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I.   Agency
     a. In General:
             i. Agency Defined:
                    1. Restatement:
                           a. A manifestation by principal, to the agent, that agent shall act:
                                    i. on the principal’s behalf; AND
                                   ii. subject to the principal’s control
                           b. Agent consents to so act
                    2. P and A agree that A will do something for P and that it will be done subject
                       to P’s control.
     b. Application (Examples of an Agency Relationship)
             i. Gorton v. Doty
                    1. Facts: Δ loaned her car to football coach; coach was told he could only
                       borrow the car if he was the one who drove it; coach crashed the car and
                       several kids were killed.
                    2. Issue: Was coach and agent of Δ?
                    3. Application: Δ made the agreement conditional upon the coach agreeing
                       that only he would drive the car. Thus, the arrangement was subject to Δ’s
                       control and on her behalf. Consent by the coach was implied by the fact
                       that he took the car. Therefore, the coach was an agent of Δ.
                    4. Holding: Δ was liable for coach’s negligence.
            ii. A. Gay Jensen Farm v. Cargill
                    1. Facts: Δ was a grain seller; A was a grain elevator (storage). A owed Δ
                       money, so to continue in business w/o Δ calling its debts, A agreed to act
                       subject to some control by Δ; they entered into a series of contracts that
                       obligated A to Δ in certain respects. A then owed money to farmers (π) that
                       were selling their grain to A; A couldn’t meet its obligations, so π sued Δ.
                    2. Issue: Whether an agency relationship existed between Δ and A.
                    3. Application:
                           a. Δ manifested an intent that A would act on its behalf  it would
                               store grain for Δ and sell to it first
                           b. Was subject to Δ’s control  A required to consider Δ’s
                               “recommendations” (which were backed by the fact that Δ could call
                               its debts), plus Δ interfered w/ A’s business operations
                           c. A consented to the agreement
                    4. Holding: Agency established  Δ was liable for A’s wrongdoing.
           iii. Options:
                    1. Do Nothing  risk liability. See Cargill.
                    2. Reduce Control  less influence over the third party, so they may screw up
                    3. Exert More Control  take over every aspect to ensure things are done well
     c. Liability of Principal to Third Parties in Contract
             i. Authority
                    1. Rule: an agent that has been authorized to act on behalf of the P (actual
                       authority) may bind the P to contracts that the A enters into.
                           a. 2 Kinds of Actual Authority:
                                    i. Express – Principal tells A to do something
                       ii. Implied – P assigns A a task and one of the things A does is
                           reasonably necessary to carry out the task.
                               1. Prior practice and industry custom may also be the
                                  basis for implied authority
              b. Requires that P made a manifestation of consent to A, that A would
                  have authority to act on P’s behalf.
      2. Mill Street Church v. Hogan
              a. Facts: Church (P) hires A to paint church ceiling; A tells church that
                  it’s a 2 person job. P takes out insurance in event of injury to A. A
                  hires his brother (π) to help paint; π gets hurt wants church to help
                  pay for his injury; P argues that π was not an employee b/c A did not
                  have authority to hire π.
              b. Issue: Whether A had authority to hire π.
              c. Application: A had told P that it would require 2 people to do the
                  job; P hired A to do the job  Thus, it was implied that A had
                  authority to hire another employee.
              d. Holding: A had authority to hire  P liable re: payment
ii. Apparent Authority
      1. Rule: Where P makes a manifestation of consent to a third party that A has
          authority to act on P’s behalf, then P will be bound by A’s actions
          consistent w/ that manifested consent. See Ampex. However, if the third
          party’s belief that A has authority to act on P’s behalf is unreasonable, then
          P not bound by A’s actions.
              a. Defenses:
                        i. Third party’s belief that A had authority to act on P’s behalf
                           was unreasonable.
                               1. If notice (actual or constructive) that A does not act
                                  for P, then the belief is unreasonable as a matter of
                                      a. Employment manual
                                      b. Web site (law firm directory)
                                      c. News ad
                               2. Almost necessary w/ respect to former employees 
                                  P must put parties it deals w/ on notice that A no
                                  longer works for P
                       ii. NO manifestations of consent
                               1. BUT, failure to act may satisfy manifestation
                                  requirement  Estoppel. See Hoddeson.
      2. Lind v. Schenley
              a. Facts: π was a salesman for Δ; Δ’s VP, and π’s boss, assigned him to
                  work for A and told π to report to A re: his new position and new
                  salary; A told π that he would get a 1% commission on all sales; π
                  made a sale, but Δ denied him the commission.
              b. Issue: Did A have apparent authority to bind Δ?
              c. Application: Δ (through the VP) had led π to believe that A had the
                  authority to set π’s salary and spoke on Δ’s behalf. Although the 1%
                  was high and only state managers had usually received the bonus, π
                  had as much responsibility as many state managers, so his belief that
                  salary + commission were genuine was reasonable.
               d. Holding: Δ owed π the commission b/c A bound Δ to the terms that
                   he gave to π.
        3. Three-Seventy Leasing v. Ampex
               a. Facts: π negotiated computer leases with one of Δ’s salesmen (A); π
                   submitted an offer to lease the units; Δ never signed the agreement,
                   but A had given π a delivery schedule of when the components
                   would be sent.
               b. Issue: Did A have apparent authority to bind Δ?
               c. Application: Δ had manifested consent to π that A had authority b/c
                   A was a salesman, and it’s common practice that salesmen have
                   authority to enter into contracts on behalf of their employers, and Δ
                   never did anything to change that impression in π’s mind. The
                   belief was reasonable (common practice)
               d. Holding: π bound to the contract b/c A had apparent authority to act
                   on P’s behalf.
iii. Inherent Agency Power
        1. Rule:
               a. Usually only arises in two cases:
                        i. Undisclosed Principal (third party is unaware of P)
                                1. P liable for actions that A takes that would be w/in
                                   the usual scope of business by A’s engaged in similar
                                   activities. See Fenwick (orders for cigars and food by
                                   bar manager).
                       ii. Agent exceeds his/her authority
               b. Catch-all rule – fills the gaps where other theories would fail
        2. Watteau v. Fenwick (Undisclosed Principal)
               a. Facts: A sold his bar to Δ; Δ only permitted A to buy water and
                   bottled ale; A kept his name on the liquor license and his name
                   remained on the door; A bought cigars and Bovril from π; π did not
                   know that Δ was the true owner, nor that Δ did not have authority to
                   buy; Δ refused to pay π b/c it told A not to buy.
               b. Issue: Whether Δ was liable on the contract given that A did not
                   have actual authority, nor had Δ made manifestations that would
                   lead to a finding of apparent authority.
               c. Application: Buying cigars and Bovril was w/in the power of most
                   bartenders  Inherent Agency
               d. Holding: Δ liable for A’s contract
iv. Ratification (retroactive grant of authority)
        1. Elements of Ratification:
               a. Acceptance of A’s action w/ intent to ratify; AND
                        i. Affirmation may be express or implied
               b. Knowledge of the material circumstances. See Botticello.
        2. Note: cannot ratify an agreement if it would cause a gross injustice.
        3. 2 Key Questions:
               a. What types of acts constitute an affirmation by the principal?
               b. What effect will be given to that affirmation?
        4. Botticello v. Stefanovicz
               a. Facts: H and W owned land jointly; π, who was leasing the land,
                   wanted to buy  negotiated lease w/ option to buy w/ H; W never
                   was a party to the deal; π moved in and made improvements and W
                   had benefited from the rental payments. When π tried to exercise
                   his purchase option W said no deal  π sues to enforce contract.
              b. Issue: Did W ratify H’s contract of sale by standing by and watching
                   π make improvements and accepting his rental payments?
              c. Application: Although W arguably accepted the agreement w/ intent
                   to ratify, she was not apprised of the material circumstances of the
                   deal  she was not informed and could not ratify something in
                   which she was uninformed.
              d. Holding: W’s actions did not constitute a ratification of the contract.
 v. Estoppel (Relies on Apparent Authority Theory  NO apparent authority in fact)
       1. Rule:
              a. A Δ may be estopped from denying agency (even where no P-A
                   relationship ever existed) if:
                        i. Δ’s acts or omissions create an appearance of authority in the
                            purported agent;
                       ii. π reasonably relies on the appearance of authority;
                      iii. to π’s detriment (damage)
       2. Hoddeson v. Koos Bros. (Negligenceapparent authorityharm to π)
              a. Facts: π went to Δ’s store to buy furniture; A appeared to sell π the
                   furniture; A was not an employee, but a crook; π never got her
                   furniture and sued.
              b. Issue: Could π sue Δ under an agency theory
              c. Application: Since Δ’s negligence led to a veil of authority being
                   cast over A, and π had reasonably and detrimentally relied upon that
                   apparent authority, she had stated a claim.
              d. Holding: π could sue; Δ could be estopped from denying an agency
vi. Agent’s Liability on the Contract
       1. In General
              a. 2 Scenarios:
                        i. Disclosed Principal
                                1. Not liable, unless:
                                       a. Clear intent of parties that A be bound; OR
                                       b. A made contract w/o authority
                       ii. Undisclosed Principal
                                1. A treated as though a party to the contract. See
                                       a. third party elects who to sue
       2. Atlantic Salmon v. Curran
              a. Facts: Δ did business as a corp X – buying and selling seafood; Δ
                   actually owned corp Y – never get dba as corp X; Δ entered into
                   contracts w/ π; Δ defaulted; π could not sue corp X (didn’t exist) nor
                   corp Y (no money)  wanted to sue Δ anyway b/c he was the one
                   w/ the $.
              b. Issue: Whether Δ was liable for the contract that π athought it was
                   entering into with corp X.
                      c. Application: Since the principal (corp X) was only partially
                           disclosed (not a valid corp b/c Δ never had corp Y dba corp X 
                           partially disclosed P), Δ (agent) was liable on the contract.
                      d. Holding: Δ liable for corp X’s contract b/c P was only partially
d. Liability of Principal to Third Parties in Tort
       i. Rule:
              1. A principal is liable for the torts (or breaches of contract) of an agent that
                  are conducted within the scope of the agent’s employment. See Humble.
      ii. Test:
              1. Is there an agency relationship (act on P’s behalf and subject to P’s control)?
                      a. No: P NOT liable
                      b. Yes: Step 2
              2. Is A a servant or independent contractor (almost a subquestion re: control –
                  but it’s a defense any Δ would raise)?
                      a. Independent Contractor: P NOT liable. See Hoover (insufficient
                      b. Servant: Step 3
              3. Was A acting within the scope of his employment?
                      a. No: P NOT liable
                      b. Yes: P liable  Agency. See Humble (sufficient control).
     iii. Servant v. Independent Contractor
              1. General Rule: a Principal is liable for the torts of its servants, not for the
                  torts of an independent contractor.
                      a. Real Key = degree of control. Cf. Hoover (P not liable b/c it only
                           had ability recommend certain practices to A, but A could reject)
                           with Humble (liable b/c P had ability to control the day-to-day
                           activities of A)
              2. Humble Oil v. Martin
                      a. Facts: Δ oil company owned gas station and leased it to A;
                           agreement gave Δ the right to give A orders; one of A’s employees
                           left parking-brake off and car rolled down hill and hit someone.
                      b. Issue: Was A an agent of Δ?
                      c. Application: Δ maintained (or had the ability) control over A
                           sufficient that A was considered a servant, not an independent
                      d. Holding: A = servant; Δ = liable.
              3. Hoover v. Sun Oil
                      a. Facts: Similar case involving gas station and a fire started by a
                           cigarette. Difference  Δ oil company only had right to make
                           recommendations, did not have control over day-to-day
                      b. Issue: Was A an agent of Δ?
                      c. Application: Δ did not have ability to control A, so no master-
                           servant relationship established.
                      d. Holding: Δ NOT liable.
              4. Murphy v. Holiday Inn
                      a. Facts: Δ is the corp.; A is a franchisee; π slipped and fell at A’s hotel,
                           sues Δ under an agency theory.
                     b. Issue: Was A an agent of Δ?
                     c. Application: Although the franchise agreement created many
                         obligations between Δ and A, the Δ did NOT have control over the
                         day-to-day operations of the hotel. Thus, no master-servant
                         relationship established.
                     d. Holding: Δ NOT liable.
      iv. Scope of Employment
              1. Liability only attaches to the agent for acts done w/in the scope of
                 employement, not for those outside the scope of employment (frolic)
              2. Two Approaches:
                     a. Total Abandonment
                              i. A must totally abandon his duties. See Clover.
                     b. Foreseeability
                              i. If A’s misconduct is foreseeable, then P liable for that
                                 misconduct. See Bushey.
              3. Ira S. Bushey & Sons v. United States
                     a. Facts: Drunken sailor, returning from shore-leave, damages dock.
                     b. Issue: Was sailor acting w/in the scope of his employment?
                     c. Application: It was foreseeable to the US (Δ) that a sailor would get
                         drunk and do something foolish to the dock while returning to
                         “serve” the master.
                     d. Holding: sailor was acting w/in the scope of his employment b/c the
                         harm was foreseeable.
       v. Liability for Torts of Independent Contractors
              1. General Rule: Principal NOT liable for torts committed by an independent
                     a. Exceptions:
                              i. Principal retained control over the aspects of the work in
                                 which the tort occurred
                             ii. P hired an incompetent IC
                            iii. P hired IC to carry out an activity that is a nuisance per se
                                 (inherently dangerous)
                            iv. Nondelegable duty
              2. Majestic Realty Associates v. Toti Contracting
                     a. Facts: Δ hired IC to demolish a building; IC goofed and damaged a
                         neighboring building.
                     b. Issue: Was Δ liable for IC’s negligence?
                     c. Application: If the activity contracted for was a nuisance per se or
                         inherently dangerous, than the exception would apply.
                     d. Holding: Remanded for determination re: whether the demolition
                         was a nuisance per se / inherently dangerous.
e. Fiduciary Obligation of Agents
       i. In General
              1. Two Duties
                     a. Duty of Care
                              i. Not to do job negligently/recklessly
                     b. Duty of Loyalty
                              i. Examples of Breach of Fiduciary Duty of Loyalty:
                                     1. Kickbacks, bribes or gratuities. See Rst § 388
                              2. Secret profits. See Regem (had to disgorge $ made
                                  through his position despite fact that employer could
                                  not have made)
                              3. Usurped business opportunities. See Singer (had to
                                  disgorge profits for repair jobs redirected from his
                                  employer although employer could not have done
                              4. “Grabbing and Leaving” (using information gained
                                  from agency relationship to former P’s disadvantage).
                                  See Town & Country (ex-employees liable for taking
                                  customer lists from former employer and then using
                                  that list to solicit business to the ex-employer’s
                                      a. Duty to preserve secrets extends beyond the
                                           agency relationship  customer lists, trade
                                           secrets, etc.
                                      b. Law Partner Hypo:
                                                i. Tell clients you’re leaving + invite
                                                    them to come  breach
                                               ii. Leave, then invite clients to come 
                                                    no breach
                      ii. Disclosure
                              1. If A discloses his breach to P  gives P the power to
                                  handle (allows P to ratify/sanction A’s actions)
ii. Duties During Agency
       1. Reading v. Regem (Duty of Loyalty)
              a. Facts: π (soldier) was approached by smugglers and asked to
                  transport goods across a checkpoint; π was paid for assisting the
                  smugglers; the Crown (Δ) discovered the smuggling and took all the
                  money π had been paid by the smugglers.
              b. Issue: Whether Δ could take (was the rightful owner) of the money.
              c. Application: Δ could NOT have made the money on its own since
                  doing so would have been illegal. So, the narrow issue was whether
                  the Δ could take profits from and agent that it could not have made
                  on its own. Court reasoned that since π was only able to make the
                  $ by virtue of his position as Δ’s agent, then the $ should be turned
                  over to Δ  public policy: want to deter that kind of conduct.
              d. Holding: Δ entitled to keep the $
       2. General Automotive Manufacturing v. Singer (Duty of Loyalty)
              a. Facts: Δ worked for π as a consultant; Δ had contract  was
                  supposed to “dedicate” himself completely to work for π (loyalty); π
                  did not have capabilities to do some of the jobs that were referred to
                  them  Δ rerouted those jobs to other shops and made $ for every
                  job he rerouted; π sued to have that profit disgorged.
              b. Issue: Did Δ breach his fiduciary duty of loyalty?
              c. Application: Δ argued that he did not breach duty of loyalty b/c π
                  was unable/unwilling to do the jobs. However, Ct reasoned that Δ
                  was still required to inform π about the jobs so it could decide
                  whether to take at increased cost (and decreased profit) or whether
                                to expand its business to address the demand. Thus, his actions
                                were disloyal.
                            d. Holding: Δ required to disgorge his profits to π (although those
                                profits were more than π would have made on its own  public
                                policy: deterrence)
            iii. Duties During and After Termination of Agency – Grabbing and Leaving
                     1. Town & Country v. Newberry
                            a. Facts: Δ worked for π  house cleaning business; π had spent time
                                and effort to find clients; Δ quit and started own business in
                                competition w/ π; Δ used π’s customer list to solicit business  took
                                clients from π.
                            b. Issue: Did Δ violate his fiduciary duty of loyalty despite the fact that
                                the agency relationship had ended?
                            c. Application: Δ had used information gained from the agency
                                relationship to π’s detriment.
                            d. Holding: Δ breached duty of loyalty  liable
II.   Partnerships
      a. What is a Partnership? Who are the partners?
              i. In General
                     1. Partnership:
                            a. “an association of 2+ persons to carry on as co-owners a business
                                for profit.” See UPA § 6(1)
                            b. Requires an agreement btw the parties.
                     2. Basics:
                            a. Characteristics (Factors in the Test):
                                      i. For profit, unincorporated business
                                     ii. 2+ owners
                                   iii. each owner contributes
                                    iv. share in profit/losses (BIG)
                                     v. share in control/management (BIG)
                            b. BUT:
                                      i. These characteristics may vary b/c the partnership agreement
                                         (contract) may alter those characteristics
                                             1. Examples:
                                                     a. Voting rights + loss obligation is proportional
                                                         to ownership interest  allows one
                                                         person/group to retain control (Law Firm
                                                         management committee)
                                             2. BUT: bending the rules too far can be risky
                     3. Liability:
                            a. partners (individually) are liable for the debts/obligations of the
                     4. UPA & P’ship Agreements:
                            a. UPA acts as the default rules guiding the partnership and its
                                relations  in the absence on a specific agreement, these rules will
                            b. However, parties can alter the default rules w/ a P’ship Agreement:
                                      i. % of income can be altered
                                     ii. loss allocation can be altered
                              iii. duties can be assigned
               5. Formation of a Partnership:
                       a. Requires an agreement
                                i. Agreement may be written (formal) or oral (informal)
                                        1. even a written agreement may not de determinative
                                           of whether or not a partnership exists. See Fenwick.
       ii. Partners v. Employees
               1. Fenwick v. Unemployment Compensation Comm’n
                       a. Facts: π operated beauty shop; C worked as receptionist; C asked for
                          raise, π could not afford so offered to make her “partner”; Terms of
                          written agreement: C got 20% of profits, π bore all losses, π had all
                          control, severable by either party w/ 10 days notice.
                                i. Note: UPA  receipt of profits is prima facie evidence that a
                                   partnership exists.
                       b. Issue: Was C a partner?
                       c. Application: Facts favoring partnership  C got 20% of profits and
                          held the title of “partner.” Facts against partnership  π retained
                          full managerial control and bore all the risk (of losses). Ct reasoned
                          that although the agreement made C a “partner” it was in name only;
                          in fact, π’s sole control and burden of risk made him the only partner
                          (under the default rules).
                       d. Holding: C was not a partner.
      iii. Partnership by Estoppel
               1. Young v. Jones
                       a. Facts: π loans money to bank, who gives money to a SAFIG; SAFIG
                          steals $; PW-Bahamas audited SAFIG and said they were OK;
                          SAFIG and PW-Bahamas are judgment proof; π tries to sue PW-US
                          on the theory that it is a partner w/ PW-Bahamas. The 2 companies
                          are not actual partners, so π has to sue under a p’ship by estoppel
                       b. Issue: Is PW-US a partner by estoppel w/ PW-Bahamas?
                       c. Application: P’ship by estoppel requires some kind of manifestation
                          by PW-US that it was a partner of PW-Bahamas, which π then relied
                          upon. Since PW-US never made any statements/manifestations that
                          π relied upon  no p’ship by estoppel
                       d. Holding: Δ was not a partner by estoppel
               2. Note:
                       a. PW-Bahamas and PW-US both licensed their names from PW-
                          Worldwide (a holding co.)
                       b. π may have succeeded if he had sued PW-Worldwide under an
                          apparent agency theory.
                                i. BUT, see Murphy (Hotel franchise not liable for the torts of
                                   its franchisee  lack of control)
                       c. If π had succeeded against PW-Worldwide it may have been able to
                          assert a claim against PW-US  reverse veil piercing, or maybe
                          inherent agency power (undisclosed principal and PW-US was
                          principal and PW-Worldwide was the agent).
b. Fiduciary Obligations of Partners
        i. Introduction
        1. Duty of Loyalty
                a. Can’t cheat other partners or take personal advantage of
                    opportunities that one comes upon through his position as partner.
                    See Meinhardt.
                b. Disclosure
                         i. If a partner discloses a personal opportunity that arose from
                             his position as a partner (p’ship opportunity), then the P’ship
                             may decide whether or not to act on the opportunity. BUT,
                             decision must be made in good faith.
                        ii. Thus, p’ship may ratify (sanction) the partner’s personal
                             acceptance of the p’ship opportunity
                c. Waiver – RUPA § 103(b)(3)
                         i. Duty of Loyalty may not be discarded by a p’ship agreement,
                             but may specify certain actions that are not considered
                             breaches of duty (prospective waiver), so long as those
                             specified actions are not manifestly unreasonable.
        2. Meinhardt v. Salmon (Duty of Loyalty)
                a. Facts: π and Δ formed partnership to manage a hotel for 20 years; π
                    was somewhat of a silent partner, while Δ was the more visible
                    managing partner. When lease on building expired, the land owner
                    made a deal w/ Δ to develop the land; Δ never informed π of the
                    opportunity; π sued  breach of fiduciary duty of loyalty (took a
                    partnership opportunity for himself)
                b. Issue: Did Δ breach his fiduciary duty of loyalty?
                c. Application: Δ argued that the p’ship ended at 20 years when the
                    lease expired; π argued that the opportunity came to Δ through his
                    position in the p’ship, and therefore, the opportunity righylt
                    belonged to the p’ship  since Δ failed to disclose the opportunity
                    he had breached his FD of loyalty. Ct accepted π’s arg.
                d. Holding: Δ took advantage of a p’ship opportunity w/o disclosing
                    that opportunity to the p’ship.
 ii. After Dissolution
        1. Bane v. Ferguson (Duty of Care)
                a. Facts: π retired from law firm, was entitled to a pension; firm
                    merged w/ another firm  was a disaster and the merged firm
                    folded; π stopped receiving his pension; π sues  mismanagement
                    (breach of duty of care).
                b. Issue: Did Δ owe π a duty of care since he was no longer a partner?
                c. Application: π was not a partner; his relationship w/ the firm was
                    contractual. Since he was not a partner (though he still had an
                    interest in the firm’s continued profitability) the firm did not owe
                    him fiduciary duties. Even if it did owe him a duty  protected by
                    BJR w/ respect to the merger.
                d. Holding: Δ did not owe π fiduciary duties  not liable.
iii. Grabbing and Leaving
        1. Meehan v. Shaughnessy (Duty of Loyalty)
                a. Facts: Δ’s were partners in a law firm, were dissatisfied and planned
                    to leave: Δ’s talked with some employees and asked if they wanted
                    to join; sent out letters, on π firm’s letterhead, inviting clients to join
                         them (did not indicate that clients had choice to stay with π); and,
                         when asked by other partners, denied that they were leaving.
                      b. Issue: Did Δ’s breach their fiduciary duty of loyalty?
                      c. Application: It’s OK to compete, but Δ’s could not use do so while
                         working for π. Since they solicited clients during their employment,
                         on firm letterhead, and w/o indicating that clients had a choice to
                         stay  breach. Also, although Δ’s could have kept their plans to
                         leave to themselves, since other partners asked them, and Δ’s lied 
                      d. Holding: Δ’s breached their fiduciary duty of loyalty
     iv. Expulsion
             1. UPA
                     a. Any partner may be expelled as long as the expulsion is not carried
                         out in bad faith.
             2. Lawlis v. Kightlinger & Gray
                     a. Facts: π was a partner in Δ law firm; π was alcoholic  given one
                         last chance  alcoholic  second chance  straightened up +
                         wanted more $ (restored to previous amount)  another partner told
                         him he was going to be fired  Δ’s executive comm’t fired π  π
                         sued (breach of FD of loyalty)
                     b. Issue: Did Δ breach its FD of loyalty by firing π?
                     c. Application: Although the partner told π he would be fired, that was
                         not a wrongful termination b/c that was just an expression of what
                         partner thought executive comm’t would do. Was actually fired
                         when comm’t terminated him by vote, which was permitted w/in the
                         p’ship agreement  P’ship had a right to terminate him w/ a vote.
                     d. Holding: No breach of FD  Δ not liable.
c. Partnership Property
       i. Rule:
             1. A partner has an interest in the p’ship, individual partners do NOT own the
                 assets owned by the p’ship.
             2. So, when a partner sells their interest in the p’ship  they’re out. See
      ii. Putnam v. Shoaf
             1. Facts: π was a partner in a firm; sold her interest to Δ; later discovered that
                 old accountant had embezzled $ from p’ship (while π was still owner);
                 p’ship won judgment against accountant; π sued Δ for the money they
                 received from the judgment against the accountant  reasoned that the
                 recovery belonged to her since she was the one cheated (Δ would get a
             2. Issue: Could π recover the judgment from Δ?
             3. Application: When π conveyed her interest in the p’ship she conveyed
                 everything she owned  the right to receive $. She did not transfer nor
                 retain any interest in a judgment against the accountant b/c she never owned
                 such an interest  that rt belonged to the p’ship (which would then
                 distribute the judgment in the form of $ to the partners).
             4. Holding: π could not recover from Δ b/c she never had a property interest in
                 the p’ship claim against the accountant.
d. Raising Additional Capital
       i. Couple Approaches:
             1. No Agreement
                     a. Problem of free-riding  not all partners may decide to invest and
                          free-ride if MP gets the $
             2. Managing P can try to sell additional points
                     a. Incentive to invest; otherwise, partner will have his ownership
                          interest in the firm decreased
             3. Penalty Dilution Provision in P’ship Agreement
                     a. Partners obligated to invest additional capital or face dilution if they
                          don’t invest
e. Management Rights
       i. UPA
             1. all partners have equal rights in the management of the partnership
                     a. may be varied by p’ship agreement
                               i. Planning: want to have some sort of procedure re: actions w/
                                  respect to a tie vote (tie-breaker or unanimity)
      ii. Nat’l Biscuit Co. v. Stroud
             1. Facts: Δ and F formed a p’ship to run a grocery store; Δ and F disagreed
                 about whether F should be allowed to buy more bread; Δ told π that he
                 would not be liable for any bread π delivered; F ordered more bread from π;
                 p’ship defaulted and π sued Δ.
             2. Issue: Was the p’ship bound to the contract, given that there was an even
                 split re: whether F had power to enter into the contract, or was F personally
                 liable (acted outside of authority w/ respect to the contract)?
             3. Application: Since the default rules indicate that a majority vote is required
                 to carry out a course of action Δ’s and F’s disagreement did not revoke F’s
                 power to carry out p’ship business. Since Δ failed to remove F’s ability to
                 continue ordering bread, F retained the power to order bread despite Δ’s
                 objections. Since F was an agent of the p’ship  p’ship bound  Δ
                 personally liable (partners are personally liable for the debts of the p’ship).
             4. Holding: Δ personally liable for the bread debt.
     iii. Day v. Sidley & Austin
             1. Facts: Δ had, by a p’ship agreement, vested management control in an
                 executive committee (controlled day-to-day operations); π was a partner and
                 chairman of the Washington office; Δ and another firm decided to merge; π
                 was made co-chairman; Δ decided to close its office and move to the
                 merged firm’s Washington office; π unhappy w/ loss of prestige and the
                 move  sues for fraud, breach of K, and Breach of FD.
             2. Relevance: Illustrates that partners are free to make contracts to change the
                 dynamics of the p’ship relationship  Δ had given all of its managerial
                 control to the executive committee and that was acceptable.
f. Dissolution
       i. Terminology
             1. UPA = Dissolution
                     a. When a partner leaves/joins, then old p’ship dissolves and is
                          immediately reformed w/ the current members
             2. RUPA = dissociation
                     a. P’ship continues but w/ or w/o the joining/leaving partner
      ii. Phases of Demise of a P’ship:
        1. Dissolution – change in p’ship relationship; partners agree to stop working
        2. Winding Up – process of shutting down; taking care of unfinished business
        3. Termination – the end
iii. Causes of Dissolution
        1. Natural (e.g. permitted expulsion, permitted departure)
        2. Wrongful – in violation of p’ship agreement
        3. Extraneous (e.g. bankruptcy)
iv. Buyout Agreements
        1. Major Issues:
                a. Who may departing partner sell to?
                b. May departing partner force remaining partner(s) to buy his interest?
        2. Planning Issues:
                a. Provisions to Consider:
                         i. Rt of First Refusal
                        ii. Compulsory buy-out
                       iii. Restrictions on Sale
                       iv. Rt to Purchase on death/dissociation/disability
                b. Buyout Price:
                         i. Appraisal
                        ii. Formula
                       iii. Book value
                       iv. Pre-arranged price
        3. G & S v. Belman
                a. Facts: π and N are general partners; N becomes a cocaine addict and
                   engages in all kinds of outrageous behavior; π sues N for dissolution
                   of the business; While suit in progress, N dies  interest transfers to
                   his heirs/assigns (Δ); π then tries to exercise its buy-out option
                   (which arose when N died); Δ argues that the suit = wrongful
                b. Issue: Can π exercise its buyout option or did the filing of the
                   dissolution suit = wrongful dissolution.
                c. Application: The p’ship agreement did not specify how the p’ship
                   could be terminated  UPA governs  allows ct to dissolve for
                   cause. Since court had not made a determination, no dissolution had
                   occurred. Also, since π had grounds to file for dissolution its filing
                   of the claim did NOT equal a wrongful dissolution. Thus, since the
                   p’ship was still in existence at N’s death, π was permitted to exercise
                   its contractual right to purchase N’s interest at his death.
                d. Holding: No wrongful dissolution from filing suit; π could exercise
                   its buyout option.
 v. Law Firm Dissolution
        1. UPA
                a. $ made while wrapping up firm business belongs to the firm 
                   distributed accordingly. See Jewel.
                         i. BUT, p’ship agreement can specify different way to handle
                            distribution of old clients and their business. See Meehan
                            (clients could be taken if departing partner paid a “fair
                    2. Jewel v. Boxer
                            a. Facts: 4 partners in law firm; no p’ship agreement; split evenly into
                                2 firms; π sues Δ for profits earned by Δ on clients (of the joint firm)
                                that Δ continued to work for post-dissolution.
                            b. Issue: Whether π was entitled to profits made by Δ, from clients of
                                the joint firm, that Δ took with them upon dissolution.
                            c. Application: The clients were from the old firm, so the $ made by
                                Δ’s (and vice versa w/ respect to clients π took) belonged to the old
                                firm and was to be distributed accordingly.
                            d. Holding: π was entitled to profits made by Δ in wrapping up old
                                firm business  Δ had fiduciary duty to handle competently (not
                                that it was really needed – wants to keep good client relations).
                    3. Meehan v. Shaughnessy
                            a. Facts: P’ship agreement provided that clients could be taken if old
                                firm paid a “fair charge”  no on-going fiduciary duty like in Jewel.
                            b. Issue: What about charge for clients taken unfairly?
                            c. Application: Since π had breached its fiduciary duty in removing
                                some of the clients (not informing them of their option to stay), then
                                allowing the p’ship agreement to govern (fair charge) would be
                                unjust. Thus, the appropriate remedy for clients taken in breach of
                                FD would be disgorgement.
       g. Limited Partnerships
              i. Rule
                    1. A limited partner, unlike a general partner, is not personally liable for the
                        debts of the p’ship. See Holzman. However, if a limited partner 1) exerts
                        control (like a GP), and 2) a party relies on the LP’s conduct  LP liable.
                        See Holzman.
             ii. Holzman v. De Escamilla
                    1. Facts: 1 GP and 2 LPs; P’ship went BK  trustee sued LPs to hold them
                        liable for debts  theory = no longer LPs. Key facts: LPs had overruled
                        GP on an occasion, LPs forced GP to resign as manager, and GP could not
                        withdraw $ w/o LP approval
                    2. Issue: Did the LPs, by their actions, become GPs?
                    3. Application: Their actions demonstrated that they had exerted enough
                        control to be held GPs.
                    4. Holding: LPs liable for p’ship debts.
III.   Preliminary Corporate Issues – Nature of Corporations
       a. Promoters and the Corporate Entity
              i. Rules:
                    1. De Facto Corporation
                            a. An improperly incorporated corp will be treated as a corp if:
                                      i. Tried to incorporate in good faith;
                                     ii. Had a legal right to do so; AND
                                    iii. Acted as if a corporation
                    2. Corporation by Estoppel
                            a. An entity will be treated as a corp if person dealing with the entity:
                                      i. Thought entity was a corp all along; AND
                                     ii. Would be unjustly enriched if now allowed to argue that
                                         entity was not a corporation
              3. Sub-Rule:
                     a. If Ct holds that entity is a corp  promoter NOT liable (limited
              4. Exception: If rights would be substantially prejudiced. See Camcraft (no
                 prejudice where company incorporated under a different country’s laws
                 than it had represented in the contract)
      ii. Promoters
              1. Defined
                     a. A person that acts as an agent of the business prior to its
                     b. Issues:
                              i. Once business incorporates, does it become a party to the
                                      1. Yes, but only if it adopts the contract (explicit or
                                           implicit  accept benefits)
                             ii. Once the business incorporates is the promoter free from
                                  liability if corp breaches?
                                      1. Not automatically, requires other party to release
                                           promoter from liability
                            iii. If business does not incorporate is promoter liable on the
                                      1. Yes, absent an agreement to the contrary
                                      2. “corp” may still be held liable under partnership law
                                            although not a corp, may argue that they were
                                           partners  liability via agency law
              2. Fiduciary Duties
                     a. Promoters owe fiduciary duties (care and loyalty) to the corp they
     iii. Southern-Gulf Marine Co. v. Camcraft
              1. Facts: π’s promoter entered into an agreement w/ Δ; π was not yet a corp 
                 represented that it would be a corp of one state, but actually incorporated in
                 a foreign country; Δ tried to back out of contract; π sued to enforce the
              2. Issue: Could Δ deny the existence of the contract?
              3. Application: Δ believed that π was going to be a corp, and would be
                 unjustly enriched if permitted to argue that π was not a corp. Furthermore,
                 no prejudice was shown to stem from the fact that π incorporated in a
                 different country.
              4. Holding: contract was enforceable  Δ breached
b. Limited Liability
       i. In General
              1. The individual owners of a corporation are not liable (individually) for the
                 debts of the corporation. See Walkovszky.
                     a. Piercing the Corporate Veil (See Sea Land)
                              i. A creditor of a corp may reach the assets of the individual
                                  shareholders if:
                                      1. Unity of interest and ownership
                                                a. Disregard of Corporate Formalities
                                                b. Undercapitalization
                                         c. Commingling of corp + personal funds
                                         d. Treating corp’s assets as one’s own
                                2. Refusal to hold individual SH liable would sanction
                                    fraud or promote injustice
                                         a. Fact that π may be unable to collect full
                                             judgment is NOT sufficient. See Sea Land.
                                         b. But, in the tort context, injustice prong may
                                             be automatically satisfied. See In re Silicon
                                             Breat Implants.
                        ii. Distinction: Contract Creditor v. Tort Creditor
                                1. Contract: can negotiate terms and investigate
                                    beforehand  adjust for risk
                                2. Tort: cannot negotiate or investigate  Ct more
                                    likely to PCV in this case
                b. Enterprise Liability
                         i. Where “sister” corporations are owned by a single source
                            and the owner ignores the formalities btw each of the “sister”
                            corps (i.e. treats all of the corps as one). See Walkovszky.
                c. Planning
                         i. To avoid PCV problem, owner should make sure that the
                            corporate formalities are observed and avoid
 ii. Walkovszky v. Carlton
        1. Facts: Δ owned 10 cab corps, each owning two cars and carrying the
            minimum amount of insurance; each cab corp had little assets; one cab
            injured π  insurance did not cover the judgment nor did the corp’s assets;
            π sued Δ  piercing corp veil and enterprise liability (suit against the other
            corp’s insurance  not valid b/c their insurance only covered their cabs).
        2. Issue: Whether Δ was personally liable for cab corp’s debt
        3. Application: π had not pled that funds were commingled, nor that
            formalities were disregarded, nor that Δ had treated the corp’s assets as his
            own; the fact that Δ had broken his fleet into 10 corps was insufficient to
            pierce the corp veil.
        4. Holding: Δ not personally liable  NO veil piercing
iii. Sea Land Services, Inc. v. Pepper Source
        1. Facts: Δ defaulted on contract w/ π; Δ owned several corps  funds were
            commingled, the corps were undercapitalized, Δ used the corps assets to
            pay his personal debts, no corp formalities were observed; also owned 1
            corp jointly w/ another, but still used assets from that corp to pay personal
        2. Issue: Could π pierce the corp veil to reach Δ’s personal assets and the
            assets in his other corps?
        3. Application: Since formalities were disregarded, funds were commingled, Δ
            treated corp assets as his own, the Ct held that unity of interest prong was
            met. Also, if π were not allowed to PCV, then Δ would be unjustly enriched
            and a semi-fraud would be sanctioned by allowing Δ to escape liability.
        4. Holding: π could PCV  reach Δ’s personal assets and those in the other
iv. In re Silicon Gel Breast Implants Products Liability Litigation
              1. Facts: Δ owns a subsidiary corp that produced silicon breast implants; π
                 class was harmed by the fake boobs  try to PCV to reach Δ’s assets; Δ
                 had all kinds of control over subsidiary, including the fact that the
                 subsidiary was basically controlled by Δ’s executives and subsidiary
                 required Δ’s approval to do anything.
              2. Issue: Could π PCV?
              3. Application: Unity of interest was met due to the control factors  Δ
                 treated subsidiary and its assets as its own. Injustice prong met
                 authomatically in the tort context.
              4. Holding: π could PCV.
c. Role and Purpose of Corporations
       i. Ultra Vires Doctrine (Waste)
              1. Actions taken by officers/directors that are outside of their power or
                 contrary to a business purpose
                     a. Cf. Barlow (donation to Princeton would help recruiting education
                         workers and give corp better reputation w/ community); Wrigley
                         (corp could forego potential higher revenue from night games b/c of
                         the legitimate concerns about the negative impact that lights would
                         have on the neighborhood) with Ford (desire to ensure all people
                         had a job was contrary to the corp’s purpose of making money).
      ii. A.P. Smith v. Barlow
              1. Facts: Δ corp gave $ to Princeton; π sued on the ground that making a
                 donation to a school was beyond the D&O power and contrary to a business
                 purpose  to make money!. Δ argued that donation to school was w/
                 power and helpful to business b/c it would make corp more attractive to
                 graduates and help build a positive image w/ community.
              2. Issue: Whether the donation to Princeton was ultra vires
              3. Application: Although the purpose of a corp is to make money, how money
                 is made is left to discretion of D&O. Thus, where D&O believe that a small
                 donation to a university will further the corp’s business interests, then that is
                 an acceptable use of power.
              4. Holding: Donation was NOT ultra vires
     iii. Dodge v. Ford
              1. Facts: Δ refused to issue dividends one year for two reasons: 1) was saving
                 money to rebuild a plant, and 2) was trying to ensure corp had enough
                 money so that it could provide jobs for as many Americans as possible; π
                 wanted dividends, sued on ground that objectives were ultra vires.
              2. Issue: Whether the two reasons for denying dividends were ultra vires
              3. Application: The first reason – saving for the plant construction – was a
                 legitimate reason not to pay dividends (at least so far as that cost was
                 concerned) b/c it was legitimate business concern  protected by BJR.
                 Second reason, however, was not consistent w/ the corp’s goal of achieving
                 profits for SHs  was ultra vires. BJR did not protect.
              4. Holding: Goal of trying to make jobs for all people = ultra vires
     iv. Shlensky v. Wrigley
              1. Facts: Cubs were losing $; π argued that loss was due to fact that team did
                 not play night games; Δ refused to do night games b/c he felt: 1) baseball
                 was a sport meant to be played during the day (illegitimate – See Ford), and
                        2) that the lights that were needed to play night games would be harmful to
                        the neighborhood  harmful to the team/business.
                    2. Issue: Whether the denial to play night games, though perhaps financially
                        unwise, was an ultra vires decision
                    3. Application: Concern about effect of lights on neighborhood and the
                        potential harmful side-effects upon the team/business were legitimate
                        business concerns  BJR protects
                    4. Holding: Denial to play night games were permissible
IV.   The Duties of Officers, Directors, and Other Insiders
      a. Duty of Care
            i. Business Judgment Rule
                    1. 2 Conceptions:
                            a. Abstention Doctrine
                                      i. Court will NOT review BOD decisions
                                     ii. UNLESS:
                                              1. fraud
                                              2. illegality
                                              3. self-dealing (Duty of Loyalty)
                                              4. Gross Negligence/Recklessness (uninformed)
                                    iii. Significance  if an exception is shown, then still have to
                                          show a breach of the duty of care
                                              1. Ex: Fed Ex trucks getting ticketed (illegal), but
                                                  probably a wise business decision  not liable.
                                                  Whereas, if BJR=std of liability, then liable b/c it’s
                            b. Standard of Liability
                                      i. NO liability for negligence
                                     ii. Liability requires:
                                              1. fraud
                                              2. illegality
                                              3. self-dealing (Duty of Loyalty)
                                              4. Gross Negligence/Recklessness (uninformed)
                    2. BJR protects D&O for simple negligence (imprudent business decisions).
                        See Kamin.
                    3. BJR does NOT protect if:
                            a. D/O makes a decision that he does not honestly believe is in the
                                 corp’s best interest
                            b. D/O makes decision that is uninformed (failure to inform itself of
                                 “all material info reasonably available to them”). Protects judgment,
                                 so if there is no judgment made, then BJR cannot protect. See Van
                                      i. Reports
                                              1. D/Os are entitled to rely on reports. But, if the report
                                                  does not relay the facts upon which conclusions are
                                                  being made, the party selected to make the report (e.g.
                                                  an “expert”) was negligently selected, or is made by
                                                  someone on a matter in which he lacks competence,
                                                  then that reliance is unreasonable.
                            c. D/O has a conflict of interest (Duty of Loyalty)
 ii. Test:
        1. Does the BJR shield the Δ’s decision?
               a. Yes: NOT liable. See Kamin (informed decision); Brehm (same)
               b. No: Step 2. See Van Gorkom (uninformed); Caremark (illegal)
        2. Did Δ (D/O) breach his duty of care?
               a. No: NOT liable. See Caremark (reasonable efforts taken)
               b. Yes: Step 3
        3. Did BOD cure the defect?
               a. Yes  BOD went back afterwards and fixed: NOT liable
               b. No: Step 4. See Van Gorkom (ineffective amendments)
        4. Did SHs ratify the decision?
               a. Yes: NOT liable
               b. No: Step 5. See Van Gorkom (SHs cannot ratify if uninformed)
        5. Affirmative Defense: Was the transaction “entirely fair”?
               a. Yes: NOT liable. See Cinerama (no damages; deal was good)
               b. No: Liable
iii. Kamin v. American Express
        1. Facts: Δ took a loss on an investment in another co.; Δ wanted to get rid of
           loss, so distributed the shares as a dividend; π argues that Δ would have
           saved money if it sold the shares and wrote off the loss in tax filings; Δ,
           however, was concerned about the effect π’s plan would have on reported
           net income and, therefore, the stock price; Δ considered π’s proposal and
           rejected it; π sued for breach of duty of care  imprudent decision
        2. Issue: Did Δ breach its duty of care?
        3. Application: π did not allege fraud, illegality, nor self-dealing. Rather, π
           alleged that decision was negligent. Since the Δ carefully considered the
           proposal, the decision was not hasty nor uninformed. Thus, the BJR rule
           applied and shielded the Δ from liability.
        4. Holding: BJR applies  Δ not liable
iv. Smith v. Van Gorkom (Uninformed Decision  Attacking Process)
        1. Facts: T was profitable corp, but had tax credits that it couldn’t use; Δ
           (BOD) investigated several options re: how to make more $; investigated
           management buy-out angle  CFO thought it could get a loan for MBO at
           a price of $55/share (that’s the max price Δ would have been able to get a
           loan for; NOT the value of the corp); CEO went to P and offered to sell him
           the corp for $55/share, P quickly agreed; Δ asked for rt to try to sell to other
           bidders for higher price, P agreed but asked for a lock-up of 1M shares
           (guaranteed at least $17M profit – but would also make it harder for Δ to
           sell to another bidder  total purchase price would go up by $55M+ b/c of
           the extra 1M shares); window of opportunity to sell to another bidder was
           short and restricted (not a realistic chance to get another bidder); Δ accepted
           the terms after a 2 hour meeting  later realized terms were bad, tried to
           modify, but changes were not very helpful and made w/o looking over the
           new deal; SHs voted to approve deal, but were not told how the $55/share
           price was determined (i.e. uninformed).
        2. Issue: Did Δ breach its duty of care?
        3. Application: The decision was uninformed b/c there was no basis for the
           purchase price, decision was made in 2 hours, when a simple glance would
           have probably warned them about the problems w/ the deal  uninformed
                BJR does not protect. Also, their attempts to cure were not helpful b/c
               the amendments to the deal were crap and made without really looking
               them over. Finally, the SHs did not ratify the decision b/c their vote was
            4. Holding: Δs breached their duty of care.
  v.    Cinerama v. Technicolor
            1. Introduces the “Entire Fairness” Defense
                   a. If transaction is “entirely fair” then there are no damages  Δ NOT
 vi.    Brehm v. Eisner
            1. Facts: π brought suit against old board re: Ovitz’s compensation package
               and against new board re: no-fault termination; Δ argues that BJR protects
               against claim 1 b/c they relied on an expert (compensation consultant), and
               against claim 2 b/c, although there were facts supporting termination for
               cause, that would have required litigation, $, and time  was a business
            2. Issue: Whether Δ breached its duty of care
            3. Application: Ct agrees that Ovitz compensation package was important info
               that was reasonably available to Δ, but that Δ did not breach its duty b/c it
               relied upon an expert. There were no allegations that expert was
               disbelieved nor negligently selected  Δ were entitled to rely on his report
                BJR applies. As to the second claim, Ct agrees that Δ could have
               pursued termination for cause, but that the decision not to was a business
               decision b/c of the cost/risk of pursuing litigation.
            4. Holding: BJR applies  Δ NOT liable
vii.    Francis v. United Jersey Bank (Failure to Stay Informed)
            1. Facts: Δ was Director of corp, along w/ her 2 dishonest sons; Δ drank, was
               old, and completely abandoned her duty as director; sons embezzled $ (in
               the form of loans); corp went BK; BK trustee (π) sued Δ, on behalf of
               creditors, for breach of duty of care; Δ argues that BJR applies to the loans
               sons took out b/c it was an imprudent business decision.
            2. Issue: Did Δ breach her duty of care?
            3. Application: BJR did not apply b/c Δ never made any judgments. She
               completely neglected her responsibility as a Director  lack of due care w/
               respect to process. As a Director she had a duty to be reasonably informed
                failed to do so  breached duty of care.
            4. Holding: No BJR  breached duty of care  Δ liable
viii.   In re Caremark
            1. Facts: Δ was a healthcare provider, subject to anti-referral payments law;
               some violations of the law were uncovered  Δ settled litigation w/ gov’t;
               π sued derivatively, alleging harm to the corp  Δs failed to monitor what
               was going on w/ reps.
            2. Issue: Did Δ breach its duty of care?
            3. Application: BJR did not apply b/c the claim was that Δs failed to monitor
               what was going on (i.e. no judgment – See Francis). However, no breach
               of duty of care b/c Δ was not required to monitor day-to-day operations, and
               there was no evidence that Δ completely failed to exercise oversight.
            4. Holding: No breach
 ix.    Planning
             1. If you do screw up and breach duty of care, can still fix:
                     a. Get an informed BOD to fix/approve the deal; OR
                     b. Get the SHs (informed) to approve the deal
             2. Affirmative Defense
                     a. Could always try to claim that the deal is fair
b. Duty of Loyalty
       i. Test:
             1. Is there a conflict of interest? (abuse of power as D/O to benefit self)
                     a. No: transaction valid
                     b. Yes: Step 2
             2. Has an informed AND disinterested BOD approved/ratified?
                     a. Yes: transaction valid
                              i. See infra Quorum Issues
                     b. No: Step 3
             3. Has the transaction been approved by informed SHs?
                     a. Yes: transaction valid. See Gottlieb.
                     b. No: Step 4
             4. Is the transaction intrinsically fair to the corp?
                     a. Yes: transaction valid
                     b. No: transaction INVALID  voidable by corp
      ii. Quorum Issues:
             1. DGCL § 141(b):
                     a. Quorum (number of directors required for vote to be valid) requires
                         that a majority of the directors be present at the vote.
             2. DGCL § 144(a)(1)
                     a. A valid vote requires that a majority of the disinterested directors
                         approve of the action
             3. Thus, there can be a sufficient number of directors present to make a
                quorum, but if there are an insufficient number of disinterested directors
                that approve of the action, then the vote is invalid.
                     a. How to solve  conference call. See DGCL § 141(i).
     iii. Planning
             1. Where a course of action has been undertaken that involves a conflict of
                interest, there are several ways to cure the problem:
                     a. Show that the deal is intrinsically fair. See Bayer.
                     b. Get an informed and disinterested BOD to approve/ratify the action.
                     c. Get the action approved by informed SHs.
     iv. Directors and Management (D/O)
             1. Bayer v. Beran
                     a. Facts: Δ (BOD) decided to run a radio ad program; CEO/Director
                         consulted his wife, who made recommendations, ad agency accepted
                         her advice; Wife was also a singer and was offered a job to do some
                         of the radio ads  pay was reasonable and she received no special
                         prominence; Δs did not know that CEO’s wife was one of the
                         singers until after it had approved of the radio campaign; π asserts
                         that Δ breached its duty of loyalty b/c the campaign was designed to
                         further the career of the CEO’s wife (i.e. self-dealing). Also claimed
                         that action was ultra vires b/c BOD never approved of the campaign
                         by formal board resolution.
            b. Issue: Whether Δ breached its duty of loyalty.
            c. Application: There was a conflict of interest b/c Δs had hired CEO’s
                wife as part of an advertising campaign. The action was not ratified
                by an informed BOD b/c they did not learn that the wife had been
                hired until after they had decided to embark on the ad campaign.
                Furthermore, the SHs never voted on the matter. However, the deal
                was fair to the corp  wife was not paid excessively, she was only
                one of several singers hired, the program was carefully selected and
                successful (i.e. corp got its $ worth). Thus, the deal was intrinsically
                      i. Although BOD never formally adopted, it was agreed upon
                         by a majority informally and, in any case, was arguably
                         ratified by acceptance of the benefits.
            d. Holding: Δ did not breach duty of loyalty.
      2. Lewis v. S.L. & E.
            a. Facts: Δs were BOD of a SLE (owned real property that it leased to
                LGT); Δs were also BOD of LGT (tire dealership); Δs entered into
                agreement w/ other shareholders of SLE, that if they did not own
                LGT stock, they would have to sell their SLE stock. LGT’s lease
                expired on the property; Δs never pursued renegotiating a lease b/c
                that would have cost LGT money and Δs basically viewed SLE as
                existing for LGT’s benefit. When agreement ripened and non-LGT
                owning SLE SHs (π) were supposed to sell, π brought derivative
                action  alleging that Δs had harmed the value of SLE stock by
                failing to renegotiate a lease b/c it was in their personal benefit not
                to do so.
            b. Issue: Did Δs breach their duty of loyalty?
            c. Application: Clearly a conflict of interest b/c Δs had a personal
                interest in not renegotiating the lease on behalf of SLE. Also, was
                not ratified by a disinterested board, nor was it ratified by the SHs.
                Finally, the deal was not fair.
            d. Holding: Δs breached their duty of loyalty.
v. Corporate Opportunities (D/O/Maj SH)
      1. Rule
            a. A D/O/Maj SH breaches his fiduciary duty of loyalty if he
                misappropriates a corporate opportunity. See Guth; Broz.
      2. What is a corporate opportunity?
            a. Tests:
                      i. Historical (Interest/Expectancy/Necessity)
                              1. Corp has a real/vested interest in the opportunity (i.e.
                                 has a better right than others)
                              2. Corp has an expectancy that it will receive the
                                 opportunity (will come to corp by natural course)
                              3. Corp needs the opportunity to continue its existence
                    ii. Delaware (See Broz)
                              1. corp is financially able to take opportunity
                              2. w/in corp’s line of business
                              3. corp has an interest or expectancy
                              4. embracing opp would create conflict btw corp and
                                 director’s self-interest
                    iii. Line of Business
                              1. Capable of pursuing the opportunity; AND
                              2. its w/in corp’s line of business
                    iv. Fairness
                              1. Would it be unethical for the D/O/Maj SH to take the
                                 opportunity from the corp?
                     v. Hybrid
                              1. Combine aspects of all the Tests.
             b. Defenses:
                      i. Source
                              1. Opportunity came to D/O/Maj SH personally
                                 (possibly due to reputation), not through his position
                                 w/ corp. See Broz.
                     ii. Incapacity
                              1. Corp is unable to take advantage of the opportunity
                                 (lack of resources). See Broz.
                    iii. Disclosure & Approval
                              1. informed BOD or SHs can ratify the action
      3. Broz v. Cellular
             a. Facts: Δ was on BOD of π; learned of an opportunity to buy a
                 license in a non-competing area; opp was offered to Δ, not to π;
                 mentions to CEO/D and another D, both agree that π was not
                 interested in the opportunity; π was experiencing financial
                 difficulties and could not have afforded to pursue; Δ pursues license;
                 another corp competes; Δ wins license, other corp buys π, then sues
                 Δ for taking a corp opp.
             b. Issue: Did Δ misappropriate a corp opp?
             c. Application: opportunity came to Δ in his individual capacity, not as
                 a Dir of π; π was incapable of taking advantage of the opp (no
                 interest); opp was not offered to π b/c of its financial condition (no
                 expectancy). Thus, this was not a corp opp.
             d. Holding: Δ did not breach his duty of loyalty by misappropriating a
                 corp opp.
vi. Dominant Shareholders (Maj SH)
      1. Rules:
             a. SHs, acting as SHs, owe each other no fiduciary duties
             b. But, Maj SH can owe fiduciary duty to the Min SHs when it
                 conducts business w/ the corp (since it can control the BOD) and
                 there’s a potential for self-dealing (i.e. using power as Maj SH for
                 personal gain at Min SHs expense). See Sinclair (Δ failed to enforce
                 contractual rights b/c it was also Maj SH in the corp that breached
                 the contract  Δ benefits at Min SHs expense); Zahn (redeemed
                 Min SHs stock w/o telling them their plans to liquidate and
                 capitalize on increased value  Min SHs redeemed, rather than
                 convert, and Δ received a windfall)
                      i. Maj SH will have to show that the deal is intrinsically fair 
                         absolute defense
               ii. Can also get approval/ratification from disinterested and
                   informed BOD (though usually not helpful unless there are
                   Min Directors); OR
              iii. Can get approval from the disinterested and informed Min
                       1. However, this only shifts burden on π to show that
                           the transaction was intrinsically unfair.
2. Sinclair Oil v. Levein
      a. Facts: Δ owned 97% of Sinven’s stock; π (Min SH) sues derivately,
           alleging three causes of action: 1) Δ breached its duty of loyalty by
           forcing Sinven to pay out excessive dividends (i.e. self-dealing), 2)
           Δ misappropriated corp opp  no expansion policy, and 3) Δ
           breached its duty of loyalty by refusing to enforce a breached
           contract between π and another of Δ’s subsidiaries.
      b. Issue: Did Δ breach its duty of loyalty?
      c. Application:
                i. π failed to allege any self-dealing w/ respect to the first claim.
                   Since Δ had paid equal dividends, irrespective of whether the
                   SH was Maj or Min, then all π had really claimed was an
                   imprudent business decision (excess dividends = waste).
                   Thus, this was a duty of care claim, and the BJR applied  π
                   failed to overcome BJR.
               ii. There were no corp opp that Δ usurped  π failed to allege
                   that any opps were presented to Sinven that Δ took for its
                   own advantage. Thus, no expansion policy was subject to
                   BJR  π failed to overcome BJR.
              iii. The failure to enforce the breach of contract did allege self-
                   dealing, since Δ would have been harmed by enforcing
                   Sinven’s rights. Action was not intrinsically fair, nor
                   approved by disinterested BOD nor the disinterested SHs.
                   Thus, Δ had breached its fiduciary duty of loyalty.
      d. Holding: Only the failure to enforce Sinven’s contract rights was a
           breach of the duty of loyalty.
3. Hypo
      a. XYZ owns 90% of ABC oil co (Texas)
      b. XYZ learns of an oil opportunity in Alaska
      c. XYZ uses it power to liquidate ABC and pays out equal dividends
      d. XYZ then uses the money used from liquidation to pursue Alaska oil
      e. NO breach of fiduciary duty of loyalty
                i. All SHs received equal dividends  BJR (no self-dealing)
               ii. No corp opp usurped from ABC (came to XYZ)
4. Zahn v. Transamerica
      a. Facts: Δ was Maj SH of Class A and B stock; A = 2x liquidation
           preference, convertible to B; B’s could redeem at $60/share +
           unpaid dividends; Δ learned that its tobacco inventory went way up,
           planned to liquidate and make huge profit, so Δ used its control to
           redeem the Class A stock (they’re bought out – no longer SHs); π’s
           take the redemption value and do not elect to convert to B; Δ then
                         liquidates and makes huge profit; π sues for breach of duty of
                     b. Issue: Did Δ breach its duty of loyalty?
                     c. Application: Ct holds that Δ, if it were impartial, would have
                         disclosed the info re: increase in tobacco price. This was a conflict
                         of classes case, and the Ct held that the BOD failed to act
                         impartially toward each class; rather, the Δ used its power to its
                         personal benefit.
                     d. Holding: Δ liable  breach of duty of loyalty
     vii. Ratification (i.e. SH approval)
             1. Fliegler v. Lawrence
                     a. Facts: Δ was president of corp; bought land and offered to sell to
                         corp, but he and BOD agreed that corp could not afford at the time;
                         Δ and BOD formed another corp and transferred the land to that
                         corp; Δ and BOD then entered into an option agreement between the
                         2 corps to purchase the land (Δ was on both sides of the transaction
                         = conflict of interest); deal was approved by SHs; when BOD
                         exercised option, π sued.
                     b. Issue: DidΔ breach his duty of loyalty or did the SHs ratify the
                     c. Application: SHs did not ratify the agreement b/c the majority of the
                         approval was by the interested SHs (i.e. the BOD); there was
                         insufficient evidence to indicate that a majority of the disinterested
                         (i.e. minority) SHs had approved. However, Δ did establish that the
                         deal was intrinsically fair.
                               i. Quirk re: DGCL § 144(2): does not confer immunity on D/O
                                  if SHs ratify. It simply provides that a transaction may not
                                  be invalidated solely b/c a D/O is involved  still subject to
                                  fairness inquiry.
                     d. Holding: Δ did not breach duty of loyalty
c. Disclosure and Fairness
       i. Derivative Actions
             1. Eisenberg – who suffered the most direct injury?
                     a. Corporation: Derivative
                     b. Shareholder: Individual
             2. Standing:
                     a. Must have been SH at time of alleged wrongdoing
                     b. Must be a fair/adequate representative (conflict of interest?)
             3. Hurdles:
                     a. Bonding – required to post security for corp’s litigation costs. See
                     b. Demand – must first demand BOD to pursue suit (usually against
                         itself). Excused if reasonable doubt that:
                               i. BOD is disinterested/independent; AND
                              ii. Transaction was valid exercise of business judgment
                     c. Special Litigation Committees – the untainted BODs  Cts may
                         only scrutinize process, not substance (BJR). If SLC denies, then π
                         can pursue in Ct – Ct can look at:
                          i. Whether SLC acted independently, in good faith, and w/
                             reasonable investigation; AND
                         ii. Whether the dismissal passes the BJR
 ii. Securities Act of 1933
        1. Regulates Primary Market
        2. Purpose:
                 a. Disclosure to investors
                 b. Prevent fraud
iii. Securities Exchange Act of 1934
        1. Regulates Secondary Market
        2. Issues:
                 a. Securities Fraud
                 b. Insider Trading
                 c. Short-Swing Profits
                 d. Regulate Proxy Voting
                 e. Regulate tender Offers
        3. Section 10(b): Prohibits the use of fraudulent or deceptive practices in the
             purchase or sale of a security
iv. Definition of a Security
        1. 3 Kinds of Security:
                 a. Stock. See Landreth (stock is always a security).
                 b. Investment Contract: (See Howey; Monsanto)
                          i. Investment of $
                         ii. In a common enterprise
                                 1. Horizontal Commonality
                                         a. Pooling btw investors – share in profit/loss
                                         b. Sufficient to satisfy commonality req.
                                 2. Vertical Commonality
                                         a. Investor and promoter are in common scheme
                                              – investors fortunes linked w/ promoters
                                         b. Circuit split as to whether this alone suffices
                       iii. With an expectation of profit
                        iv. Solely from the efforts of others
                                 1. Reality: solely is more like mostly
                 c. Any interest commonly known as a “security”
                          i. Same as investment contract. See Monsanto.
        2. Examples:
                 a. Public Corp: quintessential case  stock
                 b. Close Corp: stock. See Landreth.
                 c. Partnership (Investment Contract):
                          i. No, P’s have control (NOT solely from effort of others)
                         ii. Might be occasion where some P’s are so deprived of control
                             that it looks like a security  p’ship agreement
                 d. LP (Investment Contract):
                          i. Yes, LP has no control (effort of others)
                         ii. No, LP may exercise control – have to look at facts
        3. Great Lakes v. Monsanto
                 a. Facts: Δ created an LLC to do some work for it; LLC was basically
                    an independent business (employees and all) w/ ownership being
                 held in “shares” that were owned entirely by Δ; Δ sold the LLC to π;
                 something went wrong w/ LLC and π sued Δ for federal securities
                 fraud (easier to plead/prove than state C/L fraud claim); Δ moved to
                 dismiss on ground that LLC was not a “security” w/in the meaning
                 of Rule 10b-5.
              b. Issue: Whether an LLC is a “security”
              c. Application: Not stock b/c it’s not a corp. Had to examine as an
                 investment contract. Ct held that there was no common enterprise
                 b/c π was the only interest-holder (no horizontal commonality) and
                 Δ had sold its entire interest, so no vertical commonality. Also, Ct
                 held that expected profits would not come solely from the efforts of
                 others. Although the LLC had employees that would do all the work,
                 π retained complete control over management and could therefore
                 directly affect the profits it would receive from the LLC. Bottom
                 line: this was the sale of a business, not a security.
              d. Holding: LLC was not a security  fed securities fraud claim
v. Registration Process
      1. In General
              a. Whether you’re dealing w/ a security is important b/c securities
                 must be registered before sold  liability otherwise
              b. Also, registration is costly and delays when investment opp can be
              c. Exempt Securities v. Exempt Transactions
                      i. Security – never needs to be registered (rare)
                     ii. Transaction – exempt only for this deal
                              1. Private Placement:
                                     a. Number of offerees and their relationship to
                                               i. Offerees knowledge/sophistication
                                              ii. Offerees access to information
                                     b. Number of units offered
                                     c. Size of the offering
                                     d. Manner of offering
                                               i. No general advertising/solicitation
      2. Securities Act of 1933 § 11
              a. Liability for materially misleading statements in a registration
              b. Materiality:
                      i. Info that would be important for a reasonable person to make
                          an informed judgment
                     ii. One that would effect a person’s decision
              c. Who’s Liable?
                      i. The Issuer Strictly liable (NO Due Diligence Defense)
                     ii. Anyone that signs the registration statement
                    iii. Directors
                    iv. Experts
                     v. Underwriters
              d. How to Approach:
                       i. Experts  parts of the statement that they prepared
                      ii. Everyone else  everything the Experts did NOT work on
       3. Due Diligence – § 11(c)
              a. Directors, underwriters, and signatories are NOT liable for
                  materially misleading statements in a registration statement, if they
                  reasonably investigated the information and reasonably and
                  honestly believed that it was in fact accurate. See Escott.
              b. Experts:
                       i. No reason to believe statements were false; AND
                      ii. Was reasonable to believe that
                              1. Unreasonable if no investigation undertaken (e.g.
                                  take corp reps at their word). See Escott.
       4. Escott v. BarChris
              a. Facts: Δ issued debentures prior to going BK; there were two sets of
                  debentures, so two sets of registration statements; 1960 statement
                  (audited and unaudited) contained some material misstatements re:
                  balance sheet; 1961 statement (unaudited) had material
                  misstatements throughout; when Δ went BK π sued the issuer, the
                  directors, and the auditor (expert).
              b. Issue #1: Were there any material misstatements in the registration
              c. Issue #2: Whether any of the Δs were protected from liability under
                  the Due Diligence defense?
              d. Application #1: Yes, the difference between the numbers given and
                  the actual figures would have been important for a person to make
                  an informed judgment about whether to purchase the debentures or
              e. Application #2:
                       i. Issuer: Strictly Liable
                      ii. Pres + VP (Directors): claimed that they were uneducated,
                          unsophisticated, and did not know what was going on  Ct
                          holds them liable b/c they undertook no investigation nor
                          hired lawyers to investigate for them  NO Due Diligence.
                     iii. K (Director): failed to investigate  NO Due Diligence
                     iv. B (Director): failed to investigate  NO Due Diligence
                      v. G (Director): failed to investigate; atty, so should have
                          known better  NO Due Diligence
                     vi. PM (auditor – expert): assigned a young auditor, he took the
                          D’s at their word re: info, failed to reasonably investigate to
                          discover whether the info was accurate, investigation would
                          have revealed truth  NO Due Diligence
              f. Holding: All Δs liable for the material misstatements in the
                  registration statements
vi. Rule 10b-5 (Securities Fraud)
       1. Elements of Securities Fraud:
              a. Fraud/Deceit:
                       i. Material misrepresentation
                              1. Probability-Magnitude Test. See Basic.
                              2. Material Omission:
                               a. Must be a duty to disclose
               ii. Scienter (See Pommer)
                       1. Intent to deceive
                       2. Recklessness
                               a. Maybe, but PSLRA appears to have
                                   heightened the pleading requirement  more
                                   likely π has to show intent.
             iii. Reliance
                       1. Fraud on the Market Doctrine. See Basic (where
                          misstatement are made publicly, then, in an efficient
                          market, the stock price will reflect that info and π is
                          presumed to have relied).
                               a. Requirements:
                                        i. Misstatement was public. See West.
                                       ii. Efficient market
                               b. Defenses:
                                        i. Market was NOT deceived
                                       ii. Corrective statements (notice to
                                           investorscorrect the stock price)
                                      iii. Show individual πs would have sold
                       2. Omission  reliance presumed
                       3. If reliance is unjustified, then no cause of action. See
                          Pommer (was unjustified for π to rely on statements
                          that an acquisition was imminent b/c the fact that Δ
                          told π that the price range was $50M-$100M
                          indicated that negotiations were in early phase and
                          acquisition was not imminent)
              iv. Proximate Cause (misstatement caused the damage)
      b. In connection w/ the purchase/sale of a security
                i. Only purchasers/sellers have standing to sue. No standing if
                   misstatement caused you to NOT purchase. See Blue Chip
               ii. The misstatement(s) need only “touch and concern” a
                   purchase or sale. See Basic (denial that corp was planning to
                   merge w/ another held to “touch and concern” the
                   purchase/sale of the stock).
2. Planning:
      a. If no duty to disclose, then can simply say “no comment” or say
          nothing at all  just don’t lie.
      b. If statements made by employee (e.g. CEO or Pres), then Corp will
          be liable under Agency Law
      c. If material misstatements are made  affirmative duty to correct
          those misstatements.
3. Basic v. Levinson (Materialiy & Reliance – Fraud on Market)
      a. Facts: Δ corp’s agents denied that it was engaged in merger
          negotiations on three occasions; stock price = $20 after the first
          denial; merger was ultimately announced  price went up to $46; π
          brings class action on behalf of all SHs that sold in about a 1 yr
      b. Issue #1: Were the merger denials material misstatements?
      c. Issue #2: Is this a proper class action, given that reliance is an issue
          (and is usually highly fact-specific)?
      d. Application #1: Ct held that the statements were material. There
          was no duty to disclose, but Δ affirmatively misstated the truth.
          Magnitude = great, b/c having their corp merged into another would
          greatly impact SHs (nothing could affect them more). Probability =
          may not have been material at first denial, but probability had to go
          up as time went on and negotiations developed. Thus, the denial
          that Δ was not in merger discussions was material
      e. Application #2: Ct held that where misstatements are made publicly,
          and the market is efficient, it’s reasonable that those misstatements
          will be reflected in the stock price. Therefore, πs need not show that
          they actually heard/read and relied on the misstatements; rather,
          reliance was presumed due to the probable effect on the stock price.
          Fraud on the Market Doctrine. However, Δ could try to rebut the
      f. Holding: Δs made material misstatements and reliance was
          presumed under the Fraud on the Market Doctrine.
4. West v. Prudential (Fraud on Market)
      a. Facts: Δ told his clients that a corp was about to be acquired at a
          premium  was a lie; πs were NOT Δ’s clients, but sued Δ on the
          ground that his misstatements affected the stock price and they
          bought at those artificially inflated prices.
      b. Issue: Whether the Fraud on the Market Doctrine could apply to
          satisfy the reliance requirement?
      c. Application: FOM requires that the misstatements be made public; Δ
          made his misstatements in private. Thus, investors could not have
          gotten wind and the stock price would not have reflected the false
          info. Rather, says the Ct, sophisticated investors, operating on all
          the info available to the public as well as their own special
          knowledge, would realize that the price was inflated and bring it
          back in line w/ its actual value.
      d. Holding: FOM theory inapplicable to misstatements made in private.
5. Pommer v. Medtest
      a. Facts: W was SH in Δ corp; told πs that: 1) Δ had a patent on a
          device, and 2) Δ was about to be acquired for between $50M-$100M;
          both statements were lies; πs bought Δ stock from another SH
      b. Issue: Whether Δ had committed securities fraud under Rule 10b-5.
      c. Application: Both misstatements were material: 1) b/c the ownership
          of a patent would be important factor for a reasonable investor, and
          2) the potential acquisition would be very important for any
          potential investor. Fact that Δ later did receive patent was irrelevant
           π would have paid a lower price; may affect calculation of
          damages though. However, reliance on the second misstatement
          was unjustified, b/c the fact that W indicated that the price range
                        was between $50M and $100M signaled that there was a lot of
                        negotiating to do before any merger would be completed. Also,
                        since W did not sell his own stock, there was a question about
                        whether he had the requisite scienter required for securities fraud.
                    d. Holding: Materiality established for both statements; reliance
                        unjustified for second statement; remanded for determination on
                        scienter question.
              6. Santa Fe v. Green (Misstatement  false statement)
                    a. Facts: Δ owned 95% of Kirby stock; decided to merge corp w/
                        another and pay each SH $150/sh for their stock; in merger
                        prospectus, Δ disclosed that the physical assets alone were worth
                        appx $640/sh; Min SHs (π) sued, alleging that actual share value
                        was around $772/sh and that Δs had committed securities fraud
                        under Rule 10b-5
                    b. Issue: Whether Δ had made a material misstatement w/ respect to
                        the merger
                    c. Application: The Δs did not make a material misstatement. Rather,
                        they disclosed what the actual value was, but indicated that they
                        were only going to pay the πs a fraction of that value  no false
                        statement. However, π would be able to pursue their appraisal rights
                        or a state breach of fiduciary duty claim (Maj SH  duty of loyalty).
                    d. Holding: NO misstatement  π’s 10b-5 claim was dismissed
d. Inside Information
       i. Rules:
              1. Common Law:
                    a. 3 Approaches:
                             i. Majority Rule
                                    1. D/O may trade w/ SHs w/o disclosing material info
                            ii. Special Circumstances Rule
                                    1. Duty to disclose may be imposed if there are special
                                            a. Highly material info
                                            b. Concealment of identity or other active fraud
                                            c. Susceptible π
                           iii. Minority Rule
                                    1. D/O have a duty of full disclosure whenever they
                                        buy/sell shares from SHs
                    b. Only applied to face-to-face transactions
              2. Traditional Insider Trading [Rule 10b-5]
                    a. Premised on an omission of material fact (i.e. silence)  must be a
                        duty to disclose (silence ≠ fraud, unless there’s a duty to speak)
                    b. Rule:
                             i. If you are 1) an insider in possession of 2) material, non-
                                public info and 3) knowingly/recklessly 4) buy/sell, then
                                you’re liable.
                    c. Elements:
                             i. Duty (Recall, there must be a duty to disclose; so who will
                                the law impose that duty upon?)
                     1. Statutory Insiders and “constructive” insiders have a
                         duty NOT to trade while in possession of non-public
                         info  “disclose or abstain”. See Cady-Roberts.
                     2. Statutory Insiders
                             a. Directors
                             b. Officers
                             c. 10% SHs
                     3. “Constructive” Insiders
                             a. Tipper Liability:
                                     i. Liable if their tippees trade and would
                                        be liable under Dirks.
                             b. Tippee Liability:
                                     i. Tipper breached a fiduciary duty 
                                        Personal Benefit Test (tipper sought
                                        to benefit himself personally: money,
                                        reputation, quid pro quo, gifts). See
                                        Dirks (disclosure made out of desire to
                                        expose fraud NOT made for personal
                                        benefit); Switzer (Δ overheard corp
                                        Pres tell his wife of merger, Pres did
                                        not tell Δ to personally benefit).
                                    ii. Tippee had knowledge of the breach
                                   iii. Tippee bought/sold stock
             ii. Scienter
                     1. Δ knowingly or recklessly trades when inpossession
                         of such knowledge.
            iii. Materiality
                     1. Whether a reasonable investor would attach
                         importance to the info  Probability/Magnitude Test
                     2. Factors to Consider:
                             a. Nature of info
                             b. Company’s response
                             c. Market response
                             d. Conduct of insiders
                     3. Does the fact that the insider traded on the info
                         demonstrate materiality?
            iv. In connection w/ purchase/sale of a security
      d. Planning:
              i. If you have material, non-public info, then do NOT buy/sell
                 that stock. Abstain!
             ii. Cannot disclose if you’re an employee b/c you have duty
                 NOT to reveal confidential info obtained through employer.
                 See Rst Agency § 395
            iii. Once info is publicly disclosed, must still wait a reasonable
                 amount of time to let info become available to the investing
                 public. See Texas Gulf Sulphur (employee liable b/c he
                 traded a few minutes after announcement, but before info
                 was relayed on NYSE ticker-tape)
3. Misappropriation:
                a. Breach of fiduciary duty – usually confidentiality – to the principal
                   (not the SHs of the stock being bought/sold). Cf. Chiarella (Δ not
                   liable b/c learned of inside info affecting corp X through his
                   employer, who was agent for Corp Y, the acquiror).
                        i. feigns loyalty while secretly using for personal gain. Thus,
                           disclosure may absolve from liability. See O’Hagan
                           (disclosure to principal and the acquiring corp may have
                           cleansed his purchase  no apparent need to get their
                       ii. Info learned from a family member that was supposed to be
                           kept secret is sufficient to impose liability. See SEC Rule
                      iii. Any fiduciary relationship will suffice – the scope of the
                           duty is irrelevant. See Willis (psychiatrist liable for insider
                           trading from info obtained from a client in therapy)
                b. Buy/sell a security
 ii. SEC v. Texas Gulf Sulphur (Statutory Insiders)
                a. Facts: Corp discovered a promising mineral deposit; Pres swore
                   everyone to secrecy; Δs (insiders who knew of the discovery) started
                   buying the corp’s stock; discovery leaked, but was quickly quelled
                   by some materially misleading statements made by corp officials;
                   truth was later revealed; SEC sues Δs for insider trading.
                b. Issue: Were the Δs guilty of insider trading?
                c. Application: The discovery was certainly material info b/c any
                   reasonable investor that was buying/selling the stock would have
                   thought the info was important. Also, Δs had a duty to disclose or
                   abstain b/c they were D/O (statutory insiders). Thus, they were
                   liable b/c they knowingly traded in the corp’s stock.
                d. Holding: Δs liable for insider trading.
iii. Dirks v. SEC (Constructive Insiders  Inherited Duty)
                a. Facts: S, a former officer of corp, tells Δ about fraud going on inside
                   the company; Δ investigates and uncovers  tells his clients; clinets
                   sell their stock.
                b. Issue #1: Did S owe a duty to his former employer?
                c. Issue #2: Did Δ inherit S’s duty to abstain or disclose?
                d. Application #1: Yes, as a former statutory insider, S had a duty to
                   keep the information secret.
                e. Application #2:
                f. Holding:
iv. US v. O’Hagan
                a. Facts: Δ was law firm partner at law firm; law firm was working for
                   Grand Met, who employed law firm to do legal work in their
                   acquisition of Pillsbury; Δ learned of the deal and bought Pillsbury
                b. Issue: Was the Δ liable for insider trading?
                c. Application: No duty under the traditional analysis b/c he was not a
                   tippee nor an insider of Pillsbury. Ct reasoned, however, that Δ was
                   liable under the misappropriation theory  Δ had breached his
                   fiduciary duty to his law firm, by utilizing confidential info for his
                         personal gain. Since he breached his duty to his employer, he was
                         liable b/c he bought Pillsbury stock.
                     d. Holding: Δ liable for insider trading.
      v. Rule 14e-3
              1. Regulates insider trading w/ respect to Tender Offers
              2. No Breach of Fiduciary Duty required  Strict Liability
              3. Elements of Liability:
                     a. Material, non-public info about a Tender Offer
                     b. Knowledge that info came from an insider
                     c. Buy/sell stock (offeror or target)
                     d. Offeror has taken substantial steps to consummate the deal
e. Short-Swing Profits
       i. SEA § 16(b):
              1. Profits made from buying/selling stock or convertible debt must be turned
                 over to the corp if:
                     a. Insider
                              i. Director or Officer  must always account for profits
                             ii. 10% SH
                     b. The purchase and sale are made w/in 6 mos. of each other
                              i. Director or Officer
                                      1. §16(b) applies if a D/O prior to either the purchase
                                          or the sale
                             ii. 10% SH
                                      1. have to be 10% SH prior to both the purchase and
                                          sale. See Reliance (sold stock to get below 10%, then
                                          sold remainder  not accountable for the second sell
                                          b/c he was no longer a 10% SH)
                                      2. the sale that puts you over the 10% threshold is not
                                          matchable for § 16(b) purposes. See Foremost (Δ not
                                          accountable for profits b/c the initial acquisition that
                                          took it over the 10% threshold could not be
                                          considered; no threat of “inside” info)
              2. Policy:
                     a. Prevent Insiders from profiting off of inside info
                     b. Thus, § 16(b) inapplicable where no threat of misuse of inside info.
                         See Kern (Δ did not purchase/sell w/in the meaning of § 16(b) when
                         it was forced to accept stock as part of merger agreement and was a
                         hostile party in the deal so unlikely that it had access to inside info).
      ii. Reliance v. Emerson (10% SH & Prior to Both Transactions)
                     a. Facts: Δ owned 13.2% of stock; π merged the corp into itself; w/in 6
                         mos. of buying the stock, Δ sells 3.24% (taking him to 9.96%), then
                         later sells the remainder; π sues Δ for the profit he made.
                     b. Issue: Is Δ accountable for the profits he made?
                     c. Application: Δ was 10% SH after initial purchase; Δ was 10% SH
                         when he sold the first group  accountable for profit made on that
                         sale. However, Δ was no longer 10% SH when he sold the second
                         group, so § 16(b) did not apply.
                     d. Holding: Δ not accountable for his profits.
     iii. Foremost v. Provident (10% SH & Prior to Both Transactions)
                           a. Facts: Δ acquired debentures from π that were convertible to stock
                              (over 10%); Δ distributed those debentures to its SHs b/c it was
                              liquidating; π sues Δ for the profits made on the distribution.
                           b. Issue: Is Δ accountable for the profits it made?
                           c. Application: Δ was NOT a 10% SH when it initially acquired the
                              debentures, so that purchase could NOT be matched w/ the
                              subsequent sale for § 16(b) purposes.
                           d. Holding: Δ not accountable for the profits.
           iv. Kern County Land Co. v. Occidental Petroleum
                           a. Facts: Δ was trying to acquire Kern; Kern worked out a deal w/
                              Tennoco to merge w/ them instead; T and K merge  Δ forced to
                              exchange its K shares for T shares as part of the merger; Δ gives T
                              an option to buy the shares; T exercises option  Δ makes profit; K
                              (π) sues to account for the profits.
                           b. Issue: Is Δ accountable for the profits it made from the options?
                           c. Application: Δ was forced to accept T stock as part of the merger; Δ
                              was a hostile party in the transaction (rival bidder), so there was no
                              risk of misuse of inside info.
                           d. Holding: Δ not liable for its profits
V.   Problems of Control
     a. Proxy Fights
             i. In General
                    1. Proxies
                           a. A SH may appoint someone (a Proxy) to vote his shares at a meeting
                           b. Generally, proxies are solicited by the groups vying for control
                    2. Regulations
                           a. Must provide a written proxy statement before you solicit a proxy
                    3. Incumbent Power – Rule:
                           a. The incumbent board may use reasonable corporate funds to contest
                              a proxy fight. See Levin. Corp $ can be used so long as incumbents
                              do not commit waste, fraud, or illegal acts. See Levin.
                    4. Basic Rules:
                           a. Corp may NOT reimburse any party, unless the dispute concerns
                              questions of policy.
                           b. Only reasonable and proper expenses may be reimbursed.
                           c. Corp may reimburse incumbents irrespective of whether they win or
                              lose. See Rosenfeld.
                           d. Corp may reimburse insurgents only if 1) they win and 2) the SHs
                              ratify the payments. See Rosenfeld.
            ii. Strategic Use of Proxies
                    1. Levin v. Metro-Goldwyn Mayer
                           a. Facts: π was a Min SH and was dissatisfied w/ the corp’s direction;
                              staged a proxy fight against incumbent management (Δ); Δ’s used
                              corporate funds to solicit proxies and for events/travel in the
                              solicitation process; Δ’s won the contest; π sues, alleging that Δ’s
                              misused corp assets.
                           b. Issue: Whether Δ was liable for misusing corp assets?
                           c. Application: SHs have a right to be informed of the competing
                              positions. Accordingly, incumbent management may use corp $ to
                  inform the SHs of what’s at stake. Since Δ did not commit waste
                  nor do anything illegal/fraudulent, the expenses it incurred in the
                  proxy fight were permitted.
               d. Holding: Δ’s expenditures in the proxy fight were acceptable.
iii. Reimbursement of Costs
        1. Rosenfeld v. Fairchild
               a. Facts: Δs were successful insurgents; old borad had used corp funds
                  to contest the proxy fight; when Δs appointed to BOD they
                  reimbursed incumbents for additional expenses and put forth a vote
                  for the SHs to ratify the reimbursement of their expenses  SHs
                  ratified; π challenged the reimbursement of both the insurgents and
                  the incumbents.
               b. Issue: Could the Δs reimburse the incumbents for expenses and
                  could they seek approval for reimbursement of their own expenses?
               c. Application: Δs could reimburse both themselves and the
                  incumbents so long as the expenses were reasonable and the contest
                  was about policy (as opposed to personal power). The incumbents
                  could be reimbursed by the Δs, and the Δs could seek
                  reimbursement for their costs by SH vote/ratification.
               d. Holding: Yes, Δs could reimburse incumbents and seek
                  reimbursement from the SHs for their own expenses.
iv. Shareholder Proposals
        1. In General
               a. SHs can request that BOD place a proposal before fellow SHs
                        i. Can also have proxies solicited in favor of the proposal 
                           Corp bears the cost
               b. Rule 14a-8(i)(5)
                        i. BOD allowed to exclude proposals that:
                               1. relate to operations that do NOT account for 5% of
                                   corp’s assets, earnings, or sales
                               2. are NOT otherwise significantly related to the firm’s
                                   business. See Lovenheim (ethical and social concerns
                                   may be included  significantly related to firm’s
               c. Other Reasons to Exclude:
                        i. Proposal does not concern a proper subject for action by SHs
                       ii. Proposal is illegal
                     iii. Proposal violates proxy rules
                      iv. Proposal is beyond corp’s power
                       v. Proposal relates to ordinary business matters (e.g. employee
                      vi. Proposal has been submitted in the past and has not obtained
                           much support
               d. Precatory Proposals
                        i. “Request” or “hope”
                       ii. Not binding on BOD. If it does not follow  BJR
        2. Lovenheim v. Iroquois
               a. Facts: π wanted to include a proposal to form committee to
                  investigate the corp’s pate business b/c he was concerned about the
                 ethical implications of force-feeding geese to yield more pate; Δ
                 (BOD) refused to include the proposal on the proxy b/c pate
                 accounted for such a small portion of corp’s business.
             b. Issue: Whether Δ could exclude π’s proposal?
             c. Application: Clearly the Δs could exclude the proposal on the
                 ground that it accounted for less than 5% of the corp’s assets,
                 earnings, and sales. The focus was on whether the ethical practices
                 of force-feeding geese were “significantly related to the corp’s
                 business.” Ct reasoned that the ethical and social concerns of force-
                 feeding geese were significantly related to corp’s business, so Δs
                 could not exclude the proposal.
             d. Holding: Δs could not exclude the proposal
v. Shareholder Inspection Rights
      1. Proper Purpose Test:
             a. SHs have a right to inspect corp records if their inspection is being
                 done for a proper (business) purpose. Compare Crane (informing
                 SHs of π’s tender offer terms was a proper purpose); Sadler (same)
                 with Honeywell (π was corned solely w/ political and social goals,
                 not the economic interests of the corp or its SHs).
      2. Crane v. Anaconda
             a. Facts: π desired the SH list so that it could distribute to them, in a
                 proxy, the terms of its tender offer; Δs refused to give π the SH list;
                 π sued.
             b. Issue: Could Δ deny π access to the SH list?
             c. Application: Furnishing the SHs w/ the terms of a tender offer was a
                 proper business purpose, b/c it related to the economic interest of the
             d. Holding: Δ required to give π the SH list
      3. State ex rel. Pillsbury v. Honeywell
             a. Facts: π learned that Δ was producing anti-personnel frag bombs for
                 Vietnam War; π bought stock in Δ, then asked for the SH list to
                 convince SHs to stop producing the bombs; Δ denied to turn over
                 the SH list  π sued.
             b. Issue: Could Δ deny π access to the SH list?
             c. Application: π had requested the list solely to pursue his own
                 personal political and social agenda; he disagreed w/ the war and
                 was trying to push his beliefs on the SHs. He was not concerned
                 about the economic interests of stock ownership.
             d. Holding: Δ did NOT have to turn over the SH list
      4. Sadler v. NCR
             a. Facts: AT&T, acting as agent for π, requested SH list (CEDE and
                 NOBO) so that it could submit its tender offer terms directly to the
                 SHs; Δs refused  π sued.
             b. Issue: Proper Purpose? If so, could π get the NOBO list although it
                 was not presently in existence?
             c. Application: Yes, purpose was proper. Yes, π could get NOBO list
                 despite fact it was not yet in existence. NOBO list had the actual
                 names on non-objecting (to being disclosed) SHs, which would
                 better allow π to reach SHs.
                      d. Holding: π could get the CEDE and NOBO list.
b. Shareholder Voting Control
       i. Entrenchment:
              1. Originators of corp issue 2 classes of stock: one w/ full rts (more expensive)
                  and another w/o rt to dividends (cheaper).
              2. The cheaper class is a “control class”  only originators own the stock, and
                  b/c its cheaper they usually have a lot of shares. Since 1 vote per share 
                  allows originators to maintain control of their corp.
              3. When full-incident stock is sold publicly, corp must disclose the stock
                  structure  investors buy w/ knowledge of what they’re getting into.
      ii. Stroh v. Blackhawk
                      a. Facts: Δ created 2 classes of stock: A and B; A = full ownership
                           incidents (vote and dividends), B = voting stock (no dividends).
                           Originally, there were 87K shares of A and 500K shares of B; Δ
                           then sold 500K shares of A to public; π bought some of the A shares;
                           π challenged legality of the B shares (not stock).
                      b. Issue: Were the class B shares valid?
                      c. Application: Although the B shares did not carry a financial
                           property interest, control was still a valid proprietary interest.
                      d. Holding: class B shares were valid.
c. Control in Closely Held Corporations
       i. Close Corp Characteristics:
              1. held by a few SHs (usually families)
              2. NO secondary market
      ii. Income Issues:
              1. Usually derived from salary as a Director/Officer
              2. Rarely do they pay dividends
     iii. Legal Options for the Transactional Atty:
              1. Shareholder Agreements
                      a. Validity? See McQuade (obligation to use Director power re:
                           selection of officers)
                      b. Problem w/ a deadlock. See Ringling (arbitrator)
                      c. Enforceability? See Ringling (none); Ramos (forced/elected sale)
                      d. Constraint on Director Discretion. See McQuade
              2. Voting Trusts
                      a. Advantage:
                                i. no chance of deadlock (trustee decides and carries out)
                      b. Disadvantages:
                                i. loss of control
                               ii. limited duration
                              iii. still possible for BOD to oppress
              3. Statutory Close Corporations
                      a. Defined by statute
                      b. Management is by SHs NOT the BOD  eliminates independent
                           Director problem
              4. Employment Contracts
                      a. Way to guarantee status as officer w/o tying it to exercise of power
                           as director
                      b. Terms:
                         i. Duration
                        ii. Compensation
                       iii. Duties
                       iv. Termination
       5. Involuntary Dissolution
              a. When all else fails, Ct may step in and dissolve to protect the Min
                   SH  don’t count on this though! SHs (and their attys) should
                   make sure they take steps to ensure their security.
iv. Rules:
       1. SHs may agree on how they’ll vote as SHs, See Ringling, even if the
           corporation is public, See Ramos.
       2. However, a SH Agreement that constrains a Directors discretion to act
           independently is invalid. See McQuade.
              a. But, if all the SHs are included in the agreement, then no party is
                   harmed by the limitation, and the agreement is valid and enforceable.
                   See Clark (the only 2 SHs were both parties to the agreement).
              b. Also, a SH Agreement that limits director discretion, but only binds
                   some of the SHs, may be valid if: 1) it’s a close corp, 2) no Min SH
                   objects/complains, and 3) the terms are reasonable. See Galler.
 v. Ringling Bros. v. Ringling
              a. Facts: π and Δ entered into a vote pooling agreement; agreement
                   provided that in the event of disagreement, arbitrator would decide
                    NO enforcement mechanism; π and Δ disagreed about BOD
                   nominee vote  submitted to arbitrator  he selected π’s proposed
                   board composition; π voted according to arbitrator, Δ did not  π
                   sues to enforce agreement. Lwr Ct forces Δ to vote according to
                   arbitrator  π’s BOD elected.
              b. Issue: Whether Δ was bound to vote according to the arbitrator’s
                   decision? If so, could arbitrator’s decision be enforced?
              c. Application: The agreement was a valid contract, so Δ was bound by
                   its terms. However, there was no enforcement provision, so
                   arbitrator could not vote Δ’s stock for her (nor could Lwr Ct). Thus,
                   Δ had breached the agreement, so her vote was nullified.
              d. Holding: Δ bound by agreement  lack of enforcement provision
                   meant that arbitrator could not compel Δ to vote according to his
vi. McQuade v. Stoneham
              a. Facts: Δ was Maj SH; π bought an interest in the corp; π and Δ
                   entered into a SH agreement to elect each other Directors and to
                   ensure that, as Directors, they would vote to keep each other as
                   Officers at set salaries; Δ fired π from his position as Officer  π
                   sues for specific performance on the agreement.
              b. Issue: Whether the provision to elect each other as Officers was
              c. Application: Directors are supposed to be able to exercise
                   independent judgment. Since the agreement purported to bind the
                   parties to certain courses of action, in their capacity as Directors, the
                   agreement was invalid.
              d. Holding: Agreement was invalid
     vii. Clark v. Dodge\
                     a. Facts: π and Δ were the only two SHs in a corp; Δ and π entered into
                         SH Agreement  Δ would keep π as an officer if π disclosed a trade
                         secret; π disclosed  Δ fired  π sues for specific performance.
                     b. Issue: Whether the SH agreement was enforceable?
                     c. Application: Although Directors are supposed to be able to exercise
                         independent judgment, where all the SHs are involved in the
                         agreement then there’s nobody harmed  agreement is valid and
                     d. Holding: SH Agreement was valid and enforceable.
    viii. Galler v. Galler
                     a. Facts: π and Δ had entered into a SH Agreement: vote pooling
                         component, guaranteed BOD seats, mandatory dividends, and
                         mandatory death benefits; together, they owned 95% of the stock;
                         there was also a 5% SH, though he sold his stock during the suit; Δ
                         refused to abide by the agreement  π sues.
                     b. Issue: Was the SH Agreement valid and enforceable?
                     c. Application: SH Agreements that limit Director discretion are
                         generally invalid. But, where all the SHs are involved in the
                         Agreement, then there’s no harm to anyone. In this case, there was
                         a 5% SH that was not included in the Agreement. The Ct reasoned,
                         however, that unanimity is not required when: 1) it’s a close corp
                         (yes), 2) there’s no complaining Min SH (yes), and 3) the terms are
                         reasonable and legal (reasonable duration, dividends only paid if
                         excess income, and death benefits were reasonable).
                     d. Holding: The SH Agreement was valid despite the fact that not all
                         SHs were included in it.
      ix. Ramos v. Estrada
                     a. Facts: Δ was Maj SH of BG, π was Min SH in BG; BG owned ½ of
                         TV; π and Δ entered into a SH Agreement: vote pooling agreement
                         (would vote according to how the majority determined) +
                         enforcement mechanism (if you failed to vote as majority
                         determined, then you were deemed to have elected to sell your
                         shares); π wanted to defect from agreement  used power as
                         Director to vote Δ out as the Pres (officer); Next BG meeting, Δ and
                         his allies, nominated a slate of Directors  π was excluded and
                         refused to abide by the vote; Δ claimed that, by failing to abide by
                         the agreement, π had elected to sell his shares  π sues to have
                         agreement declared invalid
                     b. Issue: Was the SH Agreement enforceable as written?
                     c. Application: π’s decision to vote Δ out as Pres was OK  the
                         Agreement did not constrain their ability to vote as a Director.
                         However, when π failed to abide by the majority’s Director
                         nomination slate, he breached the vote polling portion of the
                         Agreement. Accordingly, the enforcement provisions were
                         triggered and π was deemed to have elected to sell his shares.
                     d. Holding: Agreement was enforceable  π elected to sell his shares
d. Abuse of Control (FDs btw Maj SH and Min SH in a Close Corp)
       i. In General
1. SHs in a Close Corp usually rely upon their salary as an Officer/Director for
   income b/c dividends are rarely paid, and when they are, usually don’t
   amount to much.
2. Freeze-Out:
       a. When a controlling block of SHs earns a return at the expense of the
          others. See Wilkes.
3. Rules:
       a. SHs in a close corp owe each other fiduciary duties. See Wilkes.
               i. Maj SH may take actions adverse to the Min SH if those
                  actions are in pursuit of a legitimate business purpose. See
                      1. If legitimate purpose is being pursued, then Min SH
                          may still prevail if it can show that there is a less
                          harmful alternative. See Wilkes.
                              a. Ct must then balance the legitimate bus
                                  purpose against the feasibility of the
                                  proposed alternative. See Wilkes.
              ii. Min SH may owe fiduciary duty to Maj SH, if that Min SH
                  has such power (e.g. veto power) that he could effectively
                  oppress the majority. See Smith (80% required to pass any
                  measure  4 Directors = veto power). If so, then the Min
                  SH has a fiduciary duty to use that power responsibly. See
                  Smith (used veto power b/c he disliked the other SHs, not for
                  any legitimate course of business he was pursuing).
             iii. Termination of an Employee/SH:
                      1. If π is SH because of their employment  Δ can fire
                          w/o concern about FD. See Jordan.
                              a. But, even if π is an “at will” employee, cannot
                                  fire for a bad reason. See Jordan.
                      2. If π is employee because he is a SH  FDs apply.
                          See Wilkes.
       b. Delaware:
               i. SHs in a close corp do NOT owe each other special fiduciary
                  duties. See Nixon (only the Bayer/Sinclair standard applies)
                      1. Forces SHs to enter into protective agreements
4. Planning:
       a. Buy-Sell Agreement (ex ante)
               i. Rt of First Refusal
                      1. Specify what conditions trigger the Rt. See Frandsen
                          (Agreement only applied to sales of stock, did not
                          include a merger)
                              a. Even if Rt NOT triggered, can still try to
                                  outbid the competitor. See Frandsen.
              ii. Buy-Out Agreements (Other party must buy your stock)
                      1. Compulsory Buy-out. See Jordan.
                              a. Triggered when SH leaves corp
                      2. “Tag Along”. See Frandsen
                              a. triggered when other SH sells their stock
             iii. Restrictions on Sale (who can SH sell to?)
                 b. Rely on Fiduciary Duties (ad hoc)
                         i. Extremely unwise  borderline malpractice
                        ii. Expense  litigation
 ii. Wilkes v. Springside
                 a. Facts: π and Δs were SHs in a nursing home (4 owners); π and one
                    of the Δs had a falling out; π informs Δs of his intent to sell his
                    interest; Δs vote to eliminate his salary and remove him as an officer
                    and director; Corp did not pay dividends; π stayed on and was
                    willing to continue to work until he sold his interest; Δs then offer to
                    buy out π at a low price; π sues for breach of fiduciary duty.
                 b. Issue: Did Δs breach their fiduciary duty to π?
                 c. Application: π was willing and able to continue working; There was
                    no indication that he was incompetent/negligent  Δs apparently
                    fired him out of avarice and not for a legitimate business purpose.
                 d. Holding: Δs terminated π for an illegitimate reason (personal avarice)
                     they breached their fiduciary duty.
iii. Smith v. Atlantic Properties
                 a. Facts: πs and Δ owned a close corp  4 SHs; Corp bylaws required
                    that any vote required approval by 80% of the BOD  any 1 SH
                    had a veto power; πs wanted to declare dividend to avoid tax
                    penalties; Δ did not want dividend (would hurt his tax status) and
                    wanted corp to reinvest the money for repairs; πs and Δ had a falling
                    out; Δ never really came up w/ a plan for repairs; income continued
                    to accumulate and corp was forced to pay tax penalties; πs sue Δ for
                    breach of fiduciary duty
                 b. Issue: Did Δ, a Min SH, breach his fiduciary duty to the Maj SHs?
                 c. Application: Since the veto power gave Δ the ability to oppress the
                    Maj SHs, he had a fiduciary duty to use that power responsibly.
                    Since he vetoed dividends more out of dislike for the πs than for any
                    real interest in seeing the $ reinvested for repairs (no plan).
                 d. Holding: Δ had a fiduciary duty to use his veto power responsibly
                    and he breached his fiduciary duty by using that power to spite the π
iv. Jordan v. Duff & Phelps
                 a. Facts: Δ = analyst firm, π = one of Δ’s analysts; π = an at will
                    employee, and owned some stock in Δ pursuant to a Stock
                    Restriction and Purchase Agreement; π’s wife hated his mother, so
                    he decided to look for employment in another state  offered job in
                    TX  tells Δ that he’s planning on accepting, but will work through
                    the end of the year (get highest value on his stock pursuant to the
                    Agreement); Δ is in merger negotiations at the time, but does not
                    reveal to π that fact; shortly after π quits, the merger is announced 
                    later falls through  2 years afterward, Corp is eventually bought in
                    an employee LBO.
                 b. Issue: Did Δ commit securities fraud or breach it fiduciary duty to π?
                 c. Application: Δ’s principal argument is that there was no duty to
                    disclose the merger to π b/c he was an employee at will  it could
                    have fired him at any time, including right before the merger  he
                    would not have profited from the merger. However, Ct reasons that
                        Δ could not have fired π for a bad reason (i.e. to deny him from
                        benefiting from the merger), so a duty to disclose did exist
                    d. Holding: Δ did have a duty to disclose the merger to π  it breached
                        its fiduciary duty and committed securities fraud by failing to do so.
e. Transfer of Control
       i. Control Premium
             1. The price paid for shares over their going market price (the “premium”) b/c
                the amount of shares acquired will give the purchaser control over the corp
             2. Cheaper than a tender offer
             3. Benefits of buying control:
                    a. Run the company
                    b. Appoint BOD
             4. Subject to special regulation b/c its not an ordinary purchase of stock
             5. Two Main Issues:
                    a. Should a SH be allowed to sell stock at a premium? Is that fair to
                        the other SHs?
                              i. Yes. See Zetlin (as long as Controlling SH is only selling
                                 control, than it’s OK if he makes a premium on the sale).
                                 But see Perlman (Controlling SH sold more than control,
                                 also cashed out on a corporate opportunity  Feldmann plan)
                    b. The Sale of Corporate Offices: Is the buyer purchasing more than
                        just a controlling block of stock?
                              i. Cannot buy Offices. See Essex.
                             ii. What about BOD?
                                      1. Lumbard:
                                              a. If Buyer has bought a “controlling” interest
                                                  bottom line is that he can control who will
                                                 be appointed to BOD  OK that Directors
                                                 appoint his nominees (NO B of FD)
                                              b. Thus, focus is on whether Buyer bought a
                                                 “controlling” interest.
                                      2. Clark:
                                              a. Should be decided on the facts  “jury ?”
                                      3. Friendly:
                                              a. Directors owe FD to all SHs  when a
                                                 Director resigns, the other Directors have a
                                                 duty to appoint the person best for the Corp,
                                                 NOT just the person the controlling SH wants
                                                 (breach of FD).
      ii. Frandsen v. Jensen-Sundquist
                    a. Facts: Δ = Maj SH, π = Min SH; π and Δ had a Buy-Sell provision
                        in their SH Agreement: if Δ planned to sell its stock, then π had the
                        rt of first refusal (chance to buy at same price) or, if he declined to
                        exercise that right, then Δ had to purchase his stock (and sell it w/
                        their own)  “Tag Along” provision; Δ announces that corp is
                        planning to enter into a merger w/ FW  π claims that triggers his
                        Rt of First Refusal power; FW changes its position  just wants to
                        buy one of the Corp’s assets (bank); deal goes through, π sues 
                    argues that his rt of first refusal option was triggered by the merger
                    deal and he should have been allowed to buy.
                 b. Issue: Was π’s Rt of First Refusal triggered by the merger
                 c. Application: A merger is NOT the same as a sale of stock. Since Δ
                    was not selling his stock, the Buy-out provision, which specified
                    sale, was not triggered. Ct reasoned that π could have specified in
                    the SH Agreement that a merger would also trigger the Rt of First
                    Refusal, but he failed to do so.
                 d. Holding: π’s Rt of First Refusal was not triggered, but he could have
                    still tried to outbid FW.
iii. Zetlin v. Hanson
                 a. Facts: Δ owned 44% of stock  sold to buyer at double the price; π
                    argues that he too should have the opportunity to sell at a premium.
                 b. Issue: Could Δ sell his stock at a premium?
                 c. Application: Δ sold control  that’s OK; π desired that the buyer
                    basically make a tender offer and buy everyone’s stock at a premium
                     NO, tender offer is different and would be contrary to law to
                    force buyer to also buy π’s shares.
                 d. Holding: Δ could sell at premium; π was out of luck.
iv. Perlman v. Feldmann (UNIQUE)
                 a. Facts: Δ owned 37% of stock (controlling interest) in a steel maker
                     sells to buyer (end-user of steel) at a premium; π’s argue that
                    they’re entitled to some of the premium b/c Δ sold more than just
                    control; Due to war, steel prices were frozen; Δ had implemented a
                    plan (Feldmann Plan) to get around, by forcing steel buyers to pay in
                    advance for future steel (interest-free loan)  very profitable for the
                    Corp; Buyer was planning to end the practice and sell the steel to
                    itself (less $ for the other SHs)
                 b. Issue: Whether Δ had breached his FD as Maj SH to the Min SHs.
                 c. Application: Ct reasons that Δ had sold more than just control  he
                    sold a corp opp (made extra money off the sale b/c buyer was
                    planning to end the Feldmann plan). Thus, Ct held that he breached
                    his FD by selling a corp opp. Also, πs probably would have had a
                    hard time suing buyer (after all, buyer is the one ending the
                    profitable plan) b/c there’s some issue over the legality of the
                    Feldmann Plan (quasi-bribe)  tough to show BoFD by buyer.
                 d. Holding: Δ had breached FD  π’s entitled to share in the premium.
 v. Essex Universal v. Yates
                 a. Facts: Δ owned 28% of RP (controlling interest), agreed to sell that
                    to π; Δ agreed that he would also ask all the BOD to resign, one at a
                    time, then replace those Directors w/ π’s appointees; RP stock rose
                    and Δ tried to renege on the deal  alleged that sale was illegal b/c
                    it conveyed more than just control (conveyed the BOD)
                 b. Issue: Whether the sale was legal?
                 c. Application:
                          i. Lumbard: Because π had effectively bought control, there’s
                              no harm in permitting him demand that his BOD be
                              appointed. True that Directors owe FD to SH, but the reality
                                      is that π could select the BOD at the next occasion  why
                                      elevate form over substance?
                                  ii. Clark: summary judgment improper  jury question
                                 iii. Friendly: Can’t sell BOD control  Directors owe FD to
                                      SHs to ensure best replacement is brought in  Form over
                                      substance. BUT, can’t apply retroactively  Summ
                                      Judgment reversed.
VI.   Mergers, Acquisitions, and Takeovers
      a. Mergers and Acquisitions
            i. In General
                   1. Merger
                          a. The combining of 2 corporations into 1
                                   i. Merger: both become the acquiror
                                  ii. Consolidation: new corp formed
                          b. Requires BOD approval
                          c. Surviving Corp assumes liabilities of both corps
                          d. Merger Consideration:
                                   i. Consideration passes to the non-dissenting SHs
                                  ii. Appraisal Rights:
                                           1. Most states have dissenters’ rights statutes
                                           2. If lots of SHs dissent, then it may threaten the merger
                                               deal (non-dissenting SHs may not make much $)
                                           3. Allow a Min SH that disapproves of a merger to sell
                                               his shares at “fair value”  appraisal proceeding
                                               determines “fair value”
                                                   a. Both Target SHs and Acquiror SHs may
                                                        exercise dissenters’ rights to a merger
                                           4. Delaware:
                                                   a. Eliminates dissenters’ rights if target is a
                                                        publicly traded company and the
                                                        consideration is stock in the acquiror.
                          e. Triangular Transaction:
                                   i. A sets up a new corp  capitalizes the new corp w/ the
                                      consideration that will be paid to T
                                  ii. NC and T merge
                                           1. T SHs have dissenters rts
                                           2. Since NC (subsidiary) is owned by A (parent), A’s
                                               BOD control how NC’s shares will be voted  NO
                                 iii. T’s SHs get paid the consideration (cash, debt, or A stock)
                                 iv. NC becomes a wholly-owned subsidiary of A
                   2. Acquisition (Asset Purchase)
                          a. The purchase of a specific asset(s) from a corp
                                   i. Both corps survive after the sale (at least for a little while
                          b. requires BOD approval to sell
                          c. Subject to emerging tort doctrine, the purchasing corp does NOT
                              take the liabilities of the selling corp unless there is a written
                              assumption of liabilities
               d. Consideration for the Sale:
                        i. Can be distributed to the SHs in the form of dividends
                       ii. More often, target liquidates and all the assets are distributed
                           to the SHs
        3. Tender Offer
               a. A public offer (usually to all SHs) in which a buyer offers to
                  purchase the target corp’s shares
               b. NO BOD approval required
               c. If buyer gets 50.1% or more of the shares  control
        4. Proxy Contest
               a. NO BOD approval required
               b. BUT, requires approval by SHs
        5. Stock Purchase
               a. Similar to tender offer, but shares are bought over time  NOT a
                  single offer to all.
 ii. Planning:
        1. When do you want to bypass the BOD?
               a. If it refuses to sell at any price
               b. BOD is holding out for a higher price than you want to pay
               c. BOD is holding out for side-payments (i.e. kickbacks)
        2. What are the tax consequences of a plan of action?
iii. De Facto Merger Doctrine (substance-over-form)
        1. Rule:
               a. “If it has the same effect as a merger, then we’ll treat it like one”
                        i. Thus, Dissenters’ Rights and Appraisal Rights available
               b. When the transaction so fundamentally changes the nature of the
                  corp as in effect to cause the SH to give up his shares in one corp
                  and, against his will, accept shares in another.
                        i. Factors to Consider:
                               1. Change in BOD composition
                               2. change in SH composition
                               3. significant changes in SH value
                               4. significant changes in corp’s line of business
               c. Has fallen out of favor
        2. Modern Rule (Equal Dignity):
               a. The statutes governing asset sales and mergers are separate  must
                  give equal dignity to each  allows flexibility and predictability
                  when structuring. See Hariton (Delaware).
        3. Farris v. Glen Alden
               a. Facts: L corp owned 38.5% of Δ  wanted to merge L and GA;
                  Structured deal as an asset sale: L would sell all of its assets to GA,
                  GA would issue stock and give that to L as consideration for the
                  assets; Result: L ended up owning 76.5% of GA stock  liquidates
                  and gives its SHs the GA stock; π (a GA SH) sues, claiming that the
                  transaction was basically a merger and, therefore, he’s entitled to
                  dissenters’ rights  appraisal.
               b. Issue: Was the deal a de facto merger?
              c. Application: BOD was changed, SH composition was changed,
                 changes to SH value, and changes to corp’s line of business  de
                 facto merger.
              d. Holding: Yes, was a de facto merger.
iv. Freeze-Out Mergers
       1. In General
              a. Freeze-Out Merger Defined
                      i. When the Maj SH causes the corp to merge (usually w/ a
                         shell that Maj SH owns), thereby eliminating the Min SHs
                         entirely. See Weinberger.
                              1. mergers usually require approval of both BOD and
                                 SHs  Since Maj SH is motivating the merger,
                                 approval is usually a non-issue.
              b. Why freeze-out the minority?
                      i. Eliminate costs associated w/ a public corp.
                     ii. More flexibility w/ respect to moving around assets
                    iii. Eliminate Fid Duties to Min SHs
              c. What about objecting minority?
                      i. Sole remedy is usually appraisal, unless there’s fraud, self-
                         dealing, or waste. See Weinberger.
                              1. If self-dealing is alleged, then Min SH may bring a
                                 class action. See Coggins. To avoid liability for B of
                                 FD, Maj SH will have to show that the transaction
                                 was entirely fair. See Rabkin.
                              2. Entire Fairness:
                                     a. Fair dealing; AND
                                     b. Fair price
              d. Test (for Breach of FD Claim in Freeze-Out Merger Context):
                      i. Is there fraud, self-dealing, or waste? But see Rabkin
                         (appears to broaden this standard  appraisal only the
                         remedy when price paid is unfairly low)
                              1. No: Appraisal is remedy
                              2. Yes: Step 2. But see Coggins (business pupose?)
                     ii. Was the merger approved by a majority of the Min SHs?
                              1. Yes: Step 3
                              2. No: Step 4
                    iii. Can the π prove that the transaction is unfair?
                              1. Yes: Breach of FD
                              2. No: Step 4
                    iv. Can the Δ prove that the transaction was entirely fair?
                              1. Yes: Appraisal is remedy
                              2. No: Breach of FD
              e. Equitable Remedies
                      i. Why would a Min SH pursue a class action, rather than “fair
                         value” from an appraisal proceeding?
                              1. Due to time between suit and trial, π may be able to
                                 free-ride on Δs improvements to the corp
                              2. If π can get injunction/rescission, then its worth FAR
                                 more than “fair value”
                                   3. Atty Fees and advantages of Class Action over
                                       appraisal (i.e. settlement)
             2. Coggins v. New England Patriots
                   a. Facts: Δ used to be Pres of Patriots Football Team  lost control
                       and was voted out  eventually got control back; to get control, Δ
                       had to get loan from bank, bank wanted Δ to use corp’s income to
                       repay loan (security); Δ, realizing that such an arrangement would
                       be a B of FD, elects to merge the corp into another “shell” that he
                       created; merger is approved, but π, a dissenter, sues to stop the
                   b. Issue: Did the Δ, by undertaking a freeze-out merger, violate his FD?
                   c. Rule: Same as above, but includes the “business purpose” prong
                       before the “fairness” prong.
                   d. Application: Ct recognized that there was self-dealing in the case b/c
                       Δ was pursuing the merger to satisfy his personal debts.
                       Furthermore, it found that this reason was not a legitimate business
                       purpose  Breach of FD
                   e. Holding: d breached his FD by freezing-out the Min SHs w/o a
                       legitimate business purpose
      v. De Facto Non-Merger Doctrine
             1. Equal Dignity Rule:
                   a. An asset purchase is an asset purchase, and a merger is a merger 
                       form over substance. See Rauch.
             2. Rauch v. RCA
                   a. Facts: GE wanted to buy Δ’s assets; Δ had both common and
                       preferred SHs (π); π had liquidation preference = $100/sh  if Δ
                       sold assets, then liquidated, it would have had to redeem the
                       preferred stock (i.e. less merger consideration for the common SHs);
                       Δ and GE instead agreed to merge  Δ’s SHs would get cash as the
                       merger consideration; merger went through  πs got $40/sh, while
                       common SHs got $66/sh, pursuant to the merger agreement; πs sue
                       alleging that the merger was a de facto asset sale.
                   b. Issue: Was the merger a de facto asset sale?
                   c. Application: Equal Dignity to the statutes  it was a merger.
                   d. Holding: Merger  No liquidation. Appraisal???
b. Takeovers
      i. Intro
             1. Tender Offer
                   a. Most potent weapon in Corporate Raider’s arsenal
                   b. Can bypass BOD and go straight to SHs
                   c. Until 1960’s, almost no regulations
                            i. Williams Act (1968)  regulations
                                   1. Key required disclosures:
                                           a. Identity
                                           b. Plans and intention
                                           c. Any contracts, arrangements, understandings,
                                                or relationships w/ the issuer
                                   2. §§ 14(d)-(e) triggered when anyone commences a
                                       tender offer for more than 5% of the stock
      d. Types of Defensive Tactics:
              i. Greenmail
                      1. Pay the potential acquiror to go away. See Cheff.
                      2. BUT, there are concerns about Directors using their
                         power to perpetuate their control. See Cheff (use of
                         defensive tactics may be a B of FD).
             ii. Competition (“White Knight”)
                      1. Find a friendly “white knight” to take over the firm
            iii. Scorched Earth
                      1. Poison Pills
                             a. Rts that attach to stock that make acquisition
                                 very unattractive
                      2. Poison Debt
                             a. Make target incur debt  unattractive target
                      3. Share repurchases at a premium
            iv. Turn the Tables (“Pac Man” Defense)
                      1. Original target attempts to take over the original
      e. SHs attitude toward resistance
              i. want BOD to drive up price, but do NOT want BOD to be
                  looking out for its own interests
      f. Judicial Ambivalence Toward Defensive Tactics:
              i. Reasons For Deference:
                      1. BOD is supposed to make day-to-day decisions and
                         look out for long-term prosperity
                      2. Do not want to be the reason that corps are broken up
                      3. BOD is supposed to drive up price
             ii. Reasons For Scrutiny:
                      1. BOD’s self-preservation incentive
                      2. If corp is trying to take over, than it’s likely b/c BOD
                         is doing a poor job
2. Rule:
      a. When a takeover attempt is made (usually by a SH), and the BOD
         resists the takeover, then concerns about Breach of the Duty of
         Loyalty arise. See Cheff; Unocal. The concern is that the BOD may
         be trying to perpetuate its own control at the expense of the
         acquiror/SH or at the expense of other SHs. See Cheff (greenmail);
         Unocal (self-tender offer, financed at corp’s expense). However, the
         BOD may act adversely to the acquiror/SH if it acts in good faith
         after reasonable investigation, and the defensive measures are
         proportional to the perceived threat. See Unocal.
      b. Inside Directors v. Outside Directors:
              i. Outside Directors (weaker incentive to preserve control)
                      1. Threat Prong
                             a. Did they perceive a threat after reasonable
                                       i. No: Duty of Loyalty Test
                                      ii. Yes: Step 2
                                b. Did they act in good faith based upon that
                                         i. No: Duty of Loyalty Test
                                        ii. Yes: Go to Proportionality Prong
                        2. Proportionality Prong
                                a. Was the action reasonable in relation to the
                                    perceived threat?
                                         i. No: Duty of Loyalty Test
                                        ii. Yes: BJR applies  π must try to
                                            show actual self-dealing/fraud, or that
                                            they were uninformed. See Unocal.
               ii. Inside Directors (stronger incentive to preserve control)
                        1. Standard Duty of Loyalty Test:
                                a. Approved by Informed + Disinterested BOD
                                    (importance of Outside Directors). See
                                b. Approved by informed SHs
                                c. Deal is intrinsically fair to the corp
      c. Changing Duties:
                i. BOD may take protective measures against a takeover when
                   the interests of the SHs would be harmed. See Unocal.
                   However, once bidding reaches a point that it becomes clear
                   the corp will be sold, then BOD’s only duty is to maximize
                   SH return – consideration of Corp’s responsibilities no
                   longer applicable, unless it affects SH return. See Revlon
                   (BOD breached FD b/c it impermissibly considered Corp
                   obligations, which they faced personal liability for, rather
                   than solely focusing on SH return)
3. Cheff v. Mathes
      a. Facts: M was trying to take over H corp; Δs, H’s BOD, were trying
           to prevent the takeover b/c they believed that M would liquidate; H
           employees had already become unsettled by M’s actions; Δs elected
           to buy M’s shares w/ corporate assets and at a premium, in order to
           make him M away (i.e. greenmail); M accepted the deal; π (SH)
           sued on the ground that Δs had violated their FD by wasting
           corporate assets to perpetuate their own control.
      b. Issue: Did the Δs violate their FD?
      c. Application: There was some concern that the Δs used breached
           their FD by looking only to perpetuate their own control, rather than
           looking toward the interests of the SHs. For the inside directors
           (directors + officers), they had a stronger incentive to try to preserve
           their control ($$$). So, the inside directors actions had to show that
           their actions satisfied the traditional duty of loyalty test (cleansed or
           fair). For the outside directors (non-officers), the incentive to
           preserve control was weaker  they had to show that they perceived
           a threat to the corp after reasonable investigation, and that they acted
           in good faith pursuant to that info. Ct reasoned that the outside
           directors had taken reasonable investigations into the effect M was
           having on the corp (long-term and short-term) and that they’re
                 decision to buy him out was taken in good faith. Thus, the outside
                 directors were cleared, so if the greenmail was approved by a
                 majority of the outside directors, then that would cleanse the action
                 for the inside directors.
             d. Holding: Δs did not violate their FD.
ii. Development
       1. Unocal v. Mesa
             a. Facts: π owned 13% of U stock  made two-tiered front end loaded
                 tender offer at $54/sh; Δ (U’s BOD) investigated the offer  reports
                 from experts concluded that the deal was low; Δ was advised that a
                 self-tender might ward off the coercive tender by π; Δ made self-
                 tender at $72/sh (per advice), which π was excluded from and only
                 kicked in if π got a controlling interest  gave incentive for people
                 to hold their shares and not sell to π (would get the higher price
                 instead); self-tender was to be funded by corp and π was excluded
                 from participating; Δs approved the plan  approved by majority of
                 the outside directors; π sued Δ on ground that they violated their FD
                 to him  self-dealing to preserve their power.
             b. Issue: Whether Δs had violated their FD to π?
             c. Application: If the outside directors were cleared, then that would
                 cleanse the deal for the inside directors.
                      i. Threat:
                             1. Δs had conducted a reasonable investigation (reports
                                  by experts) and perceived a threat th SHs interests
                                  (low price and bad deal on the back-end), and they
                                  acted in good faith to protect the SHs (the self-tender
                                   prevent the takeover or ensure the back-end
                                  people would not be harmed).
                     ii. Proportionality:
                             1. the self-tender was proportional to the perceived
                                  threat  would ward off π (who was offering a low-
                                  ball price) or ensure that those on the back-end would
                                  not get cheated w/ junk bonds.
             d. Holding: Δs actions were proportional to the perceived threat 
                 defensive measure was protected by the BJR. Also, the interested
                 directors were absolved b/c the action was approved by a majority of
                 the informed and disinterested BOD.
       2. Revlon v. MacAndrews & Forbes
             a. Facts: Δ resisted a low-ball tender offer by π  poison pill, self-
                 tender, and “lock-up”; π eventually realized that defensive tactics
                 had worked  forced to up its offer into a reasonable range; π
                 continued to up its tender offer  Δ got “white knight” – which it
                 gave all kinds of inside info that was denied to π – and the WK
                 agreed to a price; the deal contained a lock-up (no more bidding),
                 and also a guarantee by WK that it would cover some outstanding
                 notes issued by Δs that were potentially litigious.
             b. Issue: Did Δs breach their FD to SHs?
             c. Application: The poison pill and self-tender were valid defenses 
                 aimed to prevent harm to SHs by low-ball bid. However, once it
   became apparent that π was going to up bid (and that Δ was going to
   be bought out), then Δs duty changed  duty was to get highest
   price for SHs. Since Δs were more concerned about avoiding
   personal liability for the notes  entered into a lock-up deal w/ WK,
   which ended the bidding  denying SHs of maximum value.
d. Holding: Δs breached their FD of loyalty.

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