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138 Cards in this Set

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Community Counseling Service, Inc v Reilly
While working as a salesman for CSS, Reilly negotiated and set up engagements to work as a fund raiser for several churches. This was precisely the service that he was trying to sell for CSS-
1.Reilly had a clear right to compete with CSS after he left their employ so long as he did not use any trade secrets or confidential information
2.His act of soliciting business for himself while working for CSS was disloyal and untrue to his employment obligation
3.Until the employment relationship is severed the employee must put the interests of the company ahead of his own
a.Can not solicit business for himself during this time-
b.Must decline to take part in negotiations with the business
4.Does not matter that the campaigns would not have commenced until after the end of his employment. The money he made was the fruit of his disloyal conduct and he can not retain it.
Hamburger v Hamburger
Strained relationship between a uncle and nephew. Nephew talks to a supplier to get capital to start a new business. Next day quits and incorporates.
1.Court says that this is ok-
a.Making logistical arrangements while still employed does not violate the duty
b.Employers who wish to restrict their employers should sign non-competes
Foley v Interactive Data Corp-
fiduciary who learns that someone who his employer has hired and put into an important position is an embezzler and tells his supervisor of this-
1.Required by § 381 of agency
2.However, the tort of discharge in contravention of public policy should not be imported into contract law
3.Don’t want a flood of litigation
(a) relations among the partners are governed by the partnership agreement
(b)-Partnership agreement may not
(1) vary the rights and duties under 105(filing of statements
(2)unreasonably restrict the rights of access to books or records
(3)eliminate the duty of loyalty(can ID things that will not violate this-partners can ratify things tht might violate this)
(4)unreasonably reduce the duty of care
(5)eliminate the dty of GF ( can set the standard)
(6)vary the power to dissassociate
(7)vary the right of a court to expel a partner
(8)vary the right to wind up the business
(9)Vary the law of limited liability
(10)restrict the rights of third parties-
Formation- the association of two or more persons to carry on as co-owners a business for profit forms a partnership whether or not they intended it. Joint tenancy ( common property) is not enough, nor is the sharing of gross returns, Person who receives a share of the profits is presumed to be a partner unless the profits were received in payment ( debt, rent, for services rendered, etc…)
§ 301
Each partner is an agent and their actions bind the partnership if their actions were in the ordinary course of the partnership UNLESS they had no authority to act and the person with whom they were dealing knows it. If the act was not in the course of the partnership business then it binds the partners only if they authorized it
All partners are jointly and severally liable for the obligations of the partnership unless otherwise agreed. If admitted into an existing partnership then a person is not liable for previous debts. Limited liabilty partnerships limit personal liability of the partners but the partnership is liable for all debts
Each partner is deemed to have an account that is:
(1) credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner's share of the partnership profits; and
(2) charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partner's share of the partnership losses.
Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits.
) A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property.
A partnership shall reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute.
A payment or advance made by a partner which gives rise to a partnership obligation under subsection (c) or (d) constitutes a loan to the partnership which accrues interest from the date of the payment or advance.
Each partner has equal rights in the management and conduct of the partnership business.
A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.
A person may become a partner only with the consent of all of the partners.
A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.
a. In winding up a partnership’s business, the assets of the partnership, including the contributions of the partners required by this section, must be applied to discharge its obligations to creditors, including, to the extent permitted by law, partners who are creditors; any surplus must be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under subsection (b).
Kovacik v. Reed:
a partner who contributed only services was relieved of obligation to reimburse his share of capital contribution by other partner at dissolution; despite not having ex ante bargaining:
1. Where one party contributes money and the other contributes services, then in the event of a loss each would lose his own capital - the one his money and the other his labor. Another view would be that in such a situation the parties have, by their agreement to share equally in profits, agreed that the values of their contributions - the money on the one hand and the labor on the other - were likewise equal; it would follow that upon the loss, as here, of both money and labor, the parties have shared equally in the losses.
Shamloo v. Ladd:
when no understanding that services/expertise would be treated as capital contribution, then no avoidance in sharing of losses; Thus, the rule is that, absent an agreement, a partner is not entitled to compensation for rendering services for the partnership other than profits.
ii. Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business; in settling accounts among the partners, the profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners’ accounts; the partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner’s account; a partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under Section 306.
Meinhard v Salmon-
. Joint adventurers owe to one another the duty of finest loyalty.
c. As a co-adventurer S owed M the opportunity of getting in on the deal
i. Had to at least give M the opportunity to bid on the lease on his own
ii. would be natural for M to assume that the lessors had extended the lease, since he had heard nothing from S about it.
Iii, Very fact that S was in total control actually put a higher burden on him to disclose this offer
UPA 403
requires a partner to disclose to the other partners full and complete information about partnership matters. This does not abrogate the common law right discussed in M v. S-
Appletree v. Investmark-
- Court held that the UPA did not abrogate the broader general duty to disclose all material facts.
Vigneau v Storch Engineers-
- Vigneau entered into and fulfilled contracts for himself to do what he did for the partnership
1.Can’t engage in SD- Does not matter that there was no loss to the D’s
2.For a breach of fiduciary duty, once the fduty has been shown the burden of proof of fair dealing shifts and that must be met by clear and convincing evidence
Self dealing
Self-dealing is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting for his own interests rather than for the interests of the beneficiaries of the trust, corporate shareholders, or his clients. Self-dealing may involve misappropriation or usurpation of corporate assets or opportunities.
Meinhard v Salmon (redux)-
Significance of giving Salmon 51% is that it could make him the controlling shareholder. He would need to exercise his control as a shareholder to elect the directors that would vote with him-\
Covalt v High-
Two partners are arguing about the fact that one wants to raise the rent on some RE that the partnership owned-
1.Court says here that the only recourse is dissolution-
a.Partnership requires an obligation of good faith and fairness in dealings and a duty to act in furtherance of all partners in transactions conducted to further the interests of the partnership
b.there is a difference of opinion between the partners as to management the decision of the majority must govern-
c.Lindley on partnership states that when a partnership is evenly divided the partner forbidding change have to win out
d. Summers v Dooley- Court held that the UPA's command that ordinary business ventures must be decided by majority is mandatory language
2.In cases of co-partnership when the partnership is evenly divided, and there is no written provision to the contrary, the power to exercise discretion on behalf of the partners is suspended so long as the division continues
3.When the partnership was formed both partners knew about the possibility for a conflict of interest
4.Here b/c there was not document to the contrary, there was no breach of the FD and the only recourse is a dissolution of the partnership
Starr v Fordham
- P sued claiming that the partners in the law firm owed him money based on his role as the partners. Also sought damages for breach of fiduciary duty and fraudulent misrepresentation. New partnership agreement gave absolute discretion to the founding partners for setting salaries. First year the partners divided the profits evenly. Next year their business went way up and they chose to allocate 6.3% of the profits to the P. ( this was after he withdrew from the firm)
1.D’s are not subject to the business judgment rule b.c they are on both sides of the transaction
2.Even though they had discretion, they still had to act in good faith, and not giving a share that was equivalent to the amount of business was a violation of the covenant of good faith
UPA 1914 29
The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business
UPA 1914 §30.
Partnership not Terminated by Dissolution.On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed
UPA 1914 § 31. Causes of Dissolution.
Dissolution is caused:
(1) Without violation of the agreement between the partners,
(a) By the termination of the definite term or particular undertaking specified in the agreement,
(b) By the express will of any partner when no definite term or particular undertaking is specified,
(c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking,
(d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;
(2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time
(3) By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;
(4) By the death of any partner;
(5) By the bankruptcy of any partner or the partnership;
(6) By decree of court under section 32.
UPA 1914 § 32. Dissolution by Decree of Court.
(1) On application by or for a partner the court shall decree a dissolution whenever
(a) A partner has been declared a lunatic in any judicial proceeding or is shown to be of unsound mind, (b) A partner becomes in any other way incapable of performing his part of the partnership contract,
(c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, (d) A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him,
(e) The business of the partnership can only be carried on at a loss,
(f) Other circumstances render a dissolution equitable.
(2) On the application of the purchaser of a partner's interest under sections 28 or 29: (a) After the termination of the specified term or particular undertaking, (b) At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued.
UPA 1914 38(1)
When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under section 36(2), he shall receive in cash only the net amount due him from the partnership.
UPA 1914 38(2)-
When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows:
(a) Each partner who has not caused dissolution wrongfully shall have,
I. All the rights specified in paragraph (1) of this section, and
II. The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.
(b) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name, either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under clause (2a II) of this section, and in like manner indemnify him against all present or future partnership liabilities.
(c) A partner who has caused the dissolution wrongfully shall have:
I. If the business is not continued under the provisions of paragraph (2b) all the rights of a partner under paragraph (1), subject to clause (2a II), of this section,
II. If the business is continued under paragraph (2b) of this section the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damages caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered.
UPA 1997 801
EVENTS CAUSING DISSOLUTION AND WINDING UP OF PARTNERSHIP BUSINESS. A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events:
(1) in a partnership at will, the partnership's having notice from a partner, other than a partner who is dissociated under Section 601(2) through (10), of that partner's express will to withdraw as a partner, or on a later date specified by the partner;
(2) in a partnership for a definite term or particular undertaking:
(i) within 90 days after a partner's dissociation by death or otherwise under Section 601(6) through (10) or wrongful dissociation under Section 602(b), the express will of at least half of the remaining partners to wind up the partnership business, for which purpose a partner's rightful dissociation pursuant to Section 602(b)(2)(i) constitutes the expression of that partner's will to wind up the partnership business;
(ii) the express will of all of the partners to wind up the partnership business; or
iii) the expiration of the term or the completion of the undertaking;
(3) an event agreed to in the partnership agreement resulting in the winding up of the partnership business;
(4) an event that makes it unlawful for all or substantially all of the business of the partnership to be continued,
(5) on application by a partner, a judicial determination that:
(i) the economic purpose of the partnership is likely to be unreasonably frustrated;
(ii) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or
(iii) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement; or
(6) on application by a transferee of a partner's transferable interest, a judicial determination that it is equitable to wind up the partnership business:
(2) an event agreed to in the partnership agreement as causing the partner's dissociation;
(3) the partner's expulsion pursuant to the partnership agreement;
(4) the partner's expulsion by the unanimous vote of the other partners if:
(i) it is unlawful to carry on the partnership business with that partner;
(ii) there has been a transfer of all or substantially all of that partner's transferable interest in the partnership,
(iii) within 90 days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent
(iv) a partnership that is a partner has been dissolved and its business is being wound up;
(5) on application by the partnership or another partner, the partner's expulsion by judicial determination because:
(i) the partner engaged in wrongful conduct that adversely and materially affected the partnership business;
(ii) the partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under Section 404; or
(iii) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner;
(6) the partner's:(i) becoming a debtor in bankruptcy;(ii) executing an assignment for the benefit of creditors;(iii) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner's property; or (iv) failing, within 90 days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner's property obtained without the partner's consent or acquiescence, or failing within 90 days after the expiration of a stay to have the appointment vacated;
(7) in the case of a partner who is an individual:
(i) the partner's death;
(ii) the appointment of a guardian or general conservator for the partner; or
(iii) a judicial determination that the partner has otherwise become incapable of performing the partner's duties under the partnership agreement;
(8) in the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee;
(9) in the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or
(10) termination of a partner who is not an individual, partnership, corporation, trust, or estate.
McCormick v Brevig-
Lower court ordered that the partnership be dissolved but thought that forced liquidation would be inequitable and therefore the court ordered that P sell her interest in the partnership to her brother.
1.Court disagrees-
a. Under the RUPA there are two ways to end a partnership
i. Dissociation- This only occurs when one partner dies or declares bankruptcy (among other things) and would allow for a buyout
ii. The other track is when there is a judicial ordering of the dissolution- This has to result in a liquidation of the assets. Court used blacks to define liquidation to include a buy out of the partnership
iii.This was a mistake as the purpose of liquidation in the RUPA was to reduce the partnership assets to cash-
1. all other precedents here were pre-RUPA and are not on point
2. Court has to order a liquidation and reduce all the assets to cash
§ 701:
Purchase of Dissociate Partner’s Interest: If a partner is dissociated from a partnership without resulting in a dissolution and winding up f the partnership business under Section 801, the partnership shall cause the dissociated partner’s interest in the partnership to be purchased for a buyout price determined pursuant to subsection (b)
a.Buyout price: buyout price of a dissociated partner’s interest is the amount that would have been distributable to the dissociating partner under Section 807(b) if on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date; interest must be paid from the date of dissociation to the date of payment; damages offset from interest; indemnify from liabilities; if no agreement for the purchase of a dissociated partner’s interest within 120 days after a written demand, the partnership shall cause to be paid in cash the estimated value; deferred payment okay; wrongfully dissociated doesn’t get anything until conclusion of the term
§ 602.
Partner's Power to Dissociate; Wrongful Dissociation.
(a) A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to Section 601(1).
b) A partner's dissociation is wrongful only if:
(1) it is in breach of an express provision of the partnership agreement; or
(2) in the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking:
(i) the partner withdraws by express will, unless the withdrawal follows within 90 days after another partner's dissociation by death or otherwise under Section 601(6) through (10) or wrongful dissociation under this subsection;
(ii) the partner is expelled by judicial determination under Section 601(5);
(iii) the partner is dissociated by becoming a debtor in bankruptcy; or
(iv) in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated.
(c) A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the partner to the partnership or to the other partners.
Dissociation(dissolution) under the 1914
Dissolution in contravention of the agreement is wrongful, and the partnership is not dissolved and can continue on as long as the remaining partners buy out the WD partner minus any damages incurred by the breach
Drashner v Sorenson-
- Partnership that would continue at least until the D’s were paid back their capital investment. Makes this a partnership for a term. Drashner tried to squeeze more money out of his partners than the agreement allowed and then filed for a dissolution
1.Court says that this was dissolution in contravention to the agreement and therefore he is liable for damages-
McCormick v Brevig(redux)
New question is whether Clark dissociated from the partnership. The TC found that the partnership had not be dissociated despite Joan’s contention that Clark had taken steps to transfer title of the ranch to himself and had converted $400k of partnership funds for his own use
1.TC also found that Clark had not given notice, that the partnership agreement did not apply and that Clark continued to work the ranch since his alleged dissociation. The failure of the court to consider the withdrawal of funds was not error because it was not raised in a timely manner
2.Court also rejected the contention that Clark had dissociated by instigating criminal charges against her-
a.DC found that both parties were at fault and that taking an alternate legal position is not enough to get to dissociation
b.Judgment of the DC MUST BE CLEARLY ERRONEOUS in order to be overturned on appeal
3.Better lawyering in this case probably gets to WD and then damages and the right to continue with a buyout.
Fiduciary limits on dissolution at will-
i. Partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his co-partner for his share of the prospective business opportunity
Page v. Page-
Partnership is for a term, and the Court holds that absent bad faith, the partnership can be dissolved any time after the term is completed-
1.A showing of bad faith can get to a wrongful dissolution on the basis that they violated the implied duty not to exclude defendant wrongfully from the partnership business opportunity-
2.UPA 1997 specifically overruled this and said that dissolution was only bad if it was in contravention to the agreement-
Couch v Cude
- Partners in a Laundromat. One owns the building in which the Laundromat is located. He obtains a judicial dissolution and then says at the sale that he will not lease the premises to another Laundromat
1.Not a breach of FD b/c the fact that he had said that he would not lease this property to anyone else, and that he benefited from this transaction is not enough to get to breach of the FD-
Meehan v Shaughnessy
-Law partners contract to deal with when a partner withdraws from a firm. P agreement gives the departing partner- the right to capital contribution- right to their share of the net income-right to a portion of the firms unfinished business, and in exchange they give up a right to any business retained by the old firm-Can take any case that they brought to the firm as long as they pay a fair charge-
1.No wrongful dissociation b.c the partners waived the three month waiting period
2.Partners leave and do a few things before they are gone--
a.Get an office, getting client lists, getting financing- This is not enough to get to FD- Merely logistical arrangements
b. Unfairly acquired clients though- Lied when asked about leaving, waited to give a list of clients until they had already talked to the clients, and sent a letter that was not honest enough with the clients-
3.Damages- Leaving partners are still entitled to their capital contributions ( this is not a form of LD’s, still get their salary (can only be forced to disgorge salary when it can be shown that they did not do enough work), have to give up fees on clients that they can’t show would have gone with them regardless
Bohatch v Butler & Binion P
P sued after she was expelled from the partnership for raising concerns about overbilling by another partner. TC awarded money for lost wages, mental anguish, and punitives. COA reversed saying that the only way to get to expulsion in bad faith would have been if it was for personal gain, and since there was no evidence of that, D's were only on the hook for breaching the partnership agreement.
1.This is not a wrongful expulsion-Courts have held that partners can expel partners for purely business reasons, that partners can be expelled to protect relationships within and without the firm and that a partnership can expel people for a fundamental schism among the partners
a.FD does not require that people remain partners or else answer in tort
2.No exception for law firms and lawyers compliance with the rules-
3.Firm is on the hook for breaching the exact terms of the partnership agreement
DGCL 141(a)-
Business and affairs of the every corporation organized under this law SHALL BE MANAGED BY OR UNDER THE DIRECTION OF THE BOARD OF DIRECTORS-
DGCL 142-
- Every corp shall have officers with titles and duties that are provided in the by-laws, or a resolution by the BOD. One person can hold more than one position as long as it is not in conflict with the bylaws
DGCL 101
Incorporators; how corporation formed; purposes
(a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.
(b) A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.
DGCL § 102. Contents of certificate of incorporation-COI shall set forth
1.The name of the corporation, the address, the nature of the business or purposes to be conducted, name and mailing address of the incorporator and their powers post termination
2.Nature number and type of stock
Things that can be in the COI From DGCL 102
a.Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the members of a nonstock corporation; if such provisions are not contrary to the laws of this State.
b.Such provisions as may be desired granting to the holders of the stock of the corporation, or the holders of any class or series of a class thereof, the preemptive right to subscribe to any or all additional issues of stock of the corporation of any or all classes or series thereof, or to any securities of the corporation convertible into such stock.
c.Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power,
d.A provision limiting the duration of the corporation's existence to a specified date
A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
-§109 BYLAWS
i. (a) The original or other bylaws of a corporation may be adopted, amended or repealed by the incorporators, by the initial directors if they were named in the certificate of incorporation, or, before a corporation has received any payment for any of its stock, by its board of directors. After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote, or in the case of a nonstock corporation, in its members entitled to vote; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body by whatever name designated. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws.
ii. (b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.
Amending the certificate- § 242
Amendment of certificate of incorporation after receipt of payment for stock; nonstock corporations
i.(a) After a corporation has received payment for any of its capital stock, it may amend its certificate of incorporation, from time to time, in any and as many respects as may be desired, so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of the filing of the amendment.
ii.(B)(2) The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any class so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of this paragraph.
Securities act of 1933
a.Companies offering a security for public sale must file a registration form which includes
i.Description of the company's property and business
ii.Description of the securities
iii.Information about the management of the registrant
iv.Financial statements certified by independent accountants
Definition of a security (1)
The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil
Exemptions from the securities disclosures
§ 3(a)(11)- Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.
1.Must be incorporated in the state where the offering is made
Exempted transactions under the securities act
i. The provisions of section 77e of this title shall not apply to—
(1) transactions by any person other than an issuer, underwriter, or dealer.
(2) transactions by an issuer not involving any public offering
Prohibitions relating to interstate commerce and the mails
5 (a) Sale or delivery after sale of unregistered securities
i. Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
1. (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
2. (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
SEC v Ralston Purina
SA of 1933 exempts transactions by an issuer not involving any public offering. RP offered to its employees the option of purchasing stock in the company without registering with the SEC. They said this fell under 4(2) and that these were key employees-Employees who bought the stock ranged from office clerk to veterinarian and ranged in salary down to someone who only made $2700 dollars a year.
1. RP concedes that an offering to all of its employees would be a public offering BUT that these offers were only made to "key employees"
2.IN order to determine if the offering is public, it is ESSENTIAL to examine the circumstances under which the distinction is sought to be established and to consider the purposes sought to be achieved by such distinction
a.DC held the reason for the distinction here was to keep stock ownership within the operating personnel of the business and to spread ownership among the many depts.
b.COA- Offering w/o solicitation of common stock to select employees most of whom already own stock
3.Statute is around to protect people who are not privy to this kind of information- Here the people sold to are not privy to this kind of information, so this IS A PUBLIC OFFERING-
Straight v. Cumulative Voting:
i.Straight “normal” voting regime: each shareholder can cast their votes for each of the candidates
ii.Cumulative Voting: entitles a shareholder to aggregate his votes in favor of fewer candidates than there are slots available; consequence is that a minority shareholder is far more likely to be able to obtain at least one slot on the board
Cumulative voting formula
1. The maximum voting power of a given block of shares under cumulative voting: SX/(D+1): S= total shares voting (need to predict ex ante); D=total number of directors need to be elected; X=number of directors looking to elect
Delaware GCL § 214-
i. The certificate of incorporation of any corporation may provide that at all elections of directors of the corporation, or at elections held under specified circumstances, each holder of stock or of any class or classes or of a series or series thereof shall be entitled to as many votes as shall equal the number of votes which (except for such provision as to cumulative voting) such holder would be entitled to cast for the election of directors with respect to such holder's shares of stock multiplied by the number of directors to be elected by such holder, and that such holder may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any 2 or more of them as such holder may see fit.
1.Must be in the COI
2.Can specify which elections it may be used at
3.Can specify which classes of stock will be eligible
Del GCl 141(d)- Classification of directors
i.The directors of any corporation organized under this chapter may, by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted by a vote of the stockholders, be divided into 1, 2 or 3 classes; the term of office of those of the first class to expire at the first annual meeting held after such classification becomes effective; of the second class 1 year thereafter; of the third class 2 years thereafter; and at each annual election held after such classification becomes effective, directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire…
ii.Must be in the AOI or in the bylaws OR by a bylaw adopted by the shareholders
iii.Allows the director to serve for either 1 year ( 1 class) 2 years (2 classes) or 3 years (3 classes)
iv.If they are not classified at first and the shareholders amend the bylaws, then the board of directors will assign the directors into classes
Removal of directors-Delaware GCL 141-(k)
Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows:
i. (1) Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d)(classes of directors) of this section, shareholders may effect such removal only for cause; or
ii. (2) In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director's removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part.
iii. Whenever the holders of any class or series are entitled to elect 1 or more directors by the certificate of incorporation, this subsection shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole
Campbell v Loew's Inc
Directors had failed to cooperate with the CEO, had tried to put themselves in control, made baseless accusations in order to divert the CEO, moved into the building and began a program of harassment.
1. Called for a lot of records and were rude to the personnel, sent Daily letters to the directors making serious unfounded charges
2. Court says-
a. Charge that they desired to take over the corporation is not enough. This is a perfectly legitimate objective which is part of the corporate existence-
b. Lack of cooperation is also not enough
c. Harassment to the detriment of the corporation is bad if the behavior becomes deliberately obstructive-
i. If the actions constitute a real burden on the corporation then the shareholders are entitled to relief
ii. Charge is enough to get over summary judgment
Auer v Dressel
Before a director is removed for cause, there must be the service of particular charges, adequate notice and full opportunity to respond
1. Exact procedures ( from Campbell v Loews)
a. When the form went out to vote for removal , the only thing presented to the SH's was the CEO's side of the story. Even though the SH could vote against it, this violates fairness
b. Directors must be accorded an opportunity to be heard before the SH's vote-
2. Proxies can be solicited ONLY after the accused directors are afforded an opportunity to present their case to the stockholders
a. Request for a proxy must be accompanied or preceded with both side's statements-
Adlerstein v Werthheimer-
-Adlerstein was the majority shareholder in a Delaware corporation. He was the CEO and the Chairman of the board of the company. At a meeting that he did not attend two of the directors voted to issue to Reich a sufficient number of super-voting preferred stock to give him a majority of the voting power of the stock. They stripped P of his title and executed a written consent for such action.
1.Court holds- That the general rule that a BOD must conduct its business in a way that satisfies minimum standards of fairness-
a.Outweigh the D’s interest in removing Adlerstein as controlling SH
i.Fear that he would kill the deal-
ii.Company was insolvent-
1. When the company is in bankruptcy/insolvent then it is possible that the court would allow this kind of deal b/c the duty of loyalty might extend to the creditors of the company
2.Board must show a COMPELLING justification for this, and the Court has never found a situation where this would apply
Share Repurchase agreements
Courts will generally enforce the terms of a share repurchase agreement even if events subsequent to execution make the purchase price substantially less than the fair market value of the to be acquired shares unless there is an equitable reason not to
a.Remaining question is how much will courts use the FD to protect minority shareholders from oppressive conduct on the part of the majority in terms of share repurchase agreements
§ 202. Restrictions on transfer and ownership of securities
A written restriction … on the transfer… of a security of a corporation, or on the amount of the corporation's securities that may be owned by any person or group of persons, if permitted by this section and noted conspicuously on the certificate or certificates representing the security or securities so restricted…may be enforced against the holder of the restricted security or securities or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate or certificates… a restriction…is ineffective except against a person with actual knowledge of the restriction.
Evangelista v Holland-
Agreements are freely bargained for, they may reflect a bargain not meant to unduly burden the corporation and tied to the life insurance in the case- Reflects a mutuality of risk by the parties
King v Driscoll-
- Court separated breach of good faith that occurred before the terms of the repurchase agreement. SRA does not give a pass to corporations to notact in good faith
Concord Auto Auction v Rustin-
All three parties agreed that at the time of their death all of their shares would be sold back to the corporation with and would be funded by insurance policies designed to pay for this. Rustin failed to tender the shares back after Cox died b/c the agreement says that the agreement required the price of the shares be reevaluated annually no later than the annual meeting ( which was here in Feb). When Cox died in March the price had not been reviewed
i.Court says that it is possible to give effect to all of the terms in the K-
1.No duty to change the price, just to meet and decide on any upward change-
2.Rustin did not call a meeting and therefore there was no duty to change the price-
ii.Court will not question the validity of these shareholders agreements absent fraud and duress, etc…
iii.Also SP will not be refused because the price is inadequate or excessive- There is no breach of duty here, just an enforcement of the contract
iv.Court will not rewrite bad bargains, here Cox could have called a meeting and failed to do so
Gallagher v Lambert
P bought stock in a company subject to a mandatory buy back if his employment ended any time before 1/31/85 at book value. Company fired him before the date after which the price would have been higher-
i. P got the deal that he bargained for and there is no reason for the court to set this aside
ii. Court had already decided that the fact that an employee has a mandatory buyback provisions does not affect the at will relationship
1. Must separate the duties to an employee and to a shareholder-
iii. P argues that they fired him at that time in order to get the lower price-
1. Buyback provisions are in place in order for close corporations to control who owns the company and they will not be rewritten based on a claim of unfairness
2. To open this up would be to rewrite the K and open the door to litigation
3. This is a mere application of the plain terms of the agreement
iv. Dissent- This case is distinct from the Ingle case b/c it does not refer to a COA based on employment but as a shareholder
1. TO extend Ingle to this situation is unfair b/c this is a totally different type of case-
v. Don’t’ forget that the employee here was a sophisticated party and likely bargained for this possibility when he took the K
Minnesota method- Lots of rights to the Close corporation- Pedro v Pedro
Brother is fired from working with his brothers. Had worked there for forty years. Brother told lies about him and refused to execute the SRA agreement which allowed for a 75% of FMV analysis-
1. Relationship in a close corporation is analogous to that of a partnership
a. Include a requirement of acting openly, honestly and in good faith
b. D's were guilty of a lot of breaches of good faith ( lying, having him followed, telling him to lay off on the investigation )
2. Damages are not tied to a diminution in value-
a. When an employee is forced out in bad faith, then the measure if the difference in FMV and the price from the SRA
3. Damages for breach of a lifetime employment K are not double recovery with enforcement of the SRA
Director's duties that run directly to the shareholders
i.Duty of candor- Director owes a duty to tell the truth when recommending that the shareholders approve a merger-
1.Direct Suit- Sh may enforce these duties directly with a suit and with recovery going to the Sh's
Two ways to enforce the FD
1.Action brought by the corporation itself
2.Derivative suit brought on behalf of the corporation by the SH's
a.Normally it is the director's responsibility to bring suits , but when the court determines that the managers are unable to impartiality in good faith control a lawsuit
i.Usually when it is obvious that a majority of the BOD face a real danger of being found liable to the corp if the lawsuit wins
b.Directors ability to control FD litigation is itself protected by the business judgment rule
What is entire fairness under the BJR
Weinberger v UOP Inc.-
a.Look to Fair dealing( timing, how initiated, structured, negotiated, disclosed to the directors, how approval was obtained) and
b.Fair price ( economic and financial considerations of the proposed merger- assets, market value, earnings, future prospects, etc…)
Schlensky v Wrigley-
-Dc dismissed a complaint by shareholders alleging negligence and mismanagement by the directors for failing to install lights at Wrigley Field and begin scheduling night games-
1.Courts of equity will not undertake to control the policy or business methods of a corporation although it may seem that a wiser policy might be adopted and the business might be more successful if other methods were pursued-
a.Must be permitted to control the business when not in violation of the charter, a public law, or corruptly and fraudulently subversive of the rights and interests of the corporation or of a shareholder-
i.The decision of the directors is considered to be final unless tainted with fraud
2.Complaint also fails to allege damages to the corporation-
a.There are allegations that the corp will make money from the night games and be able to offset the costs of the lights BUT NOT THAT THERE WILL BE NET BENEFIT TO THE CORPORATION
Dodge v Ford Motor CO-
Conflicting interest transactions under the common law
i.In the 19th century courts were in agreement that transactions between a corporation and one or more of its directors were void or voidable simply because a conflict of interest existed
1.Wardell v Union Pacific- Directors of corporations and all persons who stand in a fiduciary relationship to other parties and are clothed in with the power to act for them, are subject to this rule; they are not permitted to occupy a position which will conflict with the interest of parties they represent and are bound to protect
Development of the Conflicting interest transactions doctrine
ii.By the 20th century most courts no longer viewed COI transactions automatically void or voidable . Instead they were voidable only if the transaction or the conduct of the COI was unfair to the corporation
1.Would be voided if the terms of the transaction were found unfair or, even if the terms were found fair, if the benefiting directors had in any way breached their obligation to disclose fully all relevant facts to the corp, including the facts of their interest in the subject matter
Globe Woolen Co v Utica Gas & Electric Co-
P sued for SP of a K to provide electric to their mills. The D argued that the K was unfair and made under the dominating influence of a common director- that the terms were unfair-the consequences oppressive and that they could not stand-
i.A constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to protest and renounce if through blindness of those who treat with he gains what is unfair
1.Maynard was influencing the decision from the beginning to the end-
2.The decision was made before the board had a chance to vote and there was no distinction between M's role as the majority Sh of the P and as a Director of the D's
a.If the K is not fair then it can not stand-
b.There must be candor and equity in the transaction and some reasonable proportion between the benefits and burdens
ii.If Maynard had voted then the K would definitely be voidable-
1.P argues that by not voting he was excused from liability-
a.This is not true= the rule of law which holds a trustee to the duty of constant fidelity supports the idea that a failure to speak can be a violation as well
b.Trustee can refrain from acting if the deal is fair, but does not lose the duty to renounce the K if the terms are bad
§ 144. Interested directors; quorum
a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose, if
a.(1) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
i.Only need one disinterested director to ratify the transaction
(2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders.
(b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction
Sinclair Oil Corp v Levien-
Sinclair was the majority shareholder in a compnay called Sinven which was an oil company in Venezuala- They nominated all the directors of Sinven and owed a fiduciary duty to the corporation
1.P filed a derivative suit alleging breach of FD for paying dividends, for a denial by Sinclair of industrial development, and for a breach of K between a subsidiary of D and Sinven-
2.D’s argue for the BJR-
a.Court disagrees- When there is a parent and subsidiary with the parent controlling the transaction and fixing the terms then the fairness test is applied- Basic situation for application is when the parent has received a benefit to the exclusion and at the expense of the subsidiary
i.Getty Oil v Skelly Oil- Court held that the BJR was appropriate because the parent did not profit from the deal which stopped separate allocation of oil supplies to a subsidiary. Since there was no benefit then there was no self dealing-
ii.Standard will only be applied when there is self dealing-
iii.SD happens when the parent causes the Sub to act in a way which benefits the Parent to the detriment of the minority Sh's of the sub
3.Burden is on Sinclair to show absolute fairness-
a.Dividends were not Self Dealing b/c they involved payouts to everyone-
b.Decision not to engage in expansion is not self dealing
c.Failure to pay out for this is Self dealing and in order to win on this D must show that not pursuing the contract actions was fair- This is not possible
Corporate Opportunity Doctrine
A corporate manager can not usurp corporate opportunities for his own benefits unless the corporation consents-
Delaware approach to the CO doctrine
From Guth v Loft
i. 1) Can the corporation undertake the opportunity, 2) Is it within the line of business, 3) Is there an interest or expectancy, and 4) By taking the opportunity is the person in conflict with the corporation.
Broz v Cellular Information Systems, Inc-
-Broz is the president and sole shareholder of RFB cellular, a Delaware corporation. Also a member of the BOD of Cellular Information Systems which is Del corp and a competitor of RFBC. Borz gets offered a license that is not offered to CIS b/c it is in chapter 11. Broz talks to the CEO. At the time CIS was in negotiations to be bought by PC-
a.CIS was not financially able to exploit this opporutunity
b.Was within the LOB ( although the ability of the corporation to pay may change this)
c.Not clear that CIS had an interest/expectancy b/c CIS was divesting itself of these licenses
d.No direct conflict b/c BOD knew that Broz was a competitor and CIS was not trying to get this K
2.No need for Broz to put this to the board if he finds that the opportunity is one he can take for himself
General Rule under the ALI approach to the CO doctrine
. A director [§ 1.13] or senior executive [§ 1.33] may not take advantage of a corporate opportunity unless
1. (1) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest [§ 1.14(a)] and the corporate opportunity [§ 1.14(b)];
2. (2) The corporate opportunity is rejected by the corporation; and
3. (3) Either:
a. (A) The rejection of the opportunity is fair to the corporation;
b. (B) The opportunity is rejected in advance, following such disclosure, by disinterested directors [§ 1.15], or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule [§ 4.01(c)]; or
c. (C) The rejection is authorized in advance or ratified, following such disclosure, by disinterested shareholders [§ 1.16], and the rejection is not equivalent to a waste of corporate assets [§ 1.42].
(b) Definition of a Corporate Opportunity, under the ALI
For purposes of this Section, a corporate opportunity means:
(1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either:
a.(A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or
b.(B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or
2.(2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.
(d) Ratification of Defective Disclosure. under the ALI
A good faith but defective disclosure of the facts concerning the corporate opportunity may be cured if at any time (but no later than a reasonable time after suit is filed challenging the taking of the corporate opportunity) the original rejection of the corporate opportunity is ratified, following the required disclosure, by the board, the shareholders, or the corporate decisionmaker who initially approved the rejection of the corporate opportunity, or such decisionmaker's successor.
(e) Special Rule Concerning Delayed Offering of Corporate Opportunities.
. Relief based solely on failure to first offer an opportunity to the corporation under Subsection (a)(1) is not available if: (1) such failure resulted from a good faith belief that the business activity did not constitute a corporate opportunity, and (2) not later than a reasonable time after suit is filed challenging the taking of the corporate opportunity, the corporate opportunity is to the extent possible offered to the and rejected in a manner that satisfies the standards of Subsection (a).
NE Harbor Golf Club v Harris-
Country club president acquired property adjacent to club’s golf course which the real estate agent had offered to her in capacity as president on assumption club would be interested-
1.Court remands to decide if the opportunity was offered to her b/c of her position as the president-
Special problem of directors compensation-
a. If directors set their own compensation without ratification by the shareholders, the transaction is outside the business judgment rules presumptive protection so that where properly challenged receipt of the benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation
b. Instead of ratification, the salary could be set by the independent and disinterested board members
i. This will generally lead to deference by the court to the decision UNLESS the facts show that the amounts compared with the services to be received in exchange constitute waste or could not be the product of a valid exercise of business judgment
Two part tests for stock offerings
1. Must involve an identifiable benefit to the corporation (Plan must contain conditions such that the corporation can reasonably expect to obtain that benefit
a. Not a QPQ, some benefits may be intangible
b. As long as the corporation expects to receive some benefit then the corp does not have to quantify the benefit, just look to see whether the plan has adequate safeguards to ensure that the corporation will actually receive the benefit-
2. Value of the options must bear a reasonable relationship to the value of the benefit passing to the corporation
a. In the absence of actual fraud the judgment of the directors as to the consideration for the issuance of such rights and the sufficiency thereof shall be conclusive-
b. Presumption will not apply unless there is some consideration offered
Byrne v Lord
Shareholders challenge an option plan that was adopted in order to get the BOD to stick around and help the company, however, the plan did not require that the board stay on in order to exercise their option-
i.Here the option plan is invalid and not subject to the protections of the business judgment rule, b/c there was no requirement that the directors remain in office in order to receive the benefit-
1. Court rejects a reading of Olson- In Olson the initial plan required that the directors stay in office, but AFTER they found a buyer ( who they knew would want seats on the board) they amended the agreement to allow themselves to get the stock option. There the corporation got what it wanted- Good directors to sell the company
Del GCL §141 (e)-
A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation
141(e) discussed
ii.Does not have to be a written report-
iii.In order to survive a motion to dismiss where an expert has advised the board it must be shown-
1.Directors did not rely on the expert
2.Reliance was not in good faith
3.Did not believe that the expert's opinion was within their realm of competence
4.Expert was not selected with due care and that was the directors fault
5.Decision was so unconscionable as to constitute waste or fraud
Breach of the duty of Care can be cured by a shareholder ratification-
i. Settled rule is that where a majority of fully informed SH’s ratify the action of even interested or negligent directors an attack on the transaction MUST FAIL-
ii. Shareholders must be fully informed-
1. Burden is on the board to show that the shareholders were fully informed
2. Directors owe a duty to disclose all facts germane to the decision=’s all information that a shareholder would consider important in deciding whether to sell or retain the stock
Board is required to disclose fully and fairly all material information within the board's control
1. Arnold v Society for Savings Bancorp- in order to be material it must, " Be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available"
Smith v Van Gorkom-
Shareholder challenge to the merger of Transunion through the use of a leveraged buy out
1. In order for the directors to be liable they must have failed to inform themselves, prior to making the business decision, of all material information reasonably available to them
a. Here what the Board did was bad b/c they failed in
i. Not establishing VG's role in forcing the sale
ii. Uninformed about the intrinsic value of the Company
iii. Had only 2 hours consideration, no prior notice and without exigency or emergency
b. Fact that they were told by a lawyer this was ok, that there was such a premium between the market price and the offering price, and that the board was so experienced can not cure the deficiencies in the board’s failure to inform itself
2. Shareholder ratification is not a defense b/c the board did not carry its burden to show that the SH’s were fully informed about what went into the decision
a. Lack of valuation should have been disclosed, proxy had some statements that made it look like the board knew the value of the company, mischaracterized the report on the value of the company, etc…
Statutory exculpation provisions-
102(b)(7) is in the form of an affirmative defense, and once it has been raised by the corporation and the court has found that there is no other claim besides a duty of care, then the court will dismiss the complaint-
Malpiede v Townson-
Shareholder challenge to a sale of the Frederick’s of Hollywood chain-
1. Court rejects the duty of loyalty claims-Except in EGREGIOUS cases, the threat of personal liability does not in itself provide a sufficient challenge to the disinterestedness of the directors b/c there is a threat of litigation in all decisions to sell the company
2. Court also rejects bad disclosure claims- Plaintiffs failed to carry their burden to show that the disclosure claims were material
Special considerations in the M & A area-
IN the takeover context there are intermediate standards of review
i.Comes about whenever the board of a company takes action to frustrate a takeover effort by an outsider-
1.Any time that happens we are sufficiently worried that they are trying to keep their own management
a.Instead of using the BJR, the directors have to show that the actions that they took were done b/c they had a reasonable belief that the outsiders posed a threat to a corporation
b.Have to show good faith after a reasonable investigation-
i.Impose the burden on the directors of showing that they acted in good faith-
2.Then they have to show that whatever action they took was reasonable in reaction to the threat that was posed
a.Any time you see a takeover threat expect to see some reference to the Unocal rule-
Rule for duty of care once the board of directors have reached the decision to sell the company
1. If management comes to think that this is the best deal, at the point that it is clear that the company will be sold then the Revlon rule kicks in then the directors become auctioneers-
a. Sole obligation shifts to obtaining the highest possible value for the shareholders-
i. Until they become auctioneers, they can consider other things than the shareholders-
b. Anything they do to favor one bidder over another, they have to show that they have acted in good faith after reasonable investigation that their action was reasonable-
Graham v Allis-Chambers Mfg Co-Absent
Absent cause of suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret wrongdoing which they have no reason to suspect exists-
In Re Caremark International, Inc
- Caremark was created in Nov 1992 as a spin off of from Baxter Int. Before the spin off, they were unsure whether their practices of entering into contracts with physicians whom prescribed or recommended services that Caremark provided to medicare recipients- P’s argue that the BOD violated its FD by failing to oversee the activities of these low level employees-
a.Court says that these claims are the hardest possible complaint to win on-
i.They will not look to the substance of the decision but whether the decision was based on a process that was either rational or employed in a good faith effort to advance corporate interests-
b.Board must assure themselves that information and reporting systems exist that are reasonably designed to provide to senior management and to the board timely information
i.Level of detail is a product of business judgment
1.Board must make a good faith judgment that the information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner of ordinary operations so that it may satisfy its responsibility
2.Only a sustained or systematic failure of the board to exercise oversight - such as a total failure to assure that there is a compliance system will establish a lack of good faith
ii.Here there is a good faith effort to assure compliance-
A Caremark claim that rises to the level of recklessness may, if plead with particularity be enough to avoid dismissal under 102(b)(7) for failure to state a claim other than a duty of care violation-
Recklessness in oversight can be a violation of the duty to act in good faith and therefore be non-exculpable-
McCall v Scott-
P’s alleged that there was a long term failure on the part of board in in its oversight duty-
a. Court holds-
i. In the DF area with a Caremark claim- Aronson’s 1st prong does not apply- Instead the Court should use the standard enunciated in Rales v Blasband-
1. Court must determine, “ whether or not the particularized factual findings …. create a reasonable doubt that as of the time the complaint is filed a majority of the board… could have properly exercised its independent and disinterested business judgment in responding to a demand.”
2. This is a timing issue- If the board has changed since the time of the decision, then Rales will stop you from being able to sue
ii. Here the Court finds that at least half of the board was not independent when the suit was filed-
iii. Board was reckless in ignoring the large profits, the federal investigation, etc…
b.Court rejects a finding that the directors breached their duty of loyalty by selling stock when they knew that the value was too high-
i.P’s failed to link any specific sales to specific information that was possessed when the sale took place-
§ 220(b)
Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from
i. (1) The corporation's stock ledger, a list of its stockholders, and its other books and records;
ii. In every instance where the stockholder is other than a record holder of stock in a stock corporation or a member of a nonstock corporation, the demand under oath shall state the person's status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be.
iii. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder.
In Re Walt Disney Derivative Litigation
Brehm take two-
1. Case turns on the Board’s ability to delegate authority to the compensation committee-
a. In the by-laws it says that the board can delegate its authority to decide compensation questions
i. Compensation committee is still held to the standard of due care and good faith, but the newly plead facts show that they did in fact consider the NFT and balanced it against what he was giving away by signing on at Disney
b. Fact that the employment agreement was not signed until Ovitz became president does not get to a FD on the part of Ovitz.
i. Terms of the agreement were all worked out before he actually became the president
c.Eisner/Litvack did their best to try and fire Ovitz for cause but there was no legal way to do this-
Stone v Ritter
There are only two duties under Deleware law- Loyalty and care- Good faith is merely a subset of loyalty. Caremark claims will only succeed where the failure to act is so egregious that it constitutes an intentional dereliction of the duty of loyalty to the company.
Officer’s oversight responsibilities and Reporting duties- Miller v Us Food Service
- CEO/President of US Foods files suit for the breach of employment agreement and they counter claim for breach of duty of care, loyalty and good faith-
1.Court says-
a.Counterclaims do state a claim for a breach of the loyalty duty & the duty to act in good faith-
i. Reckless inaction in the face of evidence of fraud can lead to a finding of the breach of the duty to act in good faith-
ii.Loyalty duty is invoked when the court finds that the officer failed to stop something that would do affirmative harm to the corporation-
b.Waste claim is out the window though-
i.Corporation agreed to repay all of the stuff that Miller did that was beyond the scope of his employment agreement-
1.Can’t ratify the transaction and then complain that the action constituted waste
Aronson v Lewis- Two part inquiry for demand futility
Demand is excused when the Plaintiffs plead particular facts that if proven would give rise to A REASONABL DOUBT EXISTS THAT either:
1.The directors are disinterested and independent or other wise entitled to the BJR OR
2.The Challenged transaction was otherwise the product of a valid exercise of the BJR-
When does Aronson not apply
Won't apply in cases where
1. A majority of directors have changed since the decision was made
2. Where the subject is not a decision of the board
3. Where the decision being challenged was made by a board of a different corporation
ii. IN these cases the court just looks to see if the particularized facts plead raise a reasonable doubt that the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand
What must be plead in order to meet the first prong of Aronson
i.Directors had a financial interest in the challenged transaction
ii.Motivated by a desire to retain their positions on the board or within the company
iii.Dominated or controlled by a person interested in the transaction-
In Re the Limited-
Shareholder derivative action for waste and breach of FD by the board. D's argue that the suit should be dismissed for failing to make a pre-suit demand under Rule 23.1-
1. Mere allegation that the directors received a salary for their service on the board is not enough to get to interestedness-
a. Must show something more-
i. Officers who receive a large salary will be presumed to be interested ( if the challenged transaction involves a benefit to their boss)
2. A finding that half of the board is interested in the transaction is enough to get over Rule 23.1
3. Once the Court has made a finding that at least half of the board is interested, this is enough of a showing to get to a violation of duty of loyalty-
What happens if a plaintiff can not show that demand was excused?
If a plaintiff can not show that demand was excused and they failed to make a demand, then the only avenue of recovery is a showing that the transaction constituted waste-
i.MUST Show that no person of ordinary business sense could conclude that this was a fair exchange-
1.Court will ordinarily not inquire into the adequacy of the consideration for deal-
a.Almost anything will suffice to meet this standard-
2.Fact that the Plaintiff identifies that there were other options is not enough to get to a showing of waste-
Haley v Talcott-
2 person LLC in a deadlock over what to do with the property- One guy wants the other to use the exit mechanism which allowed one party to buy out the other and not force a sale of the property
1.Court analogizes to § 273 on corporate deadlock
b. In order for §273 to apply the court needs to find-
i. 2 people-
ii. IN a joint venture
iii. In a deadlock over how to continue
c. B/c it is an LLC the court must also look to the K provisions in order to decide how to proceed-
i. Here there is an exit mechanism but it would not allow Haley to be off the hook as a personal gurantor of the mortgage so the court buys the §273 analogy and orders dissolution
Dissolution of joint venture corporation having 2 stockholders
a. (a) If the stockholders of a corporation of this State, having only 2 stockholders each of which own 50% of the stock therein, shall be engaged in the prosecution of a joint venture and if such stockholders shall be unable to agree upon the desirability of discontinuing such joint venture and disposing of the assets used in such venture, either stockholder may, unless otherwise provided in the certificate of incorporation of the corporation or in a written agreement between the stockholders, file with the Court of Chancery a petition stating that it desires to discontinue such joint venture and to dispose of the assets used in such venture in accordance with a plan to be agreed upon by both stockholders or that, if no such plan shall be agreed upon by both stockholders, the corporation be dissolved.
VGS v Castiel-
Castiel forms an LLC and has the power to appoint 2/3 of the managers. He is one of the managers and he appoints one of the other two managers. His appointed manager defects from his camp and works a deal with the other manager to merge the LLC into a Delaware corporation giving him a minority position in the new organization. They don’t give him any notice that this is going to happen
1. Court holds- Because the two managers acted without notice to the third manager under circumstances where they knew that with notice he could have acted to protect his majority interes
a. They breached their duties of loyalty and of good faith-
b. The Court is not the appropriate place to decide if Castiel is a good manager. This should be decided in the board room
§ 228. Consent of stockholders or members in lieu of meeting
a. (a) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voteD
Zidell v. Zidell-
P had previously received a salary for working in the family business. He demands a raise and then resigns and sues to force a dividen
a. Corporate officers have a FD, BUT in the case of dividends the court will not overturn decisions that are made in GF and reflect legitimate business purposes rather than the private interests of those in control
b. Principal test is to see if the directors acted in their personal interests rather than corporate welfare
i. D's countered the P by saying that they were saving for future physical improvements, a possible relocation of a major plant, the need for cash to pay large inventory orders, need for renovation to a dock, need for continued financing through short term bank loans
McQuade v Stoneham-
When MQ bought into a corporation he executed a document whereby Stoneham agreed to use his majority power to appoint and retain MQ as a director and officer of the corporation. 9 years alter MQ was fired as a director-TC awarded damages for the breach of the agreement. COA reversed
a. Directors can not be limited in this way
i. Motives can not be questioned so long as their actions are legal-
b. Stockholders have the power to elect directors, here they have chosen not to choose MQ and the court will respect this
Clark v Dodge-
- Clark was a 25% owner who agreed with the 75% owner that he would be retained as a director, get 25% of the corporations net profits, and that the company would not pay an unreasonable salary in order to decrease the amount that he was paid- LBter has a falling out with Dodge and sought to have the order enforced. Court says-
a. Here there is no harm to anyone by the slight limitations placed on the board
i. This is really an agreeemnt between the two shareholders of the company-
ii. Here the directors are the only two shareholders
iii. Broad statements in McQuade should be limited to those facts
Benintendi v Kenton Hotel-
Sh's adopted a law that all actions by the SH and the directors had to be approved by a unanimous decision. Majority repudiates and the minority sues-
a. Board is given the power of management of the corporation. Rule 27 does modify the common law rule of majority by allowing the by-laws to state the # of people necessary for a quorum, it can not allow this kind of action
DGCL 350
. Agreements restricting discretion of directors A written agreement among the stockholders of a close corporation holding a majority of the outstanding stock entitled to vote, whether solely among themselves or with a party not a stockholder, is not invalid, as between the parties to the agreement, on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors. The effect of any such agreement shall be to relieve the directors and impose upon the stockholders who are parties to the agreement the liability for managerial acts or omissions which is imposed on directors to the extent and so long as the discretion or powers of the board in its management of corporate affairs is controlled by such agreement.
Zion v Kurtz-
- When Z bought into the corporation, K agreed not to engage in any business or activities without Zion's consent- K did it and Z sued
1. GCL allows close corporations to do things that would conflict with the discretion of the BOD.Close corporations tend to operate by direct shareholder management so section 350 allows corps to K around normal board rule
2. Her Kurtz agreed to do everything to give effect to the terms of the agreement, so even though they were not incorporated as a close corporation the court orders the AOI reformed and finds liability for a breach-
a. This is essentially a K’s case-
3. Gabrielli dissent- Here the majority was wrong to think that the laws should be read to include all corporations that might be considered close corporations regardless of the presence of a declaration of a close corporation in the certificate of incorporation.
a. These requirements reflect a judgment that the legislatures were intent on limiting the use of this exception ot the normal rule to situations where there is clear notice to potential purchasers of the stock
Blount v Taft
- Close corporation adopts new bylaws. One of them (4) says that they can be amended or repealed by a majority of the directors. Another (7)says that there will be an executive committee that can do the work of the BOD, but it must have one member of each family and will have all the power of hiring which must be based on a unanimous decision-
1. Three years later the BOD adopts a new set of bylaws which took out a guarantee that all three families would be represented. Minority shareholder stated that he did not think that the new provision was in effect b/c the first was adopted by all the SH's at a meeting of the BOD
2. Court holds that the normal rules of SC apply and all the terms of the new by laws should be read together, so it was ok for the board to amend the bylaws like this-
a. If this was an agreement outside of the bylaws, then it would be binding but the fact that it is subject to section 7 makes it amendable
Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period.
212 (e)
A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally
a. Proxy coupled with an interest- there must be consideration flowing back to the person to whom the proxy has been granted and made irrevocable-
Proxy coupled with an interest-
must be consideration flowing back to the person to whom the proxy has been granted and made irrevocable
Ramos v Estrada
D's were minority shareholders in Broadcast Corp. BD decided to merge with Ventura 441 to form a new corporation. When they were adopting the merger agreement, the Sh's of BC adopted an agreement that said that they would vote together as a block. The decision on who to elect would be decided by a majority of the Sh's. D's voted with the Ventura 441 group to remove a BC person from president and secretary.
1. D’s argue that this was an irrevocable proxy- Not true- the agreement dealt with how they were going to vote their own votes
2. Even though they were not a close corporation ( as listed in the agreement) this is still ok-
a. This was a legal transaction
Donahue v Rodd Electrotype
Donahues are the minority shareholders in a close corporation. When Rodd is about to retire, the BOD gives him the opportunity to sell back his shares at $800 a share, but make no offer to the Donahue’s for the same-
1. Court rules that in the close corporation setting, where management is in the hands of ownership and there is a high level of trust and confidence, the majority must live up to the same level of good faith that a partner must abide by
2. Equal opportunity doctrine- If the majority is giving itself a benefit, then they must offer the same to the minority so here, the offer should have also been made to the Donahues
Wilkes v Springside Nursing Home-
- Close corporation stops paying one of its diectors and officers after they get mad at him for something-
1. As an outgrowth of partnership law into corporate law, the court notes that there is a duty of the majority to deal with the minority with the utmost good faith and loyalty
a. Question that must be asked is whether the majority can demonstrate a legitimate business reason for its action-
2. Even if a legitimate business reason is advanced, if the minority can demonstrate that the same objective could have been reached through an alternative less harmful to the minority’s interest, then the court must weigh the one against the other-
i. Nixon v Blackwell-
Minority shareholders challenge several decisions by the board. TC employs the EO doctrine from Donahue and states that b.c the decisions by the board provided for liquidity in the majority shares and not in the minority, these provisions were bad-
ii.Supreme Court overrules-
1.Corporation just must show entire fairness and that is it-
2.No special rules for close corporations-
a.Delaware code allows for a lot of leeway in close corporations-
i.Stockholder agreements, bargained for provisions in the articles.
ii.They can bargain for protection before parting with their consideration-
b.In fact this corporation is not even listed as a close corporation
3.Would be counter to the doctrine of independent legal significance to hold that the provisions of a close corporation should be applied here when they have not elected to be that kind of entity
354. Operating corporation as partnership
1. No written agreement among stockholders of a close corporation, nor any provision of the certificate of incorporation or of the bylaws of the corporation, which agreement or provision relates to any phase of the affairs of such corporation, including but not limited to the management of its business or declaration and payment of dividends or other division of profits or the election of directors or officers or the employment of stockholders by the corporation or the arbitration of disputes, shall be invalid on the ground that it is an attempt by the parties to the agreement or by the stockholders of the corporation to treat the corporation as if it were a partnership or to arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners.