Corporation Outline

Book and class notes

Class 1 notes

Gortson v. Doty
- Agency = consent on both sides and control by principal
o Manifestation of consent and subject to his control
 Does not have to be a written contract or payment
- Principal- agent relationship makes the principal liable for the actions of the agent
o Ownership alone establishes a prima facie case against the owner
- She says it must be him that drives and creates the condition
- Was it just a nice gesture?
o Dissent says it was
o Does not disagree with the majority for the test of consent but does think there
was not enough manifestation
 How much manifestation must there be? - answer is not clear
A.Gay Jenson Farms co. v. Cargill
- Suing on the grain contract, not the seed
o Giving money to warren for him to buy grain and they were buying most of it
from him then
- Court says that there was control and influence
o They were loaning money, so it was expected that there be rules but was there too
much control? (move out of the credit/debtor to principal/agent)
- Cargill tells farmers that they will get the money and they are sending someone over to
take care of it
o Apparent authority
o Come in and make distributions
o Use the most grain
o Agent relationship in other places
 Seems as though there is enough manifestation
- Why did they keep on extending credit when they were not getting paid back?
o Commission based pay that employees wanted to meet their quotas
 Agency costs- incentives to make deals (turned out making bad deals for
the company)

Class 2 notes
Agency- principal, agent, 3rd party
- Actual authority
o Actual express authority
 Sell my house
o Actual implied authority
 Don’t have to set out all the things that they can do
o Apparent authority
  Principal (liable to) 3rd party (because of agent)
 Enough manifestation indicating by principal that agent is
authorized
o 3rd party needs reasonable prudence
o Ratification- as if authorized at the beginning
- 370 leasing corporations v. Ampex corporations
o There is apparent authority here
 Must notify the third party of limitations (Joyce was never told that Kays
couldn’t make the contracts
 Was reasonable for him to think that there was authority
- Liability of principal to third parties in tort
o Servant v. independent contractor
 Control v. not as much control
 Master- servant
o Humble oil v. Martin
 Agency relation= control
o Why is there an agency relation in Humble but not sun?
 How the two cases are the same
 Sun representative weekly visits
 Both use the advertising material
 No one viewed as master
 Different
 Conditions- humble took profit
 Sun was sliding scale profit
 Humble could terminate the lease where in Sun either could
 Humble controlled the hours
 Barone assumed the risk in Sun
o The test is control
- Why does liability follow control- why is this the test?
o The more control you have the more you will make your agents be careful
 More control = more risk
 Behavior we try to prevent
 Makes you more careful
 Want employees to be more careful to ensure against dangers and will
reduce liability

Class 3 notes
- Fiduciary duty
o Rash v. JVIC
 Rash competes, and he only uses his own business
 Loyalty
o Competition
o Self-dealing
o Taking an opportunity
 Rash had a duty to JVIC, but a financial interest in his company
 o He competes with them and he only uses his company
 Does not inform and this breaches the fiduciary duty
 Fiduciary duty – duty that agent owes principal but not vice versa
 There are higher stakes for the principal
 There is a lot of risk for a principal when they hire
o You are liable for all of their actions
o They are given one protection which is the fiduciary duty
 Must deal openly and disclose fully
 He failed to disclose
- Entities
o Publicly traded corporation- sell stock and others have an interest in it
 Listed on stock exchange
 Traded more- easy to find
 Less control
 Discloser- more to compare
 More knowledge available on it so more reliance
o Privately held- same structure but not listed
 State law
- Entity overview
o Limited liability
 Corporation- not personally liable so yes limited
 Partnership- not limited, fully responsible for partnership and debt
 LLC- yes limited
o Management
 Corporation – board of directors (voted by shareholders) centralized
 Partnership- equally managed (1 partner= 1 vote)
 LLC- members/ manager
o Transferability
 Corporation – freely transferable
 Partnership- no, cannot unless all agree
 LLC- depends; default is no- creature of contract
o Taxes
 Corporation- money goes to IRS then money goes to partners which is
then taxed again
 Double taxation
 Partnership- money goes to partners then is taxed
 LLC- same as partnership
o Life
 Corporation- perpetual
 Partnership- partner exit= dissolve
 LLC- perpetual
o LLC- entity of choice because there is limited liability and flow through
- Themes
o Exit and how you get money out of investments
 Different in public v. private
 o Control- management or control- how do owners exert
 How much watching publicly traded company
 Private= more control for the owners
o Tax- how it works
- Partners compared with employees
o Can become a partner without knowing- like agency
o Test: association of 2 or more to carry on as co-owners a business of profit
- Fenwich v. unemployment compensation commission – worker at a salon made into
partner so that owner could decide to pay her more if the business allowed
o Court looks at
 The intention of the parties
 The right to share in profits
 Obligation to share losses
 The ownership and control of the partnership property and business
 Community power of administration
 Language of agreement
 Conduct of the parties towards third persons
 The right of the parties on dissolution
- Partners compared with lenders
o Partner= liable for debt
- Martin v. Peyton

Class 4 notes
- Fiduciary obligations of partners
o Fiduciary need to treat their principal interest as their own
- Meinhard v. Salmon
o For meinhard
 Lease was the same- extension of same subject matter
 Co-adventurers
 Owe loyalty
 Had right to know so he could have made an offer
 Same property
 He put up the money
 Should have disclosed
o For salmon
 Lease had ended
 When it lapsed their joint venture did too
 There were additional properties, so it was a bigger deal
 He put in the time and work as manager
 No intent to expand
 Mein knew lease was expiring and could have reached out
 Opportunity changed in scope
o There is a duty of the finest loyalty
- As a joint venture would Meinhard win under UPA and what contradicts
 o Subsection E of the UPA would contradict Mein interest
o Best for Meinnhard is (b)(1)- appropriation of partnership and winding up
business
- Contracting out of fiduciary duties
o Metaphone- UPA is off the rack rule for parties that provide generally applied
rules that can be tailored if they don’t quite fit
 Majority default rules
o Fiduciary duty supplies the rules
 Protects fiduciaries
 Cover your ass
 Salmon would want to (K as fiduciary)
 Fair dealing
 Increase Meinhard
 Trying to keep money
 The fiduciary duty would create loyalty and binding of Salmon
reassures Meinhard that Salmon will have loyalty and disclose
- Sandvick v. Lacrosse- horn leases and 2 renew which in a. Conflict of interest not to sell
o Need to keep the others interest above your own
o This was a conflict of interest
o Breached fiduciary duty
o Dissent says there was no written K so they might have contracted out of it
- Cannot contract out of loyalty completely

Class 5 notes
- Risk and investments
o Government
o Stock- more risk= make more
 Risk is part of investing
 Chance of higher return
- Mitigate risk
o Diversifying
o Not all eggs in one basket
- Grabbing and Leaving
- Meehan v. Shaughnessy – lawyers who leave to start their own firm and remove cases
o They continued doing their work in good faith
o Didn’t provide the firm with a list of clients they were going ot remove
o Looking at spaces and setting up for the new business was okay because they
were doing their work well
o The way they took the cases was improper
 Not truthful about them leaving
 There is an expectation to follow guidelines
 Contracted in secret
 Kept list away
 Didn’t give option for clients to pick who represented them
  Used PC letterhead which made it seem like it was coming from the
company
 Duty to put partners interest above own
o Agency building blocks that partner is an agent
 When one partner waived the 3 months’ notice it was on behalf of the
whole partnership, so it was good
- Lawlis v. Kightlinger and Grey- partner who became an alcoholic then voted out
o What is the duty of firm to partner with disease?
 It is a voluntary relationship and can kick people out based on what the
agreement specifies
 Firm used good faith in kicking him out
 Kept him as partner for 6 months (he voted) gave him a second
chance
- Partnership property
- In re Fulton
o Determined by the intentions of the partners at the time the property was acquired
o Bankrupt of one partner= dissolve partnership
 Partnership properties pay liabilities
o Order to paying debt
 Debt to creditors other than partners
 Debt to partners for contribution other than capital and profits
 Debts owing to partners in respect of capital contributions
 Debt owing to partners in respect to profits
o When you put capital into a firm you are entitled to whatever is in the capital
account

Class 6 notes
- Forming a partnership and what it requires- can form without saying
- Fiduciary duty- basic element
- Partnership property
- Management and money

National biscuit company v. Stroud- not buying bread but delivers anyway
- No restrictions in partnership agreement of Freemans authority
- UPA= majority of partners have to agree but single partner acts as agent
- For management 401 (k)-
o Ordinary course of business of a partnership maybe decided by a majority of the
partners
- Ex. If there are three and two say no- he has lost actual authority- if he accepts anyway
do they have to pay? Yes
o Seems under apparent authority that he would have the ability to buy the bread
o Reasonable under 3rd party
o Acts as agent and binds the partnership
 Could sue freeman though for exceeding his authority that he didn’t have
but, on the hook, to pay 3rd party
 - If you want to limit the authority the agent, must have vote and communicate that
limitation to third parties
Summers v. Dooley- trash collection 2-person business and hire another one
- Summers loses because he had no legal case
o Default is that partners equally manage the business 401 (h)
o Majority of the partners must consent to ordinary course of business
 Hiring employee is ordinary
o Majority doesn’t matter here because only 2 partners
- Why NaBisCo have to pay and not summers?
o Apparent authority?
o Continually voiced objections – so did Stroud
o Faced with a stalemate and hard to decide= no change.
 Partner who wants change loses
 Go with whatever was happening
o Dooley objected so he lacked actual authority to make a change
o Summers cannot change status quo on his own
o Rule in favor of the person not trying to make the change
 Didn’t use apparent authority but changed status quo
o If Summers had said you are hired on behalf of the business, then would have
been liable to third party
- Could the partners have solved in advance?
o Yes, but to contract out of it you would have to convince the other not to have say
- What do the summers and Stroud’s of the world do when they are stuck in the stalemate
status quo?
o Dissolve

Revised partnership act of 1997

How things used to be in common law

- Death, incapacity, voluntary exit  dissolve  (winding up) termination
o If partners die of incapacitated or exist, then partnership dissolves but when it
dissolves there’s still something there (food center) so how do we split it up
(winding up- get assets together sell and pay off debt then split. If still debt, then
reach into pocket and pay) then partnership terminates

Revised uniform partnership act 1997

- What are the difference?
o UPA 1997 introduces dissociation
 601- events causing dissociation
 What happened under the revised model act?
 701= dissociated partner can be bought out
  There can be a dissociation and the interest are bought out and
sometimes the partnership as a whole dissolve
 What happens if I die?
 What tells when dissolve or dissolution?
o 801(1)
o Changes the common law and 1914 act and says if die or
incapacitated then that partners interest is bought out, but
the partnership continues but if a partner voluntarily
dissolves then it triggers dissolution
 If haven’t set term or undertaking, then these rules apply
o 601 (1) voluntary exit dissociation  dissolve  winding up  termination
o 601 (2)- (10) buyout
 Dies then partnership goes on
 Buy out heirs
 Default changes so death doesn’t dissolve partnership

The right to dissolve

Owen v. Cohen
- Dissolution of partnership
- When can you dissociate or dissolve?
o Nervous that he didn’t have the power to do so because they did not expressly fix
any duration of the partnership it must be presumed that they intended the
relationship continue until liquidated in the manner mutually contemplated (until
paid backundertaking)
o Particular undertaking and walkaway is wrongful dissolution
- Not practicable to carry on

Day 7
Dissociation and dissolution (wrongful)- winding up

Partnership is at will

UPPA 1914 (common law)

Death/incapacitation/voluntary exit dissolution winding up  termination

UPA 1997
Dissociation 601(1) dissolution winding up termination
- Voluntary exit
Dissociation 601 (2) - (10)  buyout (partnership continues)
- When one dies

If there is a power and dealing with a crazy partner, then why don’t you just dissolve?
Partnership for term or particular undertaking
You can always get out but when is it wrongful
What is wrongful dissociation and what happens when you wrongfully dissociate
- In breach of express provision of the agreement or before the end of the term (602) (b)(c)
and that person is liable for damages plus debts and obligations and any other liabilities
of the partner to the partnership
o Owe damages to partnership
o Delayed payout to end of term 701 (h)
o Partnership continues
- Each who didn’t wrongfully dissociate have a breach of contract claim against the one
who did and if want to continue then they can and have to pay but the one who was
wrongful still has a right to the value of his partnership less any damages caused by his
dissociation
o Do get what they are owed but not until the expiration of the term or completing
the undertaking unless can prove it wouldn’t impact the business

Owen (yesterday) doesn’t want to be wrongful dissociate so he sues

- Other things can cause dissolution

Giles v. Giles Land Company

- Limited partnership- entity where one or many general partner (unlimited liability and
manages the business) then there are many limited partners who contribute capital but
have a limited liability shield (can lose investment but no more)
o Treat it like a general partnership
- They don’t want to dissolve business and sell it, but they need to get rid of Kelly
o Try to dissociate him by expelling him by judicial decree
 Use 56a-601 (e)(3)- conduct makes it not practicable to carry on a
business with him anymore
 The easier one and the one that the court uses
 Just have to say that you cannot get along
 Also 601 (e)(1) – wrongful conduct that adversely and materially affected
the partnership business (this is the alternative argument)
 This is wrongful conduct
 Father says that the business is at a standstill and the family is the
business

Prentissv. Sheffel
- Partners can bid on the company
- A partner would offer to buyout based on their share of the company
 o Should get 6 million but have the power to share
 Nuclear option- if you aren’t paying me 8 million then we will go to sale
o Right of dissolution gives the voluntary exiting partner power to blow everything
up
 Remaining partners need to negotiate but it will cost them
- Corporation shares are freely transferable but in closely held then there may be less
liquidity because in partnership a partner can blow the whole thing up so there is more
power and more liquidity

Pav-Saver corporation v. Vasso

- Survivor get the option to continue the business and the wrongful gets whatever his share
is less damages
- Goodwill of the business- the intangible value associated with the business
o Agreement says this will not be considered
- What does the damages clause do?
o Agreement governs (this was the agreement the partners made)
 You are able to contract around the default rules
 This is what was agreed to, and this is what they should follow
 They contracted out of the default rules
 Expressly stated what should happen if there was a breach
 Only agreed to use the patent during the term of the agreement and since it
is over then the right to use the patent should be gone
 Liquidated damages depend on the return of the patent
 Based on the agreement it goes back to the owner and not to the
continuing partner
 Dale would not have entered into the agreement had this agreement not
been agreed upon
 That is why they contracted this way

o Statute governs (this is what the court decides on) (this is the default)
 Section 38 does control because PSC is the wrongful party so Vasso are
entitled to continue their business which they cannot continue without the
patent
 Contract doesn’t specify what happens during the notice of termination
 The section says that this is what happens when wrongful dissolution

Day 8 – dividing the pie

- Code book
- Default rule for profit sharing
o 401- equal share
 Split equally
- What is the default rule for loss sharing and where is it in the UPA?
o 401 a – losses in proportion to the partners shares
 Not necessarily equal
  Losses follow profits
Profits and losses
The Kovacik exception
Buyout agreements

401
Default for profit= split equally
Default for Losses= proportion to share of distributions
- Losses follow profits
o If A contribute 200 to B 100
o If A takes 2/3 profit, then also get 2/3 of losses unless contracting differently
o Specify or default provides the rule

Compensation for services provided by partners

- 401j – default rule is that except in the case of winding up business, you work for the
partnership for free can contract out of it but if you haven’t said anything then you work
for the partnership for here
What happens to the capital contributions that the capital partners provide and how are they
treated. What happens at dissolution?
- When you put money into the partnership it goes into capital account and it is a running
list of what you have contributed and what has been distributed to you out of the
partnership and if you leave the capital account has your balance and you have to be
cashed out because that is a debt for you that the partnership owes you
- Must be paid back
- Balance as to how much capital the partners put in

Kovacik v. Reed
- Trial court had it right because losses follow profits, so Reed would have owed 4,340
because they were to split profit 50/50
o Partners don’t get paid for their work unless agreed (partners work for free)
- California supreme court see problem with how UPA is applied because Reed has
worked for free and shouldn’t have to pay back for capital
o Say that the labor was presumed to be the same as the amount of money that K
put in
o When one partner contributes money and other contributes skill, neither party is
liable to the other for contribution for any loss sustained
o Pure equity v. pure sweat partner then we presume the contributions were equal
and everyone goes back to own corners and no one pays anyone back
 Satisfying equity result but doesn’t fit with UPA

How do you pay back for partners property contribution? 401 b d or f

 - Full - Part - none
- services - $25k + services+ - $50k
lease payment
- - -
- - -
- - -
- - -

Unlimited liability= partners have to reach into own pockets to pay back debt (including capital
debts)

If have 0= then the capital account is 75,000 to pay back the partners
- Under UPA= Losses follow profit so each share equally, so each partner must pay 25,000
to pay back the partnership
- Under Kovacik= full pays nothing and part and none divide the losses evenly 75,000/2 =
37.500
o Or each bear own losses
o Or does not apply at all because supposed to be for pure capital or pure money

Kovchick only for deficit? Probably

If one of the partners gets hurt and partnership has to pay (intra-partner claim)
- Hurt gets paid first and each contributes equally under UPA
- Kovacich- doesn’t apply either way (no pass when there is a third party creditor)
o Because it is a tort creditor and not from the provision

Buyout agreements- limited partnership form

G&S investments v. Belman

- If suing for dissolution, then we know that they do not want to be wrongful dissociates
o Either contracted out of voluntary exit or it is for a particular time/undertaking
- General rule: surviving or remaining general partners may continue the partnership and
shall purchase the interest of the retiring general partner
- Buyout formula- addition of sums of the partners capital accounts plus average of
the prior three years profits

Obligation v. option to buyout

- Obligation= don’t want someone who isn’t working for the business to be voting and
hanging around. You want him out.
- Option to buy gives more flexibility – etc. installments

How do you set the price at the outset?

What method did the parties choose?
- Partners’ capital contributions plus profits minus losses
 o The issue for Nordale is that the fair market value is way more than the cost basis

Associate to partner you pay in with a capital investment and you share losses and if they need
more capital you put

Day 9
Corporations
Hypo- why is the corporate form better than the partnership
- Centralizing control whereas partnership has equal management power
o Voting rules
- Limited liability
- Transfer money stream (freely transferable), cannot transfer partnership interest
- Partnership can dissolve (whole thing can be blown up)
o More liquidity in partnership than in corporate
- Corporate= perpetual life if shareholder dies or wants to exit then it keeps going
- Partners are agents of the partnership
o Corp= decentralized agency power
- Shareholders (residual claimants) own the corporation but they vote for board of directors
who manage and oversee it, but they delegate their power to the officers (CEO CFO)
o Were they acting as shareholder, director or officer?
 Creditors paid first then shareholders paid last
o Power to vote= incentivize them to be in control
o G
o Powers of shareholders
 Vote
 Sell
 Sue
o Officers are hired and fired by directors
- Promotors- before corporation comes into being there are individuals who will buy land
or signed leases on behalf of the corporation
o They are fiduciaries of the corporation and owe fiduciary duties to the corporation
- Formalities matter and who can act on what behalf
o Paula cannot sue as individual but as a corporation

Forming a corporation
- Piece of paper with secretary of state of the state
o Articles of incorporation
 Like the constitution of the corporation
 Filed with state and difficult to amend
o Bylaws
 Document of the corporation not filed with the state
o If disagreement, then articles over bylaws
o Delaware and the Model business corporation act
o Chancery court in Delaware-
Boilermaker
- Directors passed bylaw that said if you sue as shareholder then you have to sue in
Delaware
o Just saying where you have to sue- not what you can sue
- Contractually invalid argument
o Court says that it isn’t unfair
 Contractually binding bylaws where shareholders do not have to consent
to everything
 They are on notice that eh board may act unilaterally
 Stockholders can adopt, amend or repeal by laws
 109 a= shareholders amend bylaws but, in the certificate, they can
say that the directors can do this too. This doesn’t take away power
from the shareholders
 They bought in knowing that the directors had a unilateral right to change
the process
 If you don’t like it then can vote to repeal or vote out the directors

Day 10
- Internal affairs doctrine- internal affairs of corp. are managed by the state of its
incorporations which is not typical place of business, so corporation has choice of 51
different states to incorporate
o Model business act or
o Delaware- dominates corporate law
- Board of directors centralize where shareholders vote for board and board oversees day to
day officers
- Articles of incorporation and bylaws
o Fee shifting bylaw
o If P doesn’t win on merits, then P pay own
- No fee shifting bylaws- new law
- Promoters- individuals who make the contracts for the early corporations
o They are fiduciaries who owe duties to the corporation and disgorge any profits
that they make

Piercing the corporate veil doctrine- why is it the case to have to put a requirement that you say
you are a corporation
- Notice to public that they are dealing with a corporation
o Difference in dealing with business entity v. Individual
o If you want protection of limited liability, then put world on notice they are
dealing with a limited liability entity
 Only get company assets, not the individuals UNLESS corporate veil gets
pierced
 - In rare cases the shareholders personal assets can be on hook
- Test for GA: corporation is a mere instrumentally or “alter ego” of shareholder and
corporate form for fraud and injustice and there is proximate causation

Sea land
- Need unity of interest and ownership or fraud and injustice
- Factors that we look for?
o Failure to maintain adequate corporate records
o Commingling of funds
o Under capitalization
o Treating corporate assets as your own
- Corporate formalities- formal expectations to expect in a corporation (protect an
individual)
o Never had meetings
o Never had an article of incorporation
o Minutes of meetings
o No bylaws
- Marchese has all these different corporations and never does any of these things
- Under capitalization- not having enough capital in the corporation purposefully
- Commingling funds- funds between the different entities and using funds for personal
expenses
- Given these facts it makes sense to hold him liable for not respecting the corporate form
o This court said that this was not enough
- The most important factor is do not comingle funds
o More it seems like you drained those assets and creditors should be able to go
after you for that
- More willing to pierce in tort rather than contract. Why?
o Situation where corporation has caused harm
o What makes a tort creditor more sympathetic rather than a contract creditor?
 Contract creditor can (ex ante) investigate assets before hand
 Tort creditor is an involuntary creditor so cannot assess beforehand the
assets

Walkovsky v. Carlton
- Carlton owns 10 cab companies who each have 2 cabs and law requires 10,000
insurances and each has only that which is required
- 3 causes of action
o Enterprise liability-
 Common enterprise allows P to dip into all the asset of the different
companies
 All seem to be run out of one location, but they are separate
corporations
 Common employees
 Centralized accounting
 Same phone number and address
 o Common enterprise would not help here because only get
the assets of the other businesses but not of the individual
o All split up equally and intentionally undercapitalized to
avoid responsibility and income continually drained out
assets so that they cannot be taken
 NO ASSETS IN ANY BUSINESS
 Test for a common enterprise- whenever anyone uses control of the
corporation to further his own rather than the corporation’s business
 Wants to pierce corporate veil to get to individual assets instead of the
corporations
 Respondeat superior

- Piercing corporate veil

o Intentionally avoided liability by draining funds
o Policy argument to compensate for harm
o Intentionally undercapitalized
- Not piercing the veil
o Lies with legislature
o Allows for multiple corporations
o Had the minimum insurance
o Shielding from liability
o NY allowed
o Not trying to commit fraud
o Was upholding the corporate form
 Was playing by the rules
 Using the corporate form to avoid liability

Dissent says driving is a dangerous business and there will be torts and 10,000 minimum is the
same as any normal person and should uphold more
- This is up to legislature to change though

Not enough to pierce the corporate veil

Why are there corporations with a parent and many subsidiaries

- Generally, the parent isn’t liable

AP Smith v. Barlow- gives money to Princeton

- Against permitting manufacturing from donating to Princeton
o Concerned with how to decide and who to go to
o How does it benefit the shareholder that want to give it to that enterprise?
o Shareholder disagreement- giving away money to different causes
o Give money to shareholders and have them decide where they want to put it
- For donating
o Benefits the company and the public
 Reputational benefits
 o Public policy supports
o Corporate citizens with duties to society

Incorporate for any lawful purpose- what is this purpose?

- Legislature reserved the right to change the rules and we did
- The state says goes and you can donate to charities as long as it is less than 1% you don’t
even have to ask shareholders
o What is the limit?

Day 11
Shlensky v. Wrignley- derivative suit
- Power to vote sell or sue (shareholders) they sue by derivative
- Internal affairs doctrine- state choose what law will govern
o Schlensky arguments
 Make more money because more people like night because weekdays=
work
 During the away games there is more attendance and more money
o Wrigley
 Acting within scope of the law as directors
 For the business because if lights make quality of the neighborhood go
down then no one will want to come to the games
 Thinks baseball is a daytime sport
- P has a better argument based on business decisions
- P doesn’t even state a cause of action because of the business judgment rule
- Business judgment rule- court defers to director’s business decisions and
judgements except in fraud illegality or conflict of interest
o Directors are more likely to direct under this rule
o More or less likely to be a shareholder?
- Court justify results in policy terms and another way that is left out
- Why do we have this for policy reasons?
o Discretion for internal decisions
o Shareholders appoint giving them power
 They are elected for their business decisions and their judgements
o Tension between discretion and accountability
 You want to give the managers discretion to make decisions and even
wrong decisions because the whole point of centralization is to centralize
management in board of directors
o Gives wide amount of discretion
o When do we hold the directors accountable? What are the limits?
o What doing something wrong means in the case of corporations
o Judges say they aren’t experts and defer to judgement of the directors
 - If Wrigley is only 51% holder in the cubs- still controls but is 80% in white sox and
allows night games for the white sox but not the cubs. Different result?
o Drain out competition? Conflict of interest
o Favoring the team, he has 80% ownership interest in
- No fraud, no illegality, no conflict of interest= no cause of action

Dodge v. Ford
- Dodge wants court to compel Ford to pay special dividends and stop the building of the
new factory and wants him to stop lowering the price of cars
o Court will not do any of this except pay dividends
- It is within the power of directors as to when to declare dividends
o Seems like business decisions- can we afford it; do we need it to expand…
- So why does the court order them to pay dividends?
o Corporation is for the profit of the shareholders and Ford wants to run it as a
semi-charitable institution
- Ford wanted everyone to be employed and have good jobs, but the court says business
organized for the profit of the stockholders
o He was trying to change the end (the end is to make shareholders profitable)
o Discretion does not extend to changing core mission of the corporation which is
for the interest of the stockholders
 Limit on the discretion of the board of directors
- Ford thinks shareholder have made enough money and he is running corporation for other
reasons
- Court is comfortable with making them distribute this dividend is because even with the
expansion and price raise, Ford has 30 million dollars left over and can afford to pay the
dividend
- What is the business reason for him stopping?
o Reinvest into the business and increase capacity
o Dodge was going to use the dividend for their other (competing) business
- Business run primarily for shareholders benefit
o No duty to maximize shareholder value though
o As long as ultimate business is for shareholders

Benefit corporations – incorporate as a benefit corporation then articulate what your goals are
(public purpose) that is not just profit for the shareholders (Patagonia was first to re-incorporate
as one)
- Primarily for the purpose of the shareholders then latitude to do almost anything

Duty of care and the duty of loyalty are the two duties in corporate form
1. Duty of care
a. Decisions – was it good or bad and the care that was taken
b. Oversight – running the corporation (typically in compliance or violations)
i. Overseeing with adequate care?
Kamin v. American Express
- Amex invest in other companies and bought DLJ for 30 million and it was a bad
investment
o Lost 25 million dollars
- Directors can sell the shares and take a deduction- when you take a loss you deduct from
your income and save 8-million-dollar tax
- Or distribute the shares to the shareholders
o P say to harvest that lost and get the 8 million dollars
o Breach of the duty of care because the decision is a bad one
- P loses. Why?
o Just because unwise or because there are better alternatives, it doesn’t mean they
were negligent
 They had a meeting and deliberately thought on the decision
 Knew they would have large losses either way
o Imprudent decision in business
 The essence of business is risk
o Don’t punish directors for risks or they won’t take risks
 Must give discretion
o Directors say if we sell and it’s a loss then that will look bad and the market will
punish us because we will take 25 M dollar loss

Class 12
Duty of care- essence of business is risk (we expect them to take risks for more return)
Shlinksy v. Wrigley- what are policy on business judgment rule?
- Centralized management with shareholders and directors
o Shareholders vote for directors and get the ones they vote for
- Duty of care is not being a bad manager but more concerned with process than content
o Directors could make wrong decisions
- Look at care in a different context
- Shlenksy has no cause for complaint in decision not to install lights
o Rights as minority shareholder= no rights
o Majority holder rules and dictates how the corporation is going to run
o He bought in knowing that was the deal and that he wouldn’t really have a cote in
these decisions
o Majority says goes
 How does this impact the price that Schlensky will pay?
 Would want to pay less for them if you get no say
 Minority shares sold as discount or control at premium
 Buying control of company

Smith v. Van Gorkom (most important in corporate law and irrelevant)

- Trans union is a big company and has a problem (or opportunity) had difficulty
generating taxable income and discussed selling trans
- Deduction and credit
o 10% tax bracket= $100 - $10
o Have $100 and have a deduction of $10= $90 (so only report you made 90 to IRS
so then you only pay 10% of 90 which is $9 so you get to keep 91 dollars instead
of having to pay 10% of 100
o Have 100 dollars and a 10-dollar tax credit
 Owe nothing to IRS and keep whole 100
 To make a credit useful then you need taxable income
 This is trans unions problem
- Ways to solve this problem?
o Sell to someone else and have them figure it out
o Merge with a comparable company with more income
o Expand (make more money) then you will have more income to use the tax
credits
o Leverage buyout
- We’re going to merge with a subsidiary owned by Pritzker (New T)
- § 251- of the Delaware general corporation-2 corporations may merge into one by
adopting a resolution approving the agreement with terms and conditions and mode and
due notice sent to the shareholders
o Board of directors recommend and shareholders vote (neither can do it on their
own)
- Target merges into wholly owned subsidiary
- Merges needs a vote at the director and shareholder level for the one being merged
- But subsidiary not necessarily
o Forward triangular merger
o When target is the survivor = reverse transaction
- Leveraged buyout- purchase of a company financed by a relatively small amount of
equity (common stock) and a large amount of debt (which provides leverage). Often
assets of the company
o If you default they have rights to the property
o So, if Bank gives money to buy company what secures that loan?
 The company
o Use debt to buy the company and the debt is secured by the assets of the company
that you are buying
 Just like buying a house
 Secure note with the asset itself
- Does the leveraged buyout help solve this problem of the tax credits?
o No because borrowing gives you deductions (interest is deductible) which is good
unless you have tax credit already
- Management led buyout- when senior management are the ones doing the buyout
o Van does not like this because possible conflict of interest because he is almost at
mandatory retirement
 Concern that managers are going to entrench themselves so veto outside
offers
  If managers are the ones doing the buying, then they have an incentive not
to perform at their best to lower the price of the business
 They would want to pay as little as possible and this is a conflict of
interest
 Management entrenchment but he is about to be mandatory requirement,
so it wouldn’t matter for Van anyways
- Three options on the table
- Did the board act with the requisite care in making the decision that it made to sell and in
negotiating the transaction
o Valuation is the important question
 Price chosen is $55
o Two ways to value assets
 Market price look for comparable companies to see the price
 Look at the cash flow and income that it will generate for you
 Amount of money a company generates
- Trans union CFO ran the numbers and found that based on cash flow, the company would
still owe 50-80 million dollars
o Come up with 55 dollars a share based on historical stock price
- Shouldn’t the shareholders be happy since the shares are high?
o This isn’t good enough because they picked the offers without seeing what else
could come
o Control premium
 This price is the control of the company ($55 being bigger than $35 is not
enough) need to look at what a willing buyer would pay for the control of
this company
- Did Van act with the required level of care in his dealing with Pritzker
o No, he should have done more and looked around more and done more thinking
o Should have run it by his board
 Negotiating the sale of the company so should be talking to board more
- The lock up (million dollars lock up)
o Before you lock in an offer you do a lot of research to decide what you should pay
for this company
 Lock up is a way to get someone to promise a price before someone offer

Class 13
Leveraged buyout
- Good companies made from the ground up and people borrow money, buy it then scrap it
o Debt creates discipline effect
o But how do companies become more efficient- by doing more with less
- Trans union deal is not hostile
o Tax credit problem that can be an opportunity
o Van got ahead of himself and went too far in negotiating a deal without checking
with the board who is the monitor of the corporation
  CEO should not do without checking with board
- Concern that the court has because of the $55 number and where it came from
o Feasibility of a leveraged buyout at this price and no other valuation
- Lock up- Pritzker doesn’t want to be a stalking horse and do research and make an offer
and someone swoop in and take offer so next time more reluctant to make a bid at all
o So, CEO could say if you make an offer in good faith then I will take it (binding
contract) but then CEO put himself and board at risk for losing better offers and
more money
o Or can promise Pritzker lock up which is right to purchase 1 million shares at $38
o There is a cost to the lock up and the cost is that there is a lockup agreement
which makes it less likely that you will bid because you are the one buying
because there is a chilling effect on the second bidder because someone else
doesn’t want to pay off the first bidder
- Lock up is justifiable otherwise Priztker wouldn’t bid because didn’t want to be a stalking
horse
o Engineer transactions to spread risks
- $55 bid and the lock up agreement
- Question is the board’s decision to sign the offer and its behavior afterwards
o Was it grossly negligent? - failed to act with informed reasonable decision (acted
without information)
 No evaluation of the company
 No report
 Only romans statement
 Relied completely on van Gorkom’s 20-minute oral presentation
 Didn’t read the amended agreement
 No document or executive summary presented to the board
 2-hour consideration
 Went with market price
 No senior management
 No notice of the sale of the company before the meeting
 Didn’t ask questions, it was just a short meeting and presentation (2 hours
and they sell the company)
 Pritzker wanted to get done quickly so does this matter?
 Trying to rush it through so bigger flag goes up
 Just because the buyer wants it quick, that is not a defense, the
board needs a process in place
o Court implies insisting more time or questions or a market test
- Why was this not a real market test?
o Not free to solicit offers
o Could not disclose internal documents to others who want to make an offer
o When they amended the agreement the market situation was worse because
Pritzker made it to where a higher offer was not enough but must accept first
 Move deadline up
 Competing bid must be an executed agreement based on public
information
 - Could have asked for more or bargained
o Engage in negotiation for a better deal for the shareholders
- D say 55 is a premium over where the stock has traded
o Court says everyone agrees trans union shares are undervalued by the market
o The 38-dollar price that stock had traded at was a minority position (1 share) and
this is a controlling share which needs premium price
 Court not impressed that 55 is more than 38
- Court says this is gross negligent- did not inform, undue haste, where valuation came
from

Argument not gross negligence

- Corporate world moves quickly, and shareholders know the company like the back of
their hand and have experience and are well informed, sophisticated business men

If there is a sale, there is a lot of process and you need to paper the deal so you are not charged
with failing to be informed
- A lot of process now

1. CFO makes a statement and CEO does and 141 E provides the board with protection on
relying on reports from outside and insiders
a. Why did this not protect the board?
i. What they did didn’t qualify as a report- Van was uninformed and romans
statement was irrelevant to the issue before the board
1. Must be pertinent to the subject matter and be entitled to good faith
reliance
b. Oral presentation not a report
c. 141 e gets changed to show that there are more things the board can rely on
i. Good faith reliance
ii. Reasonably believe within the persons professional competence
2. Question 4 fairness opinion is not legally required
a. No legal requirement for a fairness opinion but in practice every deal has a
fairness opinion where outside firm opines
i. Outside firm states the price is fair
b. What if they say the price isn’t fair?

Two puzzles
1. Once a board or officer is shown not to be protected by business judgment rule they are
not sunk- still have ability to prove entire fairness by proving fair price and fair dealing
a. Didn’t give board that chance
b. Cinerama court says they van doesn’t get that because breaches of care and faulty
disclosure means there’s no way it can be entirely fair
2. In the Cinerama case there is reference to the fact that
a. If you are a shareholder and someone offering 55 a share, and you vote against the
merger then you can claim appraisal rights- if vote against merger then can go to
court and tell court to conduct an appraisal to get the price
i. Appraisal right you are taking a risk
 ii. Court in issuing appraisal could come in under the price

Smith gives taste of big company transaction

- Signifies that the process the board engaged in was so flawed it amounted to gross
negligence
o Three words to describe the case
 Chicago lyric opera

Plaintiff represented in this case represented 12 million 700,000 shares and if each should have
gotten 60 dollars then that is 5 extra dollars a share
10-133.5 million dollars
Directors have
- D and O -director and officer insurance- Pritzker kicked in some money then directors
had to cover
- Reaction in corporate America?
o Directors scared and want protection  don’t want to be director
o Panic in board room because insurance not for this liability
-
- Most important case: del leg looked at this in horror and adopts 102 b 7- can adopt in
charter eliminating or limiting personal liability for a director for monetary damages
o Exculpation- contract out of gross negligence as a standard of can’t
- Cannot eliminate duty for loyalty, not in good faith, intentional misconduct, knowing
violation of the law or any transaction for director getting improper benefit
o This protects directors

Day 11

For today's class, you can just skim the problems on pages 313-14. Instead, we will review this
problem under Sections 144 of the DGCL and 8.60-8.63 of the MBCA (sorry for the earlier
email misfire):

John Erickson is the CEO and a director of Wood Products, Inc., which owns
Greenacre. The Wood Products board agrees to sell Greenacre to Vision, Inc. Is there a
conflicting interest transaction either under MBCA 8.60 or DGCL 144 assuming that
Erickson has the following relationship with Vision:
Woodproducts (Erickson CEO) is selling greenacre to vision

(a) Ralph Thin, Vision’s CEO and Board Chair, is the long-time boyfriend of Erickson’s
daughter, Jill; Ralph and Jill jointly own and occupy a home
Related person is party MBCA- Jill is a related person of ralph because they are in the same
home. Ralph is the CEO of vision- but the parties to the transaction are the corporations and not
the CEO- CEO does not have a material financial interest in the corporation
Not under DGCL
(b) James Thick, an outside director of Vision, recently divorced his spouse. James is a
good friend of Erickson’s son, Bobby. For the past 10 months James has been living in the
Erickson’s basement.
 Living in the same home as the individual MBCA- they are related persons but not parties to the
transaction
DGCL- not a conflicting interest
(c) Vision’s CEO is Erickson’s spouse, but they are divorcing and have not lived in the
same home for 2 years.
Spouse MBCA- Wife does not have a material financial interest and relevant time is a
consideration  not part of the transaction in this case
(d) Vision is a nonprofit corporation and plans to use Greenacre as a homeless shelter;
Erickson is a member of Vision’s board of directors.
MBCA 8.60 v- yes there is a conflict of interest  he is a director and a related person is a party
to the transaction—related person is a party because it is defined as a nonprofit corporation of
which the person is a director- since he is a director the nonprofit becomes a party in the
transaction
DGCL- transaction between 2 corporations in which one or more of directors are directors.
Because Erikson is a director on the other side it is a conflicting interest
(e) Erickson owns 1,000 Vision shares
MBCA - Financial interest that could reasonably impair. Has a financial interest in a business
that he is a director of- just because he has an interest in vision does not mean he has an interest
in green acre what is an interest of the transaction? (defer question) what the percentage
ownership interest is
- There is no conflict here
DGCL- between corporation in which one or more of its directors has a financial interest
- conflicting interest in Delaware
(f) Erickson’s wife is Vision’s real estate agent for the transaction, and will be paid $30K
Related person has a material interest
MBCA- material financial interest in the actual transaction
DGCL- does not talk about related parties or persons so no conflicting interest in Delaware

Poison pill- board can adopt bylaw and if someone comes in and buys over a certain threshold of
shares then board is authorized to issue shares to every other shareholder besides that one
- Protects board from takeover which protects from market correction

Aftermath of smith 102B7- this is gross negligence and approved merger too fast and 102b7
corporation can contract out of gross negligence as the standard of care
- Accountability v. discretion
- Can let corporation insulate themselves- Delaware
- Race to the bottom- incorporate where best for the managers which is bad for shareholder
Francis v. united jersey bank – re-insurers and sons took all money from the company (co-
mingling) and Pritchard did not look at the financial statements
- No business judgment rule because did not make a business decision
- Standard of care in the model act is in section 8.30
- §8.30
o You have to do something as a director
o Have to try to learn and look at the financial report
- She had a duty to fulfill and she didn’t, so she should have resigned
Duty of loyalty
Three situations where duty appears
1. Competition
2. Conflict of interest
3. Corporate opportunity

Conflicting interest transactions

Due diligence
Conflicting transaction fair to the corporation
- Between director and her business were void ab initio (void at beginning) because of fear
that insider is taking advantage
- § 144 says that in certain circumstances some conflicting transactions are okay because
sometimes they are okay and are good for the corporation
o So, what is a conflict under the statutes? (problems above)
o If there is a conflict and the disinterested shareholders approve, then it is okay but
we first have to know if there is a conflict or not

Day 12

Taking a corporate opportunity

Conflicting interests

Broz v. Cellular
- Broz and price cellular are both interested in MI 2
- Pricellular bidding on CIS (in the process of acquiring CIS)
- Broz is an outside director of CIS- do not work for the company as their day job but do
serve on the board of the company
- Corporate opportunity that Broz is taking is buying MI 2
o Was this a breach of his duty of loyalty to CIS
- CIS claim
o CIS had future plans
- Broz claim
o Competition and opportunity (company said he didn’t want it)
o Was offered to him and not to the corporations
o Presentation to the board was not necessary
o Not obligated to refrain from competition
o Took care not to usurp an opportunity that CIS was willing and able to pursue
because CIS was not going to pursue it
o Future plans too far removed
o CIS had been getting rid of its cellular interest

May not take the opportunity when

1. Corporation is financially able to exploit the opportunity
a. Was not financially able to buy it
 2. Opportunity is within the corporation’s line of business
a. Was within business but they were getting out of this
business
3. The corporation has an interest or expectancy in the
opportunity
a. Had no interest in buying it
4. By taking the opportunity for her own, the corporate fiduciary
will be placed in a position that conflicts with her duties in the
corporation
a. He is an outside director and they are getting out of the
business
ii. Factors suggesting that the director or officer may take opportunity
1. Opportunity presented to an officer in his individual and not
corporate capacity – they did not approach CIS
2. The opportunity is not essential to the corporation
3. Corporation has no interest or expectancy in the opportunity
4. Director has not wrongfully employed the resources of the
corporation in pursuing the opportunity
He talked to a director of CIS who said they were not interested in the opportunity
This case would not appear if he had gone to the board
He did not have to go to the board but going creates a safe harbor (insulation from a claim)
- Going out of this means you have to go to court and defend and go through the factors
- Broz seems to be a good guy and did talk to members of the board and was not trying to
be sneaky and it seems mean for pricellular to be doing this because Pricellular bid and
got the license but had a clause that said over 500K over price can have it then price
bought CIS and kicked out board of CIS then sued Broz
o Had no duty to consider pricellular bid until was done

In re eBay
- Public v. private companies- private not on national exchange
- IPO= company sells share to the bank then the bank sells to the public
o Initial public offering
- Bank has to price the shares at the initial price range then prices them the first day of
trading
o First day pop set prices usually go up on the first day
o Secondary offering- bank selling to public then public start trading
 So, company gives more shares to be sold
- Sachs make money by making secondary offering to make 1.1B dollars
o Made over 8M dollars
- Corporate opportunity- offering IPO to favored clients and eBay should have been
offered the opportunity first to be offered the shares that were held by Sachs
o The IPO of other companies and P say corporate opportunities that should have
been offered to eBay first
1. Ebay was financially able to exploit opportunities
2. Ebay line of business- was in the business of investing securities
 3. Interest or expectancy- investing was integral part to eBay cash management strategy
and a significant part of its business this is as close a thing to a sure thing that you are
going to get in investing IPO are not risk investments. They are the surest thing
4. There is a conflict that arises  looks like bribe because my duty is in the best interest
of the corporation in picking the bank that is the best fore the shareholders at the
cheapest price, but you have pocketed million dollars because Sachs gave IPO to you

Was it in individual or company capacity?

Was specifically to the director and they are wealthy individuals and we are giving
investment opportunities- not because they are officers of ebay
Court says you are trying to buy them as business partners
Nominally individual but impacted the corporation
Was the opportunity essential to the corporation?
Opportunity to invest in other corporations shares so not essential to the corporation
Is free money but not essential
Was there interest or expectancy in this opportunity?
Director wrongfully employed the resources of the corporation
No

Yes, this violates corporate opportunity

Except 102b7 which exculpates them – still have to pay 7.2M
- Breach of duty of loyalty

Day 13

Duty of loyalty
- Competing
- Conflicting interest transaction
- Corporate opportunity
In ebay, there was an opportunity to invest in shares of IPO
- Ebay invests in securities and might be interested
- P allege enough to suggest that this might be rather than an opportunity at personal level
then for the corporation
- Was it okay to pursue the opportunity or did it belong to the joint venture
o Not fair for the officer to take that opportunity and it is the corporations
Problem on page 325
Is this in the line of business for the corporation? – no, to broad- it is one niche that can be
applied in so many ways
- Look at it as it is currently being run
- Part of the business already as running now or looks like they might expand (interest or
expansion)
 - This seems too far out to be a corporate opportunity
What if they approached him at Zappcos booth at a trade fair
- Being approached in his corporate capacity
That is the analysis that you undertake

102b7 – post smith v. vangorkem

Can opt out of personal liability for directors but not for the breach of duty of loyalty
Cannot get rid of the duty of loyalty
12 b 7 says it can insulate directors from money damages for breaches of duty of care but not for
the duty of loyalty or acts or omissions not in good faith
- cannot exculpate duty of loyalty

Sinclair oil v. Levien- Sinclair owns 97% of sinven and there are 3% of outside shareholders
- nominating all of the directors to the board for Sinclair
- DOMINANT Shareholder owns a fiduciary duty to the board of directors
- Controlling shareholder who controls the board is a separate shareholder
- Typically, shareholders do not have a fiduciary duty- they can vote selfishly however
they want for their own benefit
o Directors do have a fiduciary duty to act for the best of the company
- EXCEPT for a dominating and controlling shareholder who then has a fiduciary duty
- Claims by the P on behalf of the three percent shareholders
o Made them pay out excessive dividends
 Self-dealing
o Denial of sinven industrial development
 Corporate opportunities
o Breach of contract
- Self-dealing- parent corporation is on both sides of the transaction
o Benefits in the detriment of the minority shareholder
 Court did not agree that it was self-dealing because they payments
complied with BJS because they went equally to the minority
- Business judgement rule applied because it was not self-dealing because minority got a
proportionate share of the money being transferred from Sinven
o They got their share of the dividend
- Could involve self-dealing if it was an improper motive could not fail to see that
o If on both sides of transaction and X get declared dividend and Y doesn’t would
be an example
- If there is self-dealing
o No business judgment rule to protect anymore
o Burden of proof shifts to D to prove entire fairness- fair price and dealing
o Prove entire fairness
- They did not miss any business opportunities
o Did not come straight to the m
o Did not usurp
o Sinclair could have given Alaska opportunity
  Sinclair purchased and developed land and other business as a separate
subsidiary
 This is fine and can be done- is not unfairly prejudicing
- There was a breach of contract by Sinclair
o Caused sinven to contract with international and the payments lagged and did not
comply with the fixed amount of products
 This is self-dealing because Sinclair received the products by sinven and
minority shareholders were not able to share in the receipts
 Were on both sides of the transaction and was benefitting to the detriment
of the minority shareholders
 Not holding out contract because it benefits Sinclair
- Since self-dealing= no business judgment rule so Sinclair must prove fair price and fair
dealings

Section 170
- Directors have discretion in paying dividends and have to do so unless shown to waste
assets of the corporation

Background:
Crazy that sincalir make Sinven pa more than profit in dividends
Sinclair thought Venezuela would nationalize
Got as much out of subsidiary before taken by government
Fine to do that because not advancing itself at detriment of minority so it was okay because
everyone was being paid out- they were just trying to get their money out

Zahn v. Transamerica
- 3 kinds of stock
o Preferred
o Class A
o Class B- initially only they could vote
- When the company liquidates
o Preferred gets paid first 105 plus unpaid dividends
o Then class A and B shares are paid off, but A gets twice as much as B
o A can convert to B at any time
o Corporation has right to buy A shares at any time for 60 dollars a share (to call the
A shares)
 Ex. If one share class A one share class B and at end there is 240 lefts
 Divide by 3 and A gets 160 and B gets 80
 if B looking at A getting 160 then you try to vote and make
corporation call the A share because if A share gets called then it
gets paid off at the tune of 60 dollars a share and then there would
be 180 left for B
 A won’t like that because instead of A getting 160, it would get 60
 A has the power to convert so it will convert to a B share and there
are then 2 B shares who split the 240
 - Zahn is a class A holder so why does Zahn win
o Transamerica owns majority of the stock- is the dominant shareholder
o This is self-dealing because they are the majority shareholder and board of
directors so used their power to make sure they benefit most
o But Transamerica has A shares too so why would it screw itself over on that
aspect?
 Disproportionately own the B shares over A shares
 So, they look to benefit B at the expense of A
- What is the problem with what the Transamerica does that is so unfair
o Called the shares then liquidating
o A disinterested board would have called the shares but there was no need to
liquidate it afterwards
 Directors did not tell the class A shareholders that tobacco value
skyrocketed
 Class A had no notice to take part in the profit
- Advantaged themselves disproportionately
o Self-dealing
o Fail to meet fairness
- Did it in a way without disclosing a huge asset in the corporation and that was unfair to
the minority because they could not convert to share in the spoils
- Court says what should have happened is you get the disclosure and convert and give 20
extra per share rather than 240

Day 14 – makeup day

If there is a situation involving conflict or corporate opportunity, how do we ratify or clean up

the transaction?
144 and 8.60 say that there are these self-dealing situations, but they are okay
How to cleanse these transactions
Day 15
Duty of care for monetary damages are gone except for acts and omissions not in good faith

Loyalty
Don’t compete
Don’t take corporate opportunity
Don’t enter into conflicting interest transactions

Business judgement rule does not apply

102b7 does not get rid of duty for loyalty

What happens if there is a corporate opportunity?

- Make sure it is a corporate opportunity
o Broz gave these tests
o Ask directors
o Even if you don’t then you can prove that it was entirely fair to the corporation
- Conflict of interest
o Do we have a conflicting interest transaction?
 Del 144
 Model act 8.60
- Even if conflict- doesn’t mean director is sunk
o Officer can get a vote of the disinterested investors/stockholders
 o Then burden to Plaintiff to show that was not entirely fair
- Even if doesn’t get the vote, the director can go to court and say conflicting interest but
was fair
o If not fair, then on hook
- Differences in the model act and Delaware code
o Qualified director
o Different statutes and forum rule
o Basics are about the same
 Do we have a situation where director lining pockets at expense of
corporation?
 Did they get the blessing of disinterested decision maker?

With the shareholders:

Power to vote, sell and sue

Power to sue:
Typically, board of directors manages the corporation
Whether or not to sue: important question for a corporation
Centralized decision making
Sometimes board shouldn’t be entrusted what decision of when to sue
Then shareholder takes a derivative action on behalf of the corporation
Shareholder says they speak for the corporation and not the board of directors
This is weird because board is always the one who speaks for the corporation
We allow shareholders to speak because sometimes we don’t trust the directors to take that step
so when is that?
Delaware requirements
1. Demand required
a. Management is centralized with board, so shareholder must make demand to
board to sue on behalf of the company
b. Unless excused because it is futile (Aronson test- determine when the demand is
excused)
i. Plaintiff needs to allege particularized fact that raise a reasonable doubt
that a majority of the board is interested or not independent
ii. OR that the board action is otherwise not a valid exercise of business
judgement
2. If demand is made then refused, then can claim wrongful refusal

Grimes v. Donald
- If Donald is terminated without cause, then he gets all kinds of benefits
- What did the court say was wrong with this?
o Constructive termination- basically firing but not really
o In this agreement what counts as constructive termination? – unreasonable
interference in my good faith judgement or in my duties as CEO
 This is bad because directors are supposed to be able to do this, and not
the CEO and board is supposed to fire shareholder if not doing a good job
  Now CEO can say that board is doing a bad job when board is supposed to
be saying if shareholders are doing their job
 Foolish and ill conceived- not how business works
- Grimes has two kinds of claims
o Direct: abdication claim
 Board abdicated its role and that board is supposed to be evaluate how the
CEO is doing and board gave this power to Donald to say if they
interfered with his power
o Derivative: waste of company resources and excessive compensation
 Corporation has been wronged and he is speaking on their behalf
- Loses on the abdication claim: an informed decision to delegate a task is as much an
exercise of business judgement as anything else
o Brick-bottle analogy
 They made one decision to make him CEO and that will limit them in
other ways
 Will deter board from dismissing senior officers- services are worth this
much money then that is a business judgement decision
 They cannot say that he has a job for 2 years no matter what but here they
can still fire him, but it will just cost them a lot of money. They still have
the power
- If it is a direct suit, you can just sue
o On the abdication claim is asking for the board to be able to do their job- not
monetary relief (that’s why it is not a derivative- the corporation will not get
money)
 Smith v. Van gorkem is direct because he is disputing merger because if it
happens then smith is no longer a shareholder, so it is a direct cause of
action because not for the corporation but is their own personal suit –
remedy comes to you personally
- Second claim: shareholder says board acted badly because wasted assets and paid too
much and that they should sue themselves because they breached duty of care
o Derivative almost always asking board to sue itself – weird
- Derivative cause of action- must make a demand on the board
o Grimes made a demand on the board and the board refuses the demand, so
standard is wrongful refusal
o Plaintiff does not win because he claimed that the demand was excused as well
- Once you have made a demand, you have conceited something
o You have conceited that the board is independent, and you are under wrongful
refusal now which uses the standard of valid exercise of business judgement
 Board has its decision analyzed under the business judgment rule
 This protects the board
- Grimes said made a demand, but they were wrong, and the suit should go forward and
conceited that they are independent, so business judgment protects them
o When they refused they got many different opinions and thought about it
- With wrongful refusal, especially when consulted with outside sources, when don’t think
suit should go forward, defendant typically will never lose
 o For the well-advised plaintiff in Delaware, this means you SHOULD NOT make
a demand
o Why make a demand if you are then stuck and are in wrongful refusal standard?
o Always argue demand is futile and should be excused

Page 379 problems

1. Derivative suit- under duty of loyalty and the damages will go to the entire company
2. Claim that demand is excused under Aronson
a. Majority of the board is interested or not independent because there are 5
members and 3 of them are interested because they have bought the land
b. Have a financial interest
i. Demand excused under Aronson
3. If only Adams buys the land, then still argue that demand is excused because can argue
that majority of the board is independent
a. Interest means interest in the transaction personally
b. Not independent- controlled by someone who has a financial interest in the
transaction
i. Not interested but controlled by her decision
ii. Broader inquiry
4. What if there is no director vote rejecting the corporate opportunity?
a. Then this gets to whether or not the board could have properly exercised its valid
business judgment. Is there a valid suit on the merits?
b. Enough facts raising reasonable doubt that board could have used disinterested
business judgement in evaluating if the suit should go forward

Aronson- requirements
To make a case under Aaronson prong two must show some claim that not a loyalty claims not
precluded by 102b7
What qualifies as not valid exercise of business judgement for damages in 102b7
Act or omission not in good faith
Good faith is a way in for plaintiffs

The Model Act

Demand futility analysis
7.42- requires demand in all cases
Board is the one in charge and you always have to make a demand
- If demand is accepted – can sue
- If ignored – after 90 days can bring the suit
- If rejected – Plaintiff allege with particularity that board did not consist of qualified
directors (1.43) or subsection A was not met
o Determined in good faith with reasonable inquiry that proceeding was not in the
best interest of the corporation

Day 16
Delaware with a shareholder who wants to sue for the corporation (derivative suit)
- Demand is required
- If make a demand and it is wrongful refusal, then you say they are independent and can
hear the suit
- If no demand (excused) Aronson
o Can say not independent (under some kind of control)
o Decision is not valid exercise of business judgement
Lawsuit about whether to have a law suit

We need a universal demand (Model act)

Make a demand
7.44 make a demand
- Accept- lawsuit
- Reject
- Stall – after 90 days then shareholder proceed with lawsuit

If rejected, then
1.43= qualified director- no material interest in the outcome or interest in the person
Then need majority of qualified directors- not in problem one because majority have an interest
Or majority vote of a committee
So, there is not a valid determination because unqualified directors and no committee so have to
go through with lawsuit

If create committee of qualified directors, then how do P challenge recommendation of

dismissal?
- If not in good faith after conducting a reasonable inquiry from the committee
- D have to prove that the directors are qualified and if they are then P prove not a
reasonable inquiry conducted in good faith

Universal demand still does not solve the problem

When are they meritorious?

Delaware= fight over whether to have the lawsuit

Model says there must be a demand but have to see if the directors are qualified
Still need sorting mechanism
Just a question as to when to sort the lawsuit

What if board says they are tainted (not independent) but others are independent so let’s bring
them in and have them decide on a committee (special litigation committee)

Zapata
- The demand is excused so what if we form a SLC
o Directors come in after the injury and they make a committee
 - Full power of the board to the committee to decide if the suit can go forward
o Can they do this? Yes
 Analogy between the 141 and del c § 144
 141 is power to delegate and we have seen this in action in 144 which says
that financial interests are voidable
 When a director has a conflict of interest
 Transaction is not voidable if approved by the board or committee
by votes of disinterested directors for a transaction
o Can delegate this power to the special litigation committee
 But this doesn’t mean we grant the business judgment rule protection
- Zapata Two Step Test
o Court inquire into the independence of the committee and ensure that
investigation was a reasonable one
 Board has the burden to prove independence
o Court apply own business judgement and special considerations to law and
public policy
- This test is more plaintiff friendly

What happened with Oracle?

- Stock trading at 3016 so sue for breach of fiduciary duty
- Underlying claim is insider trading
o Public market is supposed to be fair with equal access to all information
o But insider knows information that will impact the market
o If you have material non-public information, then it is illegal to use that for your
benefit
- The advisors were Simpson and they were independent because they had never done
legal work for them before now
- Directors of the SLC
o Garcia and Grundfest
 Board members get director fees from the company and get paid $250 an
hour
- They are not independent
o Both members were both professors at Stanford and each other member had
significant connections
 Would not want to piss off a large donor
 Worked together
- The question: special litigation committee decides not to go forward and not sue which
the hockey stick is
o Why
- Is there any argument that the defendants are interested in this transaction?
o No because they are not a part of the board and made no money from the insider
trading, so they are not interested in the transaction
- The sole question is independence
o They talk about what this means- financial relationship that makes you controlled
by the people in there
  They are professors and have tenure
 Are they independent enough?

For being independent

- They were not controlled /beholden
- Couldn’t lose their job
- Said they didn’t know of the substantial donations to the school

For not independent

- Has significant connections
- Worked with them
- It would be odd to subject a co-member to litigation

Day 17

Derivative suit
Oracle-
- Special committee said inside trading claim lacked merit and should not be pursued
o Because of the hockey stick effect
 Large portion of each quarters earnings come in at the end of the quarter
 A lot of sales at the end of the quarter
 This failed to happen in this quarter, but the point is that because of
that pattern, when the D sold, everything looked as it normally did
 No knowledge that it wouldn’t pan out this quarter
o Did not know of the weakness and did not have material, non-public information
o Ellison only sold 2% of his holdings and if he knew he probably would have sold
off more
- Now must show that the SLC members were independent
o They don’t have any interest
o They are tenured professors
o Ellison’s kid was rejected
o They cannot lose their job
o They are not being controlled
 Court decides they are not independent
 Stanford relationships- worked together
 One is a huge donor
 Could have friendship/collegiality motives
 Human nature
 Against fellow professors and directors
 Stanford doesn’t want to piss off Ellison and be social effects
 There is a bias there
- Independence is the most important factor
o Allegation of friendship isn’t enough but if detailed enough then maybe it can be
 - Independent directors in NY stock exchange- lack of ties
- Delaware independence- who is interested and who is within the context of that inquiry
o Who is independent of that particular person who is interested in that transaction
o Transactional focused rather than NY approach of independent from the person

Back to good faith

Decisional- good faith decision
1. P says demand is excused because it is futile
a. Aronson prong 1 that demand is futile best argument
b. how is the board interested or not independent?
i. Interest in hiring then firing him
1. Eisner and Ovitz were friends, so Eisner wanted the deal for his
friend then dominated control of the board
ii. They don’t pass prong 1
2. So, under prong 2: the underlying transactions
i. Process and duty of care claims and waste
b. The hiring of Ovitz is one decision and the decision to let him go for a no-fault
termination are at issue
i. Hiring package
1. Tranche 1= at end of 5 years 3M50M
2. Tranche 2= 2M
ii. If fired for cause, then doesn’t get anything
iii. No fault= salary+7.5M+immediate vesting of first tranche+10M cash
c. They hired an outside expert (141 e) entitled to rely on expert advice
d. Flaw with the compensation scheme – must say that the board didn’t act in good
faith in authorizing this deal
i. Didn’t deliberate enough
ii. Incentive for him to try to get let go not for cause
e. What do the plaintiffs have to show to defeat 141 e
i. That they are interested or not independent
ii. They didn’t do their due diligence
iii. They didn’t talk to the board or take their advice into consideration
iv. Did not rely on the expert
v. Reliance not in good faith
vi. Didn’t think it was in their competence
vii. Not selected with reasonable care
viii. So obvious that it was negligent either way
f. On the merits
g. Eisner and Ovitz reach an agreement on their own and not by the board
i. Agreement was done before it got to the board
h. What is the problem with the second decision: no fault termination
i. Could have found a way to get him for the fault
1. Couched in the terms of waste- a decision that no rational person
would enter into if under ordinary and sound business judgement
2. Basically, a gift
 3. No adequate consideration
ii. Could have fired him for cause but fired with 130M dollars
3. P win on a good faith claim- win on the waste claim
a. No demand, plead prong 1 interest and independent but this doesn’t work so plead
prong 2, not valid exercise of business judgment so must claim waste and good
faith under this
i. What is the good faith claim?
1. Waste is bad faith- firing
ii. What did board do wrong in OK this contract to let good faith get by?
1. They abdicated their duty to the CEO
2. You didn’t do your job at all
3. They had a duty and didn’t do it (not that they did a bad job but
that they didn’t do it at all)
a. This is enough for a good faith claim
4. Is good faith co-equal with care and loyalty?

Day 18

Contract out of due care but not good faith

Futile if interested or not independent OR not a valid exercise of business judgment
Come back to good faith- can get exculpated for gross negligence but not good faith
- What is status of duty of good faith?
o 102b7 – exculpate for breach of duty of care but not bad faith
o 145 – indemnification statute
 Corporation must pay directors legal fees with some liability dealing with
the corporation
 Says that director can be indemnified for liability incurred by reasons of a
violation of duty of care but mot for a violation of the duty to act in good
faith

Disney confronts good faith question head on

Three categories not in good faith
1. Subjective bad faith- conduct of directors motivated by an actual intent to do harm
2. Lack of due care- fiduciary action taken solely by reason of gross negligence
3. Intentional dereliction of duty- conscious disregard of responsibilities (to Disney this is
not bad faith gross negligence cannot be bad faith because 2 statutes that separates bad
faith) duty of care and gross negligence same thing and okay but good faith not
a. Gross negligence is not bad faith

Two decisions at issue

1. The hiring and if that was bad faith
a. There was a fatal flaw in the agreement- incentive for him to do a bad job to get
millions of dollars
b. Eisner negotiates for the corporation to a degree that he should not have
 2. No fault termination was waste (exchange so one sided that no rational business person
would enter into it)
a. This doesn’t work because
i. They were informed
ii. There was no cause to fire him
iii. Consulted lawyers and could not find cause
b. There was no cause to fire him

There is no breach of the duty of good faith

Compares this and smith v. Van gorkem and finds that Disney D look good in relation to van
gorkem
- Disney process looks flawed but how better than smith
o Board was informed
o They consulted outside consultants
 Accountant and expert in CEO compensation
 Were at the meeting and answered questions on top of what they were
getting from Eisner
o More thought and care
 They knew they needed a number two and discussed his qualifications and
what it would take to get him away from his business
o Knew the terms of the agreement
o Had a term sheet and documentation
o The vote was unanimous, and board was in favor and on board for hiring him
o Time difference in this decision based on the other
o Kind of decision
 Hiring a CEO is important but not as big as selling a company and how
much to sell it for

Finds that there was no bad faith in this

Strange?
- Van Gorkem is a case about gross negligence so haven’t we taken care of that?
- Why does it talk about best practices?
o They want them to follow the best practices
o This is what you want to do distinguished from what actually happened and
advise them on the best practices to use and stay away from court
o Telling you want you should do
- Not liable but still not looking good and how to do better in their practices
- Bad faith- conscious disregard from his or her duties which is different from gross
negligence
- Chandler recasting van gorkem as a bad faith case to compare the because the point at
issue in Disney is bad faith and not gross negligence
o Conscious disregard to act in a known duty to act
- Articulate what smith says and there is good faith and the test for it but in practice looks
like care but that is gone from liability and we are looking at good faith because cannot
get out of it
 o Mediating between discretion and accountability
 Gross negligence
 102b7
 Leave out good faith
 Find out what good faith means

What is the duty of good faith? - care loyalty or own thing

- Need bad faith to establish
- Breach of duty of good faith is a breach of the duty of loyalty because in bad faith is a
breach of loyalty
o Lining pockets for self at corporation’s expense
- Duty of good faith is loyalty

Stone v. Ritter – bank had to pay 50M in penalties because crimes committed by employee
- To what extent should the company be held liable for crimes that the agents of the
corporation commit (when is it fair to hold the board liable)
- Why don’t we talk about Aronson?
o Because there was no demand
o Aaronson test looks at whether or not the board was interested or independent to
evaluate the demand or if decision as a valid business judgment
o Doesn’t work here because no demand so there was no decision or business
judgement here
- The claim is that the board did not manage the way it should have
o They just didn’t oversee the way they should
- First good faith for decisions (Aaronson)
- Oversight= Caremark claim and use rales v blasband
o Reasonable doubt but no question of looking at decision
o Only interested and not independent is a reasonable likelihood of success on the
merits and corporation would be liable
o P proved enough that there is a reasonable likelihood of success on the merits
o Graham v. Alice- absent cause for suspicion the directors do not need to institute
a corporate espionage system
o Caremark- didn’t mean that you cannot do anything
 Have to assure themselves that information and reporting system exists
that provide management with information to reach informed judgements
about compliance with the law and the business performance
 Must have systems in place
 Liability comes from not exercising good faith-
 Must be reporting standards
 Utter failure to implement system to make sure no violations or
you have a system and don’t do anything with it
o This will trigger bad faith in Caremark

Violate bad faith= breach of loyalty

Breach of loyalty isn’t necessarily bad faith though

How is this different than Aaronson?

- Oversight you are not interested in any decision or independence so is there likelihood
o Particularized facts to raise reasonable doubt that they failed to put systems in
place or failed to do anything about them

What is a bad faith claim under Disney if this isn’t?

Day 19

Good faith
- Decisional (Disney)
- Oversight (Caremark)

Stone v. Ritter- crimes by bank employees

- No Aronson because no business decision
- Demand still applies but Rales because no business decision
- Particularized facts that indicate the D might be liable
o Standard- no system unless there is a problem
o This changed- there is a duty
 Need a monitoring system in place to inform the company
 To prove bad faith (make you liable- failing to implement any reporting
system OR have them and fail to monitor them so you are not informed
- Good faith is part of the duty of loyalty so cannot be exculpated
- Do the plaintiffs meet their burden here?
o No, they don’t because the directors had procedure in place
o Could not raise reasonable doubt as to whether the reporting system was in place
or was not monitored
- Board delegated its responsibility to numerous other positions so maybe it still wasn’t
keeping itself informed
o There were presentations and regulations and training annually
o Enacted and adopted policies
o Have compliance officers and systems and the board knows about them
- Because there are all these penalties
o Plaintiffs didn’t put these facts into the complaint so how did they get there?
o KPMG report was after the fact which show all the things that went wrong and
the P reference that into the complaint
 But this showed all of these other things that had been done

What about fed ex truck?

 - Economic terms
- Social terms on society
- Statutory argument- 102(b)(7)(ii)- knowing violation of the law
o Risk of knowing you are violating a law

In re China agritech shareholder derivative action

- Public via a reverse merger- sells all its assets but remains as lyft
- They bought a shell and merged into it and were automatically public
- Three causes of action
o Aronson
 Yinlong transaction
 Firing of the auditors
 Special committee’s decision not to take action
o Rales
 Lack of oversight
- The yinlong transaction
o Interested transaction
o Agritech buys yinlongs 10% of pacific dragon
- The directors
o Teng.
o Chang
o Bennett
o H. Chang
o Dai- daughter is COO
 All also on the auditing committee
o Wang and Law end up joining the board
- McGee report- McGee was shorting the stock because figured they would go down
o Borrow shares and pay them back to you in a set time in the future
o Making a bet that it will go down in value
o Found that it was not a functioning business and wrote a report
- Why was my demand futile?
o Demand futility
 Majority not independent or
 Cannot exercise valid
o Would have been biased with the demand because had risk of liability
- Rales
o Plaintiff claim moves forward

Day 20

What is the difference between buying shares of burger king v. Second hand car?
- Stock is primary, and car is secondary market
- Want to know what rights you’re getting, how much money you will make
 - Look at the car and test drive it and hire a mechanic
- But a share is a right to the assets of the company so how much is the company worth?
Federal law intervenes in the sale of stocks and not in houses
- Security is an intangible and we don’t know what it represents, and investors are at a
disadvantage because not evaluate the tangible components of it
What is the basis for federal regulation? Why can congress regulate the sale of securities?
- Commerce clause
o If sales of security crosses state lines the federal jurisdiction has regulation power
o Unless in trust state company (exempt)
What kind of regulation
- Merit- federal government says if stock is good or not
- Disclosure- government requires corporation to disclose financial information, related
party transaction, biography, who on board, stockholders
Do you want to sell a security?
- Must register with SEC (Initial Public Offering) unless
o Not a security
o Exempt from registration
What is a security?
- Stock, bond, financial instrument
33 act (securities act)- requirement for selling shares to the public by IPO
- Shares are sold from the company to the investment bank at a discount then to the public
and the bank is also on the hook for some liability
34 acts- securities exchange act
- Deal with the periodic filings
What is an “Investment contract”?

Securities and exchange commission v. Edwards

- Pyramid scheme- not enough revenue so depended on new investors to meet obligations
- Howay test: whether scheme involves an investment of money in a common enterprise
with profits solely from efforts of another
- We don’t distinguish from fixed v. variable return
- Investment K= effort of others
- Fixed rate= investments contract= security= subject to federal security law
o This fits the Howay test because investors are giving money to the enterprise and
don’t have to do anything after in order to make a return. Not involved in the day
to day operations of the payphones that they owned
o Fixed v. variable does not matter-
- Security
- Do you think they thought they were being protected by the security act?
o No because it looked like they were buying the tangibles
o But 33 Act has very broad securities definition
o Can argue that it is non-security but under broad Howay, it is probably going to
lose
o If you sell without registering, then purchasers have right to back out and get
money back and can sue
- Must help client understand that when they are selling shares you must follow security
law, or it is malpractice (take securities regulation)