Corporations Checklist & Short Outline

Issue Checklist AGENCY

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Ѧgent?

[1] manifestation of consent of consent P‐>Ѧ, Gorton [2] act on behalf of behalf of P, P, Gorton [3] subject to P's control, Cargill [4] Ѧ consents to so act P Liable on K Due to Ѧ's Actions? Actual Authority (P‐>Ѧ) ○ Express ○ Implied, Mill Street Church (hire 2nd person) Apparent Authority (P‐>3rd) ○ Express, Dweck v. Nasser (lawyers) ○ Implied, 370 Leasing (salesman inherently) behalf of P P Inherent Authority: solely agency [1] position/industry custom [2] on behalf of ○ Undisclosed principles, Watteau v. Fenwick (no manifestations from P) Ratification: [1] P affirming with intent + P's full knowledge [2] legal effect necessary ○ Botticello (accepting $ = implied ratification) Estoppel : appearance [1] 3rd party changed [2] detriment [3] reliance ○ Hoddeson (imposter salesman) Ѧ Liable on K? Disclosed P = no liability Ѧ can be liable: ○ Intent to bind ○ No authority to K ○ Non/partially disclosed P, Atlantic Salmon (disclose + ID; actual knowledge) P Vicariously Liable for Ѧ's Tort? [1] Only if P's if P's Ѧ, and: ○ [2] Servant or indep. contractor? □ Master‐servant = control, Gas Station Cases Cases,, Murphy v. Holiday Inn (instrumentality) Indep. contractor = risk, Gas Station Cases □ Servant – [3] liable if scope if scope of Ѧ's employ [A] type of work, of work, Clover v. Snowbird Ski Resort (frolic/detour); Bushey (foreseeability) □ [B] time space, Manning (baseball game) □ [C] purpose serve P, Manning (intentional torts) □ [D] exceptions outside scope: P intended/reckless/non‐delegable/reliance on □ apparent authority Indep. Contractor – [4] not liable unless [A] P retains control □ [B] employs incompetent, Majestic Realty (bad @$ =/= incompetent) □ [C] inherent danger/non‐delegable, Majestic Realty □ Ѧ Violated Fiduciary Duties? Duty of Care of Care: paid = ind. stds. Duty of Loyalty of Loyalty ○ Conflicts of Interest of Interest (bribes) ○ Secret Profits, Reading (profits using army) ○ Business Opps., Singer (referral fee w/o disclosing) ○ Grabbing & Leaving, Town & Country 

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PARTNERSHIP

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Partnership? Shared control + shared profits, Fenwick Partnership by Estoppel = [1] representation + [2] reliance, Young Partnership Rights + Liabilities? Interests (profits + surplus), Putnam (only assign all or none) Specific property Management Liability (rank = non‐partner creditors > partner creditors > capital > profits) Partner Violated Fiduciary Duties? Duty of Care: of Care: grossly negligent/intentional Duty of Loyalty of Loyalty ○ Conflicts of interest of interest ○ Account partnership opp., Meinhard (min. duty disclose ) ○ Grabbing & leaving, Meehan (firm partners lying) Partner Has Right to Manage/Authority to Bind? Management: equal ○ Ordinary business decision: majority Deadlock = no change, National Biscuit ○ Extraordinary: unanimous Authority to Bind: [1] by all agents + [2] apparent business usual way, unless [3] no authority + 3rd knows this, compare National Biscuit Co. v. Stroud (P had actual authority b/c deadlock on ordinary business), with Summers v. Dooley (opposite) Tort Liability: partnership liable ordinary business, see Moren Partnership Ending? Dissolution: by [A] act / [B] operation of law of law / [C] court order (frustrated/bad conduct/not practicable) ○ Buy‐sell agreement: "I split, you choose" bag of weed of weed Wrongful Dissolution: Owen v. Cohen (wrongful b/c not term) Fiduciary Duties: Page v. Page (dissolve only to profit) UPA Winding Up = selling assets, paying creditors, dividing, Prentiss (paper dollars OK) Kovacik)) Dividing Losses: default share losses proportional to profits, RUPA (rejecting Kovacik ○ Kovacik only: [1] 1 service & 1 capital + [2] service no salary Partner Liable in LP, LLP, LLLP? LP: >1 GP + >1 LP ○ GP personally liable ○ LP's liability::LP's contributions, unless control, Holzman v. De Escamilla (pretending GP liable b/c controlled plants grown/firing/bank $) LLP: ~GP, but partners not liable LLLP: ~LP, but GP liability limited 

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CORPORATIONS

1. Pre‐Incorporation Liability? • Promoter (Ѧ) Fiduciary Duties ○ Arms length OK, Ѧ must disclose P, Atlantic Salmon • Ѧ's Liability on K ○ 3rd doesn't know = Ѧ bound by K ○ 3rd knows yet‐to‐be‐formed corp. Corp. bound when adopts K Ѧ liable unless 3rd intent/released Ѧ liable if never if never formed • De Facto Corp.: [1] good faith try + [2] legal right to incorp. + [3] acted ~corp. • Corp. by Estoppel: 3rd [1] thought corp. + [2] deny corp. = windfall to 3rd, Southern‐Gulf Gulf Marine Marine Co. 2. SH Limited Liability? • SH Limited Liability: unless corp. used only as personalѦ [MBCA MBCA]] • Piercing Corporate Veil: ○ [1] unity interest + ownership [A] corporate formalities [B] commingling $ [C] under‐capitalization [D] shared assets ○ [2] not PCV sanctions fraud/promotes injustice, Sea‐Land Services (must be wrong > not a able to collect debt) • Alter Ego Theory: SH liable merged b/c [A] control [B] dummy corp. [C] purely personal goals, Walkovszky (no PVC b/c NYC cab purpose undercapitalized but corps. =/= only SH's personal benefit); Sheffield (alter ego = parent liable for controlled subsidiaries but =/= each subsidiary liable for others) • Enterprise Liability: recover A or B ○ [1] Corp. A<‐‐‐lack horiz. formalities‐‐‐>Corp. B ○ [2] same owner • Reverse Veil Piercing: A liable for B, Sea‐Land Services (no formalities, all corps. 1 bank, same office) ○ [1] Owner<‐‐‐ lack vert. formalities‐‐‐>Corp. A ○ [2] Owner<‐‐‐ lack vert. formalities‐‐‐>Corp. B • Parent‐Subsidiary Liability: if control if control ~ alter ego, Silicone Gel (fraud/injustice not req. in tort ) • LP w/corp. GP: OK if careful, if careful, Frigidaire (tax shelter LP's disclosed creditor assumed risk) 3. SH Derivative Action Allowed? • Direct: OK, Grimes (who injured + relief) • Derivative: Π = SH @ time of wrong of wrong + suit Bond, Cohen (forum state law) ○ [A] Universal Demand = required / 90 days [MBCA MBCA]] Dismissed if not if not corp.'s interest □ Unless no good faith/investigation/indep. ƁΩƉ review: □ [a] full ƁΩƉ w/indep. quorum = SH's ßοǷ [b] ind. subset appointed by indep. = corp.'s ßοǷ □ [c] court‐appointed indep. = SH's ßοǷ □ ○ [B] DE/NY Demand = required unless futile (excused) DE futile [Grimes Grimes]: ]: Π's ßοǷ reasonable doubt [a] maj. ƁΩƉ $/family interest [b] maj. □ ƁΩƉ no indep./controlled [c] underlying transaction no BJR NY futile [Marx Marx]: ]: Π's ßοǷ allege with particularity [a] maj. ƁΩƉ interested [b] ƁΩƉ □ not informed [c] underlying transaction no BJR SLC Dismissal = OK after demand excusal if: DE SLC [Zapata Zapata]: ]: Δ's ßοǷ [1] independent & good faith + [2] court's BJR □ NY SLC [Auerbach Auerbach]: ]: Π's ßοǷ [a] SLC interested [b] not informed □ ○ [C] Wrongful Refusal = BJR unless Π's ßοǷ [1] not indep. [2] no due care Demand made & refused = can't argue excused, Grimes   

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FIDUCIARY DUTIES

1. Questioning Corporate Decision? • BJR: SH wealth max = deference ƁΩƉ, unless ƁΩƉ breach DoL /DoC, compare Shlensky v. Wrigley (any reason BJR), with Dodge v. Ford (Ford fucked himself) • Entire Fairness: breach fiduciary duty, but no liability if entire transaction [procedurally and substantively] fair, compare Cinerama ($, timing, negotiation, structure, disclosure, approval by ƁΩƉ/SHs), with Van Gorkom (double fail =/= entire fairness) 2. Beached Duty of Care? • Duty of Care: [1] good faith + [2] reasonable belief corp.'s best interests corporation [MBCA] ○ Egregious Decisions: Kamin v. Amex (misjudgment OK, only liable mal/nonfeasance) ○ Insufficient Process: Van Gorkom (grossly negligent not OK b/c talk merger 20 mins w/o inquiry/expert advice) ƁΩƉ's Obligations: Cinerama (CEO's good job =/= ƁΩƉ relieved duty deliberate + market test) ○ ○ Inattentive Director: Francis v. United Jersey Bank (100% nonfeasance) • ƁΩƉ Oversight/Compliance w/Law [A] utter fail implement control system [B] consciously fail to monitor, compare Caremark (ƁΩƉ conscious decision no compliance prog. = BJR), with Stone v. Ritter (opposite) Sarbanes‐Oxley: sr. managers + ƁΩƉ proactive oversight ○ 3. Breached Duty of Loyalty? • Interested Transaction (self ‐dealing): conflict of interest = no BJR, but OK if entirely fair ○ Bayer (hire wife sing commercial entirely fair) ○ Benihana (director on both sides of table no matter b/c ƁΩƉ actually knew) • Usurping Corporate Opportunity =/= normal DoL test ○ DE Test [Broz]: [1] crop. has $ [2] line of business, compare Martha Stewart (sell stock =/= line of business), with eBay (IPO stock line of business ancillary but part of asset strategy) [3] corp. interest/expects [4] conflict‐of ‐interest, Broz (disclosure not needed) [ALI]: ○ [1] corporate opportunity = [A] all insiders, from corp. [B] sr. execs, "closely related" [2] insider take opp. OK if: [A] disclosed [B] corp. rejected • Controlling SH Actions: BJR unless self ‐dealing (detriment minority), then entire fairness, Sinclair Oil Corp. (Π showed self ‐dealing in breach of K, Δ's ßοǷ entire fairness); Zahn v. Transamerica (redemption OK, no t disclosing windfall to Class A = usurping opp. to convert) 4. Ratification? • Counting Votes ○ Quorum = dis + interested ○ Votes = only interested • Ratification [Del. 144]: disclosure material facts ○ [A] maj. disinterested ƁΩƉ ○ [B] maj. interested/dis. SHs SH ratification effects [Wheelabrator]: DoC ‐> extinguished □ DoL v. ƁΩƉ ‐> shifts ßοǷ to Π show waste □ DoL v. controlling SH ‐> shifts ßοǷ to Π not entirely fair □ 5. Breached Good Faith? • Subjective bad faith (::breach DoL) = breach • Intention dereliction duty (::breach DoC) = breach • Gross negligence =/= breach, In re Walt Disney (relying consultant not bad faith)  

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SECURITIES REGULATION

1. Security? • Stock: [1] "stock" + [2] usual characteristics of stock • Investment Contract: [1] invest $ [2] common enterprise [3] profits solely<‐efforts of others, Robinson v. Glenn (control ~partnership, not "solely from others") 2. Liability for Sale/Registration §11 + §12? • Registration ○ Public sale [1] register [2] 20 day approval [3] delivery prospectus < sale ○ Private exempt [Reg. D] <$1M = unlimited □ < $5M =< 35 offerees □ > $5M =< 35 sophisticated offerees □ Re‐sales No ads File notice • Untrue Statements [Sec. Act §11]: untrue fact/omitted req. material in reg. statement Reliance/causation/scienter ‐> not req. Π cannot have known truth N/A to exempt ○ Possible Δs = signed reg. statement (req. signors)/ director/experts/underwriters Issuer = strict liability Other Δs = liable ф of fault + Δs ßοǷ did not cause damages Due Diligence Defense: ○ For non‐experts relying on experts: no reason to believe For others: [1] reasonable investigation [2] reasonable grounds to believe [3] did believe statements true/no omissions material fact, Escott v. BarChris (higher stds. experts ) • Reg. Process Violation [Sec. Act §12]: strict liability [A] offer/sell unregistered security, unless exempt / [B] misrepresentations in prospectus/oral comm. ○ Liability + due diligence same as §11 ○ Due diligence defense OK 3. Accounting Issue? • Efficient Capital Markets ○ Weak market reflect past prices ○ Semi‐strong reflect public info ○ Strong reflects all info • Accounting ○ Balance sheet = assets, liabilities SH's equity on specific date Assets = liabilities + SH's Equity ○ Income statement: profit (revenues, expenses, net‐income [revenue ‐ expenses])/timeΔ ○ Statement cash flows: cash received + paid/time Δ ○ Statement SH's equity: Δ in SH's equity   

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4. Liability for Misstatements 10b‐5? • Rule 10b‐5 Untrue Statements of Material Fact: ○ [1] Jurisdictional nexus ○ [2] Transactional nexus ○ [3] Materiality Sliding scale uncertain events: [A] probability + [B] magnitude, Basic ○ [4] Reliance: fraud on the market Rebut everyone knew/corrected ○ [5] Causation Transaction causation ~ reliance Loss causation: evidence market believed misrepresentation ○ [6] Scienter: intent deceive/defraud, some cts. reckless disregard truth 5. Liability for Insider Trading? • Insider's Duty: only to SHs; sell non‐SHs OK, Goodwin (no duty public exchange) • Common Law: split ○ Special circumstances rule (only OK in) ○ Minority rule (not OK) ○ Traditional rule (OK) • Traditional Theory [Rule 10b‐5]: ○ [1] buy/sell security ○ [2] basis material ○ [3] nonpublic info, [Reg. FD] (disclose mat. info to all investors at once) ○ [4] breach duty [insider], Chiarella (not insider) Statutory insiders= ƁΩƉ, sr. execs, 10% SHs Temp. insiders = [i] given nonpublic material info + [ii] expectation confidence + [iii] relationship implies duty • Misappropriation [Rule 10b‐5]: ○ [1] undisclosed use of [breaching duty confidentiality], US v. O'Hagan (OK if disclosed) Duty Trust/Confidence: [A] agrees [B] history/practice sharing so recipient knows [C] from spouse/parent/child/sibling, unless no expectation, [Rule 10b5‐2] ○ [2] material nonpublic info ○ [3] belonging to principle ○ [4] personal gain • Derivative Liability ○ [1] tipper breached DoL by tipping for personal benefit, Dirks (Secrist =/= tipper, no breach) ○ [2] tippee should/knows tipper breached, Dirks (Dirks knew Secrist's purpose expose fraud, not personal benefit) • Tender Offers [Rule 14e‐3]: [1] trade on/communicate(if foreseeable) [2] material non‐public info [3] exceptions 

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PROXY SOLICITATION

1. Soliciting Proxy? • Proxy Solicitations [Rule 14a]: [1] must be w/statement [2] file w/SEC [3] old ƁΩƉ annual report • Reimbursing Proxy Fights ○ Incumbent OK if [1] expenses reasonable + [2] bona fide contest (policy, NOT personal), Rosenfeld (wining dining) ○ Insurgents OK if [1] win + [2] SH ratify reimburse 2. Liability for Misleading Proxy? • Misleading Proxy Violation [Rule 14a‐9] ○ [1] misleading statement/omission ○ [2] material, Mills v. Electric Auto‐Lite Co. (not disclosing conflict of interest material); Seinfeld (valuations of options not material duh) ○ [3] causation, Mills v. Electric Auto‐Lite Co. ("proxy statement itself, not [defect] essential link"); but see Virginia Bankshares (material defect =/= causation if maj. SH enough votes) ○ [4] damages = best interest of all SHs Merger set aside if equitable $ if can quantify proxy defect 3. Excluding SH Proposal on Proxy ? • SH's Proposal on Corp. Proxy Statement [Rule 14a‐8]: for eligible SH ($2K FMV/1% interest > year) ○ Excluding OK on 13 grounds: Personal grievance of SH Unrelated business, Lovenheim (force‐feeding geese %$ not met, but still significant) Elections or procedure for Already rejected past 5 years Specific dividends 4. SH Inspection Right? • Right to SH List [Rule 14a‐7]: SH ßοǷ proper [corporate] purpose, compare Crane Co. (inform SHs why his hostile takeover good OK), with Pillsbury v. Honeywell (social/political issues unrelated to economic not OK)  

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CLOSED CORPORATIONS

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Split Ownership & Control? DE: economic and voting split OK,Providence (28% shares, 3% vote OK) IL: voting right req., Stroh (loophole b/c no economic OK) SH Agreements & Voting Trusts? SH Agreements: OK but no specific performance, Ringling (remedy ignore inconsistent votes) Director Agreements: void b/c takes away ƁΩƉ's indep. judgment, compare McQuade (constrain ƁΩƉ = violate fiduciary duty), with Clark (opposite no min. SH, only 2 party K) ○ Homemade McQuade (K to prevent) LLC? Pass Through Tax Manager‐Managed = corp. ƁΩƉ ○ Managers ‐> fiduciary duties Member‐Managed ≈ partnership (1 vote/share, maj. wins) ○ All members ‐> fiduciary duties Piercing LLC Veil ○ Members/managers/SHs not liable ○ PCV OK, but lack formalities not enough, New Horizons (properly formed LLC ‐> no PCV) End LLC = partnership, New Horizons (Δ liable b/c fucked dissolution $‐>Δ not creditors)

CORPORATE CONTROL

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How to Get Corporate Control? Proxy Contest: $$$ pro rata, 2‐tier = coercive Stock Purchase: open market Sale of Assets: buy Target's assets (effect ≈ merger) Merger/Consolidation: control + combine ○ Merger ‐> acquirer lives ○ Consolidation ‐> new corp.

Merger SH Approval Yes

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Only if selling "sub. all"

Appraisal

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Liabilities

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Tax

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Steps to a Merger (DE)? [1] ƁΩƉ approval [2] maj. SH approval [3] filing notice [4] appraisal (n/a public) De Facto Merger/Non‐Merger? PA ‐> legislature abolished de facto mergers post‐Farris DE ‐> rejects de facto merger, Hariton (follow either indep. statute OK) & de facto non‐merger, Rauch Acquirer [Maj. SH] Breached Fiduciary Duty w/Freeze Out Merger? Entire Fairness = test maj. SH breached fiduciary duty in freeze‐out, Weinberger (maj. SH breached by withholding expert report + not disclosing conflicts of interest); Rabkin (maj. SH not violate K per se, but breached by intentionally avoiding commitment to min. SHs) ○ Maj. SH Δ's ßοǷ if: [A] no ratification / [B] evidence of fraud/misrepresentation/misconduct Π's ßοǷ show unfairness if: [1] valid ratification (maj. of min.) + [2] no evidence o fraud/misrepresentation/misconduct Business Purpose DE: not req., Weinberger o MA: [1] after Π meets ßοǷ self ‐dealing by Δ, [2] controlling SH ßοǷ: legit business purpose + [3] o overall fairness, Coggins v. New England Patriots (no legit business purpose to force out minority SHs) Damages o [A] Appraisal: if Π only alleged $ too low Value before freeze‐out Open‐ended valuation (no market, min. discount), Weinberger o [B] Equitable Relief [Recession]: if appraisal not adequate + fraud/misrepresentation/self ‐ dealing/deliberate waste [Weinberger]/simple misconduct [Rabkin] o [C] Rescissory Damages: present value if recession not practical, Coggins Liability in LLC Merger? Min. interest ‐‐duty of loyalty [disclosure]‐‐> maj., even if maj. will outvote, VGS, Inc. (LLC merger invalid b/c min. managers secret voted to freeze‐out maj. member)  

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Sale of Assets (DE)

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Williams Act Tender Offer Violation? Acquirer > 5% ‐> disclosure 10 days Tender open 20 days Revocable $ increase ‐> all tenders

7. State Regulating Takeovers? • States can give SHs more protection b/c they created corps., as long as can comply w/state + fed. law, CTS (Indiana Act not preempted by Williams Act/ violate CC)

8. What Type of Takeover Defense? 1. Did ƁΩƉ Breach Fiducary Duty With Takeover Defense? • Golden Parachute • Modified Duty of Care Test for Takeover Defenses [Unocal]: ƁΩƉ's ßοǷ: [1] reasonable belief danger to corp. • Greenmail [Cheff ] ○ Part [1] Unocal DoC test + policy/effectiveness ([A] good faith [B] reasonable investigation) + [2] proportionate responses to threat, business purpose Unocal (legit threat = $54 offer inadequate, junk bonds, ○ No deterrence well‐known corp. raider) ○ IRS tax ○ Level of Threat [Unitrin]: [a] opportunity loss [b] • Counter‐Tender Offer [Unocal, Time]: structural coercion (SH's decision distorted) [c] $$$ if 1st tier tenders (but not Acquirer) substantive coercion (SHs misled on $) ○ Reverse‐coercive Non‐SH Considerations: ○ Now counteroffers to all SHs [SEC] [a]employee unrest, Cheff □ • Poison Pills [Revlon]: "SH Rights Plan" via [b] creditors, customers, employees, □ vehicle ‐> takeover less profitable Unocal Triggering event [c] others OK if ultimate benefit must be □ ƁΩƉ can redeem + "disarm" for SHs, Revlon, accord ALI (forcing negotiation) Revlon auction ‐> only SHs  Flip‐In Plan: right to buy another ○ [d] corporate culture, Time □ share, diluting Target's stock so Proportionate Action [Unitrin]: no court interference ○ maj. control difficult/expensive if [1] indep. ƁΩƉ + [2] defense not "draconian" Flip‐Over Plan: dividend stock ○ (coercive + preclusive) + [3] range of reasonableness w/right to convert 1 Target stock ‐> Coercive, Toll Brothers (forced SHs to reelect 2 Acquirer stock, diluting Acquirer incumbent ƁΩƉ or not have functioning ƁΩƉ) stock $, maybe control Preclusive, Toll Brothers (made any takeover Back‐End Plan: ≈ Unocal, offer $$$ ○ impossible) debt securities if 1st tier tenders, forcing offer above back‐end price ○ Revlon Auction: if corp. in sales mode, ƁΩƉ's fiduciary duty = highest auction $, Revlon (lock‐up ○ Voting Plan: dilute voting rights not OK b/c discourage bidding) (50% stock = only 5% votes) ○ Longstanding Plan Exception [Time]: Revlon does not ○ Poison Debt: debt issued with K apply to long ‐term sale plan (only active bidding), preventing corp. issuing more debt, Time (Time not in Revlon mode b/c deal was long‐ defeating LBOs standing plan, not abandoning control/strategy) • Dead Hand/No Hand Pills: for stopping a Unless Longstanding Plan is Change to Private ○ new ƁΩƉ from redeeming poison pills Control [QVC]: Revlon also applies when corp. ○ Dead Hand Pills: new ƁΩƉ cannot control shifts public SHs ‐> private, QVC (breakup not redeem, Toll Brothers (not OK can't req. going private) restrict ƁΩƉ's power) 

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No Hand Pills: no one can redeem for X time, Quickturn Design 10. Corp. Debt? Systems (disproportionate defense • Successor Obligor Clause: boilerplate clause = can't prevent ƁΩƉ exercising legal uniform interpretation + literal, Sharon Steel ("all duties) assets" @ time plan to liquidate created) • No‐Shop + Lock‐Ups [Van Gorkom, • Indenture Agreements: no extra benefits not Revlon, QVC]: lock‐up"/termination fees bargained for in indenture K, MetLife v. RJR (adding for Acquirer's cost of bidding more debt =/= breach implied duty good faith + fair ○ Incentivizes bidding dealing b/c risk of existing debt losing value ○ Problem w/high fees: lowers overall considered + assumed) selling price + Target's value ○

CORPORATIONS OUTLINE

AGENCY 1. IS THERE AN AGENT? • Rest. § 1(1): "Agency" is the relationship which results from the [1] manifestation of consent by one person (the principle) to another (the agent) that the other shall act [2] on behalf of the principle and [3] subject to principle's control, and [4] the agent consents to so act. • See Gorton v. Doty ‐ coach was agent of teacher so teacher liable for kids injured while coach driving [1] handing over keys = manifestation of consent to drive kids ○ [2] coach drove kids to football game on teacher's behalf (teacher wants football team to win thus ○ SOME SHARED INTEREST, even if more for the benefit of the coach) [3] telling coach only he could drive indicates a CONDITION, thus under teacher's control ○  A says: even minimal backseat driver limitations signal control [4] coach implicitly consented to act as A b/c he agreed by taking keys after CONDITIONAL OFFER ○ • See Jenson Farms v. Cargill ‐ Warren was Cargill's agent so Cargill as P was liable on all contracts made by an A on the P's behalf (unlike vicarious liability turning on scope of employment) [1] Cargill directed Warren to enter into grain purchasing contracts with farmers and [4] Warren ○ consented [many times] [2] Warren putt Cargill's name on contracts and used Cargill bags for the grain ○ [3] in addition to financing, Cargill had control ("strong paternal guidance") in almost every aspect ○ of Warren's day‐to‐day business operations, inspect records, and even enter Warren's premises 2. PRINCIPLE LIABLE FOR AGENT'S ACTIONS ON CONTRACTS? • Rest. § 144: a principal "is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party" • Actual Authority (P ‐> A): Express statement that there is or is not authority see Dweck v. Nasser ‐ client told lawyer "you ○ can talk in my name" Implied actual authority which the principal actually intended the agent to possess, typically such ○ powers as are practically necessary to carry out the duties actually delegated  Look at reasonable belief of the A for "manifestation of consent" from P to A  Implied authority is highly contextual, often depending on prior practices or industry customs (e.g., "incidental authority" to do things that are usually necessary to do the actions expressly authorized)  See Dweck v. Nasser ‐ client had been allowing lawyer to settle suits for 20 years • Apparent Authority (P ‐> 3rd Party): arising from the manifestation of authority from P to 3rd party See Mill Street Church ‐ everyone knew this was a 2 person job so there was apparent authority to ○ hire another worker See 370 Leasing Corp. v. Ampex Corp. ‐ salesman had apparent authority to sign contract b/c ○ that's what salesmen do ‐ sell shit and inherent part of selling is signing sales contracts  Not all courts hold salesman title auto grants authority, but this 3rd party believed it See Hoddeson v. Koos Bros. ‐ some imposter salesman sold lady furniture ‐ silence can be ○ manifestation of authority, but it has to be observed by 3rd party • Inherent Authority: derived solely from the agency relations, found if [1] transaction is usual in the business (custom in the industry); and [2] done on behalf of P Comes up a lot with undisclosed principles b/c there can be NO MANIFESTATION, see Watteau v. ○ Fenwick ‐ A held himself to be owner of bar and buyer didn't know actual owner of bar so no apparent authority (no manifestations possible), but inherent authority b/c P allowed A to make so many manifestations that he was actual owner (title, custom, etc) A says: reasonable belief of 3rd party is NOT required ‐ i.e., the agent has a position/title that ○ indicates certain authority in the industry ‐ irrelevant that 3rd party doesn't know the industry or

importance of title in industry • Ratification: if A acts without authority (of any kind) and there is no grounds for estoppel, P will only be bound if P ratifies the contract, which requires: [1] valid affirmation by P (intent to ratify and with full knowledge of all the material ○ circumstances)  Affirmation can be express or implied  P must know or have reason to know all material facts AND [2] to which the law will give effect ○  Denied legal effect when necessary to protect the rights of innocent 3rd party  I.e., principle can't ratify a contract just to help himself, must be NECESSARY to protect innocent 3rd party See Botticello v. Stefanovicz ‐ Botticello bought property not realizing that Mary and Walter were ○ both part owners; but Mary ratified contract by accepting payments • Estoppel: P cannot deny granting authority to A if [1] a 3rd party changed his position [2] to their detriment [3] in reliance on the representations made, see Hoddeson v. Koos Bros. ‐ [1] lady reasonably and in good faith changed position (handing over $) [3] in reliance (an imposter salesman in a gray suit seemed pretty legit in a furniture store), [2] to lady's detriment (lady never got her furniture) Acts or omissions relevant but only if the party is present ○ P's intentional or negligent acts ○ Estoppel only binds the principal, not the 3rd party ○ 3. IS AGENT LIABLE ON A CONTRACT? • RULE: Disclosed principal = no liability, but A can be liable in 3 situations: Disclosed principal but clear intent of all parties to bind A ○ Disclosed principal but agent made the contract without authority ○ A non‐disclosed or partially disclosed P ○ • See Atlantic Salmon v. Curran ‐ an A must disclose not only that he is representing a P, but also the identify of the P to avoid personal liability on a contract Actual knowledge is the test . . . "The duty rests upon the agent, if he would avoid personal ○ liability, to disclose his agency, and not upon others to discover it." 4. PRINCIPLE VICARIOUSLY LIABLE FOR AGENT ON TORT?

• ANALYSIS: Is A an agent of P? ○  Yes – [1] Is A a servant of P, or an independent contractor? □ Servant – [2] Was the tort committed within the scope of A's employment?  Yes – P is liable for A's tort No – Does situation fall into an exception?  ◊ Yes ‐ P is liable for A's tort ◊ No ‐ P is not liable in agency law for A's tort □ Independent Contractor – [3] Does situation fall into an exception?  Yes ‐ P is liable for A's tort. No ‐ P is not liable in agency law for A's tort.   No ‐ P is not liable in agency law for A's tort • [1] Master‐Servant (Employer‐Employee) OR Independent Contractor? More control = master‐servant ○  More control than agency, this is control or right to control PHYSICAL CONDUCT of servant □ Principals direct results or ultimate objectives of A ("make this happen, but I don't care HOW it happens") □ Masters direct or has the right to control every aspect ("this is HOW you [the employee] physically has to get shit done")  See Humble Oil v. Martin / Hoover v. Sun Oil ‐ indicators of control evaluated generally (looked at who set hours of operation, who hired staff, who bought shit)

But see Murphy v. Holiday Inns, Inc. ‐ control evaluated narrowly; court holds NO master‐ servant relationship b/c the P did not control the "instrumentality" that caused the injury More business risk = Independent Contractor ○  See Humble Oil v. Martin / Hoover v. Sun Oil ‐ independent contractor b/c gas station had the overall risk of profit or loss • [2] Tort Within the Scope of Servant's Employment? Rest. § 228(1): A's conduct is within the scope of employment if: ○  [A] kind of work A is employed to perform and conduct in same general nature or incident to the conduct the servant was employed to perform □ See Clover v. Snowbird Ski Resort ‐ normally driving to work is not in scope of work, but ski bum skiing to work was "foreseeable" so in the scope of employment □ Accord Bushey v. U.S. ‐ adopts Foreseeability Test: who is cheapest cost avoider (sailor shooting dude is not foreseeable, but dock could foresee somebody accidently turning valves & but there were no safety precautions)  A says: not that great of test b/c if work is in the middle of no where, does that mean people driving 100 miles is a foreseeable harm?  [B] substantially within the authorized time and space limits □ See Manning v. Grimsley ‐ Orioles pitcher was warming up in time/space of work  [C] It is actuated, at least in part, by a purpose to serve P □ See Ira S. Bushey v. U.S. ‐ sailor had no purpose to serve P by turning valves at 2AM □ But see Manning v. Grimsley ‐ court held pitcher could have been serving Orioles by getting rid of the heckler who was interfering with his job  A says: not correct b/c the proper Q is if A thinks he is helping to serve P and pitcher must know throwing ball at heckler is not going to help; maybe court arrives at decision by construing it as a subconscious purpose • [3] P Liable for Independent Contractor? RULE: P not liable for torts of independent contractor, except: ○  [A] P retains control over action leading to tort (P is a master);  [B] P employs incompetent independent contractor;  [C] contractor's task is inherently dangerous;  [D] duty is non‐delegable See Majestic Realty v. Toti ‐ argue [B] city was negligent for hiring an incompetent contractor and ○ [C] [D] demolishing buildings is inherently dangerous principle's duty non‐delegable 

5. AGENT VIOLATING FIDUCIARY DUTIES? • Rest. § 13: "An agent is a fiduciary with respect to matters within the scope of his agency." • Fiduciary Duties: Duty of Care ○  Paid to do job, then do it to normal standards in industry Duty of Loyalty is violated in following situations: ○  Inherent Conflicts of Interest (kickbacks, bribes, tips from 3rd parties)  Secret Profits □ From use of position, involving 3rd party, Reading (profits from using army uniform to benefit himself) □ From dealing with P without P's knowledge (real estate agent secretly buying house without informing seller)  Usurping Business Opportunities from principal, Singer (sent away business to another shop for a referral fee without disclosing, key is lack of disclosure to P)  Grabbing & Leaving, Town & Country (OK if you just remembered stuff but cannot jack the entire customer list or other secret/confidential info & duty applies even AFTER you leave)

PARTNERSHIPS 1. IS THERE A PARTNERSHIP? • Definition : "an association of two or more persons to carry on as co‐owners a business for profit." Co‐owners = shared control + shared profits ○ No formal requirements ○ • UPA § 7(1): Persons who are not partners to each other are not partners as to third parties, except for partnership by estoppel • See Fenwick v. Unemployment Compensation Commission ‐ was receptionist a partner in hair salon, when there was a "partnership agreement" but it looked like receptionist was just an employee [1] sharing of profits is prima facie evidence of partnership unless profits were paid as wages ‐ ○ chick's partnership agreement clearly said this [2] intention of parties in conducting business ‐ chick's position in the company didn't change ○ [3] obligation to share losses ‐ none, Fenwick still taking all risk ○ [4] property ownership ‐ still owned wholly by Fenwick ○ [5] running the business and control ‐ agreement excludes chick from any control ○ [6] did others see the business as a partnership ‐ how they acted in public is more relevant ○ than the terms the written agreement [7] assets after dissolution ‐ none, the chick would just end like quitting a normal job ○ • HYPO: Tiger Woods's caddy, Steve Williams claims he can't be fired b/c he is Tiger's partner who [1] shared profits and does [5] a little joint decision making ○ A says: courts often look at the norms in the community (everyone knows the caddy is not a partner in the sense he has power to control part of Tiger's shot) 2. PARTNERSHIP BY ESTOPPEL? • UPA § 16(1): "A person who represents himself, or permits another to represent him , to anyone as a partner in an existing partnership or with others no actual partners, is liable to any such person whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership." [1] need representation as partnership AND ○ [2] some sort of reliance on the representation ○ • See Young v. Jones ‐ [2] NO partnership by estoppel b/c Π didn't give credit to (rely on) the assertions 3. WHO IS LIABLE IN A GENERAL PARTNERSHIP? • UPA § 15: All partners are liable (a) Jointly and severally for everything chargeable to the partnership (e.g., torts and breaches ○ of fiduciary duties) (b) Jointly for all other debts and obligations of the partnership . . . [e.g., contracts] ○ • UPA § 40(b): liabilities of the partnership rank in order for payment: 1. Debts owed to creditors other than partners; 2. Debts owed to partners other than for capital and profits . . . 4. PARTNER VIOLATING FIDUCIARY OBLIGATIONS? • GENERAL RULE: "Partners owe each other a fiduciary duty of the utmost good faith and loyalty . . . As a fiduciary, a partner must consider his or her partners' welfare, and refrain from acting for purely private gain . . .", Meehan v. Shaughnessy • RUPA § 404: (a) ONLY fiduciary duties a partner owes to partnership and other partners = the duty of ○ loyalty and the duty of care set forth in subsections (b) and (c). (b) Duty of loyalty is limited to: ○  (1) To account to the partnership and hold as trustee for it any property, profit or

benefit derived [from partnership] including the appropriation of a partnership opportunity. □

Partners must do stuff for the partnership as a whole, including new partnership opportunities, see Meinhard v. Salmon (minimum duty was to disclose new opportunity to partner)

(2) To refrain from dealing with . . . a party having an interest adverse to the partnership □ No deals where there are conflicts of interest  (3) To refrain from competing . . . □ "Grabbing & leaving" law firm partners cannot steal clients, see Meehan v. Shaughnessy (leaving wasn't the issue, LYING = breach of duty ) (c) Duty of care . . . is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. 

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High standard; accidents are excusable

(d) A partner shall discharge the duties to the partnership and the other partners . . . consistently with the obligation of good faith and fair dealing. (e) A partner DOES NOT violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner's conduct furthers the partner's own interest. 

Perfectly acceptable to look out for #1 (but just disclose and don't violate duties)

(f) A partner may lend money to and transact other business with the partnership . . . • Opting Out: Partners can structure agreements to opt out or differ from general rules of partnership, but there are limits on even what partners can opt out of / contract away See Perretta v. Prometheus Development Co. ‐ could not opt out b/c manifestly unreasonable ○ A's Key Point: look at the agreement as a whole to decide if it is "manifestly unreasonable" ‐ ○ and NOT "manifestly unreasonable" when there are good reasons for the agreement ○

5. PARTNERSHIP PROPERTY RIGHTS • UPA § 24: The property rights of a partner are 1. his rights in specific partnership property, 2. his interest in the partnership (share of profits + surplus), and 3. his right to participate in the management. • UPA §§ 25(1), (2): "A partner is a co‐owner with his partners of specific partnership property holding as a tenant in partnership." Equal right to possess partnership property for partnership purposes ○ Rights in specific partnership property are not assignable except in connection with the ○ assignment of rights of all the partners in the same property 6. DOES PARTNER HAVE A RIGHT TO MANAGE AND/OR AUTHORITY TO BIND PARTNERSHIP? • Management ‐ RUPA § 401: Each partner has equal rights in management and conduct of the partnership business ○ Become a partner only with the consent of all of the partners ○ A difference arising in the ordinary course of business may be decided by a majority of the ○ partners  If deadlocked (i.e., only 2 partners in National Biscuit), nothing changes An act outside the ordinary course of business or an amendment to the partnership ○ agreement undertaken only with consent of ALL partners (unanimous) • Authority to Bind ‐ UPA (1914) §§ 9(1),(2): [1] Every partner is an agent of the partnership for the purpose of its business, AND ○ [2] the act of every partner for apparently carrying on partnership business IN THE USUAL ○ WAY binds the partnership, UNLESS:  [A] the partner has in fact no authority to act for the partnership in the particular matter, AND  [B] the person with whom he is dealing has knowledge that the partner has no such authority [3] An act of a partner which is NOT apparently for the carrying on of partnership business in ○

the usual way does not bind the partnership, unless authorized by the other partners." Compare National Biscuit Co. v. Stroud ‐ Stroud‐Freeman partnership, Stroud says he is not ○ paying National Biscuit for a bread order only Freeman agreed to b/c Stroud told National Biscuit he wasn't ordering anymore  Notice to National Biscuit of no more bread orders didn't matter b/c [2] Freeman still had actual authority to order bread per RUPA § 401 (equal management unless majority decides otherwise) With Summers v. Dooley ‐ Summers‐Dooley partnership for trash collection, Summers hired ○ another employee over Dooley's objections, sued to get paid for this expense  Unlike National Biscuit, Summers hiring another person was NOT in the ordinary course of business and required consent of ALL partners per RUPA § 401 • TORT LIABILITY: partnership is liable for torts committed by one partner in the ordinary course of partnership business But see Moren ‐ partner brought her kid to work and partnership liable for kid's injuries ‐ ○ ordinarily you don't bring kids to work but court says doing your job at work is "ordinary course," even when your kid is there 7. ENDING THE PARTNERSHIP? • 3 Types of Dissolution: [1] by act of one or more partners ○ [2] by operation of law (death, bankruptcy, etc.) ○ [3] by court order that: ○  (i) the economic purpose of the partnership is likely to be frustrated  (ii) another partner has engaged in conduct that makes it not reasonably practicable to carry on the partnership  (iii) not reasonably practicable to carry on the partnership in conformity with the partnership agreement • See Owen v. Cohen ‐ good partner worried he could lose investment of $7K if he terminates by himself, so he gets court to say [3iii]that there was no way the partners could keep on working together b/c other partner real big asshole After court ordered dissolution, either sell the business and divide the proceeds or have an ○ auction where one partner can buy out the other • See Page v. Page ‐ partner wants a court declaration that it was a [1] partnership at will (not term "until profits are made") so he can end that shit and PROFIT Court holds no implied term but warns partner it would be breach of fiduciary duty to dissolve ○ the partnership solely to profit himself 8. WHAT ARE CONSEQUENCES OF DISSOLUTION? • Dissolution and Winding Up Under UPA: Dissolution does not terminate the partnership but limits partners' authority to act for ○ partnership, and starts "winding up" of the partnership  "Winding up" = selling partnership's assets/business, paying creditors, and dividing remaining assets or liability for remaining losses

[1] Acquire business from other partners and continue the partnership  CASE: Prentiss v. Sheffel ‐ 2 out of 3 partners, who owned 85% combined interest decide to dissolve partnership then buy business back at auction using their interest in the dissolved partnership, effectively just kicking out the last partner Court says 2 partners bidding with "paper dollars" is OK b/c the removed partner ○ gets more value for his 15% (not unfair) [2] Continuation per agreement ○ □ Creates a new partnership □ Debts carry over  Departing partner entitled to an accounting and fair value of the partnership □ Remains liable on all firm obligations unless released by creditors  New partner liable for old firm debts, but debts only can be satisfied out of the partnership assets (i.e., he has no personal liability) [3] Continuation after wrongful dissolution (e.g., early termination of a term partnership) ○  Wrongful dissolver subject to damages for breach of the partnership agreement  Remaining partners have right to continue business even absent an agreement to do so  Wrongful dissolver entitled to the fair value of his interest (NOT including the value of the partnership's goodwill), minus any damages he caused • Disassociation and Dissolution Under RUPA: Triggering event = "disassociation", then 2 options: ○ ○

9. HOW ARE REMAINING PROFITS / LOSSES DIVIDED? • UPA (1917) § 40(b): order of distributing assets: (1) owed to creditors other than partners ○ (2) owed to partners other than for capital and profits ○ (3) owed to partners in respect of capital ○ (4) owed to partners in respect of profits ○ • Dividing Losses, General RULE: if agreement is silent, default is partners intended to share profits and losses equally, regardless of how much capital each contributed RUPA § 401(b): "each partner is entitled to an equal share of the partnership profits and is ○ chargeable with a share of losses in proportion to the partners' share of the profits."  Explicitly rejects Kovacik • But see Kovacik v. Reed ‐ Reed provides all labor and Kovacik provides all capital ($10K); they agree to share profit 50‐50 but didn't talk about losses; Kovacik says Reed must pay 1/2 the losses when business fails This court says Reed is NOT liable for losses b/c he put in labor equal in value to $10K and lost ○ all of that already ‐ holding NOT consistent with general rule  Court tailors partnership law to a hypothetic contract negotiation ‐ if the parties had thought about the issue of losses, what would they have agreed to? Kovacik limited ONLY to cases where there is 1 service partner and 1 capital partner AND the ○ service partner has [1] NO SALARY, and [2] NO CAPITAL CONTRIBUTION

10. BUYOUT (BUY ‐SELL) AGREEMENT? • Trigger events = death, disability, voluntary opt out? • Determining price is biggest issue: Have periodic agreements ○ Hire an appraiser ○ Use a formula ○ Most common approach is "I split, you choose" like splitting a bag of weed ○ 11. LIMITED PARTNERSHIP? • Definition of LP: A limited partnership is composed of at least one general partner, and at least one limited partner Death of a limited partner does NOT cause dissolution ○ Limited partnership shares are often transferable ○ Limited partners may have restricted voting rights. ○ The general partner is personally liable to creditors ○ • RUPA § 303(a): limited partners are liable only to the extent of their contributions, UNLESS: They are also general partners ○ They exercised control (pretending to be a general partner) or had a right to exercise control ○  But then they are ONLY liable to persons who reasonably believed, based on the limited partner's conduct, that the limited partner is a general partner See Holzman v. De Escamilla ‐ cannot get out liability by claiming that they only limited ○ partners when they controlled the business by: (1) making big decisions such as what crops are grown; (2) changing management; (3) had absolute control of the business bank account • Limited Liability Limited Partnership (LLLP): Similar to a limited partnership, but also grants general partner limited liability (somewhat ○ similar to making a corporation the general partner). • Limited Liability Partnership (LLP): Acts like a general partnership, but with limited liability. ○ Liability of LLP – RUPA §306(c): "An obligation of [a limited liability partnership] . . . is solely ○ an obligation of the partnership . . . A partner is NOT personally liable . . . solely by reason of being . . . a partner."

CORPORATIONS 1. CORPORATE ENTITY?

Limited Liability

General Partnership

Corporation

No, but partners can bargain it from 3rd party, buy insurance

Yes, but creditors may seek personal guarantees

Free Default: No, but may be allowed Transferability

Default: Yes, but may be restricted

Longevity

Dissolution at will, unless agreed upon otherwise

Default: Indefinite, but can be limited

Centralized Management

No; each partner an agent. But can use committee & limit authority by agreement/notice.

Yes, but may want to modify to prevent freeze‐ out.

Formation/ Formalities

Informal (no filing)

Formalities required, including: Articles of Incorporation, Bylaws, Board of Directors, Officers, Minutes, Elections, Filings; more costs

Tax

Single taxation – Partnership is not taxed; partners are.

Double on distributed earnings: Corporation taxed, and so are dividends

2. PROMOTER LIABLE FOR PRE ‐INCORPORATION ACTIVITY? • "Promoters" purports to act as an agent of the business prior to its incorporation • Fiduciary Duties Pre‐Incorporation: promoter is an agent of the corporation so has fiduciary duties, see Atlantic Salmon Generally OK to enter into arms length transactions, but if A has a P, A must disclose P's identity ○ • Liability of Promoter: if 3rd party doesn't know corp. is yet‐to‐be‐formed, an purported A acting for the nonexistent P becomes party to the contract unless agreed otherwise If 3rd party knows the corp. is yet‐to‐be‐formed: ○  Once the articles are filed, implicitly or explicitly, corporation adopts the contract □ Promoter not liable ONLY if released by other party  If the articles are NOT filed, promoter liable on the contract (like the undisclosed principal situation) 3. DEFECTIVE CORPORATION? • RULE: If the articles are NOT filed or are defectively filed, the defectively formed entity (or individuals) can enforce the contract or avoid personal liability only if there is a de facto or corporation by estoppel De facto Corporation: a court may treat an improperly incorporated firm as a corporation if ○ organizers:  [1] acted in good faith to incorporate;  [2] had the legal right to incorporate; and  [3] acted as if they were incorporated. Corporation by Estoppel: a court may treat an improperly incorporated firm as a corporation if ○ third parties:  [1] thought business was a corporation; and  [2] would earn a windfall if allowed to deny that the business was a corporation • See Southern‐Gulf Marine Co. No. 9 v. Camcraft, Inc. ‐ Camcraft claimed contract was void b/c SGM did not exist as a corporation when they entered into the contract Court finds SGM was a "corporation by estoppel" b/c [1] both parties treated the SGM as a ○ corporation; and [2] Camcraft would earn a windfall if they were allowed to deny the existence of SGM corporation 4. IS PERSONAL LIABILITY LIMITED DUE TO CORPORATE ENTITY? • Limited Liability ‐ MBCA § 6.22(b): "Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is NOT personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct" Agency rules hold if a P uses corp. as his agent (furthering only his personal goals), the P is held ○ liable for corp.'s acts as an A of P • Piercing the Corporate Veil Requires: [1] a unity of interest and ownership, determined by looking at four factors: ○  [A] the lack of corporate formalities (between owner and corporation),  [B] the commingling of funds and assets,  [C] under‐capitalization, and  [D] the use by one corporation of assets of another. AND [2] a situation where failing to PCV would either ○  [A] sanction fraud OR  [B] promote injustice. • The "Alter Ego" Theory: is when a "dummy" corp. is controlled and used by an individual stockholder for purely personal rather than corporate ends, merging the person and corp. so that it would sanction fraud or injustice to not hold the stockholder liable for actions of dummy corps. it controls See Walkovszky v. Carlton ‐ NYC cab case is not about escaping liability b/c that is the exact ○ purpose of a corporation, but about when PCV is needed to prevent fraud/injustice  [1C] Π asked court to PCV b/c the stockowners purposefully left no money

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(undercapitalized) to avoid personal liability  No PCV with alter ego theory b/c Π didn't allege taxi corp. owner was using all the corps. for his personal benefit rather than corp. See also Roman Catholic Archbishop of SF v. Sheffield ‐ alter ego means a "parent" is liable for ○ the actions of "subsidiaries" it controls, but each "subsidiary" is NOT liable for actions of the other subsidiaries.  [2B] mere fact Sheffield will have difficulty collecting from church in Switzerland is not enough of an injustice "Reverse Veil Piercing": due to lack of vertical formalities [between the Corp. A and Common Owner, AND Corp. B and Common Owner], a Π can hold Corp. B liable for actions of Corp. A  Big PRO of reverse veil piercing is judgment creditor > levy owner of equity shares ○ See Sea‐Land Services ‐ Π sued owner of PS, Marchese, and 5 of his other companies ‐ claiming that all of Marchese's corps. were alter egos of each other that Marchese used for his own personal benefit  [1] court found unity of interest and ownership b/c no corporate formalities, only one bank account all businesses, and Marchese moved $ freely from one corp. to another  [2] problem was Π didn't allege outright fraud and not enough evidence PCV was necessary as to avoid promoting injustice □ Had to be a "wrong" BEYOND a creditor's inability to collect a debt □ On remand Π won after providing evidence Marchese committed blatant tax fraud Enterprise Liability: is when there is a lack of formalities horizontally (between two Corps. A and B), both with a common owner, a Π can recover from A or B Parent‐Subsidiary Liability: "Parent corp. is expected to exert some control over its subsidiary . . .however, when a corp. is so controlled as to the alter ego or mere instrumentality of its stockholder, the corporate form my be disregarded in the interests of justice." See In re Silicone Gel Breast Implants Product Liability Litigation ‐ Bristol liable for subsidiary ○ MEC's fucked up boobs b/c they had corporate control of MEC  Evidence of fraud, inequity, or injustice NOT required in this tort liability case  Bristol also directly liable b/c it put its name on breast implant packages, endorsing the product negligently without researching it Tax Shelters: A limited partnership with a corporation as general partner so that the limited partners can claim partnership losses on their taxes, while corp. GP incurs all the liability for the debts See Frigidaire ‐ no personal liability for Mannon and Baxter as limited partners ○  A says: only b/c Mannon and Baxter were very clear when doing business, i.e., stating when they were acting as limited partners or acting as officers in Union Corp. ‐ so Frigidaire knew and assumed the full risks

5. PROPER SHAREHOLDER DERIVATIVE ACTION? • Derivative Action Flowchart: Direct Action – SH suit allowed. ○ Derivative – Is demand universal? ○  Yes ‐ Universal Demand Rule (MBCA) □ Did appropriate demand review institution find suit not in corp's interest?  Yes – Dismiss unless institution's decision not in good faith or not based on reasonable investigation. ◊ Types of review of demand refusal ► Full Board (quorum = independent): SH bears burden of proof ► Subset of Board: Corp. bears burden of proof ► Court ‐appointed: SH bears burden of proof No – SH suit allowed.   No ‐ Non‐universal demand rule (Del./NY) □ Is demand futile and thus excused? Demand excused – SH suit allowed; Corp. may use SLCs to get court to  dismiss.



Demand not excused – was demand made? ◊ No – Suit dismissed/stayed until demand made. ◊ Yes – Demand refused? ► No – Board of Directors takes control of suit ► Yes – Refusal wrongful? (decision to refuse demand [not the underlying conduct] reviewed under business judgment rule)  Yes – Shareholder suit allowed  No – Suit dismissed.

• Direct Actions: vindicate individual SHs' structural, financial, liquidity, and voting rights Grimes focuses on WHO was injured and thus receive the relief ○ Direct suit damages are paid directly to SHs ○ • Derivative Suit: suing in equity to enforce the corporation's rights I.e., enforce fiduciary duties of directors, officers, or controlling SHs ‐ all duties owed to the ○ corporation, see Cohen v. Beneficial Industrial Loan Corp. All recovery goes to corporation, but attorney's fees are reimbursed by corp. ○ ○ Π must be a SH at the time of the alleged wrongdoing and when suit commences • Universal Demand ‐ MBCA § 7.42: SHs must make "demand" before filing derivative suit  And cannot start until "90 days have expired from the date the demand was made . . . unless irreparable injury to the corporation would result by waiting for the expiration of the 90‐day period" Demand May Be Reviewed By: ○  Board, if independent directors = quorum (majority) □ Not independent if:  Material interest in transaction Dominated or controlled by interested party (i.e., VP is not independent if the  President is interested party)  Committee of two or more independent directors appointed by independents  Court‐appointed independent panel • Demand Futility ‐ Del/NY: if the directors cannot be expected to make a fair decision, demand would be futile and is excused DELAWARE Demand Futility Standard (Aronson; Grimes): To excuse the demand requirement, ○ a Π must show reasonable doubt (easier std. than NY) that EITHER:  [1] majority of BoD has a material financial or familial interest; OR  [2] majority of BoD is incapable of acting independently for some other reason such as domination or control; OR  [3] the underlying transaction does not pass BJR NEW YORK Demand Futility Standard (Marx): To show that demand would be futile (thus ○ excused), the Π's complaint must allege with particularity (tougher std.) that EITHER:  [1] majority of BoD interested; OR  [2] directors failed to inform themselves; OR  [3] challenged transaction could not have passed BJR • Demand Excused ‐ Special Litigation Committees (SLCs) RULES: if demand is excused, suit is allowed unless corp. uses independent SLC to get dismissal NEW YORK SLC Test: Unless the Π can show that [1] the SLC's members were themselves ○ interested OR [2] did not act on an informed basis, the SLC's recommendations are entitled to judicial deference under the BJR  BJR allows SLC to dismiss suit for variety of reasons (i.e., undermine employee morale, underlying claim lacks merit, recovery not worth cost of litigation, bad publicity, etc) DELAWARE Two‐Step SLC Test (Zapata): ○  [1] Independence and good faith of SLC and the bases supporting recommendations (Δ has burden)  [2] Court may apply its own business judgment (less deference to SLC, friendlier to SH Πs) as to whether the case is to be dismissed

• Demand Refused RULE: BoD takes control of suit unless the refusal is wrongful If SH makes demand, can't go back and argue it should have been excused ‐ only claim left is ○ wrongful refusal Wrongful Refusal: if a demand is refused, BoD is entitled to presumption of BJR unless the SH ○ can allege facts that gives reason to doubt: [1] the board acted independently OR [2] with due care in rejecting the demand  In DE never make demand b/c demand excusal doctrine (Aronson rule) is much easier for Π than demand refusal doctrine (BJR)

FIDUCIARY DUTIES 1. QUESTIONING CORPORATIONS' MANAGEMENT/DECISIONS?

• ANALYSIS: We are looking for red flags [1] If NO red flags  BJR applies; defer to the business decision of the board ○ [2] If there ARE red flags  Entire Fairness Test applies ○  [A] If entirely fair (procedure and substantively)  no violation of the relevant duty  [B] If NOT entirely fair  violation of duty of loyalty OR duty of care • Business Judgment RULE (BJR): Absent fraud, illegality or conflict of interest, the board's business judgment is not second guessed by the court; the court defers to the BoD's decisions, unless:  [1] Directors breach their duty of loyalty by tainting their decision with fraud, illegality, or a conflict of interest  [2] Directors breach their duty of care by not conducting sufficient investigation OR insufficiently deliberating before making a business judgment See Shlensky v. Wrigley ‐ derivative action trying to get Δ Chicago Cubs director to install lights ○ for night baseball (to earn more $) was not successful b/c director said lights would fuck up ambiance of neighborhood ‐ court gives ANY reason BJR deference But see Dodge v. Ford Motor Co. ‐ court would not interfere with Δ Ford's business judgments ○ (i.e. price of products, decision to expand the business, etc.) except Ford's decision not to pay dividend only b/c Henry Ford said he didn't care about making $ ‐ directly against the corporate charter • "Entire Fairness" Test: Even when there is a breach of fiduciary duty, if the entire transaction was entirely fair under a balancing test (procedurally and substantively fair), the BoD is relieved of liability Argue BoD didn't breach, but even if they did, the transaction is entirely fair so BoD is not liable ○ See Cinerama v. Technicolor ‐ Technicolor BoD (Δ) breached its duty of care (even though CEO ○ did thorough research and hard bargaining, that didn't relieve BoD of their duty deliberate and conduct a market check) ‐ BUT the BoD met its burden of proving the "entire fairness" of the deal so BoD NOT liable  "Entire Fairness" Considerations: timing, negotiation, and structure of the transaction, the disclosure to and approval by directors, and the disclosure to and approval by SHs  Different from Van Gorkom b/c Van Gorkom BoD violated duty of care (by failing to adequately inform themselves) AND violated duty of disclosure to SHs ‐ the double fail couldn't pass "entire fairness" test

2. BREACH OF THE DUTY OF CARE? • The Duty of Care ‐ MBCA § 8.30(a): "Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation" See Kamin v. AmEx. ‐ Directors can breach duty of care if they neglect to, or fail to perform, or ○ violate duties of management but can't be ordinary negligence, must be "neglect of duties (i.e., malfeasance or nonfeasance), not misjudgment"  Not a breach of duty of care b/c AmEx. BoD addressed the issue, disagreed with it, and had reasonable justification based on the financial statements  Maybe breach if BoD didn't look at the financial statements, just made decision on a whim "oh b/c we feel like it" ○ See Smith v. Van Gorkom ‐ BoD breach duty of care owed to SHs b/c they were grossly negligent in approving the merger in 20 mins without substantial inquiry or expert advice  Party attacking a BoD's decision can rebut the presumption of BJR by showing duty of care breached by not making informed decision  BoD should have gotten expert opinions, market tests, more documentation See Francis v. United Jersey Bank ‐ director turned blind eye to her sons robbing the company ○ blind so she breached her duty of care by nonfeasance (didn't do ANYTHING towards discharging her job duties)  No BJR protection b/c minimum a director needs to look at basic info that is reasonably available • Sarbanes‐Oxley Federal Duty of Care: Requires senior management and directors to take proactive role in overseeing and ○ monitoring the financial reporting process, including disclosure, reporting systems and internal controls • BoD Oversight / Compliance with Law: BJR presumption rebutted and breach of the duty of care if a BoD: [1] utter fails to implement a control system; or [2] consciously fails to monitor the system See Caremark ‐ BoD making a conscious decision not to do the compliance program is OK under ○ the BJR ("we thought about it and its too expensive for our small little company") but if you set it up, you have to follow through But see Stone v. Ritter ‐ change from Caremark, BoD doesn't get BJR if they make an ○ affirmative decision not to do a compliance program 3. BREACH OF DUTY OF LOYALTY IN AN INTERESTED DIRECTOR/OFFICER TRANSACTION? • See Bayer v. Beran ‐ BoD did not breach duty of loyalty by hiring a director's wife to sing in their commercials b/c though there was a conflict of interest (self ‐dealing transaction), the transaction was entirely fair (served legitimate corporate purpose and the wife only got normal compensation) BJR does not apply when there is conflict of interest ○ • But see Benihana of Toyko v. Benihana, Inc. ‐ Benihana BoD did not violate duty of loyalty by allowing self ‐dealing (director Abdo on both sides of negotiation) b/c BoD knew Abdo was BFC's representative, thus were informed when making decision that was entirely fair (negotiations fair, final price fair) Didn't matter BoD weren't expressly told Abdo was BFC's rep. b/c they actually knew he was ○ 4. BREACH OF DUTY OF LOYALTY BY USURPING CORPORATE OPPORTUNITIES? • Corporate opportunity doctrine is a subset of the Duty of Loyalty with special rule different from regular DoL analysis • Delaware Test (Guth v. Loft, Broz v. CIS, Inc.): An officer/director violates Duty of Loyalty by embracing a business opportunity if ( A says: look at these as factors instead of elements): [1] The corporation is financially able to take the opportunity; ○ [2] The opportunity is in the corporation's line of business; ○ [3] The corporation has an interest or expectancy in the opportunity; and ○ [4] By embracing the opportunity the officer/director creates a conflict‐of ‐interest with the ○ corp.

See Broz v. CIS, Inc. ‐ Broz did NOT breach of duty of loyalty under DE Test b/c:  [1] CIS not financially capable of exploiting the opportunity  [2] opportunity may have been in the line of business  [3] but CIS had no interest or expectancy b/c the BoD decided to get out the market  [4] Broz's interest in opportunity created no conflicts with his obligations to CIS  Broz didn't need to disclose to CIS (but disclosure would have provided a "safe harbor") ‐ opposite to ALI Rule [2], where the fiduciary MUST disclose and wait for corporation to reject the opportunity Compare Beam ex rel. Martha Stewart Living v. Stewart ‐ [2] BoD Martha not usurping business ○ opportunity by selling stock b/c selling stock was ancillary and NOT in corp.'s line of business ○ With In re eBay, Inc. Shareholders Litigation ‐ [2] BoDs usurping opportunities to buy IPOs was in eBay's line of business b/c eBay does a lot of investing in securities b/c they have a lot of cash and it is part of their asset management strategy  A says: sometimes even ancillary activities may be considered in the corporation's line of business (but eBay does A LOT of investments) • American Law Institute (ALI) Rule: [1] a "corporate opportunity" is defined: ○  [A] For all insiders (directors & senior executives), opportunities: □ in connection with the performance of functions as a director/sr. executive; or □ under circumstances where the person offering opportunity expects it to be offered to the corporation; or □ acquired through the use of corporation information or property, if reasonably expected that this opportunity would be of interest to the corporation.  [B] For senior executives only, any opportunity that is closely related to a business in which the corporation is engaged or expects to engage [2] An insider may take advantage of a corp. opportunity if: ○  [A] The insider first offered the opportunity to the corporation, and disclosed the conflict of interest;  [B] The corporation rejected the opportunity; and either □ The rejection of the opportunity is fair to the corporation; or □ The opportunity is rejected in advance, by disinterested directors in a manner satisfying the BJR; or □ The rejection is authorized or ratified by disinterested SHs and rejection is not a waste of corporate resources See Broz v. CIS, Inc. ‐ not in definition of "corporation opportunity" under ALI Rule [1A] ○  not connected to a position at PriCelluar (entity claiming breach of duty)  person offering the opportunity did not expect it to be offered to the corporation ‐ seller didn't want to sell to PriCelluar b/c their financials were too poor  Opportunity not acquired through use of the company info/property ○

5. BREACH OF DUTY OF LOYALTY BY A CONTROLLING SHAREHOLDER? • Simple majority SH is controlling (but not as obvious as 97% SH in Sinclair), UNLESS voting requires a supermajority • Fiduciary Duty of Dominant SHs: "Entire fairness" is applied in transactions by a dominant SH who has a fiduciary duty ‐ BUT ONLY WHEN the transaction is self ‐dealing (transaction is to detriment of minority SHs), otherwise the BJR is applied The burden is on the director or dominant SH not only to prove the good faith of the ○ transaction but also to show its inherent fairness, Pepper v. Litton • See Sinclair Oil Corp. v. Levien ‐ Δ wants court to apply the BJR (Π has burden of showing the controlling SH was guilty of gross overreaching); Π wanted the "entire fairness" test to apply (once Π shows Δ self ‐dealing, burden is on Δ to show the entire fairness of deal) Excessive dividends ‐ NOT self ‐dealing b/c paying dividends benefited all SHs ○ Preventing expansion of operations ‐ NOT self ‐dealing b/c Π didn't show any opportunities ○ were actually available

Breach of contract ‐ self ‐dealing b/c benefited only Δ while being detrimental to minority SHs • See Zahn v. Transamerica ‐ duty of loyalty breached by controlling SH b/c they should have disclosed the possible windfall profits (giving Class A SHs opportunity to convert to Class B) ○

6. NO BREACH OF DUTY OF LOYALTY DUE TO RATIFICATION? • Voting Statutes: Interested directors count toward the quorum attendance, but their votes do not count ○ Disinterested directors can pass a vote even without quorum, as long as other interested ○ directors are there to make it a quorum • Ratification § 144(a): Ratification OK if: (a)(1): with disclosure of material facts, it is approved by a majority of [all] the disinterested ○ directors [not just ones present at quorum] (a)(2): with disclosure of material facts, it is approved by a majority of the shareholders ○ [interested or disinterested] • See In re Wheelabrator Tech. Shareholders Litigation Duty of care claims are extinguished by fully‐informed shareholder ratification ○ Duty of loyalty claims against BoD: ratification shifts burden to Π to show waste (very difficult) ○ Duty of loyalty claims against controlling SH: SH ratification only shifts burden to Π to show ○ lack of entire fairness (that the deal was somewhat unfair) 7. BREACH OF DUTY OF GOOD FAITH? • See In re Walt Disney Co. Derivative Litigation ‐ not many cases deal with "good faith" separately from duty of care and duty of loyalty, this court says the BoD hired and relied on a compensation consultant so it seems to pass BJR as not in bad faith 1st type of bad faith = subjective bad faith ("I hate Disney, I hate Mickey Mouse, I'm going to ○ ruin this company") for sure breach of duty of loyalty, but very hard to show 2nd type of bad faith = intention dereliction of duty ("Oh I just really don't feel like coming to ○ work this year") is breach of duty of care, but also very difficult to prove 3rd type of bad faith = gross negligence creating a breach of the duty of good faith, but ○ ultimately just reaffirmation of the BJR

PUBLIC CORPORATIONS & SECURITIES REGULATION 1. IS IT A "SECURITY"? • Securities Act, §2(a)(1): "The term 'security' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit‐sharing agreement, . . . investment contract . . . or, in general, any interest or instrument commonly known as a 'security' . . ." • Definition of "Stock": called stock and has usual characteristics of stock • Definition of "Investment Contract": an investment of money (anything of value, i.e., gold) in a common enterprise (money pool to do something) with profits to come solely to come from the efforts of others (Robinson v. Glenn) CASE: Robinson v. Glenn ‐ profits did not come "solely from the efforts of other" so not an ○ "investment contract" dude could sue on 2. LIABLE FOR FUCKING UP SECURITIES SALE & REGISTRATION UNDER §11 OR §12? • Registration: Not allowed to sell securities until you register ○ Offers permitted and price is usually named at end of the 20 days ○ Then 20 days for the SEC to say no or do nothing (then you're allowed to sell your securities) ○ Must delivery the prospectus before the sale ○ • Exemptions from Registration:

Transactions by an issuer not involving any public offering Reg. D provides a safe harbor for private offerings: ○ □ Under $1M, unlimited number of people □ Under $5M, up to 35 offerees □ Above $5M, up to 35 offerees of financial sophistication  Re‐sales count against the sales need to put restrictions on the stock to prevent resale  Issuer can't advertise publicly  Issuer still must file a notice of the sale with the SEC (but don't have to register security) • Securities Act §11: liable for a registration statement that contains an untrue statement of a material fact OR omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . "  Do not need to show reliance, causation or scienter  No cause of action if Π knew of untruth or omission;  Does not apply to exempted registrations Issuer is strictly liable ○ Other Δs liable for degree of fault and Δs have burden of showing the degree their conduct did ○ not cause plaintiff's damages  Possible Δs: □ Anyone who signed the registration statement (issuer, executive officers, directors MUST sign) □ Every person named as director in reg. statement + directors at time statement becomes effective □ Every expert named as having prepared or certified any part of the statement, or as having prepared any report or valuation used □ Every underwriter of the security Due Diligence Defense: [1] after reasonable investigation, [2] Δ had reasonable grounds to ○ believe and [3] did believe that the statements were true and no omissions of material fact  See Escott v. BarChris ‐ SHs sues the BarChris corporation and everyone who signs the registration statement under Securities Act §11, claiming false statements on the registration made them buy stock and lose money Issuer (BarChris) is strictly liable but all other Δs raise due diligence defense (none ○ succeed) ○

RULES for Due Liability of Non‐Experts Diligence Defense:

Liability of Experts

Prepared by Non‐ Experts

Not liable if reasonable investigation + affirmative belief the statements are true (have show you went out and did actual due diligence so you really had reason to believe misstatement was true)

No liability for the shit that the expert had nothing to do with / materials they didn't prepared / materials the company didn't use / altered materials

Prepared by Experts

Not liable if you had no reason to believe and did not believe statements were misleading (all you have to show is that there were no red flags)

Same as top left box

• Securities Act §12: Strict liability for: ○  [1] offering or selling a security in violation of the registration process mandated by the Securities Act (should have been registered but wasn't), unless security is exempt from registration  [2] misrepresentations in the prospectus/oral communications (not just registration) □ No need to prove reliance □ Applies only to public offerings

Due diligence defense also available Liability of Δs same as §11 Main remedy is rescission (or comparable remedies if Π no longer owns securities) □

○ ○

3. ACCOUNTING ISSUE? • Efficient Capital Markets Hypothesis: 1. Weak market reflect past prices 2. Semi‐strong reflect public information 3. Strong reflects all information including private information • Basic Elements of Financial Position Balance Sheet: company assets (what company owns), liabilities (what company owes), and ○ shareholder's equity on a specific date  Assets = Liabilities + Shareholder's Equity  Shareholder's Equity = Assets ‐ Liabilities Income Statement: profit over a period of time, includes revenues, expenses, and net‐ ○ income (revenue ‐ expenses) Statement of Cash Flows: cash received (i.e., income, proceeds, etc) and paid (i.e., payments ○ to suppliers, income tax, capital expenditures, etc) by business during a period of time Statement of SH's Equity: how much SH's equity account has changed in a period of time (i.e., ○ change in stock price/share)  Common stock: class of stock that pays a dividend  Preferred stock: class of stock that pays fixed and regular interest income  Retained earnings: profit that is not distributed to SHs but reinvested into the company (counts as part of SH's statement of equity) 4. LIABLE FOR SECURITIES FRAUD UNDER RULE 10B‐5? • Rule 10b‐5: "it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." • Elements of Rule 10b‐5 Violation: [1] Jurisdictional Nexus: must involve interstate commerce ○ [2] Transactional Nexus: P must have actually bought or sold securities ○  I.e., GE issues a misstatement, you can't sue GE for deciding NOT to buy or sell based on the misstatement [3] Materiality: "fact is material if there is a substantial likelihood that a reasonable SH would ○ consider it important in deciding how to vote"  Sliding Scale Test for uncertain events: (1) probability that the event will occur (i.e., the merger would happen); and (2) the magnitude of the possible event, see Basic, Inc. v. Levinson [4] Reliance: fraud on the market theory essentially eliminates the reliance requirement ○  Rebut with: no reliance b/c everyone knew CEO was lying, P would have sold regardless due to him being broke, misstatement was corrected [5] Causation: ○  Transaction causation: basically the same thing as reliance (presumed by courts)  Loss causation: how much did you lose due to your reliance (provide evidence market believed misrepresentation) [6] Scienter: state of mind of the person making material misrepresentation ○  Intent to deceive / defraud is enough  Some courts also accept reckless disregard for the truth of a statement

5. LIABLE FOR INSIDER TRADING? • Common Law: Split ‐ more states follow the special circumstances rule OR minority rule, NOT the majority rule; insider ONLY owes duty to SHs (no duty when selling to non‐SHs at time of transaction)  Traditional or "Majority" Rule: officers & directors may trade with SHs without disclosing material info  "Special Circumstances" Rule: duty to disclose to SHs might be imposed when there are special circumstances  Minority Rule: insiders have a duty to fully disclose material information whenever they purchase shares from SHs ○ See also Goodwin v. Agassiz ‐ insiders do not have a duty to disclose when trading on public exchange

• Rule 10b‐5 Traditional Theory: Rule 10b‐5 is violated when there is a purchase or sale of a security . . . on the basis of material nonpublic information about that security, in breach of a duty to disclose [or to abstain from trading] because of the necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed . . . stockholders Statutory Insiders: directors, officers, 10% SHs ○ Temporary Insiders: for fiduciary duty to be imposed, outsider must [1] be given nonpublic ○ material info from issuer; [2] with expectation of confidentiality; and [3] relationship implies duty of confidentiality Derivative Liability of Tippee: tippee is liable for trading or passing on a tip [1] if the tipper ○ breached his duty of loyalty by disclosing the tip [for a personal benefit]; and [2] the tippee knows or has reason to know of the breach of fiduciary duty  Tippee cannot inherit derivative liability UNLESS the tipper breached his duty, see Dirks v. SEC (SEC comes after Dirks but Dirks is NOT an insider so no derivative liability) □ [1] Secrist was not a tipper b/c he didn't breach his duty for his personal benefit, and no tipper = no tippee □ [2] Dirks knew Secrist's motivation was to expose fraud, not personal benefit • Insider Trading "Traditional" Theory Flowchart: Is Defendant in possession of material non‐public information? ○  No – No liability.  Yes – Is D a statutory insider or a temporary insider? □ Yes – Did D trade (recklessly or intentionally) without disclosing to the trading partner or the market generally [TGS]? Yes – Subject liable for personal trades under 10b‐5.   No – Did D tip others? ◊ No – No liability under "traditional" theory (but check other theories). ◊ Yes – See "tippee" section below. □ No – Is D a tippee (derivative liability)? No – No liability under "traditional theory" (but check other theories).  Yes – Did insider tip others recklessly, for personal benefit?  ◊ No – No liability for either tipper or tippee (but check other theories). ◊ Yes – Did Tippee know or should reasonably know of tipper’s breach? ► No – Tipper liable under 10b‐5, tippee is not (but check other theories). ► Yes – Both tipper & tippee are liable under 10b‐5.

• Rule 10b‐5 Misappropriation Theory: Rule 10b‐5 is violated when a person misappropriates confidential info for securities trading purposes, in breach of a duty of confidentiality owed to the source of the info Requirements: ○  [1] Material nonpublic information  [2] Undisclosed use of information  [3] Belonging to principle  [4] For personal gain See US v. O'Hagan ‐ O'Hagan defrauded his law firm and firm's client by using material ○ nonpublic info about the tender offer to personally profit  But A says: NO liability if [2] O'Hagan just disclosed that his planned trades to his law firm and firm's client before trading b/c then no "deceptive device" under 10b‐5 Rule 10b5‐2: non‐exclusive list of 3 situations where a person has a duty of trust or ○ confidence for the purpose of the misappropriation theory:  [1] when a person agrees to maintain info in confidence; or  [2] when the two people have a history or practice of sharing confidences, such that the recipient of the info knows or reasonably should know the communicator expects the recipient to maintain confidentiality; or  [3] info obtained from a spouse, parent, child or sibling, UNLESS recipient shows that history or practice indicates no expectation of confidentiality • Insider Trading "Misappropriation" Theory Flowchart: Is Defendant in possession of material non‐public information? ○  No – No liability.  Yes – Does D owe a fiduciary duty of confidentiality to possessor of information, and is the information within the scope of this fiduciary duty? □ No – No liability under the "misappropriation" theory, unless D received tip from someone who had such a fiduciary duty (in which case, see below). □ Yes – Did D trade (recklessly) without disclosing to the source of the information? Yes – Subject liable for personal trades under 10b‐5.  No – Did D tip others?  ◊ No – No liability under "misappropriation" theory (check other theories). ◊ Yes – Did insider tip others recklessly, for personal benefit, without disclosing? ► No – No liability for either tipper or tippee (check other theories). ► Yes – Did Tippee know or should reasonably know of tipper's breach?  No – Tipper liable under 10b‐5, tippee is not (check other theories).  Yes – Both tipper & tippee are liable under 10b‐5. • Rule 14e‐3 Tender Offers: when a tender offer has commenced or is about to be commenced, it is a violation of §14(e) for a person other than the offering person to trade in the relevant securities, if that person has material non‐public information relating to the tender offer, which the person knows or has reason to know was acquired (directly or indirectly) from: the offeror, target company, or any officer, director, employee of offeror or target company Rule 14e‐3(d): It is a violation of §14(e) for the following persons to communicate material ○ private information to others if it is reasonably foreseeable that this communication will result in a violation of §14(e) . . . Exceptions for communicating to the target and necessary people within the offering ○ organization

• HYPO: Insider Trading Liability Who

Traditional

Misappropriation

14e‐3

B, CEO of Buyer No ‐ B is not an insider of Co. (discloses) Target Co. info to T, the CEO of Target Co.

No ‐ B owes the duty of confidentiality to her [Buyer] company, but no liability b/c not for personal benefit (discussing deal)

No ‐ This is tender offer, but the exception allows disclosure to Target Co. b/c it's necessary to the deal

B (trades) on info using her personal account

Yes ‐ now for personal gain, unless Yes ‐ tender she makes disclosure to Buyer Co. offer and she before doing so [US v. O'Hagan] is trading for her personal gain

No ‐ B is not an insider of Target Co.

T, CEO of Yes ‐ T is an insider so liable for trading target company (trades) on info using her personal account T (discloses) info to L, her personal lawyer, asking for advice; J, her husband, and inadvertently son S overhears

No ‐ Target Co. was arguably not source of information, and didn't owe duty of confidentiality to source (B)

No ‐ Have to show it was for No ‐ Target Co. was arguably not personal benefit; unless source of info, and didn't owe duty she's hoping someone she of confidentiality to source (B) disclosed to will trade on this info

Yes ‐ tender offer and she is trading for her personal gain

No ‐ unless she anticipates trading on this information

L, T's personal No ‐ (1) L is not a temp Yes ‐ L breached duty of lawyer (trades) insider b/c he is personal confidentiality to client T by using on info lawyer of T, not corporate info to trade lawyer of Target Co.; (2) T was not tipping L for personal benefit, only seeking advice; (3) even if it was for personal benefit, still have to prove L knew it was for personal benefit [Dirks]

Yes ‐ tender offer and he is trading for personal gain

John, T's No ‐ T did not disclose for Yes ‐ there is a presumption of husband personal benefit, so John duty with a spouse per Rule 10b‐5; (trades) on info cannot inherit liability [Dirks] unless John can show there was no pattern of keeping confidences


John, T's No ‐ disclosure from T to husband John was not for personal (discloses) info benefit, and the disclosure

No ‐ though John might be No ‐ unless he breaching his duty to his wife by anticipates trading, no liability for disclosing to trading on this

to golf buddy H from John to H also not for personal benefit

H b/c not for his personal benefit

information

S (trades) on info

No ‐ T did not disclose for personal benefit

No ‐ though not perfectly clear this info was in the scope of the duty of confidentiality to T, normal duty of confidentiality between mom and son per 10b‐5 does not apply b/c it was an incidental overhearing


H, John's golf buddy (trades) on info

No ‐ disclosure from T to John was not for personal benefit, and the disclosure from John to H also not for personal benefit

No ‐ unless (1) H liable as a tippee if he knew John was disclosing for personal benefit OR (2) if there was a duty of confidentiality to John


• Key to traditional liability = every link must be breached AND initial violation must be from insider • Misappropriation is same as traditional in that every link must be breached, but initial violation does NOT have to be insider 1. • • •

PROXY SOLICITATION / CONTEST? Rule 14a‐3(a): Anyone soliciting a proxy must first provide a written proxy statement Rule 14a‐6: Proxy statement must be filed with SEC Rule 14a‐3(b): Incumbent directors must provide an annual report before soliciting proxies for the annual meeting • Proxy Fights: Reimbursing Incumbent: OK to reimburse even for wining and dining b/c [1] expenses were ○ reasonable and [2] a bona fide proxy contest based on policy, NOT personal reasons Reimbursing Insurgents: can get reimbursed if they [1] win and [2] shareholders ratify ○ reimbursement

2. LIABLE FOR PROXY VIOLATION? • Rule 14a‐9 Proxy Violation: [1] misleading statement or omission ○ [2] info is material if there is a substantial likelihood that a reasonable shareholder would ○ consider the info important when voting or giving proxy votes  See Mills v. Electric Auto‐Lite Co. ‐ not disclosing conflict of interest in proxy statement was very material  But see Virginia Bankshares (when majority SH has enough votes to pass, even material defect =/= casual necessity)  See also Seinfeld v. Bartz ‐ omission of Black‐Scholes valuations of option grants on the proxy statement is not material as a matter of law b/c not required by SEC regulations [3] burden of causation met if can show defect was material and the "proxy statement itself, ○ rather than the particular [defect], was an essential link in the accomplishment of the transaction" [4] damages is determined by best interests of SH as a whole ○  Merger set aside only if equitable  Monetary relief if possible to quantify of proxy defect 3. CAN BOARD EXCLUDE A SHAREHOLDER PROPOSAL? • Rule 14a‐8: allows eligible SH to put a proposal before their other SHs, and have proxies solicited on the company's proxy statement SH eligible only if holds at least $2,000 in market value or 1% interest for over year ○ Company can exclude the proposal on 13 grounds, for example: ○  Personal grievance of SH  Something not significantly related to corporate business

Related to specific dividends  Related to substantially same proposal that had been rejected in past 5 years  Related to elections or procedure for elections • CASE: Lovenheim v. Iroquois Brands ‐ corp. cannot exclude the SH's proposal as "not related to corporate business" b/c this was a really important ethical issue that could have impacts on corp. 

4. SHAREHOLDER SUING FOR INSPECTION RIGHTS? • Rule 14a‐7 gives Π SHs the right to either get the SH list or to make the corp. mail out proxy statements to SHs without turning over the SH list of SH Default: SH list accessible if there is a proper [corporate] purpose ○ NOBO list (non‐objecting beneficial owners): longer list that contains the actual names of the ○ beneficial owners, unless they objected to being listed CEDE list: shorter list with only the street names of the owners ○ • Compare Crane Co. v. Anaconda Co. ‐ was a proper purpose to get SH list when Π needed to inform the SHs why his hostile takeover offer was actually good for SHs ‐ even when a hostile takeover opposed by BoD • With Pillsbury v. Honeywell, Inc. ‐ ethical concerns [about producing weapons for Vietnam War] are NOT a "proper purpose" for inspection b/c must be related to an economic purpose / investment return and not purely to persuade adoption of social or political concerns

CLOSED CORPORATIONS • Defining characteristic: no secondary market • Splitting Bundle of Rights: important rights related to economic (i.e., the right to dividends, voting, etc) DE: OK to have different economic and voting rights, see Providence v. W (OK for SH to own 28% ○ of the shares but only 3% votes due to bylaw limiting number of votes as # of shares increases) IL: must have voting rights but economic not necessary, see Stroh v. Blackhawk Holding ○ • Voting Trusts & Agreements: Shareholder agreements and trusts (to vote shares per a 3rd party if disagreement) are OK, but ○ no specific performance, see Ringling (remedy is to just ignore the votes of breaching party) Director agreements are void b/c it takes away independent judgment of directors, see ○ McQuade v. Stoneham (directors violate fiduciary duties by constraining themselves b/c they can't consider other options)  But see Clark v. Dodge (agreement between SHs is valid EVEN WHEN the agreement is about controlling management decisions b/c only 2 SHs affected, unlike McQuade where there were other SHs)  "Homemade McQuade" = sell stock to create another SH so a SH agreement cannot be enforced per Clark □ Prevent by making any purchaser of stock consent to the SH agreement IS THIS A LIMITED LIABILITY COMPANY (LLC)? • Characteristics: Main benefit = "pass through taxation" avoid the double tax in corps. ○ Manager‐managed is like corporations: exactly same as BoD ○  Managers owe fiduciary duties Member‐managed is like partnership: one vote per membership share, simple majority wins ○  All members owe fiduciary duties End of LLC: same as partnership (disassociation or dissolution) ○ • Piercing Corporate Veil for LLC: Members, managers and SHs normally not liable and nothing explicit applying PCV to LLCs ○ A says: can PCV, but more difficult b/c LLC lacks formalities in the first place, so only showing lack ○ of formalities is NOT enough, cf. ULLCA §303(b): "The failure of a [LLC] to observe the usual company formalities . . . is not a ground for imposing personal liability on the members or managers for liabilities of the company."

○

See also New Horizons Supply Coop. v. Haack ‐ Δs properly formed a LLC so not subject to PCV, but LLC not properly dissolved b/c Δ took the assets of the dissolving LLC instead of turning over to creditors first, thus Δ personally liable for the debts

CORPORATE CONTROL • Many ways to get corporate control: Proxy contest: expensive and not as large of profits (only the % you own) ○ Tender offer: acquiring company offers premium to target SHs for stocks, can be conditional on ○ # shares, if oversubscribed, tenders accepted pro rata Stock purchases: buying stock on open market (tough to get more than 10% this way) ○ Sale of assets: don't buy target corp., instead all of target's assets ‐ but same effect as a merger ○  Does not come with unknown liabilities Merger/consolidation: only way to gain control AND truly combine the 2 companies ○  Merger = only the acquirer survives □ More appealing than sale of assets b/c of tax reasons □ Assets and liabilities are transferred in a merger  Consolidation = new company is formed from acquirer and target • Steps to a merger in DE: [1] Board approval from each company (bound by its own law) o  Usually also change the articles of incorporation [2] Majority SH approval o [3] Filing notice with state o [4] Appraisal rights (right to get paid cash for fair value of shares) o  NOT available for public corps. (just sell on open market) 1. IS THE TRANSACTION A DE FACTO MERGER OR DE FACTO NON ‐MERGER? • De Facto Merger Doctrine: a court will hold a transaction as a merger even if called a "sale of assets" in order to prevent circumvention of SH protection (cannot allow people to take away appraisal rights just by calling it a "sale of assets") o See Farris v. Glen Alden Corp. ‐ court concluded sale of assets was really a merger after looking at: (1) all provisions of agreement, (2) overall consequences of transaction, and (3) purpose of applicable corporate law  Aftermath: PA legislature abolished the doctrine of de facto mergers See also Hariton v. Arco Electronics ‐ DE Court says the DE sales‐of ‐assets statute and merger o statute are independent so following either is OK and de facto merger does NOT apply • De Facto Non‐Merger Doctrine: to find that something called a "merger" is really substantively something else (i.e., sale of assets followed by redemption in Rauch v. RCA Corp) See Rauch v. RCA Corp. rejecting de facto non‐merger doctrine b/c merger complied with DE's o merger statute, and Δs had the right to choose merger or redemption 2. DID MAJORITY SHAREHOLDER BREACH FIDUCIARY DUTY IN FREEZE ‐OUT (CASH ‐OUT) MERGER? • Triangular Mergers: Parties: Acquirer, Subsidiary, Target o 1. Acquirer (often a majority SH) forms wholly‐owned Subsidiary 2. Subsidiary is capitalized with $ or stock to be paid to Target's SHs 3. Subsidiary merges with Target 4. Once in control of Target, force the remaining minority SHs of Target to take cash payment, freezing them out 2 advantages: Acquirer gets total control of Target and without assuming Target's liabilities o Forward triangular merger: Subsidiary survives o Reverse triangular merger: Target survives o • RULE: whether a majority SH breached his fiduciary duty in a freeze‐out merger is judged by the Entire Fairness Test (remember the primary test for interested transactions), and:

[1] Burden to show unfairness is on the Π, if:  [A] Valid ratification (majority of the minority); □ AND  [B] NO evidence of fraud, misrepresentation, or misconduct [2] Burden to show fairness is on the majority SH Δ if either one of two things is true: o  [A] if a Π can show ratification was invalid b/c Δ's failure to meet a disclosure obligation; □ OR  [B] if a Π shows SOME evidence of fraud, misrepresentation, or misconduct See Weinberger v. UOP, Inc. ‐ majority SH for breached his fiduciary duty to minority SHs by o withholding relevant info and not disclosing conflicts of interest Entire Fairness Test: evidence pointed to a lack of fair dealing (withholding 1st expert o report, not revealing 2nd report was prepared by an interested party); no finding on fair price b/c the lower court didn't consider all relevant factors o See Rabkin v. Philip Hunt Chem. Corp. ‐ majority SH did not violate merger agreement per se, but court doesn't like bad behavior and finds Δ breached fiduciary duty by intentionally avoiding a commitment made to minority SHs o A says: majority SHs behavior not so bad ‐ contract was a year, and they waited after a year to do the other freeze out merger • Business Purpose of Merger: DE: NOT required to show a business purpose, Weinberger o MA: Coggins requires controlling SH Δ to prove (after Π met his burden of showing self ‐dealing o by Δ): [1] the transaction served a legitimate business purpose for the corporation; and [2] overall fairness to the minority shareholders See Coggins v. New England Patriots ‐ majority SH breached fiduciary duty to minority SHs o b/c NO legit business purpose (Sullivan only wanted to force out minority SHs so he could pay back his loans) o A says: now there is a standard set of business purposes (decrease transaction costs, minimize disclosure obligations, etc) • Damages: Appraisal only remedy if the Π only alleges cash‐out merger didn't pay enough $ o  Look at stock value right before freeze out merger, even if price increased solely due to majority SHs merger attempts  Open‐ended valuation to account for other factors (i.e., lack of market, "minority discount"), Weinberger Monetary or Equitable Relief (i.e. Recession): OK if appraisal not adequate, "particularly in o cases of fraud, misrepresentation, self ‐dealing, deliberate waste," Weinberger; maybe simple misconduct per Rabkin Recession of Merger or "Rescissory Damages": OK if majority SH breach fiduciary duty, Coggins o  Normally recession of the merger, but if practical anymore, minority SHs can recover "rescissory damages" (present value of minority SHs stock) o

3. LIABLE FOR LLC MERGER? • See VGS, Inc. v. Castiel ‐ LLC merger was invalid b/c the two minority managers violated their fiduciary duty to 3rd majority manager by voting in secret to merge (and oust 3rd majority) b/c: Minority interest has a duty of loyalty to the majority interest, even if it means that the o majority will outvote the minority No disclosure of vote = breach of fiduciary duty o

4. DID BOARD OF DIRECTORS BREACH FIDUCIARY DUTY WITH A TAKEOVER DEFENSE? • Williams Act (1968) Federal Regulation of Tender Offers & Stock Purchases: Anyone acquiring, including coordinated buys) more than 5% of shares must file a disclosure ○ within 10 days of purchase Target company has to file a response on tender offer ○ • The Front‐Loaded Tender Offer: 2‐tiered tender offer where front‐end offer is really good but back‐ end offer is junk , having a "coercive effect" on SHs to tender • Defenses Against Hostile Takeovers: Golden Parachute ○ Greenmail, [Cheff ]: OK for BoD of Target Co. to pay off corporate raider but a horrible defense ○ b/c it doesn't deter, but encourages more raids  Though IRS has big tax on greenmail to discourage this Counter‐Tender Offers [Unocal, Time]: Target co. offers to buy back shares for high $$ IF the ○ first tier tenders, but excludes Acquirer from offer, thus incentivizing SHs to hold out and NOT sell until second‐tier (which will never happen)  But not very effective now b/c SEC Rule 13e‐4(f)(8) prohibits an issuer from making counter‐tender offers that are not made to ALL SHs Poison Pills [Revlon]: modern defensive tactic which are SH‐exercisable rights ("SH Rights Plan") ○ that make the takeover less profitable to the acquirer, typically by lowering the value of the target's or the acquirer's shares □ Rights cannot be exercised until a triggering event (i.e. announcement of a hostile tender offer, acquisition of more than 20% of target's stock, etc) □ BoD can redeem and "disarm" poison pills, forcing acquirer negotiate with the BoD  Flip‐In Plan: SH's granted the right to buy another share of target at 1/2 price after triggering event, diluting the target's stock pool and making it very expensive for acquirer to get majority control  Flip‐Over Plan: special dividend stock issued to SHs that provides the right to convert existing stock to double the stock in the acquirer ‐ so if acquirer succeeds, the SHs of the target get tons of shares in the acquirer, diluting the stock value of acquirer, possibly even getting control  Back‐End Plan: same idea as Unocal, if first tier goes through, remaining SHs get a right to convert share into debt securities at higher price ‐ forces acquirer to offer above the set back‐end price  Voting Plan: if event triggers, those that acquire stock in target have their voting rights diluted ‐ i.e. acquiring 50% of the target corporation only gives the acquirer maybe 5% of the votes  Poison Debt: target corp. issues debt to SHs, and debtor's rights contains provision preventing the corp. from issuing more debt ‐ defeating LBOs that require using the target corp. as a security for it's loans Dead Hand and No Hand Pills: prevents the redemption loophole in poison pills (where acquirer ○ installs a new BoD to redeem poison pills)  Dead Hand Pills: provision in pill that says newly‐elected directors cannot redeem poison pill; reserves redemption right only to approved successors, see Toll Brothers (dead hand pill NOT OK b/c: can't create unequal directors and restrict BoD power)  No Hand Pills: creates a time period where no one can redeem pill, see Quickturn Design Systems (no hand pill used was disproportionate b/c it prevented the new BoDs from exercising one of their fundamental duties to the corp. ‐ negotiating possible sale of corp.) Lock‐Ups [Van Gorkom, Revlon, QVC]: to incentivize bids, Target might give "lock‐up" or ○ termination fees to cover an acquirer's cost of bidding □ Problem is really high termination fees: (1) might get more people to participate but lowers overall selling price AND (2) lowers the total value of Target by the amount it has to pay in termination fees  No‐shop obligation: prevents target from dealing with alternative buyers to bid up the price if one buyer is already putting in the $ and work

• Modified Duty of Care Test for Takeover Defenses [Unocal]: BJR normally applies to BoD decisions but potential for conflict in takeover defenses places the burden on the BoD to prove that: [1] BoD had reasonable grounds to believe there was a danger to corporate policy and effectiveness, which is demonstrated by showing [A] good faith and [B] reasonable investigation; AND [2] the defense were proportionate responses to the level of threat posed, see Unocal ‐ counter‐tender offer OK b/c BoD were confronted with a legit threat to corp. policy evidenced by: junk bonds in offer, the $54 offer was inadequate, and dude was a well‐known corp. raider  Level of Threat: determined by price, offer, risk of non‐consummation, timing of offer, quality of securities □ 3 common categories of threats to corp. policy [Unitrin]: Opportunity loss (offer deprives SHs opportunity to choose a better offer)   Structural coercion (coercive offer distorting SHs' decisions to tender) Substantive coercion (SHs led to believe an underpriced offer is fair despite  intrinsic value) □ Consideration of others other than SHs: Cheff ‐ listed "employee unrest" as valid consideration for BoD   Unocal ‐ OK'd considering others such as "creditors, customers, employees, and perhaps even the general community"  Revlon ‐ can consider others besides SHs as long as had some ultimate benefit for SHs ‐ never in a Revlon auction Time ‐ maintaining "corporate culture" was relevant but did not explain how it  would benefit SHs  Proportionate Action [Unitrin]: a court will not interfere with defensive measures by independent BoD if: [1] the action is NOT "draconian" (coercive or preclusive), AND [2] as long as action taken is in the range of reasonableness □ "Coercive" = a bad incentive that forces SHs to do something □ "Preclusive" = a deterrent that makes tender effectively impossible □ See Toll Brothers (dead hand pill NOT OK b/c coercive forced SHs to reelect the incumbent directors if they wanted a functioning BoD and preclusive b/c made any takeover impossible) Relationship between Revlon, Time, and QVC: ○  Revlon – If the company is for sale – must have an auction  Time – but not if the sale is part of a longstanding plan  QVC – unless the long standing plan represents a change to private control Revlon Auction: but once company in sales mode, BoD's fiduciary duty changes to auctioning ○ for highest price, see Revlon (lock‐up agreements are not per se illegal in DE but this lock‐up agreement does NOT pass modified Unocal test b/c BoD's duty changed to auctioneer the lock‐ up discourages bidding) Longstanding Plan Exception To Revlon Auction [Time]: but Revlon only applies to [1] active ○ bidding and [2] abandoned long‐term strategy, see Time (Time was NOT in "Revlon Sales Mode" b/c the deal they locked‐up had been in place for a long time and was not a deal to abandon control/strategy ‐ thus regular Unocal standards applied)  Revlon's White Knight was a new strategy; Time just followed their plan from day 1 Change in Control Exception to Longstanding Plan Exception [QVC]: a BoD has an obligation to ○ seek the best value available for SHs when there is a breakup of the corporate entity (Revlon), OR when there is a change in corporate control, see QVC (breakup not necessary when shifting control from public SHs ‐> single private SH)

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