Corps

Front 1

Agency: RSA 1

Back 1

Agency is the fiduciary relation which results from the manifestation of consent by one person to another, that the other shall act on his behalf and subject to his control, and consent by the other so to act. Principal is the one for whom the acton is to be taken. Agent is teh one who acts.

Front 2

Actual Authority: RSA 7

Back 2

Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal's manifestations of consent to him. Actual authority may be express or implied.

Front 3

Authority; creation: RSA 26

Back 3

Authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to beleive that the principal desires him so to act on the principal's account.

Front 4

Actual Express

Back 4

words, conduct, verbal

Front 5

Actual Implied

Back 5

do what is is reasonably necessary to complete the task that the principal asks you to complete

Front 6

Apparent Authority: RSA 8

Back 6

Apparent authority is the power to affect the legal relations of another person by transactions with 3rd persons, professedly as agent for the other, arising from and in accordance with the other's manifestation to such 3rd persons.

Front 7

Apparent Authority; created: RSA 27

Back 7

writing, orally telling, or other conduct of the principal which resonably interpreted causes the 3rd person to believe that the principal consents to have the act done on his behalf by the perosn purporting to act for him.

Front 8

Direct Apparent Authority

Back 8

words spoken to 3rd person

Front 9

Indirect Apparent Authority

Back 9

signs, advertisements

Front 10

Inherent Authority: RSA 8A

Back 10

Authority that arises from the position of the agent. If the task is something that the agent, by virtue of their position, would seemingly have authority to do even if no direct representation is made to the 3rd person that they have this authority.

Front 11

Liability based upon Agency Principles: RSA 140

Back 11

The liability of the Principal to a 3rd party upon a transaction conducted by an agent, or the transfer of his interests by an agent, may be based upon the fact that: (a) the agent was authorized; (b) the agent was apparently authorized; or (c) the agent had a power arising from the agency relation and not dependant upon authority or apparent authority.

Front 12

Respondeat Superior liability: RSA 29

Back 12

Through the doctrine of respondeat superior, a principal may be liable for the Torts committed by an agent if there is a Master/Servant relationship and the tort was committed within the scope of the Master/Servant relationship. If a tort is committed on a frolic, so that the actions of teh Servant were so far out of teh scope of employment, the Principal/Master is not liable.

Front 13

Servant: RSA 220 (1)

Back 13

(1) a Servant is a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance of the services is subject to the other's control or right of control

Front 14

Servant: RSA 220 (2)

Back 14

(2) in determining whether one acting for another is a Servant or an Independent Contractor, the following matters of fact, among others, are considered: (a) the extent of control which, by the agreement, the master may exercise over the details of the work; (b) whether or not the one employed is engaged in a distinct occupation or business; (c) the kind of occupation, with reference to whether in the locality the work is usually done under the direction of the employer or by a specialist without supervision; (d) the skill required in the particular occupation; (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; (f) the length of time for which the person is employed; (g) the method of payment, whether by time or by the job; (h) whether or not the work is a part of the regular business of the employer; (i) whether or not the parties believe they are creating the relation of master and servant and; (j) whether the principal is or

Front 15

When a Master is Liable for Torts of his Servant: RSA 219

Back 15

Master is liable for torts of his servants committed while acting in the scope of their employment. A master is not subject to liability for the torts of his servants acting outside the scope of employment unless: 1) the master intended the conduct or consequences, 2) the master was negligent or reckless, 3) the conduct violated a non-delegable duty of the master, or the servant purported to act or speak on behalf of the principal AND there was reliance upon apparent authority.

Front 16

Actual Agency: Right to control test for vicarious liability

Back 16

if, in practical effect, the
franchise agreement goes beyond the stage of setting standards, and allocates to the
franchisor the right to exercise control over the daily operations of the franchise, an
agency relationship exists.

Front 17

Apparent Agency: RSA § 27

Back 17

one who represents that another is his servant or other
agent and thereby causes a third person justifiably to rely upon the care or skill of such
apparent agent is subject to liability to the TP for harm caused by the lack of care or skill
of the one appearing to be a servant or agent as if he were such.

Front 18

Partnership: RUPA §101(6)

Back 18

A partnership is an association of two or more persons to carry as co-owners a business for profit.
*Intent to share profits is prima facie evidence that a partnership exits, however, this presumption may be rebutted by showing that the payment of profit is for repayment of a debt (In re Feinmore case) * A partnership is an entity separate and distinct from its partners

Front 19

RUPA §301

Back 19

Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including an execution of an instrument in the partnership name, for apparently carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership binds the partnership UNLESS the person had no authority for the act for the partnership in the particular matter AND the person with whom the partner was dealing knew or had received notification that the partner lacked authority.

Front 20

RUPA §306

Back 20

All partners are liable jointly and severally for all the obligations of the partnership unless otherwise agreed by the claimant or provided by law. However, a person admitted as a partner into an existing partnership is not personally liable for any partnership obligations incurred before the person’s admission.

Front 21

RUPA §305

Back 21

A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission of a partner acting in the ordinary course of business for the partnership or with authority of the partnership.

Front 22

RUPA §307(c):

Back 22

Must get a judgment against the individual partners as well as the partnership because the partnership is a distinct legal entity. If you only have a judgment against the partnership it is not enough to go after the assets of a partner.

Front 23

RUPA §307(d):

Back 23

A judgment creditor of a partner may not levy judgment against the asserts of a partner unless the partner is personally liable for the claim under §306 AND one of the following: (1) a judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part; (2) the partnership is a debtor in bankruptcy; (3) the partner has agreed that the creditor need not exhaust partnership assets; (4) a court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that the partnership assets subject to execution are clearly insufficient to satisfy the judgment or (5) liability is imposed on the partner by law or K independent of the existence of the partnership

Front 24

RUPA §103:

Back 24

Limits what the partnership may do. A partnership agreement may not restrict the rights of third parties. Also may not eliminate the duty of loyalty but it may identify specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable.

Front 25

RUPA 401(j):

Back 25

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 agreements may be undertaken with only the consent of all the partners.

Front 26

RUPA §404

Back 26

The only fiduciary duties partners owe each other is the duty of loyalty and the duty of care. Per Meinard v. Salmon case, you don’t need to tell partners about every opportunity. Do not violate the duty of care or loyalty merely because the partner’s conduct furthers the partner’s own interest.

Front 27

Events causing Partner’s disassociation: RUPA §601

Back 27

 A partner is dissociated from a partnership upon the occurrence of any of the following events
 (1) the partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner;
 (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 w/ that partner
 (ii) there has been a transfer of all or substantially all of that partner’s transferable interest in the partnership,
 (iii) w/in 90 days after the partnership notifies a corporate partner that it will be expelled b/c it has filed a certificate of dissolution or the equivalent or its charter has been revoked
 (5) on application by the partnership or another partner, the partner’s expulsion by judicial determination
 (6) the partner’s becoming a debtor in

Front 28

Partner’s power to dissociate; Wrongful Dissociation: RUPA §602

Back 28

 a) A partner has the power to dissociate at any time rightfully or wrongfully by express will pursuant to 601(1).
 b(2)(i): a partner’s dissociation is wrongful only if 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, the partner withdraws by express will unless the withdrawal follows within 90 days after another partner’s dissociation by death or otherwise under 601(6) through (10) or wrongful dissociation under this subsection.
 (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.

Front 29

RUPA 701(a):

Back 29

If a partner is dissociated from a partnership without resulting in a
dissolution and winding up of the partnership business, the partnership shall cause the dissociate partner’s interest in the partnership to be purchased for a buyout price.
(h) a partner who wrongfully dissociates before the expiration of a definite term or the
completion of a particular undertaking is not entitled to payment of any portion of the
buyout price until the expiration of the term or completion of the undertaken (unless he
can prove that it would not burden the partnership to pay him now) and their
price may be reduced by the amount of damages they caused by their wrongful dissociation.

Front 30

Events Causing Dissolution and Winding Up of a Partnership Business: § 801

Back 30

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 601(2)-(10) of that partner’s express will to withdraw as
a partner or on a later date specified by the partner.
• THERE IS NO DISSOLUTION ON DEATH

Front 31

801(2)(i):

Back 31

If you have a wrongful dissociation, there is no dissolution unless ½ of the remaining partners agree to wind up the business in the case of a term partnership

Front 32

Partnership continues after dissolution: 802 (1 of 3)

Back 32

A partnership continues after dissolution only for the purpose of winding up its business.
The partnership is terminated when the winding up of its business is completed.
At any time after the dissolution of a partnership and before the winding up of its
business is completed, All partners, including dissociated partners, may waive the right to
have the partnership’s business wound up and the partnership terminated.

Front 33

Partnership continues after dissolution - Winding up: 802 (2 of 3)

Back 33

The actual process of paying off bills, selling assets, wrapping up partners’
accounts. Partnership still exists but only for purposes of winding up.
o In a partnership at will, does the dissociation of a partner terminate the partnership?
 Only the express willful dissociation of a partner in a partnership at will may lead to dissolution

Front 34

Partnership continues after dissolution - Termination: 802 (3 of 3)

Back 34

Generally, a partnership continues post-dissolution to wind up only. On completion of
winding up, the partnership terminates unless the partners agree to waive their right to a
winding up and termination.

Front 35

§ 807(a):

Back 35

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 is distributed amongst the partners.

Front 36

Partnership accounts:

Back 36

• Reflects net of any liabilities the partner has assumed, capital contributions of the partner to the partnership, profits and losses that have been allocated to that particular partner.
o On dissolution, the partnership must pay each partner the amount in his partnership account

Front 37

Piercing the Corporate Veil (Huntington v. Elders case): (1 of 3)

Back 37

An individual shareholder can be held personally liable by disregarding the corporate form; 2 Prong test; Sturkie Test:

Front 38

Piercing the Corporate Veil (Huntington v. Elders case) 1st prong: (2 of 3)

Back 38

8 factor analysis to determine whether the business was operating as a corporation: (1) whether the corporation was grossly uncapitalized;
 (2) failure to observe corporate formalities;
 (3) non-payment of dividends;
 (4) insolvency of the debtor corp at the time;
 (5) siphoning of funds of corp by dominant shareholder;
 (6) non-functioning of other officers or directors;
 (7) absence of corporate records; and
 (8) fact that corp was merely a façade for the operations of the dominant shareholder.

Front 39

Piercing the Corporate Veil (Huntington v. Elders case) 2nd prong: (3 of 3)

Back 39

element of injustice or fundamental unfairness if the acts of
the corporation be not regarded as the acts of individuals. (i.e. unjust/inequitable not to pierce)
 (1) D must be aware of the P’s claim against the corporation, and
 (2) thereafter, D acted in a self-serving manner w/ regard to the property of the corp and in disregard of the P’s claim in the property.

Front 40

Corporate Formation:
De jure corporation:

Back 40

Filing the articles of incorporation with the secretary of the state and the incorporator complies will all state laws in creating the corporation.

Front 41

Corporate Formation:
De facto corporation:

Back 41

Occurs when statutory incorporation was possible and there was a good faith attempt to comply, business was conducted in the corporate name. Only some jurisdictions recognize de facto corporations.
Those purporting to act as or on behalf of a corporation knowing that there was no incorporation may be held liable.

Front 42

Shareholder agreements:
(McQuade v. Stoneham)

Back 42

Shareholder agreements are not presumptively illegal, but shareholders cannot agree amongst themselves to control the directors in the exercise of their judgment vested in them by virtue of their office to elect officers and fix salaries.

Front 43

Soliciting Proxies under
Rule 14(a)(9):

Back 43

The solicitation may not contain a false or misleading statement of material fact, omit to state a material fact necessary to make a given statement not false or misleading, and/or omit to state a material fact necessary to correct prior (related) statements, which have become false or misleading.

Front 44

Shareholder Proposals
Rule 14(a)(8):

Back 44

Shareholders may present proposals for inclusion on the proxy card with the goal to have other shareholders vote with respect to a given shareholder’s ideas. Companies frequently recommend that the shareholders vote against the proposal. Companies seeking to exclude a given proposal altogether may see a No-Action letter from the SEC. A No-Action letter is a recommendation by SEC staff that the full commission not challenge the specified conduct.

Front 45

Director’s Inspection Rights:
(Kortum v. Webasto Sunroofs)

Back 45

any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to the director’s position as director. Once the director makes a demand that is refused, a prima facie showing of entitlement to the documents has been made and the burden shifts to the corporation to show why inspection should be denied or conditioned.

Front 46

Shareholder’s Inspection Rights:
§220(c)

Back 46

Where a shareholder seeks to inspect the corporations books and records, other than its stock ledger or list of stockholders, such shareholder must first establish his/her/its compliance with §220(c) and that he/she/it seeks inspection for a proper purpose that is reasonably related to its interest as a stockholder.

Front 47

Voting Agreements:
(Ringling Bros. case)

Back 47

Shareholders can agree to pool their votes and have a third party intercede when there is any disagreement as to how to vote.

Front 48

CORPORATE DECISIONMAKERS’ BUSINESS RESPONSIBILITIES
Does the Business Judgment Rule Apply?
Business Judgment Rule:

Back 48

A court applying the business judgment rule is presuming: 1) the directors acted in good faith, 2) in a manner he reasonably believed to be in the best interests of the corporation, and 3) the director discharged his duties with appropriate level of care. To rebut the presumptions of the business judgment rule, the P must show that the D breached the duty of care, duty of loyalty or duty of good faith.

Front 49

CORPORATE DECISIONMAKERS’ BUSINESS RESPONSIBILITIES
The Business Judgment rule does not apply in cases in which the corporate decision:
(Joy v. North)

Back 49

• lacks a business purpose
• is tainted by a conflict of interest
• is so egregious as to amount to a no-win decision,
• or results from an obvious and prolonged failure to exercise oversight or supervision.

Front 50

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF CARE
MBCA §8.30(b) and Delaware
(Caremark Factors for oversight function)

Back 50

The members of the board of directors or a committee of the board, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.

Front 51

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF CARE
Wrigley case: (Illinois)

Back 51

A court will not interfere with an honest business judgment absent a showing of fraud, illegality, or conflict of interest.

Front 52

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF CARE
Smith v. Van Gorkun case (Delaware):

Back 52

Breach of duty of care: Presumption that directors used good business judgment can be overcome only by proving gross negligence on the part of the directors.

Front 53

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF CARE
Barnes v. Andrews case: (NY)

Back 53

Directors have an individual responsibility to keep themselves informed of the company’s happenings and have a duty to perform with skill of person in like position.
NY requires P to show breach of duty of care as well as causation between breach and damages.
DE: Once a breach of duty is shown, the burden shifts to the director to prove the propriety of their conduct.

Front 54

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF CARE
Caremark Factors (Delaware):

Back 54

Two conditions necessary to establish liability under breach of duty of care with respect to oversight function:
1) The directors utterly failed to implement any reporting or info system or controls OR
2) Having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

Front 55

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY:
8.30(a):

Back 55

Each member of the board of directors, when
discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the
director reasonably believes to be in the best interests of the corporation.
A director breaches the duty of loyalty if he/she usurps a corporate opportunity, competes with the corporation, or is involved in interested director transactions without disclosure.

Front 56

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Competing with the Corporation: (Jones v. Frank Burke, Inc. case)

Back 56

Each officer is prohibited from acting in any manner inconsistent with his agency or trust and at all times is bound to exercise the utmost good faith and loyalty in the performing of his duties.

Front 57

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Usurping Corporate Opportunities:
Delaware (Broz v. Cellular Info): Line of Business Test:

Back 57

A corporate officer may not take a business opportunity as his own: if the corporation is financially able to undertake, it is in the line of business of the corporation, and the corporation has an interest or expectancy in the opportunity– very hard to tell what falls within the corporation’s line of business. Must also look to whether the opportunity was presented to the director in his individual capacity or his director capacity.

Front 58

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Usurping Corporate Opportunities:
ALI Standards: (Northeast Harbor Golf Club, Inc. v. Harris):

Back 58

Corporate officer may shield herself from claim of usurping corporate opportunity by:
1) Director must first offer the opportunity to the corporation after making full disclosure, 2) the corporation must reject the offer, and 3) either: a) a rejection of the opportunity if fair to the corporation, b) the opportunity is rejected in advance by disinterested director, OR c) the rejection is authorized by disinterested shareholders.

Front 59

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Interested Director Transactions:
Delaware (HMG/Courtland Properties v. Gray case)

Back 59

Where directors stand on both sides of a transaction, they have the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the court.

Front 60

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Interested Director Transactions:
Entire Fairness Test: 2 Prongs: Fair Dealing and Fair Price

Back 60

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

Front 61

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
DUTY OF LOYALTY
Interested Director Transactions:
Giannotti v. Hamway case:

Back 61

case about excessive salaries and acting in bad faith: The courts have full authority to liquidate in a proper case where oppressive conduct has been established.

Front 62

CORPORATE DECISIONMAKERS’ LEGAL RESPONSIBILITIES
THE REQUIREMENT OF GOOD FAITH
MBCA (Cookies Food Products, Inc. v. Lakes Warehouse):

Back 62

Corporate directors may under proper circumstance transact business with the corporation. Director is not going to be liable because it’s an interested director transaction if they can establish full disclosure, board approval, shareholder approval or fairness. The Court must still look to see if there is proof of good faith, honesty, and fairness on the part of the director.
In Iowa, director carries burden of establishing good faith, honesty, and fairness. Other jurisdictions, burden is on the P challenging because of the business judgment rule.

Front 63

THE SPECIAL CASE OF EXECUTIVE COMPENSATION
Executive Compensation:
Exacto Springs case:
Indirect Market Test

Back 63

Was the salary excessive thus breaching the duty of loyalty?
Salaries are deductible as ordinary and necessary business expenses, but dividends are not, so the corporation must not be using salaries to disguise payment of dividends
Exacto Springs case: To determine if the salary is excessive, courts look to the indirect market test which compares to what investors in a like firm would expect as returns and takes into account the higher rate of return an officer can generate, the greater the salary he can command without raising suspicions as to whether the salary is excessive.

Front 64

Dividend Distribution:
Zidell case:
Per Sinclair: Intrinsic Fairness

Back 64

Zidell case: Directors have the authority to decide on the amount of dividends so long as they are not acting in bad faith and represents legitimate business purposes.
Per Sinclair, a standard of intrinsic fairness will be applied in ANY self-dealing transaction by a parent corporation whose majority ownership places a fiduciary duty on it, but the transaction be self-dealing if the transaction is to the detriment of the minority shareholders. No self-dealing, business judgment rule is applied.

Front 65

Derivative suit:

Back 65

involves two actions brought by an individual shareholder:
• 1) an action against the corporation for failing to bring a specified suit and
• 2) an action on behalf of the corporation for harm to it identical to the one which the corporation failed to bring

Front 66

Derivative suit:
Procedural Requirements: Standing:
MBCA §7.41

Back 66

P must have been a shareholder at the time of act/omission complained of AND P must fairly and adequately represent the interests of the corporation, must join corp. as nominal defendant, some jurisdictions require the posting security for expenses of the suit, and make a demand on the directors of the corporation that the corporate sue on its own behalf. The board will then sue or refuse to sue. If board refuses, shareholder must prove flaw in decision making process OR prove that decision was tainted by conflict of interest.

Front 67

Derivative suit:
Suit w/o demand:

Back 67

Life or death of P’s case will turn on whether demand on directors was excused as futile.

Front 68

Derivative suit:
Suit w/o demand:
Delaware: Futility of Demand:

Back 68

P must allege particularized facts which create reasonably doubt that: 1) directors are disinterested and independent and 2) the challenged transaction was otherwise the product of a valid exercise of business judgment.

Front 69

Derivative suit:
Suit w/o demand:
Universal Approach:
MBCA §7.42:

Back 69

Make a demand in all cases without exception and prohibits the commencement of a derivative suit without 90 days unless the demand is rejected earlier but may file before 90 days (even if not rejected) if the corporation would suffer irreparable injury from waiting.

Front 70

Direct Suit:

Back 70

Direct harm to the shareholder; the shareholder is suing to vindicate the shareholder

Front 71

Special Litigation Committee

Back 71

Rather than having the decision to file a motion to dismiss decided by the full board, boards hands off the task to special litigation committees.

Front 72

Special Litigation Committee
NY (Auerbach Case):

Back 72

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

Front 73

Special Litigation Committee
Delaware (Zapata case):

Back 73

To determine when a special litigation committee should be permitted to cause litigation to be dismissed, (1) courts should inquire into the independence and good faith of the committee in reaching their decision, and 2) courts should apply its own independent business judgment rule to determine whether the decision was truly made in the corporation’s best interest, taking into account law and public policy.

Front 74

THE SPECIAL CASE OF EXECUTIVE COMPENSATION:
In re the Walt Disney Company Derivative Litigation case:

Back 74

3 categories of bad faith:
1) Subjective bad faith; actual intent to do harm, 2) lack of due care (gross negligence),
and 3) intentional dereliction of duty; conscious disregard.

Front 75

Preemptive Rights:

Back 75

Rights that allow a given shareholder to purchase shares of a new issue before they are offered to non-shareholders. The shareholder typically has the right to purchase enough shares such that they may maintain their historic ownership. Availability of preemptive rights may vary, depending on state law and the Articles of Incorporation.

Front 76

The Securities Act of 1993:

Back 76

(1) Requires disclosure in connection with new issue of securities by the corporation. Full disclosure of material facts. (2) Requires certain issues of new securities to file a registration statement with the SEC. Registration exemptions: private placement, limited offering (even if there is an exemption, anti-fraud rules apply).

Front 77

Securities Act of 1934:

Back 77

Requires ongoing disclosure by publicly held companies.

Front 78

Rule 10b-5:

Back 78

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or the mails, or of any facility of any national securities exchange,
• (a) to employ any device, scheme, or artifice to defraud
• (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made not misleading, or
• (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

Front 79

Materiality:
(Basic case)

Back 79

Whether an omitted fact or misleading statement is material depends on the significance the reasonable investor would place on the withheld or misrepresented information. Involves a balancing test of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.

Front 80

Materiality:
EP Medsystems v. EcoCath:
Bespeaks Caution:

Back 80

EP Medsystems v. EcoCath: To render a statement or omission not material:
Bespeaks Caution: (judicially created doctrine) cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law. For bespeaks caution to apply, the cautionary language must be directly related to the alleged misrepresentations or omissions.
Applies to forward-looking statements as well.

Front 81

Materiality:
Safe Harbor Provision:

Back 81

(essentially, a codification of the “bespeaks caution”
doctrine) issuer is not liable for a forward-looking statement if it is identified as
such and is accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from those in
the forward-looking statement. Statements must sufficiently neutralize materiality
of the misrepresentation.

Front 82

Omission/Misleading statement: Malone v. Brincat (DE):

Back 82

Even if there is no duty to disclose information, if a corporation does choose to disclose information, it must be accurate. Directors who knowingly disseminate false information that results in corporate injury or damage to an individual shareholder breach their fiduciary duty.

Front 83

RULE 10B-5: INSIDER TRADING
Jeff Once Made Some Spicy Revolting Rice:

Back 83

trading in securities with the benefit of material non-public information. Insiders, tipper/tippees, and misappropriators can be held liable.
Jeff Once Made Some Spicy Revolting Rice:
Jurisdiction (interstate commerce/mail/national stock exchange, Omission/Misstatement, Material (reasonable investor test, major factor is the importance attached by those knowing about it), Scienter, Standing, Remedies (injunction/recission/out-of-pocket damages)

Front 84

RULE 10B-5: INSIDER TRADING
SEC v. Texas Gulf:

Back 84

Anyone in possession of material inside information must either: (1) disclose it to the investing public OR (2) if he is disabled from disclosing it in order to protect a corporate confidence or he chooses not to do so must ABSTAIN from trading in or recommending the securities undisclosed.

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Misappropriation Theory:
(US v. O’Hagan)

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Holds that a person commits a fraud in connection with a securities transaction and thereby violates Rule 10b-5 when he misappropriates confidential information for securities trading purposes, in breach of a fiduciary duty owed to the source of information. Misappropriator defrauds the principal of the exclusive use of the information.

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RULE 16b

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Section 16b of the 1934 Act allows parent companies to recover short swing profits earned (or losses avoided) by directors, officers, and/or beneficial owners of more than 10% of a corporation’s stock at the time of both the purchase and the sale. Short swing profits are profits earned within a six-month window.

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RULE 16b:
JISP

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Jurisdiction (corporation is listed on the national stock exchange or $10 million in assets and at least 500 shareholders), Insider (director, officer, beneficial owner), Short Swing (within 6 months), Purchase or Sale

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RULE 16b:
Reliance v. Emerson case:

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A company can split its sale of shares into more than one part to reduce their holding to less than 10% to avoid liability under 16b.

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RULE 16a:

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Generally requires that certain statements be filed with the SEC by directors, officers, and beneficial owners of more than 10% of a company’s stock at the time when securities of the company or registered or within 10 days after becoming a director, officer, or 10% beneficial owner.

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Fundamental Change:
Requires:

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Requires: 1) board approval, 2) shareholder notification, 3) shareholder vote at special meeting (with presence of quorum and approval of majority vote), 4) if approved, shareholders who didn’t approve might have a right to force the corporation to buy them out, and 5) the corporation is usually required to inform the state of the fundamental change by filing a document with the secretary of state.

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Mergers:
Dissenter’s Right of Appraisal:
(HMO case)

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Shareholders who did not approve of a merger might have a right to force the corporation to buy them out. If shareholders comply with statutory requirements, shareholders will be entitled to receive “fair value” of shares held. Minority discount application frustrates the equitable purpose to protect minority shareholders.

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Mergers:
Sue the Directors who Approved the Merger for Breach of Duty of Loyalty:
Weinberger v. UOP, Inc. case:

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Apply the entire fairness test of HMG/Courtland Properties v. Gray:
Fair dealing and fair price, also in determining fairness, all aspects of the transaction must be considered, not just a matter of look at fair dealing and fair price.

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Mergers:
De Facto Merger Doctrine:

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Parties may argue that various transactions have the same substantive impact or practical result as a statutory merger. Parties argue that regardless of its form the substance of the transaction is a direct merger, and the acquiring corporation will therefore succeed to the liabilities of the Target corporation.

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Mergers:
De Facto Merger Doctrine:
Franklin v. USX Corp. case:

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Crucial factor is determining de facto merger is whether adequate cash was paid for the predecessor’s corporate assets. If adequate consideration is paid by an acquiring corporation, the acquiring corporation does not succeed to the liabilities of the Target company.

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Hostile Takeover:

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A hostile takeover is gaining control over a corporation over the objection of that corporation’s board of directors.

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Hostile Takeover:
Takeover defenses:

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adopting a “poison pill,” golden parachutes, shark repellent, and white knight.

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Hostile Takeover:
Unocal Corp. v. Mesa:
Two-prong test directors must satisfy when they take action to deter a potential hostile takeover:

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Board can act if it 1) reasonably perceives a threat to corporate policy and effectiveness exists AND 2) its defensive measure is reasonable and proportionate in response to the threat posed.

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Hostile Takeover:
When a takeover is inevitable: Revlon case:

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when it becomes clear that a particular company is up for sale, the board’s duty then becomes to secure the highest prices for the shareholders, as opposed to preserving the entity.

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Corporate Dissolution:

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Upon dissolution, a corporation must liquidate its assets, pay creditors, distribute any remaining proceeds to shareholders, file a notice of dissolution with the secretary of state, and provide a notice of dissolution to known and unknown claimants. Creditors must be paid in full before shareholders receive anything. Creditors not paid properly may later seek payment from shareholders to the extent the shareholder received payments on dissolution (piercing the corporate veil).