Corporations - Temple Law (Mehra)

Front 1

DELAWARE CASES

Back 1

x

Front 2

AGENCY (Case)

Back 2

Agency = Mutual agreement

GORTON v. DOTY
Doty said only Gorton could drive car. (Control)

"Control" threshold LOW. (Not gratuitous.)
Control = "Acting on behalf of" someone else.

Front 3

AGENCY (Statute)

Back 3

Restatement (Third) of Agency: § 1.01
AGENCY = "Fiduciary relationship that arises when a principal manifests assent to another person (agent)."
1.) Agent act on principal's BEHALF
2.) Agent acts subject to principal's CONTROL
3.) Agent manifests ASSENT or otherwise consents
**Assent = Written OR Spoken (Informal)

Front 4

LIMITED LIABILITY (Case List)

Back 4

Walkovszky v. Carlton (New York 1966)

Sea-Land Services, Inc. v. Pepper Source (7th Circuit 1991)

Roman Catholic Archbishop of San Francisco v. Sheffield (California 1971)

In re Silicone Gel Breast Implants Product Liability Litigation (Alabama 1995)

Front 5

LIMITED LIABILITY (Statute)

Back 5

DGCL

MBCA

Front 6

LIMITED LIABILITY

Walkovszky v. Carlton

Back 6

Veil Piercing Requirement: Alter-Ego

CONCEPT: "Piercing the Corporate Veil"
**"To prevent fraud or achieve equity"

FACTS: "Cab case"
Holding: NO FRAUD
**Not fraudulent for owner of cab corporation to take out no more than minimum insurance.
**Dissent: Intent was to avoid insurance costs.

RESULT: Doesn't pierce the veil
Limited Liability has social merit.
π = wrong cause of action
**Didn't allege alter-ego.

Front 7

PIERCING THE CORPORATE VEIL

Back 7

1. ALTER-EGO: Use of corporation to further one's own interests (not corporation's) = liable.
**RESPONDEAT SUPERIOR

2. FRAGMENT: But where corporation is a fragment of a larger corporate combine which actually conducts the business, court will NOT "pierce the veil" to hold individual SH liable.
**ENTERPRISE LIABILITY (Not typical in U.S.)
--> Respondeat Superior: Implicitly
--> Requires: Reverse Piercing

3. Judge's discretion. More likely w/ small corps.
**Debt owed = greater than company assets

CARDOZO: "Piercing the veil is guided by the general rules of agency."

Front 8

LIMITED LIABILITY

Sea-Land Services, Inc. v. Pepper Source

Back 8

FACTS: Pepper Source dissolves; had no assets. Never pays freight cost to Sea-Land. SL wants to pierce SH (Marchese); reverse pierce to SH's other corps.

Rule: Fraud must = Form.

Test: "Van Dorn Test" (2 Prongs)
1. UNITY OF INTEREST & OWNERSHIP
Alter-Ego: SH completely disregarded form.
**No meetings, co-mingling, etc.

2. SANCTIONS FRAUD or INJUSTICE
Fraud: Not paying not enough. Shifting $$$ to avoid payments is enough. (Deceptive Form / WRONG)
**Avoid responsibility
**Unjust enrichment
"Small Test" via adverse possession case.

Holding: NO FRAUD

Front 9

LIMITED LIABILITY

Roman Catholic Archbishop of San Francisco v. Sheffield

Back 9

Enterprise Theory

FACTS: Dog case (Swiss Monastery)
**SF Arch & Monastery both subsidiary of Vatican

RULE: Can't recover from one subsidiary by going to another. Must go through parent.

Van Dorn Test:
1st Prong: Unity of Interest
NO. SF isn't "Alter-Ego" of Monastery
2nd Prong: Fraud/Injustice
NO. Sure, no form. But no causal nexus between lack of form and "fraud."

π argues agency relationship.
Could have tried enterprise theory.

^^Agency = parent liable for actions of subsidiary; but not subsidiaries for other subsidiaries

Front 10

Piercing the Corporate Veil (TEST)

Back 10

Get to personal assets.
Beyond point of limited liability.

VAN DORN TEST: (2 Prongs)

1. UNITY OF INTEREST / OWNERSHIP
*Failure to follow formalities
*Failure to maintain separate accounts
*Failure to capitalize via deception

2. SANCTION FRAUD / INJUSTICE
*Unfair business practices
*Intentional misrepresentations
*Actions maybe incurring civil/criminal penalties
*Eliminate liability w/ no business purpose
*Unjust enrichment
*Actual fraud (difficult to prove)

Front 11

§ 106: Commencement of Corporate Existence

Back 11

EFFECTIVE IMMEDIATELY

File when you want it to take effect.

Front 12

§§ 121 & 122: General & Specific Powers

Back 12

COLLECTIVE CHOICE

Stockholder influence & control

Front 13

§ 141: Board of Directors

Back 13

BOD = NATURAL PERSONS

Front 14

LIMITED LIABILITY

In re Silicone Gel Breast Implants

Back 14

Substantial Domination Test

FACTS: Torts claim (product liability). ∆ Bristol-Meyers want SJ re: cannot pierce corporate veil via wholly-owned subsidiary, MEC

HELD: No SJ. Totality of facts in play. Good case.

**TORTS = Lower burden of proof. No fraud.

TEST:
1. Alter-Ego: Met --> Comingling, Sole SH, etc.
2. Fraud --> Prong not relevant (Tort)

Front 15

Substantial Domination (Test)

Back 15

Parent-Subsidiary

Parent = liable for subsidiary when evidence shows Parent tortious negligence re: subsidiary's products.

Courts look for:
1 Common directors or officers;
2 Intertwined Operations;
3 Consolidated financial statements and tax returns;
4 Whether Parent finances the subsidiary;
5 Whether parent pays subsidiary’s salaries and expenses;
6 Whether subsidiary receives no other biz except what parent gives it;
7 Whether parent uses the subsidiary’s property as its own

***IS SUBSTANTIAL DOMINATION UNIQUE TO TORTS AND DELAWARE ... OR TORTS IN DELAWARE?

Front 16

Shareholder Litigation

Back 16

Direct Action – shareholder sues in her personal capacity to enforce her rights as a shareholder.
**Recovery to the individual
**Voting rights, election process, div. payment

Derivative Action – Sh sues on behalf of the (c) to enforce rights of the (c) which affect them only indirectly.
**Recovery to the Corporation
**Can require "security post" for legal fee to sue.
**Fiduciary Duties
**Keeping Board/Managers in check

DISTINGUISH:
Focus on who was injured & who will receive the relief. Some are hard to categorize. (C) will always argue it’s derivative.

Front 17

SHAREHOLDER DERIVATIVE ACTIONS (Case List)

Back 17

Cohen v. Beneficial Industrial Loan Corp. (Sup.Ct. 1949)

Grimes v. Donald (Delaware 1996)

Auerbach v. Bennett (New York 1979)

Zapata Corp. v. Maldonado (Delaware 1981)

In re Oracle Corp. Derivative Litigation (Delaware Ch. 2003)

Front 18

SHAREHOLDER DERIVATIVE ACTIONS (Statutes)

Back 18

DCGL: § 219-220;

MBCA: § 2.01-2.06, 3.01-3.02, 3.04, 8.01, 8.03, 8.20-8.25, 8.40, 8.43

Front 19

SHAREHOLDER DERIVATIVE ACTIONS

Cohen v. Beneficial

Back 19

Legal Fees: Derivative Suits

Some states require SH with min ownership who brings a derivative suit to provide security for, and if lose, then pay for the corp’s reasonable expenses and atty’s fees in defending the lawsuit (does not apply in direct)

Issue: Small SH derivative suit. Directors/Managers of Beneficial were stealing from corp.

Rule: NJ law requires sh w/ min ownership (<5%) that brings a derivative suit to post security for and pay for corp’s Reasonable Expenses and Atty’s Fees for Corp.’s cost of defending if she looses.

Policy: balance between preventing frivolous suits and enabling legitimate shareholder claims.

Held: The New Jersey statute should be followed because the statute is not a procedural matter than would preempt federal rules.

Shareholder derivative suits will still have to follow applicable state laws.

Front 20

SHAREHOLDER DERIVATIVE ACTIONS

Grimes v. Donald

Back 20

The Demand Requirement
Business Judgment Rule

Facts: to invalidate Donald’s employment agreement which Plaintiff believed effectively abdicated the Board’s management powers to Donald.

Issue: The issue is whether Plaintiff’s pre-suit demand waives his right to contest the independence of the Board on all of his claims.

Rule: A plaintiff, by making a demand, waives his right to contest the independence of the Board of Directors, and the effect of the demand will apply for all of a plaintiff’s stated claims.

Held: Plaintiff waived his right to contest the independence of the Board once he demanded that they invalidate the employment contract. A pre-suit demand is a tool to avoid further litigation, but it would not serve that function effectively if Plaintiff was allowed to bifurcate his claims and claim the demand was excused for one set of claims.

Front 21

SHAREHOLDER DERIVATIVE ACTIONS

Auerbach v. Bennett

Back 21

Special Litigation Committee (NY / MBC)

Issue: whether the special committee correctly and justifiably refused to continue the derivative action.

Rule: A party may challenge the independence of a special committee, but once a committee is deemed to be independent then their decisions are protected under the business judgment rule.

Held: Once the special committee was deemed to be impartial and disinterested in the issue at hand, their decision is entitled to deference by the court under the business judgment rule.
**SLC not independent simply because the interested directors appointed them.

Front 22

SHAREHOLDER DERIVATIVE ACTIONS

Zapata v. Maldonado

Back 22

Special Litigation Committee (Del. / DGCL)

Rule: 1.) Court determine if defendant corporation proves that the appointed committee is independent
2.) When applying BJ standard, whether motion to dismiss the derivative suit should be granted.
**Board has power to refuse litigation on demand when decision to do so is not wrongful.

Two-step test shifts the burden to the corporation to prove the independence. Less advantageous.
**Favors shareholders
**"Balancing" test equivalent

Front 23

§ 141(a) - Board of Directors, Powers

Back 23

x

Front 24

SHAREHOLDER DERIVATIVE ACTIONS

In re Oracle : Derivative Litigation

Back 24

Special Litigation Committee Independence (Del.)

π alleges breach of duty of loyalty via insider trading
**Oracle forms SLC: 2 Stanford Profs.

Rule: SLC doesn't meet burden of "demonstrating absence of material fact" re: independence where members are professors at a university that has ties to ∆ corporation subject to derivative investigation.

**When evaluating whether a director is "disinterested" you have to look as broadly as possible. It isn't just a financial connection, or the ability for an interested director to 'punish them' (by firing them for example), you also have to look at non-economic social ties, or anything else that could affect that director's loyalties.
--> Only applicable when accused of wrongdoing.

**All factors in play. (Love, friendship, etc.)

Tip: IF π wants to get SLC overturned, cite Oracle.

Front 25

Corporate Form Purpose

Back 25

Developed for large-scale capital pooling.
**People who don't know each other.

To decide whether a (C) has the power to do something, look at Articles of Incorp. and Corporate Bylaws

Front 26

The Demand Requirement

Back 26

Most states: requirement that SH approach the BOD and *demand that the Board pursue litigation* before the shareholder is allowed to bring a derivative suit in the name of the corporation.

Applies: Direct claims of alleged abdication by BOD of its statutory duty, failing to exercise due care and committing waste. (i.e. Excessive compensation.)

Rule:
1. Claim of BOD abdication of statutory duty may be brought directly
2. When SH demands that the BOD take action on a claim allegedly belonging to the corporation and demand is refused, the SH may not restate a claim based on other legal theories for the same claim.
**Board's decision protected by BJR

Delaware Exception: "Futile"
Must show reasonable doubt that a MAJORITY of the board are disinterested / independent.
**Therefore, BJR is not valid argument.

Front 27

Special Litigation Committee

Back 27

Delaware:
1.) Court determines whether committee is disinterested, independent, acting in good faith.
2.) Court applies own BJR re: evidence AND the committee's recommendation.

NY:
Courts defer to SLC if capable of independence.

Front 28

§ 219: DGCL

Back 28

List of stockholders entitled to vote; penalty for refusal to produce; stock ledger

Front 29

§ 220: DGCL

Back 29

Inspection of books and records

Front 30

CORPORATE PURPOSE

Back 30

A.P. Smith Mfg. Co. v. Barlow (Sup.Ct. 1953)

Dodge v. Ford Motor Co. (Michigan 1919)

Shlensky v. Wrigley

Front 31

CORPORATE PURPOSE

Back 31

DCGL: §102(b)(7), 144

MBCA § 8.30, 8.31, 8.42, 8.60, 8.63

Front 32

CORPORATE PURPOSE

A.P. Smith v. Barlow

Back 32

"Pet-Charities"

Issue: Whether A.P. Smith can donate money to a charity without authorization from stockholders or through the certificate of incorporation.

Rule: Corporate gift-giving is an allowable method of increasing goodwill, but the gift should be less than 1% of capital and surplus and directed to an institution owning no more than 10% of the company stock.

Reasoning: (1) BOD has ability to make charitable donations bc NJ statute authorized it & NJ has a reserve power to change corporate charters for the public interest; (2) Princeton is charitable. strong normative views, curb communism.

Held: π can give $$ to charities if rule requirements are met. Corporate gift-giving increases the goodwill of the corporation, and public policy should encourage corporations to provide to charities in the same manner as individuals are encouraged to give.

**Codified in §DGCL (public welfare / charity)

Front 33

CORPORATE PURPOSE

Dodge v. Ford Motor Co.

Back 33

"Primarily for Profit of Shareholders"
Corporate Responsibility > Social Responsibility

Facts: Ford wants to reinvest in business; stop "special dividends."

Issue: Is it for benefit of shareholders enough that we would still entrust it to discretion of board?

Rule: Business corporation is organized and carried on primarily for profit of the SH

Held: NO. vision too charitable, not enough SH focused. Force to pay dividends. Things Ford is doing are not primarily for the profit of the SH. Ford wants to make socially responsible company.

**Not best law. But never overturned.
**Shows pitfalls of "substance" vs. "process"

Front 34

Business Judgment Rule

Back 34

Presumption that directors (in good faith) can make best judgments for company.

**Attacking party has duty to rebut presumption.
i.) Breach of care
ii.) Breach of loyalty
iii.) Otherwise beyond Board's discretion

Policy: Encourages risk taking by directors.

Front 35

§ 141(a): DGCL

Back 35

x "Safe Harbor"

Safe Harbor – safeharbor if you have interested transaction – the disinterested directors may approve it in advance and then you don’t have this duty of loyalty problem. [§144(a)(1)].

More judicial flexibility than MBCA.
**More case law.

Front 36

MBCA

Back 36

More "bright-line" than Delaware.

Less room to be ambiguous.
Not as much case law.

Front 37

CORPORATE PURPOSE

Shlensky v. Wrigley

Back 37

"Primarily for Profit of Shareholders"
Rational Reason / BJR

Shareholders try to compel directors to put lights in; make more money.

Held: No. As long as there's a "rational reason" then the court won't interfere.

Front 38

MBCA § 830 - Standard of Conduct for Directors

Back 38

Members of Board / Committees (Oracle)

**Similar to "Reasonable Person Standard"
**Think: Van Gorkam

Front 39

MBCA § 8.31 - Standards of Liability for Directors

Back 39

i. bad faith
ii. breach of duty
iii. nepotism (i.e. Oracle)
iv, v.

Front 40

DUTIES [Care] (Case List)

Back 40

Kamin v. American Express Company (New York 1976)

Smith v. Van Gorkam (Delaware 1985)

Cinerama, Inc. v. Technicolor, Inc. (Del. Ch.)

Francis v. United Jersey Bank (New Jersey 1981)

Front 41

DUTIES [Care] (Statutes)

Back 41

MBCA sections 8.42, 8.60-8.63

Front 42

DUTY OF CARE

Kamin v. American Express

Back 42

"Nonfeasance" & BJR

Facts: π's filed a shareholder derivative suit against ∆ corporation, American Express, and officers after ∆ allegedly negligently decided to issue dividend.
**AMEX shifts bad shares to SH (like-kind tax loss)

Rule:
1.) Not enough to say other action would be better
2.) Gross neg. standard for Nonfeasance = negligence + nonfeasance (not informed, attention)

Held: Court can't interfere (BJR) if good faith.

**Even more favorable than Wrigley
**VERY lenient standard
**"Only" involves 4 / 20 directors.

Front 43

DUTY OF CARE

Smith v. Van Gorkam

Back 43

"Nonfeasance" (Duty of Care) (Advisory)
**Nonfeasance
**Stalkinghorse: "Lockup Option" no outbidding

Van Gorkam (Board) agrees to "stalking horse" without reviewing terms, etc. (Tax motivation)

Rule: All information needs to be reasonably available to directors before a decision.

Under BJR a business judgment is presumed to be informed, but the judgment will not be shielded under the rule if the decision was unadvised.

Test:
BJR assumes informed directors. Party suing has to overcome presumption. Does here. (Rare)

Held: Holds directors (TransUnion) liable for rational decision as to which there were no allegation of bad faith or self-dealing. (Teeth to Del. Fid. Duty law)

**Duty of Care = Procedural
**After Van Gorkam -- Board must get fairness and opinion letters from outside bankers/lawyers.
**One of few exceptions where BOD liable w/out bad faith.
**Del. can amend charter to limit liability to only failure to act in good faith.
**"End-Period" cash-out

Front 44

DUTY OF CARE

Cinerama, Inc. v. Technicolor

Back 44

"Fairness" (Duty of Care)

LAWYERS
1. Fair Dealing: when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.

ACCOUNTANTS
2. Fair Price: The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock.

**Delaware Chancery

Front 45

DUTY OF CARE

Francis v. United Jersey Bank

Back 45

Duties for Liability Protection (Directors)

Old Woman inherits family business. No knowledge, no research, no presence, etc.

Held: Breach of fiduciary duty via nonfeasance.

Rule:
1.) Continued obligation to be informed.
2.) Not a detailed inspection of day-to-day activity.

Reasoning:
If even a bird's eye view, she would have noticed "continuous, open, notorious, lengthy pattern of fraud." Nonfeasance enabled situation.

Effect:
Incentivizes directors to stop theft, make detailed investigation, or at least a "noisy" withdrawal.

Rule: Liability of director requires demonstration:
1) Duty exists
2) Director breaches duty
3.) Breach was proximate cause of client's loss

NOT VEIL PIERCING:
VP = SH (...also not alter-ego; it's her sons)
Here: SH & Director (Fiduciary Duty)

**"Willful blindness"
**Reinsurance = "entrustment of capital"
**Breach was "proximate cause" of losses

Front 46

Duty of Care / Nonfeasance

Back 46

Board of Directors Behavior:

1. In good faith
2. For benefit of the corporation

1. π sues director via duty of care claim
2. ∆ entitled to BJR; limits liability to acts involving gross negligence and simple negligence.

Front 47

DUTIES [Loyalty] (Case list)

Back 47

Bayer v. Beran (New York 1944)

Benihana of Tokyo, Inc. v. Benihana, Inc. (Delaware 2006)

In re eBay, Inc. Shareholders Litigation (Delaware 2004)

Sinclair Oil Corp. v. Levien

Front 48

DUTY OF LOYALTY

Bayer v. Beran

Back 48

Directors and Managers
President's Wife radio ad
Fairness @ Arms length

Self-Interested transaction = Not in good faith.
**Rebuts BJR presumption of good faith

Held: Director met his burden to prove he made it in good faith & that it was fair to the corp. So, ct held director didn’t breach fiduciary duty of loyalty

Board made reasonable review of the decision.
1.) Wife's ability/wage/etc. was normal.
**Corp. received benefit
**Cost not disproportional
2.) Lack of formal meeting not enough
**Cultural standard at Bayer

Front 49

DGCL § 144(a)(1):

Safeharbor: Conflict of Interest exception

Back 49

disinterested directors can vote to approve transaction despite the conflict of interest if informed re: majority of material facts of relationship disclosed

Vote after conflict can ratify transaction.

Front 50

DUTY OF LOYALTY

Benihana of Tokyo, Inc. v. Benihana

Back 50

Directors and Managers
Substance over Form re: Duty of Loyalty
"Safe harbor, recasting of Van Gorkam"

Held: Ct said everyone knew Abdo was on both sides, and if they didn’t know then they should have. Doesn’t look beyond that, can’t believe that the directors didn’t know this stuff.
**Substance over form.

Reasoning:
Abdo didn’t breach his duty of loyalty – no ev that he used the confidential info against Beni and Beno ended where it wanted to be for most important terms. Abdo didn’t set the terms of the deal nor did he dominate or control other members approval.

Duty of Care re: Board would favor BJR

Front 51

DUTY OF LOYALTY

In re eBay

Back 51

Corporate Opportunities
"really broad reading of corp. opportunity and line of biz bc doesn’t pass smell test"

Select ebay directors/officers accepted unique, below mkt price investment opps. in other companies from Goldman as incentive for maintaining future relationship, Turned around and sold for millions, and kept profits for themselves. Could have gone to eBay, not directors.

Corporation:
1. financially able to take advantage
2. It’s w/in their line of biz
3. Corp has an expectancy in it
4. implicated the director’s self interest

Held: Fundamentally, this isn’t eBay’s main biz. Ct says eBay holds marketable securities. But they don’t issue eBay shares as their direct lien of business, they do auctions. Ct had to stretch to apply doctrine.

1. stretches doctrine to cover what it sees as improperly handled fiduciary duties
2. eBay got less bc directors took kickback for themselves rather than giving it to ebay. Doesn’t pass smell test, feels like a bribe.

Front 52

Duty of Loyalty Standard

Back 52

Conflict of Interest

No-Conflict: BJR

Conflict: burden to directors to prove
1.) good faith
2.) intrinsic fairness to corporation (Bayer)

Front 53

DUTY OF LOYALTY

Corporate Opportunity

Back 53

3 Prongs:

1. In the interest/expectancy of the operation
2. It's in the line of business of the firm
3. Fairness: Apply standards of fair/equitable conduct under the circumstances.

Front 54

DUTY OF LOYALTY

Dominant Shareholders

Back 54

GENERAL RULE: Shareholders don't owe fiduciary duty to other shareholders.

1. Not every SH owes fiduciary duty to other SH
2. Controlling SH do owe fiduciary duty.
**Majority has fiduciary duty toward minority.

Front 55

DUTY OF LOYALTY

Sinclair Oil Corp. v. Levien

Back 55

Domint SH

Reverse Ford:
Ford wanted to invest, Plaintiff wanted dividends.
Sinclair pays dividends, Plaintiff wants investment.

Court remands via Duty of Loyalty b/c Sinclair is 100% wholly owned subsidiary. Parent-Subsidary.

Rule: Intrinsic fairness standard applied in any self-dealing transaction by parent whose majority ownership places a fiduciary duty upon the parent, but the transaction only be self-dealing if transaction is to detriment of minority shareholders.

Controlling SH that can dominate affairs of corp. (i.e. elect own directors) and conduct transactions that exclude minority; burden to ∆

Held: really high dividend claim (1) not exclusionary, but k claim (2) was exclusionary.
1) not to minority’s exclusion bc both minority & majority getting %. So BJR rule applied over fairness
2) Sinclair caused Sinven to K w/ another Sinclair subsidiary then had the other subsidiary breach the K & failed to have Sinven seek any remedy.
100% v. 97%: Excludes 3%.

Front 56

DUTY OF LOYALTY

Intrinsic Fairness Standard

Back 56

Parent-Subsidiary

Intrinsic Fairness Standard: Parent-Subsidiary
"Would someone do this at arms length?"
**Self-Dealing

A standard of intrinsic fairness will be applied in any self-dealing transaction by a parent corporation whose majority ownership places a fiduciary duty upon the parent corporation, but the transaction only be self-dealing if the transaction is to the detriment of minority shareholders.

Front 57

DUTIES [Good Faith] (Case List)

Back 57

In re The Walt Disney Co. Derivative Litigation (Delaware 2006)

Stone v. Ritter (Delaware 2006)

Front 58

GOOD FAITH

In re The Walt Disney

Back 58

Compensation
Ovitz Employment Agreement

"These facts, if true, do more than portray directors who, in a negligent or grossly negligent manner, merely failed to inform themselves or to deliberate adequately about an issue of material importance to their corporation. Instead the facts alleged in the new complaint suggest that the defendant directors consciously and intentionally disregarded their responsibilities..."

The Trial Court found that the directors' conduct was less than ideal, but not in bad faith or grossly negligent.
**The Court stated ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care.

Held: The Delaware Supreme Court affirmed.

Court found that the directors are not required to be informed of every single contingency (example: if Ovitz' left early). Instead, they have to be 'reasonably informed' in order to meet the requirements of the duty of care.

Front 59

GOOD FAITH

Stone v. Ritter

Back 59

Oversight
"Triad of Duties": Care, Loyalty, Good Faith

Failure to act re: known duty = Bad faith

Conscious disregard can rise to duty of loyalty.

Rule: Directors must perform due dilligence

**Caremark Duties

Front 60

3. Del Gen Corp §144: Interested Directors

Back 60

1. §144(a)(1): material facts are disclosed to the board who in good faith authorizes the transaction by a majority of the disinterested directors
2. §144(a)(2): material facts are disclosed to the shs, and the disinterested shs in good faith take a vote that ratifies the transaction
3. §144(a)(3): the transaction is fair to the corporation

Front 61

Securities Act 1933

"Security"

Back 61

Section 2.

Broad definition. Common law adjudication.

Front 62

Caremark Duties

Back 62

Reasonable reporting system

**Cannot be charged if trusting employees integrity and honesty unless grounds for suspect deception.

Front 63

DUTIES [Disclosure and Fairness] (Case List)

Back 63

Robinson v. Glynn (4th Cir. 2003)

Doran v. Petroleum Management Corp. (5th Cir. 1977)

Basic Inc. v. Levinson (Sup.Ct. 1988)

Santa Fe Industries, Inc. v. Green (Sup.Ct. 1977)

Front 64

DUTIES [Disclosure and Fairness] (Case List)

Back 64

Securities Act of 1933 sections 2(a)(1), 4, 11-12.2

Securities Exchange Act Section 10(b); Securities exchange Act Rule 10b-5 (p.433 in the casebook);

Front 65

DISCLOSURE & FAIRNESS

Robinson v. Glynn

Back 65

Definition of a Security (SA33 §2)

Issue: "Is the agreement, what they call "stock", actually a security?
**Can π bring a securities claim?

Reasoning:
"Passive investor"
vs.
"RoW" Return on Work - not labor of 3rd party.

Held: π expected to work/manage; not a security.
**Membership interest
**Economic reality

Front 66

DISCLOSURE & FAIRNESS

Doran v. Petroleum Management

Back 66

Public or Private?

Issue: Was the offering a private placement?
Whether the sale of the LLC interest to Plaintiff was a private offering exempt from the SEA34.

Policy for Private:
1. No systemic fraud issue (# of investors)
2. Allows for smaller investment
**Otherwise precluded by registration costs

4 Factors: (Rule for private offerings)
i.e. --> Registration Statement $$$
1. Number of offerees (systemic) (familiar/relational)
2. Number of units
3. Size of offering (cost of making it public)
4. Manner of offering
**Court here ok with 2, 3, 4. Skeptical of 1.

Factor 1 is the most "qualitative."
See: Section 4 --> Income at least $100,000

Held: Remanded for further inquiry.

Court notes difference between disclosure and access to information. A disclosure means information has been given to π, and then the issue is the offeree’s knowledge in the filed. If ∆ provided access, they would still have to demonstrate how accessible the information was for π.

Front 67

DISCLOSURE & FAIRNESS

Basic Inc. v. Levinson

Back 67

Misleading statements. 10-b5
**Directors deny merger negotiations
**"Fraud on Market"
**Unpopular w/ Conservatives

SH (Levinson) sells shares after "misleading statements" re: merger issued by Basic.

Issue: Were misleading statements "material"

Rule: Misleading statements during merger discussions will be material under Rule 10b-5 if the misstatements would have changed the view of the total information by a reasonable investor.

**Presumption of reliance
**Purpose of SA = "philosophy of full disclosure"
^^Not "caveat emptor" / Buyer beware
^^"Agreement in principle" not good enough
Narrow holding: Merger discussion = material

Favors "Materiality":
Fact-based assessment.
**Based on "MAGNITUDE" x "PROBABILITY"
**Merger has corporate magnitude / importance

Rule:
"Materiality = Significance to reasonable investor"

"No comment" is better than issuing a misstatement regarding a merger.
**Omissions... 10-b5

Reliance

Front 68

SA33

§ 11
§ 12
§ 12(a)

Back 68

§ 11: registration statement fraud
§ 12: strict liability on sellers of securities re: §5
§ 12(a): private civil liability on "material misrepresentation" re: interstate securities sale

Front 69

DISCLOSURE & FAIRNESS

Santa Fe Industries, Inc. v. Green

Back 69

"Short-Form Merger" Statute: Delaware

∆ (Kirby Lumber) forced π (SH) to sell shares.

Rule: Minority shareholders can appeal via "appraisal right" to Del. Court of Chancery.

10-b5 limited to deception / misrepresentation.
**Read flexibily; not forecefully / restrictive
"Manipulation" = Term of Art re: Securities
"Materiality" requires a decision.

Fiduciary unfairness differs from 10-b deception
**No "federal fiduciary" standard

10-b5 = securities sales;
NOT "short-form mergers" (Parent-Subsidiary)
^^Does NOT require SH approval

Front 70

Disclosure: Materiality

Back 70

Significance to reasonable investor

Magnitude x Probability

Front 71

DISCLOSURE

Reliance

Back 71

via Basic v Levinson
10-b5

Public information = market price
**Takes "market integrity" as de facto

∆ still has option to rebut re: deception/misrepr

Front 72

Rule 10b-5

Back 72

Developed from common law fraud

via Basic:
**New interpretations: re: "Fraud on the Market"
^^Assume public market price integrity
^^Precludes investing b/c of inaccuracy


via Santa Fe:

Front 73

DISCLOSURE

"Fraud on the Market"

Back 73

If the defendant had publicly made a fraudulent statement, every investor could sue if it could be shown that the statement affected the market as a whole.

This "fraud on the market" presumption of the plaintiff's reliance upon the deceit is only available in situations (like in Basic) where the security is traded on a well organized, and presumably efficient, market. The same can be said for an omission of material information.

**Still good law.

Front 74

Rule 10-b5: Fraud Elements

Back 74

1. Material Deception
**∆ affirmatively misrepresents material fact
^^Test: Basic "reasonable person"
**Duty to Speak (Chiarella) (relationship of trust)

2. Scienter
**∆ knew (or reckless in not knowing) true state of affairs and recognized that π might rely on misinfo

3. Reliance
**π relied on misrepresentation
**Public markets = inferred reliance

4. Causation
**π suffered actual losses proximately caused by misrepresentation

5. Damages
**π suffered damages / but no punitive damages

Front 75

DUTIES [Inside Information] - (Cases)

Back 75

Goodwin v. Agassiz (Mass. 1933)

SEC v. Texas Gulph Sulphur Co. (2nd Cir. 1968)

Chiarella v. United States (Sup.Ct. 1980)

Dirks v. SEC (Sup.Ct. 1983)

United States v. O’Hagan (Sup.Ct. 1997)

Front 76

INSIDE INFORMATION

Goodwin v. Agassiz

Back 76

Old law --> Violates federal law

Pre- SE / SEA

No "corporate opportunity" law at the time.

Front 77

INSIDE INFORMATION

SEC v. Texas Gulph Sulphur

Back 77

Press Release to quell mineral discovery rumors

PR by lawyers/pr firm = true but deceptive
**Trying to insulate stock price / want to buy more
**Insiders continue to buy after the press release

Even the "tippee" who transacted at 10:20 a.m. is too close to the deadline.

Held: selective disclosure violated 10b-5 SEC compelled insiders to disgorge their trading profits

Rule:
1. Disclosure: Full & not misleading
disclosure must be full and not misleading
2. 10-b5 Fraud
Can’t make selective true disclosures to create false impression (10-b5 fraud)
3. Reasonable Person - Material to Decision
Material info: is it outcome determinative, would a RP attach importance in determining to buy/sell
4. Reasonable Person - Misled
In connection with – whether RP would have been mislead by the statement
5. Time
Insiders must wait to trade until information is effectively disseminated i.e. 10:20am

Possible Claims:
1.) Loyalty
2.) Corporate Opportunity (Asset)
3.) Fraud 10b5

Front 78

INSIDER TRADING (Definition / Rule)

Back 78

Arises from fiduciary relationship.

Classic Insider Theory: Insiders who get the info bc the Corp, & its Sh and ees have placed them in a position of trust have a duty to abstain or disclose. (arises from a fiduciary relationship)

Defines insider narrowly- To be insider, must be (1) an insider to the firm & (2) actually have the info

Front 79

INSIDE INFORMATION

Chiarella v. United States

Back 79

FRAUD via FIDUCIARY DUTY

No fiduciary duty = no fraud
**still good law, but...

Facts: Markup man in financial print shop figures out who parties in deal and buys stock in the target. Escapes punishment because he doesn’t owe a duty to SH to keep the info confidential.

Not an insider of the target company. Not an agent, fiduciary, or person the SHs placed their trust.

Note: Mehra thinks Misappropriation theory might work today, but wasn’t presented to ct. Deceit-acting like good printing EE while really trying to break code of what printing & trading on it.
**Misappropriation theory might destroy his I’m not fiduciary argument, but doesn’t destroy the I figured it out on my own

Front 80

INSIDE INFORMATION

Dirks v. SEC

Back 80

Tippees: Confidentiality duty must be upheld
**INHERITED DUTY
**MOTIVE TEST

Rule: Tippees do not always inherit the duty from an insider, but they do when:MOTIVE TEST
1.) insider violates own fiduciary duty to the co. or its Shs in disclosing info, which occurs if insider tells u for insider’s own personal benefit (sells tip, give to family/friend, expects tippeee to return favor)
2.) Tippee knows or should have known that the insider breached his duty when telling him.

**Even extends to former employees

Held: Dirks had no duty to abstain or disclose.
**Tippee who gave Dirks info was trying to uncover, not benefit. Dirks can't have duty if tippee didn't breach fiduciary duty. (INHERITED DUTY)

**O'Hagan distinguishes/overrules/builds on Dirks:
by not requiring a breach of a fiduciary duty as called for in Section:14e-3(a)

10b-5 application = Insider must seek personal gain

Front 81

INSIDE INFORMATION

United States v. O’Hagan

Back 81

Facts: Respondent, James O’Hagan, was an outsider who had access to confidential information, and he profited from the info (tender offer) @ expense of company & other shareholders.

Issue: 10-b5 fraud re: outsider?

Rule: An outsider who misappropriates confidential information to personally benefit violates Section:10(b) because there is deception in connection with the purchase or sale of a security.
**Public market

Held:
1.) 10-b5 violation. All elements met.
**Public policy, it would not make sense to limit the scope of the Act to only prohibit certain kinds of activities that endanger a fair market.

2.) Rule 14e-3(a) did not exceed the SEC’s rule-making authority. Again, the purpose of the Act is to provide safeguards to ensure that the market is operating fairly and that investors can rely on the market. Rule 14e-3(a) does not require a demonstration of a breach of duty in order to find a party liable for violations of the Act.
**No breach = Judge's discretion

Front 82

SEA34 § 14(e)

Back 82

Deception via Tender Offers (O'Hagan)

**Nonpublic information directly OR indirectly from offeror, issuer, officer/director/partner/employee or anybody acting on behalf of offeror/issuer.

Front 83

INSIDE INFORMATION

Notes:

Back 83

"Classical Theory" (Texas Gulph Sulphur)
**Requires duty to SH via insiders
**Relationship gives rise to duty (Chiarella)(Dirks)

"Misappropriation Theory" (O'Hagan)
**Outsider Trading
**Breach of duty to source of information
**Applies to outsiders re: nonpublic information
--> Deception via Security Transactions
--> Info received via trust/confidence = 10b-5
^^Qualifies as "fiduciary"

Front 84

INSIDER TRADING
Misappropriation Theory

Back 84

via Supreme Court

MISAPPROPRIATION THEORY (O'Hagan)

1. Use of "deceptive device" under 10b-5
**Deceptive to source of information
2. "In connection with" securities trading
**Must act on knowledge

Front 85

10b-5 Duties

Application to Parties

Back 85

10b-5 = material, nonpublic information

Insider: 10b-5 duty (Chiarella)

Constructive (Temp. Insiders): 10b-5 (Dirks)

Outsiders via Source: 10b-5 (O'Hagan)
**"Fraud on the source"

Tippers: Duty of confidentiality (Dirks)
**Requires reciprocal benefits

Tippee: 10b-5 if knowingly exchange improper tips
**Inherited abstain-or-disclose duty

Total Stranger: no 10b-5 duty (Chiarella)

Front 86

DUTIES [Short-Swing Profit - Insider] (Cases)

Back 86

Reliance Electric Co. v. Emerson Electric Co. (Sup.Ct. 1972)

Foremost-McKesson, Inc. v. Provident Securities Company (Sup.Ct. 1976)

Front 87

SHORT SWING PROFITS

Reliance Electric Co. v. Emerson Electric Co.

Back 87

BRIGHT-LINE RULE (Unlike O'Hagan)
**Easy to get around unless you are a director who is also a day-trader. Specific rule target.

SEA34 § 16
Applies to directors, officers, 10% shareholders

Front 88

SHORT SWING PROFITS

Foremost-McKesson, Inc. v. Provident Securities

Back 88

Time of Purchase

Last transaction pushes them over 10% (SH)

Issue: DO you have to own 10% before the transaction?

Held: No. AT THE TIME of the transaction.

**Adheres to language of statute
**Consistent w/ Reliat

Front 89

Short-Swing Profits: Rule

Back 89

SEA § 16

Profits from purchase and sale of securities within 6-months, unless such security or security- based swap agreement was acquired in good faith in connection with a debt previously contracted

BRIGHT-LINE APPLICATION

Front 90

CONTROL [Proxy Fights] (Case List)

Back 90

Levin v. Metro-Goldwyn-Mayer, Inc. (New York 1967)

Rosenfeld v. Fairchild Engine & Airplane Corp. (New York 1955)

J.I. Case Co. v. Borak (Sup.Ct. 1964)

Lovenheim v. Iroquois Brands, Ltd. (D.C. 1985)

AFSCME v. AIG, Inc. (2nd Cir. 2006)

CA, Inc. v. AFSCME Employees Pension Plan (Del. 2008)

Crane Co. v. Anaconda Co. (New York 1976)

Pillsbury v. Honeywell

Sadler v. NCR Corporation (2nd Cir. 1991)

Front 91

CONTROL [Proxy Fights] (Statutes)

Back 91

DGCL sections 211-214, 216, 222-223;

Securities and Exchange Act section 14 and rules 14a-1, 14a-2, 14a-8, 14a-9 and 14a-7(1), 14a-11

Front 92

PROXY CONTROL [Strategic Use]

Levin v. M.G.M.

Back 92

Fight over TV licensing (1960s)

Rule: Directors can use corporate resources to solicit proxy votes.

π thinks unfair that ∆ used corporate funds to solicit proxies.

π seeks injunctive relief.
∆ only wants to spend $125k / budget = millions

Clash over POLICY;
Not PERSONALITY

Business Judgment Rule applies.
**Doesn't want to overrule management.

Front 93

PROXY CONTROL [Reimbursement of Costs]

Rosenfeld v. Fairchild Engine & Airplane

Back 93

"Reasonable Expenses"

Rule:
1. If proxies sought for POLICY
2. "reasonable expenses"
3. both sides reimbursed

Dissent: This is a fictitious distinction

Front 94

Proxy Fight: Payment & Reimbursement

Back 94

1. If proxy fight is good faith over POLICY → both sides reimbursable for reasonable expenses if insurgents WIN.

2. If proxy fight is about PERSONAL interest → insurgents don’t get reimbursed

**Both sides will couch the fight in POLICY

Front 95

PROXY CONTROL [Private Actions by Proxy Violations]

J.I. Case Co. v. Borak

Back 95

"Private Right of Action" / Misleading Proxy

Facts: Respondent brought a private action against Petitioner for releasing a misleading proxy statement prior to a merger.

Issue: The issue is whether Section: 27 allows a private party to bring a Section: 14(a) action.

Held: Yes, allowable.

RULE: The language of SEA does not prohibit private actions, but instead implies the right.

Front 96

PROXY CONTROL [Shareholder Proposals]

Lovenheim v. Iroquois

Back 96

"Town Meeting Rule"
Substance v. Process: (Sort of the line between)

SH: Process
Directors: Substance (BJR)

Brightline rule
**Applies "Objective Standard"

Rule: Under Rule 14a-8(c)(5), a shareholder proposed resolution for a proxy statement can only be turned down when the proposal both concerns less than 5% of total earnings or assets, and when it is not significantly related to the business.

The court holds that both sections of Rule 14a-8(c)(5) need to be met. The ruling is consistent with the idea that not all decisions made by a corporation will be made solely along economic lines.

Front 97

Town Meeting Rule

Back 97

Proposed resolution for proxy vote must:

1. Concern 5% or more of total earnings or assets

2. Significantly related to the business.

BOTH PRONGS MUST BE MET.

Front 98

PROXY CONTROL [Shareholder Proposals]

AFSCME v. AIG

Back 98

Proxy Exemptions - Delaware

AFSCME (Public Employee Union) wants to "democratize" AIG's BoD elections by giving SH-suggested candidates placement on ballot.

**Court permits SH to create proxy access.
^^Activist π / Activist Court

Front 99

Democratized Proxy Statements

Back 99

SEC revised rule 14a-8 to overrule AFSCME v. AIG court decision, allowing companies to exclude SH proposals if certain conditions are not met. (13 conditions)

Front 100

PROXY CONTROL [Shareholder Proposals]

CA, Inc. v. AFSCME

Back 100

Delaware Court §§ 141 & 109
"Substance vs. Process"

Proposal to make Corp. pay "reasonable expenses" for insurgent slate of directors if at least 1 wins.
**Bridge too far for the state of Delaware

Ca, Inc:
§ 141: Election reimbursement = director discretion
**148-a allows exclusion of illegal SH proposals

ASFCME:
§ 109: Shareholders have right to adopt bylaws
**Therefore, SH proposal not illegal

HELD:
The Delaware Supreme Court found that in general, the proposed bylaw related to director elections and, thus, was a proper subject for a shareholder proposal under Rule 14a-8.

However, the Court found that a shareholder proposal to amend the bylaws in the way AFSCME proposed would violate Delaware law because it "mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude" and, thus, if adopted, could cause CA to violate Delaware law.

--> Violates f. duty b/c it gives directors a "Fiduciary Out"

Front 101

PROXY CONTROL [Shareholder Inspection rights]

Crane Co. v. Anaconda Co

Back 101

Crane wants to obtain list of shareholders.
**Tender Offer

Rule: Can get list, but restrictions on sales.
**Broad view of "business interest"

**A qualified shareholder is allowed, when in good faith, to inspect a corporation’s stock register in order to notify shareholders of exchange and solicitation offers for stock.

Reasoning: Everything affecting SH doesn't affect corporation; but inverse is not true.

Held: SH can receive list.
**Appellant does not prove improper purpose
**Purpose is determined from a shareholder’s perspective rather than the corporation

Goof faith purpose = no adverse to business interest

MBCA?/ State: Shareholder friendly.

Front 102

PROXY CONTROL [Shareholder Inspection rights]

Pillsbury v. Honeywell

Back 102

Proxy List: Economic Purpose

Pillsbury wants Honeywell to release shareholders b/c he thinks fragmenting bombs are bad.

Proxy List Purpose: Restricts proper purpose to some sort of financial or economic interest. Narrow.

"Right to inspect" = "Power to destory"

Petitioner has no prior (economic) interest in Honeywell. If Pillsbury framed economic argument, would have been stickier. (Subjective Inquiry)

Economic Reliance:
Lovenheim = Federal (Not ONLY economic)
Honeywell = State (economic prevails)

Front 103

PROXY CONTROL [Shareholder inspection rights]

Sadler v. NCR Corporation

Back 103

Cites Crane (Liberally Construed)

TENDER OFFER
William Sadler et al., sought to inspect the records of Defendant corporation, NCR Corporation

Rule: A party can inspect records under section 1315(a) of the New York Business Corporation Law even when through an agent as long as the elements of the statute are met.

Requesting Shareholder = PROCESS
**Crane Liberally Construed b/c SH need assistance
**Depends on Agency relationship

Front 104

Tender Offer

Back 104

Hostile Takeover

Don’t negotiate with board, but go directly to SH and say we want to buy your shares.

Front 105

M&A&TAKEOVERS [M&A] (Case List)

Back 105

Farris v. Glen Alden Corporation (Pennsylvania 1958)

Hariton v. Arco Electronics, Inc. (Delaware 1963)

Weinberger v. UOP, Inc. (Delaware 1983)

Front 106

M&A&TAKEOVERS [M&A] (Statutes)

Back 106

DGCL sections 271 and 275

Front 107

M&A: De Factor Mergers

Farris v. Glen Alden

Back 107

De Facto Merger
**Big issue in PA
**Not in DE

FACTS: π brought this action to prevent ∆, Glen Alden Corporation, from executing a reorganization agreement that operates as a de facto merger with another company.

A reorganization by a corporation to acquire the assets of another organization operates as a de facto merger if the nature of the corporation is significantly changed and the shareholder’s interest is significantly altered.

Held: Yes, De Factor merger.
**Court looks at CONSEQUENCES to SH

Acquisition (Cursory) vs. Merger (Fundamental)
**Changes in corporate form

Delaware: Certainty of form (legislative)
Pennsylvania: Judicial activism
**Legislature eventually responds

Aftermath: Legislature responds to defeat de facto
Terry v. Penn Central (Tests limits of leg.)
**Penn Central creates wholly-owned subsidiary
^^Subsidiary acquires target corporations.

Front 108

M&A: De Factor Mergers

Hariton v. Arco Electronics

Back 108

ARCO wants DE FACTO MERGER

Court: No de factor merger.
Delaware:
**Statutory merger = appraisal rights
**Asset acquisition = no appraisal rights

Rule: Asset sales statutes and merger statutes are independent of each other, and a corporation complying with one or the other is complying with the law.

Policy Rationale:
1. Honoring the choice
2. Uncertainty & Confusion

Sec. A = Procedural Statute
(No appraisal right, like merger)

Q: If you want to avoid "piercing corporate veil" in Delaware, what do you do?
A: Maintain corporate formalities

Front 109

M&A: Freeze-Out Mergers

Weinberger v. UOP

Back 109

Freeze-Out = Coercive

Fiduciary Duty: Cash-Out Merger (Delaware)

Rule: A majority shareholder (Signal) owes a fiduciary duty to minority shareholders to provide all relevant information that would pertain to a proposed cash-out merger.

Issue: Withholding relevant information from non-Signal UOP directors and minority shareholders.

Held: Lack of fair dealing.

The court places the same burden on majority shareholders for mergers as they would place on them for inside information. Must disclose.
**Think: Duty of Loyalty / Conflict of Interest
**Lots of issues in play (Fairness / Conflict / etc.)

Front 110

M&A&TAKEOVERS [Takeovers] (Case List)

Back 110

Cheff v. Mathes (Delaware 1964)

Unocal Corporation v. Mesa Petroleum Co. (Delaware 1985)

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Delaware 1985)

Paramount Communications, Inc. v. Time Incorporated (Delaware 1989)

Paramount Communications Inc. v. QVC Network, Inc. (Delaware 1994)

Front 111

M&A&TAKEOVERS [Takeovers] (Statutes)

Back 111

DGCL section 262

Front 112

TAKEOVERS

Cheff v. Mathes

Back 112

Hostile Takeover: "Takeover specialist"

Issue: Whether the directors improperly agreed to purchase its own shares in order to keep their positions with the company.
**"Director/Officer entrenchment"
**"Different than self-dealing

Rule: Directors have the burden of proof that a buyback of shares by a corporation in an attempt to remove a threat to the current corporate model is in the corporation’s interests.

Using MGM analysis. Corp. funds to preserve what they've done **within reason** & goof faith.

Pro-status quo.

Front 113

De Factor Merger

Back 113

2-Tiered Tender Offer
**"Coercive"

Less opportunity to haggle. (Find price ceiling)
**Van Gorkam (No price discovery)
**Signal (UOP Board overlapped)

SH can ban together.
1. Proposal in proxy statement (MGM)
2. Annual meeting: elect directors

Front 114

TAKEOVERS: Development

Unocal Corporation v. Mesa Petroleum

Back 114

"Proportionality Test" - Reasonable Response
4 different tender offers happening...
(Affirmative Defense to Tender)

Rule: REASONABLE RESPONSE TO THREAT
Directors have a duty to protect the corporation from injury by third parties and other shareholders, which grants directors the power to exclude some shareholders from a stock repurchase.
**ENHANCE SCRUTINY

Court gives deference to BoD good faith/judgment
**§141 = BJR
**§160

The burden of proof was on the directors to prove that there was a legitimate business interest at stake to rebut the presumption of their conflicting interest in denying the takeover. This was well-established, but the allowance by the court to allow the directors to deny the plaintiff from participating in the resulting repurchase was new ground.

Front 115

TAKEOVERS: Development

Revlon, Inc. v. MacAndrews & Forbes

Back 115

Unocal's Bookend (Auctioneer duty)

Rule: When a takeover is inevitable, the directors’ duty is to achieve the best price for the shareholder.

Issue: Whether Revlon’s agreement with Forstmann should be enjoined because it is not in the best interests of the shareholders.
**How much power does a board have to fend off a takeover? (POISON PILL)

Revlon’s directors owed a fiduciary duty to the shareholders and the corporation, but once it was evident that Revlon would be bought by a third party the directors had a duty solely to the shareholders to get the best price for their shares.

UNOCAL BOOKEND:
The court held that the Unocal doctrine that outlined a director’s duty to the corporation and the shareholder no longer extended to the corporation once it was determined that the corporation would be sold.

Revlon: "Cancellation fee" & "Lockup option" not per se illegal. Require legitimate profit endeavor.

Front 116

TAKEOVERS: Development

Paramount v. Time

Back 116

Stock-for-Stock Merger w/ Warner

Rule: If you're a Director, you're not ALWAYS an auctioneer.
**Time thought Paramount wouldn't uphold the same standards as Warner.

Rule: Directors are not required to favor a short-term shareholder profit over an ongoing long-term corporate plan as long as there's a reasonable basis to protect negotiated deal/plan.

Issue: whether Time’s proposed merger acts as a sale of Time that would trigger a Revlon analysis that would render the merger invalid.

Held: The court has now applied a dual Revlon/Unocal test to determine if the directors acted reasonably. Once it is determined that a company is not simply putting itself up for sale, then the courts will apply the Unocal standard.

The directors also passed the higher standard called for in Unocal to directors who are rebuffing a potential buyer. The directors reasonably believed, after researching several companies, that a merger with Warner made the most sense as far as future opportunity.

Front 117

TAKEOVERS: Development

Paramount v. QVC

Back 117

Cannot merge & restrict f. duties

Issue: whether the Paramount board violated their fiduciary duty to shareholders by not fully considering the QVC offer.

Rule: A merger agreement between a target company and an acquiring company that restricts the target company’s directors from upholding their fiduciary duties owed to their shareholders is invalid.

Held: merger between Defendants should be enjoined, and that the merger agreement between Paramount and Viacom was invalid.

Paramount misinterprets Revlon ruling.
**No free reign to ignore $$ offers

DUTY: Paramount was under no contractual obligation to avoid discussions with QVC because the merger agreement between Viacom and Paramount was invalid. Paramount shareholders would lose complete control. Therefore there was a heightened scrutiny of the directors’ actions when seeking a merger.

Cannot accept one-all cash offer without considering alternatives.

Front 118

Poison Pill

vs.

Deal Protection

Back 118

POISON PILL
The poison pill involves a kind of doomsday scenario for the aggressor. If the takeover is successful, it will end up paying enormous dividends to the company's current stockholders.

When a takeover bid begins, the company's board of directors issues this preferred stock to its current shareholders. The stock is essentially worthless and is intended to scare away the aggressor. If the takeover succeeds, the stock becomes quite valuable. It can then be redeemed for a very good price or it can be converted into stock of the new controlling company—namely, the aggressor's. Both scenarios leave the aggressor with the choice of either buying the stock at a high price or paying huge dividends on it. This is the pill's poison.