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94 Cards in this Set

  • Front
  • Back
Ownership rights
1) Right to residual cash flow
2) Residual control rights

("Residual" means what's left over of money/control after contractual obligations are met)
When providers of capital get ownership rights
Actual authority
The authority a principal actually gives an agent--this can be either express or implied. This protects the principal from being liable for any crazy thing the agent goes and does.
Apparent authority
This protects third parties from being screwed over by tricksy principals/agents: if an agent appears to have the authority to enter into a contract, it will bind the principal.

The apparent authority is supposed to emanate from the principal, but at times it can also emanate from the agent if that's reasonable. This makes especial sense when the principal is a corporation and so sometimes can't emanate much of anything except via its agents.
Gas company that leases a gas station is liable for crap that goes on there because they had control over it--court looks to Humble being able to set the hours, owns the stuff the station sells, and pays a lot of the operating costs (the cost of rent varies based on the amount of stuff sold--follow the money!) to determine Humble has control.

Note: the court didn't differentiate between the gas part of the station and the car repair part, over which Humble seems to have had less (if any) control. Humble should have played that difference up!
Similar facts to Hoover: gas station, but this time it's not a master/servant relationship because not enough control. Rent can vary a bit, but there's a min/max amount, so the guy who runs the station bears more of the risk (and thus, we seem to assume, has more of the control). Guy running the station also gets to set the hours of operation here.
Murphy v Holiday Inns
Because the franchise cost is set, the court says HI doesn't exercise control so no liability for a tort. K thinks this needs to be analyzed under apparent authority though--it's crazy wrong!

NB: principal-agent relationships are subdivided into master/servant and independent contractor; principal is liable for agent's torts in the former but not the latter.
Just because there's a contract doesn't mean there can't be ownership too--look behind the words to see who really calls the shots!

Court lists 9 factors on pages 10-11 to determine that there really was control here. Overall they cut more towards control (though some pointed the other way or were neutral) so Cargill is responsible for the agent's debts (only the ones incurred after it became the principal, though)!
Dweck v Nasser
Shiboleth had actual authority to settle the case on behalf of Nasser (the principal) so Nasser is bound. This is reasonable because Nasser had said that Shiboleth could speak in his name and there was also a long-standing relationship. There's also probably apparent authority.
Miller v McDonald's
Apparent authority means that McD's is liable for somebody biting into a stone (!) in their Big Mac.
Watteau v Fenwick
Weird case, no actual or apparent authority but still "inherent agency power" holds principals liable.
General Automotive v Singer
Intro of fiduciary duty -- very important! Employee shops out some jobs to other repair shops (though only when this shop can't do it) and pockets the cash himself, not telling GA about it.

Singer had the duty to act in good faith by disclosing this stuff to GA. He has to pay back everything he got.
Town & Country v Newberry
T&C built up a big list of people who wanted maids; the maids working there ended up quitting and taking the customers with them; this is not cool, the court says, because they're basically stealing T&C's IP.

[But K thinks that's a weird framework to use]
Two or more people operating together to make a profit.

Default rule is that a partnership is dissolved whenever one of the partners dies--but this can be easily contracted around.
Meinhard v Salmon
Fid duties within a partnership. Two possibilities:

1) Weak Meinhard: same as Singer. All you have to do is disclose economic opportunities to your partner, but then you can compete with her for it.
2) Strong Meinhard: have to disclose, but also can't compete with partner for getting the opportunity! This might be what the "punctilio of an honor the most sensitive" and "renounce all thought of self, however hard the abnegation" crap is getting at!
Meehan v. Shaughnessy
Lawyers violated their fid duty not by competing (aka this court blows off Strong Meinhard) but by 1) not contacting their clients until the last minute, thus not giving them a fair chance to stay with Parker Coulter; and 2) affirmatively lying to the partners about their plans to leave.
Day v Sidley Austin
1) Account for any profit acquired in a manner injurious to the interests of the partnership;
2) Can't steal partnership property (i.e., take it without partners' consent) or divert to your own use a partnership opportunity;
3) Can't compete with the partnership within the scope of the business.

Rejects strong Meinhard.
Page v Page
By default, partnerships are at will--but you can't dissolve it to avoid a fid duty! So if you want to do that and not get busted you have to compensate your partner; you could have an outside company valuate the opportunity, or you could just do an "I cut you choose" deal (though careful if your partner doesn't have the cash to buy the opportunity and thus lacks a real choice he might still be able to sue).

Bottom line: they should have contracted about this ex ante! Contract about how to end the partnership when you create it.
Delaware General Corporation Law - just random statutes that have accreted over time when the DL legislature has disagreed with the courts' decisions, not meant to be comprehensive (just amendments to the common law), but certainly important.
Model Business Corporation Act - unlike the DGCL, meant to be comprehensive and code-like.
Walkovsky v Carlton
Cabs that are each owned by a separate corp, one torts Walkovsky, and W wants to pierce through to the owner of the corp because C keeps taking money out of the corp so it doesn't have enough money to pay. Courts don't allow it: just cuz you can't get enough money isn't a good enough reason to pierce.
Piercing the corporate veil
3 theories:
1) Not following corporate formalities, doing things like mixing personal funds and corp funds.
2) Fraud - we won't let you defraud the public and use corp law as a shield against liability.
3) Aggressively under-capitalizing the firm *might* be grounds for piercing the CV--but it has to be really bad; for example, Walkovsky v Carlton didn't qualify. [It sounds like this is kind of a fringe theory]

Basic ideas for avoiding piercing:
a. Respect corporate formalities. Keep minutes of corp meetings and don't intermingle personal and corp funds.
b. Don't use the corp to commit a fraud.

[Note: we will never pierce through to shareholders in a publicly-traded corp, aka the suburban dentists]
Pepper Source didn't pay their bill, so SeaLand sued them and won. But PS had no assets so SL tried to pierce the corp veil and go after Marchese, the owner--and also "reverse pierce" into the other corps he owns 100% of, plus one (Tie-Net) that he only owns 50% of.

To win, they have to go to trial and show:
1) A unity of ownership and interest (meaning things like lack of formalities, commingling of funds, under-capitalization, use of one corp's assets by another, etc.); and
2) Failing to pierce would either
a) sanction fraud (such as fraud to escape creditors); or
b) promote injustice (unjust enrichment, for example).

Marchese meets both, we find out at trial.
Silicone Gel
Bristol Meyer owns 100% of a subsidiary, MEC, which gets sued and can't cover the liability. Can they pierce through to BM?

Page 208 lists factors to take into consideration (no summary judgment, it has to go to trial).

Fraud not so important here because it's a torts case, not a contract--but in a sense it is contractual because people took on more risk by choosing the cheap option or delegating the choice to your doctor (or something).
General partners are liable for a partnership's debt, not limited partners are not. Basically you can exploit this by making a corp (that you and your friends own, i.e., it's closely-held) be the only general partner and the rest of you only limited partners. Thus no human being is liable for the partnership's debts. While that's honoring form over substance, to do otherwise would destroy all limited liability for corps, so Frigidaire should have contracted around this situation. Tough luck.
We draw a distinction between creditors and tort victims when considering whether to pierce the CV. We're very unlikely to do so for creditors because they can contract for what they want and who should be liable for what (whether personally or just in their official capacity).

But SeaLand is an example of when we do pierce the CV even in a contractual context -- fraud.

Kordana really likes this case.
Derivative suit
Only a corp can sue bad managers, but if most of the managers are bad then a shareholder can force the corp to sue the bad apples. It's called derivative because the shareholder is harmed only indirectly--bad managers who steal from the corp mean the corp is worth less, and thus my shares are worth less too.
Deference to managers
At a deep level, it's pro-shareholder because they chose to delegate authority to these managers, not retired DL judges, so courts should respect their wishes and not be too quick to step in.
The corp reorganizes and drops its assets (airplanes) down into a subsidiary corp. Eisenberg sues, basically arguing there's now too much bureaucracy (it's like voters' relationship to the Sup Ct now, whereas before it was like voters' relationship to Congress; went from direct to one step removed).
Merger in 3 steps
1) Which corp survives and thus owns both previous corp's assets?
2) Which corp dies?
3) What is the treatment of the dying corp's shareholders?
A valid derivative suit is filed, but then a hack law firm comes and files a similar one--and if that one settles (which is what they're looking for) it precludes the first one! Courts can't do much to stop it. The real winners are lawyers who get lots of attorney's fees. Yay!
Exhaustion of internal remedies
Before bringing a derivative suit, you generally have to go ask the directors themselves to bring the suit themselves (this is the demand requirement).

When is the demand requirement excused? And if demand is excused can they still get it dismissed? (Answer: yes, sometimes, via special litigation committees.)
Grimes v Donald
Demand is excused when:
1) The majority of the board has a financial/familial interest in the underlying transaction;
2) The majority of the board is incapable of acting independently for some reason such as domination or control; or
3) The underlying transaction is not the product of a valid business judgment.

When would #1 apply? Canonical example would be if a 3-member board of directors is running the corp and the corp has entered into a contract with directors 1 and 2 because a majority of members of the board have a financial interest in the underlying transaction.

Prong 2: when would that apply? If the same situation as above but the contract is only with director #1 but he effectively controls enough shares to control the entire board.

Prong 3: substantive judgment. If they're just totally wacky there's no point in asking them not to be wacky.

Demand requirement is best understood as defending the other shareholders' interest in not having the corp spend its money on legal fees for trivial suits.

Even if you get past the demand requirement, though, there's still the next round: the special litigation committee!
Marx v Akers
Example of the demand requirement in action with 2 claims, one that all the directors gave themselves too much money (demand excused under prong #1) and another that they gave the executive managers too much money (not excused because only 3 of them are on the board, but prong #2 is possible if those three were really the movers and shakers on the board).
Auerbach v Bennett
The rise of the special litigation committee! Even if demand is excused in a derivative suit, the board can create a quote-unquote "independent" special litigation committee to determine whether the suit should really go forward.

Very deferential to the SLC's decision. As long as they follow decent procedures, we'll accept what they say!
Cuts back on the deference given to SLCs in Auerbach. Now there's a two-step process to determine if we'll accept a SLC's determination:
1) Procedures followed - were they good?
2) Substance - is it plausible? Court can make an independent judgment about whether the suit should go forward.
Fiction of SLCs' independence is normally respected (even though there are obvious structural biases to make them not all that independent of the board that appointed them) but here DL says it's not going to just sign off on them automatically if there's significant enmeshment between the board and one of the people appointed to the SLC. (Basically, a Palo Alto corp can't appoint Stanford business dudes to their SLCs because they're just too conflicted.)
AP Smith
Derivative suit to enjoin charitable gift from corp to Princeton. This is about profit maximization.

Court dismisses the suit, says gifts to charity are a valid business judgment. But there are limits.

Not OK:
* Indiscriminately made gifts, or those made to pet charities without a valid business purpose.
* Can't give "too much". Obviously this is a tough standard to administer, but 100% of this year's profits probably qualifies.
* Should be in the best interest of the corp. Anonymous donations then might be problematic (we want credit so that it helps the corp!).
Ford v Dodge
Ford says it's going to stop issuing dividends during wartime and put the money instead into a new factory; Dodge, which owns 10% of the shares, sues to enjoin the factory and keep the dividends coming. How do regular shareholders feel? They're torn, Dodge is a competitor so they're skeptical of them, but Ford could be acting self-interestedly here too.

Court ends up splitting the baby: have to keep issuing dividends but also can go forward with the plant.

Why the weird result (courts normally leave decisions about dividends up to managers)? Ford said stuff on the witness stand to prevent his looking like a robber-baron, basically made it sound like the Ford Co was a charity, which isn't the purpose of the corporation (it's supposed to make money!).
Shlensky v Wrigley
Owner of the Cubs won't put in lights so that they can play night games--he's not maximizing profits! Court throws up its hands, as long as there's any remotely plausible reasoning on the business's side, they'll let them keep doing what they're doing.
Business judgment rule
Kordana just sees this as shorthand for "as long as you don't violate either your duty of care or loyalty, you're golden" -- there's no free-standing BJR.
Kamin v American Express
AE issues DLJ stock (which had previously gone down significantly in value) to shareholders instead of cash; Kamin, a shareholder, sues and says AE should have sold the stock first and given them cash. Four directors didn't want to do that because their bonuses were tied to the corporations profits, so if they had sold the stock first and issued cash dividends the corp would have recognized a loss, thus diminishing the bonuses tied to reported profits.

This is really dumb as a business judgment: the corp could have saved a lot in tax writeoffs! Plus, everyone totally already knew the value of the asset had declined, it wouldn't have harmed stock value!

Kamin is scary because it seems to say that as long as the managers had a meeting about it, they can make terribly stupid business decisions that only hurt the corp with no possible upside. Today we've gotten better about this.
Van Gorkum
Sea change: you just don't question the judgment of experienced managers who have a two-hour meeting about an issue! [UNTIL NOW, BITCHEZ!]

The corp could have lifted its little pinky finger and gotten at least a bit more money, but they didn't. Not OK to meet your duty of care.

Take-away: lift your pinky finger. Bring in the McKinsey punks to evaluate the deal. Else you might be violating your duty of care.
Leveraged buyout
When an outside company comes in to buy Trans Union and offers Trans Union IOUs to the previous shareholders to buy them out--this greatly increases the firm's debt, which makes the managers work harder to meet debt payments (good), but also might incentivize hail mary's (bad).
Joy v North
Directors are only liable for gross negligence. Why?
* They're the ones the shareholders chose to delegate to, not us judges!
* After-the-fact court investigations aren't the best way to investigate business judgments [but they are OK in every other context? weird...]
* Don't want to create incentives for being overly cautious with business decisions.

This is less deferential than Kamin (which was basically total deference), more like Zapata: we'll look into the substance (though still be deferential)
Francis v United Jersey Bank
Old woman is liable for violating the duty of care. She did nothing, she was bed-ridden so didn't go to any meetings, but also didn't read any financial statements (which she could have done in bed) etc. So her sons' fraud was spawned "in the back-water of her neglect" -- ouch!

She clearly violated her DoC, but then there's also causation that needs to be met: there needs to be harm caused by the violation. And here the shareholders weren't harmed, it was the creditors. But that's enough here -- why?
1) Financial institutions (like banks) get less leeway, held to a higher standard.
2) Because the creditors, not the shareholders, own this corp at this point.
3) Formalism: duty isn't owed to the creditors, it's owed to the firm! But that just hides the ball: does the firm protect the shareholders' or the creditors' interests? When the creditors own most of it, then theirs! In other words, what's the default rule about hail mary passes? It makes sense to say "no" to them as a default.
Director's wife hired to do an ad for the corp, shareholder brings derivative suit. Such contracts used to be completely void, but now under DGCL S 144 it's a standard (overall, is it fair?). Director here found not liable.

Because the corp didn't sanitize this deal beforehand, the directors bore the burden of proof to show that this was fair. The safe harbors are 144(a)(1) and (2).

1) If you disclose the deal to the board and and a majority of disinterested directors approves it, you're good.
2) (Disinterested) shareholders approve it by majority vote.

If you get into either of those safe harbors, then you're pretty well protected by the BJR--complaining shareholder bears burden of proof and will have to probably show gross negligence.
Preferred convertible stock. Preferred means that you take assets after creditors but before regular shareholders. Convertible means that you can convert to regular stock if you want (which you'd want to do if the firm ends up being successful).

Abdo negotiated this deal with Benihana, but he was also on the Benihana board of directors! Conflict of interest! But since he's not in charge at Benihana, then as long as he leaves the room when Benihana votes on it that sanitizes things. That's what they do, and it's all kosher.

Broader point: giving up some control is not a breach of fiduciary duty of loyalty, it can be part of a valid trade-off to get much-needed cash!
When does a director violate his duty of loyalty by not disclosing a potential business opportunity to the rest of the board? 4 factors:
1) Is the corp financially able to undertake the deal? If not, then it's probably not a violation not to tell them about it.
2) Is it in the corp's line of business and of practical advantage to the corp?
3) Is it one in which the corp has an interest or a reasonable expectancy?
4) How self-interested is the director brought into conflict because of the deal?

[Also, note here that while Broz didn't officially present this opportunity to the board of directors, he did tell some of them about it, so they knew.]
Spinning becomes popular: basically, a bribe to directors from Goldman Sachs for hiring them to do their IPO work. GS will give the directors preferential buying opportunities for other GS clients' IPOs.

This is like Singer: the executives are using the shareholder money to hire GS and getting a kickback--and not passing it along to the shareholders!

GS's lesson here should be to bribe them not with easily fungible cash, but with cocaine-fueled orgies in Bermuda.
Sinclair v Levien
Classic money pump. Sinclair owns 97% of a Venezuelan subsidiary, Levien et al own 3%. Levien is worried that S is making contracts with its 100% owned subsidiaries at SV's expense so that they get all the money. He easily wins on this claim--it is a violation of duty of loyalty.

Other two claims:
1) S is making SV pay too much in dividends, more in fact than they're taking in. Levien is cuckoo on this because Venezuela is going to hell so it's smart to be taking your money out. Also, controlling shareholders get to set the dividend policy, that's a perk and there's nothing you minority shareholders can do about it. Caveat: director-shareholders owe a stronger fid duty, even in re: dividend policies. It makes sense to give controlling shareholders some fid duties to other shareholders (unlike normal shareholders who owe no fid duty to other shareholders) because otherwise they could just put judgment-proof flunkies on the board and get away with crap.
2) Levien claims that S usurped SV's corporate opportunities, giving more opportunities to subs that it owns 100% of. This one's hard. Generally deciding which country-specific sub to use for a deal is protected by the BJR, but if the others are 100% owned that can raise red flags.
Crazy tobacco prices because of wartime price controls/gov't-created-market-demands. Insider directors take advantage of this by calling home stocks that, if their holders knew all the info, would have converted to common stock to make more money on. Normally in publicly traded corps this won't come up, but here due to the weird wartime scenario it did. It's a violation of fid duty to call the stocks home based on secret info--but it's not a violation to call them home just because it will make you more money! That was the deal! (Aka strong Meinhard is still too strong.) Just don't use secret insider info to screw the other shareholders over.
Walt Disney
Disney hires Ovitz with a _very_ generous contract, and though the board doesn't officially ratify it they knew about it and could have stopped it. It turns out Ovitz is a disaster, but they can't find cause to fire him so they have to give him his golden parachute. A suit is commenced saying the board violated their fid duty of loyalty. But the fact that stock shot up when the hiring of Ovitz was first announced proves that it wasn't a stupid decision by the board to not stop this deal--ex ante it seemed right! Sometimes it doesn't work out, and unless there was gross negligence, well, shareholders are stuck with the board they chose to delegate authority to.
Suburban dentists aren't going to attend the shareholder meetings, but there are quorum requirements so someone needs to represent them. These are proxies. SDs usually don't care and just vote for the people the directors say they should vote for (who end up being the directors themselves and their friends who, not surprisingly, vote to re-elect the same directors).

Proxy fights occur when a different group wants the SDs to vote for them so they can take over the corp. They can only do this if the SDs are upset with how the company is being run.

Proxy fights are not common because they're expensive and if you win the SDs, not you, are the main beneficiaries. So takeovers are more popular: internalize more of the benefits to yourself!
Levin v MGM
Levin is on the board but not in the majority so he starts a proxy fight. The firm hires a PR company to help them win over shareholder votes. Is that an OK thing to charge to the firm, or too convenient?

This is OK because they don't spend an unreasonable amount of money, it's legal, and in an uncontested election they can spend money to convey info to the shareholders. K tends to think this is OK because all things being equal, shareholders rationally prefer incumbents. Of course, this creates an asymmetry: challengers have to pay out of their own pockets, win or lose, incumbents don't.
If the insurgents in a proxy fight win, can they pay themselves back out of the corp assets for the expenses incurred in the fight? Shareholders would say yeah, OK, because we want to incentivize successful proxy fights. This trims back on the asymmetry created in MGM at least a bit.
Basic rules emerging from Levin and Rosenfeld about proxy fight rules
• No reimbursement unless the dispute concerns policy issues, not simply personal issues.
○ K doesn't really believe this--if an insurgent is running solely because O'Brien has red hair and would follow the same policies, K is pretty sure they'd let the incumbents charge expenses to the corp.
• Only reasonable expenses - though that's a pretty tony standard of "reasonable"
• Firm can reimburse incumbents win or lose
• Firm can reimburse insurgents if they win, though you'd do best to get shareholder approval (though that shouldn't be hard if you just won)
Lovenheim v Iroquois Brands
Lovenheim wants a shareholder proposal (think CA ballot propositions) sent out to have them vote on divesting corp money from foie gras industry. Corp doesn't want to let him.

There are three ways to be able to force the corp to let you get a shareholder proposal out there (assuming procedural rules have been followed):
1) It's more than a tiny portion (5%) of the corp's assets; or
2) More than 5% of its gross earnings; or
3) Significantly related to the company's business

Then you can get it on. Court agrees here that prong 3 is met (though K is not so sure he should have conceded 1 and 2 so quickly here).

See 3/15 notes for more reasons to shoot this crap down.
Access to the shareholder list. In NY you have to own at least 5% of the stock and promise you're not going to send spam to the shareholders. Crane wins even though Anaconda says they want to use the list for control, not business, purposes--that's a stupid distinction.
Pillsbury v Honeywell
Access to shareholder list also requires a valid business purpose though: here Pillsbury buys 5% of the stock and asks for the list but explicitly says he only cares about the morality of the bomb parts Honeywell is making for Vietnam. Court says this isn't a valid purpose. Lesson for Pillsbury next time: lie.

Burden for showing an improper purpose is on the corp, not the shareholder seeking access to the list.
Sadler v NCR
Access to shareholder list is an exception to the internal affairs doctrine (which says to use the corp law of the state where the business is incorporated).
Stroh v Blackhawk
You can make it so that we split voting power 2/3-1/3 but voting power 1/3-2/3. And if William Jennings Bryan comes along and bans it, we can get around it. Ad infinitum.
Ringling Bros
Closely-held corp with a vote-pooling agreement among shareholders about who to elect to the board. But two of the parties end up hating each other and don't want to follow the agreement. When the break it, what should happen? One files suit for the votes to be cast as they should have been, but the court ultimately says if you break the agreement your votes don't count at all!

The solution, after Ringling, is to just give the lawyer (who decided on the agreement) an irrevocable proxy, thus preventing you from ever breaking the vote-pooling agreement.
You can contract about who you'll elect to the board of directors, but it's harder to contract beforehand about what those elected directors will do (like who they'll hire as managers and how much they'll pay the managers). Why?
1. Shareholders generally aren't as informed as directors about the firm. So we shouldn't enforce shareholder agreements that trammel director's discretion. But K says this doesn't actually hold water because you only find shareholder agreements in closely-held corporations in which shareholders are informed (and in fact are usually the directors too!).
2. Directors should exercise their independent judgment in furtherance of their duty of care--shareholders don't generally owe such fid duties to each other. This is supposed to protect minority shareholders from exploitation. K thinks "eh" about this since again these only crop up in closely-held corps where there's already a lot of negotiation before people buy any shares.

But the bottom line is that courts are wary of these and usually won't uphold them (as happened here).

K thinks this is a horrible decision.
Clark v Dodge
Similar to McQuade where one party screws the other over by not honoring a shareholder agreement that said how they would act as directors. But here the result is different--though they just distinguish McQuade, don't overrule it as K would like. They say that since here there are no other shareholders who weren't parties to the agreement then it's OK to enforce it here.
Galler v Galler
Upholds a shareholder agreement that constrains the directors' discretion after their election--this is another step away from McQuade, and further than Clark v Dodge went because here there was one shareholder who wasn't party to the shareholder agreement, but since he didn't *object* we'll uphold the agreement.
Ramos v Strada
Corporation which owns a controlling share of another company has a shareholder agreement: they'll decide by majority vote who they'll all vote for as board of directors in the second company, and they all have to go along with it--if not their shares can be bought out at an 8% per year premium (but the shares are worth more than that on the market). They vote to vote the Estradas off the second company's board, but the Estradas won't go along with it and so get bought out.

The Estradas sue and the court upholds the agreement as valid. This didn't constrain director discretion at all, it's just an ex post punishment for breaking the agreement. (?)
Wilkes v Springside Nursing Home
Very important case -- canonical closely-held corp freeze-out.

Four buddies are all employees and shareholders of the nursing home; they don't pay dividends to avoid taxation, just get all their money out via salary (deductible at the corp level). But then they go all Tolstoy on each other and the 3 gang up and fire #4 so he's frozen out. He runs to court.

First, the court allows this suit even though it's shareholder vs shareholder--normally not somewhere that fid duties are owed, but since this is a closely-held corp we treat it basically like a partnership with (tax) benefits, so Wilkes can sue.

(The court apparently didn't quite treat this the same as a partnership, said that if the controlling shareholders could show a legitimate business purpose for what they did then they could still win.)

Wilkes was unsophisticated: he should have gotten a buy/sell agreement (with a haircut, of course) before he bought in at the beginning. Or else he shouldn't have settled for being an at-will employee and bargained for a nice golden parachute or something. He ends up OK because the court is willing to ride to the rescue (thank you, MA!), but really, don't be stupid.

Alternatively, Wilkes could have filed a derivative suit against the other 3 directors for setting their own salaries too high and screwing him over, and probably could have won that one too.
Nixon v Blackwell
DL goes the opposite direction of MA did in Wilkes! DL is adopting a penalty default rule for stupid people, creating incentives for people to think ahead about this stuff.

Which rule is better? Depends on if we think more closely-held corps are unsophisticated (like in Wilkes, in which case that one is the best default) of if they're lawyered-up and sophisticated (in which case Nixon is right). It's quite possible that each is right given each state's situation (DL is home to lots of smart corporations).
Brodie v Jordan
Classic freeze-out, but the MA appeals court screws it up and splits the baby: just give the frozen-out woman a seat on the board! Gee, let's keep these scorpions locked in a bottle, that's a great idea!
Smith v Atlantic Properties
Another closely-held MA corp case. Wolfson et al require 80% votes on the board of directors to get anything done--yes, this avoids lockouts, but it also makes the costs of doing business skyrocket!

They disagree whether to issue dividends or reinvest in the firm, so they end up doing neither thanks to this stupid 80% rule, thus triggering fines for letting so much cash build up in their corp. The 3 who want to issue dividends sue Wolfson and win--but this is cuckoo! They're *both* breaching their fid duties!

MA court erred in analogizing to Wilkes (saying Wolfson was a controlling shareholder though he only owned 25% of the firm, just like the other three). That's just stupid.
Jordan v Duff
Easterbrook muses about fid duty being an off-the-rack default of what parties would contract for if they were smart and rational. Thus they're just majoritarian default rules that can be contracted around. Posner dissents on the merits but agrees that contracts should govern.

To summarize the case and the disagreement, let's think about a small closely-held corp. A and B are the founders of the corp, and C is hired for a high-level job at the corp (say, CEO) and at the time he was hired he was required to buy 1/3 of the shares of the corp. And like Jordan, he has to sign a buy/sell agreement and it says that if he should cease to be an employee for any reason he has to re-sell the stock to the corp at book value. Also, his employment is at will. Suppose the corp is successful and we can expect high future profits--that means the FMV of the stock is going up but the book value is pretty much the same. A and B now have an incentive to fire C just to get his shares back at lower than FMV. That would be an opportunistic thing to do, not renouncing all thought of self. So can A & B fire C to get their hands on the shares? Posner says yes, Easterbrook says no. Who's right? It depends on ordering. What trumps? Do A and B's fid duties to C as a shareholder trump the employment contract which is at-will? Or vice versa? Posner thinks the employment contract trumps because he only got the shares as part of his employment; fundamentally he's an employee who happens to have some shares as an incentive to stick around, the shareholding is secondary, so it makes sense for the employment at will trump the Wilkes-like fid duty. Easterbrook is ordering the fid duty that A and B owe C as a shareholder higher than the employment contract; he thinks it's like Wilkes, where the employment flows from him holding shares--there it's obvious that Easterbrook's ordering is right. Which of these is the case in Jordan v Duff and Phelps? Hard to say. K seems to lean towards Posner's position, that he's more fundamentally an employee. Old-school guy would think the fid duty should always trump because it's mandatory, not a default rule. But Easterbrook and Posner both think of fid duties as default rules, though.

Ideally, we'd like to have the parties tell us which trumps which. And on page 636 (part (3) in the full paragraph) we arguably have just that! When Jordan got the stock, there was a provision in the shareholder agreement saying that you aren't getting a Wilkes-like right not to be fired. So K thinks Posner is right, the parties seem to have stipulated that as a perk of employment he gets a few shares but he's not Wilkes.

Summary of arguments: Easterbrook says abstain/disclose rule applies whenever the shareholder could have responded to the material information--Jordan could have responded by sticking around in which case the Wilkes-like rules would have prevented the corp from firing him at will. Posner says no the abstain/disclose rule shouldn't apply here because Jordan can't respond: the shareholder agreement says that he's not Wilkes, so the employment at will trumps the Wilkes-like fid duties and they could have fired him any time, and whether the corp showed any likelihood to actually fire him is irrelevant--don't want to punish the firm for being nice!
Alaska Plastics
Muir (an ex-wife who inexplicably was given shares in the closely-held corp--"Gee, let's bring a scorpion into this bottle!" they must have been thinking...) is frozen out. She sues, seeking corp dissolution under AK law--a poor man's buy/sell agreement.

AK is worried that dissolution is a radical remedy, but they're stupid: it's not like some repo guy will show up the next day and start auctioning off their assets piecemeal: the other shareholders will show up and buy the whole thing at FMV and have to pay Muir her fair share. And if the business is worth less than its assets (i.e., it's terribly run) then it's better to auction it off piecemeal and split the proceeds evenly anyways.

The app court remands to the trial court to make findings of fact that this is indeed an oppressive situation (as the dissolution statute requires), but it really clearly is so the trial court again just orders the other 3 to buy her shares at FMV since there's no reason to really go through with dissolution.
Pedro v Pedro
It's like Wilkes, but 2 of the 3 shareholders are apparently stealing from the firm and fire the third when he tries to investigate. There is a buyout agreement, but it's a really low-ball price (3/4 of book value, which is an underestimate of FMV) so he sues to get dissolution, the off-the-rack remedy where he hopes to get FMV for his shares. He wins. The other 2 violated their duty of loyalty by stealing and definitely by firing him, so they have to give him FMV, no haircut since he was wrongfully forced out.
Frandsen v Jensen-Sundquist
If you wanted to take control of the subsidiary, you should have contracted to get right of first refusal on the sale of its stock too, not just on the parent corp's stock.

Also, control premiums are OK if reasonable (not really part of this case, but lurking in the background--Frandsen had a "take me along" clause if there was a premium paid for the parent corp's controlling shares and he couldn't buy them with his right of first refusal).

Note also that blocking control premiums isn't really the best way to solve the underlying problem: that's just applying a bandaid. A more longterm solution would be to ratchet up the duty of care and loyalty.
Zetlin is like Levien, a small minority shareholder. Controlling shareholder sells its stock at a premium. Zetlin wants to be taken along (i.e., have his shares bought at the same price) but the court says too bad: sales of controlling shares at a premium are OK.

Reasons this is so: control shares give you valid (read: nonabusive) perks. Also, the new controlling shareholder might validly be able to unlock a lot more value and so the premium might be fine (however, in this scenario you should be skeptical of Bill Gates not wanting to buy Frandsen's shares--don't want to let him free-ride on your soon-to-be-success, so if he doesn't want to buy any other shares along with the control block that points more towards him being a looter than a value-unlocker).

But control premiums can also be problematic: something's fishy if you're willing to pay 10x the market rate! Sounds like you're going to be getting invalid (read: abusive) perks now!

Control premiums can be viewed as a proxy for how much minority shareholder abuse there is: above a pretty small level, it raises red flags.
Perlman v Felder
Court blocks a control premium (buying control for $20/share when its FMV is $12/share -- a sizable but not unheard-of control premium normally) because of the weird wartime situation: because steel is so in demand right now but there are artificial price caps, we'll just make people pay today's price for steel they won't get until next year. We're not violating the pricing caps technically, but we are getting a bump-up in the "interest" that people are willing to pay. This is called the Feldman plan and it's genius. Feldman wants to sell to an end-user of steel, though, who will just effectively "pocket" that bump (and split it with Feldman in buying control at such a high price)--in effect stealing a corporate opportunity that otherwise the minority shareholders could ride along on. So Perlman, a minority shareholder, can sue and win here. Feldman is taking all the benefit without sharing with the other shareholders.
Yates has a control block in a firm that has staggered elections of its board (1/3 up for election each year). He wants to sell the control block to Essex and, since it would be annoying to have to wait 3 years to fill it up with his own flunkies, Yates is going to have his flunkies resign one by one so that the rest can start appointing Essex flunkies. Rest of world, who own the other stock in the firm, object. So Yates tries to renege on his deal with Essex and just walk away; Essex sues.

Fractured opinion, but it seems like they enforce the sale of control, but not the appointing of flunkies?

Is the sale of a director's seat ever allowed? It might be diverting a corporate opportunity.
Two corporations that want to join together have lots of options: one can buy the other's assets, or vice versa, or they can do a stock purchase, or they can merge; and in any of those possibilities, you have cash/IOUs/stock to choose between for payment.

PA here has a de facto merger doctrine, which triggers an appraisal right in dissenting shareholders. But why a de facto merger doctrine? Why not a de facto stock purchase doctrine?

This all arises because at the time, both PA and DL (where the two corps are incorporated) have appraisal rights for mergers, but only PA does for selling assets, and neither does for buying assets. This is stupid because they all functionally achieve the same thing, so whatever way you want to go, apply it evenly across all these possibilities! But anyways this setup allowed the PA corp to buy the assets of the DL corp, thus not triggering any appraisal rights--tricksy!

Appraisal rights are rights that state corp law sometimes gives dissenting minority shareholders to sell back their stock at FMV to the corp when they disagree with a big decision. It's like a cheap buy/sell agreement a la AK Plastics. It is only triggered when the shareholder objects to a specific, major financial decision (like a merger). By FMV we mean the FMV right before this merger was entered into. When this can happen varies state by state--sometimes it's only in mergers, but in other states it's in situations similar to a merger, and in modern-day DL you never get the right.

Do we want appraisal rights? Argument for: it protects shareholders who can't sell their shares immediately--they can still get the price they would have gotten if they had clicked sell immediately. Downside: it slows down transactions because you have to raise cash to buy out these annoying dissenting shareholders!
DL case, a firm does a merger via another name and DL refuses to adopt the de facto merger rule: we're going to respect the form of a transaction here!

Contrast this with Farris v Glen Elden
Sometimes a corp wants to call home the shares of its minority shareholders--they can be annoying to deal with! But that's not a default provision, you'd have to contract for that ex ante.

But if you didn't do that, you can still do that functionally, no problem. You can cash out minority shareholders by merging with a shell corp and having it survive and giving the old shareholders FMV plus epsilon.

Weinberger says this is OK, but giving them $21 when FMV is $14 but you made a memo saying that you could afford to pay them $24 is not enough. You haven't met the "full fairness" requirement--at least if you didn't share the info with them that you knew you could afford to offer up to $24.

Shades of Van Gorkum (lift your pinky finger to help out the shareholders a bit more) and Singer (be candid!). What the corp should have done is put together a special, independent committee to determine what would have been a fair price to buy them out at (a la Zapata).

Note that the ability to cash the minority shareholders out is not in doubt: it's just making sure they get a fair value. In other words, if you buy shares in a corp, you only have liability rule protection in your shares.
MA case about the Patriots. Similar to Weinberger, but the shareholders getting bought out can't even vote (though under MA law apparently they get to vote on the merger). MA ends up with an even stronger protection than DL--you need a legitimate business reason to cash the people out, can't just do it at the drop of a hat. This isn't complete property-rule protection, but it's a bit more than plain liability rule protection.
Weird. Olin buys controlling share at a premium (fine under Zetlin) but says if he does cash out the minority shareholders in the next year, he'll buy them out at that premium price, aka "bring them along." He waits exactly a year, then starts process of cashing them out at the FMV (i.e., *not* premium) price. DL app court ends up saying this needs to go to trial, we're going to adopt a standard looking at the total overall fairness. This despite the fact that Zetlin seems to say that control premiums are fine. Olin and DL both seem to be tacitly admitting that Zetlin might be too bright-line of a rule, the way the're acting they seem to know that the transaction whiffs of some corruption or something.
Takeovers - two ways
You want the corp's assets. Two general ways to go about this:

1) Talk to the shareholders and offer to buy their shares to get control. For some reason it's *this* one that gets called "hostile."

2) Talk to the managers and see if they're willing to sign a merger or sell the corp's assets to you.

3 ways to look at managers' typical resistance to a hostile takeover:
1. The managers are bastards who just want a "friendly" takeover so they can get a bribe.
2. It's good because the initial resistance makes sure the acquirer will give the SDs a fair price, i.e., the managers are in a position to act in a disciplined way and can act in the shareholders' ultimate interest.
3. A mix of both. Probably the most realistic scenario.
Cheff v Mathes
Greenmail: paying a potential acquirer money to go away and not take over the corp. Here it took the form of buying back the acquirer's stock that he had bought (not a control block) at a premium. Managers like this because they get to keep their day jobs, shareholders (naturally) hate it because it dilutes the value of their shares.

DL court ends up OKing this greenmail -- they say that yes, normally inside directors (who work at the firm day to day) have a high burden of proving that they didn't pay the money just to perpetuate themselves in office, but that outside directors (as was the case here) don't have as high a burden. But the outside directors are appointed by the incumbent inside managers, so there's still plenty of structural bias--no good reason to draw a distinction! This should have gone the other way.

Arguments for greenmail: maybe the potential acquirer gave us some good ideas in exchange for going away that will help the firm in the long run! Or maybe we're paying off the first guy to create space for a bidding war that will end up benefiting the shareholders. K doesn't usually find these convincing, though he admits that maybe there shouldn't be a bright-line rule against greenmail, but he wants a pretty good showing of why it's valid before letting it go forward.
Another takeover case. Mesa wants to take over, so they stampede the herd: they offers the shareholders $54/share now, but if they wins and they held out, they'll buy them out for a bit less then $54/share. Not being disciplined, shareholders will stampede towards this front end deal.

Unocal comes up with an ingenious defense: they offer a back-loaded deal! If Mesa gets more than 50% of the shares, then they'll buy out everyone who held out for $72! Thus now people will want to hold out.

Of course, that means that Unocal won't ever have to pay anything because their cashout offer is conditioned on Mesa getting 50% of the shares, which now he won't cuz everyone will be waiting on the Unocal buyout. Collective action problem exploitation ftw!

Is Unocal's defense legal? Mesa says no. DL says it's OK, but K is apoplectic: Mesa isn't a threat to the firm, the firm is just screwing over the shareholders by entrenching bad managers!

K wants a standard, not a rule, for when you can beat off taker-overs.

Revlon revises this case a lot. Thanks goodness.
Lots of machinations going on with a takeover attempt, a poison pill (a particularly scorched-earth type of back-loaded defensive maneuver), a white-knight third party who wants to engineer a shady management buyout, and other craziness.

Pantry Pride sues to enjoin Revlon and Forstmann, the third-party white knight, from doing their shady stuff. DL court enjoins it. Good.

The original response to PP's low offer was good--you want to kick PP's offer price up. But once you've started a bidding war and gotten Forstmann interested, you can't self-interestedly just pick one of them (here, Forstmann) and let him bribe you into letting him buy the firm.

The Revlon doctrine: you can adopt defensive measures to beat off an initial low offer, but then once the auction starts you have a duty to maximize the sale price.

[In this whole line of cases, it's not so doctrinaire: DL just says, "hey, you got a dispute? Come in today, we'll get you an answer by tomorrow!"]
Paramount v Time
Time and Warner want to merge, but Paramount shows up and wants to try to buy Time too. Time and Warner don't like this, they had a nice deal set up for themselves. So before they announce the merger (and thus kick off an inevitable bidding war) they make defensive agreements (that they can buy each other's stocks and won't entertain other offers, etc).

But Paramount shows up and tries to ruin the party anyways. They make a huge cash offer, which Time SDs love--they want cash now, who cares how Time ends up doing? But Time managers don't like it because they know they'll be fired. So they reject the offer. DL says this is OK.

Cheff was very permissive of takeover defenses, Unocal was still quite permissive but added the requirement that they must be proportional to the threat, and Revlon said that at least some takeover defenses are impermissible, but now Paramount swings way back the other way. There's no reason for these defenses except self-interest on the part of Time's managers! This is a huge agency problem.

The way to reconcile Paramount v Time and Revlon is that in Time they had been planning this specific merger for a long time, they weren't just selling to the highest bidder, so that makes it OK. You don't have to upend your long-term plans just cuz some rich guy offers you a ton of cash. But if you're selling to just anybody for cash, you can't pick the one that will bribe you (the managers).
Paramount v QVC
Paramount wants to merge with Viacomm, but now QVC is the interloper! QVC wants to take over Paramount in a "friendly" takeover, but Paramount's board resists.

Court says QVC wins, the defensive measures that Paramount enacts are a violation of their duty of loyalty to their shareholders. Why is this different than Time? In Time, they were selling from suburban dentists to other suburban dentists, so no real change in control, but here there would be a change in control, they're selling a control block (aka effectively the whole company) so they have to sell to the highest bidder.
Instruments used to take on debt
Bonds are a general term for all of these instruments. Debentures typically denote unsecured debt. Notes will be paid off in 1-10 years. Bills are less than a year. Bonds are 11+ years.

Indentures are the terms of the bond contract.

Important terms of all of these: Timing. When will interest be paid? Quarterly? Lump sum at the end? Yearly?

Allowing the issuer to to call (or pre-pay) bonds is very pro-issuer because it allows them to take advantage of low-fluctuating interest rates.

You can't change core terms (principal, interest rate, duration) without unanimous consent of all bondholders; but you can change other terms by a majority or supermajority of the bondholders (details are specified in the indenture agreement itself).
Sharon Steel
Sometimes the owners of your bonds (your creditors) put clauses into the bond agreement such that if you sell substantially all your assets then they get the right to be paid back in full at that time. This case concerns such a clause and its interpretation. Winter seems to say that because they sold the assets off piecemeal, now selling the last one and the cash isn't selling substantially all the assets. Bizarre, but whatever, we can just contract around that going forward in NY.
If you hold someone's debt, you're going to be pissed if they issue a ton of new debt at the same priority level--yours is worth a lot less now (also known as decreasing the equity cushion)! But to prevent this, you need to contract for it beforehand, most especially if you're a sophisticated debtholder like MetLife. But MetLife didn't, they only contracted against the debt-issuer issuing new debt at a *higher* priority.

The court refuses to ride to MetLife's rescue: you made your contractual bed, now sleep in it. If you want that protection, then you contract for it and you pay for it.

Don't overread this: there are times when we'll ride to the rescue of bondholders... but this ain't that case.
Katz v Oak Industries
Bondholders are being offered a premium on their bonds because the company taking over OI (which is struggling) conditions its influx of capital on them reducing their debt. So they strip the bondholders of some rights (with majority bondholder consent because it's in their ultimate interest). It's also relevant that most of the debt is held by a few large, institutional players, so there isn't a collective action problem going on here.

But some bondholders sue, saying this is abusive. Arguments against them:
1) Dudes, you're getting more than FMV for your debt!
2) You're not one of the institutional debtholders, so you're more likely to be wrong about whether or not this is abusive.

DL court shuts these rogue bondholders down: this deal did not violate the good faith and fair dealing duty and it doesn't go against the terms of the indentures.

How to read this case? Cautiously. 4/24 has an example where you could offer above "FMV" in a thin market and screw people over and stampede the herd by offering them more than that "FMV" but less than they're really worth and strip the protections on the holdouts, thus devaluing them either way.

Bottom line: exchange offers that include stripping of covenants, made to a small number of institutional investors, are OK, but offering a thin premium over the market price to a herd might not be OK--in that case courts are more likely to be sympathetic to Katz.

This is a coercive situation, it just then turns on whether you're coercing jerky holdouts to submit to an overall good deal or if you're coercing honest people into crappy deals. The former is certainly OK (and this is the scenario in Katz); the latter is bad (naturally).
Archer Daniels Midland
Background for Archer Daniels Midland. Imagine that I buy bonds at a time when interest rates are higher than normal, and that this is because both the company is risky and market rates are pretty high to begin with; suppose that later the company is less risky and/or market rates have fallen. Then that bond is going to be quite valuable--great for me as a bondholder, but annoying to the issuer. So the issuer may contract to be able to call the bonds home, but when negotiating for that the bondholder is going to ask for a premium (you'll have to pay $1100 to buy back a $1000 bond). The premiums are often not very significant, so the bondholder might still be upset about getting called home.

So redemption protection for bondholders usually takes two forms:
1) Strong protection: No calling home for a period of time, say the first five years. That's an unusual form of protection, empirically speaking.
2) Weak protection: bond is "nonrefundable" for some period of time. A typical nonrefundable provision is in the Archer Daniels Midland - start on last sentence of page 868: issuer can't call any bonds home under certain circumstances (?) (using certain funds?)

ADM issued bonds that were non-refundable. Page 868: company may not redeem the debentures pursuant to the call option from the proceeds of or in anticipation of the issuance of new debt with interest of less than 16%. So the idea is that if interest rates fall, the corp can't issue new bonds at the low rate and just call the old debt. But we'll see that this isn't very strong protection.

Page 872 - the redemption was lawful because it was accomplished only through clean money raised via sale of common stock.

See 4/26 notes for more details and follow-up hypos.