De Bar - Corporations

Front 1

corp -- procedures for formation of a DE corp?

Back 1

i. Reserve corporate name with Sec. of State
ii. File COI with Sec. of State
iii. Appoint initial BOD
iv. Hold an Organizational Meeting

Front 2

corps -- what must be in COI?

Back 2

i. Name of corporation;
ii. Name and address of registered agent in DE;
iii. Statement of nature of business;
1. “any lawful purpose for which a corporation may be formed under DGCL” is okay.
iv. Capitalization - # of authorized shares, classes and series within classes; par value OR grant to BOD authority to establish these.
v. Name and address of incorporator;
vi. Name and address of initial BOD if incorporator’s powers are to terminate upon filing of COI.

Front 3

corps -- what is a DGCL 102(b)(7) provision in COI?

Back 3

vii. DGCL § 102(b)(7): Provision limiting or eliminating director’s liability for monetary damages for breach of fiduciary duty
1. NOTE  a provision limiting liability “to the fullest extent allowed by DE law” ELIMINATES liability for breaches of the DUTY OF CARE.

Front 4

corps -- director liability for what CANNOT be eliminated by a 102(b)(7) provision?

Back 4

a. Breaches of duty of loyalty
b. Acts or omissions not in good faith
c. Intentional misconduct
d. Knowing violations of law
e. §174 violation -- unlawful dividend, repurchase or redemption
f. Any transaction from which director received an improper benefit

Front 5

corps -- how to amend COI?

Back 5

i. Okay so long as amendment would have been lawful and proper to insert in original COI.
ii. Approving amendments?
1. BOD approves first then
2. ABSOLUTE majority of SH

Front 6

corps -- who can adopt bylaws?

Back 6

i. Incorporator, BOD (if authorized), or SHs
1. NOTE SH power to adopt, amend or repeal Bylaws can NEVER be eliminated.

Front 7

corps -- generally, what is the content of a corp's bylaws?

Back 7

i. Bylaws may contain ANY provision, not inconsistent with law or COI, relating to business of corp, conduct of its affairs, and its rights or powers or the rights and powers of its SHs, directors, officers, and employees.
1. NOTE  Bylaw conflicting with DGCL or COI is VOID.

Front 8

corps -- how can bylaws be amended?

Back 8

i. By SH (i) at annual or special meeting or (ii) by consent
ii. By BOD if COI so provides
iii. By implication where Bylaw is uniformly and consistently disregarded

Front 9

corps -- petitioning for annual meeting to be held?

Back 9

a. NOTE  If annual is not held within 13 months of previous annual meeting, SH may petition Chancery Ct to direct a meeting to be held.
i. Chancery Ct’s decision is DISCRETIONARY
1. Mitigating circumstances will be considered.

Front 10

corps -- election of BOD takes place of annual meeting if:

Back 10

2. Election of BOD may take the place of an annual meeting if:
a. Written consent is unanimous; or
b. All directorships that would have been up for election at the annual meeting were vacant and filled by the consent.

Front 11

corps -- who can call a special SH meeting?

Back 11

a. BOD, and
b. Anyone authorized in COI or Bylaws (if no one is specially authorized, only BOD can do it).

Front 12

corps -- who can challenge the validity of a SH vote and what kind of votes can they challenge?

Back 12

1. SH Can challenge validity of contested election; appointment, removal or resignation of any director; and ANY action at meetings which required a vote.
2. Directors  Can challenge validity of contested election; appointment, removal or resignation of any director.

Front 13

corps -- what form must notice of SH meeting take?

Back 13

1. In writing
2. By electronic medium if SH has consented

Front 14

corps -- what must notice of a SH meeting contain?

Back 14

1. Time,
2. Place
3. Date, and
4. Purpose IF a special meeting.

Front 15

corps -- who gets notice of SH meeting and what is timeframe?

Back 15

1. To record SHs entitled to vote at the meeting
2. 10 -60 days before the meeting.
a. 20 -60 days before if:
i. Vote on merger
ii. Vote on sale or all or substantially all of corp’s assets.

Front 16

corps -- what is statutory quorum requirement for SH meetings?

Back 16

1. Quorum = majority of shares entitled to vote, present in person or by proxy.
a. NOTE quorum requirement can be altered in COI or Bylaws BUT may NEVER be set less than 1/3 of shares entitled to vote.
2. NOTE Business canNOT be transacted without a quorum

Front 17

corps -- what is required vote amount to take action at SH meetings?

Back 17

1. Absent specification in statute, COI, or Bylaws:
a. Directors are elected by a plurality;
b. In all other matters, a vote of a majority of shares present (by person or proxy) carries
i. Exception 
1. Eliminate supermajority provision in COI requires supermajority vote
2. COI amendments require absolute majority
3. Merger requires absolute majority
4. Sale of all/substantially all assets requires absolute majority
5. Dissolution requires absolute majority

Front 18

corps -- requirements for a valid proxy? how long is it good for?

Back 18

1. Requirements
a. Written and signed by SH of record
b. Later-dated proxy controls
2. Duration? Unless otherwise provided, proxy is valid for 3 years.
a. NOTE Proxy is FREELY REVOCABLE

Front 19

corps -- what is a voting trust?

Back 19

An agreement among SHs which vests voting rights in a trustee.
1. Must be filed with corporation.
2. Separates voting rights from other attributes of ownership

Front 20

corps -- what is a voting agreement?

Back 20

An agreement between SHs to vote shares in a specified way.
1. No requirement to file with corp
2. No separation of voting rights from other attributes of ownership.

Front 21

corps -- record date: who fixes? when can it be? default in the event none is set?

Back 21

i. BOD fixes record date
1. Record date MUST be 10-60 days before the meeting.
2. If BOD fails to fix a record date record date = day before notice is given.

Front 22

corps -- separate record date for notice and voting?

Back 22

ii. Separate record dates for (1) entitlement to notice and (2) entitlement to vote.
1. BOD now permitted to fix separate record dates.
a. Must be done at time record date for notice is determined.
b. If BOD simply determines a record date for the meeting, it is the record date for both notice and vote.

Front 23

corps -- record date for dividends: who fixes? when can it be? default in the event none is set?

Back 23

1. If fixed by BOD 
a. Cannot precede resolution fixing the date, and
b. Cannot be more than 60 days prior to distribution.
2. If no date is fixed by BOD record date = date of BOD resolution fixing the distribution.

Front 24

corps -- what form may a vote by written consent take?

Back 24

1. On paper, or
2. By means of telegram, cablegram, or other electronic transmission
a. NOTE E-consents not effective until reproduced in paper form AND delivered to the company, UNLESS BOD makes special provision for acceptance of E-consents.

Front 25

corps -- what actions may be taken by SH written consent?

Back 25

ii. What action may be taken by written consent? ANY action which SHs can take at a meeting.
1. NOTE  Right to act by written consent may be eliminated or limited in COI, but NOT in Bylaws.

Front 26

corps -- requirements for action by written consent?

Back 26

1. Vote required = majority of all OUTSTANDING shares entitled to vote (50% + 1)
a. NOTE Not a mere majority of a quorum.
2. Delivered to corp at (i) registered office, (ii) PPB, (iii) agent or officer having custody of minutes of SH meetings.
a. Delivery must be within 60 days of delivery of 1st written consent.
3. Signed by SH of record
4. Notice to non-consenting SHs after delivery.

Front 27

corps -- DGCL 141

Back 27

a. DGCL § 141: The business and affairs of every [DE] corporation shall be managed by or under the direction of a board of directors.

Front 28

corps -- statutory requirements regarding number and qualification of directors?

Back 28

1. Number? Only one required; otherwise, number is set in COI or Bylaws.
2. Qualifications? No statutory qualifications; COI may require director to be a SH and set other reasonable qualifications.

Front 29

corps -- what is cumulative voting? when is it available?

Back 29

a. Only available for election of directors.
b. MUST be provided for in COI.
c. Allows a SH to cast the total number of votes he is permitted to cast for all directors in favor of a single director or more than one director.

Front 30

corps -- term of directors?

Back 30

1. Directors hold office until:
a. Successor is elected and qualified; or
b. Resignation; or
i. Can do so at ANYTIME upon written notice to corp.
c. Removal; or
d. Retirement

Front 31

corps -- how is a director removed?

Back 31

i. Permitted by SH vote at special or annual meeting with or without cause.
1. NOTE  If removal for cause, Director is entitled to present a defense.
2. If BOD is staggered, ONLY removal for cause is PERMITTED.
ii. Directors canNOT remove other directors.

Front 32

corps -- where must provision for a staggered BOD be made?

Back 32

2. Staggered BOD permitted if provided for in (i) COI, (ii) initial Bylaws, or (iii) SH adopted Bylaw.

Front 33

corps --curing a defect in notice of BOD meeting?

Back 33

1. Defects can be waived or ratified, or
2. Presence at meeting constitutes WAIVER of notice.

Front 34

corps -- quorum requirement for BOD meetings?

Back 34

a. Unless otherwise provided, quorum = a majority of directors.
i. Bylaws may NOT set quorum requirement at less than 1/3 of all directors.
ii. Bylaws MAY require ALL directors to be present to meet quorum.

Front 35

corps -- BOD action by written consent?

Back 35

1. Unless otherwise provided, BOD may act by unanimous written consent.

Front 36

corps -- what actions may and may not a BOD committee take?

Back 36

1. A committee may exercise full powers of BOD except for the following, which require full BOD action and approval:
a. Vote to amend COI;
b. Adopt an agreement of merger;
c. Recommend to SH the sale of all, or substantially all, assets of corp;
d. Recommend to SH dissolution or revocation of dissolution;
e. Amend Bylaws;
f. Declare dividend, authorize issuance of stock, or adopt certificate of ownership and merger under § 253 UNLESS authorized by BOD resolution, bylaw or COI.

Front 37

corps -- BOD's duty of oversight

Back 37

i. There is NO independent duty to ferret out wrongdoing of which BOD has no reason to suspect.
1. BOD is entitled to rely on the honesty and integrity of subordinates until something occurs to put them on suspicion that something is wrong. Graham v. Allis Chambers
ii. Oversight = adequate procedures
1. BOD does have a duty to ensure that information and reporting systems exist which would allow directors to obtain accurate information sufficient to reach informed judgments concerning both the corp’s compliance with the law and its business performance. Caremark.
2. What triggers liability for an oversight failure?
a. A sustained or systematic failure of BOD to exercise oversight…such as an utter failure to attempt to assure that a reasonable information and reporting system exists. Stone v. Ritter.

Front 38

corps -- requirements/procedure for a long form merger

Back 38

a. Adoption of merger agreement;
b. BOD approval of merger agreement prior to submission to SH;
c. Notice to SHs of both corps, even if not entitled to vote, at least 20 days prior to SH meeting;
d. Vote of SH of non-surviving corp:
i. Absolute majority of all shares entitled to vote.
e. Execution and acknowledgment of merger agreement;
f. Filing of merger agreement;
i. Alternative to filing merger agreement 
1. Certificate of Merger or Consolidation

Front 39

corps -- what does a certificate of merger or consolidation contain?

Back 39

a. Name and state of incorporation of each corp;
b. Statement that merger agreement has been approved, adopted, etc.;
c. Name of surviving or resulting corp;
d. Any amendments to COI of survivor;
e. Statement that agreement is on file at PPB of survivor, its address, and that copy will be provided upon SH request.

Front 40

corps -- procedure for a short form merger

Back 40

a. If sub merges into parent NO SH vote required.
b. BOD adopts a resolution
c. Certificate of ownership and merger is filed and recorded.

Front 41

corps -- when is there a sale of substantially all of a corp's assets?

Back 41

If the sale of assets quantitatively and qualitatively vital to the operation of the business and is out of the ordinary course of business and substantially affects the existence and purpose of the corp, then it is beyond the power of BOD.

Front 42

corps -- what is the general scope of the duty of care?

Back 42

i. Directors have a duty to act on an informed basis:
1. A duty to exercise care in the decision-making process, Smith v. Van Gorkom; and
a. Directors are expected to:
i. Have reasonable knowledge of the company’s business;
ii. Obtain credible information on each issue; and
iii. Understand the consequences which will flow from each decision before making it.
2. A duty to exercise care in all other aspects (e.g., delegation and oversight).

Front 43

corps -- standard of liability for breaches of the duty of care?

Back 43

GROSS NEGLIGENCE
1. Directors NOT penalized for honest mistake of judgment if they acted with good faith, after reasonable investigation, if judgment appears reasonable at time it was made.

Front 44

corps -- on what are the directors entitled to rely in executing their duty of care?

Back 44

a. Directors are FULLY PROTECTED in relying in good faith upon the records of the corp and upon such info, opinions, reports or statements presented to the corp by any of the corp’s officers or employees, or committees of the BOD, or by other experts or professionals selected with reasonable care.

Front 45

corps -- iii. Examples of Director Failure to Observe the Duty of Care --

Back 45

1. Haste in decision making, Van Gorkom;
2. Lack of preparation (reviewing key docs, etc)
3. Lack of questioning;
4. Lack of involvement;
5. Lack of a meaningful record;
6. Lack of care in dealing with, understanding and reviewing relevant documents;
7. Failure to attend BOD meetings consistently;
8. Failure to implement a corporate info and reporting system, Caremark.

Front 46

corps -- effect of a determination that directors failed to comply with their duty of due care?

Back 46

1. BJR does NOT apply  Burden shifts to Director to demonstrate that the transaction was entirely fair.

Front 47

corps -- 102(b)(7) particulars:

Back 47

1. MUST be in COI; only SHs can put it in COI.
2. Shields ONLY directors from liability, NOT officers or employees.
a. NOTE  Not a shield from an action to enjoin BOD from taking action without exercising due care.
3. It’s an affirmative defense
a. Thus, directors bear the burden of establishing each of its elements.
4. Avoiding the effect of § 102(b)(7)? Plead facts that, if true, allege a breach of duty of loyalty or good faith.

Front 48

corps -- scope of a director's duty of loyalty generally?

Back 48

i. Requires that the best interest of the corp and its SHs take precedence over any interest possessed by the director, officer, or controlling stockholder and not shared by the SHs generally
1. Implicated where a director has a substantial self-interest which is NOT consistent with the interests of the corp.
ii. Self-dealing is NOT forbidden per se.
1. Rather, duty of loyalty requires that self-dealing transactions be ENTIRELY FAIR to the corp.

Front 49

corps -- director compensation and the duty of loyalty

Back 49

a. § 141(h): Directors may fix their own compensation.
i. BUT compensation must be reasonable in relation to the services provided.
1. Reasonableness factors  (i) what similarly-situated execs receive; (ii) whether compensation bears relationship to corporate performance; (iii) ability of the executive.

Front 50

corps -- examples of self-interested transactions implicating the duty of loyalty

Back 50

1. Compensation
2. Transactions between Corp and a Person who Exercises Control over the Corp
3. Corporate Opportunities

Front 51

corps -- b. When does a business opportunity rightfully belong to a corp?

Back 51

4 part test:
i. The corp is financially able to take advantage of the opportunity;
ii. The opportunity is within the corp’s line of business;
iii. The corporation has an interest or reasonable expectation in the opportunity; and
iv. By taking the opportunity, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corp

Front 52

corps -- when can a fiduciary rightly take a corporate opportunity for himself?

Back 52

i. The opportunity is presented to the fiduciary in his personal capacity;
ii. Opportunity is NOT essential to the corp;
iii. The corp holds NO expectancy or interest in the opportunity;
iv. The fiduciary has NOT wrongfully employed the resources of the corp in pursuing or exploiting the opportunity

Front 53

corps -- DE statutory safe harbor for transactions involving interested director(s)?

Back 53

2. § 144: No interested director transaction is void or voidable solely because it is an interested director transaction, provided:
a. It is approved by a majority of fully informed, disinterested directors even though less than a quorum; or
b. It is approved by a majority of full informed, disinterested SHs; or
c. Contract or transaction is shown to be fair to the corporation.
3. Effect of compliance with one of § 144’s 3 safe harbors? Ct will review under BJR standard.

Front 54

corps -- is there a separate duty of good faith?

Back 54

No. i. SUBSUMED within duty of loyalty. Stone v. Ritter.

Front 55

corps -- 2 categories of bad faith behavior by a fiduciary?

Back 55

1. Subjective bad faith -- i.e., fiduciary conduct motivated by an actual intent to do harm; and
a. e.g., backdating stock options, approving “spring loaded” stock options
b. e.g., fraudulent disclosures
2. Failure to act in the face of a known duty to act; a conscious disregard for fiduciary responsibility

Front 56

corps -- what predicate showing must be made when asserting a good faith violation arising out of a director's oversight responsibilities?

Back 56

i. Directors utterly failed to implement any reporting or information system or controls; or
ii. Having implemented such system or controls, directors failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention, Stone v. Ritter.

Front 57

corps -- what is the duty of disclosure generally?

Back 57

i. Directors owe SHs a duty of disclosure based on a materiality standard
1. NOTE Not an independent duty; rather, it flows from duties of care and loyalty
a. NOTEIf claim presents a disclosure breach flowing from duty of care, § 102(b) (7) can exculpate.

Front 58

corps -- when is the duty of disclosure implicated?

Back 58

1. Whenever directors communicate publicly or directly with SHs about corporate affairs, AND
2. Communication concerns material facts

Front 59

corps -- examples of instances in which directors communicate publicly or directly with SHs about corp affairs

Back 59

directors must be honest in:
i. Public statements made to the market;
ii. Statements about the corp to SH without a request for SH action; and
iii. Statements to SH in connection with a proposed SH action.

Front 60

corps -- when does a communication to SHs concern material facts?

Back 60

Reasonable person standard -->
a. Material facts are those facts for which there is a substantial likelihood that a reasonable person would consider them important in deciding how to vote; OR in the case of a tender offer, whether to tender; OR in the case of a merger, whether to demand appraisal.

Front 61

corps -- if circumstances implicate, how is the duty of disclosure complied with?

Back 61

1. Directors must disclose fully and fairly ALL material info within the BOD’s control when they seek shareholder action.
a. NOTE Once partial disclosure is made, full disclosure is require. Arnold v. Soc’y for Savings Bancorp.

Front 62

corps -- to whom are fiduciary duties owed?

Back 62

1. The corporation
2. SHs
a. Common stock holders
b. Preferred stock holders -- Yes, but rights of preferred SHs are generally limited by terms set forth in COI or designation.
c. Convertible debt holders - NO
d. Option/warrant holders - NO
3. Creditors - Generally NO.
a. BUT when a corp is insolvent or within the “vicinity” or “zone” of insolvency, directors’ duties expand and they owe duty to creditors.
i. NOTE Creditors are limited to bringing derivative claims for harm to the corporation; CanNOT bring claims alleging a breach of fiduciary duty resulting in direct harm to themselves.

Front 63

corps -- BJR as a procedural rule

Back 63

1. Procedural  BJR operates as a presumption that in making a business decision the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the corp.

Front 64

corps -- BJR as a substantive rule

Back 64

2. Substantive BJR provides that there is no liability for an injury or loss to the corporation arising from corporate action where the directors, in authorizing such action, proceeded in good faith and with appropriate care.

Front 65

corps -- effect of application of BJR?

Back 65

1. Where a BOD has complied with its duties of good faith, due care and loyalty, a court will NOT substitute its judgment for that of the board if the board’s decision can be attributed to ANY RATIONAL BUSINESS PURPOSE.

Front 66

corps -- requirements for defeating the BJR and the effect of doing so?

Back 66

1. P must show that the majority of the directors who approved the challenged transaction:
a. Had a personal interest in the subject matter of the transaction; or
b. Were under the domination and control of a person with an interest in the subject matter; or
c. Were not fully informed in making the decision; or
d. Did not act in good faith.
2. If P makes this showingburden shifts to directors to show transaction was entirely fair.

Front 67

corps -- what does the entire fairness standard require?

Back 67

i. Requires a showing of fair price and fair dealing
1. Fair Price relates to the economic and financial considerations of the proposed transaction.
2. Fair Dealing includes fairness as to when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of BOD and SHs were obtained.

Front 68

corps -- shifting burden to P to show that transaction is not entirely fair?

Back 68

, burden shifts to P to show that transaction was NOT entirely fair if:
a. Self-interested transaction involving a controlling SH
i. was approved by a diligent committee of disinterested and independent directors; or
ii. was approved by a well-informed majority of the disinterested SHs (majority of the minority).

Front 69

corps -- when does enhanced scrutiny apply?

Back 69

1. Director actions involving a change in control of a corporation, whether pro-active (e.g., BOD seeks to sell corp) or reactive (e.g., defensive action against an unwanted buyer).

Front 70

corps -- what is the two-part unocal/unitrin test?

Back 70

a. Reasonableness - Satisfied by demonstrating that BOD had reasonable grounds for believing that a danger to corporate policy and effectiveness existed; and
b. Proportionality - Satisfied by a demonstration that the actions taken by the BOD were reasonable in relation to the threat posed.

Front 71

corps -- factors to consider under the reasonableness prong of the unocal test?

Back 71

1. Adequacy of price;
2. Nature and timing of offer;
3. Quality of consideration being offered;
4. Impact on parties affected (e.g., are there potential antitrust problems);
5. Likelihood of non-consummation;
6. Questions of illegality;
7. Past actions of bidder in takeover;
8. Negotiability of the offer.

Front 72

corps -- making a determination under the proportionality prong of the Unocal test?

Back 72

i. Court is not permitted to substitute its judgment for that of BOD if BOD response is
1. NOT draconian, and is
a. Draconian = COERCIVE or PRECLUSIVE
2. Within the range of reasonableness
a. Factors to consider  (i) is response statutorily authorized; (ii) routinely made in a non-takeover context; (iii) was response limited and corresponded to degree and magnitude of threat; (iv) were all SHs treated identically as a result of response or were options provided?

Front 73

corps -- enhanced scrutiny of director action when there is a sale of control?

Back 73

The Revlon Doctrine --
1. If BOD decides to put company up for sale, they are duty bound to seek the BEST transaction reasonably available. Revlon.
a. NOTE Highest price is not necessarily the best price.

Front 74

corps -- standard for determining whether BOD has met its revlon duty to obtain the best transaction?

Back 74

a. Adequacy of BOD decision making process, including information on which it was based; and
b. Reasonableness of BOD action

Front 75

corps -- triggering Revlon (when does it and does it not apply?)

Back 75

a. Typically applies when company as a whole or control of the company is being sold.
b. Does NOT apply:
i. When majority SH decides to “take out” minority SHs (no change of control); or
ii. Control of company is with public SHs before and after the transaction.
iii. Stock-for-stock merger in which SHs did not lose opportunity to receive control premium b/c SHs continue to hold shares in merged corp. Arnold.
iv. Where majority SH gives option to purchase his majority share to 3d party b/c control was never with minority SHs and thus were never in a position to receive a control premium. In re Paxson.

Front 76

corps -- what is a no talk provision?

Back 76

Prohibit BOD of target from responding to unsolicited offers from 3d parties:
i. DISFAVORED.

Front 77

corps -- what is a no shop provision?

Back 77

Prevents BOD of target from shopping for a better deal.

Front 78

corps -- what is a window shop provision?

Back 78

Disallows a target from providing info to an unsolicited potential suitor.

Front 79

corps -- what is a fiduciary out provision?

Back 79

Allows BOD to talk and provide info where suitor promises a superior deal.

Front 80

corps -- what is a lock up provision?

Back 80

Gives acquirer the right to purchase prized assets of target at an attractive price or a block of stock in target if deal falls apart for any reason.

Front 81

corps -- what is a termination fee deal protection device?

Back 81

Fees paid by target to prospective merger partner if deal falls apart.
i. Must be reasonable Fees as much as 3.5% have been held to be acceptable.

Front 82

corps -- DE treatment of poison pills

Back 82

a. Issuance is permitted under DE law
b. When issued NOT in response to a proposed transaction  BJR applies.
c. Decision to “redeem” the plan (allow hostile bid to proceed)/Decision to keep pill in place (block hostile bid) subject to Unotrin/Unocal enhanced scrutiny.

Front 83

corps -- major provisions of the DE takeover statute?

Back 83

only applies to publicly traded companies or those w/ more than 2000 shares outstanding.
1. Business combinations (mergers, asset sales, stock transfers) with acquirers are delayed for 3 years UNLESS:
a. approved by target’s Bd. of directors, or
b. acquirers obtain 85% or more of target in a first-step transaction
2. Acquirer can avoid 3-year delay if:
a. obtain Bd. approval, and
b. vote of 2/3 of shares NOT owned by interested stockholders
i. interested stockholder = one who owns 15% or more of target’s stock.

Front 84

corps -- predicate showing that directors must make when a defensive action affects SH franchise in a CONTESTED election?

Back 84

a. When primary purpose of BOD defensive measure is to interfere with or impede effectiveness of SH franchise in a CONTESTED ELECTION of directors
i. Before enhanced scrutiny  show a COMPELLING JUSTIFICATION
1. BOD MUST demonstrate a compelling justification for such action as a condition precedent to any judicial of reasonableness and proportionality. Blasius.

Front 85

corps -- meeting enhanced scrutiny when director defensive action affects the corporate SH franchise?

Back 85

directors must:
i. Identify a legitimate corporate objective served by the decision;
ii. Show that actions were reasonable in relation to that objective;
iii. Show that actions did not preclude SHs from exercising right to vote; and
iv. Show that actions did not coerce SHs into voting in a particular way.

Front 86

corps --when is a controlling SH subject to fiduciary duties?

Back 86

i. Controlling SH subject to fiduciary duties ONLY IF it actually uses its power to control the corp.

Front 87

corps -- long form mergers, controlling/majority SH, and the entire fairness standard

Back 87

1. Entire Fairness Standard APPLIES 
a. Controlling SH causes corp to enter into a merger that eliminates minority SHs in exchange for cash or other consideration.
b. Merger between two companies, both of which are controlled by majority SH.
c. Exception Shifting burden to P to show transaction was not entirely fair
i. burden shifts to P to show that transaction NOT entirely fair if Majority Shareholders implement
1. special committee of disinterested directors;
2. condition transaction on the approval of majority of fully informed disinterested minority shareholders.

Front 88

corps -- invoking the BJR in an otherwise interested transaction involving a majority/controlling SH?

Back 88

1. To invoke BJR, an otherwise interested transaction with a majority SH:
a. Must be fully disclosed; and
b. Have the following protections as preconditions to the transaction:
i. A recommendation by a disinterested and independent special committee which was given sufficient authority and opportunity to bargain on behalf of the minority SHs;
ii. Approval by SHs in a non-waivable vote of the majority of ALL of the minority SHs; and
iii. No threats, coercion, or fraud by the majority SH.

Front 89

corps -- short form mergers involving majority SH. what protection do minority SHs have?

Back 89

1. Absent fraud or illegality appraisal is ONLY remedy available to minority SHs.
a. Entire Fairness does NOT apply.
b. NOTE Full disclosure is still REQUIRED to allow SH to decide whether to demand appraisal.

Front 90

corps -- requirements for tender offer portion of a two-step tender/short-form merger transaction by a majority SH?

Back 90

i. Tender offers by controlling SHs must meet the following criteria:
1. Must be subject to a non-waivable majority of the minority condition;
2. Controlling SH must promise to consummate a prompt § 253 short-form merger at the same price and for the same consideration (as tender offer).
3. Controlling SH must NOT make any retributive threats.
4. Independent directors of sub must be allowed time to hire independent legal and financial advisors to review offer and them make a recommendation to minority SHs.

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corps -- what is "capital surplus"?

Back 91

The amount of value in the corporation in excess of capital.
1. Capital surplus = net assets - capital
a. Net Assets - Total assets minus total liabilities

Front 92

corps -- when can dividends be paid?

Back 92

i. Must be paid from funds available in surplus OR net profits from the present or prior year.

Front 93

corps - when/to whom are appraisal rights available?

Back 93

1. In ANY merger where SHs receive
a. cash or
b. shares OTHER THAN
i. those of a widely-held company OR
1. “widely held” = listed on national securities exchange; or has > 2000 holders
ii. of the surviving company OR
iii. a mix of the two;
2. SH of sub in a short-form merger.

Front 94

corps -- requirements for demanding appraisal and instituting an appraisal action?

Back 94

1. Party seeking appraisal cannot have voted in favor of merger
a. Vote in favor of merger = WAIVER of appraisal rights
2. The Demand
a. (i) Delivery to corporation of (ii) a written demand for appraisal (iii) BEFORE the vote on merger (iv) by or for RECORD stockholders.
i. NOTE Beneficial owners of stock held in “street name” may file appraisal petition in their own name.
3. The Notice
a. Within 10 days of effective date of merger, corp must inform dissenting SHs (i.e., those who furnished a demand for appraisal)
4. The Action
a. Within 120 days of effective date of merger, SH must file petition for appraisal in Chancery Ct.
5. NOTE SH must retain ownership through effective date of merger.

Front 95

corps -- determining whether an individual or derivative action is appropriate?

Back 95

a. Who suffered the alleged harm -- the corporation or the SH individually?
b. Who would receive the benefit of the recovery or other remedy? Tooley v. Donaldson.

Front 96

corps -- 3 Shareholder status requirements for bringing a derivative action?

Back 96

a. P in a derivative suit must be a SH of the corp
i. At the time of transaction complained of; or
ii. Stock must have devolved upon him by operation of law subsequent to the transaction complained of.
b. P must be qualified to serve in a fiduciary capacity as a representative of a class whose interest is dependent upon P’s fair and adequate prosecution of the matter.
c. P remains a SH throughout course of litigation

Front 97

corps -- 2 methods of meeting the demand requirement in a derivative suit?

Back 97

a. SH must have made a demand on corp to institute litigation and demand has been wrongfully refused, or
b. SH demonstrates that demand would be futile and is therefore excused. Aronson v. Lewis.

Front 98

corps -- if P makes a demand for corp to pursue an action, what must demand contain?

Back 98

i. SH’s demand MUST:
1. Identify alleged wrongdoers;
2. Describe basis of wrongful acts;
3. Identify the harm caused to the corp; and
4. Request remedial relief.

Front 99

corps -- how will BOD's refusal of P's demand to pursue an action be evaluated by a court?

Back 99

ii. If demand was properly made and subsequently refused, BOD’s decision to refuse will be protected if it was a valid exercise of business judgment
1. To challenge BOD’s refusal, SH must allege particularized facts which, if proven, will rebut presumption of BJR.
a. May allege facts showing BOD acted in bad faith or fraudulently when refusing demand
b. MUST allege facts showing BOD was grossly negligent when it refused b/c it did not have enough info to make informed decision.

Front 100

corps -- what is the Aronson test to determine whether making a demand on corp to pursue litigation would be futile?

Back 100

1. Court asks whether particularized facts alleged in the complaint create:
a. A reasonable doubt that a majority of BOD are disinterested and independent, OR
b. A reasonable doubt that challenged transaction was otherwise the product of a valid exercise of business judgment.

Front 101

corps -- for purposes of the Aronson test, how is director interest and independence defined?

Back 101

i. Director’s interest -- shown by demonstrating a potential benefit or detriment to the director as a result of the decision.
ii. Director’s independence -- measured on whether the decision is based on the merits or extraneous considerations or influence; a contextual inquiry.

Front 102

corps -- In what situations will Aronson NOT apply to determine whether making a demand would have been futile?

Back 102

Rales Test -->
1. Aronson Test does NOT apply in 3 situations:
a. Where a majority of directors making a business decision have been replaced;
b. Subject of derivative suit is not a business decision (e.g., BOD’s oversight duties); and
c. Decision being challenged was made by BOD of a DIFFERENT corp (e.g., a sub).

Front 103

corps -- Under the rales, when will failure to make a demand be excused?

Back 103

demand will be excused ONLY IF
a. P’s particularized factual allegations
b. Create a reasonable doubt that
c. As of the time complaint was filed
d. BOD could have properly exercised its independent and disinterested business judgment in responding to the demand.

Front 104

corps -- SLC rejection of a demand for corp to pursue litigation: The Zapata Test

Back 104

ii. If SLC decides derivative action should NOT be pursued and files a motion to dismiss, motion will be GRANTED if the Zapata test is satisfied:
1. If SLC is truly independent from Directors who voted for the challenged transaction, AND
2. If SLC acted in good faith and has shown a reasonable basis for its determination, AND
3. The court, exercising its own business judgment, agrees that action should be dismissed

Front 105

corps -- The Internal Affairs Doctrine

Back 105

Choice of law doctrine recognizing that ONLY the state of incorporation should have authority to regulate the corp’s internal affairs.
i. APPLIES to matters that pertain to relationships among or between the corp and its officers, directors, and SHs.
ii. Thus, DE substantive corporate law applies to the exclusion of any other state’s efforts to regulate internal affairs of DE corps.

Front 106

corps -- DE long-arm statute and jurisdiction over directors, officers, and EEs?

Back 106

1. Acceptance of directorship = implied consent to (i) jurisdiction of DE courts, and (ii) appoint of corp’s registered agent as his agent for service of process.
a. NOTE also applies to certain high-ranking officers (CEO, COO, Pres., CFO, Chief Legal Officer, Controller, Treasurer, Chief Accounting Officer, anyone identified in SEC filing as highly compensated executive officer.
b. Obviously, limited to actions for acts/omissions in capacity as director, etc.

Front 107

corps -- scope of permissive indemnification permitted against third party actions?

Back 107

1. THIRD PARTY ACTIONS -- § 145(a) provides indemnification against any threatened, pending or completed action--whether civil, criminal, administrative or investigative--as follows:
a. For expenses, costs of settlement, damages, or fines if the officer or director:
i. Acted in good faith; and
ii. In a manner he reasonably believed to be in or not opposed to the best interests of the corp, and
iii. If a criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.

Front 108

corps -- scope of permissive indemnification permitted against derivative actions?

Back 108

§ 145(b) provides indemnity against derivative actions as follows:
a. For expenses, if the officer or director:
i. Acted in good faith; and
ii. In a manner he reasonably believed to be in or not opposed to the best interests of the corp.
b. If officer or director is found LIABLE Corp canNOT indemnify unless permitted to do so by the court.

Front 109

corps -- when is indemnification mandatory under DE law and for what?

Back 109

Where officer or director is successful in his or her defense of either a third-party (§145(a)) or a derivative (§145(b)) action Corp MUST indemnify against expenses.
1. Success = on the merits, a technicality…anything other than a dismissal with prejudice.

Front 110

corps -- requirements for a proper advancement under DE law?

Back 110

i. Requirements:
1. Officer or director must provide a written undertaking promising to repay all sums advanced if it is ultimately determined that he or she did not satisfy the requisite standard so as to be entitled to indemnification.
ii. Advancement right must be specifically provided in COI, Bylaws or BOD resolution.

Front 111

corps -- how does a SH properly exercise her right to inspect the corporate stocklist?

Back 111

2. To exercise right, SH must deliver to corp a demand:
a. In writing
b. Under oath
c. Stating a proper purpose and
i. Proper purpose = one reasonably related to such person’s interest as a SH.
d. Where SH is not record holder, documentary evidence of beneficial ownership along with a statement of authenticity.

Front 112

corps -- requirements for a SH demand to inspect corporate books and records?

Back 112

1. In writing
2. Under oath
3. Include documentary evidence of beneficial ownership
4. State purpose for which inspection is sought
5. Delivery to corp’s PPB or office of registered agent in DE.

Front 113

corps -- when may chancery ct appoint a corporate custodian or receiver?

Back 113

1. MAY be granted where:
a. SHs are so divided at a meeting they are unable to elect directors whose terms have expired; or
b. Corp is deadlocked (BOD and SHs are both divided) AND corp’s business is suffering or threatened with irreparable harm as a result.
c. Corp has abandoned its business AND has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.

Front 114

corps -- dissolution procedure?

Back 114

i. BOD resolution
ii. SH approval
1. NOTE Unanimous SH consent obviates BOD approval.
iii. File and record certificate of dissolution.