CHOICE OF ENTITY:
1. Structure of power
2. Fiduciary duties
a. Duty of Care – standard for business decisions.
b. Duty of Loyalty – putting the corporation and shareholders ahead of your own
c. Duty of stockholders – majority stockholders own a fiduciary duty
Factors in deciding choice of entity:
4. Continuity of Existence
6. Raising Additional Capital
SP: Person or business, working alone but can hire employees. Do not have to file
w/government, except d/b/a on county level
1. Liability: unlimited personal liability.
2. Control: management: solely by owner.
3. Transferability: business can be sold as an asset deal. Everything goes.
4. Continuity of existence: until the earliest of selling the business, terminating the
business, filing for personal bankruptcy, dying.
5. Taxation: owner directly taxed.
6. Raising Additional Capital: cannot sell ownership stake to raise capital but can secure
GP: statutory laws governing. Mandatory provisions [103(b) RUPA]. An association of 2 or
more persons to carry on as co-owners a business for profit. Subjective intent to form
partnership not required. No written agreement required; implied agreement enough.
1. Liability: each partner jointly and severably liable, regardless of which partner is at
fault. EXCEPTION: [UPA 17] -> new partners only liable for extent of investment.
J&S liability remains with managerial interest.
a. Limiting liability: insurance, limiting through K, [RUPA 303] limiting
apparent or actual authority of partner to bind partnership.
2. Control: [UPA 18(e), RUPA 401(f)]: all partners have equal rights unless partnership
agreement says otherwise.
3. Transferability: [RUPA 503]: transfer only entitles the transferee to financial aspects
of the partnership, not decision making power. Default rule: only if all other partners
agree to make you a full fledged partner, do you receive the managerial interests in
4. Continuity of existence: until the earliest of death of partner, completion of project,
drop dead date.
a. [UPA 29] If no partnership agreement, then UPA and RUPA refer to events
which dissolve partnership. Dissolution automatically triggered upon an
event. Partnership not terminated, but relationship between partners changes.
Partners must agree to new partnership.
5. Taxation: no entity level tax as GPs are flow-through tax entities.
6. Raising Additional Capital: partnership can borrow money or additional partners can
make a capital contribution.
7. Proving a partnership:
a. Right to a voice in management.
b. Division of profits.
c. Look at the agreements/relationship to one another.
d. Even if K states that the association is not a partnership, the conduct of the
parties is controlling.
8. Martin: defendants are lenders, so no partnership and no joint and several liability.
Veto power, but not affirmative power to make proactive decisions.
9. Lupien: the right to participate is the essence of co-ownership. More active role here
than in Martin where some things done were in the ordinary case of protecting loans.
10. Summers: where there is a difference of opinion with respect to ordinary matters, it
may be decided by the majority of the partners. If only 2 partners, then unanimous
a. [UPA 18(h)]: In the absence of an agreement regarding decision making
power, majority regardless of partnership percentage (look at control %).
11. Meinhard: partnerships entail a duty of finest loyalty to each other. Pursuing an
opportunity for self-gratification breaches that duty. [UPA 20, 21, RUPA 403,
a. [RUPA 103(b)(3)]: partnership agreement can define what a fiduciary duty
means, but cannot eliminate the fiduciary duty entirely.
LP: Formed by statute [RULPA §101, 201, 302, 403]. 1 or more GPs and 1 or more LPs. File a
certificate with Sec. of State. Liability and management and control are different from
partnerships. All of the factors are essentially the same.
1. Liability: GPs have J&S liability but LPs only lose their investment.
2. Control: GPs have managerial control but LPs have NO control.
a. EXCEPTION: If a limited partner goes too far and becomes engaged in the
business, he becomes a general partner and assumes liability.
3. Transferability: transfer of only financial interests.
4. Continuity of existence: until a specified event.
5. Taxation: flow-through tax entities.
6. Raising Additional Capital: borrow money or add additional partners.
7. Gateway: under AZ, liability for an LP whenever the LP exercised substantially the
same control as a GP, even if the creditor had no contact with the LP and no
knowledge of the LP‘s control.
a. [ULPA 303(b)]: LP may consult or advise or call a meeting.
b. [ULPA 303(a)]: if LP participates, only liable to those who transact reasonably
believing based on what you were doing that you are a GP.
8. In re USA Cafes: directors of the GP owed the LPs no duty of loyalty or care, but
owed the GP and shareholders duty of loyalty.
a. Fiduciary duty – one who controls property of another may not, w/o implied
or express agreement, intentionally use that property in a way that benefits
the holder of the control to the detriment of the property or its beneficial
LLP: [UPA 101(5), 306(c), 1001, RUPA 1001, 1002]. essentially GPs, but the liability of the
general partners is less extensive than the liability of a general partner. Limited J&S liability.
A partner in an LLP is not personally liable for all partnership obligations, but only for her
acts of malpractice, not others. EXCEPTION: under some LLP statutes, she is also
unlimitedly liable for activities closely related to her, for contractual obligations, or both.
LLPs must register with State.
LLC: non corporate entities that are created under special statutes that combine benefits of
corporation and partnership form, without the disadvantages. Owners have limited liability.
Formed through articles of organization in a state office.
1. Liability: limited to investment. All owners have limited liability; no one has J&S.
a. Some LLC statutes permit operating agreement to waive all fiduciary duties.
b. Some statutes provide that in a manager-managed LLC, a member who is not
also a manager owes no duties to the LLC or the other members solely by
reason of being a member.
2. Control: operating agreement provides for the governance of the LLC, its
capitalization, the admission and withdrawal of members, and distributions. Default
rule: LLC managed by its members. Everyone can participate and not susceptible to
a. Member-managed: each member binds the LLC.
b. Manager-managed: only managers bind the LLC.
3. Transferability: operating agreement will govern the ability to transfer. If no
operating agreement, then the LLC statute will allow you to transfer your financial
interests, but not the managerial aspects (only allowed if majority votes). Transferee
always maintains limited liability by statute.
4. Continuity of existence: continues until an event. Events of disassociation.
5. Taxation: no entity level tax. Flow-through tax.
6. Raising Additional Capital: LLC allows for different levels of ownership interests.
Can issue ownership interests w/o voting rights.
Corporation: must file articles of incorporation. Public corps. must register with SEC.
1. Liability: limited liability for shareholders.
a. EXCEPTION: veil piercings sometimes allow you to go after the shareholders.
2. Control: direct management removed from owners. [DGCL 141(a), NYBCL 701].
Separation of ownership and control. Board of Directors control through shareholder
election. Directors can also be officers (inside directors).
3. Transferability: can be transferred with or w/o some K obligations (transferability
may be limited).
a. Private corps. do not offer a secondary trading market. Shareholders are often
directors; transferability often restricted by K.
4. Continuity of existence: either state a termination date or perpetual existence.
5. Taxation: ―C‖ corps. taxed at entity and shareholder level. ―S‖ corps. only taxed at
shareholder level (flow-through taxation).
a. To qualify for ―S‖ corp.: must have 75 or fewer shareholders, only one class of
b. Restrictions: ―S‖ corp. may buy stock in any ―C‖ corp., but cannot be owned by
any ―C‖ corp.
6. Raising Additional Capital: ―C‖ can flexibly raise capital through debt securities or
issuance of stock (preferred or common). They are K claimants, not ownership
claimants. Capped interest rate, priority in the event of liquidation.
i. Bonds: long-term, secured, collateralized.
ii. Debentures: long-term IOUs, not collateralized. Naked promise to
iii. Notes: short-term IOUs, secured or unsecured.
iv. Trade debt (accounts payable) – amounts that a corporation owes for
goods and services at any point in time.
v. Bank debt (loans payable) – financing from commercial-bank loans.
b. Preferred: Dividend preference: until the current stock dividend to preferred
stockholders are paid up, you cannot pay dividends to common shareholders.
Liquidation preference: once all the creditors are paid in full, the preferred
shareholders are paid second according to the stated dollar amount in the K.
i. Difference between debt and preferred stock – debtholders have a fixed
claim on the corporation for interest and principal while preferred
shareholders normally have no fixed claim for distributions.
c. Common: common shareholders get everything else after the creditors and
preferred stockholders are paid off. Normally, common stock carries the right
to vote in the election of directors and certain other matters.
Liquidation/Bankruptcy ―Food Chain‖
1. Creditors Senior
Subordinated – if you agree to be here, you get a higher rate of interest.
Subordinated debt securities are called ‗junk bonds‘.
2. P/s holders
3. C/s holders
10 equal owners, $1M pre-tax profit, all profits paid out, 15% Corp. Div. tax rate (max rate
today), 35% ‗C‘ Corp tax rate, 39.6% Ind. Tax rate.
Pre-Bush ‗C‘ Corp Post-Bush ‗C‘ Corp Flow-through P-
ships, LLC, ‗S‘ Corp
Entity Level Tax $350K $350K None
Ind. Level Tax
Profits/owner $65K $65K $100K
Personal Income Tax $25,740 $9,750 $39,600
(15%/39.6) – shareholders (65K x .396) (65K x .15)
Money in pocket $39,260 $55,250 $60,400
Tax bill for individuals in flow-through entities = $39,600.
Choosing where to incorporate:
1. A corporation‘s internal affairs are governed by the laws of its state of incorporation.
a. If a corporation does business in a state, then doing-business tax
b. If a corporation is incorporated in a state, then franchise tax regardless if the
corp. does business in that state.
c. If there is a dispute related to corporate governance, the court will apply the
incorporation laws where you incorporated.
2. Reasons for incorporating in DE:
a. DE is very statutorily liberal. Only minimal restrictions on managerial control
(management friendly). Allows public companies to adopt takeover defenses.
Need for shareholder limited.
b. Predictability: existing case law.
c. Judiciary: courts are efficient.
Capital: funds, properties, or other assets that are contributed or loaned to the business that
are necessary for that business to operate.
The Balance Sheet
Current Assets (CA) Short Term (ST)
Fixed Assets (FA) Long Term (LT)
Intangible Assets (IA)
Other Assets (OA)
o Common Stock Account
o Preferred Stock Account
o Additional Paid in Capital
Retained earnings or deficit
Total Assets = Total Liability + Owners‘ Equity:
Assets: reflected in order of liquidity
1. Current Assets: can be easily sold or converted to cash; quickly and easily liquidated
(cash, marketable securities, accounts receivable, inventory (considered a current
interest, but less liquid)).
2. Fixed Assets: not quickly converted to cash; used over multiple years. Furniture,
computers, property, plant and equipment. FAs must be depreciated over time. On
the balance sheet, you will see the historic cost, minus the less accumulated
depreciation, and the net. The depreciation is subtracted out on your income
statement as an expense.
3. Intangible Assets: intellectual property, copyrights, trademarks.
4. Other Assets.
1. Amounts borrowed by the corporation that it needs to pay; those to whom money is
owed are contract claimants (K through performance or action included).
2. Contract claims: indenture (K used for bonds and debentures).
a. Creditors are senior to stockholders.
i. Secured creditors are paid first.
ii. Senior debt holders are paid second.
iii. Subordinated creditors are last – by K, agree to stand at the bottom of
the list of creditors. Typically 3-5% higher interest rate.
1. Capital contribution: what did the owners of the business contribute to the business
in exchange for their ownership interest? Common stock or preferred stock. Every
corporation has common stock, but not preferred stock.
2. Retained earnings or deficit: the profits and losses of the business since inception.
Money not given back to shareholders can be reinvested in the business.
3. Common Stock Account: number of outstanding shares of common stock x par value
per share of common stock.
a. DE capital [DGCL 154]; NY stated capital [NYBCL 506].
4. Preferred Stock Account: number of outstanding shares of preferred stock x par value
per share of preferred stock. Almost always paid for its par value.
5. Additional Paid in Capital Account: Amount that shareholders pay that is over and
beyond par value. APIC = amount paid over par value x number of outstanding
Par Value: The minimum amount which by law an investor must pay for his amount of
stock, common or preferred.
1. Par value was designed to protect creditors and other investors/shareholders.
Minimum value adds to capital cushion. Factors into legal capital rules.
a. People who pay less than par value own ―watered stock‖. Hurts creditors since
these people pay less and the capital cushion is not increased, and hurts
b. Illegal to issue ―watered stock‖. [DGCL 153(a) and NYBCL 504(c)].
i. [DGCL 152 and NYBCL 504(i)]: if stock not fully paid then
shareholders can go after you in a suit by creditors to make up the
2. People who form the corporation determine the par value. To find the par value,
look at the stock certificate or the certificate of incorporation or the balance sheet.
3. The higher the par value amount, the lower the amount to pay dividends. Par value
amounts are normally very low to minimize par value and maximize the ability to
4. Can a company issue no par value stock? [DGCL 151(a) and NYBCL 501(a)], YES,
you can offer no par value stock. No par value stock means that the board of
directors can pick the dollar amount going into the CSA and whatever remaining to
go into the APIC. Each time the Board makes that allocation, it does so by
a. If the Board forgets by Resolution to make the allocation and a period of time
has run, all of the consideration gets lumped into the CSA by default. Helps
creditors (adds to cushion), hurts stockholders (less in dividends).
Legal Capital Rules: Illegal to pay dividends or to distribute to shareholders if it would
reduce the capital cushion.
1. Surplus: [DGCL 154] the excess of a corporations net assets over the amount
determined to be capital. Dependent on the balance sheet (shows the ability to pay
a. S = (TA – TL) – capital.
b. OR, if there are any APIC or R/E.
c. TA – TL = Net assets [DGCL 154]
d. Capital: the amount in the CSA and the amount in the PSA.
2. DE Legal Capital Rules: [DGCL 170(a)]. Directors of DE corp. may declare and pay
dividends out of surplus THIS YEAR or if there is no surplus, out of its net profits for
the current fiscal year or the previous year.
a. Liability for violation: [DGCL 174(a)]: you‘re on the hook for the amount
distributed in excess of what you legally could pay.
i. Pro-director: [DGCL 174(a)] only directors that willfully or deliberately
violate the capital rules are liable. [DGCL 172] directors are entitled to
rely on the determinations of the corporations accountants and
attorneys when trying to decide if they have surplus or net profits. No
director liability as long as there is reasonable reliance in good faith.
c. Knowing shareholders exception: [DGCL 174(c)] even if directors are liable
and must pay money, they can go after any of the shareholders who knew that
it was illegal.
3. NY Legal Capital Rules: Insolvency: [NYBCL 102(8)] a company that is unable to pay
its debts as they come due in the ordinary course of business. Look at the balance
sheet – if the current/long term liabilities outweigh the assets, this could be an
indication of insolvency.
a. [NYBCL 510]: 2 parts must be satisfied for a dividend to have been paid legally.
i. Insolvency test: [NYBCL 510(a)] a NY corp. cannot declare and pay
dividends when it is currently insolvent or will become insolvent b/c of
the dividend pay out. Unable to pay debts as they become due in the
ordinary course of business.
ii. Net assets test: [NYBCL 510(b)] [equivalent to DE surplus prong] a
corp. can declare and pay dividends only out of surplus and so long as
the net assets remaining after the payment is at least as big as the stated
1. TA – TL >= stated capital (CSA + PSA)
iii. Maximum dividend payable = (TA – TL) – stated capital.
1. Same formula for DE surplus.
b. Liability for illegal dividends: [NYBCL 719 (a)(1) and (d)(1)]: on the hook for
the over-payment (illegal part) of the dividend. Defenses based on the
reasonable reliance of people in good faith.
Shareholders‘ Equity: valid consideration for stock
1. [DGCL 152] stock that you issue will be fully paid and accessible if the total amount is
received by the corporation as cash, services rendered, personal property, leases of
property or a combination or if someone is not paying everything up front, at least
the par value and a binding contract to pay the difference.
a. Promise of future labor is not good consideration. Only for services previously
rendered is good consideration.
2. [NYBCL 504 (a)]: four things qualify
a. Money or other property, tangible or intangible or labor or services actually
received but must have been rendered before.
b. Services previously rendered ok even if it was before the corporation formed.
c. A binding obligation to pay the subscription price is valid.
d. A binding obligation to pay services at a stated value in writing.
i. Future services ok as long as you have a binding K and the value of the
services is clearly stated.
3. Big difference is between future services: future services ok in NY, not ok in DE.
Preferred stock: each series has its own rights, preferences, privileges which are idiosyncratic
to that particular series.
1. Getting into the charter:
a. Directly: You can include them in the original article of incorporation. [DGCL
102(a)(4) and NYBCL 402(a)(6)]
b. Indirectly: They give the board blank check authority to offer different series
of preferred stock based on market conditions. Blank check authority in
[DGCL 102(a)(4) and NYBCL 402(a)(6)]. Place in charter.
c. Through board resolutions, they will negotiate with preferred stock holders as
to rights, attributes, preferences.
d. They will take the resolutions and put in a certificate of designations (DE) or
certificate of amendment (NY). [DGCL 151(g) NYBCL 502 (c) and (d)].
e. You file with the Secretary of State and it becomes part of your charter.
2. 2 preferences over common stock:
a. Dividend preference: until the preferred stock dividends are declared and paid,
the corporation cannot pay common stock dividends. [DGCL 151]. Legal
capital rule applies to preferred stock.
i. Dividends paid quarterly.
1. Does not mean that preferred stockholders will actually get
their contractually stated dividends.
2. On a debt security, you have to pay interest which is not subject
to the legal capital rules. If not paid, debt can be accelerated ->
3. Preferred stock dividends are subject to the legal capital rules.
4. Preferred stock dividends are payable at the discretion of the
board of directors.
ii. Cumulative preferred stock dividends: if the board chooses not to pay a
dividend (does not want to or legal capital rules not satisfied), it
becomes an arrearage (missed preferred stock dividends that have
accumulated), and the board must pay the cumulative preferred
stockholders‘ arrearage and current quarterly dividends before common
1. If 6 quarterly dividends are missed, it triggers voting rights for
preferred stockholders to appoint 2 new board holders.
iii. Non-cumulative preferred stock: if they pass on paying the quarterly
stock dividend, that dividend is gone forever, even if there is money
later and the board wants to pay.
1. Why would you want non-cumulative preferred stock?
a. Venture capitalists – they want convertible non-
cumulative p/s (can convert into common stock at an
established conversion rate); hope that the company
eventually goes public or is sold to a competitor, both at
high prices. They do have representation on the Board.
b. Liquidation preference: stated in K typically equal to the par value and in a
liquidation context, you receive the liquidation preference plus any unpaid
dividend arrearage prior to payments to common stockholders.
i. Voting rights: preferred stockholders generally receive voting rights
either by law or you can negotiate for voting rights (extremely limited
in the K).
1. P/s typically vote with c/s.
2. By law: [DGCL 242(b)(2) and NYBCL 804(a)], any time you
amend a charter that adversely affects a Series, that Series votes
separately as a class (veto power).
3. By K: p/s given the opportunity to elect Board members if
dividends have been missed for 6 consecutive quarters. After
arrearage has been paid, those Directors must resign.
ii. Conversion rights: convert shares of preferred stock to common stock
at a negotiated rights.
1. Reason: preferred stock is capped at its stated dividend rate.
Upside accrues to the benefit of common stockholders.
2. BUT, dividend rate is lowered.
iii. Participation rights: preferred stockholders participate along with c/s in
dividends as if their shares were c/s. (Ex. p/s with quarterly div. of
$1/share, $.25 div. to c/s, 20 shares total. Total dividends = $25.)
iv. Redemption rights: corporation can redeem/repurchase preferred stock
at predetermined prices if the company chooses [DGCL 151(b)].
1. Reason: p/s is between debt and equity. When interest rates
fall, it makes sense for the company to buy p/s for cheaper debt.
Refinancing their debts.
Common Stock: ownership claimants, not K claimants.
1. Pricing: Decision is up to Bd. of Dir. Must charge at least par value, unless selling
watered stock. Typically, Bd wants to give the least amount of ownership for the
highest per share price. Amount/share based on how badly the company needs the $
and how badly the c/s want to invest. Steps to determine—value the whole company
(look at discounted cash flow, comparable companies, book value) and based on that,
decide what percentage will be sold to the public.
a. BV = total assets – total liabilities.
2. Non-voting c/s: [DGCL 151(a) and NYBCL 501(a)].
a. One condition: you cannot issue a class of non-voting c/s unless there is
another class of c/s that has full voting rights due to concern about control.
There are a group of investors who have no desire to vote, only want the
investing attributes. By having voting and non-voting stock, you have a
separation between the management stakeholders and financial stakeholders.
b. BUT, different stock exchanges feel that it is unfair for c/s to have non-voting
stock. The stock exchanges would never list non-voting shares. So, the
companies created super-voting stock – a class of stock that has more than 1
vote/share, typically 10 votes/share.
a. Election of Board of Directors: they get to elect agents that represent their
b. Whether their company should merge with another; fundamental corporate
c. Shareholder permission to amend the charter.
e. Stockholders DO NOT vote on the issuance of new stock.
Dividends: only payable at the discretion of the Board and so long as LCRs allow
1. Dividend does not have to be paid in cash: you can issue a stock dividend or a grant of
additional shares. [DGCL 173 and NYBCL 510(a)]. OR, you can issue an inventory
dividend (coupons or products substituting for dividends).
a. No tax for stock dividends; only for cash dividends. You can dividend shares
that you own in another company.
b. Spin-off transaction: where a publicly-traded parent company (UPC) owns
100% of a subsidiary, UPC can offer stock from subsidiary as a dividend to
2. Preemptive rights: control concept. If you own 51% of a corp = 51% of voting power,
and the corp. needs to raise capital, the company can issue new shares which will
diminish your voting power (voting dilution). You can protect yourself through
a. Definition: they guarantee you the opportunity (but not the obligation) to
purchase, in certain circumstances, enough of the additional shares to preserve
your voting power.
b. Preemptive rights are not guaranteed by law. [DGCL 102(b)(3) and NYBCL
622(b)(1)]: only get preemptive rights if the certificate of incorporation gives
you those rights.
Internal Corporate Governance Documents (ICGD):
1. 3 main ICGDs and pecking order:
a. Certificate or articles of incorporation (charter). Paramount and controls
b. Bylaws: rules that help govern the way the corporation is run. Contain very
detailed governance rules on day-to-day governance procedures (sending
notice of meetings, letters of meetings, etc.).
c. Board of Directors Resolutions: written statements of the director‘s resolve for
corporation to take specific action.
Certificate of Incorporation:
1. Naming: corporation or incorporation, limited or an abbreviation must be included.
a. [DGCL 102] – what is mandated in your charter.
b. [NYBCL 402(a)(1)]: name of the corporation. States names that cannot be used
in your name. You can use some names if you have approval by the
superintendent of banks.
c. What if your name‘s been taken by another? The application is bounced back.
You can reserve a name under NY and DE, and that reservation is good for 60
days with 2 possible 60 day extensions [DGCL 202, NYBCL 303].
2. Business purpose: either specific purpose, general purpose, or both.
a. [NYBCL 402(a)(2)] – specific purposes – limit you to that specific purpose
b. [NYBCL 402(a)(4)] – authorized share provision – you have to list in your
charter, the class or classes of stock you can issue an the par value of each class.
Once you run out, you have to amend your certificate to change that number
so you can issue more
c. [NYBCL 402(a)(5)] – rights, privileges, preferences, etc. – if you divide your
stock into different classes, you have to delineate all the rights and preferences
of each series into the certificate
d. [NYBCL 402(a)(6)] – blank check provision
e. [NYBCL 402(a)(9)] – duration of the corporation – usually your corp. has a
perpetual existence unless you specify a date
f. [NYBCL 402(b)] – provision in charter to limit liability for breach of fiduciary
duties – can limit fiduciary liability for breach of the duty of care – you cannot
give rid of actions in bad faith, intentional misconduct, crimes – but can limit
for negligence of directors
g. [NYBCL 402(c)] – other matters – anything else can be added to your charter
as long as it is legal
Amending Certificate of Incorporation:
1. [NYBCL 803(a)]: if you have issued stock then you must get shareholder approval of
any change to the certificate of incorporation. Board must approve and majority of
the outstanding shares. After you get approval, file a certificate of amendment to the
Sec. of State.
2. Exceptions to shareholder approval of charter amendment: If there are no shares
outstanding, then there is no one you have to get approval from. Just file an
amendment. The sole incorporator can do that.
a. [NYBCL 803(d), DGCL 241][no shares outstanding and Directors not
b. Typos: under [NYBCL 105] you can amend the certificate to correct typos w/o
shareholder approval. In NY, you can fix typos, but not typos in the name.
By-laws: It governs the mechanics behind calling meetings of the Board and shareholders.
1. Specifies the number of Directors and how to fill vacancies if a Director dies or
resigns. Lists the titles of the offices (not the names) and gives a job description.
a. [NYBCL 601(a) and DGCL 109(a)]: BoD can unilaterally amend by-laws if the
certificate of incorporation allows them to do so.
b. Shareholders are always entitled to amend the by-laws.
c. Shareholders can override what the Directors have done.
d. Shareholders always win.
3. By-laws do not need to be written at incorporation.
1. A corporation is not a natural person; it is an artificial person so it can only act
through its officers or agents.
2. If a corporation is to take some material action, then it can only do so after approval
by Directors and you want to memorialize the directives.
The Classical Ultra Vires Doctrine
1. Ultra vires = beyond the corporation‘s power.
2. Powers and purposes: Whether a corp. had acted beyond its purposes; engaged in a
type of business activity not permitted under its certificate. Whether the corporation
had exercised a power not specified in its certificate.
3. Policy: To protect the public from corporations engaged in unsanctioned corporate
activity. Certainty in commercial transactions: if corporation does not have express
power, then the Courts may be able to assume implied powers.
4. Under modern corporate statutes:
a. [DGCL 122(11)]: specifically authorizes DE corps. to engage in limited
partnerships although it is not in the charter.
b. [NYBCL 202(a)(15)]: specifically authorizes corps. to become involved with
5. Differentiation between ultra vires act and illegal act:
a. Just b/c act is ultra vires does not mean it is illegal. Generally, ultra vires acts
are legal, just beyond the scope of the charter.
b. Illegal acts are illegal to everyone. Still illegal even if in the charter.
6. Goodman: If a shareholder has participated in the ultra vires act, he cannot thereafter
attack it as ultra vires. [DGCL 124]: Ultra vires may be asserted first in a proceeding
by the shareholders for an ultra vires act. If the proceeding is due to K, it may set
aside the performance of K if equitable. Attorney General can assert ultra vires in an
act of dissolution of the corporation or to enjoin unauthorized acts.
1. [NYBCL 202(a)(12)]: NY corp. can make a charitable gift irrespective of corporate
2. [DGCL 122(9)]: make donations for public welfare or for charitable, scientific or
educational purposes and in time of war or other national emergency in aid.
3. Who determines: for large gifts, the BoD often decides. Lower level donations are
often determined by someone in charge outside of the CEO.
4. Alternative to corporate giving: Instead of having corporations give away money,
give a dividend to shareholders and have the individual shareholder decide if and to
which charity to donate.
a. Charitable giving = good for community.
b. Large single donation by the corporation may impact the charity more than a
large number of small donations.
c. Money received by shareholders is subject to double taxation.
5. Prohibiting a corporation from making a charitable gift: put it in the charter or
amendment. [NYBCL 202]: limitation in the charter.
6. Constituencies other than s/holders: Retirees, local community, creditors, suppliers:
what are the abilities to consider people other than the s/holders?
a. [NYBCL 717(b)]: constituency statute; when a Board takes action as to change
in control. Can consider employees, customers, creditors, long/short term
interests of the corp.
b. [DGCL]: no constituency statute, only case law as to hostile takeovers.
Consider anyone you want, provided they bear some reasonable interest to
money for the s/holders.
Pre-incorporation Transactions by Promoters: someone who has the business idea by
bringing together the necessary human and financial capital to bring the idea to fruition.
1. Promoters seek money and/or part ownership, equity interest.
2. Pre-incorporated services as valid consideration for stock:
a. [NYBCL 504(a)]: services in connection with the formation of the corporation
qualifies as valid consideration.
b. [DGCL 152]: talks about services rendered and is unclear. Case law: pre-
incorporated services do qualify as valid consideration.
3. Liability: Pre-incorporation liability of promoters. Rule is that promoters are
personally liable, regardless if the corp., once formed, will benefit from the K.
a. EXCEPTION: if the other party knew that the corp. did not exist yet
nevertheless looks solely at the corp. for performance, then Goodman will not
be personally liable.
b. Promoter bears the burden of proof.
Must a corp. accept the benefits from a pre-incorporation K?
1. Ratification: where a corp. adopts a K that was previously unauthorized as its own.
No legal application as to newly formed corporations. Presupposes an agent or a
principle. Can a corporation not yet in existence ratify a K of its promoter? NO b/c it
did not exist (was not a principle). Restatement 2nd §326.
a. Agency relationship not present if corp. not yet formed. Only applies to post-
incorporated Ks. Ratification is unrelated to promoter liability.
2. Adoption: agrees to adopt as its own a K that was formed before the corp. was created.
You don‘t have to adopt a pre-incorporation K. If you don‘t adopt, the promoter is
left as liable unless the exception applies. Even if K is adopted, promoter is still joint
and severally liable.
a. Implied adoption is ok: knowingly accepting the benefits and moving forward.
3. Novation: completely separate agreement; create a new K to release promoter;
corporation is substituted in the K for the promoter. A K that looks like the previous
K, except the corp. is substituted for the promoter.
Types of promoter corporations: de jure, de facto or by estoppel
1. De jure corporation: an actual, legal, official corporation.
2. De facto corporation defense: corp. that a promoter puts together and tries to do the
right thing but messes up.
a. Requirements: must execute the certificate of incorporation (must sign), bona
fide (good faith) effort to file, must actually exercise corporate power.
b. If you are found to have a de facto corporation (even if you mess up), the
promoter will not be held personally liable for pre-incorporated Ks.
c. What if everything is done but it‘s lost in the mail? Promoter wins if he has
exercised corporate power.
d. What if everything is done but you do not include a fee. No good faith intent
and no limited liability.
e. Cantor: exercise of corporate power is interpreted narrowly (you don‘t have to
show a lot). Lease signing is enough to show corporate power. If you go after
the corp. first, that shows that you are looking to them for liability.
3. Estoppel: a legal corporation has not been formed, but it would be equitable to limit
liability to the promoter as if the corporation had been formed. Less of a showing is
needed for estoppel.
a. Difference from de facto corporation: the estoppel doctrine focuses on the 3rd
parties mental state and actions; de facto corporation focuses on the promoter
and what he tried to do.
i. If you thought of the entity as a corporation and acted as if you dealt
with a corporation you are estopped from arguing that it is not a
ii. For de facto, all you need is the three elements. You don‘t need the 3rd
party at all.
b. Estoppel is a good defense if you can‘t prove the de facto corporation defense.
c. The best defense is a de jure corporation defense > de facto > estoppel.
d. State can come after you even if you can prove de facto corporation defense.
i. [NYBCL 109(a)(2) and DGCL 329(b)]
e. Best way around using a de facto defense and estoppel defense: form a legal
f. Best way around pre-incorporation liability for promoters: incorporate first
before you do anything.
Piercing the Corporate Veil: distinction between corporate entity and shareholders entity.
Court can remove the corporate limited liability and allow creditors to go after personal
1. Fletcher: Under DE law, it is appropriate to pierce the corporate veil when you show
fraud, or when the subsidiary is being treated as the alter-ego or mere instrumentality
of the parent company. Here, second applies.
a. Alter-ego test: you must show the parent and subsidiary operated as a single
economic entity AND that there is an element of injustice or unfairness to the
whole situation which would make piercing the corp. veil fair. To show the 2
operate as a single economic entity:
i. Make sure there was adequate capitalization
ii. Corporate records (were corp. formalities maintained and observed).
iii. Siphoning of money – centralized cash management structure.
iv. Alter-ego as a façade of the parent
b. To show injustice or unfairness: (in this case it wasn‘t addressed at all).
Conclusory statements are not enough…u need proof!
2. Walhovsky: Inadequate capitalization not enough. Courts will disregard the
corporate form or pierce the corporate veil whenever necessary to prevent fraud or to
achieve equity. Whenever anyone uses control of the corporation to further his own
rather than the corporation‘s business, he will be liable for the corporation‘s acts
based on respondeat superior applicable even where the agent is a natural person.
Even though individual corporations may have been undercapitalized, it was still
satisfactory under NY law.
3. Minton: under CA law, to piece the corp. veil:
a. Director must treat the corporate assets as his own
b. Must add or withdraw capital from the corp at his will
c. Must hold themselves out as being personally liable for the corp‘s debts
d. Must provide inadequate capitalization AND
e. Must adequately participate in the corp‘s affairs
4. Avoiding getting your clients corporate veil pierced:
a. Corporate housekeeping necessary for limited liability. Treat the corporation
as a separate and distinct entity; avoid alter ego assertion.
b. Keep your corporate funds away from personal funds, no commingling:
transfers of money to you should be documented as a salary or dividend or
loan; don‘t pay with personal checks.
c. Provide minimal amount of capital customary for the business involved;
substance not just form.
1. "Deep Rock‖ doctrine: when a corporation is in bankruptcy the claim of a controlling
s/holder may be subordinated to the claims of others including the claims of preferred
s/holders, on various equitable grounds. Limited doctrine and only applies potentially
to debt claims of controlling stockholders.
a. When a controlling stockholder also lends money to the corp., the claims as
the creditor may be subordinated to the claims of other creditors.
b. Conclusion: a s/holder can also be a creditor (lender) of the corp.
2. Where do the claims fit? Debt claims go below the creditors including liquidation
preferences of preferred s/holders -> pushed down to the c/s level.
3. Equitable subordination more or less drastic remedy than piercing the corporate veil?
a. ES says that your claim as a creditor gets pushed down to the bottom.
b. Piercing the veil exposes your personal assets = much more drastic.
4. Benjamin: conditions for ES:
a. Claimant (s/holder, director or officer who has a purported debt claim of the
corp.) must have engaged in some type of inequitable conduct.
i. Does not have to rise to the level of fraud, just inequitable conduct.
ii. The claimant herself (controlling s/holder who says that they‘re owed
money) bears the burden of showing equitable/inequitable conduct.
b. The misconduct must have resulted in injury to the creditors of the corp. or
conferred an unfair advantage on the claimant.
c. ES of the claim must be consistent w/the provisions of the Bankruptcy Act.
5. Costello: b/c they used their creditor position to gain economic advantage, they were
receiving an unfair advantage – they took advantage of their fiduciary duties –
therefore, their claim should be subordinated to those of the other regular creditors of
the bankrupt corp.
6. Arnold: You have to adequately capitalize in the beginning and if you initially say it‘s
a loan, the court can disregard in terms of a bankruptcy context. Later on, a loan can
be a loan. Adversity later can necessitate corporate borrowing to meet its needs.
THE ALLOCATION OF LEGAL POWER BETWEEN MANAGEMENT AND S/HOLDERS
Distribution of Corporate Power: statutorily based.
1. Directors power:
a. [DGCL 141(a)]: the BoD gets to manage the business.
b. [NYBCL 701]: the business of the corp. should be managed by BoD, each of
whom is at least 18 years old.
c. [DGCL 141(e)]: directors are entitled to rely on reports prepared by officers
and opinions by outside advisors as long as they do so in good faith.
d. [NYBCL 717(a)]: relying on reports etc.
2. Shareholder power:
a. Amendments to the cert. of incorporation.
b. Vote on BoD or removal of BoD in certain situations.
c. Fundamental corporate transactions: merger, dissolution.
3. Shared power:
a. Amendment of by-laws typically shareholder power, but directors may have
the power too if put into charter.
4. Director removal by shareholders:
a. With cause: YES. [NYBCL 706]: s/holders can remove directors subject to
b. W/o cause: Maybe. [NYBCL 706 (b)]: If cert. of incorporation or by-laws
provide the ability of s/holders to remove w/o cause, then it‘s allowed.
5. Election of replacement:
a. For vacancies (generally): the remaining board members are usually allowed to
appoint someone to act as a board member for the remainder of the term.
b. [NYBCL 705(b)]: the s/holders who oust can vote for a new director.
c. [DGCL 141(k)]: s/holders can remove directors with or w/o cause.
6. Schnell: amending the bylaws to move up an annual meeting is legal, but still
inequitable. Directorial entrenchment: board not serving the best interests of
shareholders but focused more on their well-being.
7. Blasius: Adding more Board members:
a. [DGCL 228]: Action through written consent: any action that could be taken
by s/holders at a meeting, can be taken w/o a meeting w/o notice to s/holders if
they deliver to the company written consent telling the company to take that
i. You need the same number of votes you would need in a s/holders
meeting (s/holders of atleast 51%).
ii. You have 60 days from the earliest date of consent to get all the
remaining consents in to have that action be effective.
b. [NYBCL 615(a)]: action by written consent.
c. When taking defensive actions (which have as a byproduct protecting your
own jobs), there must be some sort of threat, and the action taken must be
d. Can a board act for the principal purpose of preventing shareholders from
electing a majority of new directors? Board must have compelling justification
to do so. If no compelling justification, they breach the duty of loyalty.
8. Stroud: Directors instituted director qualifications: allowed only certain members to
be on board thus frustrating ability of s/holders to nominate. Directors did not do this
unilaterally, and assuming full disclosure, s/holders approved (as opposed to Blasius).
9. Williams: The statements here are coercive b/c if the shareholders did not make the
2/3 majority vote, then their stock would be de-listed from the NYSE and would no
longer be able to be traded or sold. Coercion – shareholders vote on a particular issue
NOT ON THE MERITS. Here, compelling justification does not apply b/c there is s/h
approval of this amendment.
10. Business decisions are best made by directors in the board room, rather than courts in
20/20 hindsight – If business judgment rule applies, you have to show that the action
had NO RATIONAL business purpose, in order to have a court rule it voidable.
11. [DGCL 242(c)]: directors have power to withdraw amendment only if board
resolution being approved specifically states a right to withdraw after approval.
AGENCY: Principal, Agent, Third Party
1. Actual: focus is on relationship between agent and principal, agent‘s belief. The
principal‘s words or conduct would make a reasonable person believe that he was
authorized to act.
a. Express or implied: if you authorize someone to sell your house, you impliedly
authorize to advertise for sale.
b. Incidental: ensures that the main purpose will be fulfilled.
2. Apparent: focus is on 3rd party. Words or conduct of the principal would make a
reasonable party in the 3rd party‘s shoes believe that the principal‘s agent was
authorized to act.
3. Actual and apparent authority normally go hand-in-hand: power of position.
a. Ex. Reasonable for a 3rd party to believe that the Treasurer can sign checks.
b. Ex. where they don‘t go hand-in-hand: if Treasurer was not given explicit
authority to write checks. Instead, power is given to controller of the corp.
i. Nevertheless, it‘s reasonable for a 3rd party to believe that the Treasurer
could write check. Corp. is bound.
4. Agency by estoppel: similar to, or subsumed within, apparent authority. An alleged
principal will be held liable for the actions of his purported agent if an innocent 3 rd
party changes her position or:
a. Principal takes actions to induce 3rd party to believe.
b. Alleged principal knew of the 3rd party‘s belief, but did not take adequate
measures to remedy mistaken belief.
5. Inherent: the authority of the agent to take action that a person in the principal‘s
position should have foreseen that the agent would have taken even though the agent
is not authorized to do those specific actions.
6. Ratification: after the fact approval. Principal with knowledge of the facts, either
treats the conduct as authorized, or justifiable if he had such intention.
a. Express or implied. Principal accepts benefits or approves it = ratification.
b. Principal and agent both must be in existence when agent does such action.
1. Principal -> 3rd Party: principal liable if agent had any of 5 types of authority.
2. 3rd Party -> Principal: if principal is bound, 3rd party is bound to perform.
EXCEPTION: If undisclosed principal then the 3rd party is not liable with the
transaction if the principal or agent knew that the 3rd party would not deal if the 3rd
party knew the identities of the principal or agent.
3. Agent -> 3rd Party: if agent had authority, he is not bound to 3rd party unless principal
was undisclosed or partially undisclosed.
4. Agent -> Principal: if agent had actual authority, then agent not liable. If apparent
authority, then he is liable to principal for damages. Ratification probably follows
apparent authority. No settled law for inherent authority.
5. Principal -> Agent: if agent acts with actual authority, then no liability.
Board of Directors: Election
1. [DGCL 141(d)]: board can be divided into 1,2 or 3 classes and board is up for election
in successive years. Provision can be in certificate of incorporation, or initial bylaw
by sole incorporator (adopts initial set of directors and bylaws) or put in later on if
2. [NYBCL 704(a)]: notes that you cannot mathematically divide directors into one class.
You can divide into as many as 4 classes. Differs from DE: requires that directors be
divided into classes as equally as possible.
3. [DGCL 216(iii)]: unless cert. of incorporation or by-laws, top vote-getters win.
4. [NYBCL 614(a)]: plurality vote can only change in the cert. of incorporation NOT by-
5. Straight/traditional voting: you can vote the number of shares you own for each
6. Cumulative: you can take your votes and cast them all for one nominee or spread
a. Cumulative voting MUST BE IN CERT. OF INCORPORATION.
i. [DGCL 214, NYBCL 618]: stockholders may cumulate their votes only
if the cert. of incorporation says they can.
Cum. votes = (# of shares held) x (# of votes/share) x (# of directors to be elected)
To figure out how many votes are needed to elect outright:
N = (X) x (D+1)
D = # of directors to be elected (not number of nominees)
N = # of directors you get to elect
X = # of shares you own
S = total # of shares to be voted assuming 1 vote/share.
If you have 100 shares (X), 5 directors are to be elected (N), there are 1000 shares
Board of Directors: Approval of Actions
1. Action can only be taken in 1 of 2 ways:
a. Action by unanimous written consent: any action that directors can have in a
meeting can do it outside of a meeting as long as unanimous consent by
directors (issuing stock, S election, relieving sole incorporator of liability,
appointing directors). [DGCL 141(f), NYBCL 708 (b)].
b. Regular meeting.
2. Need quorum and appropriate vote.
a. Quorum: critical mass of directors present or telephonically in order to have
action binding by corporation. Quorum is majority of the entire authorized
i. [DGCL 141(b), NYBCL 707, 709(a)(1)]. Can change quorum threshold.
In DE and NY you can require a super-majority of directors for a
quorum, and you can lower the threshold, but you cannot lower to a
number less than 1/3.
b. Appropriate vote: assuming a quorum, you need a majority vote of directors
present at the meeting.
i. [DGCL 141(b), NYBCL 708(d)]. Can require super majority. [DGCL
141(b), NYBCL 709(a)(2)]. Cannot lower the required vote.
1. In order to have a vote of stockholders to be legally binding, you need to have a
quorum of stockholders present.
2. [DGCL 216]: the cert. of incorporation or by-laws can specify a quorum, but cannot
be less than 1/3 of the shares needed for a meeting. If you don‘t have a quorum
specified, default provision is the majority of stockholders needed to vote.
3. [NYBCL 608(b)]: you can have less than a majority, but not less than 1/3. You can
have a higher quorum requirement, but only cert. of incorporation can provide for it.
4. Under [608(c)], quorum requirements are met at the BEGINNING of the meeting.
5. Percentages needed:
a. In DE, the default rule is a majority vote present or by proxy.
i. [DGCL 216(2)] or by-laws can establish a threshold contrary to a
ii. Assuming no tinkering of voting requirements, you need at least 26%
of the shares. Under the default rule, stockholders who own 26% of
the shares can control.
b. [NYBCL 614(b)]: an action is approved if a number of votes cast in favor
outnumber those against. Only applies to those who vote.
a. In DE, abstention = no.
b. In NY abstention are only counted for quorum purposes.
1. [NYBCL 609(a)]: every stockholder entitled to vote may authorize another person to
act for him by proxy.
a. In NY, under [NYBCL 609(b)], a proxy is effective for a period of time up to
the date specified. If no date is specified, a proxy can be effective no more
than 11 months after date of issuance (only lasts for 1 annual meeting).
2. Irrevocable proxy: gives the proxy holder discretion as to how he wants to vote.
3. Proxy must say on its face that it is irrevocable, and must be given to one of:
a. A pledgee: ex. pledging shares as return for a loan. During a term of a loan,
the bank allowed to vote.
b. Someone who has purchased or agreed to purchase the share (record date
problem). When you have shares of a publicly traded company, the
stockholder who holds shares at the record date gets to vote, even if they sell
c. A person designated under a valid stockholder‘s agreement. Ex. trading voting
rights for cash.
4. [DGCL 212]: pretty much the same as NY but some differences.
a. [(b)]: In DE, if you don‘t put an expiration date, the proxy lasts for 3 years
from date of issuance. But proxies are still revocable at the stockholder‘s will.
b. Irrevocability: under [DGCL 212(e)], proxy must state on its face that it‘s
irrevocable AND must be coupled with an interest.
i. Coupled w/an interest: person receiving the proxy has some nexus with
ii. Haft v. Haft: the fact that father is a senior officer is enough to satisfy
―coupled w/an interest‖.
DUTY OF CARE AND THE DUTY OF LOYALTY
Duty of Care: applies not only to actions that directors take consciously, but omissions
1. [NYBCL 717(a)]: a director shall perform in good faith, and exercise that degree of
care that a person in like position would exercise.
2. Objective: reasonable person standard.
3. Subjective: ―under similar circumstances‖ component. ―How would the hypothetical
director act if presented with the same situation/facts/etc.‖ Hindsight is not a part of
the analysis. You don‘t look at how the situation turned out. Whether or not the
decision proved to be successful or not is irrelevant.
4. Duty of care analysis is an analysis of the decision making process, not the decision
5. Subjective: ―in a like position‖. Assuming the hypo director had the same skill set as
the director in question. You have to have a rudimentary understanding of the
business. Just a general monitoring function of the day-to-day activities.
6. Substantial factor test: the wrong that has been committed, must be a substantial
factor in producing the harm.
7. In re Caremark:
a. Standard: whether the corporation made a good faith judgment that the
corporation‘s information and reporting system is in concept and design
adequate to assure the board that appropriate info will come to its attention in
a timely manner as a matter of ordinary operations.
b. Evidence of good faith judgment: when there is a sustained or systematic
failure by the board to attempt to ensure that the system exists.
8. Level of negligence needed to show breach of duty of care: gross negligence.
9. BUSINESS JUDGMENT RULE: protects directors in their decision making b/c there is
a presumption that the directors made an informed judgment, in good faith (fulfilled
their fiduciary duties). Presumed:
a. Business decision
b. Informed basis: decision made on an informed basis. A duty of care concept.
c. Good faith: duty of loyalty notion.
d. Best interests of corporation: needs of corporation and stockholders are ahead
of your own needs.
10. To overcome presumption you need to show as a plaintiff:
a. Either an improper motive OR
b. Dividend constituted a waste of corporate assets OR ELSE
c. Show that dividend cannot be based on any reasonable business objective.
11. van Gorkom:
a. Directors did not make an informed business decision for 3 reasons.
i. Did not adequately inform themselves of Van Gorkom‘s role.
ii. [DGCL 141(e)]: good faith reliance. Meeting hastily called, directors
did not know what it was about, they had to make a decision in 3 days.
Directors had a duty to inquire further. Directors could not blindly
rely on Van Gorkom.
b. Directors were uninformed of the intrinsic/true value of the company.
c. Given everything that happened, there was no crisis at hand, and only 2 hours
to think about it, they were grossly negligent.
i. Given what the directors just did, they are morons and they should not
be deferred to.
d. Director‘s duty to read legal documents:
i. Board must not read every K or legal document, but if it is to
successfully resolve itself, then there must be some credible
contemporary evidence demonstrating that the directors knew what
they were doing and ensured that their purported action was given
12. Aftermath of van Gorkom: duty of care is basically dead.
a. [DGCL 102(b)(7)]: relieved from his or her duty of care except for unlawful
dividends but exculpatory charter provision cannot protect from:
i. Breach of the duty of loyalty
ii. Acts or omissions not taken in good faith.
iii. Unlawful payment of dividends (can‘t violate legal capital rule).
iv. A transaction from which a director derived an improper personal
b. [NYBCL 402(b)]: you can have an exculpatory provision. Similar to DE.
Duty of Loyalty:
1. Transaction between corporation and director: self-interested transaction. You enter
into a transaction with you.
a. Concern: if you‘re part of the deal and it‘s affecting you personally, you are
liable to put your interests ahead of the corporation. The other directors have
to approve it.
2. Interlocking directorate: transaction between two different corporations, and on the
Board of Directors there are people on both.
a. Concern: you might put the interests of one company and its stockholders over
another. But there are situations where you, as a director, may have a bigger
financial interest in one over another.
3. Usurpation of corporate opportunities: where a director or officer learns of a business
opportunity and rather than offer it to the corporation, she usurps it herself and uses
it for her advantage.
a. Concern: she is thinking about keeping money for herself.
4. Entrenchment activities: directors making decisions the result of which secure their
positions as directors. Entrenching themselves in office.
a. Concern: directors who are doing things that ensure their jobs and job safety,
may not be making the best decisions for the corporation or stockholders.
5. Action that favors one class of stockholder over another: sometimes companies have
one class of stock outstanding, benefiting one over another, and the one that is not
helped claims that it is owed money.
a. Concern: duty of fairness in regards to the stockholders.
6. Interested party statutes: [DGCL 144, NYBCL 713: more stringent than DGCL].
7. [DGCL 144(a)]: Covers first 2 factual scenarios.
a. No K or transaction between a corporation and one or more of its directors OR
a K or transaction between a corporation and one or more entities
(interlocking director problem) shall be void or voidable even if the interested
director is there and votes in the transaction if one of three things occur
i. Disclosure + disinterested director approval: if K is approved by a
majority of disinterested directors, it will be valid so long as the
disinterested directors were told of the director‘s interest in the deal.
True even if less than quorum of the board.
ii. Disclosure + stockholder approval: if the conflict of interest is disclosed
or known by the stockholders, and they approve in good faith, then the
mere fact that there was a conflict of interest cannot be challenged on
duty of loyalty grounds.
iii. Objective fairness: if the K or transaction as determined by a court is
objectively fair to the corporation, then who cares?
b. When you challenge, it would be on the grounds that the disclosure made was
inadequate. The conflict was not fully understood.
8. [DGCL 144(b)]: At a Board of Directors meeting, you need a quorum (a majority of
the total number of directors subject to modification of the by-laws to a greater
amount, or lesser amount not less than 1/3). Interested directors can show up for
quorum purposes, and can vote, but they won‘t count if you‘re trying to cleanse.
9. [NYBCL 713]: In many ways, substantially similar to DE but 3 differences.
a. Before a transaction between a corporation and a 3rd party corporation falls
within 713, there must either be an interested director or director must have a
substantial interest in the other corporation. In DE, not substantial, but you
b. NY imposes a tougher voting standard. [(a)(1)]: requires disinterested director
approval comply with §708(d). Approval by a majority of disinterested
directors present or unanimous. In DE, only majority of disinterested.
c. [713(b)]: if the procedure met and cleansed under first 2 processes, then the
transaction cannot be challenged in court. If the procedure isn‘t met, then the
burden of proving that the K is fair and reasonable to the corporation is up to
those interested in the transaction. In DE, [144(a)] is disjunctive. You can
challenge in court even if cleansed.
Hypo: Cleansing by disinterested director voting, NY is more stringent.
Board of Directors meeting. 15 directors but only 13 show up. Default provision is a
majority present so a quorum is present.
Case 1: 4 interested in transaction, 9 disinterested.
§713(a)(1): a self-interested transaction can be approved only if 1 of 2 things occur. If
any of the disinterested directors vote no, then approval must comply with §708(d). Can
be approved if 7 of the 9 vote in favor of it. Interested votes don‘t count. Up to 2 people
can vote ‗no‘ to comply with §708(d) [majority present].
Case 2: 5 interested, 8 disinterested, and 2 vote ‗no‘.
In DE, all you need is a majority of disinterested and since there are 8 disinterested, you
only need 5 votes.
In NY, you need 7.
Case 3: 9 interested, 4 disinterested.
According to §708, you don‘t have enough. If you don‘t have enough and fall below
majority voting requirement, then all disinterested have to vote ‗yes‘. Other option is
always stockholder approval.
In DE, you only need a majority vote so you only need 3 to vote ‗yes‘, not 4.
Self-Interested Transaction/Interlocking Directorate:
1. Lewis: There is a conflict of interest with the interlocking directorate. To disable the
business judgment rule, show a conflict of interest. Directors must prove that the
lease K is fair and reasonable.
Usurpation of Corporate Opportunities
1. Northeast Harbor Golf Club: corporate opportunity doctrine – taking of an
opportunity instead of offering to corporation.
a. DE: Line of business test: If a business opportunity is presented to the officer
or director which the corporation is financially able to undertake and in the
line of business of the corporation, then officer or director cannot seize the
opportunity for himself. An opportunity is in the same line of business if it is
so closely related to the corporation that the director would be in competition
with the corporation.
2. ALI‘s principles of corporate governance: General rule §5.05(a): you cannot
undertake a corporate opportunity for yourself unless 3 things occur:
a. You have to offer the opportunity to the corporation after fully disclosing your
conflict of interest and fully disclosing the opportunity itself.
b. The opportunity has to be rejected by the corporation.
c. Either one of 3 things has to occur:
i. the taking of the opportunity was objectively fair to corporation; OR
ii. the opportunity was rejected in advance by disinterested directors in
accordance with the business judgment rule; OR
iii. rejected in advance or ratified after the fact by disinterested
3. Corporate opportunity defined §5.05 (b): means one of two things.
a. In connection w/the performance of functions as a director or officer, or under
circumstances that should reasonably lead the director or officer to believe
that the person offering the opportunity expects it to be offered to the
i. Through the use of corporate information or property, if the resulting
opportunity is one that the director officer should reasonably be
expected to believe would be of interest to the corporation; OR
b. Any opportunity to engage in a business activity of which an OFFICER
becomes aware and knows is closely related to a business in which the
corporation is engaged or expects to engage.
4. Burden of proof: if not properly rejected or ratified, then director or officer has the
burden of showing that the taking was fair. If rejected, the burden is on the other
5. Need full disclosure.
1. Unocal: [DGCL 160(a)]: you can selectively purchase if it is not for the primary
purpose to entrench in office. Greenmail (footnote 13): bribe to make a hostile party
go away. Greenmail is not illegal. The Internal Revenue Code‘s dampened
greenmail. No tax benefits from greenmail. Recipient of greenmail needs to pay a
tax. Some states [NYBCL 513(c)]: requirement of stockholder approval; cannot
buyout a company unless you get complete stockholder approval.
a. Most public companies protect against hostile takeovers. These are subject to
the business judgment rule. But one exception: when you put in a defense, a
by-product of it is entrenchment. Duty of loyalty says when you take action,
you have to do so in the best interest of the corporation and stockholders.
2. Unocal Standard: Any defensive action will be protected by the business judgment
rule if two things occur:
a. REASONABLE GROUNDS: Directors have to show that they had reasonable
grounds for believing that a threat existed. Conduct an investigation.
b. PROPORTIONALITY: the defensive measures you implement have to be
reasonable to the threat posed. Cannot be draconian.
i. Draconian means are not acceptable. Disproportionate response smacks
of you trying to defend your job.
ii. Defensive response must be in the range of reasonableness.
iii. Draconian = coercive or preclusive.
1. Coercive = coercive to your own stockholders.
2. Preclusive = precluding a hostile bidder from ever winning the
company. At some price, a board should sell a company. It
becomes fair at some price, then lucrative, then super-lucrative.
If this happens, it is evidence that they want to keep their jobs.
10. Revlon: when Revlon decides to put itself up for sale, 2 things happen:
a. The defensive strategies are moot
b. The directors‘ duties become that of an auctioneer (get the best price). There
is no duty to get the highest price however.
1. Poison pill: can be unilaterally adopted by Board of Directors. Makes it prohibitively
expensive to buy. Only Board can redeem.
2. Defensive charter amendments: staggered or classified Board of Directors. One or
two elections to get nominees on the board.
3. Supermajority voting provisions.
4. Crown-jewel strategy: the target company subjected to the hostile takeover sells its
most valuable asset to a third party thus making the takeover bidder lose interest.
5. White knight strategy: if it‘s clear that you won‘t survive, then you‘d rather sell to
someone you like rather than someone you dislike.
6. Pac-Man strategy: if a hostile party initiates takeover of your company, you initiate a
hostile takeover of the hostile party.
7. Golden Parachute strategy: employment K where you know you will lose your job,
company has to compensate you with a lot of money.
Actions Favoring One Class of Shareholders Over Another:
1. Sinclair: controlling shareholder takes an unfair advantage over the minority
shareholder. INTRINSIC FAIRNESS TEST: directors or controlling shareholders must
show that the deal was intrinsically fair to the corporation and minority shareholders.
a. To disable the BJR, you have to show no reasonable business objective or
i. Improper motive = show that there were some opportunities that could
have been pursued, which they did not
b. For the intrinsic fairness test to apply, the parent has to use its dominance to
extract some benefit not available to other stockholders. Show self-dealing or
conflict of interest.
2. [DGCL 253]: to do a short term merger between parent and subsidiary, all you need
are resolutions by parent corporation, no stockholder vote necessary.
3. Jones: SELF-DEALING TEST: parent company uses its dominance to extract a benefit
for the sole benefit of the parent.
Derivative Lawsuits: Lawsuits brought by stockholders of a corporation.
1. Derivative: the original cause of action itself lies with the corporation. The
corporation has a reason to bring a lawsuit and chooses not to defend itself.
Stockholders bring the lawsuit on the corporation‘s behalf. Corporation itself has to
be involved in the litigation. The corporation is a nominal defendant (although it
ultimately receives the recovery).
2. Strike suits: corporate equivalent to ambulance chasers. They bring lawsuits by
stockholders with little ownership which are nuisances.
3. One share is enough. But you have to own shares when you bring a derivative
lawsuit and you may have to continue to own during the suit. Can bondholders or
preferred stockholders bring a derivative suit? No. No one other than common
stockholders may bring a suit. Exception is insolvency or bankruptcy b/c
bondholders have the largest stake. What if you own a bond convertible into
common stock? Convertible bondholders cannot bring suit until they convert.
a. [NYBCL 626]: you don‘t need to own any particular quantity of stock. You
must plead that you own stock at the time complaint was filed, and that you
own stock at the time of the transaction you are complaining.
b. Pro-rata recovery: what if you‘re derivatively suing directors which are then
merged out of existence? Pro-rata recovery: each stockholder will receive a
pro-rata portion according to the amount of stock they own.
c. Private Securities Litigation Reform Act: (§27 of Securities Act of 1933 & §21D
of Securities Exchange Act of 1934): 1934 Act governs secondary trading
market and is usually implicated with derivative lawsuits.
i. Certification requirements for the plaintiff: plaintiff must certify that
he has read the complaint. That he did not buy at the direction of legal
counsel. Must list other strike suits that have been implemented in last
3 years. Will not receive compensation other than pro-rata portion,
nothing extra. Court appoints a lead plaintiff. No longer a rush to the
courthouse. Anyone can apply to be a lead plaintiff. Will only appoint
the one believed to be most capable of representing the stockholders
which have been injured. Usually, those that own the largest stake.
Now, usually institutional investors. Whoever is appointed lead
plaintiff gets to appoint a lead legal counsel.
ii. Pleading requirements: plaintiff must specify the exact statements of
the defendants that are allegedly misleading and why they think they
are misleading. If a defendant needs to act with a particular state of
mind (ex. fraud), you need to plead facts with particularity that give
rise to a strong inference of that state of mind. It must be in your
complaint, thus must be in there pre-discovery.
d. State law: general need for a stockholder to make a demand on the Board of
Directors to take action to protect corporation. Very often, the harm is not
caused by the 3rd party, but by the Board of Directors themselves. So
sometimes, it is excused (Demand Futility).
4. Marx: 3 approaches to demand futility:
a. DGCL: 2 prong approach.
i. To make a complaint of demand futility, must plead particular facts that
creates reasonable doubt that directors were self-interested OR
1. If you can indicate facts suggesting defendant directors are
conflicted and wouldn‘t take action to protect corporation b/c
personal involvement in benefiting – demand excused, proceed
ii. The challenged transaction was not product of valid exercise of
1. ―Smell‖ test: Does the transaction itself reflect the spirit of
b. Universal Demand: you always have to make a demand no matter what. You
can only bring an action if 90 days have passed. Can bring earlier if Board
rejects demand or corporation would suffer irreparable injury.
c. [NYBCL 626(c)]: reasonable doubt standard. Either on its face or decision itself
calls into question their interestedness. Complaint must set forth:
i. Similar to Conflict of Interest: Majority of directors are interested in
challenged transaction. Either self-interest or lack of free will self-
interest (people exerting influence) OR
ii. Similar to Smell Test: Directors did not fully inform themselves to
extent reasonably expected under the circumstances OR
iii. Similar to Smell Test: Challenged transaction is so egregious on its face
that it could not be the product of sound business judgment.
Shareholder Inspection Rights and Proxy Voting
1. Rights to information of the corporation. As a stockholder, you don‘t know if the
managers are doing a good job unless you have information. You should have access
due to your interest as a stockholder.
2. Under CL, you needed to have a proper purpose. Obtaining a stockholder list to
communicate with other stockholders is usually a proper purpose, unless what you
want to communicate has nothing to do with a corporation (telemarketing). If books
are cooked, that is a proper purpose.
a. [DGCL 220]: informational rights provision. Only stockholders of interest:
must be on the books of the company. Contrasted with beneficial owners of
stock. Under (b), you get to see the stock ledger, a list of stockholders, and
other books and records. Procedure to see books and records: you must submit
a written demand under oath for the purpose of the examination. Must have a
proper purpose: purpose reasonably related to a stockholder‘s interest as an
investor. Burden of proof as to proper purpose depends on what you are
seeking. Under (c). if seeking a ledger or list of holders, the burden is on the
corporation that what you are doing is for an improper purpose. For anything
else, the burden is on the stockholder to show that you have a proper purpose.
b. [NYBCL 624]: differs from DE in some respects b/c limited. Under (b), you
only get to see a list of stockholders and the minutes of meetings of the
stockholders. The affidavit you send in is different from DE. You must have
a proper purpose, and you must say that you have not sold a list within the last
5 years. Under (e), upon written request, company must send you an annual
balance sheet and a profit and loss statement. More common with privately
3. Fixing record date:
a. [DGCL 213]: board can establish a record date but the date must be less than
60 and more than 10 days prior to the meeting date.
b. If record date not set, default:
i. (a): It is the day next preceding the day notice is sent out. The day
before notice is sent.
ii. (c): Dividend record date. The date cannot be more than 60 days prior
to the payment of the dividend.
1. X-dividend price.
c. [NYBCL 604]: essentially the same as DGCL §213.
4. Notice of a meeting?
a. [DGCL 222]: Written notice cannot be given less than 10 and greater than 60
i. (a): You only have to specify the purpose of the meeting if it‘s a special
ii. If you‘re a publicly traded company, you are subject to the federal
proxy rules. You do have to disclose purpose.
iii. State law not focused on disclosure. Federal law is focused on
b. [NYBCL 605]: 1st class mail sent not fewer than 10, nor greater than 60. For
bulk, not less than 24 days before the meeting. You only have to specify if the
meeting is a special meeting (not an annual meeting).
1. Corporations have statutory authority to repurchase stock. Repurchased stock that is
not retired or cancelled, is still authorized to be reissued. They think the value does
not represent the intrinsic value. In privately held companies, the reason is usually
2. Treasury stock may not be voted. The shares must be in the hands of stockholders.
You can‘t sell to a subsidiary and have that Board vote.
a. [NYBCL 612]: can‘t vote treasury stock. Treasury shares do not count as shares
outstanding for quorum purposes. [DGCL 160]: similar to NY.
1. 14 a-1: defines proxy and solicitation.
a. (f): proxy – every proxy consent or authorization.
b. (l): solicitation – any request for proxy, or any request to execute or not
execute a proxy, (if you do things leading up to proxy voting).
3. 14 a-2: exception based on street name.
a. (b)(1): mutual concern exception. Safe harbor for communication between
stockholders that have no economic interest in the solicitation itself.
b. (b)(2): de minimus exception. Solicitations made on behalf of someone other
than the company. You can ask up to 10 other people how they would vote.
4. 14 a-3: you can‘t make any solicitation subject to the proxy rules unless each person
solicited has been previously furnished a proxy statement.
5. 14 a-7: important with a hostile party. Target company has one of two choices: either
provide hostile party with a list of stockholders so the hostile party can mail. OR the
target company can mail out the hostile party‘s material (thus not disclosing the list)
which will be reimbursed.
6. 14 a-8: stockholder proposal rule. If you are a stockholder and you want something
included for stockholders to vote on. Two types which must be included:
a. Social policy proposal – ex. not to participate with an apartheid state, stop
building nuclear power plants, stop manufacturing tobacco products. BUT, it
may be within the board‘s scope. More symbolic than anything.
b. Corporate governance proposal – ex. redemption of poison pill, stop paying
directors so much money.
c. Window for when the proposal has to be received. General rule is that the
presumption is that the company must include the proposal. If you don‘t want
to include it, you can exclude it under one of a list of exceptions, explain it,
and the SEC has to agree or disagree with you. Most of the proposals aren‘t
even binding anyway.
d. Laundry list of proposals that do not need to be included: 14 a-8(i)(2) illegal
activity, (3) if it contains fraudulent misstatements [14 a-9 = anti-fraud rule],
(4) personal grievances, immateriality, (6) absence of power/impossibility, (7)
ordinary business operations (not policy matters, but ordinary business
operations), (13) relation to dividends.
e. [DGCL 141(a)]: Board of Directors get to manage affairs of the company. Even
if stockholder proposal is approved, it may be precatory.
Closely-Held Corporations: Company whose stock is only held by a few stockholders.
Treated like partners instead of shareholders. Usually consensual and restricted by K.
1. Donahue: danger of freeze outs. Shareholders must have relationship of trust,
confidence and absolute loyalty (finest loyalty) and that is needed if the enterprise is
to succeed. Fiduciary duties limited to interactions w/corp. No duty to include other
minority stockholders in the sale of your stock. BUT, when you include the company
as a party, it is unfair.
a. Ways to get some financial benefit if minority: salary, dividends, sell stock.
b. Freeze out process:
i. Stop dividend payouts.
ii. The majority owner can fire the minority owner. Since no liquid
secondary market, impossible to sell.
iii. After a few years of no money, company goes to minority stockholder
on the cheap. Not FMV or BV.
2. Statutory provisions to allow certain corporations to act like partnerships:
a. [NYBCL 620]:
i. (a) allows stockholders to enter into certain agreements to govern how
shares are to be voted. No more freedom of voting.
ii. (b) provision in certificate of incorporation that restricts management‘s
control or transfers all or part of management [ex. you can say that
someone is a managing partner(s) that may or may not be a director].
b. [DGCL §341-356]: integrated set of statutory provisions. ―Statutory close
corporation‖: entity that has OPTED-IN to a statutory scheme, as opposed to a
close corporation which may or may not have opted-in.
i. In order to be a statutory close corporation, you must: qualify AND
have an affirmative election.
ii. (a)(1): no more than 30 stockholders. Stock must be subject to
restrictions of §202 (stockholder agreement over governance and
transferability of shares). No public offering of stock.
iii. : election to have a statutory close corporation. You need to put
the title of the corporation and underneath, you must state that you are
a Statutory Close Corporation. Certificate has to include any provisions
iv. [342(b)]: allows you to set forth qualifications that people must meet to
be a stockholder (ex. all shareholders must be a member of a family).
You usually become a statutory close corporation when you file. But
under §344, you cannot have one after the fact unless you have a super-
majority of shareholders (66 2/3).
Contractual Responses: Control
1. Shareholders agreement: you can have provisions that commit contractually
shareholders to vote in one way or another. Completely valid. [DGCL 218(c) and
NYBCL 621(a)]: not buying votes, but contractually committing people to vote with
respect to a governance related issue.
2. Irrevocable proxy: one shareholder gives to someone else to allow that person to vote
as he sees fit. Proxy can be irrevocable as long as it is stated that it is irrevocable and
coupled with an interest. [NYBCL 609(f) and DGCL 212(e)].
a. Haft v. Haft: Coupled with an interest = if you have an interest in the
corporation, that may support an irrevocable proxy.
3. Voting trust: separates the voting attributes of shares from the financial attributes.
You deposit the shares in a trust and the trustee is told how to vote shares. [DGCL
218(a)]: voting trust will last as long as you want (not infinite but up till a date
specified). Must be on file too. [NYBCL 621(a)]: maximum of 10 years with a 10 year
Contractual Responses: Ownership - Restrictions on the transferability (alienability) of
shares. Four types of transfer restrictions. May see some combination of the types of
1. Right of first refusal: if I‘m a stockholder and I find a 3rd party to buy shares, I can‘t
sell unless I first offer the shares to the corporation or other existing stockholders on
the exact same terms. If the offer lapses or is declined, I can sell to the 3rd party.
Reasoning: seller should be indifferent since he is getting the same amount regardless,
but the stockholders are not indifferent. Will be found in the stockholder‘s
agreement. [DGCL 202(c)(1)]
2. Right of first offer: differs from right of first refusal b/c of timing and solicitation. If
you decide to sell, you can‘t go out and solicit from 3rd parties. You must offer your
shares to the corporation or the stockholders first. The K provision states what the
price of the shares will be. Only if the corporation or the stockholders decline can
you solicit 3rd parties.
a. If there is a combination of the right of first refusal and right of first offer,
both may kick in. If the corporation declines the right of first offer, you can
go solicit other bids, but you have to offer the stock again under the right of
first refusal. Only if the corporation or stockholders decline again can you sell
to a 3rd party.
b. If a third party purchases the shares, he will most likely be subject to the same
provisions as the original holder.
3. Consent restraint: if you have consent restraint, you most likely don‘t have a right of
first refusal or right of first offer. You cannot transfer your shares without prior
written consent of the corporation. The corp. can examine who you are selling to.
a. Consent restraint is the one most likely to be struck down by the Court.
b. [DGCL 202(c)(3)], no statutory authority in NY but case law.
i. Rafe v. Hinden: valid as long as consent is not withheld unreasonably.
4. Group restriction: means usually that the other types do not exist. You can sell your
stock freely, but only to people within the group. Ex. family restriction, or members
of a certain group. Restricting the identity of purchasers to those of a certain group.
5. **Transfer restrictions do not trump operation of law. Ex. divorce settlements – stock
can be transferred regardless of transfer restrictions.
6. **Legend: statement on the certificate that alerts prospective transferees that what
they are about to buy is subject to transfer restrictions. Legend must be conspicuous
and state that the shares are subject to the provisions. If legend isn‘t on the
certificate, then the buyer takes the stock and is not subject to provisions of which
she is not aware. If she knows about them, they apply.
a. [UCC 8-204, DGCL 202(a)].
Forced Resale Provisions: requirement by K for a stockholder to sell back her stock on the
occurrence on one of a set of events, regardless if she is willing and able to continue owning
them. Ex. termination of employment, death or incapacity.
1. Biggest issue is the price. If it‘s FMV, no one‘s complaining. Often, the stockholder‘s
agreement does not set forth FMV. Sometimes, it will set forth an actual price. More
often then not, there will be a pricing formula. Usually, the formula is BV/share
where BV/share = (TA – TL)/# of outstanding shares.
2. Problems with BV:
a. Very conservative valuation and often underestimates the value of the share.
b. BV presumes you are about to liquidate shares.
c. Terrible where you have a non-capital, intensive business. Ex. law firms. The
biggest value for law firms are the clients and the men and women who work
there. These people are not listed on the balance sheet.
3. Different approach to valuation: discounted cash flow valuation. Valuing a business
based on what the business can earn. You project out 5-10 years the amount in
earnings or cash. It is based on forecast, and you discount future dollars into present
4. Or, punt and allow an appraiser to come up with a value.
5. Allen: Restriction of transferability: to get a provision struck down on restraint of
transferability, it must be an outright prohibition on transferability. Here, you can
transfer back to the company and if the company declines, you can sell to whomever
you wish. There are some restrictions, but not outright prohibition.
Severe Disharmony: Deadlock
1. Situation in which board or stockholder decision can‘t be made b/c people don‘t get
along. The business of the corporation cannot move forward b/c the board is divided
on business matters.
2. [DGCL 226]: DE chancery court can appoint a custodian for the corporation. Can do
so when stockholders are so divided that they have failed to elect successors or b/c
directors are so divided that the business of the corporation is suffering from
irreparable injury. Any stockholder can petition.
a. Purpose of custodian: job is to continue to run the business so that hopefully,
the dispute will be resolved amicably. [226(c)]: job of custodian is not to
liquidate the company, but to continue a viable business.
3. [NYBCL 1104-a]: [not §1104(a), §1104-a] holders of 50% of the voting stock may
petition the court for dissolution of the corporation on the following grounds:
a. Director deadlock OR
b. Stockholder deadlock OR
c. Two or more factions of stockholders are so divided that it would be beneficial
to stockholders to just dissolve the corporation.
d. **NY‘s dissolution remedy is more severe obviously. Great amount of judicial
reluctance to dissolve a viable corporation. Remember, mitigation is that 50%
have to petition, as opposed to DE‘s.
i. If you don‘t have 50% of voting stock in NY, option is 1104-c. There is
a time limit. Even if you don‘t have 50% to file the petition, if 2
consecutive annual meetings (2 years) go by and no director is elected,
any stockholder can petition for dissolution.
4. Wallman: irreconcilable differences does not mandate dissolution.
Severe Disharmony: Oppression of Minority Shareholders
a. When those in control of the corporation have acted in such a manner as to
defeat those reasonable expectations of the minority stockholders which
formed the basis of their participation in the venture.
b. Reasonable expectations in buying the stock. If the company defeats the
reasonable expectations when buying the stock, then oppressive conduct.
c. Viewed in the eyes of the majority stockholders.
2. Focal point is not on what the prospective investor going in is thinking, but what the
majority stockholders believe was the purpose of me investing.
a. Under , you have to give all of the other stockholders the option to buy
out at fair value the oppressed stockholder, or dissolution.
b. [1118(b)]: if stockholders cannot agree on FMV, then the court can determine.
1. [DGCL 262]: who gets appraisal rights? Not everyone. You only go with specific
corporate transactions (ie. Mergers and consolidations[3 or more companies merge]).
a. (b): when a stockholder of a DE corp. gets appraisal rights.
b. EXCEPTION: 262(b)(1): holders of shares that are listed for trading on a
national security exchange (AMEX) are NOT entitled to appraisal rights.
c. EXCEPTION TO EXCEPTION: if you are a stockholder of a publicly traded
company, you do get appraisal rights if your consideration is cash (Cash-out
merger). If you don‘t like the value, you can petition for appraisal rights. Cash
for stock, is an artificial constraint on the market price.
d. [DGCL 271]: You do not get appraisal rights when the company sells all or
substantially all of their assets.
i. Ex. A and B want to merge. Company A will sell all of its assets and
transfer all liabilities to B. B gives stock in return. B substantially
becomes AB. The only asset remaining is stock in B. If A then
liquidates the B shares to A‘s stockholders, A still does not have
ii. Doctrine of independent significance: if you take route A or B, even
though you get to the same place, you are subject to whichever statute
e. A stockholder has to perfect his appraisal rights in order to receive them under
[DGCL 262(a)]. You must own stock at the time of the appraisal rights and
continue to own through effective date of transaction.
f. ―Dissenter‘s rights‖: you cannot vote ‗yes‘ for the merger in order to get
appraisal rights. You must either vote ‗no‘ or abstain.
g. Procedure: [DGCL §262(d)-(j), NYBCL §623]. If a corporation engages in a
fundamental transaction giving rise to appraisal rights, it must disclose to
stockholders that they are entitled to appraisal rights. She has to send a
written demand for the appraisal rights to the corporation before the vote is
held. Once the demand is put on the corporation, either the stockholder or
the corporation can petition the court [262(e)] for appraisal value.
i. No incentive for corporation to file.
h. [262(h)]: court determines value.
i. Should court take into account the expected benefits of the merger?
No. If you‘re getting off the train, you aren‘t getting any of the
2. [NYBCL 910 and 623]: 910(a): tells who gets appraisal rights and when they are given.
910(a)(1)(A)(iii): same as DE.
3. New Boston Garden Corp.:
a. Price to earnings ratio (P/E ratio): tell us that if a company has a P/E ratio is 50
and the historical earnings is 5, that means that you are paying 10x more than
the historical earnings. Higher ratio means the marketplace thinks the
company will do very well.
b. Net Asset Value: fancy term for book value. Conservative valuation.
c. [DGCL 262(h)]: does not state that you have to use the DE block method, but
that was the traditional method used.
d. [262(h) & (i)]: if there‘s a multiple year proceeding, you need money. You get
interest but you do not collect interest until it is paid.