Corps - Clarke - Short Outline

CORPORATIONS-CLARKE SUMMARY CHECKLISTPRERNA LAL

BUSINESS ENTITIES

Types Sole proprietorship – Schedule C Firm - Company

o C-Corpo S-Corp: Max 75 S/H, no non-residential aliens, no

more than one class of stock. Can be taxed as P. General Partnership - RUPA 202(a) - Association of 2 or

more persons to carry on as co-owners of a business for profit.

o No filing required for general partnership like all other LL entities

Joint venture: partnerships for a particular purpose LP – At least one general partner with management power

(ULPA 402, 406) and unlimited liability (ULPA 404)o Several limited partners w/o management power

and with limited liability. Note safe harbors.o Requires formal filing like corporations ULPA

201 LLP – RUPA 1001, 306 partners are protected by shield of

limited liability LLLP – ULPA 102(9), 404(C) general partners are

protected by shield of limited liability LLC – ULLCA 303, members have limited liability with

choice of member-managed LLC (partnership) or LLC corporation

Default rules Tailored : parties would have chosen this rule had they

thought about it Majoritarian : what rule most similarly situated parties

would follow

PARTNERSHIP

RIGHTS AND DUTIES 301 : Each partner is an agent. An act of a partner not in

ordinary cause of business does not bind partnership unless authorized by other partners.

306 : Jointly and severally liable. 401 (b): Equal share of profits and losses

o Exception: Kovacik v. Reed (where one party contributes labor and another capital, neither party is liable to the other for losses sustained)

401 (f): Equal rights to managemento Covalt v. High

401 (j): Disagreements decided unanimously Cases:

o Byker – whether parties intentionally acted as co-owners of a business for profit

o Hynansky – stricter proof of intention to create partnership

DISSOCIATION 601 : Dissociation through expression of will (I QUIT)

o Death is dissociationo 601(5) - Expelling partner does not lead to

dissolution o Fiduciary limits on expulsion but partners

may be expelled for purely business reasons: Bohatch (Partners acted in good faith to remove fundamental schism)

602 : Power to dissociate at any time, rightfully or wrongfully

o 602(b) Only wrongful if breach of express provision in K but note good faith requirement: Page

o 602(c) – liability for damages caused by wrongful dissolution

o Fiduciary limits on withdrawal: Meehan (withdrawing partners breached FD by unfairly acquiring consent from clients to remove cases)

603 : Dissociation of partner may lead to dissolution. Follow Article 8. If not, then Art 7.

o Upon dissolution, can compete (duty of loyalty under 404 b3 terminates)

o Duty of care and loyalty continue with respect to matters arising and events occurring before dissociation

Article 7: Dissociation without dissolutiono 701: Purchase for buyout price minus

damages for wrongful dissociationo 702: disassociated partner can still bind

partnership o 703: dissociated partner’s liability to others

Article 8: Dissolution o When does dissociation cause dissolution?

At-will general partnership Partnership for definite term (JV) Event agreed to in partnership

agreement Event that makes it unlawful for

partnership to continue Judicial determination that purpose

of partnership is frustrated or not reasonably practical to carry on. Dissolution under this section carries no implication of wrongfulness

Transferring interesto Two ways to dissociate in McCormick : 601

Dissociation by buyout or assets liquidated in judicially supervised auction or 801 judicial order to dissolve partnership

o 807 – settling accounts

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o UPA 38 gives non-wrongfully disassociated partner the right to force a liquidating sale. Exception: Nicholes v. Hunt

The Partner as Fiduciary: Duty of Agent to Principal Fiduciary Duty Theory

o Anderson - Best interest of client and employer to refrain from self-interested behavior not allowed by employment K

o Easterbrook - Least cost avoider: Striking a bargain between investors and agents if they were able to dicker at no cost

Fiduciary Duty: How to Determine1. Establish if there is FD2. Then, burden of proof for fair dealing shifts to P

RUPAo 103(b)(3) : Cannot eliminate the duty of loyalty but

may limit through agreemento 103(b)(4) : Cannot eliminate the duty of careo 103(b)(5) : Cannot eliminate obligation of good faith

and fair dealing.o 403 : Requires partner, on demand, to furnish the

requesting partner with full and complete information about partnership affairs

o 404 : Partner’s FD limited to duty of care and duty of loyalty. Cf Meinhard v. Salmon

o 404(c) : Mere negligence is not a violation of duty of care. Ferguson v. Williams

o 405: Right to formal accounting to enforce FD or contract

Self-dealing is a violation of FDo Vigneau v. Storch Engineers

Duty of Principal to Agent Limits on right to discharge

o Foley

The Partner as Agent: Allocating the Risk of loss in transactions with third parties 301: Every partner is an agent 303: Statement of partnership authority but note 303(f) 306: Liability of partners

Type of Authority Actual Authority (R3d: 2.01, 2.02, 3.01): principal

manifests consent directly with agent. Quick check: Cannot have undisclosed P under this.

Apparent Authority (R3d: 2.03, 3.03): third party reasonably believes that agent is authorized to act on behalf of P as a result of P’s manifestationso Blackburn cf Sennott

Inherent Authority (R2d: 8A, 140): agent derives authority from agency relationo P.A. Properties : partner can have inherent authority

where intent is to benefit partnership. Even undisclosed P is liable even if the P has forbidden the action.

o Haymond v . Lundy: partner can have power to commit partnership even without right to do so.

o Dow v. Jones : LLP status does not relieve partners personally culpable of their individual liability to third parties, and partnership assets remain available to satisfy third party claims. LLP does limit the liability of individual partners for the misconduct of other partners.

CORPORATIONSElements of Corporation as opposed to Partnership

Liability of investors Participation in management Power of individual in voting rules Ease of dissolution, cashing out Transferability of shares Decentralization of agency power

Corporate Form Shareholders: vote, sell, sue

o MBCA 7.28o Del G.C.L. 212, 212

Directors: managemento MBCA 8.01o Del G.C.L. 141 – 141(a) business is

managed by BOD except as otherwise provided by COI. Business judgment rule stems from this statute.

Officers: agents of corporation with board oversighto MBCA 8.40-8.44o Del G.C.L. 142

Incorporation (MBCA §2.02, Del GCL 101, 102) Name of Corporation Description of Capital Structure Registered Address and Agent Incorporator’s Address Signature of at least 1 incorporator

o Articles must comply with MBCA 4.01, distinguishable names

Shares (MBCA §6.01, Del GCL 151) Common: residual status and voting rights Preferred: dividend or liquidation preference

Voting (MBCA §8.04, 7.21, 7.28. DE 141(d). 212(a). 214. 216) Straight voting – candidates with the most votes win and

whoever with majority shares will have complete control Cumulative voting – formula to spreading out votes and

protecting minority interests Class voting, including dual class common – shares

divided into classes

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Annual meeting and other forums for S/H action (MBCA 7.01-7.07, 7.21; gcl 211-213, 216, 222, 228) 7.01 and 212(b): Mandatory annual meeting

o Hoschett 7.02: Special meeting Holders of at least 10 percent of all

votes entitled to be cast can call a special meeting. Compare to Del. where only directors or whoever may be listed in the Charter can call a special meeting

Action by written consent – MBCA permits action via written consent only by unanimity while Delaware permits written consent by non-unanimous vote. But Del. rule can be changed via AOI amendment.

216: quorum shall constitute no less than one-third of shares entitled to vote

o Under MBCA you only need majority of people present as long as there is a quorum.

228: written consent of S/H

Removing Directors Default: Can remove anyone at anytime with or w/o cause MBCA 8.08: No restrictions on removal with staggered

board. If cumulative voting, cannot remove if votes cast against would be enough to re-elect. If sub-class shares, director can only be removed by that class.

MBCA 8.09: provisions for judicial removal for cause Delaware G.C.L. 141(k):

o Members of staggered boards protected from removal and can only be removed for cause

o Preserve S/H power to remove protected directors for cause

o Majority retains ability to change default rules above

Limits: o Alderstein : Directors need adequate notice to protect

interest and opportunity to present defenses. Alderstein is owed a FD here because he is a controlling S/H and could have stopped the scheme.

o Centaur Partners : 109(b) states that bylaws can contain any provisions not inconsistent with articles of incorporation

How publicly-held corporations are different - Widely dispersed ownership, many passive investors creating collective action problems and enhanced agency issues.

Efficient Market Hypo Weak form: current prices incorporate all information

in past prices Semi-strong: current prices incorporate all public

information. Have to figure out just how public is info.

Strong: current prices incorporate all info.

Rise of institutional investors Proxy voting: legal relationship under which one party is

given the power to vote the shares of another. Federal regulation that requires disclosure

o Issuing securities: Securities Act of 1933o Proxy solicitation: Securities Act of 1934 – “I

am going to vote this way and you should too”

14a-3 – information to be provided 14a-4 –appearance of proxy card 14a-5- appearance of proxy

statement 14a-8: excludability of S/H proposal

Lovenheim : Shareholder proposed resolution for a proxy statement can only be turned down when the proposal both concerns less than 5% of total earnings or assets, and when it is not significantly related to the business.

14a-9-prohibits making of false or misleading statements as to any material fact or misleading omission of material fact in connection with proxy solicitation.

o Tender offers: disclosure when S/H are asked to respond to a form of corporate takeover

o Insider tradingo Periodic reporting

Both BOD and S/H can change bylaws under 109(a). See AFSCME analysis for clash of 109(a) with 14a-8.

How to Protect Minority Rights (Generally) Staggered board (MBCA 8.06, DGCL 141(d)) or board

elected by sub-class of shares Supermajority provisions to prevent hostile takeovers Bylaw changes through S/H voting DGCL 109(b), 242(b),

MBCA 10.03 Voting trusts (MBCA 7.30, DGCL 218(a)) Irrevocable proxies 7.22, DGCL 212 Shareholder pooling agreements 7.31, 218(c) Preferred stock for liquidation and dividend rights Cumulative voting instead of straight voting Par value – stock has inherent capital surplus Iron-clad employment contract Term protection with no firing without cause

Fiduciary Duty and BJRFiduciary duty Duty of care Duty of loyalty Duty of candor Duty of good faith

Business judgment rule: protects directors from liability to S/H under judicial presumption that directors have acted in

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accordance with their FD of care, loyalty and good faith. Does not apply if corporation is being sued by third party.

Elements : D had no personal interest in the transaction at question, decision was in good faith and came after a reasonable investigation of facts and decision is colorable business justification.

o As standard of review: was the conduct grossly negligent?

o As doctrine of abstention, did conduct satisfy some standard for the court’s not second-guessing it?

o Tension between authority and accountabilityo How to overcome BJR

S/H can sue for breach of care Affirmative acts (Van

Gorkham) Omission or failure to act

o Note exculpation under DE law

Breach of loyalty Self-dealing Corporate opportunity Competing business Waste Acts or omissions not in

good faith or intentional misconduct

Illegalo Defenses: S/H does not need to invest in

company and can get new directors. o Standards for intervention

Discretion to determine business policies. Courts will not step in unless there is fraud, illegality or conflict of interest Shlensky

MBCA 8.30 rejects discretion to consider interests of non-shareholders. Ford disallows change in fundamental corporate purpose.

Fiduciary duty of loyalty Corporate opportunity doctrine

MBCA 8.70, ALI 5.05o Northeast Harbor

Guth line of business test: D may not take opportunity where corporation is financially able, opportunity is in line of business, corporation has reasonable expectancy and will result in conflict of interest

D may take opportunity where it is presented to the individual, not essential to the corp, corp holds no

interest or expectancy and officer has not wrongfully employed resources of corp.

Durfee fairness test: Is it the Corp’s line of

business? If so, scrutinize equitable

considerations DGCL approach 122(17)

Broz No need for formal

disclosure if CO comes to director individually and independently

Not corporation’s line of business

ALI Test – is it a corporate opportunity as defined in 505(b)? Strict requirement of full disclosure required

Source of info. is any business opportunity of which senior executive or director becomes aware if it is reasonably of interest to corporation

Type of info. – does not relate to the source. Does not matter how you heard it as long as it is “closely related to business” that corporation is engaged in or expects to be engaged in

If yes, director cannot take it unless conditions in 505(a) met

o Disclosure to corporation and rejection by majority of disinterested directors.

Waste doctrine : applicable where CO was of such obvious importance and value that no person of ordinary sound business judgment would have rejected the opportunity. A rejection cannot be fair to corporation so it is a breach of FD. This is substantive due care.

Conflicting interest transactionsRule: all conflict of interest transactions are alright provided:

Approval of disinterested directors and shareholders

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And transaction is substantially fair to corp. with burden of proof on director

See ShapiroDGCL 144: No transaction is void or voidable simply because of financial COI if:

There is disclosure plus vote of majority of disinterested directors OR approved in good faith by shareholders OR transaction is fair to corp. at time of approval

Note: This does not bar COI claims against director for non-financial reasons

MBCA 8.60 – 8.63 CIT may not be set aside on grounds that director or

person with whom he has economic, personal association has an interest, if

o There is disclosure plus vote of majority of qualified directors or vote of qualified S/H (disinterested, but exhaustively defined) or transaction is fair to corp. at time of approval

Note: 8.61 bars claims that fall outside of statutory definition of CIT.

Transactions of controlling shareholder with corporation (Parent-Sub) Sinclair : Controlling S/H or parent receives benefit at

exclusion of sub – Parent has FD to sub and burden is on them to show fairness to sub if self-dealing

o Definition of self-dealing : controlling shareholder causes sub to act such that it receives something minority S/H do not (includes parent-sub mergers)

Standard : intrinsic fairness to minority S/H

o Non-self-dealing : minority s/h receive the same thing as controlling s/h

Standard : business judgment ruleo Non-independence: stock ownership alone is

not sufficient proof.Fiduciary duty of care

MBCA 8.30(a)(2) requires director to carry out her duties with the care of an ordinarily prudent person in a like position would exercise under similar circumstances.”

o Standard of care: gross negligenceo Rarely liable for breach of duty of care due to

business judgment rule. Joy v. North : BJR does not apply when corporate

decisions lack a business purpose, tainted with COI, is so egregious as to amount to a no win decision or results from an obvious and prolonged failure to exercise oversight or supervision.

Duty of care in decisional settings (8.30, 8.31)o Smith v. Gorkom – BJR requires that

directors must inform themselves prior to making a business decision of all material

information reasonable available to them. This duty to exercise an informed business judgment is in the nature of duty of care, and directors can breach it even when acting in good faith.

Directors also have duty of candor when asking S/H to take action.

Statutory Exculpation Provisionso MBCA 2.02(b)(4)

o S/h may eliminate liability for any action or non-action except:

Illegitimate financial benefit Intentional harm to corp. or s/h Improper distribution Intentional criminal act

o G.C.L. 102(b)(7)o May eliminate liability for breach of FD except

for Breach of loyalty of duty Acts not in good faith, intentional

misconduct Improper distribution Improper personal benefit

o Malpiede v. Townson Corporations are allowed to limit

director liability for monetary damages for breach of duty of care. Exculpation device for defense at pleading stage

Remember, good faith erroneous judgment counts against duty of care rather than loyalty. Directors can be exculpated from liability for breach of candor if actions were in good faith.

o Getting past summary judgment requires beating exculpation clauses and showing how BJR does not apply

Fiduciary duty of good faitho DGCL 102(b)(7) – no exculpation for breach of duty of

loyalty or for acts or omissions not in good faith.o Good faith is actually a subpart to loyalty and differs from

conduct that gives rise to breaches of duty of care:o Fiduciary acts intentionally with purpose other

than to advance business interests, violates applicable laws, or fails to act.

Duty to monitor: Caremark o Absent grounds to suspect deception, neither

board nor officers can be charged with wrongdoing simply for assuming the integrity if employees and the honesty of their dealings on company’s behalf

Limits on Corporation Shareholder suits – MBCA 3.04(b)(1), Del GCL

124(1)

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o Suit is derivative unless complaining S/H has suffered a special injury that is separate and distinct from that suffered by other S/H or based on a contractual right

Elements: Standing: Person bringing

suit must ne S/H at the time act was committed

Reasonableness: person must represent S/H adequately and fairly

Demand requiremento Demand requirement is universal for MBCA

(7.42) and ALI jurisdictions. Result: BOD rejects and reaches

own solution. Then apply the BJR with burden on P. If BOD accepts, Corporation handles the matter internally.

o Rule in Delaware : Demand is futile and excused when P can allege with particular facts a reasonable doubt that the directors’ actions were entitled to protection of BJR:

Facts suggest that D not disinterested and independent or

Their actions are for reasons not entitled to the protection of BJR such as a grossly negligent process.

o Delaware holds that making a demand concedes independence of board and precludes P from litigating the issue later. Argue that demand is futile.

Aronson test Whether under the

particularized facts alleged, a reasonable doubt is created that 1) the directors were disinterested and independent and 2) the challenged transaction was otherwise the product of a valid exercise of business judgment

Definition of independence: director’s decision is based on corporate merits of the subject matter rather than extraneous considerations or influences. Relative to controlling S/H probably at time of transaction

Disinterestedness : divided loyalty or a personal financial benefit from the challenged transaction. Relative to transaction at the time of transaction.

Aronson asks whether there is good reason to sue without respect to the board now.

When does Aronson not apply? Business decision made by

board where majority of directors have been replaced. Board now is the same as board then if at least half of the members are the same.

Subject of derivative suit is not a business decision of the board

Where decision being challenges was made by board of a different corporation

Ryan : allegation of a violation of terms of stock option plan approved by S/H automatically disables BJR defense

Rales : No conscious decision by the board to act or refrain from acting makes it impossible to use Aronson. Apply Rales – whether the present board is or is not disabled from exercising its right and duty to control corporate litigation. Evaluate if new members have ties to old members. Focus on board now.

Grimes : If demand is made and then refused, can litigate that refusal is illegitimate based on board now

Caremark : No decision by board so cannot use Aronson. Use Rales to determine whether board now is capable of properly evaluating the demand to sue.

o IF DEMAND IS EXCUSED , then do the Zapata two part test:

BOD will make a special litigation panel to consider the suit

Court will see if committee was independent and conducted in good faith

Corporate suit against the directors and officers - MBCA 3.04(b)(2). Del GCL 124(2)

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Suit by state attorney general MBCA 3.04(b)(3). Del GCL 124(3)

CLOSED CORPORATIONSGenerallySmall number of s/h, no ready market for stock, substantial majority s/h participation in management

Contracting as device to limit majority’s discretiono MBCA

o 7.32: S/H agreements valid for any non-public corp. event if they restrict board powers and give management rights to S/H.

o 8.01: BOD manages subject to limitations in AOI or agreement under 7.32

o 8.24(c): Board acts by majority unless bylaws or AOI provides otherwise

o DGLCo 1441(a) BOD manages affairs subject to

limitations in law or in COIo 144(b) Board acts by majority unless bylaws or

AOI provides otherwiseo 350-354

Written S/H agreement to bind the power of BOD

COI may provide for management by S/H

o Case law: o Zion v. Kurtz : An agreement between

shareholders of a Delaware corporation that requires the minority shareholder’s consent before conducting business is enforceable, even though the corporation has not met all of the formal statutory requirements.

o Blount v. Taft : Bylaws passed by unanimous vote are S/H agreements that are open to amendment by the majority of S/H

o Ramos v. Estrada : Voting agreement between S/H valid even through corporation is not a close corporation. If S/H is unable to reach a consensus, they must vote according to majority will.

Partnership Analogy, Enhanced Dutyo Legal remedies for minority S/H

o Involuntary dissolution Possibility of buyout MBCA 14.30 – S/H may petition for

dissolution in case of director or s/h deadlock or illegal oppressive, fraudulent conduct or waste

14.34: Corporation may elect to purchase shares of petitioning S/H at fair value

Case : Kemp v. Beatley – oppression means defeat of reasonable expectations.

No dissolution if company is willing to buyout at fair value.

Compare to Gimpel v. Bolstein where oppression also means burdensome, harsh or wrongful conduct, lack of probity and fair dealing, violation of fair play.

o Suit for breach of FD Derivative: protect rights of corporation Direct: protect rights of s/h

o Direct S/H suits against directorso Zidell : “Those in control of corporate affairs have

FD of good faith and fair dealing toward minority s/h”

o Wilkes Special rule for closed corporations as

defined by Donahue: Majority stockholders in a close corporation have a strict obligation to deal with minority with utmost good faith and loyalty

Burden is on controlling group to demonstrate legitimate business purpose. More intrusive review than normal BJR.

Always use this test when self dealing is present or if there is a parent-sub relationship

Share Repurchaseso Ex-ante shareholder agreemento Ex-post negotiation backed by judicial remedies such as

equitable relief or dissolutiono 14.30 sets out dissolution. o 14.34: if someone moves to dissolve, another

party can offer to buyout. If negotiation fails, court can place fair value.

o Caseso Concord : Courts will generally enforce such

agreements even if the purchase price is substantially less than the fair value of shares acquired

o Gallagher : Duty owed to shareholder and employee within closed corporation is distinct. Minority S/H who contractually agrees to the repurchase of his shares upon termination of his employment for any reason, acquires no right from the corporation or majority s/h against at-will discharge.

o Pedro : the relationship among shareholders in closely held corporation is analogous to partnership. In a closely held corporation, the nature of employment of a S/H may create a reasonable expectation by the employment is not terminable at will.

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Limited Liability CompanyPlanning and Contracting DLLCA 1101: equal voice in management and equal share

of profits (partnership type) ULLCA – voice and profit share according to investmentWhat duties do contracting parties owe each other? Contractual

o Delaware: Elimination of all duties via contract except good faith and fair dealing

o RULLCA: No elimination of duty of care and loyalty

Fiduciary dutyo LLC members in Delaware owe each other

the same FD directors owe to a corporation (care and loyalty) but can be contracted away

o RULLCA 409(a) – Loyalty and care Conflicting Interest Transactions

o Note Kahn’s explanation of good faith: it’s part of the duty of loyalty, not an independent duty.

Judicial dissolution and other remedies RULLCA allows a member to dissociate at will but such

dissociation neither dissolves the firm not provides fair buyout value.

DLLCA 604 : Fair value of equity interest Fisk : “Not reasonably practicable to carry on the business

in conformity with a limited liability company agreement.”o Halvorsen : withdrawing member entitled to

fair value of partnership interest if not provided for in agreement.

o Duty : LLC members owe each other a duty not to be sneaky and take advantage of the rules even if they believe it to be in the best interests of the LLC (VGS v. Castiel).

Compare to Close Corporation approach : Grant dissolution where conduct of those in control is deemed unfairly prejudicial or oppressive, even if the business is doing well

R&R Capital : Waiver of rights to seek dissolution

CORPORATION AS DEVICE TO ALLOCATE RISK

Piercing the veil Black letter law : corporate veil will be pierced whenever

the corporate form is employed to evade an existing obligation, circumvent a statute, perpetuate fraud, commit crime or work an injustice. Exception : Courts never allow piercing veil of a

public-ly held corporation to reach passive S/H Reasons to pierce corporate veil tests :Alter-ego or instrumentality test – was company completely dominated and controlled by S/H?

Corporate formalities test: were formalities observed during life of corp?Undercapitalization test: was corporation adequately capitalized at the beginning?Injustice test: was parent’s conduct in using sub wrongful or unjust to plaintiff?Combo: P must show control such that corporation has no separate mind, will or existence, that such control was used to perpetuate crime, fraud, wrong, or injustice and that this was the proximate cause of injury.

Piercing the veil to reach real personso Contract Creditors

o Easterbrook and Fischel argue that courts should allow this to remedy fraud and misrepresentation

o Cases:o Consumer’s Co-op v. Olsen o K.C. Roofing Center

o Tort Creditorso Need piercing doctrine to make liable people

who would not otherwise be liable.o Factors in support of piercing:

Fraudulent representation Undercapitalization Failure to observe corporate

formalities Absence of corporate records Payment by the corp of individual

obligations Use of corp to promote fraud,

illegality and injusticeo Piercing to reach parent/sub and LLC: to find a parent

corp liable, the party seeking relief must show that there is an overt duty owed to the party seeking to invoke the doctrine of piercing and that the corp. manipulated the legal entities in order to avoid legal duty

o Outsiders: de facto incorporation

MERGERSCorporate combinationso Stock acquisition

o Private dealo Tender offero Compulsory share exchange under MBCA 11.03

o Sale of substantially all assets (usually followed by liquidation)

o Merger (Del. 251, MBCA 11.03)o Straighto Triangular subsidiary merger

(1) Forward: T merges into A's sub (2) Reverse: A's sub merges into T

o Parent-sub (Del. 253, MBCA 11.04)o General Approval Process for Merger

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o Approval of board of directors of T and A with the exception of a parent-sub merger

o Approval of Shareholders (majority) of T and A with exceptions in 251(c) and MBCA 11.04(b)

(1) Exception: A (surviving corporation) shareholder approval not needed in—

(a) parent-sub merger (at least 90% ownership)

(b) whale-minnow merger (up to 20% size of whale). Minnow S/H get to vote.

(2) Exception: T shareholder approval not needed in parent-sub merger

o Appraisal rights o Rule : Appraisal right follows if you are a

shareholder in a party to a merger (target or acquirer) of which you disapprove.

MBCA Ch 13, DGCL 262 Basic rule: 13.02(a)(1) – if shareholder

approval required, s/h entitled to vote has appraisal remedy. No AR if you weren't allowed to vote in the first place because you are whale shareholder, but AR subsists if you weren't allowed to vote because you were minority in sub in parent-sub merger or if you were a shareholder in company merged out of existence in a short-form merger.

See MBCA 13.02(b) exceptions to A/R MBCA gives appraisal rights only to

shares entitled to vote. Delaware to all shares.

o MBCA section 13.02(a) lists five mandatory appraisal triggers, each of which specifically defines events that require the corporation to offer its shareholders appraisal rights:

o (1) mergerso (2) share exchangeso (3) dispositions of assets, o (4) amendments to the articles, and o (5) conversion or domestication.

o Delaware does not give A/R for the following mergers:o When a surviving company issues twenty percent

or less of its stock, no A/R for surviving S/H under both MBCA or Delaware.

o No A/R for parent S/H in short-form mergero Exception ("market out") : No AR if active market

exists for the stock you retain or the stock you have to give up unless you're getting back something other than marketable shares or shares in the surviving corp.

Exception to exception (MBCA) : If there's a suspicion of COI on the part of

dominant shareholder or senior executive.

Does not apply to interested transactions as defined by 13.01

However, S/H retain AR in cash-out mergers under DGCL 262.

TYPES OF MERGERS (EXTENDED)o Stock acquisition (DGCL 251, 259-61) (Not taxable)

o What: A gives stocks to B and B ceases to exist A is surviving corp and gets B’s assets and liabilities. B S/H get A stock.

o Voting: A board and A S/H as long as this is not whale-minnow. Then B board and B S/H vote. Majority of outstanding shares must vote. Preferred S/H only get a vote under MBCA not Delaware.

o Appraisal: Then appraisal rights for A (if they got to vote in the first place) and B S/H who dissented.

o Cash for Assets (DGCL 122, 271) (Taxable)o What: A pays B cash for assets of B and get

to choose, which assets and liabilities from B transfer to A. At this point, B can dissolve, dispensing cash to creditors and S/H.

o Voting : A and B boards vote. Then B S/H vote if B is selling “substantially all assets.” B/SH get to vote again if B plans to dissolve after the sale. A S/H do not get to vote (11.04b but 11.04h survivor exception)

o Appraisal : B S/H get A/R if they can vote. 13.02(a)(1). A S/H cannot get A/R rights because no vote.

o “Sale of substantially all assets” cases Gimble – quantitative test used to

determine that Gimble did not sell substantially all assets. The determination of substantially all depends on value of assets at time of sale.

Katz – qualitative test used by court to determine that sale affected the “existence and purpose” of the organization. No 51% threshold.

o Cash for Stock Acquisition (DGCL 122) (Tender Offer) (Taxable)

o What : A Corp buys B Corp shares directly from volunteering B S/H in exchange for cash. A Corp owns B Corp after transaction and becomes the parent, and B becomes the sub. No change in COI of A or B Corp.

o Voting : No formal voting by A or B S/H but technically, B S/H do vote with their shares. A board gets to vote but not B board since B

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S/H were approached separately. B board can recommend whether to sell or not sell.

o Appraisal : A S/H may try to argue that they get to vote and may get A/R rights using a de factor merger argument

o Stock for Assets Acquisition (Tax-free)o What : A Corp gives B stock in exchange for

assets. If A Corp also takes B’s liabilities, the effect is a statutory merger with some advantages: B creditors usually do not have claims against A. B normally dissolves and A stock that was held by B stock goes to B S/H.

o Voting : B S/H only vote if B is selling substantially all assets under MBCA 12.02 a. Under 271(a), must approve by majority of all outstanding stock. In Delaware, A S/H only vote if they need to authorize the selling of more stock but they don’t get to vote on the transaction. In MBCA, A S/H get a vote under 6.21(f). Note that A S/H would have gotten no vote if A had paid cash for assets.

o Appraisal : No appraisal rights for A or B Corp S/H in Delaware. In MBCA, B gets A/R under 13.02(a)(3) because this is a disposition of assets under 12.02. No vote for A because right to vote under 6.21(f) does not trigger appraisal in 13.02. Note how MBCA distinguishes between surviving and disappearing corporation.

o Stock for Stock Acquisition (Tax-Free)o What : End result is similar to statutory

merger except A Corp holds B Corp’s assets and liabilities in a wholly owned sub or as a separate legal entity. A deals directly with S/H of B. B Creditors have no claims against A Corp’s assets.

o Triangular Mergers (A: Buyer B: Seller) (Tax-Free)Forward

o A creates a sub. A-sub is capitalized with A shares

o A sub merges with B Corp. A sub survives. A-sub shares transferred to B S/H. B assets and liabilities transferred to A-sub.

o B shares are extinguished and B S/H get A stock.o A sub/B Corp becomes a sub of A (usually with B

retaining its name)o A is not a party to the merger. Merge is between

A-sub and B so B creditors cannot go after A. o Voting and A/R

A S/H get no vote and no A/R. A Corp board votes as S/H of A-sub. Risk of A Corp overvaluing B.

B S/H get to vote, usually with A/RReverse

o A sub merges with B Corp. B sub survives.o B S/H receive A shares (or cash). A Corp (as S/H

of A-sub) gets B shares. o B becomes wholly owned subsidiary of A Corp.o Everything else remains the same

HOW TO GET RID OF MINORITY S/H

o A Corp can do back-end merger to completely integrate B Corp into A Corp. This can be done with a board resolution (90% -owned rule). A Corp gives the minority S/H cash or debt in return for shares

o A Corp can drop down a C Corp and merge its B Corp sub into this new C Corp. C Corp would take assets and liabilities of B Corp and minorities get cashed out. Also, creditors of B Corp cannot go after A Corp since B/C is a sub.

o Reverse stock split: A Corp can say that each share of B is now worth only 1/100,000,000 of the shares of B Corp and cash out the minorities.

o De-Facto MergersCorporations try to avoid appearing like statutory mergers:

o S/H of both corps get to voteo Dissenting S/H get A/R in statutory merger. In

asset sales, no A/R for dissenters!o Creditors of target corp may go after surviving

corp.

Delaware approach to measures: form over substance. If deal is structured as a sale, then sales rules are invoked.o Independent legal significance doctrine – as long as

corps comply with one merger statute (262, merger statute) or 271 (asset statute), the transaction is legal as structured.

o Compare to Applestein

The Intersection Between Appraisal Remedy and FD Based on Judicial Reviewo Cash Out Mergers and the Business Purpose Test

o For violation of FD, remedy goes beyond merely receiving A/R. May receive accounting or recession or other remedy.

o Singer : Rejects argument that shareholder's right is exclusively to the value of his investment and not to its form. A §251 merger made solely for the purpose of freezing out minority shareholders is an abuse: majority shareholder must prove valid business purpose and duty of entire fairness to minority.

o Tanzer : Controlling shareholder's own interest counts as a valid business purpose,

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but that interest must not be suspect as a subterfuge, the real purpose of which is to get rid of unwanted minority shareholders

o Coggins : Fiduciary duties apply to freeze-out mergers as well: appraisal not sole remedy

o Weinberger : Ends "Delaware block" as exclusive

method of valuation Ends business purpose requirement Returns to emphasis on appraisal as

sole remedy Note: Can bring FD suit as a

shareholder class action. This is not a derivative suit.

o Law of Weinberger for cash out mergers: P has the burden of invoking standard for fairness:

Fair dealing (including duty of candor) – Signal could have avoided revealing price by setting up negotiating structure to mimic arm’s length transaction

Fair price: Fair value, taking into account all relevant factors, but not including any element of value arising from the accomplishment orthe expectation of the merger.

o Conflict of interest (ownership in company’s on both sides) is one reason to invoke Weinberger but burden on P

o Sole financial remedy is appraisal under Sec. 262, but appraisal subject to liberalized valuation procedures

Appraisal and Entire Fairness Review after Weinberger

1. Valuation under statutory appraisal (MBCA 13.01 (4) and DGCL 262(h))o Black letter law:

o Under MBCA, appraisal is usually exclusive remedy with no distinction between short form or long form merger

o Del.: In SF merger, appraisal is exclusive remedy, absent fraud or illegality (Glassman). In LF merger, appraisal is not exclusive remedy if you allege breach of duty of entire fairness (Rabkin, Lynch).

Cede: dissenting s/h proportionate interest is determined only after the company has been valued as an operating entity on date of merger.

Only speculative elements of value that may arise from the accomplishment or expectation of the merger should be excluded

Market price of shares may not represent true value. Paramount v. Time.

o Trend towards rejection of minority and marketability discounts

o Valuation under statutory appraisal (MBCA 13.01 (4) and DGCL 262(h))

o Cede : dissenting s/h proportionate interest is determined only after the company has been valued as an operating entity on date of merger

o Stringer : appraisal as exclusive remedy even in case of bad faith

HOSTILE ACQUISITIONSTakeover Tactics Front-end loaded tender offer – consideration in tender

offer is worth more than the consideration in the second-step merger and considered coercive because s/h who do not tender are forced to accept less for untendered shares.

Golden parachutes Greenmail

o Cheff v. Mathes o If the actions of the board was motivated

by proper business practice, board is not liable for using corporate funds to buy back shares,

Lock-ups and termination fees Poison pills

o Defensive self-tender – Unocal caseo Were there reasonable grounds for believing that

a threat to "corporate policy and effectiveness" existed?

(1) Burden of proof on directors(2) Satisfy burden by showing good faith and reasonable investigation(3) Defensive measure must also be reasonable in relation to the threat posed(4) If so, apply BJR - "[U]nless it is shown by a preponderance of the evidence that the directors' decisions were primarily based on perpetuating themselves in office, or some other breach of fiduciary duty such as fraud, overreaching, lack of good faith, or being uninformed, a Court will not substitute its judgment for that of the board."o Moran – issuance of poison pills as part of

securities is authorized under Delaware law. Court adds gross negligence to list of BJR exceptions under Unocal.

o Revlon duties :o Change from defenders of corporation to

auctioneers trying to get the best price

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o Lock up and no shop provisions are alright in this scenario if they enhance bidding

o Consideration of non-s/h interests but there should also be a benefit to s/h

o When are Revlon duties triggered? o Corporation initiates active bidding

process to sell itselfo In response to bidder's offer, target

abandons long-term strategy and seeks alternative transaction involving break-up of the company

o Any change in corporate control because it is opportunity for s/h to realize control premium

o All-cash, all-tender offers can also be a threat

o What does not trigger Revlon? o Carrying forward a pre-existing

transaction in an altered form. (Paramount v. Time)

o If Revlon duties are not triggered, use Unocal to check if board exercised proper business judgment.

Recapitalization and leveraged buyouts by management Shark repellant amendments to the bylaws or charter

o Super-majority amendmentso Fair price amendmentso Staggered board amendmentso Dual-class capitalization

Fiduciary duty: Rule : Directors may cause company to buy out dissident

s/h if they sincerely believe this is necessary to maintain proper business practices, but may not if their true motive is solely or primarily to perpetuate themselves in office.

If board is in breach of duty of loyalty and care, no exculpation of directors for loyalty breach.

o Time v. QVC : Defensive measures that breach FD are invalid.

Intermediate standard: When a board resists a takeover, there is a conflict of interest. Enhanced scrutiny:

o Two-part test: Was there a threat to "corporate policy and effectiveness"?

o Actions of board in resisting takeover (claiming to be engaged in effort to maximize share value) are judged under Unocal test:

o (a) adequate process and full information, and (b) decisions that are in “a range of reasonableness.”

o Burden of proof on board.o If board passes, judge actions under BJR (which

means board wins).

Sale of control or break-up: Maximization duty: When it becomes plain that corporation will be sold or broken up, or that control will be transferred and shareholders will nolonger be able to command control premium, board must hold auction or in some other way act to maximize value received by shareholders (“Revlon duty”).

DISCLOSURE Federal securities law

o Securities Act (“1933 Act”) – disclosure in connection with initial public offering

o Securities Exchange Act (“1934 Act”) - about continuing disclosure

When must company or others make disclosures?o Initial public offeringo Quarterly reportso Annual reportso Tender offero Proxy solicitation

o Borak allows private right of action to enforce rules during proxy solicitation

o Other material events When is a fact material for purposes of Rule 14a-9?

o TSC v. Northway test (for proxy statements): when there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote.

Causal link between misrepresentation and harm to the Po Mills v. Electric Auto-lite (S. Ct. 1970)o Reliance

o Burden on plaintiff to show materiality of misrepresented matter. No need to show more.

What happens to causal link of minority shareholder approval not necessary?

o Virginia Bankshares (S. Ct. 1991) - If minority approval not necessary, then “essential link” test is not met; the merger could have been carried out without minority shareholder approval, so misrepresentation is not causally related to accomplishment of merger. Give private right of action only to those whom Congress clearly intended to protect: shareholders whose vote matters.

Rule 10b-5 Generally: used as an alternative to state fraud actions involving private transactions of shares and/or actions involving misrepresentations or fraud relating to information about publicly traded shares.

o Birnbaum : §10(b) is "directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs, and [Rule

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10b-5] extend[s] protection only to the defrauded purchaser or seller"

o Thus, where A sells securities to B as part of a scheme in which C is defrauded, C has no 10b-5 remedy.

o Superintendent of Insurance v. Bankers Life & Casualty Co. (S. Ct. 1971): Rule 10b-5 is implicated in any fraudulent scheme if as part of that scheme a purchase or sale of securities occurs, even if the transaction is not fraudulent and there is no harm done to buyer, seller, or the integrity of the market.

o Where A sells securities to B (non-fraudulently) as part of an overall scheme in which A is defrauded (even, apparently, if by C), A has a 10b-5 remedy.

o Blue Chip Stamps v. Manor Drug Stores (S. Ct. 1975): Reinforces Birnbaum rule: plaintiff must have either bought or sold securities.

o Note exclusions under Birnbaum ruleo Santa Fe Industries, Inc. v. Green (S. Ct. 1977)

o Absent fraud (deception, misrepresentation, or non-disclosure), mere breach of fiduciary duty does not state a Rule 10b-5 claim.

o Basic, Inc. v. Levinson o If misrepresentation was material and

public, then ECMH tells us that it must have affected prevailing market price (“fraud on the market”). Plaintiffs are price takers and are presumed to have relied on the assumption that the market price was not based on false information.

INSIDER TRADING

Definition: Classic – Insider trades in his company’s stock based

upon material non-public information. o D has a fiduciary duty to C/SH.

Constructive (Misappropriation) – D has no FD to C/SH but breaches a trust with a person that does have such a duty. This is anyone with a duty of trust with the Corp. Those with access to confidential non-public information by way of their job come under this category.

o Who has duty to trust under 10b5-2

o Fraud on the Source: This person breaches a duty owed to the source of the information. Possible Defendants:

Self trader - Must be an insider (classic or constructive) and 2) must receive a benefit

Tipper Must be an insider (classic or

constructive 2) must receive a benefit. Does not

have to trade on it but someone else does.

o Tippee – tipper must have been an insider tipper must benefit tippee knows or should have known

about breach of duty. Rule 10b-5 in context as a device to regulate insider

tradingo Rule 14e-3 of the 1934 SEA: 14e prohibits fraud,

while 14e-3 defines as fraud the use of inside information (defined by its source) in the context of a tender offer. Can eliminate fraud requirement in 10b-5 by defining it away

o 16(b) of 1934 Act: requires insiders to disgorge to corporation all profits made or losses avoided from short-swing trades.

o State law: Some states prohibit purchase or sale by person connected with issuer with access to information not available to the public

o 10b-5 under 10b of 1934: prohibits fraud in connection with the purchase or sale of securities

Texas Gulf Sulphur rule: anyone in possession of material inside info must disclose or abstain from trading or recommending the securities concerned.

o Chiarella rule : emphasizes need for there to be a relationship of trust and confidence between person who trades on inside information and the person he deals with.

o Remember: Failure to disclose is only fraudulent when there is a duty to disclose

Dirks o Tippee liable when tipper would be liable;

therefore when tipper doesn’t use information to gain directly or indirectly, tippee is not liable.

o Whether tippee violates 10b-5 depends on whether tipper violated FD to corp’s s/h in giving the tip, and whether tippee knew or should have known about the breach of duty

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Documents

Corps - Clarke - Short Outline