Corporations Outline Arlen NYU by chrischs03

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									I. Agency
          Restatement section 1: Relationship resulting from the manifestation of consent by one person
          (P) to another (A), that the agent shall act on the principal’s behalf and subject to the principal’s
          right of control and consent by the agent to so act
       A. Actual Authority
                    did the A. reasonably believe, based on the P's conduct/manifestations, that the A. was
                    acting on P's behalf and subject to his control.
               i) actual implied
                    Relationship/contract/manifestations between Principal and Agent are such that a person
                    in A’s position would reasonably infer that P was delegating authority to A to act in this
                    matter on P’s behalf and subject to P’s control, and “A” consented to delegation
                    a) A. Gay Jenson Farms Co. v. Cargill, Inc.
                        2nd Restatement on Agency Test for buyer-seller (section 14K)
                        One who contracts to acquire property from a third person and convey it to another
                        is the agent of the other only if it is agreed that he is to act primarily for the benefit
                        of the other and not himself (3 factors which if true show independence)
                             1) Receives fixed price for property
                             2) Acts in his own name/receives title in his name
                             3) Has an independent business of buying/selling similar property
                                 (not present in grain reselling in Cargill)
                             i) Normal creditors would have called in their debts instead of attempting to give
                             day-to-day advice (that’s the line for creditorprincipal
                        b) Mill Street Church of Christ v. Hogan
                                 i) Custom in the industry with regards to the scope of authority;
                                 Principal’s past and present practice (what expectations are created by past
               ii) actual expressed
                    Principal & Agent explicitly agree that A has power to act on P’s behalf & subject to P’s
               iii) Principal cannot seek indemnification from Agent
       B. Apparent Authority
               A. has apparent authority if, based on P's conduct, a reasonable person in the third party's
               position would believe that A. is P's agent: that A. is acting on P's behalf and subject to P's
               control. P's conduct may be nothing more than giving A. a job title that normally carries with
               it the authority to enter into the contract in question and not informing the third party that in
               fact A. has no such authority.
                        If A. has apparent authority, P is liable to the third party but can get indemnification
                        from A (unless of course A also had actual authority). (in some jurisdictions the
                        third party must act on this reliance; Cali. and Del. require reliance)
               i) Lind v. Schenley Industries, Inc.
                    -What Must Lind Prove?: That company held out Herr. with authority to either set
                    Lind’s salary or grant Kaufman the right to set salaries
                    -Herr.’s job title along with the company (principal) conveys that he has apparent
                    authority to set salaries
                    -depends on custom of the industry and what has occurred in the past
                    -the type and terms of agreement are a factor in deciding whether a reasonable person
                    would believe that given the principal’s conduct the agent had the authority
                        -are terms too ridiculous?
               ii) 3-70 Leasing v. Ampex
                 Joyce of 370 negotiates a deal with Kays a saleman of Ampex for the purchase of
                 computers. Kays submits a written document to Joyce at the direction of his boss
                 Mueller. Joyce signs the document but Ampex never signs its box.
                         Holding: Court starts with the presumption that salesman have
                 authority to sell. Thus, defendant must explicitly rebut this
                         -For many courts, companies must be incredibly clear with
                         the authority they give to employees. Otherwise a presumption
                 may not go in their favor
C. Ratification
             If initially A. entered into a contract purportedly on P's behalf, but without actual or
             apparent authority, and P. subsequently decides to adopt the contract, then P. is bound,
             as is the third party.
        a) Elements
                  1) Agent purported to act on principal’s behalf
                  2) Principle with knowledge of the material facts either
                           -a) Expressly affirmed the agent’s conduct by manifesting an
                  intent to treat the agent’s conduct as authorized
                           -b) Engaged in conduct that was justifiable only if he had such an
                           intention (implied ratification)
                           -Must be plead in the alternative
                           -Ratification exists with no initial authority
D. Inherent Agency Power (Master-Servant/Respondeat Superior)
        This theory encompasses respondeat superior (the doctrine that holds P's liable for A's torts
        even if the A's negligence was against express instructions). It also holds P's responsible for
        some acts of agents which, while unauthorized, are nonetheless quite close to (or incidental
        to) that which they are authorized to do.
                  i) A master-servt. relationship exists where the servant has agreed to:
                           – (1) work on behalf of the master and
                           – (2) to be subject to his control (or right to control) the "physical conduct"
                           of the servant
                           -Note: An independent contractor is a person who contracts with another to
                           do something for him but who is not controlled by the other nor subject to
                           the other's right to control with respect to his physical conduct in the
                           performance of the undertaking. (Can’t Bind for torts)
                           -a) Section 220 of Rest. on Agency 2d explains factors for
                           determining M/S relationship. (In cases below)
                           b) P. need not consent to the legal implications of this relationship: in other
                           words, P. need not agree that this is a M/S relationship.
                           c) If a “Master-Servant” relationship exists:
                           • M is liable for all S’s torts WITHIN SCOPE
                           of his/her employment.
                           • M is liable for S’s torts OUTSIDE SCOPE if:
                           M intended the conduct/consequences, or
                           – M himself/herself was negligent or reckless, or
                           – The conduct violated a non-delegable duty of M, or
                           – S purported to act or to speak on behalf of the principal and there was
                           reliance upon apparent authority, or he was aided in accomplishing the tort
                           by the existence of the agency relation.
        ii) Gorton v. Daly
                            a) Doty is teacher at high school. Loans car to Garst, coach, to take players to
                            football game. -indicated that only he should drive it
                            b) Master-Servant turns on the right of the master to control agent. Master may not
                            actually exercise this right, however, if it is inherent in the relationship, it shows that
                            this is a master-servant relationship.
                  iii) Humble Oil & Refining v. Martin
                            a) Principal held title to products sold at the station; Duration is “At will,” thus
                            Humble can end relationship immediately if they find that Schneider is not
                            performing (indirect indicia of control); Reports required; must perform other duties
                            set by Humble; Humble sets hours of operation; Appearance: Signs/Uniforms;
                            Employees: Full control by Agent
                            b) Key: Who bears risk?- Humble pays 75% of utilities and rent is based on
                            monthly sales; Humble is a residual claimant (has claim to profits); When there is a
                            residual claimant courts scrutinize contract for signs of principal’s control
                  iv) Hoover v. Sun Oil
                            a) Barone (station operator) has title to the gas; duration is one year with 30 day
                            notice; no required reports, only visits; no requirements for hours; appearance:
                            signs/uniforms; employees: no control by principal
                            b) This is more of an independent basis since Barone has a fixed payment to Sun oil
                            no matter how well he does in a month (this is the key)
                            c) ex ante influence existed here but ex post not so much since Hoover forced
                            Barone to put up assets
         E. Profits Arising Out of Agency Relationship
                  Agent must account to his principal all profits that arise out of the agency relationship
                  1) Profits made in connection with transactions conducted on behalf of principal; or,
                  2) Profits made as a result of information/property that agent obtains as a result of the
                  agency relationship
                            -Doesn’t have to be within scope of employment- Reading v. Regem
                  i) Gen. Automotive v. Singer
                  Singer loses all profits to Gen.; Gen. Auto just has to show that Singer violated duty of
                  loyalty; Gen. Auto doesn’t have to show Singer’s actions negatively impacted the company
                  or that the company would have taken the opportunity
                  ii) Meinhard v. Salmon
                  -Partnership owned information of potential deal for hotel, Salmon had to disclose
                  -Meinhard doesn’t have to show that he was injured by Salmon’s failure to disclose; Have to
                  give restitution to Meinhard for Salmon’s unjust enrichment
II. Limited Liability (Corporate Veil)
         A. Arguments for
                  i) centralized management- less need for SH’s to monitor
                  ii) transferability of shares- promotes capital markets and liquidity
                  iii) promotes diversification for SH’s since cost of buying/owning low
                  iv) problem is that SH gets all upside but not liable for debt
                            a) Equitable Subordination – Subordinates any equity claims as creditors
                            to the claims of the other creditors
                            b) Piercing the Corp. Veil- SH’s are liable for debts in this situation
         B. Piercing the Corp. Veil
                  i) Can’t pierce if
                            a) SH follows formalities in formation, management and keeps corporate money
                            separate from her own. Generally true even if corp can’t pay debt
                            b) Courts have yet to pierce to dispersed SH of a publicly held firm
                 ii) Pierce to either SH assets, alter ego, respondeat superior
                          a) Sea-Land v. Pepper Source (alter ego test)-conjunctive elements
                                   1) unity of interest and ownership and
                                           i) lack of corp. formalities (not as important)
                                           ii) commingling of funds and assets
                                           iii) severe under-capitalization
                                           iv) Treating corp. assets as one’s own (very important)
                                   2) Refusing the piercing would either
                                           i) sanction fraud or promote injustice
                                                     a) Illegality, torts, fraud, other “unfair” business practices
                          b) In Re Silicone Breast Implants
                                   i) MEC has an independent board but it never meets
                                   -BMS negotiates for purchase by MEC and BMS helps pay
                                   -BMS sets pay scales for MEC

                                   ii) Court worries less for prong 2 when evidence is so strong for prong 1
                                           -Not an independent test but a sliding scale approach; the stronger
                                           the first prong the weaker prong 2 proof need to be
                                           -Additionally, tort claims generally warrant less requirements for
                                           prong 2

                          b) Reverse Pierce

                                   Reverse Pierce

III. Fiduciary Duties
         Duty of care- Regulates thoroughness and diligence in deliberations.
         Duty of loyalty- Regulates self-dealing transactions by management
         Duty of Good faith- Regulates indifference toward corporate welfare
         Duty not to waste- Regulates decisions that destroy corporate assets
         A. BJR • P. challenging an action by the board faces a
                 presumption that board was:
                 – disinterested (Duty of Loyalty)
                         • e.g., there was self-dealing or domination by someone
                         with a financial interest
                         • not in good faith: fraud, illegality or conflict of interest
                 – acted with due care in that they made an informed
                 decision (Due Care)…and
                 – acted in the rational good faith belief that action is
        in best interests of corporation
                 • Waste
        • P. loses unless he can rebut one of these

DGCL 141(a)– Powers of the board to manage corp
• DGCL § 141(c)– Powers of delegation to committees / experts
• DGCL § 141(d)- allows for the classification of the board in the by-laws or in the certificate.
This is one case where bylaw must be enacted by the shareholders (Today most corps.
classify in cert. since easier than getting SH approval for by-law)
• DGCL § 141(e)– Board members are “fully protected” in relying on opinions &
information generated by committees or others competent to render such opinions/info
• DGCL § 141(k)- can only remove a classified member for cause
• Dela 102(b)(7)- Certificate may provide that directors are not liable for damages resulting
from breach of duty of care
        -Covers duty of care violations but not: duty of loyalty, intentional misconduct, bad faith
• Dela 109- SH’s retain right to amend or repeal by-laws
•Dela 122(17)- Every corp. under this chapter shall have power to “renounce, in its
certificate of incorporation or by action of its board of directors, any interest or expectancy
of the corp. in [a whole line of opportunities]”
• Dela 142- officers are chosen in manner stated in bylaws or elected by the board
Dela 144- Transaction with interested director not voidable solely for this reason if majority
of fully informed disinterested directors approves, approved in good faith of fully informed
SH’s, or the transaction is fair
Dela 145(a): Indemnification for expenses, judgments, fines (controversy over indem. of fines; DOJ
opposes), amounts paid in settlement for non-derivative actions; need to show that act was in good
faith and reasonably believed to be “not opposed” to corporation’s interest
Dela 145(b): For derivative suits; Expenses only- don’t get indemnified for amount that you end up
owing to the firm; good faith requirement as well
Dela 145(c): Director is “successful on the merits or otherwise” in defense of any action;
Such person “shall be indemnified against expenses”
145(f): rest of 145 is not exclusive; 145(g): A corp. may be insurance with coverage broader than
Dela 151: allows for different classes of stock that allow for different voting and/or economic rights
• Dela 211- (a) says SH’s can call special meeting only if in certificate or by-laws;(b)
provides for an annual meeting of shareholders to elect directors; (d) allows either the board
of directors or person(s) authorized by the certificate of incorporation to call a special
meeting of stockholders
• Dela 212- one share equals one vote unless said otherwise in certificate
• Dela 216- Board is elected by plurality of shareholders at meeting, unless certificate or by-
laws otherwise stated; majority of SH’s present needed for vote of anything other than board
election; unless otherwise stated in by-laws or cert. quorum is majority of SH’s (cannot be
less than 33%)
• Dela 219 - Ten days before a SH meeting, a list of stockholders entitled to vote must be open to
any stockholder “for any purpose germane to the meeting.”
• Dela 220- Any stockholder shall have the right to inspect “for any proper purpose” the
corporation’s stock ledger, a list of stockholders, and other books and records.
• Dela 228(a)-allows stockholders to take action in lieu of a meeting. By written consent, stockholders can
take the same actions that would be taken at an annual shareholder meeting, with the same rules applying. One
difference is that at an annual meeting need only majority present; for 228 action, need majority of outstanding
shares for any action that would require a majority. The action must be in writing and signed, and need a
proper purpose (proper purpose=Merely justification based on shareholder’s interest, i.e. company’s profits).
Additionally, notice of the action taken must be promptly delivered to an agent of the corporation and all of the
         -can’t take away this right through by-laws but can amend certificate to disallow
• Dela 242(b)- the board must first approve amendment to the certificate (need majority outstanding
shares to approve); Certificate cannot be changed by a by-law
Dela 251- Short Form Merger
Dela 262- Appraisal Remedy
• Dela 271- the governing body or board of directors can put a resolution up for shareholder vote to
authorize the sale, lease, or exchange of any of the corporation’s property. However, the governing
body retains discretion on such a purchase
To protect against this a company should classify board in the certificate, fix number of board
in the certificate, and eliminate 228 powers
         i) AP Smith Mfg. v. Barlow
                  Courts take a very long-run view of gains from donations (good will; build up community);
                  Courts don’t require studies; Wide deference given to corporations on donations
         ii) Dodge v. Ford Motor Co.
                  -Ford had been issuing a large special dividend, Dodge sues Ford when Ford decides to end
                  the special dividend
                  -Ford didn’t even say that giving money to the public would earn goodwill and thus he made
                  no connection between giving money to the public and maximizing profit
                  -One of the only cases where board loses on dividends/waste without an instance of self-
         iii) Shlensky v. Wrigley
                  refuse to place lights; in spite of BJR’s protections, management must be able to articulate a
                  rational basis for decision (merely has to pass the laugh out loud test)
         iv) Kamin v. American Express
                -American Express purchased DLJ and value of DLJ now lower. Amex can sell the stock on
                the market and use the capital loss to offset their capital gains and realize about $8 million in
                tax benefits. However, Amex board chose to give the stock as a dividend to shareholders
                arguing that they were protecting stock price and SH’s (weak argument)
                -this rationale was sufficient for the court since the board made the decision in good faith and
                with discussion of the issue; doesn’t have to be a compelling reason, but merely a believable
                and good faith decision
         v) Smith v. Van Gorkom
                Defendant argues 141(e) saves them;
                  Plaintiff can only win against 141(e) if shows
                           Director did not rely on the expert; Reliance was not in good faith; Not reasonably
                           believe advice was within expert’s competence; Expert not selected with reasonable
                           care or on behalf of corp.; Material/reasonably available fact was so obvious that
                           board’s failure to consider was GN regardless of expert’s advice; Decision so
                           unconscionable as to constitute waste or fraud
                           -Holding: Breach of duty of care since decision not based on an
                           informed decision
                                    No outside report; Van Gorkom report was originally for Leveraged Buy-
                                    Out; market-test insufficient since difficult for third party to bid; SH vote
                                    doesn’t cleanse since uninformed
                  -Test for Breach of duty of care is gross negligence
                 -Cinerama: Once show breach of duty of care, burden shifts to board to show
                 fairness (board must show no injury)
         vi) Brehm v. Eisner & Disney
        1) Old Board Substantive Claim: In Delaware, if you cannot argue procedural
        due care, waste, or fraud/illegal/bad faith, then you have no cause of action; no
        substantive duty of care exists without waste
        2) Not waste either since Waste= “an exchange so one-sided that no business
        person of ordinary, sound judgment could conclude that the corporation has
        received adequate consideration”
        3) Old Board Procedural Due Care Claim: Dela 141c allows full board to delegate to
        committees certain responsibilities such as compensation
                 -Differences from Van Gorkom:
                 1) Magnitude of the decision plays a major role
                 2) Also there is a higher expected cost for neglecting information in Van
                 Gorkom; the cost of for Disney is much lower, especially when they had
                 little reason to believe that Ovitz would leave before the five year contract
                 3) Board of Disney had a ballpark figure for compensation of Ovitz; board
                 in Van Gorkom didn’t have a means of calculating value
        Four Takeaways of Disney
                 1) Reaffirms notion that duty of care is exclusively a claim
                 about bad process, not bad substance
                 2) Holds: Mere violation of “good governance practices”
                 alone is not sufficient to breach of fiduciary duty
                 3) Comes close to giving a “how to” guide for pleading a
                 complaint in context where board claims reliance on
                 expert/committee guidance
                 4) Ruling on “Good Faith”
                 – Dela seems to say Good Faith is an Independent duty (not
                 part of DoL or DoC) (more to come on this)
                 – More than Gross Negligence
                 – Can violate good faith without subjective bad intent if have deliberate
                 neglect of duties in face duty to act.
        4) Bad Faith: bad faith can exist without duty of loyalty claim
                 Egregious process failures=bad faith
                 a) “Intentional dereliction of duty, a conscious disregard for one’s
                 responsibilities, is an appropriate (although not the only) standard for
                 determining bad faith
                           i) Deliberate indifference and inaction in the face of a duty to act is
                           disloyal to the corporation. It is the epitome of faithless conduct;
                           Conduct not motivated by adverse self-interest that is more than
                           gross negligence.
        5) Against New Board
                 Implied that Disney gave Eisner power to fire on his own; board had right
                 but not duty to fire (key: this was supported by Disney and industry past
                 If Eisner fires for cause there would be an expensive lawsuit and bad
vii) Francis v. United Jersey Bank
        Duty to Act in Good Faith
               Court says a director has a duty to inquire and take reasonable means to prevent theft
               by co-directors
               a) Minimum Duties for director= Rudimentary understanding of the business;
                    keep informed; general monitoring; board meetings; review financial statements;
                    make inquiries into doubtful matters, raise objections to illegal action, and take
                    appropriate action
               b) Court says that normally duty only to SHs but trustee may sue (on behalf of
                    creditors) in some cases; These special cases include insolvent firms, and banks
                    and financial corps. that have trusts
               c) No BJR in cases of director inaction since no decision to be protected
      viii) In re Caremark SH Litigation (duty to monitor as a part of duty of care)
               a) Test for breach if no conflict of interest for failure to monitor:
               Systemic failure to exercise oversight;
               Utter failure to attempt to assure a reasonable information and reporting system
               exists (good faith standard which is higher than reasonably prudent person)
                        b) Corporation needs compliance program even if low chance of crime
                        because a compliance program reduces the fine (Corp. vicariously
                        criminally liable)
      ix) Stone v. Ritter (views duty to monitor as part of duty of loyalty)
           a) director utterly failed to implement any reporting or information system or controls
           b) implemented a compliance program but then consciously failed to monitor or
               oversee its operations thus disabling themselves from being informed of risks or
               problems requiring their attention
           c) Must show directors knew that they were not discharging their fiduciary obligations
           d) Hypo: Board gets together to discuss a compliance program; find out that creating a
           cost feasible program would not deter much at all and creating a program that deters
           would be unreasonably costly
               i) In Caremark the board would be protected because they had the right
               process and they had a rational reason for not creating a compliance
               program (BJR); Stone leaves open this question of whether BJR would
               ii) Araneta (2008)- No reporting system in place; No other information systems or
               controls were ever considered, thus Stone liability
B. Duty of Loyalty
      Self-Dealing: Director gets a benefit from a transaction that is greater than the gains from
      being a minority shareholder of the other company
      --A direct material financial stake, or a fiduciary duty owed to the other firm
           a) Test:
               1) Presumption of BJR unless show interest
               2) If interest present, voidable unless one of 3 conditions met
                    1) Decision approved by majority of disinterested directors who were fully
                        informed of the conflict of interest and the financial details of the
                    2) Disclosure and Approval by the majority of the shareholders (most states
                        say fully disinterested shareholders)
                    3) Deal is fair to the firm (price and dealing)
               Dealing influences court on deciding whether the price sounds fair
               It is defendant’s burden of proof for each of these conditions
b) Lewis (NY)
       i) Argument that defendant breached duty of loyalty
       Self-dealing- Majority of directors of SLE are LGT directors
       ii) First two conditions not met since board or shareholder meeting necessary for
       proper vote
                 Defendant has trouble proving that the share buy-back was a fair price
                 All that matters in the deal is fairness of the deal to SLE
                 Defendants’ argument that the deal was globally fair to both companies
                 is fatal
c) Bayer v. Beran (singing wife)
       -Wife is gaining financially from salary and thus husband gets this gain; sign of Self-Dealing
       -Board approves the campaign without knowledge of the wife’s position; First condition is
       not met since board is not informed of the conflict of interest
       - Second condition not met since no shareholder meeting
       -Third condition: Factors to consider
                Is the deal fair to the corporation?
                Was wife of director being paid her market value?
                Was the advertising campaign approved and does it fall under BJR?
                If yes to the above ?’s then fair deal and no violation of duty of loyalty
d) Benihana
       Under Dela 144(a)(1) director approval only means that the transaction is not
       automatically voidable
              -approval by majority of disinterested (not directly interested nor is he
              dominated) directors who act in good faith and are informed of the material
              interests or relationships of those interested brings the decision under BJR
              -Alternative rule is that approval by board doesn’t cleanse the action or
              move the standard into BJR but only shifts the burden of evidence onto the
              shareholder (quite similar to above rule)
e) Sinclair in Corp. Opp.
Flowchart for Self Dealing
C. Corporate Opportunity Doctrine (Subset of Duty of Loyalty)

Current Test for Corp. Opportunity:
       a) Guth v. Loft , 5 A.2d 503, 514 (Del. 1939): “Where a corporation is engaged in a certain business,
          and an opportunity is presented to it embracing an activity as to which it has fundamental
          knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable
          to its business having regard for its financial position, and is one that
          is consonant with its reasonable needs and aspirations for expansion, it may be properly said that
          the opportunity is in the line of the corporation’s business.”
          -Old Test: Interest: something which the firm has a contractual right
          Expectancy: something which in the ordinary course of things the corporation could expect to receive: e.g., the
          firm negotiating a contract; contract about to be signed but director sneaks in and buys the property
          Necessity: takes goods or services the firm needs vitally (e.g. purchases the building the firm operates in)
Dela 122(17)-Corp. can renounce a whole line of opportunities in charter or through board action
Remedy: Gains-based (constructive trust)
       – Injunctive relief & punitive damages also.
b) Broz
          --Broz only has to think of CIS’s plans and ability to acquire Mich-2
          --Should be judged by facts as of the moment he decides whether to proceed to negotiate
          --Key Factors: Individual capacity, No CIS interest at the time, Financial incapacity
           --Critique: Should be less formalistic and judge on facts of about to be completed merger
c) Ebay
         i) Goldman allegedly allocated IPO shares to managers at EBay in return for Ebay’s business
                  --Ebay is financially able to purchase IPOs
                  --Deal comes to managers in their capacity as ebay managers
                  --Ebay has been in the business of buying and selling IPOs and securities
                  (significant part of the business is managing a portfolio of securities)
ii) Other Claim:
         D’s liable because an agent has a duty to account for profits arising from the agency
         relationship (arose out of agency relationship); See Singer
iii) Comparison with Beam (Martha Stewart) case:
          --Martha Stewart wasn’t held liable when she sold MSO stock; MSO claimed that this took
          away from them an opportunity to raise money by selling the shares on better terms
                        --Martha acting purely as SH (unlike Ebay, opp. came to her as SH)
                        --MSO did not need to raise money so not competing with something firm really wanted
                        --Usually hanging in the background of corp. opp. cases is the idea that the agent is
                        competing with the principal
                        --If there was a liquidity crisis at the company and company has a buyer (ie Warren Buffet)
                        but no one else wants to buy a major stake; If director uses this confidential information to
                        sell at lower price will be liable for usurping corp. opp.
       d) Sinclair
              1. Dela 170 gives board discretion on dividends. No self-dealing in dividend distribution since
               shareholder benefited from the dividends proportionally. Without self-dealing, business judgment rule
               Mere fact that there is a controlling shareholder does not necessarily mean that fairness test applies
               (need to show it’s a self-dealing transaction by showing that defendant benefited to detriment of
               Plaintiff must now show that the transaction was waste
               2. Opportunities came directly to Sinclair. SH does not have a duty to share with sub anything it gets.
               Shareholder duty is not to take things that came to the Sinven board.
               SH entitled to have Sinven board decide that reasonable plans for expansion are limited
               3. Breach of contract claim shows self-dealing since Sinven decided not to enforce the contract
               against International which was wholly owned by Sinclair. This was a benefit it Sinclair since
               International was able to pay Sinven late and not purchase the agreed upon amount of oil. This is
               self-dealing since Sinclair benefits to Sinven’s detriment.
               --Thus fairness standard applies
               What if have majority of fully informed disinterested SH approve?
                       --If not controlling SH then effect is to shift Burden of Proof to plaintiff to say waste
                       (BJR applies)
                       --If there is a controlling SH then domination may be present and thus fairness
                       standard of review without BJR applies (court feels that domination may make
                       shareholder feel that they must go along)
                       --De jure control=over 50% shares and control of board
                       --At 22% enough for court to look to see if domination present (because SH’s are so
                       passive) ; then look at percentage control of the board; sometimes there is additional
                       analysis to see if other directors are somehow dominated
                       --However a SH vote approval still places burden of proof on plaintiff
IV. Derivative Action
       a) Eisenberg v. Flying Tiger (NY)
               --NY (mushier than Dela)“whether the object of the lawsuit is to recover upon a chose in
               action belonging directly to the SH or whether it is to compel performance of corporate acts
               which good faith requires the directors to take in order to perform a duty which they owe to
               the corporation…”
       -- Delaware Test on what is direct or derivative:
                    1) Who suffered the harm
                    Can SH show an injury to himself without showing a wrong to the corporation
                    In this case SH says he has lost voting power since he can only vote in major
                    transactions related to the holding company and not the operating company
                    2) who would receive the benefit of any recovery or other remedy (the corporation or
                         the shareholders individually)
--To enjoin the board or recoup losses against board or directors (damages go to corp.)
--Simultaneous suits in equity by. . .
    1) a SH against corp. to compel it to sue another
    2) the actual suit by corp. against that other party
--We let single SH bring derivative suit
--Free-rider problem solved by giving Plaintiff attorneys fees if they win
b) Requirements:
         --Contemporaneous Owner Rule (Standing)-
                 Plaintiff must be at least a beneficial SH for the duration of the suit; had to have
                 been an SH when the “wrong” to the corp. occurred
         --Bond (some states; not Delaware)
                 SH who loses must pay firm’s expenses; post bond in advance of suit
                 Most states require SHs in derivative suits first to approach Board of Directors and
                 demand that they pursue legal action…unless SH can claim a valid excuse.
                a) Test for futility (Aronson)
                     Demand is deemed futile only if plaintiff can allege particularized facts creating
                     a reasonable doubt that either (just one)
                         a) majority of directors are disinterested and independent
                         b) challenged transaction was product of valid exercise of business
                --Prong #1 can either be those with interest in underlying transaction or one who is
                dominated by a person with interest; domination exists if interested director could
                somehow fire the others or threaten them; friendship and serving on other boards
                with interested person not enough
                --Prong #2: Self dealing transaction that’s not cleansed(uninformed board or SH’s);
                Board breached its duty of care; Waste; Controlling SH self dealing transaction
                --102(b)(7): risk of liability does not disable the board from considering the suit
                unless particularized facts create reasonable doubt that there is a substantial
                likelihood the conduct falls outside the exemption (bad faith, intentional misconduct,
                or any other conduct for which the directors may be liable; Suit is for injunction
                arising from breach of due care)
                         i) P. made a demand and the board refuses to bring the suit. Transforms
                         claim into a wrongful refusal of demand case (Grimes)
                         --Look at board that refused demand to see if decision is product of valid
                         business judgment
                         --Once make demand you are conceding that it was required
                         --Once P makes demand he waives right to challenge
                         independence/impartiality of board
                         --Now Plaintiff has to show either waste or lack of due care
                         Problem is that litigation is inherently expensive and thus a corp.
                         rejecting demand for derivative suit is almost always not a case of
                         corporate waste
                         --Lack of due care very difficult to show especially since corps. hire
                         outside disinterested attorneys who along with disinterested directors
                         advise rejecting demand
                ii) Universal demand jurisdictions require demand in every case and BJR applies;
                court can still decide whether majority of board disinterested
c) Special Litigation Committees
       --Procedure used by SLC scrutinized under (something like) gross negligence standard
       --If SLC is not independent its recommendations are meaningless:
       Independence Factors: Non-defendants; no domination by named directors; full delegation of
       authority to SLC (Auerbach)
       i) Delaware Test: Zapata Corp. v. Maldonado
           In Delaware there is a two part test for demand excused cases in which an SLC
           has recommended dismissal
               1) Did SLC act independently, in good faith, and with a reasonable
                   investigation (burden of proof on defendants)
               2) Does dismissal pass independent judicial inquiry into business
                       a) Court not restricted to the corporations best interests but also may
                       consider “matters of law and policy”
               If demand required and SLC rejects demand then that is under BJR and plaintiff
               then has burden of proving BJR doesn’t apply because waste or breach of duty
               --If demand excused plaintiff gets limited right to discovery (only discovery
               allowed for issue of SLC)
               --If demand required then no right to discovery
       ii) Interested SLC’s (In re Oracle Corp. Derivative Litigation)
                a) We do not start with the presumption that the SLC is independent
       Board member ready to give a big donation to Stanford in areas where SLC professors
       worked. If donation went through it would boost rep. and directly benefit profs.
       iii) Easier burden for board at demand stage than SLC stage
               --more flexible review of whether domination exists at demand stage
       D. Indemnification
               Dela 145(a): Indemnification for expenses, judgments, fines (controversy over indem. of
               fines; DOJ opposes), amounts paid in settlement for non-derivative actions; need to show
               that act was in good faith and reasonably believed to be “not opposed” to corporation’s
               Dela 145(b): For derivative suits; Expenses only- don’t get indemnified for amount that you
               end up owing to the firm; good faith requirement as well
               Dela 145(c): Director is “successful on the merits or otherwise” in defense of any action;
               Such person “shall be indemnified against expenses”
               145(f): rest of 145 is not exclusive; 145(g): A corp. may be insurance with coverage broader
               than permissible
               Insurance companies exclude coverage of willful misconduct (moral hazard)
               i) Waltuch rule
                       --Doesn’t matter why suit against director dismissed; Suit against director dismissed
                       and no contribution by him required means firm pays his expenses (145c)
                     --145(f) does not mean corp. can have indemnification which escapes good
                     faith requirement of (a) and (b)
V. Disclosure and Fraud
       Anti-Fraud (Section 10b/Rule 10b-5; Rule 14a-9)
          Can be brought by Criminal Action; Civil Action by SEC to impose penalty (district court);
          Administrative Action brought in SEC court; or Private Civil Action
          a) Material Misstatement of Fact
          Must include a fact but can include whether the board believed an opinion it gave
          Must prove:
          1. Defendant defrauded him; Defendant made a materially misleading statement of fact
          2. The fraud caused plaintiff’s harm.
               Materiality: TSC Standard- An omitted fact is material if there is a substantial likelihood
               that a reasonable shareholder would consider it important in deciding how to [vote]
               Scienter: Knowing/intentional misstatements, not negligent misstatements; Can include recklessness-
               but recklessness here is deliberate indifference to knowledge and not gross negligence

               Basic v. Levinson
               i) Probability/Magnitude Test for info that should be disclosed (materiality)
                       1) Probability that uncertain event happens
                       2) Magnitude
               ii) Rebuttable Presumption Fraud Affected the Price and SH relied
                       a) SH are entitled to rely on ability to trade based on the market price being fair
                       b) Ways to rebut:
                                1) Shares do not trade on an efficient market
                                        Trading OTC
                                2) Market Price was not Affected by Fraud
                                        --Market didn’t believe it
                                        --Truth must enter market in such a sufficiently credible way as to
                                        eliminate effect of the lie
   iii) West v. Prudential Securities
        --Lie was not made publicly. Only went to a few customers. Must show their trading pushed price up
        above where it should have been
       --Easterbrook says no, since information is what moves the stock price; stock purchasers are price-takers

       iv) Hypothetical
                --No rumors about merger; Company lies in statement and says no merger; Merger occurs
                --People who sold after statement but before merger have not been harmed since the price has not
                been artificially kept down; EMH says that the price of the stock wouldn’t shift since public
                information continues to show that no merger in price of the stock
VI. Proxies
       a) Policy for SH’s to be fully informed; Board has right to speak to SH’s
               --thus, Can make reasonable expenditures (wine and dine institutional shareholders, PR
               firms etc.); reasonable is based on the size of the firm (Levin v. Metro-Goldwin)
       b) Insurgents are only entitled to reimbursement if they prevail (Rosenfeld)
               --Prevailing insurgents who take over board may reimburse the old board for expenses
               without shareholder approval
               --New board can only reimburse themselves if they get on the board and get majority
               shareholder approval for the reimbursement
               -- In all cases reimbursement only for expenses in which directors act in a contest over
               policy and their expenses are reasonable (not a personal fight)

       c) S.E.C. Regulations:
               --Rules 14a-3, 14a-4, 14a-5, 14a-11 – gives required content of proxy statements
                Borak said implied private right of action
                --SHs who win entitled to attorneys fees
                i) Misleading or fraudulent proxy statement
                          1. Defendant defrauded him; Defendant made a materially misleading statement of fact
                          2. The fraud caused plaintiff’s harm.
                          To satisfy causation:
                              1) materiality
                              2) Proxy statement was an essential link in the transaction (if board is also CS
                                  and sends misleading proxy, then can’t say proxy statement
                         a) Proxy Omitted Black-Scholes value of options
                                 Seinfeld v. Bartz- not a materially misleading statement

                ii) Proxy Mailings
                         a) Rule 14a-8 enables a shareholder (or group of SHs) to submit a proposal to other
                         SHs to be mailed in the firm’s own proxy at the firm’s expense
                         b) Under Delaware Law a SH in attendance at an annual meeting may offer a proposal for
                         SH vote so long as the proposal involves a proper subject on which shareholders may vote.
                         Eligibilty (Check)
                         Must own at least 1% or $2000 for at least one year prior to proposal submission date
                         Ownership must continue through date of meeting
                         1 proposal per SH per meeting
                         500 words limit
                         Management has unlimited response
                         Annual meeting: proposal must be submitted not less than 120 days B4 the company sends
                         out its proxy (there are exceptions)
                              1) Improper under state law; draft as recommendation
                              2) Violation of law
                              3) Personal grievance
                              4) Relates to operations accounting for less than 5% of assets or net earnings/gross
                                   sales, and not otherwise significant
                              5) Management functions/ordinary business
                              6) Relates to board election
                              7) Conflicts with company proposal
                              Many key factors are not allowed: Election of directors; Opposition to management
                              proposals; Dividend proposals
                              Typical Dynamic in SH Proposal:
                              1) SH (or group of SHs) submits to BoD a proposal to send out in proxy solicitation
                              2) BoD then considers whether to exclude proposal
                              3) If it excludes it must inform the SH and file with the SEC (subsec j)
                              4) SEC may then send a “no-action” letter; these letters are not binding
c) Rule 14a-8(i)(5)- Management can omit proposal if relates to operations Accounting for <5% of issuer’s
total assets, and For <5% of net earnings, and isn’t otherwise significant or related to issuer’s business
     i) The issue has to be a great question of morality which intersects with the firm’s business (can take a
     big hit on the firm’s reputation even if the area of business is only a tiny portion of the firm’s overall
     business) Lovenheim v. Iriquois Brands
d) Rule 14a-8(i)(6), (7)
(i)(6)-SH can’t request that which is beyond management’s power to effectuate
(i)(7)-SH can’t request that which deals with day to day operation (ordinary business)
    NY City Employees’ Retirement System v. Dole Food Co.
        --SH request for research into universal healthcare system allowed
        --Ordinary business- huge financial implications depending on what proposal Dole would support (1.
        Dole can lobby for a particular proposal 2. Dole would want to be prepared in advance of a major
        change in healthcare)
        --Insignificant relationship- Health insurance outlays greater than 5% of its income
        --Beyond power to effectuate- Has the power to research
Austin v. Consolidated Edison
--SH proposal endorsing retirement after 30 years; considered part of ordinary business matter since part
of employee compensation
-- Strategic if it deals with national policy consideration, major transaction, or even deciding whether to
create a pension for its employees
     ii) Management almost always win SH proposal litigation
          This is starting to change however. . .
          1) Activist hedge funds buying shares to change the board and bring new proposals
          2) Institutional Shareholder Services (ISS) is an advisory group which publishes rankings on
              corporate governance
e) Sharehold Lists
     --Federal Law 14a-7: sets for obligation of registrants (firms) to either provide a requesting SH with
     a SH list of all SHs from who proxies are solicited on management’s behalf or to mail the SH’s
     soliciting materials to SH’s at the insurgent’s expense
How is Delaware an improvement on this:
     DGCL section 219: Ten days before a SH meeting, a list of stockholders entitled to vote must be
     open to any stockholder “for any purpose germane to the meeting.”
     DGCL section 220: Any stockholder shall have the right to inspect “for any proper purpose” the
     corporation’s stock ledger, a list of stockholders, and other books and records.
    i) Proper Purpose
            a) --Bought shares for sole purpose of fight with management (request records and put
            pressure to end bomb production)
                    --Plaintiff would have standing if he cared about effect on long-run profits; instead
                    he had no economic interest in purchasing the shares and asking for the SH list and
                    records (Honeywell)
            b) Crane Co. v. Anaconda Co.
            --Crane an SH of Anaconda makes tender offer to Ana; wants proxy bid for board as
            well to gain control and prevent poison pill
            --Things that go to shareholder pecuniary value are a core interest of a corp.’s business
            purpose; Thus SH’s have right to learn more about tender offer; thus, obtaining SH list is
            proper purpose
    --CEDE list- list of brokers who hold street name stock in name of a depository; this lists brokerage
    firms and not actual SH
    --NOBO list- “non-objecting shareholders”, Street name shareholders who do not object to having
    their name disclosed
            Court says that when it comes to right to shareholder list, NY court will protect NY
            shareholder by applying NY section 1315, as long as the firm is doing business in NY; since
            almost all Delaware corps. do business in NY then NY shareholder list law applies;
            NY law allows for compilation of NOBO list if SH requests, even if Delaware does not
            require on basis that not too hard to compile, and CEDE list gives next to no information;
            thus plaintiff needs NOBO list (Sadler)
        ii) Blasius Standard (under duty of loyalty)
                Step #1: Does Blasius apply?
                          Applies where primary purpose of board action is to interfere with or impede
                          exercise of SH franchise and SHs are not given a “full and fair opportunity to vote”
                          (on impending action).
                Step #2: Did the board have a compelling justification; Board bears burden of proof
                a) if firm was initially structured this way (in the certificate), Shareholders already purchased
                the firm consenting to this structure and thus Blasius doesn’t apply (Stroh)
                          --Delaware says can structure virtually any way you want as long as initially spelled
                          out in the certificate
                          --Dela 151 allows for different classes of stock that allow for different voting and/or
                          economic rights
                          --Could have certain classes of stock vote only for certain number of directors (done
                          often for companies where family wants to maintain control of the corp.; very
                          common in Europe)
f) State Wisconsin Investment Board v. Peerless
       --Board wants to issue 1 million additional shares to use as options
       --Plaintiff cares because of fear that options will be issued at below market value which would thus
       dilute value of existing shares
       -- Prop 2 at meeting is losing; chairmen adjourns and keeps voting open no public announcement;
       keep soliciting “pro” votes from selected shares; prop. wins by small margin at 2nd meeting
       Holding: SWIB has standing; SH doesn’t necessarily have to immediately object
                 --Blasius applies: Step #1, Show board has entrenchment goal: Here: quest for options
                 --Board now needs to show compelling justification in step #2 (unlikely in this case)
                 --Court says much cheaper just to revote rather than litigate
VII. Controlling SH Sales
       Perlman v. Feldman
       --doesn’t turn on whether he is a director; turns on duties as Controlling Shareholder
       --Rule: You can’t aid and abet the future board’s violation of fiduciary duties
                 --must fork over any profits from such a sale
       -- Court says that if sale necessarily seems to involve sacrifice of good will (effectively
       misappropriation profits), D has to show that it didn’t.
       --Is this a general rule of premium sharing?
                 No. Court views this as control SH cashing out a corp. opportunity. Feldman is selling to
                 someone who is better able to use control to extract private benefits and he’s getting the
                 benefit of that.
        a) Appraisal Remedy
                -- 251: Board approval and then SH vote.
                – Merger can go through if approved by a majority of the outstanding shares (including the
                interested shareholder)
                – If merger approved, all shareholders must turn in their shares under the terms of the merger
                (unless prior to the vote they elected an appraisal and voted no)
                --Appraisal: gives you the value of the firm w/o any benefits of the merger
                – If the appraisal price is less than the price offered in the merger, you’re stuck with the
                appraisal price.
• Eligibility
– Must hold shares on date you make a demand
– May not sell shares until merger becomes effective
• Perfecting appraisal rights
– Must file notice of dissent from merger during 20 day
window before SH vote merger
– Must not vote for the merger
– Must file a petition for appraisal within 120 days after
merger becomes effective
• Within 60 days the SH can w/draw & get merger
        • Attorneys Fees: Ct decides who pays

Market Out Exception
• No Appraisal if
– Shares are trade on an Exchange or NASDAQ or
company has at least 2,000 shareholders (or SHs
no right to vote on the contested transaction)
• Exception
– SHs do get appraisal rights if the merger specifies
consideration other than shares in either
• the surviving company
• A third company that is exchange-traded, or has
2,000 shares etc
         • Implication: Appraisal for cash out mergers

• A short form merger is available if the parent owns 90% or more of co. stock
• Merger only needs approval of the directors of the parent
– If the parent is the surviving corp.
– If subsidiary is surviving corp. than also need approval subs shareholders
--251(f) Merger
         – Rights of SHs in acquring corp remain unchanged
         • No changes in charter; each sh same # shares
               • Number addt’l shares issued by Acquirer < 20% shares
               outstanding before merger
               – Can do merger with directors of both corporations but only the shareholders of the target
                       • Don’t need Acq’s SH approval
b) Weinberger v. UOP
               Q: Can P. fight the merger on the grounds that D’s never articulated a business purpose for
               – Dela: No. D’s need not show there’s a business purpose for the deal.
                       – All they need to show is that the deal is fair.
               Q: Advantage right to file a fiduciary duty action?
                       Class Action available for fid duty
                       --Collective action discouraged min SH from seeking appraisal
                       --Availability of injunction if suit ex ante
                       --FD even if failed to perfect appraisal
                       Different damages
                       Lower risk: Can out under the merger and then sue for breach. Get damages if win
                       but not loose merger price if loose.

Also says Ct can fashion other remedies when there is fraud, misrepresentation, self-dealing,
deliberate waste, over-reaching…– (Subsequent opinions Dela S Ct clarifies that 262 appraisal is not
exclusive remedy)

Weinberger: Steps in Analysis
1) Is it Controlling SH Self-Dealing Transaction?
          P must show transaction is controlling SH self-dealing
          Sinclair: Distinguishes SD from non-SD
2) Control: Focus on ability to control transaction
          --SH control enough shares to de-facto dictate SH vote
          --SH control the board
          --Portion nominated and elected by SH
          --Portion dominated by SH
          --Indirect evidence of control
3) If so, do we have vote of fully informed SH’s
          --If so burden shifts to P to show fairness
          --If not, and if no fully informed board vote then Board bears the burden of showing fairness
          (preponderance of the evidence standard)
          --D’s bear burden of proof to show minority shareholder vote was fully informed.
4) Rule: Fairness is fair dealing and fair price
          --Fair dealing: how transaction is timed, initiated, structured, negotiated, disclosed to directors, and
          how director and SH approval was obtained
                    Duty of Candor- Can’t use target company’s internal data without proper disclosure
          --Fair price: economic factors that go to whether price is fair
          --Non-fraudulent transaction: price is main consideration
                 Fair Value of the firm as going-concern
                 – Weinberger says get fair value of going concern but allows rescissory damages at discretion of
                 the court.
                 – Going concern: Includes non speculative future prospects
                 • suggests includes nonspeculative gains from merger
                 – Contrary to 262(h) for appraisals
                 – Emerging communications says Appraisal = Damages fairness
                 • Going concern value (not synergeis).
                 • Method for determining value
                – The Delaware “Block” method no longer exclusive
                • From this day forward:
                – Block method is acceptable;
                – But it is not exclusive -- other generally accepted methods
                for valuation are also fair game: e.g. Discounted Cash-Flow Risk Analysis

                • Traditional remedy for unfair self-dealing --
                rescission of transaction -- often not possible in
                squeeze outs
                • Are minority shareholders entitled to damages in breach of fid duty action if prove merger is
                – Chancellor power to do an equitable remedy,
                – rescissory damages (putting SHs back in position
                would be in if no merger), or
                – enjoining a merger (if not completed), or
                – undoing one if not too much time has elapsed.
c) Rabkin
         --Controlling SH SD Transaction?
                 Yes, Olin own over 63% of stock and controls board of Hunt; Self-dealing since Olin will
                 have Hunt
         --Did D shift burden of proof to P?
                 What is claim that he did?
                 Vote of disinterested fully informed directors
                 Vote of fully informed minority shareholders
                 --What is rule on vote of fully informed board?
                          1) Committee disinterested and fully informed?
                                  Did a majority approve the deal?
                                  This mimics Delaware 144
                          2) Did Committee exercise bargaining power at arm’s length?
                              1) majority SH didn’t dictate terms of the merger
                              2) special committee had real barging power which it can exercise on an arms
                                  length basis
                     If pass then shift burden to P.
    Red Flag that deal not fair: The board of Hunt if it was not under control of Olin, would have enticed
    Olin to buy the rest of the available shares within the year. They could have threatened to do the deal
    with another party to convince Olin to make the deal within the year. However, Hunt board did not do
    that. Shows that Hunt is under control of Olin (not arms length deal).
VIII. Defense Against Takeovers
        To justify a defensive measure, board must show: (Unocal)
            1) There was a danger to corporate policy and effectiveness
                         Threat prong: Board acted in Good Faith; After reasonable investigation concludes
                         that a danger exists to corp. policy and effectiveness
                                  Test: good faith (board articulated credible threat)
                                  Reasonable investigation: Board investigated the offer and determined
                                  backend not worth $54 (doesn’t matter if other party can come up with
                                  its own experts to show offer was reasonable)
                                  Majority were outsiders, which helps
                                 --Time says bad synergies with Acq. Could be threat if against long-term plan
    Threat Examples (Unitrin):
    1) Opportunity loss: hostile offer might deprive SH’s of superior alternative
    2) Structural coercion- a two-tier front loaded tender offer; offer coerces SH’s to give-in at back-end
    3) Substantive coercion- risk that SH might mistakenly take low offer because don’t believe mngmnt’s
    claims re intrinsic value

            2) Proportionality: Action must be reasonable in relation to threat posed
                       --What is Purpose?- to defeat offer or protect back end?
                       --both are valid purposes’
                       --Response targeted to goal because designed to give minority fair value of his
                       shares; if include Mesa in offer can’t serve goal
                                --Non-coercive all cash/all shares deal can be a threat if threaten board’s
                                ability to do a plan that’s better
                                --Fid. duty for board of directors is to select timeframe for achievement of
                                corps. goals; Directors are not obliged to abandon a deliberately conceived
                                corp. plan for a short-term SH profit unless there is no basis to sustain the
                                corp. strategy
                                --Proportional since Paramount not excluded from making an offer for the
                                combined Time-Warner Corp.; thus response was reasonable to threat
                       --In QVC, court says defensive action must be to entice desired bidder without
                       committing to not negotiating with another for a better deal
b) Revlon duties
        Rule: When hostile bidder makes relatively same offer as White Knight, then board cannot play
        favorites to fulfill Unocal duties
                 --Upon guaranteed sale and break-up of the firm must seek to maximize price (must protect
                 short-run interests for SH’s; fid. duty runs to equity interest and not anything else)
                 --Seen in Smith v. Van Gorkam
                 --Lock-ups okay if they entice a potential bidder to bid (to get SH’s higher price or knock
                 out a coercive bidder); but lock-ups cannot inhibit maximization of share price
        Revlon comes into play when (Time):
        1) Corp. actively seeks to sell itself or
        2) target company abandons defense and seeks alternative offers or
        3) when the board sells controlling share in the firm
                 The minute you sell or evaporate the control premium you cannot say you have just a duty to
                 the firm, but also have a duty to SH to get highest possible price for that SH control premium
c) Dissolution or break-up not inevitable when. . . (Time)
       1) Fluid aggregation of unaffiliated SH’s even after deal completed (Chancery court in Time)
       2) Underlying deal is part of corps. long-term plan (“Just say no” defense)
               BJR applies in initial decision to expand corp. through merger deal
d) Board may select 1 of several reasonable alternatives (QVC)
               --If SH’s get all cash, then cash is all directors can consider
                        --SH have no interest in firm after the deal
               --If SH’s will be stakeholders in the new firm then board can consider synergies etc to the
               extent relevant to assessing the value of what the shareholders receive
e) Antitakeover Statutes: Delaware 203
         • Firm may not engage in a business combination for three years (including sale of assets) with an
         “interested shareholder” unless an exception is met
         – Interested shareholder = 15% outstanding voting stock
         • Key elements:
         – 15% trigger for “interested shareholder”
         – 3-year moratorium on “business combinations”
         – Exceptions: (see next slide).
         – “Opt out” for new firms, and firms who wait one year.
Dela 203 Exceptions
• 1) Friendly Transaction: Unless prior to becoming an interested shareholder the board approves the deal
which results in the person becoming an interested shareholder
• 2) Unless the interested shareholder becomes interested by buying 85% of the outstanding shares
• 3) Unless after the shareholder becomes interested, the combination is approved by the board and 2/3s
of the outstanding shares not owned by the interested shareholder
– Response: Toe-hold purchase followed by proxy contest and then takeover of firm with new board’s
         Getting Around the Del. Stat.
         • Strike a pre-transaction deal with mgmt.
         • Make tender offer contingent on crossing the 85% hurdle.
         • Propose an attractive second tier.
         • Mount a proxy contest to elect a new board.
                  – Still need the SH vote
         • Wait out the three years.
Defenses to Threat Creeping Takeover
• Deadhand Poison Pill
– Invalid in Delaware
• Delay Annual meeting + Staggered Board
         -If Stagger after takeover threat, then Unocal applies

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