Random International, “Rain Room” (Expo 1: New York, 2013)

Corporations:A Contemporary Approach

Chapter 1Introduction to the Firm

Slide 1of 22

Random International, “Rain Room” (Expo 1: New York, 2013)


Chapter 2Corporation Basics

Slide 2of 23


• Corporation as “private constitution” • Basic corporate vocabulary

– corporate categories– corporate characteristics– organic documents– corporate actors– corporate securities– fiduciary duties (derivative suit)– corporate law vs. other law

• Corporate powers– change annual meeting– equitable limitations

Module I – Fundamentals

Citizen of world

Citizen of world

Law profession

Law profession

Corporate practice

Corporate practice

Bar examBar

exam


Chapter 1Introduction to the Firm

Slide 3of 25

Corporate practice

Corporate practice

Law profession

Law profession

Citizen of world

Citizen of world

Bar examBar

exam

Why BusOrgs?



Slide 4of 23

Corporate hierarchies

Corporation(officers)

Shareholders

Corporate statute(judge-made law)

Board ofDirectors

Articles of Incorporation

By-laws

Constitution

Corpora

tion a

s

privat

e co

nstitu

tion



Slide 5of 23

1. “Exit, voice and loyalty” in political organizations are similar to “liquidity, voting and fiduciary duties” in the corporation. True or false?

2. Public corporations are -- a. a type of non-profit

corporationb. a type of private

corporationc. a type of close

corporationd. a corporation regulated

only by federal law

3. Corporations MUST have:

a. Separate identity

b. Perpetual life

c. Limited liability

d. Centralized management (board of directors)

e. Transferable shares

4. Shareholders have a right to liquidate their investment and sell their shares to the corporation. True or false?

Pop quiz

1–T / 2–B / 3–A / 4–F



Slide 6of 23

5. Chancellor Bill Allen is just about the cutest jurist in the land. True or false?

6. The Model Business Corporate Act is –a. uniform statute adopted in

most statesb. ABA draft statute for states

to adopt/revise as they choose

c. modeled on the Delaware General Corporation Law

7. Corporate law is:a. Primarily judge-made law

(see ALI Principles)b. A product of each state

under choice of law principles

c. Primarily concerned with defining rights of securities -- stock, debentures, bonds, preferred shares

8. The articles of incorporation (choose two):a. Trump corporate statutesb. Trump corporate bylawsc. Name the board of

directorsd. Must be filed with the

secretary of state

1–T / 2–B / 3–B / 4–B, D



Slide 7of 23

Corporate fiduciary duties …

A corporation during WWII – with more business than it know what to do with -- spends $1 million to sponsor a “variety hour” radio program. One of the singers on the program is wife of the company’s board chair/ president. A shareholder claims the directors, in approving this expenditure, violated their fiduciary duties. Please analyze.



Slide 8of 23

Duty of loyalty

“[P]ersonal transactions of directors with the corporations … may tend to produce a conflict between self-interest and fiduciary obligation, are when challenged examined with the most scrupulous care.”

Business judgment rule (BJR)

“Questions of policy of management … are left solely to their honest and unselfish decision … and the exercise of them for the common and general interests of the corporation may not be questioned.”

Duty of care

“[A director] is called upon to use care, to exercise judgment, the degree of care, the kind of judgment, that one would give in similar situations to the conduct of his own affairs.”

Corporate Fiduciary Duties

Presumption for Presumption against

Bayer v. Beran, (NY Sup. Ct 1944)



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Enforcement of fiduciary duties …

(1) Derivative suit

(2) Class action



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Derivative suit(enforce duties to corporation)

Corporation

Shareholder(lawyer)

Fiduciaries

“on behalf of corporation”

violation of corporate duties(recovery to corporation)



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Class action(enforce duties to shareholders)

Corporation

Sh rep(lawyer)

Insiders

“on behalf of class”

violation of direct duties

(recovery to shareholders)

Shareholderclass



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With great power comes great responsibility …

Setting the shareholders’

meeting date …



Slide 13of 23

What is a proxy insurgency? Corporation

Shareholders

elect new board

Board ofdirectors

Insurgent Shareholders

Schnell v. Chris-Craft Industries, Inc.(Del. 1971)



Slide 14of 23

Insurgency timeline (1971)

Dec 08 -

Propose

d new date for

meeting (C

ortland, N

Y)

Sep 17 - Share

holder insu

rgent g

roup fo

rms

Jan 11 -

Original

date for m

eeting

(byla

ws)

Sep DecNov JanOct

Oct 18 -

Board m

eets and a

mends byla

ws

Oct 27 -

Shareholder g

roup le

arns o

f new m

eeting date



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Power vs. Duty

“… Management has attempted to use the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office … for the purpose of obstructing the legitimate efforts of dissident stockholders … These are inequitable purposes, contrary to established principles of corporate democracy.”

Schnell v. Chris-Craft Industries, Inc.(Del. 1971)

Delaware Supreme Court (2009)



Slide 16of 23

Delaware’s “product”

Dec 08 -

Propose

d new date for

meeting (C

ortland, N

Y)

Sep 17 - Share

holder insu

rgent g

roup fo

rms

Jan 11 -

Original

meetin

g

date (byla

ws)

Sep DecNov JanOct

Oct 18 -

Board m

eets and a

mends byla

ws

Oct 27 -

Shareholder g

roup le

arns o

f new m

eeting date

Nov 1 -

Sharehold

er gro

up files actio

n

Nov 10 - Chancery

Court

grants

access to S

H list

Nov 18 - Chancery

Court

denies pre

lim in

junc

Nov 29 - Sup C

t rem

ands / postp

one mtg



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What is a tender offer? Corporation

Shareholders

Board ofdirectors

Hostile bidder

(1) buy shares

(2) elect new board

Stahl v. Apple Bancorporation, Inc.(Del. Ch. 1990)



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Takeover timeline (1986-90)

3/19/90 - Board

fixes r

ecord

date for A

pril 17, b

ut no m

tg date

9/86 - Stahl b

uys 20%

of outst

anding Banco

rp sh

ares

3/28/90 - Stahl s

tarts T

O @ $38 ca

sh, p

rovid

ed gets bd m

ajority

1986 1990 19911989

11/7/86 - Stahl re

aches 3

0.3% ownersh

ip

11/22/89 - Stahl p

ropose

s byla

w change and board

-pack

ing plan

4/9/90 - Specia

l bd m

tg: finan advis

ors sa

y TO is

unfair;

Bd with

draws r

ecord

date to lo

ok for a

ltern

atives

5/9/90 - Stahl s

ends out p

roxy

materia

ls

5/14/90 - Stahl s

eeks pre

lim

injunc requirin

g SH m

tg



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Power vs. Duty

“Fiduciary duties constitute a network of responsibilities that overlay the exercise of even undoubted legal power.”

“I cannot conclude that defendants have taken action for the purpose of impairing or impeding the effective exercise of the corporate franchise.”

“Deferring this company’s annual meeting where no meeting date has yet been set and no proxies even solicited does not impair or impede the effective exercise of the franchise.”

“Plaintiff has no legal right to compel the holding of the company’s annual meeting or right in equity to require the board to call a meeting now.”

Stahl v. Apple Bancorporation, Inc.(Del. Ch. 1990)

Chancellor William Allen



Slide 20of 23

Reconcile the cases …

(1) Schnell: board has power -- but it’s inequitable for board to change meeting date and impede voting insurgency

(2) Stahl: board has power -- and it’s equitable for board to not set meeting date in face of insurgency/tender offer



Slide 21of 23

The end

Documents

Random International, “Rain Room” (Expo 1: New York, 2013)