Notes Needed: 9/7, 10/27, 11/11 Principle Agent - AGENTS ACTS ON BEHALF OF THE PRINCIPLE!

! - The principle is liable for the acts of the agent.

(1)Agency relationship between P and A (2)As dealings with T (3)Create legal liability of P to T (and vice-versa)

Relationship: Results from: 1. Manifestation of consent by one person (express or implied) 2. That the other should act on his behalf a. ARGUABLE Look for who is benefiting from the relationship If getting benefit, then more likely that the person is acting on your behalf. i. Doty Coach was found to be acting on her behalf by driving her car The benefit was maybe helping the local team. 3. And be subject to his control a. Arguable 4. And consent by the other to do so. When CONTRACTS are the issue, the question is authority Agent must be acting within the authority given to him by the principle The analysis is very context dependant. a. Actual Authority - Manifestation from the P to the A to do something AND a reasonable belief by the A. i. Express requires a manifestation of consent from the principle to the agent to do that particular thing. 1. And reasonable belief by A. 2. Doesnt necc. mean unambiguous a. Dweck - you can talk in my name

ii. Implied look at context and argue Does this usually come with the position? Past dealings? Industry Norms? 1. Church Had past dealings and 2 people were necessary to paint the church. b. Apparent Authority Manifestation from the P to a 3rd party that the agent has authority to do a certain thing AND a reasonable belief by the 3rd party. i. Dweck The P told a third party that his A could enter into an agreement for him. 1. Indirect manifestations are ok. ii. NOTE question is reasonable relief by the third party, not reasonable belief by the P. c. Inherent Catch all for when we dont have actual or apparent authority but we think there should be authority. i. Some jurisdictions dont allow for inherent authority. ii. Fenwick The principle is liable for all acts of the agent, which are within the authority usually given to an agent of this character. iii. This type of authority will be needed in the undisclosed principle cases like Fenwick 1. Focus on what someone in this position usually does. d. Estoppel Can only be used to bind the principle - Must show: i. Act of omission, intentional of negligent, that creates the appearance of authority in the purported agent. ii. Reasonable for 3rd party to rely on the appearance of authority iii. Changed her position because of reliance.

iv. SUM Show negligence and reasonable reliance.

e. Ratification The agent acts without any authority and there are no grounds for estoppel. The P will only be bound if he RATIFIES the contract. Requires: i. Valid affirmation by the P 1. Express or implied (taking actions consistent with contract) 2. P must know OR have reason to know all MATERIAL FACTS 3. Courts are careful to protect 3rd parties Wont let this as a type of option contract. ii. To which the law will give affect iii. NOTE the court is very hesitant to find ratification 1. Botticello Because the action were consistent with a lease, court find she did not ratify the option to buy. Ratification v. acquiesce: - If there was ambiguity as to whether there was authority in the first place and then we found that P agreed to the thing afterword, then this is acquiescing. o The gives authority prospectively The 3rd party can continue to rely on the existence of this authority o Essentially saying that there was authority the whole time so the third party can rely on the existence of this authority in the future. Shows that at the beginning there was apparent authority. - If ratification There is no possible was that there was authority in the first place

o Unlike with acquiesce, ratification DOES NOT show that there was actual authority and has no future effect. AGENT LIABILITY: - If principle is disclosed there is no agent liability for the contract UNLESS one of the following: o There is clear intent by the parties that the agent be bound, OR o Agent made the contract but without authority o Agent is a party to the contract o Fraud o Implied warranty of authority

- Undisclosed or partially disclosed principle

o The agent is treated as though he is a party to the contract and the 3rd part has the choice of who to sue. o Atlantic Salmon v. Curran The real company dissolved, but they continued to make contracts Because the C no longer existed, it counts as partially disclosed and the agent is liable. Restatement: When does a creditor become a principle? - Creditor becomes a principal at the point at which it assumes de facto control of the debtor - If a supplier has agreed to act primarily for the benefit of the one supplied, this shows an agency relationship.

Employee (master-servant) v. Independent contractor:

Look at CONTROL o The more control P has, the more likely someone is an employee. o The less control the P has, more likely the person is a contractor. Look at RISK o The more risk someone takes on, the more likely they are an independent contractor Humble v. Hoover Normally there isnt liability for a P when the agent is an independent contractor, BUT a large amount of control may change this.

IF MASTER SERVANT relationship, then master is liable for the servant if his actions were within the scope of his employment: - Must look at Time AND Space to determine if actions were within scope of employment o But courts have gone far in expanding this now almost require a total abandonment before we count them to be outside the scope of their employment. o LOOK at:

1) Was conduct of the same nature as the person is employed to perform? 2) Did they act with the purpose to serve the Principle? A Master is NOT liable for acts of his servants acting outside the scope of their employment UNLESS: o The master intended the conduct o The master was negligent or reckless o The conduct violated a non-delegable duty of the master Often imposed by statute o The servant purported to act or to speak on behalf of the principle and there was reliance upon apparent authority.

- Torts of Independent contractors:

o GENERAL RULE principle is NOT liable for torts of an independent contractor. o Exceptions: Principle retains control over the aspect of the activity in which the tort occurs Principle employs incompetent independent contractor. Majestic reality In dicta they say that a financially irresponsible contractor counts as incompetent. The Job is inherently dangerous ARGUABLE Majestic Reality demolition is an inherently dangerous activity. EXTRA CREDIT POINT ultra-hazardess activity is required for strict liability but only inherently dangerous activity is required for a principle to be liable for the injury. o There may be times when it is an inherently dangerous activity so the P is liable for the IC actions, BUT there is not tort because it was not Ultra-harzardess and it didnt involve negligence. POINT after show agency relationship and liability still need to see if there was an actual tort!!! ANALYTICAL STEPS: IN SUM First argue IF there is an agency relationship Then what KIND (master servant v. independent contractor) if mater servant then have to do scope of employment argument if contractor have to do that analysis And the actual tort analysis! . - Then authority or Estoppel - Then ratification v. acquiescence IF none of these, then discuss agent liability. Separate contracts from torts. Fiduciary duty?

Fiduciary Duties of Agents: These are freestanding principles that can be modified by
contract. Cannot use your position as an agent, to your own benefit, without informing the P DISCLOSURE IS KEY o Reading Using army uniform to escort trucks for kickbacks. Duty of Care Duty of Loyalty o Secret profits o Usurping business opportunities from P Singer Independently decided whether or not his P could produce certain parts Would send excess business elsewhere and make a profit. MUST DISCLOSE the default rule is that the agent let the principle know about all business opportunities so they can decide if they want to take them and the A doesnt have an incentive to give away jobs that the P can do. o Grabbing and leaving Town and Country can be taking a physical document or knowledge of certain strategies. Agency is a fallback to things like trade secret law and contract law.

PARTNERSHIPS:
An association of two or more persons to carry on as CO-OWNERS, a business for profit. o Co-owner means Shared control of the business Shared Profits of the business There must be an agreement of some sort (oral is sufficient) o Calling it a partnership is not sufficient Sharing profits is prima facia evidence of a partnership o But this does not count if receiving these profits as wages as an employee Fenwick FACTORS TO CONSIDER: o Intention of the parties Language of contract may help but not dispositive o How are profits split - who absorbs the losses o Who has the theoretical right of control o Who is practicing control? Making decisions is not dispositive to the kind of control the courts are looking for. Ex. Hiring a caterer for a party for many years and give them control of the food You may give the other side control but in theory you have full control over them. If trying to disprove the partnership, then want to focus on what the RELEVANT kind of control is and how one party does not have it.

o How do they hold themselves out to 3rd parties o What are the rights of parties upon dissolution Should be different than if a party just quit. Partnership by Estoppel: 2 elements - Must present themselves to be partners - The other side must rely on this o Young The plaintiff didnt know about the best evidence that the other side held them out to be partners so they did not rely. Property rights of a partner - A partner is co-owner of partnership property o Tenants in common Equal right to possess the whole thing for partnership purposes, but no right to possess property for any other purpose. o Not assignable except in connection with the partnership. o When you sell your rights and responsibilities, you sell ALL of them, not just the ones you know about. Putnam After selling her shares of a partnership a woman finds out that someone was embezzling, but is not entitled to damages because she sold her rights with the shares. When she transferred her interest in the partnership, she also transferred her debt liability and profit potential. o The cause of action stays with the partnership because the entity, not the person owns the property. Liability in a General Partnership: - All partners are liable, jointly and severally, for everything chargeable to the partnership, and jointly for all other debts and obligations of the partnership - The liabilities of the partnership shall rank in order of payment, as follows: o Creditors other than partners o To partners other than for capital and profits i.e. for salary o To Partners for capital/profits Due to these rules, a creditor of the partnership who becomes a partner suffered a double whammy: her debt is subordinate to the debt of non-partner creditors, and worse she is personally liable for the partnership debt. Usurping Partnership Opportunities: Duty of Loyalty - Cannot usurp RELEVANT business opportunities o ARGUABLE What opportunity is relevant - Courts dont like to look into it, but need to inform your partner and disclose everything in order to be certain. o Partnership opportunity Doctrine Give them the opportunity to compete. - Can make it less likely to be a relevant business opportunity by: o Disclosing o Contract to make the other person a Lender instead of a Partner. o Define in contract exactly what a partnership opportunity is. o Make next venture in a different location or a different type of business

o A different 3rd party that the other partner never met brings the opportunity. All of these things determine if there was in fact a partnership opportunity and exposing one partner to liability. DUTY OF LOYALTY v. DUTY OF CARE: - Loyalty o Things done while you are a partner is for the partnership, not the individual o Have to disclose a conflict of interest o Cannot compete against a partner before dissolution o Cannot usurp business opportunities o A partnership agreement can modify the duty of loyalty through contract unless it is manifestly unreasonable - Care o Must discharge duties on good faith o Gross negligence, intentional misconduct, or a knowing violation of the law o NOTE furthering ones own interest is not, in itself, a violation of the duty of care. But if lie in the process then it is a duty of loyalty problem Meehan Moving to another firm but tell the partners no Partnership capitol: - Default rule Split losses as you split profits - Service Partnership One partner contributes only labor o Reed v. Kavocik Was not liable for any of the losses because he contributed solely labor and received no salary. RUPA overrules this case The default rule that profits and losses are shared equally continues even when one side contributes only labor. Loophole Partners can agree to share operating and capital losses differently Some courts even imply a term that a service partner bears no capital losses. - Capital account a running balance of each partners equity o Allocation of profits increases the account o Allocation of losses decreases the account o Taking a draw (distribution) decreases the account. - Raising additional capital o Bank loan o Can have partners pay by allocating more points but this is difficult if the firm is doing poorly. Pro-rata dilution Sell more points at same price But this is only a good investment as a group and there is an incentive to free ride. Penalty dilution Sell points for less than they originally cost Sell them for so little that it becomes in the partners interest to invest money and get lots of points because if he doesnt, his share will be diminished.

Partnership Management: DEFAULT - Each partner has equal rights in the management and conduct of the partnership - A person can become a partner only with the consent of all partners - An issue as to a matter in the ordinary course of business may be a decided by a majority of the partners - An act outside the ordinary course of business of a partnership or an amend to the partnership agreement requires the consent of ALL partners. - Can create a management committee that make the important decision then no longer need the majority of unanimity of the partner. Partners Authority: - Every agent is an agent for the partnership o Has apparent authority to carry on, in the usual way (or of the kind), the business of the partnership National Biscuit v. Stroud: X calls biscuit company and tells them not to accept any additional orders from Y and if they send bread he is not personally liable. Nevertheless, Y, a partner of a grocery store, has the right to buy bread so the partnership is still liable. Summer v. Dully: - Court is looking at the status quo in this particular business, here one partner does not do something as drastic as hiring another person so the partnership is not liable for the new employees pay. But in many cases, hiring someone new is the status quo Looking at the ordinary proper conduct of the business o Courts less protective hear because it is a suit by another partner instead of a suit by a 3rd party. rd o If notify a 3 party that a partner has no authority, this will defeat apparent authority but does not defeat actual authority. All authority defeated if you tell a 3rd party that they are not a partner and the partner acting doesnt have the authority to act for the partnership. If a partner commits a tort, the partnership indemnifies the partner so long as the tort is committed in the ordinary course of business. - Moren Kid got his hand caught in a pizza press and court it to be in the ordinary course of business of a pizza place. o If outside the course of business then Partner is personally liable. - NOTE in an agency relationship, if the agent does something that makes the principle liable, the 3rd party can sue the principle, but the principle can always come back and sue the agent o But the agent is usually judgment proof. Terminating a partnership: Dissolution - UPA process on slide - Dissolution is not going out of business, just a change in the legal relationship of the partner due to one partner ceasing their relationship with the partnership o Winding up figuring out money while operating - There always exists the POWER of dissolution

RIGHTFUL dissolution o Act by one or more of partners at the end of a term At end of term, or if no term then at will Courts sometimes infer a term as until they make a profit o Owen v. Cohen. But other courts refuse to do this Page v. Page o If there is no term, than at will by any party at any time o Procedure Liquidation (auction) Partners can bid paper dollars using interest in the partnership to bid on the whole Not unfair to the minority SH because the bidding creates a higher liquidation price and this is the risk a minority SH takes. Prentis v. Sheffel. When an auction will not be competitive, an alternative procedure is for the court to value the partnership and give one of the partners the option of buying at this price o By operation of law o By court order WRONGFUL dissolution: SLIDE o If it is for a term OR undertaking, which is not met UNLESS one partner persists with such conduct that makes the partnership no longer operate appropriately. Owen v. Cohen o Courts are usually very hesitant to do this. o One partner cannot freeze-out the other in bad faith it would breach the duty of loyalty to push out the other in order to make a bigger profit. o If there is wrongful dissolution then the dissolver is excluded from the business and subject to damages for breach. o Remaining partners have the right to continue the business even absent an agreement to do so. The wrongful dissolver is entitled to FAIR VALUE (not including good will) minus DAMAGES caused by breach. Under RUPA the dissolvers interest includes the partnerships goodwill.

Buyout Agreement: - Failure to put this in a contract may result in a malpractice suit - Can determine price in many different ways: o Appraiser decides o Annually determine the value o Set formula o Book value o I pick you choose One partner values each point and the other side decides whether to buy or sell at this price.

Limited Partnerships: - Created to encourage passive partners to invest money without also being liable for more. - Has a general AND limited partner If a limited partner exercises control then they are treated as general partners. o Holzman The limited partners had all the control of the money and other aspects of control Held liable. RULPA SLIDE says ways not to be liable. - LLPs and LLLPs on SLIDE too Control Review o Agency On behalf, and in control (Doty, Cangrill) o Partnership = Co-owners: profits/control (Fenwick) o Limited Partnership LPs have minimal control (Holzman) Corporation there is a separation or ownership and control

CORPORATIONS:
Types: Public C there is a secondary market for the shares of the C o People can freely buy shares and trade them with other people Closed C No secondary market for the shares o Usually a small number of shareholders who actively participate in the governance of the C

Attributes: - Independent entity with its own legal identity o Can do anything an individual can do - Limited liability o Investors can lose everything they invest, but no more o General rule A SH is NOT personally liable for the acts or debts of the C Only personally liable by reason of his own acts or conduct. - Separation of ownership and control brings up agency issues o The BoD are in charge of the major decisions that a C makes. o SH have limited powers Election of directors Fundamental transactions But not day to day decisions - Liquidity Can sell shares - Administrative Must have articles of incorporation, bylaws, organizational meetings, appoint directors and officers, and then issue stock. - Flexible capital structure: SECURITIES - Claims on the firms assets and future earnings o 2 basic categories Debt securities (Bonds) Entitlements to receive a stream of interest payment followed by repayment of principle. o These are debt holders, NOT owners

Equity Securities (Shares/Stock) Unites of ownership These residual claimants have a right of ownership (according to what they own) of both the earnings of the C and the residual assets if the C is disbanded. Have a limited right of participation Sources of Law governing C o Every state has corporate law statutes o No federal corporate law statute o MBCA and Ali are guiding sources for the states.

Corporation by Estoppel o Works differently than partnership by estoppel Focuses on the benefit of the C and makes sure 3rd parties dont take advantage of them not being a C. Dont let 3rd party get a windfall because the C didnt incorporate in the right way o Sum Cant get out of a contract by saying that you didnt make it as a C if you held yourself out to be a C and the other side relied on this. Pre-incorporation activity Principles o If selling something in an arms-length transaction, there I no fiduciary duty to the buyer. o The promoter (creater of the C or promises to create) is an agent of the C, so owes it and its SH a fiduciary duty. Including those who become SH in an integrated transaction. o It is a puzzle whether an agent violates his fiduciary duty by leading the C into a bad deal if it is a good deal of the SH in their individual capacity

Piercing the Corporate Veil: When the owner of a C is liable - This is rare, when it happens it is shocking and the results are severe. o Note This lets you get to the owner, NOT the CEO - Only when the C is judgment-proof o We dont want the concept of limited liability to commit some sort of fraud on the public: - Nominal (alter ego theory) When the owner of a C is using the C to pursue individual interests instead of the Cs interests - In practice the Court looks for: o Failure to follow formalities between the owner and the C. Didnt keep minutes in meetings Didnt take votes Intermingling of accounts Must put money in C first and then issue a dividend. o Undercapitalization Although courts are hesitant to do this because they think it should be the job of the legislature o Injustice/Fraud

A catch all when something bad is obviously going on but doesnt fit above.

Enterprise Liability When owner owns more than one C o If all of the Cs are working together as one enterprise 3rd party may try to go after a different C for more money Look if assets are used by all of the Cs so they act as one o Case must be made on the basis of failing to follow formalities between the two Cs As apposed to between the C and the Owner Reverse Veil Piercing o Again when a owner owns more than one C, but this time there is veil piercing to get to the owner and then do reverse piercing to get to his other Cs Here there must be a failure to follow formalities BOTH between the owner and Corp. A and the owner and Corp. B. Seeland Case (parenthetical)

Veil-Piercing Cases: o Carlton Taxi Cab business with multiple Cs holding just a few taxi-cabs and getting minimum liability insurance. Not liable It is NOT improper to incorporate for the express purpose of limiting liability Alter-ego theory not met because Cs are made to act for the interest of the SH All formalities were maintained The owner would put the in the C first and then withdrawal and did not mix the accounts. o In Re Breast Implants C creates a subsidiary to specifically go into an area that has a high risk of lawsuits and not but the whole C at risk Must keep the same type of separation to ensure that someone cant pierce and make the parent C liable The parent didnt business on behalf of the sub, there was a lack of board meetings for the sub, etc. NOTE formalities probably more important in contract cases then tort cases In tort cases look if the parent was negligent in some way. o Frigidaire Case 2 limited partners in a partnership create a C to be the General partner. Under Holtzman, the limited partners can be liable if there are exercising control But here the law allowed a C to be a general partner and they followed all of the formalities Followed the necessary steps so that their control was exercised through the C instead of individually o Liability limited to the Cs assets. Derivative Lawsuits:

Legal mechanism that requires accountability from Cs by allowing underrepresented SH to bring lawsuits on behalf of the C o Allows the C to protect itself These suits are usually in equity, which gives courts some flexibility to determine the remedy. Note Distinguish for Direct suits: o Who suffered the harm? The C or the SH Many times can argue both so move to next step o Who receives the benefit of the litigation? Probably arguable o Some cases can be both Benihana When looking if purpose was entrenchment of a SH then direct When looking if C was ripped of because of conflict Derivitive Bond Requirement - Many states have a bond requirement for these suit (Cohen) require a plaintiff to buy a bond for legal fees if he loses the suit. o Compromise to prevent attorney encouraged frivolous lawsuits o Although the C insures its directors and most cases settle for the premium These are still thought to discourage directors from bad action because it affects their reputation and if do not ensure directors then will not be able to get best talent to hold these positions.

Demand Requirement of a Derivative suit: - The rationale is that this can save the courts trouble if the C can manage its own problems by giving the board the opportunity to remedy the problem instead of forcing them into a judicial proceeding. o But this has become the centerpiece of derivative lawsuits - Demand is excused if FUTILE (DE) if irreparable harm would result if took time to demand (MBCA) if made effort to obtain desired action (FRCP 23) o Standard for demand futility: (excusing demand requirement) Aaronson rule Excused if: A majority of the board has a material financial or familiar interest A majority of the board is incapable of acting independently for some other reason such as domination or control o But independent even if verified the contract or question or appointed the person or names as a . The underlying judgment is not the product of a valid exercise of business judgment o Standard for demand refusal: Business judgment rule gives lots of leeway Need more DO NOT MAKE A DEMAND IN DE! o If make demand then: No discovery -

Court only looks at why the demand was refused and BJR applies here. So instead of argue underlying claim, you just argue the denial. Demands are always refused If court says that demand is not excused and hence you should have made it, it is not fatal, they just give a stay and give you a chance to make a demand.

DE gives reasonable doubt standard Very low o Easy to find the demand excusal satisfied NY Must allege with particularity the reason for not making the demand (Marx) o But look at same factors o Auerbach: directors were involved and they were sued so NY court assumes that demand was excused. Despite the fact that paying bribes to foreign agencies probably made the C more money, it is egregious activity because it is illegal so BJR will not protect. Protection for the C Special Litigation Committee o When demand is excused, the C can appoint a SLC to review the litigation and see if it is bad for the company. If on behalf of the C but it will actually make the C worse off then shouldnt allow the suit If court is persuaded, then they will dismiss the lawsuit. o Zapata: SLC Composed of 2 attorneys that were hired after the alleged action took place was enough for independence even though the interested directors appointed them. o In DE the court is reviewing the SLC decision not to pursue in 2 steps: 1) Inquiry into the independence and good faith of the committee and the basis for their recommendation o Some courts will scrutinize this but in NY the burden is on the plaintiff to disprove the SLC. 2) Court may go on to apply its own business judgment as to whether the case should be dismissed. SO a lot harder for the C to get the case dismissed ONLY have this in demand excused cases!! o Not demand refused Business judgment rule A rule of deference by which courts defer of the judgment of the directors even if the decision turned out to be really bad o To hold them liable requires embezzlement, misrepresentation of fraud.

Things issued by the C to raise capital: - Preferred share o When a C issues dividends, a preferred share is entitled to a certain amount of dividends before a non-preferred shares gets any What is left over gets spread out equally

Convertible bond o Bond that can be converted into stock as a set price o Whether it is a good idea depends on the market price of the stock Warrant o A security issued by the C that gives the holder the right to purchase shares for a particular price. Can think of it as an installment payment Similar to an option but an option is in a secondary market A warrant is issued by the C itself.

Options: On Secondary Market right to buy or sell at a certain Price This is a way to bet on a drastic change in price. - Call-Option Gives right to buy a security from, the issuer at a certain price within a certain period of time. o Pay a certain price to be able to buy the share at $5 then if share goes up to $10, you exercise the right and make $5 per share. o DO this if think price will go up Make more money but bear the whole risk - Put-Option Right to sell a security to an issuer at a certain price o If think price will go down, then pay to be able to sell Shares at the price that it is now. - When a C thinks that it needs to take more risk in order to make more money, they will often give options as a form of executive compensation o If Call-Option price is very high, then willing to take more risks to reach it. Others argue that this gives incentive to think for short-term gains.

Shareholder Wealth Maximization Norm: states that SH are supposed to be the beneficiaries of the C so Cs should operate with the idea of increasing the price of their shares as much as possible. - But there are other stakeholders such as customers, employees, the environment, creditors and society at large o Some argue that other areas of law are supposed to look out for these people but then others criticize that they dont do the job so we need C law to help - Dodge v. Ford: Ford gave less dividends in order to expand the business and lower the price for consumers o Court says it will only interfere with dividends because of fraud or similar things but then make Ford give more dividends because he explicitly said that he was doing it to help the public and that they are making more money then they should be.

o Exception to the rule

But Court does not interfere with keeping money to expand because this is BJR. Cubs Case: perfect example of BJR Wrigley doesnt put in lights because he wants to keep the neighborhood nice and thinks baseball is a daygame o Neither have anything to do with the SH interest but the court inputs various reasons why this may be a good business decision.

o Instead of looking at the decision itself, they look to see if there is any inherent problem such as fraud, illegality, or conflict of interest. Charitable donations: - One power of the BoD is to make donations for the public welfare, science, or education - Courts give deference here under BJR but reserve the right to intervene for excessive charitable donations or if they are to pet charities that are bad for the SH o But typically, contributions do not lead to a derivative suit.

Fiduciary Duties:
MBCA 8.30 each member of the board of directors, when discharging the duties of a director, shall act: 1) in good faith, and 2) in a manner the director reasonably believes it be in the best interests of the C. Unless there is a breach of duty, court courts defer under BJR - LOYALTY Decision must not be tainted by fraud, illegality, or conflict of interest o If a party is conflicted Not some type of ratification by the non-conflicting members of the board. Direct Conflict Director of one C and owns the other C Indirect Conflict Director of one C and officer of the other C - CARE Must make sufficient investigation or deliberations when making a business judgment o If dont look at all info that is reasonably available The BJR is rebutted American Express: Amex lost about 10 million in taxes by giving shares to stockholders instead of selling them o No evidence of fraud, only 4 out of 20 directors was conflicted, and the board did deliberate, seek advice and give justification for it So no breach of duty Van Gorkom: Seen as a dark chapter in C law because court interfered o Looking for a way to avoid tax liability dont have money for manager buyout so negotiate a leverage buyout . o Trading at 38 and buyout offer is at 55 Pritzker only willing to make this offer with he is given a lock-up agreement If someone bids higher than him he has option to buy one million shares at 37 so its win/win o Duty of loyalty not a problem because the CEO is retiring so his interests are aligned with the SH because he is just getting money for the stock. o Duty of Care Board has 2 hour meeting with 20 min. oral presentation Court said they didnt spend enough time thinking about it so it was a breach Nothing written provided Dissent argues that these people do this for a living and know the business well so should give them deference. o Should have: Hired experts or consultants

Produce more financial info about regarding the stock price Market test to see what others would pay for it More info about what the company was worth to Pritzer More supervision by CEO Put everything in the record Disclose more information to the SH before they ratify.

Cinerama v. Technicolor: Similar to van Dworken because Court says that the BoD violated the duty of Care by not considering all of the relevant information. o Despite CEO researching a bargaining hard o But the transaction is saved at step 2 Entire Fairness Test Fair price? Structure of the transaction Dealings SH info. o NOTE 2 steps to argue: Was there a violation of a fiduciary duty? Was the transaction entirely fair so as to save it? Francis v. United States: violated duty of care to creditors by lack of attentiveness to her sons taking out all of the money for personal use. o Sometimes may be able to rely on the officers, but here her husband warned her that the sons would do this. Beyer v. Barron: radio advertising contract with the presidents wife o Duty of Care Never had a meeting, just talked informally about it. Court notes that this isnt ideal but this is the way they usually made decisions So BJR applies o Duty of Loyalty Conflict rebuts BJR so must look at entire fairness Looking to see if the husband, as president, exerted domination and control over the directors decision. The board decided on this campaign before they knew it was wife Her contract wasnt special Advertising served a legit purpose o To avoid getting to the entire fairness step Either give the decision to a panel of independent people or ask the board to ratify. Whenever there are overlapping boards with different groups of SH there is a chance for a derivative suit so need to get independent consultants. Benihana: Issue was conflict because director on Benihana board owned the C that was making offer to buy shares and used confidential info. o Court allows it because the board ratified the decision o Looked at entire deal and it looked fair so Courts let it stand. o Cant take action with the sole or primary interest of retention But Court will not assume this so if other purposes can be inferred from the actions it is OK.

TERMS: - Leverage Buyout: - Management buyout: extra money need comes from the managers of the C - Feasibility study Math that shows how much money you can borrow so that profits cover interest.

Corporate Crime:
Most criminal laws can be enforced against a C under respondent superior o Look to see if act is within the scope of employment o Intended to benefit the C Corporate intent o Some think it is ridiculous to think of this entity having intent o Others respond that a C has the intent of the agents acting on its behalf. In most jurisdictions the crime doesnt have to be by someone high up in the company o If C found guilty get fines, restitution, probationary period Only civil damages under criminal laws, but purpose of criminal laws are to create a culture change against this type of C conduct.

Corporate Opportunities Doctrine: - Threshold question is whether it is an opportunity for this C.

Look at DE Test on Slide C opportunity IF o In Cs Line of Business (Expansive def in Ebay) o Financially able (Broz going out of business) o Interest in the opportunity o That creates conflict of interest Catch All All arguable This doctrine doesnt say that you can never take this opportunity, just must give the C a chance first because you have duty to it. If qualifies as a C opportunity, then MUST o Disclose it, AND o Some disinterested part must reject it A superior or directors o If it is not rejected disinterested directors can ratify it. If it IS a C opportunity and not disclosed Then do entire fairness test o Double Check this Important difference from ALI rule ALI is more expansive when dealing with Senior Executives o Anything that is closely related will be an opportunity. Ebay Case: Ebays directors took offerings from Goldman Sachs without offering them to the C first. MUST GO THROUGH STEPS: o Ebay is financially able to purchase o Is this in line of business?

Main business is auctioning things, but they consistently invest in securities Make lots of money on this and spend lots of time doing it Court says there is so much going on is this are and such large profits that it counts as being in line of business Court stretches here volume of securities work makes the court worries that directors are making decision based on their own interest instead of the C.

Martha Stewart: Stewart owns lots of shares in the C and sells some on the market without offering it to the C. o Line of business here was not to sell stock o Distinguish from Ebay because this is more ancillary Something that directors and executives always do, and Ebay had a lot more revenue of their investments. When doing something that ALL Cs do (sell stock) not in line of business.

Fiduciary duty of SH: - Usually ignore SH conflicts when they are voting - But when these SH are CONTROLLING SHAREHOLDERS, then they have fiduciary duties. o Controlling SH exercise there control indirectly, through control of the board - Whether someone is a controlling SH depends on the circumstance o If own 48% court will probably conclude you are controlling because you can buy the other 2%. Case-by-case - Sinclair: SH owns 97% so owes fiduciary duty to the other 3% o Court applies intrinsic fairness test o Excessive dividends Give the 3% there pro-rata share, so no problem even if taking lots of money out. Reluctant in overruling decisions for things like dividends o Business opportunities Sinclair set up many subsidiaries for different geographical locations These opportunities were not for this subsidiary because they were in a different location. - Zahn v. Transamerica: Get From Lauren o Court is looking for what an independent director would do Disclose all info to everyone Act in a way consistent with contractual commitments. Ratification: - Director ratification insulates you from liability o Only comes into play in the subset of decisions where there are conflicted directors (Benihana Case) - A quarum is a majority the total number of directors.

Need a majority of all the directors that are present in order to make a corporate act. (Act = decision) - BUT, the contract must be authorized by a majority of all the disinterested SH Not just ones that are present. o OR must be approved by a majority of the SH including interested SH such as a controlling one. Court says decisions are still voidable even if these things are met May be other reasons why a contract is void or voidable So will sometimes still do entire fairness even if ratification is met. - If no ratification takes place Go to entire fairness Effect of Ratification: - If against a controlling SH o Duty of Loyalty claim shifts burden to the to show unfairness under the entire fairness test Wheelebrator case So the effect is actually minimal Shift burden from controlling SH to the - If ratified by independent directors with disclosure of all material info, then BJR applies and there is no duty of loyalty claim unless it is rebutted by a showing of waste: o There is no possible Duty of Care Action in this case Walt Disney: SH sues because of initial approval of contract with huge severance and eventual decision to terminate. o Uninterested Board ratified it o Court adds category of Bad Faith as a new category of Fiduciary duty Requires intent to do harm or intentional dereliction of duty Gross negligence is not enough Not met here They hired a consultant and were just trying to bring in talent.

Compliance with the Law: INTERNAL CONTROLS - Liability if: o Utter failure to implement a control system o Conscious failure to monitor or oversee the system - Caramark: Rebuttal of BJR assumption if a director fails to institute compliance program or fails to follow up or monitor it o But pushback in Stone: - SH sues because C is fined $50 Mill for now filling out suspicious activity stuff as required. Says that good faith is part of the duty of loyalty Under this standard it is pretty hard to find a violation here there was a failure to follow the law but directors were still protected. There was some type of system and the court found that it would good enough. PUBLIC CORPORATIONS:

Intersection of state law with federal law here. Capital Markets: o Primary the set of transactions that the C is a part of. o Secondary exchange amongst shareholder but not involving the C What is the point? Easier to obtain ownership interest (smaller of bigger) Aggregates info into a single measurement (Price) o Can help Cs make good decisions Can see the effects of certain decisions o Market capitalization Better liquidity Easier to sell

Approaches to valuing a company - Figure out the value of the assets of the C o Doesnt take into account the intangible value and future earnings power. - Based on what a comparable business had as earnings and what it sold for. o But doesnt take into account the differences in certain businesses. - Discounted cash flow o Present value take an amount of money and adjust based on interest. o Figure out what the cash flows are in future years, then account for interest. But lots of uncertainties in figuring out the cash flow. Must account for earnings and costs, etc. A lot is speculation. - Efficient capital Market Hypothesis Get idea of what it is worth from market price Different Forms here: o Weak-Form - Current price reflects all past prices. This doesnt help much because you cannot tell which way the stock is heading. To the extent that past prices are relevant, people will buy according to this and the price will go up accordingly. o Semi-Strong Form Current price reflects all public information relevant to a security. As soon as info becomes public, it is incorporated into the price. So manipulating the public info could change the price o Strong From A Stock reflects ALL information, including private information.

Securities Regulation:
WHAT IS A SECURITY? - Get Def from book - Will focus on the most ambiguous terms most often litigated: o Investment contracts

Howry Test Need to have 1) investment of money (not just time),

2) in a common enterprise, 3) with profits to come solely from the efforts of others. Common Enterprise: o Horizontal Relationship among investors in terms of profits o Vertical Relationship between investors and promoters. Some courts recognize this Solely from the efforts of others: o NOT a partnership Shared profits and control here o LLC Hard Case depends if more like partnership/C o Corporation Usually o Robinson: not stock because he had theoretical control based on his position.

o Stock Must have the usual characteristics of stock AND be called stock If called stock then look for voting rights, dividends, can appreciate, Landruth: Even if buying all of the stock, it falls under security law. o Any interest or instrument commonly known as a security look at same things as investment contracts

- Securities Act of 1933

o Focuses on primary market Transaction disclosure o Process for selling securities: Before selling OR offering, must register with the SEC After register but before approval can offer but cannot give price and cannot sell yet After approval of registration Prospectus must be delivered to people offered the securities before the sale. o Exemption Factors: Number of offerees less than 25 usually OK Knowledge and sophistication of the offerees They more they know, easier to meet exemption Total size of the offer (monetary) Manner of the offer If public advertising then wont get exemption o Regulation D Exemption ONLY applies to the initial offer If there are subsequent sales, exemption may no longer apply Will have to make reasonable inquiry as to the buyers intention or put resale prohibitions so dont get screwed down the line. o Civil liabilities for Misrepresentation in the registration process 11 liability if any part of the registration, when it became effective, contained an untrue statement of material fact.

Issuer, officers who signed, AND the directors who sign the registration are potentially liable Escott: - Test of materiality Would an average prudent investor want to know this. o Figures off by just a little were not material but ones off by a lot were material. Affirmative defenses for those beside the C o Experts Not liable for non-expertise part To meet the due diligence defense with respect to the expertise part, the expert must show Reasonable investigation, reasonable grounds for belief, AND actual belief that statement were not misleading Work was accurately represented o Non-Experts For non-expertise part it is the same high standard as above For the expertise part, the non-experts must have no reason to believe, and did not believe that the statements were misleading. Dont need affirmative reason to think it is true; just no reason to think it is false.

12 Liability for ignoring registration process or misrepresentation in the prospectus or oral communication Securities Exchange Act of 1934 Created SEC to regulate securities o Focuses on the Secondary Market o Applies to registered securities Only Key sections are 10(b) and 10(b)(5) o Need SLIDE o Elements of 10(b)(5) violation: statute about fraud, includes insider trading Jurisdictional Nexus Transactional Nexus In connection with the purchase or sale of any security NOT triggered is getting people not to buy the security Materiality Focus on two factors o Probability that this info matters o Magnitude of what happens if it goes through Think about Reasonable investor and TOTAL MIX Reliance Fraud on the Market Theory rebuttable presumption of reliance by the investor on the integrity of the market. o Based on semi-strong theory If this is made to protect the unsophisticated investors, then need to make sure this element doesnt prevent them from bringing suit because they dont always know all the info.

2 kinds of causation 1) Transaction would transaction happen either way? o Same as reliance 2) Loss Causation Did the Plaintiff really lose anything as a result of the misstatement Did he believe it? Scienter Intent to deceive or reckless disregard is enough. o NOTE must show that this person had a duty to the SH before they can be liable for this. No duty if arent an agent, fiduciary, or someone in whom the traders have put trust or confidence Basic case: Denied having merger discussion but then merged and period who sold by relying on his statement sued him. o Question is whether the statements are material o Options are Abstain OR Disclose o Even if probability of merger was low, the magnitude of it was huge o A reasonable investor would want to know this information o There is also an obligation to correct misstatements that are publically made o Used Fraud on the Market to infer reliance

Insider Trading: prohibiting a fraudulent breach The failure to disclose and get permission
to trade on the info that you have. Reasons for prohibiting Insider Trading: - Preventing incentives for bad management o If can make money when stock goes down, there is incentive to breach fiduciary duty and run it poorly. - Fairness Not fair to let insiders make extra money in virtue of their position o And worse, the other side of the transaction thinks that they are on a level playing field - Property rights o Costs a lot of money to monitor yourself or do it through contracts. o Criminal punishment is a better deterrent Reasons to allow it: - Market efficiency o Difference in info helps people trade freely o When an insider trades everyone sees it which moves the price and pushes information out. - Executive compensation

- General Rule Cannot trade on material non-public information o This is a threshold requirement for all of the theories - Traditional Rule: o Based on a fiduciary duty to the issuer of the security But limited because
must have a duty to the issuer for this ever to apply.

o Temporary Insider Ex. Lawyer trading on info he gets in virtue of being hired for a job. But this DOES NOT apply to arms length negotiations Ex. If ask for a loan from a bank and gets denied and then the Tippee trades on the info, there is no liability under the Tippee theory or the traditional theory. Dirks Case expands this Deals with Tippee/Tipper o Tippee can be liable IF: Breach of fiduciary duty by the Tipper For personal benefit of the Tipper Tippee knows OR has reason to know that the Tipper breached the fiduciary duty for personal gain Both the traditional theory and the Tippee theory are limited o Shown by Chirellee No liability because he didnt owe a duty to the acquiring company. Misappropriation theory: o Must be deception Therefore if disclose to all parties involved, this theory will not apply. o Breach of duty But not to the SH to the company he works for Basically a breach of confidentiality Difference between this and the misappropriation theory is to whom the duty is owed

10(b)5-2: The rule provides a non-exclusive list of three situations in which a person has a duty of trust or confidence for the purpose of the misappropriation theory: - 1) Whenever a person agrees to maintain info in confidence - 2) Whenever the person communication info and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of info knows or should have known that the person communicating expects the recipients to maintain confidentiality - 3) Whenever the info is obtained from a spouse, parent, child or sibling, UNLESS recipient shows that history, pattern or practice indicates no expectation of confidentiality o Here we assume that a secret from someone in the family includes a expectation of confidentiality but can overcome this because always tell the secrets. RULE 14(e)(3) Exclusively talking about Tender Offer Context - If not a tender offer Then dont apply this o SLIDE o Easiest of the insider Trading Doctrines to apply because less ambiguity o Makes the Tipper Liable as well o Purpose is to level the playing field

OHagan Case: - OHagan is a partner at a law firm and learns about a tender offer. o His law firm is involved, but he is not staffed on the matter the represent the acquiring company and he buys stock in the company that they are buying - Would not be liable under traditional theory because owes no duty to the issuer of the security and would not be a temporary insider because isnt staffed on this case. - Liable under both the Misappropriation theory because he didnt disclose to his law firm, and 14(e)(3) because it was a merger and he traded on this info NOTE: Be systematic in my answer Look for potential breaches in each link of the chain - FIRST Is this non-public AND Material o Should always argue that is or is not material - Second - MUST APPLY ALL THE THEORIES o If a tender offer then 14(e)(3) o Traditional theory Breach by an insider Duty owed to Issuer? Temporary insider? o Misappropriation Theory Breach duty of confidentiality Look for duty of trust 10(b)5-2 Agreement to retain confidence Proxy Voting: - A Proxy is a right that a SH can give to someone else to vote on your behalf o Must common in election of directors o Proxy fight A battle about what a C should do. - One question is of Expenditures in the Proxy fight To what extent can the C spend money top defend the status quo. o Cant be excessive or it will violate fiduciary duty Hiring a PR firm or taking them out to dinner seems to be OK. o More difficult for insurgents because the money comes out of their own pockets It can be very expensive, and it is really hard to get shareholders to vote no in a substantial percentage. Can only be reimbursed if the expenditures arent excessive AND you actually win, and the SH must ratify. SO high risk, low reward because dont get a higher proportion of the shares or anything just people that you want to be in power. o SO spend money to have company run by better people but then barely see the profits from it. o This is why Proxy fights are relatively rare now. - Solicited Proxies must be FACTUALLY ACCURATE

o Soliciting is defined relatively broadly If making arguments about what should happen, and then you face possible liability if there is a misstatement in your solicitation. This could lead to a lawsuit with both public and private enforcement. Private right of action Must be a violation o Materiality Significant propensity to affect the voter process OR a substantial likelihood that a SH would consider the info important. o Causation If the controlling shareholder has enough votes by itself Then no causation Seinfeld case shows how difficult to show whether it is material (facts?) Shareholder Proposals: Mechanism for SH to control some policies of the C, but doesnt give very much power because of Federal Law. - 14(a)(8)allows eligible SH to put a proposal before their fellow SH - The C can exclude the proposal for a number of reasons ARGUABLE o 1) Not the proper subject for action under state law In DE, the BOD is entrusted with day-to-day decisions, so a SH proposal about how to run the business will not work o 2) Relates to operations accounting for less than 5% earnings/gross sales. Exception UNLESS it is otherwise significantly related to the business of the C Social Policy included here o 3) If relates to an election - The SEC interprets this rule After a request for SH proposal, a C can ask the SEC for a No-Action Letter o A promise by the SEC that they will not investigate if the C denies the request. There is an appeal promise for both sides Rarely happens Lovenheim v. Iroquois Brands: proposal to form committee to think about whether force-feeding the animals is wrong. o Plaintiff strategically worded it this way because if just told them not to sell this, it would be an improper subject for action under state law. Most of these cases are just about bringing media attention to certain C policies hoping that it will start a change. o This was less than 5% of the gross sales, BUT court says it is other significantly related to the Cs business Here, the ethical or social significance was sufficiently related to the companies business but this doesnt apply to all ethical concerns Must be sufficiently ethical. AFSCIA v. AIG: SH proposal to amend the by-laws to publish names it SH nomiees for the board

o Court said this wasnt regarding an election but instead was about the procedural rules for elections o SEC later amends their regulations to include this part of an election. Pillsbury v. Honeywell: Court put much weight on the fact that plaintiff ponly bought shares for the specific reason to bring suit because he was against the war.

Inspection Rights: Last tool for SH to exert some power. - Trying to get info from the C itself - Rule 14(a)(7) doesnt allow SH access to many things, including the SH list. - Looking for PROPER PURPOSE: Basically making money for C Increasing price of shares. Under Pillsbury, uncovering alleged misconduct is not a proper purpose o If SH wants the SH list burden is on the C to show why they deny it Crane case: Sadler: Even with SH list DE is pretty stingy Can get NOBO list but more difficult to get CEDE list. o If want anything else (particular info) burden is on the SH CLOSED CORPORATIONS: - In Closed There is no secondary market, Small number of shareholders who actively participate in the governance of the closed C. o In a sense, they are similar to partnerships. - In Public There is an active secondary market and as soon as a C sells its stock, Federal securities law applies - In a Closed C, we often dont have the separation of ownership and control. o Once we get away from the principle of one vote per unit of economic interest, it is possible to structure it to achieve any balance of ownership and control. - Something about agency cost o Think the more concentrated the power, the less agency cost - In some states, Status as a Closed C gives special rights o In DE, as long as less than 30 SH, then can be closed o CAN allow the Cs business to be managed by the SH instead of the board. o CAN differentiate between economic rights and voting rights Usually do this by having different CLASSES of stock. Criticism - Some argue that gives a separation of ownership and control, which leads to high agency cost because the people making the decision are doing so on their own behalf without a strong stake in the outcome. Stroh: Illinois Con provision prohibited non-voting shares, but didnt say anything about economic rights. So the C gets around it.

o A shares get dividends and all other economic aspects of stock plus right to vote, but cost $4 o B shares can all vote, but do not have any economic rights. Management has all of the class B shares, which were MUCH cheaper to buy. Essentially control the whole C with no-economic incentive or cost. Do this if need financing but dont want people that are giving all the money (through the purchase of shares) to have control of the C. o SO instead, you dilute their voting rights by giving management MUCH MORE shares at a cheaper price but with no economic rights. o Only want B shares if want to control the company but dont care about the money. Many ways to achieve different balances between economic and voting rights. o 1) Can give out A shares in proportion to money invested and then give out B shares to making voting rights exactly as you want them Even if exactly opposite of the amount of money invested o 2) If only one class of stock allowed then can separate by equity and debt Divide equity in terms of voting rights, and then add right amount of debt to each person to get votes in desired proportion. Because equity gets to vote and debt does not o 3) Can make a Voting Trust or Irrevocable Proxy To give irrevocable Proxy to a 3rd party, it must be attached to an interest Cannot just give up your vote But court has held that the agreement itself can be the interest o 4) Can put a cap on voting rights no matter how many shares they own in order to prevent concentrated ownership At a certain point, dont get voting right with additional shares.

Ringling: Vote-Pooling agreement in order to get the majority of votes - If couldnt agree, then specific arbitrator would decide the case but one SH didnt uphold her end of the bargain. - Remedy: o SH voting agreements are NOT specifically enforceable by making them vote in a certain way o But, if they dont vote according to the agreement, then the votes are invalid. o Could have also imposed damages. - Even though SH voting agreements are valid, they are limited in scope o Only covers who will be on the board Not who will be the chair of the circus. o Day-to-day matters are outside the scope

We are concerned about minority SH getting left out because of these agreements, but constantly shifting coalitions mean constantly changing policy. o Cycling can sometimes be even worse than oppression o

McQuade: Agreement to keep a specific director on the board was invalidated - Want to allow them to exercise their independent business judgment. - In practice, courts give deference, but cannot completely constrain a C in this way. o Cannot limit the discretion of the BoD because they have a duty of loyalty to the SH, including the minority SH. - Trying to protect the minority SH Clark v. Dodge: Dodge and Clark are the only SH and Dodge agrees to keep Clark on. - Dodge fires Clark for no reason and Court says that the agreement was valid so he cannot be fired. - Court distinguishes from McQuade: No minority SH here just the two of them o The Court in McQuade was concerned about the minority SH that werent privy to the agreement, here ALL of the SH agreed on this provision. This is an important exception to McQuade CAN limit discretion of board when they is a unanimous SH agreement Way to get around this Homemade McQuade exception: o Create minority SH just before breaching the agreement. Create McQuade outcome Invalidate agreement o Other side must protect against this by putting in the agreement than all other SH must be told and agree to it as well. This will keep the Clark v. Dodge outcome

When forming a C You must decide: - Control - How much money each puts in - How much each get out - Who does the Labor - Transferability issues - Issues concerning disagreement: o Common problems Deadlock Oppression Majority pushes out minority SH One way is to combine efforts with another large SH through a SH agreement. Asset Securitization: - The pooling together of some sort of assets, usually in the form of some expected future payment, and then selling these to third parties as securities.

o Example, if expect money in the future from accounts receivable (paying money that is owed to them) if need the money now, can sell the right to these future accounts receivable This is potentially beneficial because they can attract a new realm of investors. Gives them a diversified set of assets. Can create a Special Service Vehicle SPV Another entity that CANNOT go into bankruptcy And then sell the securities through this. o SPV gets capitalized with a certain amount of money, and then buys the rights to the accounts receivable Company that buys bears the risk, but try to pool it from lots of areas to lower this Usually desirable because of there low risk relative to the stock market as a whole. The securitization of sub-prime mortgages emerged though because there were more investors than things to invest in o Thought that some people would default but if pooled tons together then it would still pay reasonably well Problem is that was all predicated on the housing market, which went way up and when it crashed, default rates soared and the pooling didnt protect people. If house worth less than you owe, there is no incentive to pay, so everyone defaulted.

LLCs: Can Structure them in many ways: - Not that much difference from one entity to another these days. - LLCs get some of the best features of both worlds. - Terminology: o Board of managers = BoD o Members= SH - Piercing the LLC veil More difficult than the C veil because LLCs are supposed to be more flexible and have less formal procedures. o Courts usually apply CL, but less strictly. - MORE flexibility o Can have member managed or manager managed LLCs Member managed are similar to partnerships Here, the members have the fiduciary duty. Manager managed LLCs are similar to Cs. - Articles of Organization AND Operating Agreement o Operating Agreement can trump the Articles of Incorporation because it is easier to change the Operating agreement So make it easier in this way - Conversion Provision Can convert into a partnership o But must have merger to turn it into a C - Notice As with a LLP, in a LLC there is a requirement of notice that you are a limited liability company.

Specific procedures required for dissolving Just taking money out of the bank isnt enough.

New Horizon Case: LLC went out of business but didnt file any of the proper dissolution materials. - Technically, because they didnt properly dissolve, this isnt a case of piercing, just need to follow the statutory process of paying off creditors first. o Didnt keep proper records showing that the money from dissolving her LLC went to the right place.

MERGERS AND ACQUISITIONS:

Reasons to combine two different firms: - Diversification o But may be cheaper way to hedge risk o New business may not be amenable to hierarchical control. - Growth in Market Share o Economies of Scale Sometimes things are cheaper when you get bigger o At some point may get anti-trust problems. - Synergy o Merging to get the assets of a company that will improve yours o Vertical Integration by just combining with other companies that perform a different step in the overall process, you avoid the transactions costs of having to negotiate with them all the time. - Freezing out the Minority o Gives full control of company and removes the risk of derivative lawsuits. WAYS TO ACHIEVE A MERGER: - Proxy contest o Already saw that this is expensive approach and not worth the expenses because dont see enough of the profit from the improvement. - Tender Offer o Offering to purchase shares directly from SH at a set price Can make it contingent on receiving a certain percentage 51% o Williams Act - Have to file a detailed set of forms including the plan for the company o Doesnt combine the two companies Just gives the person control because they own a majority of the shares. Next step would be to merge. - Stock Purchases o Just purchases as many shares as possible on the open market Williams Act prevents the effectiveness of this: After acquiring 5% of the company, must disclose to C and tell your plans for the C. All people working together count as one for the purposes of this.

Sale of assets o Instead of buying the C, you just buy everything that the C owns. Once get everything they own, can do anything they want o X sells is assets to the Acquirer and then usually liquidates Ends up having the same effect as a merger. o Can buy assets BUT not liabilities o In DE No appraisal rights for the sale OR purchase SH vote required ONLY when selling Merger/Consolidation o May be more appealing because can defer tax payments. o This is the only technique that not only gives control, but also combines the two companies. o MERGER If have an Acquire and the Target and end up with just the Acquirer Transfer assets AND liabilities o CONSOLIDATION If have the Acquirer and the Target and end up with a totally new company

Williams Act: - After getting 5% interest in a publically trading company, then you have ten days in which to disclose this and other things including your plans for the C. o Very affective of preventive acquisitions in this manner - Also regulates Tender Offers o Can make it contingent on getting a certain amount o If oversubscribed then redeem the shares pro rata o Must keep offer open for 20 days

Steps to achieve a merger in DE:

Board approval Each C bound by its own state law o Usually also change the articles of Incorporation SH approval Need a majority of SH to approve. Filing State receives notice Appraisal rights Extra protection for minority SH that doesnt exist in other contexts. o Only available for Private Cs, NOT public Cs o Corporations might want to avoid this so they dont have to raise cash o Reasons for them: Prevent investors from being trapped in a C that they did not choose. Protect investors from either oppressive behavior or economic risk o Reasons against them

May prevent some transactions at the margins These rights are redundant in a publically traded C No longer have them in this context There are other ways to diversify There are other tools to fight unfairness Such as entire fairness test.

Farris v. Glen Alden: 2 Cs here GA (PA) and List (DE) - List is much bigger but they structure the deal so GA is buying the assets of List. o Because in PA there are no appraisal right if buying but are if you are selling. - Goal here was to avoid appraisal rights in both states because this entails lawyers fees, uncertainty in the amount to be paid and there would be a need to raise capital to pay out cash. o A merger would give appraisal rights so attempt to do a sale of assets with the effect of a merger instead. o Here they were paying with stick, which shows that they didnt have the cash, so dont want to have to pay cash to SH. - De Facto Merger Doctrine: o If end result is the same as a merger must do all procedures of a merger Including giving appraisal rights A method of SH protection o Rationale Allow appraisal rights when the essential nature of the C is changed so that a SH isnt stuck in a C that they dont like. This usually happens in a merger but if some other technique also produces this outcome then SH should have appraisal right there as well. Idea here that substance should trump form - Terry: Involved the creation of a subsidy, which then merged with another company. o Court recognized that the Penn legislature dismissed the de facto merger doctrine but leave open the possibility that it can apply in situations where the minnow swallows the whale like it Glen Aiden Hariton v. Arco: Question is whether the merger of a sub should count as the parent. - DE court says must get rid of the de facto merger doctrine to get rid of uncertainty - There is equal dignity in the sale of assets and a merger Rauch v. RCA: DE courts also reject De Facto Non-Merger Doctrine - SH had a right to redeem at a certain price, the merger had the exact same effect of a redemption so SH argue that they are entitled to what they would get if it was a redemption o Court rejects this argument

Freeze Out Mergers: The Majority SH incorporates a second C, which initiates a merger with the original C. They then force the minority SH in the original C to accept a cash payment of their shares, effectively freezing them out of the resulting company. SLIDES - A duty of loyalty violation is not relevant here Go straight to ENTIRE FAIRNESS TEST o Because a freeze-out involves conflicted parties by its very nature it is ALWAYS an interested transaction so just skip this step Even if there is an independent committee involved o If not a freeze-out, then look at DOC and DOL to see if there was a violation or if anyone was interested. Benefits of a freeze-out: o In long term it eliminates conflicts because dont have to worry about derivative suits because there are no minority SH o Sometimes used to take a public C and make it private to save it from the costs of abiding by securities laws. Cons of a freeze-out: o Lose benefits of public ownership Disciplinary mechanism Liquidity o Short term conflict DE courts are not skeptical of them at all o Weinberg No business justification required at all. Other States are more protective o Coggins: If no business purpose for the freeze-out then the transaction is automatically unfair So unfair that appraisal rights arent a sufficient remedy. Damages Seeing what the Old Patriots firm would be worth today

Weinberger: - Signal recently bought 50.5% of UOP and then tries to get the remainder through a cash tender offer - Entire Fairness Test: o Create a report using UOP info but dont disclose report to UOP o Get fairness opinion from Lehman Bros. but make them do it in 4 days and dont tell SH that it was rushed o Get other factors from book Burden Shifting: For Entire Fairness Test - Burden is on plaintiff IF: o There is a ratification by disinterested SH, with full disclosure, OR o There is NO evidence of Fraud, misrepresentation, or misconduct o If C got an independent Committee to consider it. - Otherwise burden is on the C

o If no ratification, or they werent fully informed, or evidence of fraud. Remedies: - Appraisal Rights Typical remedy: Many ways to calculate a companys value o Block Method ONLY method before Weinberger Weighted average of net asset value, capitalized earnings, and market value or shares o Comparative analysis o Discounted cash flow analysis - When Fraud, Misrepresentation, or Waste can get monetary damages - Weinberg o Need some sort of deterrent to prevent a C from doing these things, Simple appraisal rights arent enough. - Raskin adds Misconduct to this list where their can be a remedy other than appraisal o Freeze-out merger where the step 2 price was much less than the step one price. This is not objectionable by itself, but here they did it specifically to avoid their promise that it would be at the same price if done within one year. Court like the secret planning surrounding this. VGS Case: 2 directors trying to merge an LLC into a C to lesson control of majority owner. o Breach of fiduciary duty because one manager didnt tell the majority SH, who appointed him, that he was going to vote against him Violation because of the way the other two people kept it a secret from the third.

Takeovers: Hostile Acquisitions

In a merger, the boards of both sides agree with the transactions. Takeovers, on the other hand, are unfriendly. Here, one C is taking over another when the board on the other doesnt want to be acquired - Why Do this? o The C is undervalued and can be worth more if the change the structure and BOD. Buying to fix and make a profit Unlike in a proxy fight, here you see the entire benefit from the change. o Some companies are more valuable if they are broken up into pieces. - Why resist? o Ethical justification o Long-term outlook is better than what the market anticipates o Preserving the C culture o Holding out to get a better deal o Job security of existing managers This is not a sufficient reason may violate DOL.

Can make them less likely to resist if give them great severance packages Golden parachute

HOW A BOD CAN AVOID A TAKEOVER: - Green-Mail Buy the shares back from the person or C that is trying to take over Essentially a stock buyback by the company o Because these are ALWAYS interested transactions, the burden is on the directors to show: 1) The purchase is in the interest of the C rather than the director trying to keep jobs 2) Reasonable grounds to believe that danger to the corporate policy and effectiveness existed. DE give lots of deference to BOD See anything as a danger o Green-mail seems like a bad strategy because people will keep coming back and either getting paid off or get the company Hope is that a C will respond by reforming the C and making it better o IRC was amended to a 50% tax on green-mail, so it is seen much less often today. Chef Case: - Maramount thinks Holland is using an outdated business model so wants to buy it and fix it to make a profit o He is known for buying and dissolving companies - Mrs. Chef offers to buy the shares back with her own money, but instead the C votes to buy back the shares at a premium price o Deference given to the BOD that Maramounts changes were bad for the C.

Problem of Two-Tier Tender Offers:

Step one is a tender offer to obtain half of the shares, step two is using this control to force through a merger. - Front-Loaded Price you are willing to pay for control is more that willing to pay at the merger stage o Sometimes bad because it discourages SH from holding out for a better offer because they know they will get less at stage 2. So everyone Tenders at first price to avoid losing out want to avoid the risk so they just vote for it. If difference is too much then it is coercive and invalid Unical DE court tries to make sure that inferior deals dont result from this pitfall. o Some say its good because if just have a one-tier system, SH apathy may prevent something from ever getting voted through. Counter Tender Offer Offer by the original C to buy all of the shares that dont decide to tender to an initial offer by someone else. - Creative way of inducing SH not to vote for the tender.

o Defensive method of target C. Each SH wants the original tender to go through, but also want to avoid voting for it so that they can get the higher price of the counter-tender offer. o Much harder to do today because of SEC regulations

Modified Duty of Care Test: - When a C is defending against a takeover, there is potential for problems, so courts slightly expand the duty of care. o 1) Did they act in good faith and make a reasonable investigation? o 2) Were the defenses a PROPORTIONATE response to the posed threat? Unicals Counter tender was proportionate because the Perceived threat was the coerciveness of the original tender offer. The back end sucked so everyone would have voted at step 1 FOR THREAT, look at: Price Offer Risk of non-consummation Timing of Offer Quality of securities if they are involved UNICAL Case: - Mesa is controlled by Pickens and Mesa controls 13% of uncial - Tries a tender offer to get enough for a controlling share - Front end - $54, Back end Junk securities that are allegedly worth $54 as well. - Unical makers counter-tender offer for $72 o This could be reverse coercion, if the deal goes through, they dont want to be on the front end because the back-end gets more Everyone wants the deal to go through, but no one wants to vote for it. So everyone votes against it and it doesnt go through. - Unical is worried about the courts striking it down, so they go further and offer to give redemption to SH at $72 even if the Pickens tender doesnt go through. o This shows that it is not just coercive but that they really think it is worth that much. - Court says a board has a large reservoir for authority to fight against takeover. POISON PILLS: More Defensive Tactics Deters takeovers by lowering the value of the targets or acquirers Shares - But only at triggering event o LOOK AT SLIDE - SUM each SH receives a right, which ordinarily is useless, but becomes valuable if some condition is met and this condition is the triggering event. Will become valuable in a way that hurts the acquirer - BOD has the right to buy back the right for a very small price if they decide that it is a deal that they should take. o Only the board has the right to redeem the rights This forces the acquire to negotiate with the board.

Must make sure that the Poison Pills dont violate a fiduciary duty

TYPES of poison pills: - Flip-over plans o A right given to each SH that allows the SH to purchase shares in the acquirer at a substantial discount. If make tender offer to these SH, the SH now takeover the acquirers company. Can be defeated by an acquiring company by putting in the articles that they cannot release more shares - Flip-in Plans o Gives a right to buy shares of the targeted company at a substantial discount SO the acquirer ends up getting less of the C then he thought because the other SH all get a bunch more shares - Back-end plans o If the triggering event happens, SH can buy debt in the target. Effect is to ensure that the 1st tier has to be worth more than a certain amount. - Voting Plans o If event triggers, those that acquire the stock have their voting rights diluted SO 50% of the C will only be 5% of the votes - Poison Debt o Not giving a SH a right, rather we are giving a conveyance to debt-holders The debt that has been issues must be repaid right away This discourages a leverage transaction. Can also say that the C promises not to take on any additional debt so it would have to be acquired with cash which makes it a lot difficult Lock-Up Agreement: Promising to give a potential buyer of the company some sort of the compensation if they do no win the tender offer. - This is a way for the Target to induce participation in the auction - Whether it is good depends on what is offered o To the extent that the target has to pay B, it is worth less to A o A high lock-up may get people participate but not increase the price very much. - Need to make sure that it isnt so much that it amounts to plying favorites - Revlon REVLON Case: - Perelman attempts to take over Revlon - Approaches B and offers $45 - trading at $40 o Investment banker says that it worth up to $60-$70 - Defenses used: o Buyback some stock at a higher price Showing that they believe that is worth high

o Back-end plan Allows shareholders to exchange their shares for $65 in one year So the acquire must offer at least this much Perelman offers 47.50 a share but makes it conditional on redeeming the rights above. o Revlon then buys back more stock and does POISON DEBT Limited Revlons ability to take on more debt by new covenants More likely to be held up by the court because this is a more normal and traditional thing to do Revlon now decides that it needs to make a MBO offer o Get around debt problem by having the white knight buy their debt and swap it for other debt. Court says its wrong to favor debt holders over SH o In return for this effort and risk The white knight gets a lock-up agreement consisting of a $25 mill cancellation fee and ability to purchase the crown jewels at a discounted price. Court find the initial provisions OK but lock-up was problematic because it amounted to playing favorites. o At the point where it is apparent that the C will be sold, you can not play favorites Must make sure it is sold at best price for SH. REVLON AUCTION Important rule from this case: o Once reach the point where it will be sold, must get best price through an auction.

PARAMOUNT CASES: Paramount v. Time: - Time and Warner are negotiating a deal Stock for stock trade - This is working out until Paramount comes in o Paramount makes large offer to Time trying to take it away from Warner They offered an all cash offer for Time shares at 175 way above the market price of 110. - Time rejects the deal and puts on defense o Changes deal with Warner from stock-for-stock trade to taking on debt to acquire Warner. Works for 2 reasons: 1) The will not be a merger, it will be a purchase, which DOES NOT requires SH approval This is vital because SH would pick the Paramount offer 2) Pac-Man defense If swallow another company then will be two big for someone else to swallow you. o Paramount raises offer to $200 but Time says no claiming it will threaten the culture of Time. - Holding REVLON DOES NOT APPLY for 2 reasons o This transaction had been in the works for a while and was already agreed upon o Time would continue to be in control if it combined with Warner - Therefore measures taken in this case were not problematic or disproportionate - Revlon would apply if there was:

o An active bidding process, OR o Abandonment of a long-term strategy Paramount v. QVC: - Paramount negotiating with Viacom to be bought out, but falls through - QVC tries to give a 2-tiered offer for paramount which leads paramount to negotiate with Viacom once again - Paramount puts together several defenses: No-Shop Provsions Prevents Paramount from facilitating other buyers (similar to van Gorkan) Termination Fee - $100 Mill Stock Option The last 2 are a traditional Lock-up and a very generous one. - QVC offers 90 and Viacom offers 85 o Board accepts Viacom offer