assets 2) Subject matter is some asset within the company. ii. Merger 1) When one corporation acquires another corporation and the acquired corporation ceases to exist. 2) Is possible under certain circumstances under LLCs and Partnerships (Not technically possible, terminate the old partnership and form a new one) iii. Stock Sale 1) Sales transaction between shareholders. 2) 1 Shareholder is selling and a new or current shareholder is buying the stock 3) Shareholder level transaction 4) Subject matter is the stock. b. Rule: The rights of first refusal are to be interpreted narrowly. (A sale means a sale) 2. Zetlin v. Hanson Holdings, Inc. a. Illustrates i. Concept of Oppression Looking for some act of exclusion to some detriment of the minority shareholder. b. Terms: i. Actual control would be a sale of more than 50% of the stock. ii. Effective control, sale of something less than 50% , but you effectively control the company. c. Rule: Absent looting of corporate assets, conversion of a corporation opportunity, fraud, or other acts of bad faith, a controlling shareholder is free to sell and a purchaser is free to buy that controlling interest at a premium. d. Facts: Zetlin held a 2% interest in Gable industries. Hanson Holdings and members of the Sylvestri family owned 44% of Gables shares. After the Sylvestri family and Hanson sold their controlling interest at a premium price per share, Zetlin brought suit, contending that minority stockholders were entitled to an opportunity to share equally in any premium paid for a controlling interest in the corporation i. a premium is the added amount an investor is willing to pay for the privilege of directly influencing the corporations affairs

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Outline Fall 2007 e. Rule of Law: Absent looting of corporate assets, conversion of a corporate opportunity, fraud or other acts of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy, that controlling interest at a premium price. i. minority shareholders are not entitled to inhibit the legitimate interests of the other stockholders 1) for this reason, control shares usually command a premium price 3. Perlman v. Feldmann a. Illustrates: The sale of control to a buyer at a premium b. Rule: When Market Demand on a companys product commands an unusually high premium. A fiduciary may not appropriate to himself the value of the premium. 4. Essex Universal Corporation v. Yates a. Facts: Yates was a shareholder and president of Republic Pictures. He owned less than a majority of share, but a sufficient amount to exercise de facto majority control. At one point he contracted to sell his interest to Essex. The contract called for a transfer of Yates shares, which equaled roughly 28% of voting shares, and also called for the resignation of a majority of Republics board, to be filled by individuals of Essexs choice. At the last minute the deal fell through, due to disagreement on the value of the shares. Essex filed suit in NY state court, seeking damages for breach of contract. b. Rule of Law: A sale of a controlling interest in a corporation may include immediate transfer of control. i. control of a corporation may not be sold absent the sale of sufficient shares to transfer such control 1) control of a corporation derives from corporate voting, and is not a personal right ii. better rule is that immediate transfer of control will not void a sale of a controlling block of stock. c. Acevedo Rule i. A majority shareholder when they buy the shares of stock in a company has the right to install the board of directors ii. A majority shareholder has the right to change the articles of incorporation or bylaws and remove any staggered term restrictions.

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