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138 Cards in this Set
- Front
- Back
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Agency
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Consensual relationship between principal and the agent.
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Principal's Duty to Agent
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Select agent; reimburse agent for expenses; can't make agent's job impossible; compensate agent.
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Principal's Power
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(1) Terminate agency relationship unilaterally
(2) Dictate to agent how agent will perform her duties |
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Agent's Duties to Principal
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(1) Fiduciary of the principal - owes to principal the duties of care, loyalty and obedience.
(2) Agent must put principal's interests above own. (3) Duty to obey all reasonable directions of the principal given within the scope of the agent's service. |
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Agent's Power
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Legal power to bind principal in legal relationships with third parties:
(1) Actual Authority (2) Apparent Authority (3) Inherent Agency Power (4) Ratification |
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Actual Authority
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Power of the agent to affect the legal relations of the principal by acts done in accordance with the princpal's manifestations of consent to her:
(1) Express authority (2) Implied authority Can be created by written or spoken words or other conduct of the principal, which reasonably interpreted, causes the agent to believe that the principal desires her so to act on the principal's account. |
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Express authority
(type of Actual authority) |
Explicit words or conduct granting the agent power to bind the principal.
Hint: Look at language or gesture (nodding head yes). |
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Implied authority
(type of Actual authority) |
Implied from words or conduct taken in the context of the relations between the principal and the agent.
Hint: Put yourself in agent's position and ask yourself "what can you reasonably believe to be your scope of your authority" Ex) told agent couldn't do it. Agent cannot reasonably believe that she has authority. But, if Agent didn't hear, then she would reasonably believe that she has authority. - no outsiders involved. |
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Apparent Authority
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Third party's reasonable belief that the principal has given agent authority.
Hint: Put yourself in the 3rd party, and given the manifestations of the Principal, "can you reasonably believe that the agent had authority?" - Manifestations can be in other ways than personal statements by Principal: (1) authorized agent statements; (2) Uniforms; (3) other gestures that could be "traced" by Principal. 2 important Bar exam points: (1) Can create apparent authority even if there is not an agency relationship. (2) Frequently arises when agent is terminated; There is still apparent authority from outside parties that have dealt with that agent (appearances are still created). Must give notice somehow to outside parties. Test: Extraordinary v. Ordinary |
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Inherent Agency Power
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Term used to indicate the power of an agent not derived from authority, apparent auhority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
-In Torts action, Principal acting as an employer is liable for the torts of her employees under doctrine of respondeat superior. (Fair to charge principal with the costs of a tort committed by an agent who was acting on behalf of the principal in the ordinary course of the principal's business.) |
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Ratification
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Principal obligated to a third party by ratifying the act of another who, at the time of the act, lacked the power to bind the principal.
(can be inferred from acts, word, or conduct of the principal showing an intention to ratify. Elements: (1) Principal can only ratify a contract that is legal; (2) Principal can only ratify a contract if the Principal could have made the initial contract (P must be incorporated, and must not violate the statute of frauds); (3) Principal can only ratify if it knows or should have known the contract (i.e., all the details of the deal); (4) Principal can only ratify either all or none of the contract, but not part of the contract. Consequence: Ratification makes this contract valid at the date of the initial contract. "Relation back" doctrine. Alternatives to ratification: (1) Adoption of the contract (but agent is still liable). (2) Novation requires a third-party to agree to substitution (agent will be released from liability) Is it ratification if Principal says "I agree with the deal?" - No. Principal knows the deal or should have known the deal know about all the details of the deal to "approve" the transaction. |
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Respondeat Superior
(master-servant rule) |
Corporation can be bound when an employee commits a tort when the employee is acting within his or her scope of employment.
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Hypothetical (Express and implied authority):
P, a horse breeder, says to her agent A, "A, please go down to the stables, put up a sign 'HORSES FOR SALE', and sell all of my horses for $500 apiece." |
Express authority = to sell horses.
Implied authority = To accept an apparently valid check in payment (as long as P had not previously demanded cash in such transactions) |
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Hypothetical (Apparent authority):
P, horse breeder, says to her agent A, "A, please sell all of my horses except for Secretariat. Whatever you do, don't sell Secretariat." P also sends out letters to prospective buyers saying, "I am selling off my horses. If you are interested, please see A at the stables. He is authorized to act for me." What happens if A sells Secretariat to the recipient of that letter? |
P is bound on the contract under apparent authority (communicating what would appear to a reasonable person to be an intention to give A the authority to sell Secretariat) even though it was contrary to her actual instructions.
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Hypothetical (inherent agency power):
P has delegated the management of her horse farm to A, who regularly buys and sells horses according to his own judgement. If A is a general agent with broad customary authority to sell any horse on the farm, the third person has a basis for believing in A's apparent authority by virtue of his position. What if A sells Secretariat to a stranger who has no basis for believing A has authority to sell P's horses? |
The sale is binding on P by virture of A's inherent agency power. As between the stranger who relied on A's authority (even if unreasonably) and P who had allowed A to regularly sell horses, P should bear the responsibility of A's unauthorized actions.
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Hypothetical (ratification):
What if A has never before sold any horses for P, but nevertheless purports to sell Secretariat to the stranger? And P learns of the sale, she says "Well, I guess that's okay. $500 is a pretty good price for that old stud anyway." |
P has ratified the transaction and becomes bound as if A had been authorized in the first place. In fact, she may be deemed to ratify the transaction if she remains silent and takes no steps to rescind it.
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Corporation's bylaws
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Generally specifies:
(1) Officers (2) Officers' functions (3) Officers' general authority |
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Chief Executive Officer (CEO) v. President
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CEO is the Senior officer with the greatest authority. At one time, the corporation's President was the CEO. More recently, the titles have become less uniform.
- In some companies, president is still the CEO - In others, especially large corporations, the CEO is likely to hold only that title. - In some corporations, the CEO also acts a "chair of the board", the director who presides over baord meetings. |
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Chief Financial Officer (CFO)
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Corporations generally have a CFO, who holds the title of treasurer. The CFO is responsible for corporation's financial records. A CFO can be the CEO (more commonly found in small companies).
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What is the authority of corporate officers?
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Depends on agency theories:
(1) Some cases, courts find that officers have express authority by being appointed to their office by Board (2) Some cases, courts find that officer has apparent authority b/c person dealing with the corporation reasonably believes the officer has authority (3) Some cases, courts find implied authority because of prior dealings between officer and third party that the board never challenged. |
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"Ordinary course of business" (apparent authority)
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Courts assume that CEO or president has authority to bind the corporation in transactions entered into in the "ordinary course of business"
- But only in acts arising in the usual and regular course of business, not for contracts of an "extraordinary" nature. How do you rise to the level of "extraordinary"? - CEO will have to do something that . . . [how can you define between extraordinary or ordinary?] - in some cases when authority is doubtful, third pary has a heightened burden to investigate the officer's authority, especially if third party knows that the given transaction will benefit some officer personally. |
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"Meeting rule"
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Board only has authority to act when assembled at a board meeting. Individual action of persons comprising the board (even if all the board members sign a document) does not bind the corporation.
- Courts have refused to uphold informal action by directors without a meeting in order to protect shareholders. |
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Informal action by board of directors
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Courts nonetheless recognize that informal board action, particular in close corporations, is common. Courts have relief on different doctrines to bind corporations on agreements never approved at formal board meetings.
(1) Unanimous director approval (2) Emergency (3) Unanimous shareholder approval (4) Majority shareholder-director approval |
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Unanimous director approval
(common law exception to "meeting rule") |
When all directors separately approve a transaction, a meeting will usually not serve any purpose. In such circumstances, even if a meeting had been held, the directors would probably not have come to a different result, but would simply have approved the action.
- If all directors are of one mind, the discussion is futile. |
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Emergency
(common law exception to "meeting rule") |
Situations arise where the board must make very quick decisions to prevent great harm or to take advantage of a great opportunity. A meeting is impossible. Corporation must proceed on the opinions of those directors who can be contacted in whatever manner contact may be made.
- emergencies = central to the continuance of the business - Protect 3rd party For corporation: Brown Deer Doctrine supercedes this doctrine (MBCA allows under 8.22 Articles and Bylaws to make it shorter time of notice; and 8.20(b) other means of communication besides attendance). |
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Unanimous shareholder approval
(common law exception to "meeting rule") |
If all the shareholders meet, the conclusion they reach will likely bind the corporation.
- the meeting rule's purpose (to protect shareholders from unwise board action) is met. |
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Majority shareholder-director approval
(common law exception to "meeting rule") |
If the directors who participate in the informal action constitute a majority of the board and own a majority of the corporation's isssued and outstanding shares, the corporation is bound.
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Unanimous written consent
(Statutory exception to "meeting rule") |
MBCA 8.21 allows board action to be taken without a meeting on the unanimous written consent of the directors.
- States have enacted statuory provisions allowing informal director action under some conditions. |
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Board meetings not in person
(Statutory exception to "meeting rule") |
8.20(b)permits board to conduct a meeting by any means of communication (being in person is not required).
- Example: telephone conference. |
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"Brown Deer" Doctrine
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Liberalized statutory exceptions to "meeting rule" preempts common law exceptions to the "meeting rule"
- Since there are statute exceptions to "meeting rule", courts have taken a harder line towards corporations that disregard statutory requirements governing board actions. |
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Notice of meeting
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Notice facilitates personal attendance by directors.
- MBCA section 8.22 Action taken at a board meeting held without the required notice is invalid. |
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Special meeting of the board of directors and shareholders
(notice) |
MBCA 8.22(b) - requires 2 days notice be given of hte date, time, and place of meeting (unless articles or bylaws impose different requirements).
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Regular meeting of the board of directors and shareholders(notice)
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MBCA section 8.22(a) does not require notice.
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Quorum (board of directors and shareholders)
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MBCA section 8.24 - Majority of the total number of directors (precludes action by a minority of the directors). Action taken in absence of a quorum is invalid.
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Committees of the board
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MBCA section 8.25 - Many companies have delegated responsibility for many board functions to committees empowered to exercise the authority of the board. May be permanent or temporary. Functions can be active or passive.
(1) Executive committee - full authority (except declaration of a dividend or approval of merger) (2) Audit committee - selection of company's auditors, scopt of the audit, review of audit results, etc. (3) Finance - responsible for giving advice on financial structure |
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Third-party legal opinion
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Parties entering into a transaction with corporation will require that the corporation's outside lawyers provide an opinion on legal matters affecting the transaction.
- covers corporation's existence, - its good standing under state corporate law, - corporation's power to enter into the transaction, and - corporate official's authority to act on behalf of the corporation. National and state bar associations have developed guidelines for methodology and language. |
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Clean (flat) opinions
(given to third-parties) |
State the lawyer's views in simple, conclusory terms-such as a straightforward statement without reservations that "the corporation has been duly formed."
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Reasoned opinions
(given to clients) |
Lengthier and provide fuller explanations and analysis and used when the facts are unclear or the legal rules are subject to differing interpretations.
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Qualified opinion
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Qualified opinion will state what matters the opinion does not cover or which inquiries were not made.
- Lawyer will give a qualified opinion if his knowledge of the matter, role in the transaction, or level of inquiry is limited - opinion may also be qualified if its scope narrowly focuses on specified matters, such as when an opinion on corporate law compliance states. |
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Opinion liability
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Lawyer is not liable simply because her opinion was mistaken. Instead, it must be shown that the opinion was negligently rendered + that losses were proximately caused by the lawyer's failure to meet the relevant professional standard.
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Opinion costs
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Opinion costs are directly attributable to a particular transaction:
(1) Costs of negotiation (2) Diligence costs - factual investigation (reviewing contracts, litigation dockets, interviewing personnel, visiting plants) required to enable a law firm to render its opinion (3) Direct costs - legal research |
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Reputational intermediary
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Opining law firm pledges its reputation as a warranty of the accuracy of the information contained in the Opinion.
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Proxy voting
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A person who is authorized to vote another's stock shares.
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Unqualified opinion
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Not limited to scope
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Agency and Tort
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Principal is liable for agent's actions. Agent still directly (personally) liable to tort victim.
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Is Principal liable for all the actions of the Agent?
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No. Principal is only liable for actions within the agent's scope of employment.
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What's the difference in consequences between apparent and implied authority?
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Apparent authority: Principal is liable, but Agent acted improperly (did not reasonably believe that he had implied authority).
- The consequence is that the Agent is liable to the Principal, and subject to the lawsuit. - If apparent authority is shown, there is reason for cause to fire the Agent. Implied authority: Principal is liable and agent is not (reasonably believed acted with authority). |
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Shareholders' powers
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(1) Elect directors
(2) Remove and replace directors in some circumstances (3) Right to vote on certain fundamental transactions (mergers, sale of corporation's significant assets, voluntary dissolution of corporation, amendments to Articles, amend bylaws). |
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Fundamental Transactions
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Transactions that change the firm's form, scope or continuity of existence.
Fundamental transactions Trigger shareholder voting rights: (1) Amendment to Articles (2) Significant mergers (3) Sale of all or substantially all of corp's assets (4) Dissolution Voting: (1) Common law = unanimous shareholder approval (2) State statutes = approved by directors + majority/super-majority of its shareholders |
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Veto power
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Shareholder voting rights in blocking fundamental transactions.
Under-inclusive --> Does not involve a fundamental change in corporation's business, notwithstanding the impact of such transactions on the shareholder's expectations. |
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Appraisal statutes
(dissenters' rights) |
MBCA 13.02:
A shareholder can dissent from certain transactions and demand that the corporation pay her in cash the value of her shares as determined by court in an appraisal proceeding (even thought the requisite majority approves the transaction). Test: (not merely b/c shareholder opposes transaction) Appraisal available only when a corporate transaction fundamentally affects share rights + uncertainty about the fairness of the transaction's price. 3 points to appraisal statutes: (1) Every Corp's statute authorizes shareholders to demand appraisal as to certain fundamental changes + to require the corporation to repurchase their stock in cash for its fair value; (2) Corporation statutes vary from state to state on when shareholders have voting and appraisal rights; (3) Sometimes shareholders have voting rights in a transaction, but not appraisal rights. Corporation must pay "fair value" for the shares, under appraisal rights. 13.01(4) defines fair value. Why do we have appraisal rights? - Once upon a time, every shareholder had a veto. But then absolute majority was modified to simple majority rule with appraisal rights. |
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Statutory merger
(including short form merger) |
Elements:
(1) C1 and C2 begin as separate legal entities; (2) C1 and C2 adopt a "plan of merger" 11.02 (3) Plan designates which C is to survive the merger (4) Plan must describe terms and conditions of the merger (5) Plan describes the basis on which shares of acquired C will be converted into shares of surviving C (6) Plan sets forth any amendments to surviving C's Articles (7) Plan submitted to shareholders of C1 and C2 and is approved*. 11.04 * "short form merger" - no vote by shareholders required if surviving C owns at least 90% of acquired C prior to the merger. MBCA 11.05; DGCL 251(a). (8) After approval is secured, plan is filed with state office and merger becomes effective. 11.06. Consequence of statutory merger (automatic): By operation of law, - acquired C ceases to exist, - assets of acquired C becomes surviving C's assets, and - liabilities of acquired C becomes surviving C's liabilities. Voting Rights (by both C1 and C2): - Simple majority of votes at a meeting at which a quorum is present. 11.04(e); 7.25(c). Appraisal Rights: - Acquired C's shareholders = Appraisal rights available if (1) entitled to vote on merger; and (2) not subject to a "market exception" - Surviving C's shareholders = No Appraisal rights unless (1) entitled to vote on merger; and (2) shares do not remain outstanding afterward. |
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Triangular Merger
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Variant form of statutory merger in which surviving C uses a wholly-owned Subsidiary to acquire and hold acquired C's business. Then S and acquired C follow the steps necessary to effect a statutory merger (acquired C merged into S by operation of law).
Benefits: (1) S distributes shares of suriving C to acquired C's shareholders; (2) Surviving C's shareholders do not vote on the merger b/c surviving C is not formally a party to the merger agreement; and (3) S (not surviving C) becomes the owner of acquired C's property and assumes acquired C's liabilities. Voting rights: - Acquired C's shareholders are entitled to vote. - Surviving C's shareholders only has a vote if proposed transaction involves a dilutive share issuance. Appraisal rights: - Acquired C's shareholders if (1) they dissent from merger and (2) do not have a market option, they can exercise appraisal rights. - Surviving C's shareholders = no appraisal rights since they retain their shares in the transaction. 13.02(a)(1). |
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Dilutive share issuance
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Surviving C issues shares in connection with the merger that will comprise more than 20% of surviving C's outstanding shares before the merger. 6.21(f), 11.04(g)(4).
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Share exchange
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Elements: 11.03
(1) Boards of C1 and C2 must approve the "plan of exchange" (2) Plan spells out the terms on which shares of C1 will be exchanged for shares of C2. (3) shareholders of C1 must approve Plan and may seek Appraisal (subject to market exception). 11.04(e), 13.02(a)(2) (4) once approved, plan is filed and shares of C2 are issued to shareholders of C1 Consequence: - C1 becomes a subsidiary to C2. Voting rights: - C1's shareholders must approve - C2's shareholders have voting rights whenever the statutory share exchange involves a diluteive share issuance Appraisal rights: - C1's shares may seek appraisal subject to market exception. - C2's shares do not have appraisal rights even if they are not entitled to vote since they retain their shares. 13.02(a)(2). |
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Purchase of Assets
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Surviving C uses its stock to buy the assets of acquired C.
Elements: (1) Boards of C1 and C2 approve transaction. (2) Shareholders of selling C approve terms of sale agreement, and have appraisal rights subject to market exception. 13.02(a). (3) Buying C's shareholders have voting rights if dilutive share issuance (prior to sale) (4) if corporate combination is structed as an exchange of stock for assets, selling C's assets must be transferred by deed (generating a good deal of paperwork) Appraisal rights: - Buying C's shareholders do not have appraisal rights since buying C is not disposing of assets. 13.02(a)(3) |
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Tender Offer
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C2 can also seek to acquire control of C1 by offering to purchase C1's shares directly from C1's shareholders.
Notes: (1) No approval of C1's board is needed; (2) C1's shareholders approve transaction by individually accepting C2's offer (rather through formal vote) (3) C1's shareholders have no appraisal rights b/c they can refuse to tender shares; (4) If holders of majority C1's shares tender stock, C2 has the power to control C1 and then will seek to acquire remaining shares in statutory or short form merger. Voting rights: - C1 = individual offers - C2 = can make a tender offer without any vote by its shareholders unless dilutive share issuance (issued shares must be authorized by Articles) 6.03(a); 6.21(f) |
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De Facto Merger Doctrine
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Some courts have looked beyond the form of the combination, and recognized shareholder rights if the substance of the combination is that of a merger.
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"Transaction in control"
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ALI Principles 6.01(b) adopted a functional approach to determining shareholder voting and appraisal rights in a corporate combination:
Shareholders are entitled to vote on any transaction that qualifies as a transaction in control, and entitled to appraisal rights. |
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Meeting Date
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Annual meeting: Corporation's bylaws fix the date of the annual meeting. MBCA 7.01(a).
Special meeting: Corp. statutes provide that the board of directors, owners of 10% of shares, or any person authorized by Articles/bylaws may call a special meeting of shareholders. MBCA 7.02(a). |
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Record date
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Board exclusively has the power to set a "record date" prior to the meeting and provide that only shareholders "of record" as of that date will be entitled to vote at the meeting to satisfy the Notice requirement. MBCA 7.07.
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Simple majority
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More for than against.
- dissentions and absence = nothing. Ex) out of 50, more for than against |
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Absolute majority
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Absolute majority of all people present
- dissentions = no vote. OR Absolute majority of all people who can vote - dissentions = no vote - absence = no vote Ex) out of 50, need 26. |
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Removal of directors for cause
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Shareholders can vote to remove a director for cause only after such director has been given:
(1) adequate notice of charges and (2) full opportunity of meeting the accusation MBCA 8.08 *Required to be in Articles to allow "removal for cause" |
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Removal of directors without cause
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Charges, standing alone, must be legally sufficient to justify the ousster of the director by the stockholders:
(1) Charge that directors desired to take over control of the corporation is not reason for ouster; (2) Charge of lack of cooperation is not a legally sufficent basis for removal of cause. |
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Poison pill (rights plan)
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Makes any hostile acquistion of a corporation prohibitely expensive, unless the target company's board approves the acquisition.
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Rights plan
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A Rights plan: footnote pg. 444
(1) Distribution to each common shareholder of one Right to purchase preferred stock; (2) Rights attach to the common stock; (3) Each Right initially entitles the holder to purchase a given amount of preferred stock for a specified price (4) Price is set to be unrealistically high |
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Shareholder Inspection Rights
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COMMON LAW:
Shareholder has the right to inspect corporate books adn records deriving from her equitable owenrship of the corporation's assets. - minutes, documents, contracts, and papers of the corporation Limit to Shareholders' rights: S can only exercise right to inspect at -- (1) reasonable times and places; and (2) only when inspection is for a "proper purpose" STATE STATUTES: Provide for a right of inspection but bary widely - some courts codify common law right. N.J./Colo. - others impose limits on which shareholders are eleigible to assertt the right and which records are subject to inspection. DGCL 220(a). - many states limit inspection rights to shareholders who own a certain percentage of corp's shares or held shares for a minimum period. NY MBCA 16.02 grants inspection rights to beneficial owners as well as shareholders of record, but divides corporate records into two categories: (1) Articles of incorporation, bylaws, minutes of shareholder meetings, and like documents. 16.01(e), 16.02(a). (2) For Minutes of board meetings, accounting records, or shareholder list, shareholder must ahve a proper purpose and describe wtih "reasonable particularity" that purpose and the records to be inspcted, which records must be "directly connected" with that purpose. 16.02(b). REMEDY: Shareholder seking inspection = writ of mandamus - corporation that obstructs shareholder's right to inspect must pay shareholder's costs (atty fees) unless corp can prove that it acted reasonably. 16.04(c). |
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Proper Shareholder purpose
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Statutes define proper purpose vaguely = "purpose reasonably related to such person's interest as a stockholder". DGCL 220(b); Official comment to MBCA 16.02.
Auer. Improper purposes: (1) obtain business secrets or aid competitor (2) secure business prospects or investment or advertising lists (3) to find technical defects in corporatie transaction (4) no right to inspection if the shareholder's purpose is "idle curiosity." |
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Close corporation statutes
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MBCA 7.32, 8.01(b) = presume all corporations are alike but expressly to authorize close corporations to adopt governance structures that vary from the traditional model.
DGCL 341-356 = Allows corporation to elect treatment under a special statutory regime if it meets certain tests. |
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Close corporation or Closely-held corporation
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A close corporation is:
(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation. |
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Straight voting
(method of election of directors) |
Each share is:
(1) entitled to one vote for each open directorship, but (2) limited in the number of votes she may cast for any given director to the number of shares she owns. *Default rule. MBCA 7.28(b). |
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Plurality vote
(election of directors) |
Those who receive the most votes are elected, even if they receive less than a majority.
*Default rule. MBCA 7.28(a). *This means any shareholder controlling 51% of shares may elect all the members of the board. |
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Cumulative voting
(method of election of directors) |
Allows shareholder groups to elect directors in rough proportion to the shares held by each group and thus to be guaranteed minority representation on the board.
*each share carreis a number of votes equal to the number of directors to be elected, but shareholder may "cumulate" her votes if Articles provide so. MBCA 7.28(b). *may cast all her votes for one candidate or allocate them in any manner among a number of candidates = formula = Text pg. 1202 |
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Majority vote
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?
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Class voting
(method of election of directors) |
Divides voting stock into two or more classes, each of which is entitled to elect one or more directors.
MBCA 6.01(c), 7.21(a)(a share is a share is a share unless you provide otherwise); DGCL 102(a)(4). |
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Shareholder Voting Arrangements
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Basic purpose is to bind some or all of the shareholders to vote together.
* Risk = voting power is concentrated in the hands of persons who do not own shares. 3 classes of devices to limit or control the manner in which shares will be voted: (1) voting trusts, (2) irrevocable proxies, (3) vote pooling agreements |
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Voting trust
(contract) |
Shareholders create a voting trust by (1) conveying legal title to their stock (2) to a voting trustee pursuant to (3) the terms of a trust agreement.
Pros: (1) Transferable (2) Entitles the owner to receive whatever dividends are paid on the underlying stock. Risks: Allow corporate decisions to be made by persons who have so little at stake that they many not enact policies consistent with the corporation's best interests. DGCL 218 |
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Irrevocable proxy
(contract that does not require consideration) |
(1) Shareholder (2) gives a proxy vote of her shares (3) to someone else and (4) gives that person entire discretion.
* Shareholder grants the proxy irrecovable subject to contingency or passage of time. MBCA 7.22(d) |
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Vote pooling agreement
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Two or more stockholers (1) agree to act jointly in exercising their (2) voting rights (3) on designated questions or on all questions that come before the shareholders.
MBCA 7.31(b) provides that voting agreements may be specifically enforceable and may provide its own enforcement mechanism. |
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High voting requirement
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Control device to allow one or more participants to veto all board decisions.
(1) unanimous vote (2) supermajority agreement |
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Supermajority agreement
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80% of the directors must approve board action.
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Share transfer restriction (STR)
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Preserve ownership and control structure of a close corporation
(1) Ensure desired balance of control (2) Creates a market for otherwise illiquid shares. |
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Consent STR
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Transfers can be conditioned on the consent of corp or shareholders as long as it is not unreasonable.
MBCA 6.27(d)(3); DGCL 202(c)(3) |
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First-option STR
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Offer to corporation or shareholders made at price and on terms fixed by agreement.
MBCA 6.27(d)(1); DGCL 202(c)(1) |
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Right-of-first-refusal STR
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First must be offered to remaining shareholders proportionality at same price and on the same terms and conditions offered by outside offer.
If any shareholder declines to purchase, allocation is given proportionately to remaining shareholders. |
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Mandatory buy-sell agreement
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Compels corporation or remaining shareholders to purchase shares ont eh occurrence of specified events.
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Squeezeout/Freezeout/Forceout
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Freezouts: isolate minority shareholders from corporate participation.
* Forcing the minority to sell to (or buy from) the majority on unfavorable terms. Forceouts: Bolder. Majority can manipulate the fundamental structure of the corporation and forcibly eliminate minority interests. * Dissolution Squeezout (close corporation): Traditional corporate model gives the majority discretion to elect directors. Methods: (1) Minority forced to sell out at less than fair value; or (2) Deprive minority stockholders of corporate offices and of employment with the corporation |
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Market-out
(remedy) |
Option to sell into a liquid trading market is unavailable for a close corporation. Thus, the only "viable" market for minority shareholders is fellow shareholders.
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Dissolution
(remedy) |
Corporate statutes provide that corporation can be dissolved with approval of the board of directors and shareholders.
MBCA 14.02-14.07. Corporation sells off its assets; pays off creditors; and distributes remainder to shareholders. |
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Involuntary dissolution
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Modern statutes grant court power to dissolve a corporation if a shareholder can establish that:
(1) directors are deadlock and deadlock is inuring the corporation; (2) shareholders are deadlocked + no director has been elected for 2 years; (3) corporate assets are being wasted; or (4) thos in control of the corporation are acting in a manner that is illegal, oppressive or fraudulent. MBCA 14.30(2). |
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Board deadlock/shareholder deadlock
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Board deadlock:
Board of directors cannot agree + business suffering as a result. MBCA 14.30(2) Shareholder deadlock: Shareholders have been unable to elect new directors for a specific period, such as two consecutive annual meetings. MBCA 14.30(2)(iii). |
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Oppression
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When is majority conduct oppressive?
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Business purpose rule
(BJR protects majority) |
Test: Whether controlling group can demonstrate a legitimate business purpose for its action.
Courts must weigh the legitimate business purpose against the practicability of a less harmful alternative. - Wilkes v. Springside Nursing Home, Inc. |
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Equal opportunity rule
(partnership-type duties) |
Partners share in management and profits and owe each other duties of "utmost good faith and loyalty."
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Custodian
(deadlocks) |
Courts appoint custodians to act as mediators to continue the business indefinitely for the benefit of shareholders. DGCL 352
Someone comes in and runs the business (conservative decision maker). Power goes to the "new director" and has to deal with his or her own decisions. |
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Provisional director
(deadlocks) |
Courts appoint provisional directors to act as a deadlock breaker. Courts add another director who gets to vote.
DGCL 353 Power goes to the tiebreaker, but now the current directors have to deal with the results. |
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Statutory buyout
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MBCA permits majority shareholders in a close corporation to avoid dissolution by electing to buy out at "fair value" the shares of a shareholder who petitions for involuntary dissolution.
- MBCA 14.34 |
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“Utmost good faith and loyalty” test
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Stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. Shareholders owe each other a strict good faith duty.
- Donahue (Mass) |
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Shareholder oppression doctrine
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Doctrine protects inority from the improper exercise of majority control.
Majority perspective: A perspective that focuses primarily on the conduct of the majority using the legitimate business purpose test. Minority perspective: A perspective that focuses primarily on the effect of that conduct on the minority shareholder. |
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“Reasonable expectations” test
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(A) Reasonable under circumstances
(B) Central to reason for joining Oppressive actions arise when the conduct substantially defeats the "reasonable expectations" held by minority shareholders in committing their capital to teh particular enterprise: (1) employement; (2) share earnings; (3) place in corporate management (4) some other form of security. - Matter of Kemp & Beatley (NY) |
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Management Control
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Existing management appoints proxy committee. Proxy committee elects directors.
Thus, control will be in the hands of the existing management even though its share in the ownership is negligible. |
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Berle-Means corporation
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Control rests with the board of directors whom the shareholders had elected. Thus, directors would act in their own self-interest rather than the best interest of the shareholders.
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"Nexus of Contracts"
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Investment is a voluntary activity and relationships among shareholders and between shareholders and managers should be viewed as essentially contractual in nature.
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Contractual theory of the corporation
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Privat contracts, and where the role of the state is limited to enforcing contracts.
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Final period transactions
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Where there is no market after the transaction (i.e., merger), managers may rationally conclude that it is in their best interest to benefit themselves at the expense of the shareholders.
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Shareholder primacy model
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The corporation should be run for the shareholders:
(1) Shareholders are viewed as the "residual claimants"; (2) Shareholders are the "owners" of the corporation. |
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Fair corporate suffrage
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Fairness is achieved by providing sufficient information to investors to allow them to make an informed choice.
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Collective action problem
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Shareholders do not discover a reason for concluding that disapproval will avert a corporate harm or benefit from larger gain every time they read a proxy statement.
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Street name
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Ownership of securities are recorded in "street name"
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Proxy solicitation
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Federal proxy rules only apply to proxy solicitations.
SEC Rules 14a-1: (1) The obvious = informational document accompanying the proxy card (2) Request to sign = any request for a proxy even if a proxy card does not accompany it (3) Request not to sign = any request to not sign or to revoke a proxy (4) The Slly = any other communication "under circumstances reasonably calculated to result in shareholders signing, not signing, or revoking a proxy. |
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Exempt solicitation
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In 1992, SEC amending 14a-2 to exempt certain classes of solicitation from the filing requirement:
EXEMPT SOLICITATIONS BUT STILL SUBJECT TO PROXY FRAUD (1) Solicitations by persons not seeking proxy authority and without a substantial interest in the matter. Rule 14a-2(b)(1) (2) Nonmanagement solicitations to less than 10 persons. Rule 14a-2(b)(2) (3) Advice by financial advisors in the ordinary course of their business, provided they disclose any interest in the proxy contest and receive no special fees from others for giving the advice. Rule 14a-2(b)(2). EXEMPT FROM PROXY RULES, INCLUDING PROXY FRAUD (1) Communications by brokers to beneficial owners seeking instructions on how to vote the owners' shares. Rule 14a-2(a)(1) (2) Requests by beneficial owners to obtain proxy cards and other information from brokers that hold their shares. Rule 14a-2(a)(2) (3) Newspaper advertisements that identify the proposal and tell shareholders how to obtain proxy documents. Rule 14a-2(a)(6). |
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Institutional investor
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Manage other people's money:
- private pension funds (unions would be the most angry if there was repricing = workers take cut, but management get bonuses) - closed and investment trusts (would sell if there was repricing) - life insurance companies - property and casualty insurance companies - nonpension fund money managed by banks and foundation - mutual funds - state and local retirement funds |
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Registered or reporting company
(Sections 12(a), 12(g)) |
Proxy rules apply to companies whose securities are registered under section 12 of the Exchange act.
Types: Listed Companies and OTC companies |
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Listed company
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Rule 12(a):
Companies who voluntarily lists its securities (debt or equity) on a national stock exchange. |
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OTC company
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Rule 12(g):
Companies whose securities (equity) are traded on OTC markets. Company > $10 million in assets + 500 equity shareholders. |
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"Chain of communications" theory
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Communication that was reasonably calculated to influence shareholders' votes, and thus a "solicitation" under hte proxy rules even though it did not mention proxies.
-- LILCO Current 1992 SEC rules would exempt this communication if the speaker neither seeks authority to act as a proxy nor requests a proxy card. |
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Proxy statement
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Rule 14-3(a).:
(1) Schedule 14A information (2) Set of itemized instructions on the information required in the proxy statement Information depends on who is soliciting the proxy: (1) Management = Info about: corporation, background of all director nominees, mangement's compensation and conflicts of interest, and any other matters being voted on (2) Nonmanagement = info about: themselves, background of their nominees, and any other matter that they seek a proxy. |
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Proxy card
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Rule 14a-4: (form)
(1) Who is soliciting it (2) Matterst o be acted on (3) Space for it to be dated |
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Proxy holder
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Shareholder can give proxy holder discretionary voting power if the proxy card states in BOLDFACE type "how the proxy holder intends to vote."
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Proxy
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SEC defines "Any action that gives or withholds authority concerning issues on which shareholders may decide."
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"Common carrier" obligation
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Rule 14a-7:
Management must mail any shareholder's soliciting materials if the shareholder agrees to defray the corporation's reasonable expenses in forwarding the materials. |
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Shareholder proposal (under Rule 14a-8)
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Shareholders can propose their own resolutions through the company-financed proxy machinery AT COMPANY'S EXPENSE.
Rule 14a-8 Procedures: (1) Shareholders must submit proposals 120 calendar days before the date proxy materials were sent for last year's meeting (2) Management must include it in the company's proxy mailing (3) Proposal can be up to 500 words |
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Stock option v. Right of first refusal
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Stock option = option to purchase stock at a pre-determined price. (Guaranteed price.)
Right of first refusal = Price whatever seller wants to sell at. (usually to match another buyer's price). |
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Duty of disclosure when corporate fiduciaries seek shareholder action.
(Delaware) |
Director is required to make a written statement to shareholders concerning the condition of corporation to disclose all material facts. Hall.
Duty of disclosure expanded to include majority shareholders (duty of complete candor to disclose all germane facts to minority shareholders). Lynch. Duty of candor applies to dorector and controlling shareholders in the context of shareholder voting. Lacos Land Co. Controlling shareholder has a duty of disclosure which emanates from the duty of fair dealing. Kahn. Those not in a fiduciary relationship with shareholders do not owe them a duty of candor. Zirn. Duty of candor is applied when directors or controlling shareholders place the shareholder in a position in which she has to decide whether to: (1) sell her stock or seek appraisal (2)in a traditional merger (3) a tender offer by a controlling shareholder (4) tender offer by the corporatin for its own shares (a self-tender). Lynch. (5) Short-form mergers, even though no shareholder vote is required since appraisal rights are available. Shell. Duty of candor = directors are under a fiduciary duty to disclose fully and fairly all material infomration within the board's control when it seeks shareholder action. Stroud. |
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Duty of disclosure when corporation communicates to shareholders.
(Delaware) |
Directors who knowingly diseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances. Malone.
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Materiality under state disclosure duty.
(Delaware) |
Fiduciaries must disclose all material information.
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TSC v. Northway (total mix) test for materiality
(Delaware) |
(1) There must be a substantial likelihood that a reasonable shareholder would consider the omitted material fact important in deciding how to vote.
(2) Disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. Merger: Once defendants traveled down the road of partial disclosure of the history leading up to the Merger . . . they had an obligation to provide the stocksholders with an accurate, full and fair characerization of those historic events. Arnold (motion for summary judgment). |
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Private actions for false or misleading proxy statement.
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State law traditionally has provided limited redress. Federal courts have sought to fill this gap by implying a private federal cause of action.
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Action for deceit
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State law of deceit:
Shareholder can sue those who fraudulently misrepresent material facts on which the shareholder rely to their detriment, which reliance was the cause of actual shareholder losses. Must prove (1) proxy statement contained an actual misrepresentation of fact; (2) management actually knew of the falsity of the representations; (3) he and the other shareholders actually read the proxy disclosures and justifiably relied on them; and (4) shareholders suffered losses because of their reliance. Corporate fiduciary duties: Shareholder can sue directors who breached their duties of care or loyalty by misrepresenting information to shareholders. Must do (1) bring a derivative suit on behalf of the corporation; (2) bringing and maintaining th suit involves procedural requirements (demand on the board, security bond for expenses, and potential board dismissal); (3) overcome BJR; and (4) prove directors had been grossly negligent, fraudulent, or self-interested. |
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SEC Rule 14-9 cause of action for fraud
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Prohibits proxy solicitations that contain any statement which is false or misleading with respect to any material fact.
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Borak rule
(broad implied-remedy theory) |
Shareholder has an implied cause of action to challenge a corporate transaction approved by a proxy solicitation that violates the SEC antifraud rule. Under section 27, the federal district courts have exclusive jurisdiction over actions to enforce any liability or duty created under the Exchange Act and prescribes service of process and venue requirements for these actions.
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Fact v. Opinion
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Misrepresentatin or Omission (fact):
(1) applies to statements in a proxy solicitation that is false or misleading or omits material fact in order to make the statements not false or misleading (falsehoods and half-truths) (2) silience is not actionable Statements of Opinions, Motives, or reasons (opinions): Virgina Bankshares test |
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Virginia Bankshares test for actionability of statements of opinions or reasons.
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An opinion by the board must both:
(1) misstate the board's true beliefs AND (2) mislead about the subject matter of the statement, such as the value of the shares in a merger. |
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Loss Causation
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In proxy fraud cases, federal courts have required that the challenged transaction have caused harm to the shareholder.
In merger: loss causation = stock price decreased b/c of merger. |
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Transaction causation
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Proxy soliciation be an essential link to the accomplishment of the transaction. For instance, there can be no recovery if the transaction did not depend on the shareholder vote.
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"Shame facts" theory of transaction causation
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Minority disapproval would have shamed the board to act differently.
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"Sue facts theory" of transsaction causation
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Minority disapproval would have allowed a suit to block the merger under state law.
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